GREAT LAKES AVIATION LTD - 10-K Annual Report

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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 (FEE REQUIRED)

For the fiscal year ended December 31, 1997

OR

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

For the transition period from __________ to __________

Commission File No. 0-23224

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

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

1965 330th Street
Spencer, Iowa 51301-9211
--------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (712) 262-1000

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

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

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

The aggregate market value of voting stock held by nonaffiliates of the
registrant as of April 16, 1998 was approximately $8,447,529.

As of April 16, 1998 there were 7,590,843 shares of Common Stock of the
registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

Document Incorporated Part of Form 10-K
--------------------- -----------------
Proxy Statement for 1998 Annual Meeting of Shareholders Part III

FORM 10-K INDEX

Page
-----

PART I................................................................ 1
Item 1. BUSINESS............................................. 1
Item 2. PROPERTIES........................................... 10
Item 3. LEGAL PROCEEDINGS.................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DURING FOURTH QUARTER OF FISCAL YEAR................. 10

PART II............................................................... 11
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................. 11
Item 6. SELECTED FINANCIAL AND OPERATING DATA................ 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION............................................ 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 22
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 22

PART III.............................................................. 23
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT... 23
Item 11. EXECUTIVE COMPENSATION............................... 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................... 23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 23

PART IV............................................................... 28
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................... 28

SIGNATURES............................................................ 30

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PART I

ITEM 1. BUSINESS

GENERAL

Great Lakes Aviation, Ltd. ("Great Lakes") is a regional airline, which
during 1997 operated under three marketing identities (the "Regional
Identities"): United Express, Midway Connection and Great Lakes Airlines.
The Company is one of several companies operating as United Express under
code sharing agreements with United Air Lines, Inc. ("United"). While the
Company does not compete against other United Express carriers on routes that
it serves, it does compete with them to receive the right to serve additional
markets under a United agreement. On October 1, 1995 the Company began
operating as Midway Connection under a code sharing agreement with Midway
Airlines Corporation ("Midway"). The Midway Agreement was terminated on May
16, 1997 and the Company ceased operating as Midway Connection. On August 8,
1995, the Company began operations in the Southwest United States and Mexico
independently under its own code as Great Lakes Airlines. This service was
discontinued on May 16, 1997 although the Company still operates as Great
Lakes Airlines on one route in the Midwest. As of December 31, 1997, the
Company's fleet consisted of 37 Beechcraft Model 1900 19-passenger aircraft
and 10 Embraer Brasilia 30-passenger aircraft. References herein to the
Company include Great Lakes and its wholly owned subsidiary, RDU, Inc. RDU,
Inc. currently has no activity and is not being utilized by the Company.

The table below sets forth certain operating information for each of the
Regional Identities for the year ended December 31, 1997.

United Midway Great Lakes
Express Connection Airlines Total

Operating revenues (000's) $ 70,303 $ 6,976 $ 6,511 $ 83,790
Passengers 559,635 63,487 52,893 676,015
Available seat miles (000's) 368,423 41,049 28,800 438,272
Revenue passenger miles (000's) 175,017 16,553 11,119 202,689
Load Factor 47.5% 40.3% 38.6% 46.2%

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

On May 16, 1997 following inspections of the Company's operations by the
Federal Aviation Administration ("FAA"), the Company and the FAA entered into
an agreement whereby the Company voluntarily suspended flight operations
pending a thorough review of the Company's maintenance and recordkeeping
procedures. On May 23, 1997, the Company resumed limited operations at five
cities after entering into a Consent Order (the "Order") with the FAA. The
Order imposed a civil penalty of $1,000,000 of which $300,000 is being paid
in installments through June 1, 1998 and $700,000 which will be forgiven if
the Company complies with all of the terms and conditions of the Order. The
Order also required the Company to, among other things, inspect each of the
Company's aircraft and demonstrate to the FAA's satisfaction that the Company
has sufficient equipment, qualified personnel, manuals, systems, procedures
and financial resources to safely conduct operations. The Company believes
it is in compliance with the Order as of the date of this filing.

1

As a result of the voluntary suspension of service, the Company suffered
lost revenues, incurred substantial maintenance expenses, continued operating
expenses, and other related expenses. In connection with the Order, each of
the Company's aircraft underwent an FAA approved inspection prior to being
returned to service. At December 31, 1997, the Company had returned all but
four of its Beech 1900 aircraft and two of its Brasilia aircraft to service.
The cost of these inspections, as well as the expenses of terminating
operations in the Southeast and Southwest (see Managements Discussion and
Analysis--Overview), and the expected costs to eliminate aircraft surplus to
the Company needs (see Aircraft--Summary of Additions and Deletions) have
been included in the 1997 statement of operations as Shutdown and other
Nonrecurring Expenses, as follows:

FAA civil penalty $ 300,000
Shutdown and termination of the Company's
operations in the Southeast and Southwest
United States costs
Grounded aircraft (rental and depreciation) $ 3,970,531
Employee related 2,881,594
Repairs and maintenance 575,686
Facilities rental 198,335
Other 8,262 7,634,408
-----------
Shutdown and Other Nonrecurring Expenses 1,299,431
-----------
$ 9,233,839
-----------

The Company has returned to its historical core route structure with the
primary focus being that of the United Express Marketing Relationship.
Within that relationship the Company is seeking to maximize its operating
advantage at Chicago's O'Hare Airport where revenue passenger yields are
relatively higher. Service has also been reinstated at United's Denver hub
and at Minneapolis/St. Paul for those routes that the Company believes are
economically advantageous.

UNITED EXPRESS RELATIONSHIP

The United Express operation serves 50 destinations in eleven states
located in the Upper Midwest, with hubs located at Chicago O'Hare, Denver and
Minneapolis/St. Paul, as of December 31, 1997. The Company became a "United
Express" carrier in 1992 under a code sharing agreement with United and is
one of the principal United Express regional carriers.

The code sharing agreement with United expired in December 1997. The
Company believes its relationship with United is satisfactory, as evidenced
by United's recent selection of the Company as the United Express carrier for
additional routes serving the Denver airport. Since December 31, 1997, the
Company has been operating as if the principal day-to-day operational
provisions of the previous code sharing agreement are still effective. The
Company and United have entered into negotiations to renew the code sharing
agreement. The Company anticipates a favorable change in the method of
allocating passenger fares which will increase the Company's share of the
ticket price for passengers traveling a portion of their journey on United.
As part of their negotiations, United has informed the Company that it
intends to restructure its operating relationships with certain of its United
Express carriers, pursuant to which the Company will provide service to
Denver from fourteen additional cities effective April 23, 1998 and an
additional four cities on June 1, 1998. The effect of this will be that the
Company will become the only United Express carrier providing service with
nineteen seat aircraft at the Chicago and Denver hubs. The Company also
intends to reduce its service that it provides using 30 seat Brasilia
aircraft. While the Company expects a new code sharing agreement to be
finalized on a mutually advantageous basis, no assurance can be given that
this actually will be accomplished. Certain material provisions of the prior
code sharing agreement and related agreements (the "United Express
Agreements") are described herein because any new code sharing agreement may
contain similar terms. Any failure to enter into a new code sharing
agreement with United, any material adverse change in terms from the prior
code sharing agreement, or any substantial decrease in the number of routes
served by the Company under this agreement

2

could have a material adverse effect on the Company's business. As a result
of the code sharing relationship with United, the Company's business is
sensitive to events and risks affecting United. If adverse events affect
United's business, the Company's business may also be adversely affected.

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

United provides a number of additional services to the Company. These
include publication of the fares, rules and related information that are part
of the Company's contracts of carriage for passengers and freight;
publication of the Company's code sharing flight schedules and related
information using the United "UA" flight designator code and flight numbers
assigned by United; provision of ticket handling services at United's
ticketing locations; provision of airport signage at airports where both the
Company and United operate; provision of United ticket stock and related
documents; provision of expense vouchers, checks and cash disbursements to
passengers on code sharing flights of Great Lakes inconvenienced by flight
cancellations, diversions and delays; and cooperation in the development and
execution of advertising, promotion and marketing efforts featuring United
Express and the relationship between United and the Company. The Company
pays United a monthly fee based on the total number of revenue passengers
boarded on all of Great Lakes' United Express flights. This fee varies
depending on whether the passenger travels through United hubs at Denver and
Chicago, is carried to or from other airports served by United or if the
passenger is carried between cities only served by Great Lakes. The Company
also receives an incentive amount for each passenger that connects with a
United flight.

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

UNITED EXPRESS MARKETS

CHICAGO

The Company's service to the Chicago O'Hare market is anchored by its
ownership of 54 slots and 20 slot exemptions and its lease of seven slots
allocated by the FAA. A slot is a 30 minute interval during the period from
6:45 a.m. to 9:14 p.m. during which an airline may operate either a take-off
or landing. Flights in this market are used primarily to provide connecting
opportunities with United flights. The Company's ability to increase its
passenger volume at Chicago O'Hare is limited by its allocation of slots, and
future increases in passenger volume are expected to come from increased load
factors, the acquisition of additional slots and the concentrated use at
O'Hare of currently operated larger aircraft. See "Slot Allocation" and "
Aircraft." During 1997, approximately 67 percent of the Company's passenger
traffic was carried to or from Chicago. During 1997, approximately 50 percent
of the Company's traffic at Chicago O'Hare connected with United, 5 percent
connected with other airlines and 45 percent traveled exclusively on a Great
Lakes flight ("on-line"). As of December 31, 1997, Great Lakes had 53
weekday Chicago
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O'Hare departures serving 28 destinations located in Iowa, Illinois, Indiana,
Michigan, North Dakota, South Dakota and Wisconsin.

DENVER

The Company's primary strategy at Denver is to implement service in
markets where United and other major carriers have reduced service and to
feed that traffic to this United hub. The Company is currently in
negotiations with United with respect to the sharing of the expenses of
operating at the new Denver airport. During 1997, approximately 25 percent
of the Company's passenger traffic was carried to or from Denver. During
1997, approximately 55 percent of the Company's traffic at Denver connected
with United, 5 percent connected with other carriers and 40 percent were
on-line. As of December 31, 1997, the Company had 24 weekday Denver
departures serving 14 destinations located in Colorado, Kansas, Minnesota,
Nebraska, North Dakota and South Dakota.

In the first quarter of 1998, the Company was selected by United to
replace another United Express carrier at ten Essential Air Service points in
Colorado, Kansas, and Wyoming to be served from Denver, effective April 23,
1998. In addition, the Company plans to begin service to four additional
cities in Nebraska, Colorado, Kansas, and Wyoming on that date. It is
anticipated that beginning June 1, 1998 the Company will add United Express
service to four more cities in Colorado and New Mexico from Denver. This
additional service out of Denver is subject to FAA approval pursuant to the
FAA Consent Order.

MINNEAPOLIS/ST. PAUL

As of December 31, 1997, Great Lakes had 11 weekday departures serving 8
destinations located in Colorado, Iowa, Michigan, Minnesota, North and South
Dakota, Nebraska and Wisconsin. During 1997, services in the Minneapolis/St.
Paul markets were substantially reduced and the remaining services are
supported by the Essential Air Service Subsidy program.

ESSENTIAL AIR SERVICE PROGRAM

The Airline Deregulation Act of 1978 ("The Deregulation Act") allowed
airlines great freedom to introduce, increase and generally reduce or
eliminate service to existing markets. Under the Essential Air Service
Program, which is administered by the Department of Transportation (DOT),
certain communities that received scheduled air service prior to the passage
of the Deregulation Act are guaranteed specified levels of "essential air
service." The DOT may authorize federal subsidies to compensate a carrier
providing essential air service in otherwise unprofitable or minimally
profitable markets. If these subsidies are eliminated the Company may
discontinue service to some or all of the subsidized communities.

4

At December 31, 1997, the Company served 21 essential air service
communities on a subsidized basis. The Company received $6.1 million, $3.5
million and $2.6 million in essential air service subsidies for the years
ended December 31, 1997, 1996 and 1995, respectively. An airline serving a
community that qualifies for essential air services is required to give the
DOT advance notice before it may terminate, suspend or reduce service.
Depending on the circumstances, the DOT may require the continuation of
existing service until a replacement carrier is found. The Company has
negotiated increases in rates and added additional cities and flight
frequencies for which it receives subsidy revenue. Subsidy rates in effect at
April 14, 1998 are expected to generate essential air service revenues of
approximately $18.6 million on an annualized basis, as follows:

RATE
ORDER # (IN THOUSANDS) EXPIRES
--------- -------------- ---------

Alpena/Sault Ste. Marie, MI 97-9-15 $ 398 12/31/98
Dickinson, ND 98-3-27 330 3/31/00
Fairmont, MN/Brookings, Yankton, SD/
Devils Lake, Jamestown, ND/Norfolk, NE 97-8-9 4,070 7/31/99
Fergus Falls, MN 98-2-4* 997 ***
Ironwood, MI 97-7-6 493 6/30/98
Manistee, MI 96-12-42 159 12/28/98
Mattoon, IL 97-5-3 218 2/28/99
Ottumwa, IA/Sterling-Rock Falls, IL 97-1-14 923 9/30/98
Mount Vernon, IL 96-8-23 246 6/30/98
Lamar, CO/Goodland, KS/Alliance, Chadron
Kearney, McCook, NE 97-10-10 5,579 6/30/99
Cortez, CO/Dodge City, Garden City, Great
Bend, Hays, Liberal, KS 98-3-32* 2,907 9/30/99
Alamosa, CO/Laramie, Rock Springs,
Worland, WY Pending* 2,303 **
--------
TOTAL $ 18,623
--------
--------

*Service scheduled to begin in 1998
**Expires two years from date of agreement
***Expires two years from date of initial service

AIRCRAFT

GENERAL

At December 31, 1997, the Company's fleet consisted of 37 Beechcraft
1900 aircraft and 10 Embraer Brasilia aircraft, of which 25 Beechcraft 1900
aircraft and eight Embraer Brasilia aircraft were operated in scheduled
service. The Company has leased or sub-leased eight 1900 Beechcraft to other
operators. As of December 31, 1997, the Company had four Beechcraft 1900
aircraft and two Embraer Brasilia aircraft which had not yet been returned to
service following the voluntary suspension of operation on May 16, 1997. The
Beechcraft 1900 aircraft are pressurized, radar equipped and offer a 300-mile
per hour cruising speed for 19 passengers, plus cargo, with a range of 850
miles. The Beechcraft 1900 aircraft is widely regarded by airlines as an
efficient and reliable aircraft for regional service. As of December 31,
1997, the Company owned seven of its Beechcraft 1900 aircraft and leased the
remaining 30 under agreements with remaining terms ranging from three months
to 18 years.

