WORLD AIRWAYS INC /DE/ - 10-K Annual Report

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------

For the fiscal year ended: DECEMBER 31, 1997 Commission File Number 0-26582

WORLD AIRWAYS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 94-1358276
(State of incorporation) (I.R.S. Employer Identification Number)

13873 Park Center Road, Suite 490, Herndon, VA 20171
(Address of Principal Executive Offices)
(703) 834-9200
(Registrant's telephone number)

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

Title of Each Class Name of Each Exchange on Which Registered

Common Stock par value $.001 per share Nasdaq Stock Market

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No State 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 the Common Stock held by non-affiliates of the
registrant on March 13, 1998, was approximately $13,152,787. The number of
shares of the registrant's Common Stock outstanding on March 13, 1998 was
7,230,064.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of World Airways, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Report.

WORLD AIRWAYS, INC.

1997 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Page

PART I

Item 1. Business...........................................................3

Item 2. Properties........................................................10

Item 3. Legal Proceedings.................................................10

Item 4. Submission of Matters to a Vote of Security Holders...............10

PART II

Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters....................................................11

Item 6. Selected Financial Data...........................................12

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................13

Item 8. Financial Statements and Supplementary Data.......................26

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................55

PART III

Item 10. Directors and Executive Officers of the Registrant................55

Item 11. Executive Compensation............................................56

Item 12. Security Ownership of Certain Beneficial Owners and Management....56

Item 13. Certain Relationships and Related Transactions....................56

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...57

PART I ITEM 1. BUSINESS

World Airways was organized in March 1948 and became a wholly owned
subsidiary of WorldCorp, Inc. ("WorldCorp") in a holding company reorganization
in 1987. In February 1994, pursuant to an October 1993 agreement, WorldCorp sold
24.9% of its ownership to MHS Berhad ("MHS"), a Malaysian aviation company.
Effective December 31, 1994, WorldCorp increased its ownership in the Company to
80.1% through the purchase of 5% of World Airways common stock held by MHS. In
October 1995, the Company completed an initial public offering. Effective
January 23, 1998, WorldCorp and MHS own 51.2% and 16.8%, respectively, of the
outstanding common stock of World Airways, with the balance publicly traded. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") - Background" for transactions effecting ownership of the
Company.

The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore,
this report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the reliance on key strategic
alliances, fluctuations in operating results and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
These risks could cause the Company's actual results for 1998 and beyond to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.

The principal executive offices of World Airways are located at Washington
Dulles International Airport in The Hallmark Building, 13873 Park Center Road,
Herndon, Virginia 20171. World Airways' telephone number is (703) 834-9200.
Overview

World Airways is a global provider of long-range passenger and cargo air
transportation outsourcing services to major international airlines under fixed
rate contracts. Airline operations account for 100% of the Company's operating
revenue and operating income. The Company's passenger and freight operations
employ 12 wide-body aircraft which are operated under contracts, a substantial
portion of which are with Pacific Rim airlines. These contracts generally
require the Company to supply aircraft, crew, maintenance and insurance ("ACMI"
or "wet lease"), while the Company's customers are responsible for a large
portion of the other operating costs, including fuel. World Airways' airline
customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offers greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is one of the largest suppliers of
commercial aircraft to the United States Air Force's Air Mobility Command ("U.S.
Air Force" or "USAF").

In July 1996, World Airways restructured its business to focus on ACMI
contract services. As such, the Company ceased all scheduled passenger and
scheduled charter services as of October 27, 1996, taking a one-time charge for
estimated loss on disposal of $21.0 million as of June 30, 1996.

World Airways' operating philosophy is to build on its existing ACMI
relationships to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts which shift yield, load factor and cost risks to
the customer. The customer bears the risk of filling the aircraft with
passengers or cargo and assumes a large portion of the operating expenses,
including fuel. World Airways has elected to emphasize its ACMI business because
the Company perceives a number of opportunities created by a growing global
economy, particularly growth in second and third world economies where the
demand for airlift exceeds capacity. World Airways attempts to maximize
profitability by combining its multi-year ACMI contracts with short term,
higher-yielding ACMI agreements which meet the peak seasonal requirements of its
customers. The Company responds opportunistically to rapidly changing

market conditions by maintaining a flexible fleet of aircraft that can be
deployed in a variety of configurations.

World Airways focuses its marketing efforts on countries where rapid
economic development drives demand for the Company's services. The Company
believes that its modern fleet of long-range medium-density wide-body MD-11 and
DC10-30 aircraft are well suited to these less dense international routes and
provide superior economics as compared to other popular aircraft such as the
Boeing 747 which has greater capacity.