The 30 passenger Embraer Brasilia aircraft are equipped with advanced
avionics, have stand-up cabins, restrooms, are staffed with a flight
attendant and offer a 360 mile per hour cruising speed with a range of 750
miles. As of December 31, 1997, the Company owned four of its Embraer
Brasilia aircraft and leased the remaining six under agreements with
remaining terms ranging from six to 15 years.

5

SUMMARY OF AIRCRAFT ADDITIONS AND DELETIONS

The table below shows the number and type of aircraft operated by the
Company on January 1, 1997 and December 31, 1997 and the number and type of
aircraft acquired or retired from the Company's fleet during the year ended
December 31, 1997.

December 31, 1997
January 1, December 31, -----------------
1997 Acquisitions Retirements 1997 Owned Leased
---------- ------------ ----------- ------------ ----- ------

Beechcraft 1900C 24 -- 5 19(1) 7 12
1900D 18 -- -- 18 -- 18
Embraer 120 12 -- 2(2) 10 4 6
---------- ------------ ----------- ------------ ----- ------
Total 54 -- 7 47 11 36

(1) - 8 of these aircraft are subleased to other carriers
(2) - These two aircraft have been returned to the lessor and the
estimated lease termination costs are included in Shutdown
and Other Nonrecurring Expenses

As part of the realignment of United's relationships with its United
Express carriers, the Company has been authorized to replace service from
Denver previously provided by another United Express carrier beginning April
23, 1998. This service will be performed with Beech 1900 aircraft, and
represents a significant expansion of the Company's current service. In
light of the Company's present and planned route structure, the Company has
determined to reduce the size of its Brasilia fleet. In February 1998 the
Company entered into an agreement with another carrier to sell its ten
remaining Brasilia aircraft and related spare parts and specialized tooling,
and disposed of one Brasilia aircraft pursuant to that agreement in March
1998. Subsequent to the February 1998 agreement, management has determined to
continue to utilize five Brasilia aircraft in its operations and accordingly,
the Company is currently renegotiating the agreement with the other carrier
to reduce the number of Brasilia aircraft to be sold. There can be no
assurance that any modification to the February 1998 agreement will be made.
The Company has included a net charge of $1.3 million in Shutdown and other
Nonrecurring Expenses for 1997 to reflect the financial statement impact of
the disposition of those aircraft expected to be sold in 1998. If management
determines or if the Company is required to dispose of additional Brasilia
aircraft, it is likely that a substantial additional charge to operations
would be required.

As of December 31, 1997, the average ages of the Company's owned and
leased aircraft were 6.8 and 4.1 years, respectively.

AIRCRAFT DEBT AND LEASES

Raytheon Corporation together with its financing affiliate
(collectively, "Raytheon") is the Company's primary aircraft supplier and
largest creditor. The Company has financed all of its Beechcraft 1900
aircraft and one of its Brasilia aircraft under lease and debt agreements
with Raytheon. Raytheon has also provided a $5 million working capital line
of credit to the Company collateralized by the Company's accounts receivable
(together with the aircraft leases and debt agreement, the "Raytheon
Agreements"). The Raytheon Agreements went into default during the first
quarter of 1997 due to the Company's non-payment of scheduled amounts due.

On July 16, 1997 the Company reached an agreement with Raytheon pursuant
to which Raytheon provided a short-term loan of $4 million. This loan, and
the $5 million working capital line of credit, which were due on July 29,
1997, have been extended until June 30, 1998. The $4 million loan, as well as
existing Raytheon indebtedness, has been collateralized with all previously
unpledged Beech aircraft spare parts and equipment and accounts receivable.
In addition, Raytheon was granted a ten year warrant, exercisable commencing
July 16, 1998, to purchase one million shares of the Company's common stock
at a price of $.75 per share. In connection with the July 16, 1997 agreement,
all defaults under the Raytheon Agreements were waived.

Effective August 31, 1997, the Company restructured its Raytheon
aircraft agreements, through a combination of sale-leaseback transactions and
modifications to existing leases. The restructuring resulted in a total of 30
Beech 1900 aircraft being financed under operating leases of various terms
with monthly lease payments ranging from $18,000 to $40,000 per aircraft and
seven Beech 1900C aircraft remaining as owned aircraft. The restructuring
also cured all of the defaults with Raytheon and resulted in a net gain of
$1.5 million, which will be recognized over the life of the lease agreements.

6

The Company has financed nine of its Brasilia aircraft through lease and
debt agreements with other unrelated entities (collectively, the "Brasilia
Agreements"). During 1997, all of the Brasilia Agreements went into default
due to non-payment of scheduled amounts due. All defaults under the Brasilia
Agreements have been cured as of the date of this filing. Two Brasilia
aircraft which the Company had in its fleet at January 1, 1997, were returned
to the lessor through the exercise of the lessor's rights as a result of the
default. The lease on one of these aircraft has been assigned to another
carrier and it is anticipated that the other lease will be assigned in the
near future. The estimated lease termination costs associated with these two
returned aircraft are included in Shutdown, and Other Nonrecurring Expenses.

On December 22, 1997 the Company became guarantor on an aircraft financing
agreement between Raytheon and a related party of the Company. In January 1998
the aircraft were leased to the Company and subsequently sub-leased under short
term operating leases.

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

MAINTENANCE

The FAA mandates periodic inspection and maintenance of commercial
aircraft. The Company performs most maintenance and inspection of its aircraft
and engines (except engine overhaul) using its own personnel. The Company
supports its fleet by utilizing decentralized maintenance bases capable of
performing these functions. During 1997, the Company reduced the number of these
bases from eighteen to five. The remaining bases are located at: Huron, South
Dakota; Grand Island, Nebraska; Spencer, Iowa; Springfield, Illinois; Marquette,
Michigan. The Company attempts to perform its maintenance at locations where its
aircraft are stored overnight to reduce maintenance costs and promote a higher
level of operating efficiency. Parts and supplies inventories are also
maintained at these locations to promote the mechanical dispatch reliability of
the fleet. The Company also maintains an inventory of spare engines and
propellers for its fleet to allow for minimal downtime during major overhauls.
The Company performs certain major maintenance overhauls to its fleet, which it
believes most other regional airlines have performed by outside contractors.

SLOT ALLOCATION

At Chicago O'Hare, scheduled flights between 6:45am and 9:14pm may be
conducted only if an airline has obtained a slot. Of the 54 owned slots and
20 slot exemptions allocated to the Company by the FAA as of December 31,
1997, 37 may be used for aircraft with up to 75 seats and the remainder may
be used for aircraft with up to 110 seats.

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

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

The FAA's slot regulations require the use of each slot at least 80
percent of the time, measured on a bi-monthly basis. Failure to do so without
a waiver from the FAA (which is granted only in exceptional cases) subjects
the slot to recall by the FAA. In addition, the slot regulations provide that
slots do not represent a property right, but

7

represent an operating privilege subject to FAA control and that slots may be
withdrawn by the FAA at any time without compensation to meet the DOT's
operational needs (such as providing slots for international or essential air
transportation or providing slots for new entrant carriers).

Since the creation of the slot system in 1968, and subsequent to the
adoption of the FAA's slot allocation, use and transfer regulations in 1985,
there have been and are currently pending several proposals introduced in
Congress and discussions within the DOT and the FAA regarding slots. In
August 1993, the National Commission To Ensure A Strong Competitive Airline
Industry recommended that the "FAA review the rule that limits operations at
`high density' airports with the aim of either removing these artificial
limits or raising them to the highest level consistent with safety
requirements." In August 1995, Congress passed legislation granting the FAA
authority to create additional slots for essential air service, international
and certain domestic jet operations. The Company has received 48 slots
(including 20 slot exemptions) to date pursuant to the August 1995
legislation.

YIELD MANAGEMENT

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

MARKETING

The Company's services are marketed primarily by means of listings in
computerized reservation systems and the OFFICIAL AIRLINE GUIDE, advertising
and promotions, and through direct contact with travel agencies and corporate
travel departments. The Company's advertising and promotional programs
emphasize the Company's close affiliation with United, including coordinated
flight schedules and the right of the Company's passengers to participate in
United's "Mileage Plus" frequent flyer program.

COMPETITION

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

Almost all markets are subject to a high degree of price competition
both from established carriers and low fare jet carriers. The Company
believes, however, that its ability to compete in its market areas is
strengthened by its code sharing relationships with United and United's
substantial presence at Chicago O'Hare and Denver which enhance the
importance to Great Lakes of the United "UA" flight designator code in the
Upper Midwest. After May 16, 1997, the Company's scheduled operations at
Minneapolis/St. Paul have been substantially reduced and the resources
re-deployed to Chicago and Denver where United's dominant position will
generate considerably greater connecting traffic to the Company's flights.
The Company competes with other airlines by offering frequent flights,
flexible schedules and low fares. In addition, the Company's competitive
position benefits from the large number of participants in United's "Mileage
Plus" frequent flyer programs who fly regularly to or from the markets served
by the Company. The United Express Agreements do not prohibit United from
competing with the Company. The United Express Agreements require the
Company to obtain United's written consent before commencing service as a
United Express carrier on routes other than certain pre-approved routes.

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

8

FUEL

The Company has not experienced difficulty with fuel availability and
expects to be able to obtain fuel at prevailing prices in quantities
sufficient to meet its future requirements. The Company contracts directly
with refiners for the purchase of its fuel. Standard industry contracts
generally do not provide protection against fuel price increases and do not
ensure availability of supply. Accordingly, a significant increase in the
cost of fuel, if not accompanied by an equivalent increase in passenger
revenues, could have a material impact on the Company's future operating
results.

EMPLOYEES

On December 31, 1997, the Company had 794 full-time and 174 part-time
employees as follows:

CLASSIFICATION:
Pilots................................................... 244
Station personnel........................................ 446
Maintenance personnel.................................... 144
Administrative and clerical personnel.................... 70
Flight attendants........................................ 34
Management............................................... 30
---
Total employees........................................ 968
---
---

The Company's pilots are represented by the International Brotherhood of
Teamsters. Effective November 1, 1997, the Company and union reached an
agreement which becomes amendable October 30, 2000. During 1996 the flight
attendants voted to be represented by the Teamsters Union, however, no
collective bargaining agreement has been negotiated.

The Company's mechanics are represented by the International Association
of Machinists. The current agreement became effective November 1, 1997 and
becomes amendable on November 1, 2000.

The Company believes that relations with its employees are satisfactory.

CHARTER AND FREIGHT SERVICE

The Company uses available aircraft and from time to time leases four and
six passenger aircraft from an affiliated company to provide charter services
to private individuals, corporations and groups such as collegiate athletic
teams. The Company also carries freight, mail and small packages on most of its
scheduled flights. Revenues from its charter flights and freight deliveries were
1.8 percent, 1.6 percent and 1.5 percent of the Company's total revenues for
the years ended December 31, 1997, 1996 and 1995, respectively.

REGULATION

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

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

The Company holds an air carrier-operating certificate issued by the FAA
pursuant to Part 121 of its regulations. The Company, as a commuter air
carrier, is licensed under Part 298 of the

9

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

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

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

INSURANCE

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

ITEM 2. PROPERTIES

The Company leases gate and ramp facilities at 51 airports where
ticketing is handled by Company personnel. Payments to airport authorities
for ground facilities are based on a number of factors, including the amount
of space used and flight volume. The Company also leases aircraft
maintenance and hangar space at 5 of the locations it serves.

The Company leases approximately 15,000 square feet of space in Spencer,
Iowa for its administrative, flight operations and maintenance offices, in
addition to approximately 35,000 square feet of aircraft maintenance and
hangar space located adjacent thereto. The Company leases an additional
32,000 square feet of space in Spencer for administration and maintenance
shops. The Company believes that it has adequate facilities for the conduct
of its current and planned operations.

ITEM 3. LEGAL PROCEEDINGS

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

The Company is a party to several routine pending legal proceedings,
none of which management believes are material to the Company.

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

There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended December 31, 1997.

10

PART II

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

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

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

STOCK QUOTATIONS

1997
High Low
----- -----

First quarter $3.63 $1.00
Second quarter 2.13 .63
Third quarter 1.63 .75
Fourth quarter 2.00 .82

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

The Company's Common Stock is currently listed on the NASDAQ National
Market. In September 1997, the NASD issued new listing requirements for the
NASDAQ National Market System which became effective February 23, 1998. The
changes increase the standards for continued listing on the NASDAQ National
Market. Companies may qualify for continued listing under two different
Continued Listing Standards. Standard 1 requires, among other things, Net
Tangible Assets greater than $4.0 million, Market Value of Public Float in
excess of $5.0 million, and a minimum Bid price greater than $1 per share.
Standard 2 requires, among other things, Market Value of Public Float in
excess of $15.0 million, and a minimum Bid Price of $5 per share. Currently,
the Company is not in compliance with the minimum requirements under either
of these standards. Under Standard 1, the Company does not meet the Net
Tangible Assets requirement. It is the Company's position, that although not
reflected in the Company's financial statements, if recorded, the value of
the Company's airport slots at Chicago O'Hare would bring it into compliance
with the Net Tangible Assets requirement. The Company will notify NASDAQ
within the next 30 days of its noncompliance. The Company will inform NASDAQ
of its plan of compliance and why the Company believes it is in compliance
with the Net Tangible Assets requirement. No assurance can be given that the
Company's position will be accepted by NASDAQ.

Should the Common Stock be suspended from trading privileges on the
NASDAQ National Market as a result of the Company's failure to comply with
any of the above, or other applicable requirements, the Company, prior to
re-inclusion, must comply with the applicable continued listing standards
prior to continued listing. However, should the Common Stock be terminated
from trading privileges on the NASDAQ National Market, the Company, prior to
re-inclusion, must comply with the applicable requirements for initial
listing on the NASDAQ National Market, which are more stringent than the
requirements for continued listing. There can be no assurance that the Common
Stock will continue to be listed on the NASDAQ National Market.

11

In the event that the Common Stock is delisted from the NASDAQ National
Market and the Company fails other relevant criteria, trading, if any, in
shares of Common Stock would be subject to the full range of the Penny Stock
Rules. Under Exchange Act Rule 15g-8, broker-dealers must take certain steps
prior to selling a penny stock, which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor;
(iii) providing the investor a written identification of the shares being
offered and in what quantity; and (iv) deliver to the investor a written
statement setting forth the basis on which the broker or dealer approved the
investor's account for the transaction. If the Penny Stock Rules are not
followed by a broker-dealer, the investor has no obligation to purchase the
shares. Accordingly, delisting from the NASDAQ National Market and the
application of the comprehensive Penny Stock Rules would make it more
difficult for broker-dealers to sell the Common Stock, purchasers of shares
of Common Stock would have difficulty in selling such shares in secondary
transactions and the per share price of such stock would likely be greatly
reduced.

As of March 31, 1998, the Company had approximately 1,800 holders of its
Common Stock. The closing price of its common stock on April 15, 1998, as
reported by the NASDAQ National Market was $3.00 per share.

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

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

12

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

The following consolidated statement of earnings and consolidated
balance sheet data as of and for each of the years in the five-year period
ended December 31, 1997 are derived from the Company's consolidated financial
statements. The financial statements for the year ended December 31, 1997
have been audited by KPMG Peat Marwick LLP, and the financial statements for
the years ended 1996, 1995, 1994 and 1993 have been audited by Arthur
Andersen LLP, independent public accountants. The consolidated financial
statements as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 and the reports thereon are
included elsewhere in this Form 10-K. The following selected financial data
should be read in conjunction with and are qualified in their entirety by the
consolidated financial statements and the notes thereto included elsewhere in
this Form 10-K.

Year Ended December 31
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- --------

STATEMENTS OF EARNINGS DATA:
Passenger and public service revenues $ 81,335 $107,528 $81,215 $67,784 $58,000
Other revenues 2,455 2,142 2,981 2,224 2,370
-------- -------- ------- ------- -------
Total operating revenues 83,790 109,670 84,196 70,008 60,370
-------- -------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits 22,091 27,801 21,407 16,157 11,958
Aircraft fuel 13,206 19,377 14,181 12,123 9,879
Aircraft maintenance materials
and repairs 7,041 13,248 9,229 8,612 6,631
Commissions 5,553 7,704 6,211 5,340 4,412
Depreciation and amortization 4,192 5,634 6,029 4,852 3,562
Aircraft rental 10,712 11,643 5,213 1,151 458
Other rentals and landing fees 5,443 6,794 5,370 3,416 2,861
Other operating expense 19,968 25,871 17,315 13,157 10,921
Shutdown and other non-recurring expenses 9,234 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses 97,440 118,072 84,955 64,808 50,682
Operating (loss) income (13,650) (8,402) (759) 5,200 9,688
Interest expense, net (4,621) (5,875) (7,282) (5,370) (6,266)
Gain on sale of slots -- -- 3,850 -- --
-------- -------- ------- ------- -------
(Loss) income before income tax expense (18,271) (14,277) (4,191) (170) 3,422
Provision for income taxes -- (1,454) (1,503) (65) 1,300
-------- -------- ------- ------- -------
Extraordinary item
Gain on extinguishment of debt,
net of income taxes of $312,000 -- -- -- 509 --
-------- -------- ------- ------- -------

Net (loss) income $(18,270) $(12,823) $(2,688) $ 404 2,122
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net (loss) income per share $ (2.41) $ (1.69) $ (0.35) $ 0.05 $ 0.45
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Average number of common shares
outstanding 7,589 7,585 7,579 7,365 4,700
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------

13

Year Ended December 31
---------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------

SELECTED OPERATING DATA:
Available seat miles (000s) (1) 438,272 678,304 566,290 477,602 369,545
Revenue passengers carried 676,015 1,012,965 805,190 663,627 611,528
Revenue passenger miles (000s) (2) 202,689 299,607 248,625 213,034 181,580
Departures flown 102,722 165,972 147,748 133,493 106,423
Passenger load factor (3) 46.2% 44.2% 43.9% 44.6% 49.1%
Break-even passenger load factor (4) 59.5% 51.5% 49.5% 44.7% 41.5%
Average yield per revenue passenger
mile (5) 37.1 CENTS 34.7 CENTS 31.6 CENTS 30.5 CENTS 30.9 CENTS
Operating cost per available seat mile (6) 22.2 CENTS 17.4 CENTS 15.0 CENTS 13.6 CENTS 13.7 CENTS
Average passenger fare (7) $ 111.25 $ 102.69 $ 97.58 $ 97.99 $ 91.87
Average passenger trip length (miles)(8) 300 296 309 321 297
Aircraft in service (end of period) 33 54 50 41 34
Destinations served (end of period) 51 86 73 55 47
BALANCE SHEET DATA:
Working (deficit) capital $(5,595) $ 603 $ 12,138 $ 10,615 $ (629)
Total assets 63,758 118,109 140,715 141,934 103,316
Long-term debt, net of current maturities 28,471 65,986 87,478 89,393 83,896
Stockholders' equity 1,127 18,740 31,540 34,202 4,962

(1) "Available seat miles" or "ASMs" represent the number of seats available
for passengers in scheduled flights multiplied by the number of
scheduled miles those seats are flown.

(2) "Revenue passenger miles" or "RPMs" represent the number of miles flown
by revenue passengers.

(3) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles
by available seat miles.

(4) "Break-even passenger load factor" represents the percentage of
available seat miles which must be flown by revenue passengers at the
average yield (net of commissions and fees) for airline operations to
break even.

(5) "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.

(6) "Operating cost per available seat mile" represents operating expenses
divided by available seat miles.

(7) "Average passenger fare" represents passenger revenue divided by the
number of revenue passengers carried.

(8) "Average passenger trip length" represents revenue passenger miles
divided by the number of revenue passengers carried.

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

OVERVIEW

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

The Company began providing air charter service in 1979, and has
provided scheduled passenger service in the Upper Midwest since 1981. In
April 1992, the Company began operating as a United Express carrier under a
cooperative marketing agreement with United. As of December 31, 1997, the
Company served 51 destinations in eleven states with 192 scheduled departures
each weekday.

14

As discussed in Item 1. BUSINESS, General, the Company suspended flight
operations on May 16, 1997 and pursuant to the Order resumed limited
operations on May 23, 1997. Additionally, the Company discontinued service
as Midway Connection in the Southeast United States and as Great Lakes
Airlines in the Southwest United States and Mexico on May 16, 1997.
Operating revenues from these two markets decreased to $13.5 million in 1997
from $23.3 million in 1996. The Company anticipates that this reduction in
service will have a positive impact on profitability since the Company's
focus will be on its core business. Both Midway Connection and Great Lakes
Airlines in the Southwest United States and Mexico were operated at a loss.
Throughout the remainder of 1997, the Company returned all but four of its
Beech 1900 aircraft and two of its Brasilia aircraft to service.

As part of the realignment of United's relationships with its United
Express carriers, the Company has been authorized to replace service from
Denver previously provided by another United Express carrier beginning April
23, 1998. This service will be performed with Beech 1900 aircraft, and
represents a significant expansion of the Company's current service. In
light of the Company's present and planned route structure, the Company has
determined to reduce the size of its Brasilia fleet. In February 1998 the
Company entered into an agreement with another carrier to sell its ten
remaining Brasilia aircraft and related spare parts and specialized tooling,
and disposed of one Brasilia aircraft pursuant to that agreement in March
1998. Subsequent to the February 1998 agreement, management has determined to
utilize five Brasilia aircraft in its operations and accordingly the Company
is currently renegotiating the agreement with the other carrier to reduce the
number of Brasilia aircraft to be sold. There can be no assurance that any
modification to the February 1998 agreement will be made. The Company has
included a net charge of $1.3 million in Shutdown and other Nonrecurring
Expenses for 1997 to reflect the financial statement impact of the
disposition of those aircraft expected to be sold in 1998. If management
determines or if the Company is required to dispose of additional Brasilia
aircraft, it is likely that a substantial additional charge to operations
would be required.

The Company has suffered significant recurring losses and negative cash
flows, which raise substantial doubt about its ability to continue as a going
concern. The Company's viability as a going concern depends upon its return
to sustained profitability.

15

RESULTS OF OPERATIONS

COMPARISON OF 1997 TO 1996

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

------------------------------------------------------------------------------------------------
For the years ended December 31 (000's)
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
Cents % Cents % Cents
per Increase per Increase per
Amount ASM From 1996 Amount ASM from 1995 Amount ASM

Total operating revenues $ 83,790 - (23.6)% $109,670 -- 30.3% $ 84,196 --
-------- ---- ----- -------- ---- ------- --------- ----
Salaries, wages and benefits 22,091 5.0 CENTS (20.5) 27,801 4.1 CENTS 29.9 21,407 3.8 CENTS
Aircraft fuel 13,206 3.0 (31.8) 19,377 2.9 36.7 14,181 2.5
Aircraft maintenance
materials and repairs 7,041 1.6 (46.9) 13,248 2.0 43.6 9,229 1.6
Commissions 5,553 1.3 (27.9) 7,704 1.1 24.0 6,211 1.1
Depreciation and
amortization 4,192 1.0 (25.0) 5,634 0.8 (6.6) 6,029 1.1
Aircraft rental 10,712 2.4 (8.0) 11,643 1.7 123.3 5,213 0.9
Other rentals and landing
fees 5,443 1.2 (19.9) 6,794 1.0 26.5 5,370 0.9
Other operating expense 19,968 4.6 (22.8) 25,871 3.8 49.4 17,315 3.1
Shutdown and other non-
recurring expenses 9,234 2.1 -- -- -- -- -- --
-------- ---- ----- -------- ---- ------- --------- ----
Total operating
expenses $ 97,440 22.2 CENTS (17.5)% $118,072 17.4 CENTS 39.0% $ 84,954 15.0 CENTS
-------- ---- ----- -------- ---- ------- --------- ----

Operating loss $(13,650) - (62.5)% $ (8,402) -- (1008.4)% $ (758) --
-------- ---- ----- -------- ---- ------- --------- ----
-------- ---- ----- -------- ---- ------- --------- ----
Interest $ 4,620 1.1 CENTS (21.4)% $ 5,875 0.9 CENTS (19.3)% $ 7,282 1.3 CENTS
-------- ---- ----- -------- ---- ------- --------- ----
-------- ---- ----- -------- ---- ------- --------- ----
Aircraft Expense
Depreciation and
amortization $ 4,192 1.0 CENTS (25.6) CENTS $ 5,634 0.8 CENTS (6.6)% $ 6,029 1.1 CENTS
Aircraft Rental 10,712 2.4 (8.0) 11,643 1.7 123.3 5,213 0.9
Interest expense (net) 4,620 1.1 (21.4) $ 5,875 0.9 (19.3) 7,282 1.3
-------- ---- ----- -------- ---- ------- --------- ----
$ 19,524 4.5 CENTS (15.7)% $ 23,152 3.4 CENTS 25.0% $ 18,524 3.3 CENTS
-------- ---- ----- -------- ---- ------- --------- ----
-------- ---- ----- -------- ---- ------- --------- ----

Change Change
1997 from 1996 1996 from 1995 1995
---------------------------------------------------------------------

Available seat miles (000's) 438,272 (35.4)% 678,304 19.8% 566,290
Revenue passenger miles (000's) 202,689 (32.3)% 299,607 20.5% 248,625
Passenger load factor 46.2% 2.0 pts 44.2% 0.3 pts 43.9%
Average yield per revenue
passenger mile 37.1 CENTS 2.4 CENTS 34.7 CENTS 3.1 CENTS 31.6 CENTS

16

OPERATING REVENUES: Operating revenues decreased 23.6% to $83.8 million
in 1997 from $109.7 million during 1996. The decrease in operating revenues
resulted from the decrease in revenue passenger miles flown by 32.3% to 202.7
million in 1997 from 299.6 million during 1996 offset by increase of 2.4 cents
in yield per revenue passenger mile to 37.1 cents in 1997 from 34.7 cents in
1996. This coincided with a 35.4% decrease in capacity to 438.3 million ASMs
in 1997 from 678.3 million ASMs during 1996. The increase in passenger yield
is due primarily to price increases in key markets, moving service from lower
yield markets to higher yield markets, and due to an increased emphasis on
managing the quantity of seats made available for sale at discounted rates.
In addition, public service revenue increased 74.3% to $6.1 million in 1997
from $3.5 million in 1996.

OPERATING EXPENSES: Total operating expenses decreased 17.5% to $97.4
million, or 22.2 cents per ASM, in 1997 from $118.1 million, or 17.4 cents
per ASM in 1996. The increase in cost per ASM reflects the costs associated
with the voluntary shutdown and the corresponding decrease in ASMs.

Salaries, wages, and benefits expense increased to 5.0 cents per ASM
during 1997, from 4.1 cents per ASM during 1996, due to normal pay increases
and a smaller ASM base across which to spread fixed labor costs.

Aircraft fuel expense per ASM increased to 3.0 cents in 1997 from 2.9
cents in 1996 due to increased fuel prices from suppliers and the
reinstatement of the 4.3 cents per gallon federal excise tax on jet fuel in
August 1996, affecting all of 1997 and only five months in 1996.

Aircraft maintenance and repairs expense decreased to 1.6 cents per ASM
during 1997, from 2.0 cents per ASM in 1996 due to a decrease in the number
of engine overhauls performed in 1997.

Aircraft expense increased to 4.5 cents per ASM during 1997, from 3.4
cents per ASM in 1996 due to reduced utilization because of the previously
discussed voluntary suspension of flight operations.

Other rentals and landing fee expenses increased to 1.2 cents per ASM
during 1997, from 1.0 cents per ASM in 1996, as a result of fixed facility
costs spread over a lower ASM base.

Other operating expenses increased to 4.6 cents per ASM in 1997 from 3.8
cents in 1996, reflecting fixed expenses, including general and administrative,
marketing, and communications, spread across a lower ASM base in 1997. In
addition, 1997 includes higher passenger booking fees on an ASM basis due to
increases in rates and higher United program fees since a higher percentage of
the Company's flying was under the United Code in 1997 versus 1996.

Shutdown and other nonrecurring expenses of 2.1 cents per ASM represents
the estimated costs associated with the voluntary shutdown and the one-time
charge for the write-down of the Brasilia aircraft. This expense includes
$7.9 million related to salaries and wages, aircraft maintenance materials
and repairs, aircraft ownership costs, facilities rental, and other expenses
directly related to the shutdown. The remaining $1.3 million for the
Brasilia aircraft reduction represents a reduction of the carrying value of
the aircraft to their estimated net realizable value, accrued estimated
future unrecoverable lease payments, accrued estimated lease termination
costs, and a reduction of the carrying value of the spare part inventories to
net realizable value offset by the recognition of related deferred purchase
incentives on these aircraft.

(BENEFIT) FOR INCOME TAXES: No income tax benefit was recorded for 1997
considering that the Company is in a loss carry forward position and that the
realization of any benefits of such are substantially in doubt.

COMPARISON OF 1996 TO 1995

OPERATING REVENUES: Operating revenues increased 30.3% to $109.6
million in 1996 from $84.2 million during 1995. The increase in operating
revenues resulted from the increase in revenue passenger miles flown by 20.5%
to 299.6 million in 1996 from 248.6 million during 1995 and an increase of
9.8% in yield per revenue passenger mile, which increased from 31.6 cents in
1995 to 34.7 cents in 1996. This coincided with a 19.8% increase in capacity
to 678.3 million ASMs in 1996 from 566.3 million ASMs during 1995. The
addition of Midway Connection and Arizona service for the entire year
accounted for 54.6% and 26.8%, respectively, of the increase in operating
revenues. The increase in passenger yield is due primarily to the expiration
of the 10% transportation tax without a corresponding

17

reduction in ticket prices and increases in certain fares. Midway
Connection's full year operation increased the overall average as a result of
its higher yield produced from its passengers with shorter trips.

OPERATING EXPENSES: Total operating expenses increased to $118.1
million, or 17.4 cents per ASM, in 1996 from 85.0 million, or 15.0 cents per
ASM in 1995. In part, the increase in cost per ASM is due to decreased
utilization of the Embraer 120 aircraft because of two airworthiness
directives requiring frequent propeller inspections and lack of replacement
propeller blades during the first quarter of 1996. The increase of total
operating expenses reflect the costs associated with expansion of the
Company's aircraft fleet and increased level of operations, except as
detailed below.

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

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

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

Depreciation and amortization decreased to 0.8 cents per ASM in 1996
from 1.1 cents per ASM in 1995, while aircraft rental expense increased to
1.7 cents per ASM during 1996, from 0.9 cents per ASM in 1995, due to the
increasing number of aircraft leased, along with the conversion of five
capital leases to operating leases in June 1996.

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

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

INTEREST EXPENSE: Interest expense decreased to 0.9 cents per ASM, in
1996 from 1.3 cents per ASM, during 1995, due to decrease in the prime
interest rate to which a substantial portion of debt is tied.

(BENEFIT) FOR INCOME TAXES: The Company's effective rate was 10.2
percent in 1996 and 35.9 percent in 1995. In recognition of the Company's
financial results of recent periods the Company has ceased recognizing future
tax benefits until it is more likely than not that such benefits will be
realized.

LIQUIDITY AND CAPITAL RESOURCES

The Company has suffered significant recurring losses and negative cash
flows, which raise substantial doubt about its ability to continue as a going
concern. The Company has no further availability on its $5 million line of
credit with Raytheon. The Company is heavily dependent on Raytheon and United
for its liquidity requirements, however neither Raytheon nor United is under
any current obligation to provide further financing to the Company. The
Company's viability as a going concern depends upon its return to sustained
profitability.

18

The Company's working capital decreased to ($5.6) million at December
31, 1997 from $0.6 million at December 31, 1996. Cash decreased $6.7 million
to $0.0 million at December 31, 1997 from $6.7 million at December 31, 1996.
The major uses of working capital in 1997 were a net loss of $18.3 million
offset by non cash charges for depreciation of $4.2 million, deferral of
lease payments of $5.9 million and the decrease in accounts receivable,
inventories, and prepaid expenses totaling $4.1 million. These changes are a
result of the Company's reduced level of operations in 1997.

Raytheon is the Company's primary aircraft supplier and largest
creditor. The Company has financed all of its Beechcraft 1900 aircraft and
one of its Brasilia aircraft under related lease and debt agreements with
Raytheon, and Raytheon has also provided a $5 million working capital line of
credit, collateralized by accounts receivable. The Raytheon Agreements went
into default in 1997 due to the Company's non-payment of scheduled amounts
due.

On July 16, 1997 the Company reached an agreement with Raytheon pursuant
to which Raytheon provided a short-term loan of $4 million. This loan, and
the $5 million working capital line of credit which were due on July 29,
1997, have been extended until June 30, 1997. The $4 million loan, as well as
existing Raytheon indebtedness, has been collateralized with all previously
unpledged Beech aircraft spare parts and equipment and accounts receivable.
In addition, Raytheon was granted a warrant for a period of ten years,
exercisable commencing July 16, 1998, to purchase one million shares of the
Company's common stock at a price of $.75 per share. In connection with the
July 16, 1997 agreement, all defaults under the Raytheon Agreements were
waived.

Effective August 31, 1997, the Company restructured its Raytheon
aircraft agreements. The restructuring resulted in a total of 30 Beech 1900
aircraft under operating leases of various terms with monthly lease payments
ranging from $18,000 to $40,000 per aircraft and seven (7) Beech 1900C
airliners remaining as owned aircraft. The restructuring also cured all of
the defaults with Raytheon. The restructuring resulted in a net deferred gain
of $1.5 million, which will be recognized over the life of the lease
agreements.

In addition, the Company has financed nine of its Brasilia aircraft
through lease and debt agreements with other unrelated entities
(collectively, the "Brasilia Agreements"). During 1997, all of the Brasilia
Agreements went into default due to non-payment of scheduled amounts due.
All defaults under the Brasilia Agreements have been cured as of the date of
this filing. Two Brasilia aircraft, which the Company had in its fleet as of
January 1, 1997 were returned to the lessor through the exercise of the
lessor's rights as a result of the default. The lease on one of these
aircraft has been assigned to another carrier and it is anticipated that the
other lease will be assigned in the near future, thereby terminating the
lease without a significant expense to the Company. The lease costs
associated with these two returned aircraft are included in Excess Aircraft,
Shutdown, and Other Non-recurring Expenses.

Although the Company has decreased its accounts payable balance from
December 31, 1996, it continues to have past due trade accounts. Notes
totaling approximately $1.8 million have been issued in 1997 to certain of
the vendors, which, in general, require payment over a one-year period. The
balance of these notes was $.7 million as of December 31, 1997. The Company
believes that it has reached an appropriate accommodation with its key
suppliers and that it will be able to obtain necessary goods and services on
acceptable terms as long as timely payment is made for current purchases.

Capital expenditures related to aircraft and equipment totaled $1.1
million in 1997, $2.6 million during 1996, and $18.2 million in 1995.
Payment of debt exceeded borrowings by $14.2 million in 1996. Long-term
borrowings exceeded principal repayments by $10.2 in 1995.

Long-term debt, net of current maturities of $2.2 million, totaled $28.5
million at December 31, 1997 compared to $66.0 million net of current
maturities of $5.1 million, at December 31, 1996, and $87.5 million, net of
current maturities of $4.8 million at December 31, 1995. As a result of the
restructuring of the Company's Raytheon aircraft agreements, long term debt
decreased $40.6 million. As of December 31, 1997, the term notes bear
interest at rates ranging from 7.5 to 9.1 percent and are payable monthly or
quarterly through July, 2007. All long-term debt as of December 31, 1997,
relates to the acquisition of aircraft and is collateralized by 11 related
aircraft. There are no financial covenants related to such long-term debt.

19

YEAR 2000 IMPACT ON COMPUTERS

Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, in approximately two years,
computer systems and software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements.

The Company has started to review its computer systems and application
programs for year 2000 compliance. The Company can not give any assurances
that The Company's systems nor the systems of other parties upon which the
Company must rely, will be year 2000 compliant on a timely basis. Examples
of systems operated by others that the Company may use and or rely upon are:
FAA Air Traffic Control, Computer Reservation Systems for travel agent sales
and United Airlines' reservation, passenger check in and ticketing systems.
The Company's business, financial condition and or results of operations
could be materially adversely affected by the failure of its systems and
applications or those operated by others.

SEASONALITY

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

FREQUENT FLYER PROGRAM

On the Company's United Express passengers may earn miles in United's
"Mileage Plus" and frequent flyer program, and passengers may use mileage
accumulated in this program to obtain discounted or free tickets for trips
that might include a flight segment on one of the Company's flights. No
revenues are earned or collected on free tickets awarded to passengers under
the program. Awards earned under the frequent flyers program have an
expiration date three years from the date earned. The program also contains
certain restrictions, including blackout dates and capacity controlled
bookings, which substantially limit the use of awards on certain flights and
during the busiest periods. The Company continually monitors the number of
free travel award reservations on its flight segments to ensure that they are
within the capacity restrictions defined in the "Mileage Plus" program. The
Company's yield management program and related seat restrictions minimize the
number of revenue passengers that may be displaced on any individual flight
segment. To date, the Company has not experienced any material use of
"Mileage Plus" and awards to obtain travel on flights, and the incremental
cost to the Company attributable to the exercise of frequent flyer awards
(consisting primarily of a minimal amount of additional gate and passenger
service expenses) has not been material. Awards used on the Company's
flights during the year ended December 31, 1997 represented approximately
2.6% percent of the Company's total passengers. The Company expects that
this percentage will remain approximately the same for the foreseeable
future. Based on this low percentage, on the availability on many of the
Company's flights of otherwise vacant seats, and on the program's
restrictions, the Company believes that the displacement, if any, of revenue
passengers by users of "Mileage Plus" and awards will not become material.
The Company continually monitors the number of awards redeemed and will
accrue the incremental costs associated with the "Mileage Plus" and program
if they become material.

EFFECTS OF INFLATION

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

20

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996

CAUTIONARY FACTORS

The Company wishes to caution shareholders and prospective investors
that the following important factors, among other identified in this Annual
Report on Form 10-K, could affect the Company's actual operating results, and
that such results could differ materially from those expressed in any
forward-looking statements made by the Company. The statements under this
caption are intended to serve as cautionary statements within the meaning of
the Private Securities Litigation Reform Act of 1996. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for
such purpose. The order in which such factors appear below should not be
construed to indicate their relative importance or priority.

DEPENDENCE ON RELATIONSHIP WITH UNITED

The Company generated approximately 84% of its revenues for the year
ended December 31, 1997 under the United Express Agreements described under
"Business - United Express Relationship". The United Express Agreements
required the Company to comply with specific operating performance standards
and, with certain limited exceptions, restrict the ability of the Company to
merge with another company or dispose of its assets or aircraft without first
offering United a right of first refusal to acquire the Company or such
assets or aircraft. The United Express Agreements also prohibited the
Company from entering into similar arrangements with other carriers in
Chicago, Denver, Minneapolis-St. Paul, Detroit, Des Moines or Omaha without
United's prior approval. The United Express Agreements required the Company
to obtain United's prior consent to operate as a United Express carrier in
any market, except for certain pre-approved markets connecting with
Minneapolis-St. Paul or Detroit. The United Express Agreements terminated on
December 31, 1997. The Company believes its relationship with United is
satisfactory, as evidenced by United's recent selection of the Company as the
United Express carrier for additional routes serving the Denver airport.
Since December 1997, the Company has been operating as if the day-to-day
operational provisions of the previous code sharing agreement are still
effective. A failure to renew the United Express Agreements, any termination
or materially adverse modification of the agreements, or any substantial
decrease in the number of routes served by the Company under the agreements
would have a materially adverse effect on the Company's business. As a
result of the United Express Agreements, the Company's business is sensitive
to events and risks affecting United. If adverse events affect United's
business, the Company's business will also be adversely affected.

EFFECT OF GENERAL ECONOMIC CONDITIONS

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

FUEL COSTS

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

SEASONALITY

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

21

CONTROL BY PRINCIPAL STOCKHOLDER

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

NO ASSURANCE AS TO LIQUIDITY ON THE NATIONAL MARKET SYSTEM

The Company's common stock is currently listed on The NASDAQ National
Market System. As discussed in Part II, Item 5, the Company may not be
compliance with the new continued listing requirements. There can be no
assurance that the Company's common stock will be actively traded on such
market or that it will continue to be listed on such market.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company as of December 31,
1997 and 1996 together with Report of Independent Public Accountants are
included in this Form 10-K on the pages indicated below.

PAGE
----

Reports of Independent Public Accountants.................................. 23

Consolidated Balance Sheets as of December 31, 1997 and 1996............... 25

Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995....................................................... 26

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995........................................... 27

Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................................... 28

Notes to Consolidated Financial Statements................................. 29

Supplemental Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts............................ 46

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

22

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Great Lakes Aviation, Ltd.:

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

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

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

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered significant losses in 1996 and
1995 and negative operating cash flow in 1996, has been unable to meet its
significant current and long-term financial obligations, and has defaulted on
certain financial and operating agreements. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

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

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Minneapolis, Minnesota
April 4, 1997

23

INDEPENDENT AUDITOR'S REPORT

The Board of Directors
Great Lakes Aviation, Ltd.:

We have audited the accompanying consolidated balance sheet of Great Lakes
Aviation, Ltd. (an Iowa Corporation) and subsidiary as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the year then ended. In connection with our audit of the
consolidated financial statements we have also audited the financial
statement schedule for the year ended December 31, 1997. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Great
Lakes Aviation, Ltd. and subsidiary as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for the year ended December
31, 1997, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 3 to the consolidated financial statements, the Company has suffered
significant losses in each of the last three years, and a result has
insufficient liquidity to pay its obligations as they come due, and has
defaulted on certain financial and operating agreements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 3.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

Des Moines, Iowa /S/ KPMG Peat Marwick LLP
April 15, 1998 KPMG PEAT MARWICK LLP

24

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

1997 1996
---- ----

ASSETS

Current assets:
Cash $ 5,784 6,676,333
Restricted funds - interest bearing deposits (note 5) 2,246,725 -
Accounts receivable, net of allowance for doubtful accounts
of approximately $923,000 and $150,000, respectively. 5,472,896 7,273,766
Inventories, net (note 2) 12,288,428 12,668,615
Prepaid expenses and other current assets 817,787 2,253,700
------------ -----------
Total current assets 20,831,620 28,872,414
------------ -----------

Property and equipment:
Flight equipment (note 5) 46,780,941 98,281,251
Other property and equipment 4,185,636 3,863,011
Less accumulated depreciation and amortization (9,656,199) (14,901,196)
------------ -----------
Total property and equipment 41,310,378 87,243,066
------------ -----------

Other assets 1,616,448 2,493,869
------------ ----------
$ 63,758,446 118,609,349
------------ -----------
------------ -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable and current maturities of long-term debt $ 10,306,234 11,667,911
Accounts payable 9,461,676 13,089,639
Accrued Brasilia disposal and lease termination costs (note 2) 1,858,492 -
Deferred lease payments 1,366,816 137,680
Accrued liabilities and unearned revenue 3,433,302 3,374,393
------------ -----------
Total current liabilities 26,426,520 28,269,623
------------ -----------

Long-term debt, net of current maturities 28,471,492 65,985,694
Deferred lease payments 3,246,598 -
Deferred credits 4,487,196 5,614,116

Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized, 7,589,121 and 7,586,326 shares issued
and outstanding at December 31, 1997 and 1996 75,891 75,863
Paid-in capital 29,577,371 28,919,765
Accumulated deficit (28,526,622) (10,255,961)
------------ -----------
Total stockholders' equity 1,126,640 18,739,667

Commitments and contingencies (notes 2, 4, 7, and 9).
------------ -----------
$ 63,758,446 $118,609,349
------------ -----------
------------ -----------

See accompanying notes to consolidated financial statements.

25

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

1997 1996 1995
---- ---- ----

Operating revenues:
Passenger $ 75,204,197 104,016,017 78,574,780
Public Service 6,130,964 3,512,156 2,639,857
Freight, charter, and other 2,454,836 2,141,517 2,981,448
------------ ----------- ----------
Total operating revenues 83,789,997 109,669,690 84,196,085
------------ ----------- ----------
Operating expenses:
Salaries, wages, and benefits 22,091,493 27,800,983 21,406,644
Aircraft fuel 13,206,289 19,377,128 14,180,745
Aircraft maintenance materials and repairs 7,040,982 13,247,641 9,229,072
Commissions 5,552,485 7,704,342 6,211,491
Depreciation and amortization 4,191,856 5,633,535 6,029,464
Aircraft rental 10,712,135 11,643,163 5,212,603
Other rentals and landing fees 5,442,825 6,793,660 5,369,654
Other operating expense 19,968,330 25,871,443 17,314,726
Shutdown and other nonrecurring
expenses (note 2) 9,233,839 -- --
------------ ----------- ----------
Total operating expenses 97,440,234 118,071,895 84,954,399
------------ ----------- ----------
Operating loss (13,650,237) (8,402,205) (758,314)
Interest expense (4,620,424) (5,874,609) (7,282,294)
Gain on sale of slots -- -- 3,850,000
------------ ----------- ----------
Loss before income taxes (18,270,661) (14,276,814) (4,190,608)
Benefit for income taxes -- (1,453,640) (1,503,000)
------------ ----------- ----------
Net loss $(18,270,661) (12,823,174) (2,687,608)
------------ ----------- ----------
------------ ----------- ----------
Basic and diluted loss per share $ (2.41) (1.69) (.35)
------------ ----------- ----------
------------ ----------- ----------
Weighted average shares outstanding 7,588,792 7,585,405 7,578,779
------------ ----------- ----------
------------ ----------- ----------

See accompanying notes to the consolidated financial statements.

26

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

Retained
Common stock earnings
---------------------- Paid-in (accumulated
Shares Amount capital deficit) Total
------ ------ ------- -------- -----

Balance at December 31, 1994 7,575,000 $75,750 28,870,946 5,254,821 34,201,517
Issuance of common stock 5,723 57 26,256 -- 26,313
Net loss -- -- -- (2,687,608) (2,687,608)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1995 7,580,723 75,807 28,897,202 2,567,213 31,540,222
Issuance of common stock 5,603 56 22,563 -- 22,619
Net loss -- -- -- (12,823,174) (12,823,174)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1996 7,586,326 75,863 28,919,765 (10,255,961) 18,739,667
Issuance of common stock 2,795 28 7,606 -- 7,634
Issuance of warrant -- -- 650,000 -- 650,000
Net loss -- -- -- (18,270,661) (18,270,661)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1997 7,589,121 $75,891 29,577,371 (28,526,622) 1,126,640
--------- ------- ---------- ----------- -----------
--------- ------- ---------- ----------- -----------

See accompanying notes to consolidated financial statements.

27

GREAT LAKES, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

1997 1996 1995
---- ---- ----

Operating activities:
Net (loss) $(18,270,661) (12,823,174) (2,687,608)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Write down of Brasilia assets and accrued disposal costs 1,299,431 - -
Depreciation and amortization 4,888,896 5,633,535 6,029,464
Loss on disposal of assets, net 312,291 - -
Deferred income taxes - (1,453,640) (1,503,000)
Change in operating items:
Accounts receivable, net 1,748,979 1,206,433 (2,147,639)
Inventories, net (1,797,983) (2,098,072) (1,926,992)
Prepaid expenses and other current assets 1,633,016 195,868 (365,328)
Deposits on flight equipment (324,500) 352,772 2,869,228
Accounts payable and accrued liabilities (1,582,275) 5,427,236 3,841,659
Deferral of lease payments 5,255,598 - -
------------ ----------- ----------
Net cash provided by (used in) operating activities (6,837,208) (3,559,042) 4,109,784
------------ ----------- ----------

Investing activities:
Purchases of flight equipment and other property and equipment (1,058,732) (2,607,852) (18,222,790)
Proceeds from the sale of flight equipment 2,246,725 21,254,048 5,930,305
Purchase of certificate of deposit (2,246,725) - -
Increase in other assets 220,045 (973,642) (672,974)
------------ ----------- ----------
Net cash provided by (used in) investing activities (838,687) 17,672,554 (12,965,459)
------------ ----------- ----------

Financing activities:
Proceeds from issuance of debt 4,300,000 11,166,726 21,543,745
Repayment of long-term debt (3,302,288) (25,411,040) (11,325,759)
Proceeds from sale of common stock 7,634 22,619 26,313
------------ ----------- ----------
Net cash provided by (used in) financing activates 1,005,346 (14,221,695) 10,244,299
------------ ----------- ----------
Net change in cash (6,670,549) (108,183) 1,388,624

Cash:
Beginning of year 6,676,333 6,784,516 5,395,892
------------ ----------- ----------
End of year $ 5,784 6,676,333 6,784,516
------------ ----------- ----------
------------ ----------- ----------
Supplementary cash flow information:
Cash paid during the year for:
Interest $ 4,026,281 6,024,469 7,483,323
Income taxes - - -
------------ ----------- ----------
------------ ----------- ----------
Noncash transactions-
Deferred manufacturers' incentives received as:
Property and equipment $ - - 1,845,660
Inventories - 690,000 935,827
Other assets - - 325,697
Prepaid expenses - 700,000 -
------------ ----------- ----------
$ - 1,390,000 3,107,184
------------ ----------- ----------
------------ ----------- ----------
Reduction of notes payable through sale-leaseback transactions $ 40,633,798 - -
Issuance of warrant 650,000 - -
Conversion of lease obligation to notes payable 528,629 - -
Conversion of accounts payable to notes payable 1,798,829 - -
Flight equipment exchanged for payment of notes payable 950,000 - -
------------ ----------- ----------
$ 44,561,256 - -
------------ ----------- ----------
------------ ----------- ----------
Conversion of capital leases into operating leases $ - - 14,202,584
------------ ----------- ----------
------------ ----------- ----------

See accompanying notes to consolidated financial statements.

28

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

(1) CORPORATE ORGANIZATION AND BUSINESS

CORPORATE ORGANIZATION

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

BUSINESS

As of December 31, 1997, the Company provides scheduled passenger and
air freight service via two marketing identities (United Express
and Great Lakes Airlines), the first of which operates under a
code-sharing agreement.

The Company operates as United Express under a cooperative marketing
agreement (United Express Agreement) with United Airlines, Inc.
(United) and provides service to 50 destinations in the Upper
Midwest as of December 31, 1997. The United Express Agreement
expired December 31, 1997, which had been extended on a monthly
basis from April 25, 1997. The Company and United are currently
operating under the terms of the previous United Express Agreement
(see note 3). Approximately 50 percent, 45 percent, and 40 percent
of the United Express passengers connected with United for the
years ended December 31, 1997, 1996, and 1995, respectively.
Outside the scope of the United Express Agreement, the Company
serves limited destinations in the Upper Midwest as Great Lakes
Airlines.

From October 1, 1995 to May 16, 1997, the Company operated as a "Midway
Connection" carrier under a cooperative marketing agreement (Midway
Connection agreement) with Midway Airlines, Inc. (Midway) and
served Raleigh/Durham from 14 destinations in eight states located
along the East Coast as of December 31, 1996. Approximately 50
percent of Midway Connection passengers connected with Midway. The
Midway Connection operation was terminated on May 16, 1997 after
the Company temporarily suspended flight operations (see note 2).

In August 1995, the company foreclosed under a security Agreement and
acquired certain assets of Arizona Airways. Inc. From August 1995
to May 16, 1997, the company served nine destination in Arizona,
New Mexico, and Mexico (collectively, the Southwest) as Great Lakes
Airlines. The Company terminated their operations in the Southwest
after the company temporarily suspended flight operation (see note
2).

Revenues during 1997, 1996, and 1995 were derived 84 percent, 79 percent
and 97 percent from United Express operations, 8 percent, 13
percent and 1 percent from Midway Connection and 8 percent, 8
percent and 2 percent from Great Lakes Airlines operations.

During October 1995, the Company sold certain landing and takeoff slots
at Chicago O'Hare airport to United, generating a gain of $3,850,000
(see note 9).

29 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) SHUTDOWN AND OTHER NONRECURRING EXPENSES

Under terms of a consent order (the Order) with the Federal Aviation
Administration (FAA), the Company temporarily suspended its flight
operations on May 16, 1997 and resumed flight operations on a
limited basis on May 23, 1997 (the Shutdown). Under terms of the
Order, the Company was assessed a civil penalty of $1,000,000, of
which $700,000 of the civil penalty will not be paid if the Company
complies with all terms of the Order for a one year period ending
May 23, 1998. The Order, among other things, required the Company
inspect each aircraft and demonstrate to the FAA's satisfaction
that the Company has sufficient equipment, qualified personnel,
manuals, systems and financial resources to safely conduct
operations. As of December 31, 1997, the Company believes that it
has complied with the terms of the Order and Management anticipates
doing so through the end of the Order. The Company's results for 1997
reflect a charge of $300,000 for the portion of the penalty paid to
date.

Subsequent to the Shutdown, the Company incurred continuing operating
expenses, significant maintenance expenses and other expenses
related to the shutdown. Those expenses have been included in the
statement of operations and are classified as shutdown and other
nonrecurring expenses.

When flight operations were resumed, on reduced basis on May 23, 1997,
the Company terminated its flight operations as Midway Connection
and as Great Lakes Airlines in the Southeastern and Southwestern
United States, respectively. The costs related to the termination
of operations in those areas are included in shutdown and other
nonrecurring expenses.

In connection with the reduced flight operations discussed above, the
Company has identified seven Embraer Brasilia 30 passenger aircraft
(Brasilia) (including two aircraft which were returned to the lessor
in June, 1997 as discussed in note 5), as being excess, which are not
needed by the Company to conduct its core United Express operation
servicing Chicago O'Hare, and to a lessor extent Denver and
Minneapolis. Additionally, the Company has four Beechcraft
1900C 19 passenger aircraft which are idle at December 31, 1997.
Subsequent to May 16, 1997, the Company has disposed of thirteen
Beechcraft 1900C aircraft considered to be excess though sales or
leasing or subleasing arrangements to other parties.

The Company's intent is to dispose of seven Brasilia aircraft (including
two aircraft which were returned to the lessor in June, 1997 as
discussed in note 5). The Company has, consistent with its intent
to dispose of seven Brasilia aircraft, reduced the carrying value
of owned aircraft to their estimated net realizable value, accrued
future lease payments estimated to be unrecoverable, accrued
estimated lease termination costs, and reduced the carrying value
of the related Brasilia spare part inventories to their net
realizable value. In February 1998, the Company entered into an
agreement to sell all of their remaining Brasilia aircraft and
their Brasilia spare part inventories and began negotiating with
the lessors and creditors for release of the Brasilia aircraft. In
April 1998, the Company determined that they have a continued need
for five of their Brasilia aircraft, and began negotiating with the
other party for a modification of the agreement. As of April 15,
1998, the existing agreement to sell all of the Company's Brasilia
aircraft has not been modified, and there can no assurance that the
other party will agree to the modification. As discussed above,
consistent with the Company's intent, the Company has accrued
diposal and lease termination costs for seven Brasilia aircraft.
Under terms of the existing agreements, the Company has disposed of
three aircraft to date. Management expects that four additional
Brasilia aircraft will be disposed of during the remainder 1998.
Management currently expects that it will continue to utilize the
five remaining Brasilia aircraft in its operations. However, if
management latter determines to dispose of these aircraft, it is
likely that a substantial additional charge to operations would be
required.

30 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) SHUTDOWN AND OTHER NONRECURRING EXPENSES, CONTINUED

Shutdown and other nonrecurring expenses in 1997 consist of the
following:

FAA civil penalty $ 300,000
Shutdown and termination of the Company's
operations in the Southeast and Southwest
United States costs
Grounded aircraft (rental and depreciation) $3,970,531
Employee related 2,881,594
Repairs and maintenance 575,686
Facilities rental 198,335
Other 8,262 7,634,408
----------
----------
Accrued Brasilia disposal and lease termination
costs, net of the reversal of related deferred credits 1,299,431
----------
$9,233,839
----------
----------

(3) LIQUIDITY AND GOING-CONCERN MATTERS

The Company has suffered significant losses in each of the last three
years, and as a result, has had insufficient liquidity to pay its
obligations as they come due, and has defaulted on certain
financial and operating agreements. These matters raise substantial
doubt about its ability to continue as a going concern. The
Company's ability to continue as a going concern depends upon
successfully negotiating deferrals or a restructuring of its
financial obligations, negotiating extended terms under its major
operating agreements, and ultimately, returning to sustained
profitability. The accompanying consolidated financial statements
have been prepared on a going concern basis which assumes
continuity of operations and realization of assets and liquidation
of liabilities in the ordinary course of business. The consolidated
financial statements do not include any adjustments that might
result if the Company were forced to discontinue its operations.

Raytheon Aircraft Corp. and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest
creditor. The Company has financed all 37 of its Beechcraft 1900
aircraft and one of its Brasilia aircraft under related lease and
debt agreements with Raytheon, and Raytheon has also extended the
Company a $5 million line of credit and a $4 million short term
note both of which are secured by accounts receivable and Beech
aircraft spare parts and equipment (collectively, the "Raytheon
Agreements"). The Raytheon Agreements went into default in 1997 due
to the Company's nonpayment of scheduled amounts due. The Raytheon
Agreements also contain cross-default provisions which may be
triggered if the Company's obligations to other creditors are
accelerated as a result of nonpayment of those obligations. The
default provisions of the Raytheon Agreements give Raytheon the
right to accelerate certain amounts due under the Raytheon
Agreements or repossess the aircraft or other assets securing the
Raytheon Agreements.

31 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3) LIQUIDITY AND GOING-CONCERN MATTERS, CONTINUED

The Company reached agreements with Raytheon in the third quarter of
1997 resulting in the restructuring of all of its Raytheon aircraft
agreements, which cured all defaults with Raytheon and allowed the
Company to defer certain lease payments (see note 5). The $4 million
short term note, discussed above, which originally expired in July
1997, has been extended to June 30, 1998. While the Company intends
to seek a further extension of the loans there can be no assurance
that Raytheon will agree to further extensions.

In addition, the Company has financed 11 of its Brasilia aircraft
through five lease and debt agreements with other unrelated
entities (collectively, the "Brasilia Agreements"). During 1997,
all of the Brasilia Agreements went into default due to nonpayment
of scheduled amounts due. One of these Brasilia Agreements has been
subsequently modified to allow deferral of payment of the scheduled
amounts. Except as discussed in the following paragraph, the
Company has cured all of the other Brasilia Agreement defaults
during the year, either by entering into a short term note agreement
or by making the payments current. Remedies available under the
default provisions of the Brasilia Agreements have not been
exercised, but include possible repossession and resale of the
related aircraft, with the Company being responsible to pay any
shortfall between such sale proceeds and the balance of the
underlying obligations.

The Company has returned two Brasilia aircraft to a lessor in June 1997.
In addition the Company has entered into a short term note
agreement in August 1997 with the lessor which covered unpaid
rentals due at that time. In 1998, the Company's lease agreement
was terminated, the Company is currently in negotiation with the
lessor in respect to unpaid rentals, lease termination costs and
the outstanding balance of a short term note agreement. The Company
has accrued estimated lease termination costs in the 1997 financial
statements. Actual results of these ongoing negotiations of the
lease termination could differ materially from these estimates.

As discussed in note 2, the Company has signed an agreement to deliver
all remaining of its Brasilia aircraft (including the two discussed
above) to another party through sales and lease agreements (as
discussed above, the Company is currently negotiating a
modification of the agreement to sell all of their Brasilia
aircraft, and intends on disposing seven Brasilia aircraft). The
Company is currently in negotiations with the other related
Brasilia aircraft lessors and creditors to terminate the existing
leases and debt arrangements that would allow them to deliver the
aircraft. In the first quarter of 1998, the Company has entered
into a lease termination agreement with one of their Brasilia
lessors that leases the Company two Brasilia aircraft. There can be
no assurance that the Company will be able to reach other
acceptable agreements with the remaining Brasilia lessors and
creditors that will allow them to deliver the aircraft under terms
of the agreement. As of December 31, 1997, the Company has accrued
estimated costs related to lease terminations and losses expected
from the sale of owned aircraft and related spare parts. Actual
results from the disposition of the Brasilia aircraft could differ
materially from these estimates.

During 1996 and through the third quarter of 1997, the Company has
extended and increased the past due amounts owed to its trade
vendors. The Company entered into several short term note
agreements totaling approximately $1.8 million with vendors
allowing them to pay the remaining balances, generally over a one
year period. As of December 31, 1997 the Company had remaining
short term note balances related to these agreements of
approximately $.7 million. The Company has also entered into
various other agreements with trade vendors allowing them to
continue operations. The Company has significantly reduced the
total trade payable balances during the third and fourth quarters
of 1997, but continues to have a significant amount of trade
payables past due. There can be no assurance that the Company's
trade vendors will continue to supply the Company with goods and
services on terms acceptable to the Company or that they will
further agree to any credit accommodations on past due amounts owed.

32 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3) LIQUIDITY AND GOING-CONCERN MATTERS, CONTINUED

On April 25, 1997, the United Express Agreement expired. The United
Express Agreement was extended on a monthly basis until December
31, 1998. In 1998, the Company and United have operated under the
terms of the previous United Express Agreement. Currently, the
Company is in default of a covenant of the previous United Express
Agreement as a result of its nonpayment of invoices when due. The
Company earns the majority of its revenues under the United Express
Agreement and, in exchange for certain per passenger fees, receives
certain benefits from its relationship with United including the
listing of its flights under United's computer reservation system
code. Management is negotiating with United to renew the United
Express Agreement. While management believes that initial
discussions have been favorable, there can be no assurance that
such negotiations will be successful or that the United Express
Agreement will be renewed or extended on terms acceptable to the
Company.

Since its inception in October 1995 until May 16, 1997, significant
operating losses were incurred from the Company's operations under
the Midway Connection Agreement. This is partially attributable to
the fact that Midway reduced the number of aircraft in its
operation early in 1996 rather than expanding operations as it had
originally planned. This reduced the number of connecting
opportunities for the Company's flights and, in turn, potential
traffic which could use the Company's services. During the first
quarter of 1997, the Company eliminated certain unprofitable routes
and the number of aircraft committed to Midway services was reduced
from twelve to ten.

As discussed in note 2, the Company terminated all of their operations
as a Midway Connection serving the Southeastern United States,
following the temporary suspension of flight operations on May 16,
1997. The remaining ten aircraft that had been committed to serving
the Southeastern United States, after being recertified by the FAA,
were returned to serving in the Company's core operation in the
Midwest, are currently idle and are considered to be in excess to
the Company's current operating needs or have been subleased to
other parties. The Company and Midway are currently negotiating on
the final settlement of their agreement that was to expire on
October 1, 1997. The settlement is not expected to have a material
adverse effect on the financial statements or operations of the
Company.

The Company has made several revisions to its flight schedule in 1997,
including as previously discussed, the termination of operations as
Midway Connection in the Southeastern United States and as Great
Lakes Airlines in the Southwestern United States. Additionally in
the first quarter of 1998, the Company has announced its plan to
operate certain routes as United Express serving the Western United
States out of Denver. It is anticipated the Company will start
flying the additional routes in the second quarter of 1998. The
Company has continued to analyze opportunities in 1997 and the
first quarter of 1998 to improve its revenues, to increase revenue
passenger yields, and reduce operating expenses. The Company is
also analyzing opportunities to rationalize its capacity levels,
optimize its aircraft fleet and mix (including, as previously
discussed eliminating seven Brasilia aircraft from its operations),
and improve the deployment of its capacity. As part of the Consent
Order, the Company must satisfy the FAA that they have aircraft,
personnel, and other resources prior to commencing operations of
new routes. The Company is currently negotiating to obtain
additional Beechcraft 1900D 19 passenger aircraft, principally through
lease agreements. Finally, the Company has recently negotiated
improved terms and subsidy rates on certain of its routes
subsidized by the U.S. Department of Transportation under the
Essential Air Service program.

33 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3) LIQUIDITY AND GOING-CONCERN MATTERS, CONTINUED

There can be no assurance the operational improvement initiatives the
Company has taken in 1997 and in the first quarter of 1998 will
result in improved operating performance or sustained
profitability. Additionally, there can be no assurance that the
agreements the Company has reached with their trade vendors and
creditors will continue on terms that are acceptable to the
Company. If the Company is unsuccessful in its efforts, it may
continue to be unable meet its current and future obligations,
making it necessary to undertake such other actions as may be
appropriate to preserve asset values, potentially including seeking
protection from its creditors under applicable bankruptcy laws.

(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTS RECEIVABLE

Substantially all accounts receivable balances are due from various
airlines, with approximately 55 percent of the December 31, 1997,
balance and 42 percent of the December 31, 1996, balance due from
United. All receivables are pledged as collateral securing a
$5,000,000 line of credit and a $4,000,000 short term note.

INVENTORIES

Inventories consist of flight equipment spare parts and fuel and are
stated at the lower of average cost or market. An allowance for
depreciation is provided at rates which depreciate the cost of
flight equipment spare parts, less estimated residual value, over
the estimated useful lives of the related aircraft. The accumulated
allowances were $3,513,000 and $3,082,000, respectively, at
December 31, 1997 and 1996. At December 31, 1997, inventories
include the estimated realizable value of $2,008,000 Brasilia
related spare parts, of which the Company intends to dispose.
Expendable parts are charged to maintenance expense as used.
Inventories consisting of Beech aircraft spare parts and equipment
have been pledged as collateral securing a $5,000,000 line of
credit and a $4,000,000 short term note.

PROPERTY AND EQUIPMENT

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

Maintenance and repairs, including periodic aircraft overhauls, are
expensed as incurred.

OTHER ASSETS

Approximately $1,475,500 and $1,800,000 of long-term deposits on
aircraft operating leases at December 31, 1997 and 1996,
respectively, were included in other assets.

34 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

DEFERRED LEASE PAYMENTS

During 1997, the Company failed to make scheduled payments on several
leases and subsequently renegotiated substantially all of their
lease agreements. The renegotiated leases contain higher monthly
payments and or longer payment terms than the original agreements.
The unpaid rentals have been accrued and expensed in the period to
which they related and are being amortized over the new lease terms
of the aircraft as a reduction in future operating costs.

DEFERRED CREDITS

The Company has received various incentives in the form of interest rate
subsidies and spares parts in connection with the acquisition of
new aircraft. Incentives, other than those related to certain
Brasilia Aircraft, which the Company intends to dispose (see note
2), are being amortized as a reduction of rent expense or interest
expense over the term of the related agreement.

REVENUE RECOGNITION

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

FREQUENT FLYER AWARDS

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

INCOME TAXES

The Company accounts for deferred income taxes under the liability
method. Under this method, deferred tax assets and liabilities are
recognized for differences in the financial statement carrying
values of assets and liabilities and their respective tax bases at
tax rates expected to be in effect when the temporary differences
reverse.

LOSS PER SHARE

Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" was adopted by the Company effective December 31, 1997. This
statement replaces the primary and fully diluted earnings per share
(EPS) disclosures with basic and diluted EPS disclosures.

35 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

LOSS PER SHARE, CONTINUED

Basic earnings per share amounts are computed by dividing net earnings
by the weighted average number of common shares outstanding during
the year. Diluted earnings per share amounts are computed by dividing
net loss by the weighted average number of shares and all dilute
potential shares outstanding during the year. Since the Company has
suffered net losses in each of the three years ended December 31,
1997, 1996 and 1995, the adoption of SFAS 128 did not effect
previously reported loss per share data (basic). Diluted per share
amounts are not presented as the consideration of potential shares
would have reduced the reported losses per share. See notes 6 and 8
for a description of certain warrants and stock options which could
materially effect earnings per share in the future.

STOCK OPTIONS

The Company accounts for employee stock options using the intrinsic value
method prescribed under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." (APB No. 25).

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

RECLASSIFICATIONS

Certain balances in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation. These
reclassifications had no effect on net loss or stockholders' equity
as previously reported.

36 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5) FLIGHT EQUIPMENT

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

1997 1996
------------------------------------- ----------------------------------
Beechcraft Beechcraft Beechcraft Beechcraft

1900C 1900D Brasilia 1900C 1900D Brasilia
----- ----- -------- ----- ----- --------

Owned 7 - 4 15 6 4
Operating leases 12 18 6 9 12 8
Leased/subleased aircraft (8) - - - - -
--- --- --- --- --- ---
11 18 10 24 18 12
--- --- --- --- --- ---
--- --- --- --- --- ---

The above table does not include two Brasilia aircraft that were returned
to the lessor in 1997, as discussed in the following paragraphs. As
discussed in note 2, the Company has determined that the seven
Brasilia aircraft (including the two that were returned to the lessor,
discussed above) will not be needed to conduct operations in the
future, and the Company plans to dispose of such aircraft in 1998.

During 1995, the Company and Raytheon amended the terms of certain
aircraft lease agreements which were recorded by the Company as
capital leases. Under the terms of then new amended agreements, these
leases met the criteria for treatment as operating leases. The gain
resulting from these transactions was not material. As discussed in
the following paragraphs, these agreements were again amended in 1997.

Since January 1, 1996, the Company has taken delivery of ten new
Beechcraft 1900D aircraft. All of these aircraft had been initially
financed by the manufacturer under 14-1/2 year operating leases. As
discussed in the following paragraphs, the agreements were amended in
1997. In connection with the lease of these new Beechcraft 1900D
aircraft, the Company acquired the right to sell Raytheon certain
Beechcraft 1900C aircraft at prices equal to the balance owed on the
aircraft.

During 1996, the Company sold eight aircraft to Raytheon and leased them
back under 12-year operating leases with an option to return upon
30-day notice during the first two years. Gains and losses on these
transactions were amortized over the first two years of the lease
agreement because that was the maximum term for which the Company
expected to retain the aircraft. Seven of the aircraft were returned
to Raytheon in 1996 and 1997. The remaining aircraft was destroyed
in November 1996.

During 1997, the Company renegotiated 17 operating lease agreements under
which the Company failed to make timely lease payments to Raytheon.
The new lease agreements have terms ranging from 7-1/2 years to 15
years. The new lease agreements generally require higher monthly
lease payments than the previous lease agreements. The unpaid rentals
due at the time the leases were re-negotiated have been accrued and
expensed in the 1997 financial statements and are being amortized
over the term of the new agreements to offset the effect of the
higher future lease payments. The transaction did not result in a
gain or loss

37 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5) FLIGHT EQUIPMENT, CONTINUED

During 1997, the Company sold eleven aircraft to Raytheon and
leased them back under operating leases with various terms
ranging from 8-1/2 years to 18 years. The gains and losses on
these transactions are being amortized over the term of the
lease agreements.

During 1997, the Company sold two Beechcraft 1900C aircraft to
Raytheon for an aggregate sale price of $5.8 million
representing the balance owed on the aircraft. The aircraft
were then purchased by a related party of the Company,
re-leased under monthly operating lease agreements by the
Company providing for monthly payments of $22,000 per aircraft
and subsequently sub-leased to a third party under a short term
lease agreement with the same terms as the lease. The sub-lease
agreements expire in 1998.

During 1997, the Company sold a Beechcraft 1900C that had
previously been pledged as additional collateral under a lease
agreement with a third party which covers two of its Brasilia
aircraft. The proceeds from the sale were used to purchase a
certificate of deposit which is pledged as collateral for the
Brasilia lease. In the first quarter of 1998, the Company
entered into an agreement with the lessor to terminate the
Brasilia aircraft lease. A substantial portion of the
certificate of deposit will be used to pay the lease
termination costs. The lease termination costs have been
accrued and reflected in the 1997 financial statements (see
note 2).

The Company has returned two Brasilia aircraft to a lessor in June
1997. In addition the Company has entered into a short term
note agreement in August 1997 with the lessor which covered
unpaid rentals due at that time. In 1998, the Company's lease
agreement was terminated, the Company is currently in
negotiation with the lessor in respect to unpaid rentals, lease
termination costs and the outstanding balance of a short term
note agreement. The Company has accrued its best estimate of
those costs in the 1997 financial statements. Actual results of
these ongoing negotiations of the lease termination could differ
materially from these estimates.

As of December 31, 1997 lease commitments for aircraft were as
follows:

BEECHCRAFT
1900 BRASILIA TOTAL
------------ ----------- -----------

1998 $ 12,378,000 5,615,000 17,993,000
1999 12,216,000 4,643,000 16,859,000
2000 12,216,000 4,319,000 16,535,000
2001 12,216,000 4,319,000 16,535,000
2002 12,216,000 4,319,000 16,535,000
Thereafter 84,882,000 29,697,000 114,579,000
------------ ---------- -----------
$146,124,000 52,912,000 199,036,000
------------ ---------- -----------
------------ ---------- -----------

38 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5) FLIGHT EQUIPMENT, CONTINUED

Rent expense under aircraft leases totaled $14,018,000 in 1997
(including $3,306,000) in rentals related to grounded
aircraft), $11,643,000 in 1996, and $5,513,000 in 1995. The Company's
aircraft operating lease agreements contain restrictive covenants
with which the Company must comply. The Company was in compliance
with these covenants at December 31, 1997.

(6) NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and current maturities of long term debt consist of the
following at December 31, 1997 and 1996:

1997 1996
------------ ------------

Term note to Raytheon (A) $ 4,000,000 -
Line of credit with Raytheon (B) 2,803,415 5,000,000
Various short term notes, $300,000
in 1997 is to a related party (C) 1,348,501 1,399,989
Current maturities of long-term debt 2,154,318 5,267,922
------------ ------------
$10,306,234 11,667,911
------------ ------------
------------ ------------

(A) The Company entered into a short term note with Raytheon in July 1997
which has been extended to June 30, 1998. The interest rate is
variable and based on the prime lending rate, which at December 31,
1997 was 8.50 percent. The note is secured by accounts receivable and
Beech aircraft spare parts and equipment and is cross collaterialized
with the other Raytheon agreements.

(B) The Company entered into a $2.5 million line of credit with Raytheon,
that was later amended to increase to a $5.0 million line of credit
in August 1996. The line of credit expired on March 31, 1997, and has
been extended to June 30, 1998. The line of credit is due upon demand.
The interest rate is variable and based on the prime lending rate,
which at December 31, 1997 and 1996 was 8.50 percent and 8.25 percent,
respectively. The note is secured by accounts receivable and Beech
aircraft spare parts and inventory and is cross collaterialized with
the other Raytheon agreements.

(C) Various other short term notes consist of various trade notes, various
lease payment default notes and related party notes in 1997, and various
trade notes in 1996. During 1997 and 1996, the Company converted
approximately $1.8 million each year in trade payables to short term
notes. The notes require monthly payments and are due in 1998. The
interest rates vary with the a maximum interest rate of 10.5 percent. The
notes are unsecured. The related party note is payable to an entity
controlled by the majority shareholder, and is due upon demand with
interest at 12 percent.

39 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(6) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED

Long-term debt consist of the following at December 31, 1997 and 1996:

1997 1996
----------- -----------

Raytheon (D) $20,747,623 60,495,801
Other long-term notes (E) 9,878,187 10,758,064
----------- -----------
30,625,810 71,253,865
Less current maturities of long
term debt 2,154,318 5,267,922
----------- -----------
$28,471,492 65,985,943
----------- -----------
----------- -----------

(D) The Raytheon notes consist of eight term notes in 1997 and twenty
nine term notes in 1996. As discussed in note 5, many of the term
notes outstanding at December 31, 1996 were repaid in connection
with sale-leaseback transactions in 1997. Additionally all of the
remaining notes were amended in 1997 due to payment defaults by the
Company. The notes require monthly payments through October 2006.
The interest rates on all of the remaining note agreements, after
the amendments, are 7.50 percent at December 31, 1997 and ranged
from 6.60 percent to 9.0 percent at December 31, 1996. The notes are
collateralized by aircraft.

(E) Other long term notes consist of three term notes in 1997 and 1996.
The notes require monthly or quarterly payments through July 2007.
The interest rates on the notes are approximately 9.05 percent at
December 31, 1997 and 1996, respectively. The notes are
collateralized by aircraft.

The Company's aircraft note agreements contain restrictive covenants
with which the Company must Comply. The Company was in compliance
with these covenants at December 31, 1997.

In connection with the refinancing of the Company's long-term notes,
short term note agreements, and the restructuring of the Company's
lease agreements, the Company issued Raytheon a warrant to purchase
one million shares of the Company's stock, at the then current
market price of the stock. The warrant is exercisable for ten years
beginning July 16, 1998 at a price of $.75 per share. Accordingly,
the Company has recorded a discount equal to the estimated fair
value of the warrant on the date of issuance ($650,000), which is
being amortized as additional interest expense over the weighted
average life of the debt and lease agreements to which it relates.
As of December 31, 1997, the remaining unamortized discount is
$617,500, and is included above as a component of long-term debt.

The fair value of the Company's debt instruments at December 31, 1997
and 1996, are not reasonably determinable considering the financial
condition of the Company.

40 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(6) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED

As of December 31, 1997, the long-term debt obligations due in the five
subsequent years and thereafter were as follows:

Beechcraft
1900s Brasilias Total
----- --------- -----

1998 $ 743,501 1,410,817 2,154,318
1999 2,080,061 1,782,342 3,862,403
2000 1,700,921 1,988,360 3,689,281
2001 1,837,571 2,908,082 4,745,653
2002 1,985,151 1,368,549 3,353,700
Thereafter 9,439,089 3,998,866 13,437,955
----------- ---------- ----------
$17,786,294 13,457,016 31,243,310
----------- ---------- ----------
----------- ---------- ----------

(7) INCOME TAXES

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

1997 1996 1995
---- ---- ----

Current $ - - -
Deferred - (1,453,640) (1,503,000)
----------- ---------- ----------
$ - (1,453,640) (1,503,000)
----------- ---------- ----------
----------- ---------- ----------

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

1997 1996 1995
---- ---- ----

Federal statutory rate (34.0%) (34.0%) (34.0%)
State income taxes,
net of federal benefit (4.0) (4.0) (4.0)
Change in valuation
allowance 38.0 27.8 2.1
----- ----- -----
(10.2%) (35.9%)
----- ----- -----
----- ----- -----

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

1997 1996
---- ----

Net operating loss carryforwards $ 7,605,000 10,708,000
Property and equipment (3,150,000) (9,916,000)
Accrued liabilities and other 4,959,000 2,827,000
----------- ----------
9,414,000 3,619,000
Valuation allowance (9,414,000) (3,619,000)
----------- ----------
Total deferred tax asset
(liability) $ - -
----------- ----------
----------- ----------

The Company has net operating loss carryforwards for federal income tax
purposes totaling approximately $21,700,000 at December 31, 1997,
expiring in years from 2005 through 2010.

41 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8) EMPLOYEE BENEFIT PLANS

401(k)

The Company maintains a qualified 401(k) employee savings plan for the
benefit of substantially all employees. The Company matches up to
4 percent of participating employees' contributions. Company
contributions totaled $276,000 in 1997, $316,000 in 1996, and
$260,000 in 1995.

STOCK OPTION PLANS

In November 1993, the Company adopted The Great Lakes Aviation, Ltd.
1993 Stock Option Plan and the 1993 Director Stock Option Plan (the
Plans). Under the Plans, options to purchase an aggregate of not
more than 600,000 shares of common stock may be granted from time
to time to key employees, officers, and directors of the Company.
Transactions involving the Plans for the years ended December 31,
1997, 1996, and 1995, were as follows:

Shares Price per share
-------- ---------------

Outstanding at December 31, 1994 275,000 $6.50-$11.00
Terminated (45,000) $7.36-$11.00
Repricing reduction (63,000) $3.88-$11.00
--------
Outstanding at December 31, 1995 167,000 $3.88-$11.00
Granted 50,000 $3.75-$ 4.13
Terminated (47,500) $3.88-$ 8.62
--------
Outstanding at December 31, 1996 169,500 $3.88-$11.00
Granted -
Terminated (131,500) $3.75-$ 4.13
--------
Outstanding at December 31, 1997 38,000 $3.88-$11.00
--------
--------
Exercisable at December 31, 1997 19,200 $3.88-$11.00
--------
--------
Available for grant at December 31, 1997 562,000
--------
--------

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

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

42 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8) EMPLOYEE BENEFIT PLANS, CONTINUED

EMPLOYEE STOCK PURCHASE PLAN

The Company maintains an employee stock purchase plan. Under the plan,
certain employees are eligible to purchase an aggregate of not more
than 125,000 shares of the Company's common stock at 95 percent of
the lower of the fair market value at the beginning or the end of
the calendar year in which the shares are purchased. In 1998 and
1997, 1,722 and 2,795 shares were purchased with 1997 and 1996
payroll withholdings, respectively.

(9) COMMITMENTS AND CONTINGENCIES

In connection with the acquisition of the Brasilia aircraft, the
Brazilian government has provided a financing subsidy to the
Company in the form of semiannual payments directly to the Company.
The Company has deferred those payments and amortized the payments
over the term of the financing on a straight-line basis. For those
seven Brasilia aircraft which the Company intends to dispose, the
remaining deferred amount related to those aircraft was included as
a reduction of the net book value of the owned Brasilia aircraft
and as a reduction the estimated lease termination costs on leased
Brasilia aircraft. The Company expects that it will transfer the
right to receive future subsidy payments in connection with the
sale of aircraft or termination of leases. The remaining subsidy
payments are not collateralized or otherwise secured against the
credit risk of the Brazilian government.

The Company leases certain small aircraft used in its charter
operations. Beginning in December 1994, two Beechcraft Model 1900
19-passenger aircraft used in airline operations were financed
under operating leases from a company owned by Great Lakes'
president and majority stockholder. Total payments under these
leases were $830,000 in 1997, $884,000 in 1996, and $844,000 in
1995.

The FAA imposed penalties on the Company for non-compliance during the
shutdown which occurred in May 1997. These penalties total
$1,000,000, of which $700,000 has been suspended for the period of
12 calendar months from the date of the Consent Order, and shall be
waived if the Company complies with all the terms and conditions of
the Consent Order. The $300,000 minimum penalty has been expensed
during 1997. The remaining $700,000 has not been accrued as the
Company believes that it has and will comply with the Consent Order
for all relevant periods.

NONAIRCRAFT LEASE COMMITMENTS

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

1998 $2,532,000
1999 150,000
2000 146,000
2001 38,000
2002 18,000
Thereafter 3,000
----------
$2,887,000
----------
----------

43 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9) COMMITMENTS AND CONTINGENCIES, CONTINUED

SLOT ALLOCATIONS

On August 29, 1995, United exercised its contractual option and
effective October 29, 1995, purchased ten of the Company's landing
and takeoff slots at Chicago O'Hare airport for $3,850,000. The sale
of the slots resulted in a gain of $3,850,000 which was recorded in
the fourth quarter of 1995. These ten slots were the only slots owned
by the Company which were not encumbered by requirements to provide
essential air service to small communities. The Company had an
agreement to lease these slots from United for $11,000 per month
until May 1997. Thereafter, the Company has not paid any separate
consideration for the use of these slots.

United has an option which expired concurrently with the United Express
Agreement in April 1997, which was extended on a monthly basis to
December 31, 1997, to acquire all or any portion of the Company's
slots for the lesser of their fair market value or certain
specified maximum prices set forth in the option agreement. United
did not exercise its option to purchase the slots prior to the
expiration of the United Express Agreement. The maximum aggregate
purchase price for the 54 slots was $26.2 million. United's
acquisition of the slots would be subject to the approval of the
U.S. Department of Transportation (DOT) and the assumption by
United of essential air service responsibility to certain communities.
In the event United acquires the slots, the Company has the right
to lease the slots from United for a period of one year thereafter.

LITIGATION

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

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

44 (Continued)

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents selected quarterly unaudited financial data for
each of the years ended December 31, 1997 and 1996 (in thousands,
except for per share information):

First Second Third Fourth
quarter quarter quarter quarter Year
------- ------- -------- ------- -----
1997
----

Operating revenues $ 26,688 $ 19,340 $ 20,374 $ 17,408 $ 83,790
Excess aircraft, shutdown, and
other nonrecurring expenses - 4,217 2,638 4,512 9,234
Operating income (loss) (3,174) (5,363) 242 (7,488) (13,650)
Net loss (4,787) (6,823) (1,045) (7,748) (18,271)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per share $ (.63) $ (.90) $ (.14) $ (1.02) $ (2.41)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average
shares outstanding 7,586 7,589 7,589 7,589 7,589

1996
----

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

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

45

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

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

1997
Inventory Reserves $ 3,082,000 $ 2,172,000 $ - $1,741,000 $ 3,513,000

1996
Inventory Reserves 1,380,000 2,332,000 - 630,000 3,082,000

1995
Inventory Reserves 937,000 678,000 132,000 366,000 1,380,000

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

(2) Balance sheet adjustment for capital lease conversion.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

46

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of the Company is incorporated
herein by reference to the descriptions set forth under the caption
"Executive Officers" and "Election of Directors" in the Proxy Statement for
Annual Meeting of Shareholders to be held June 12, 1998 (the "1998 Proxy
Statement").

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by
reference to the information set forth under the caption "Executive
Compensation" in the 1998 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1998 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions
with the Company is incorporated herein by reference to the information set
forth under the caption "Certain Transactions" in the 1998 Proxy Statement.

PART IV

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

(a) DOCUMENTS FILED WITH THIS REPORT.

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

(b) REPORTS ON FORM 8-K. During the quarter ended December 31, 1997, the
Company filed no reports on Form 8-K with the Securities and Exchange
Commission.

(c) EXHIBITS

3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 Promissory Note payable to Raytheon in the amount of $3,445,000, dated
December 30, 1992, together with related security agreement.(1)
10.2 Schedule identifying other Promissory Notes payable to Raytheon,
which are substantially identical in all material respects to
Exhibit 10.1.(1)
10.3 Form of Aircraft Lease Agreement dated March 6, 1990, by and between
Raytheon and the Company.(1)
10.4 United Express Agreement, dated February 28, 1992, by and between
United Air Lines, Inc. and the Company (certain portions deleted
pursuant to request for confidential treatment).(1)
10.5 Standard Ground Handling Agreement, dated April 3, 1991, by and between
United Air Lines, Inc. and the Company.(1)

47

10.6 United Express Fare Revenue Sharing Agreement, dated February 28, 1992,
by and between United Air Lines, Inc. and the Company (certain portions
deleted pursuant to request for confidential treatment).(1)
10.7 Letter Agreement, dated April 21, 1995, amending the United Express
Agreement (certain portions deleted pursuant to request for confidential
treatment).
10.8 United Express Interline Agreement, dated February 28, 1992, by and
between United Air Lines, Inc. and the Company.(1)
10.9 O'Hare License Agreement, dated April 1, 1991, by and between United
Air Lines, Inc. and the Company (certain portions deleted pursuant to
request for confidential treatment).(1)
10.10 Hector International Airport Terminal License Agreement, dated
September 8, 1994, by and between United Air Lines, Inc. and the Company
(certain portions deleted pursuant to request for confidential
treatment).(1)
10.11 Airport/Airport Facilities Lease Agreement, dated November 1, 1989, by
and between Minneapolis-St. Paul Airport and the Company.(1)
10.12 Great Lakes Aviation, Ltd. 1993 Stock Option Plan.(1)
10.13 1993 Director Stock Option Plan.(1)
10.14 Great Lakes Aviation, Ltd. Employee Stock Purchase Plan.(1)
10.15 Facilities Lease Agreement, dated February 18, 1992, by and between the
City of Spencer, Iowa and the Company.(1)
10.16 Agreement in Principle, dated August 29, 1991, by and between United
Air Lines, Inc. and the Company (certain portions deleted pursuant to
request for confidential treatment).(1)
10.17 Fifth Amendment to the Agreement in Principle, dated November 12, 1993,
by and between United Air Lines, Inc. and the Company (certain portions
deleted pursuant to request for confidential treatment).(1)
10.18 Aircraft Finance Agreement, dated March 1, 1994, by and between
Raytheon and the Company.(2)
10.19 Aircraft Finance Agreement, dated March 1, 1994, by and between
Raytheon and the Company.(2)
10.20 Negotiable Promissory Note dated March 30, 1996, from the Company to
Raytheon Aircraft Credit Corporation.(2)
10.21 Negotiable Promissory Note, dated July 31, 1996, from the Company to
Raytheon Aircraft Credit Corporation.(3)
10.22 Consent Order entered into by the Company and the Federal Aviation
Administration on May 23, 1997. (4)
10.23 Warrant Agreement, dated July 23, 1997, by and between Raytheon
Aircraft Credit Corporation and the Company.
11. Statement regarding computation of per share earnings.(5)
Consent of Independent Public Accountants
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick
27. Financial Data Schedule

- ----------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-71180 (the "Form S-1").
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(4) Incorporated by reference to the Company's Form 8-K, File Number
97616934, filed May 23, 1997.
(5) Income per common share amounts is computed by dividing net income
applicable to common stockholders by the weighted average number of common
shares outstanding. Common stock equivalents related to stock options
which would have a dilutive effect based upon current market prices had no
effect on net income per common share in each of the years presented in the
Company's Statements of Income and, accordingly, this exhibit is not
applicable to this filing.

48

SIGNATURES

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

GREAT LAKES AVIATION, LTD.

Dated: April 17, 1998 By /s/ Douglas G. Voss
-------------------------------------
Douglas G. Voss,
President and Chief Executive Officer

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

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

/s/ Steven J. Wagner
- --------------------------- Vice President, Chief Accounting Officer
Steven J. Wagner

/s/ Richard A. Hanson
- --------------------------- Vice President, Controller
Richard A. Hanson

/s/ Vernon A. Mickelson
- --------------------------- Director
Vernon A. Mickelson

/s/ Gayle R. Voss
- --------------------------- Director
Gayle R. Voss

/s/ Ivan L. Simpson
- --------------------------- Director
Ivan L. Simpson

49