World Airways substantially increases its potential customer base by being
able to serve both passenger and cargo customers. The Company flies passenger,
cargo and passenger/cargo convertible aircraft that the Company believes permit
the Company to target emerging opportunities. World Airways has been providing
safe, reliable services for over 50 years. The Company has flown for the USAF
since 1956, for Malaysian Airlines System Berhad ("Malaysian Airlines") since
1981 and for Garuda Indonesia ("Garuda") since 1973.

Customers

Over the years, the Company has had relationships with a number of major
international airlines and with the USAF (see "MD&A - Customers"). The Company's
growth strategy is based, first and foremost, upon providing the highest level
of service to these customers, thereby maintaining and expanding the amount of
business being done through long-term contracts.

The information regarding major customers and foreign revenue is contained
in Note 15 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.

Information concerning the classification of products within the air
transportation industry comprising 10% or more of the Company's operating
revenues from continuing operations is presented in the following table (in
millions):

Year Ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----

Flight Operations - Passenger $ 267.3 $ 257.6 $ 168.0
Flight Operations - Cargo 39.5 39.3 64.6

COMPETITION AND SEASONALITY

See Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 18 "Unaudited Quarterly Results" of the Company's "Notes to
Financial Statement" in item 8.

AVIATION FUEL

The Company's source of aviation fuel is primarily from major oil companies,
under annual delivery contracts, at often frequented commercial locations, and
from United States military organizations at military bases. The Company's
current fuel purchasing policy consists of the purchase of fuel within seven
days in advance of all flights based on current prices set by individual
suppliers. More than one supplier is under contract at several locations. The
Company purchases no fuel under long-term contracts nor does the Company enter
into futures or fuel swap contracts.

The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant impact on the
Company's operations in recent years because, in general, the Company's ACMI
contracts with its customers limit the Company's exposure to increases in fuel
prices. However, a substantial increase in the price or the unavailability of
aviation fuel could have a material adverse effect on the air transportation
industry in general and the financial condition and results of operations of the
Company.

REGULATORY MATTERS

Since it was founded in 1948, the Company has been authorized to engage in
commercial air transportation by the DOT or its predecessor agencies. The
Company is currently authorized to engage in the scheduled and charter air
transportation of combination (persons, property and mail) and all-cargo
services between all points in the U.S., its territories and possessions. It
also holds worldwide charter authority for both combination and all-cargo
operations. In addition, the Company is authorized to conduct scheduled
combination services to the foreign points listed in its DOT certificate. The
Company also holds certificates of authority to engage in scheduled all-cargo
services to a limited number of foreign destinations.

The Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including flight operations, equipment, aircraft
noise, ground facilities, dispatch, communications, training weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using specified
equipment. These certificates and specifications are subject to amendment,
suspension, revocation or termination by the FAA. In addition, all of the
Company's aircraft must have and maintain certificates of airworthiness issued
or approved by the FAA. The Company currently holds an FAA air carrier operating
certificate and operations specifications under Part 121 of the Federal Aviation
Regulations. The FAA has the authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed personnel for failure
to comply with regulations promulgated by the FAA and to assess civil penalties
for such failures.

Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft fleet must comply with certain Stage 3 noise restrictions
by certain specified deadlines. All of the Company's aircraft currently meet the
Stage 3 noise reduction requirement, which is currently the most stringent FAA
noise requirement. FAA regulations require compliance with the Traffic Alert and
Collision Avoidance System ("TCAS"), approved airborne windshear warning system
and aging aircraft regulations.

Additional laws and regulations have been proposed from time to time which could
significantly increase the cost of airline operations by imposing additional
requirements or restrictions on operations. Laws and regulations have been
considered from time to time that would prohibit or restrict the ownership and
transfer of airline routes or slots. There is no assurance that laws and
regulations currently enacted or enacted in the future will not adversely affect
the Company's ability to maintain its current level of operating results.

Several aspects of airline operations are subject to regulation or oversight by
Federal agencies other than the DOT or FAA. For instance, labor relations in the
air transportation industry are generally regulated under the Railway Labor Act,
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. In addition, the Company is subject to the jurisdiction
of other governmental entities, including (i) the FCC regarding its use of radio
facilities pursuant to the Federal Communications Act of 1934, as amended, (ii)
the Commerce Department, the Customs Service, the Immigration and Naturalization
Service, and the Animal and Plant Health Inspection Service of the Department of
Agriculture regarding the Company's international operations, (iii) the
Environmental Protection Agency (the "EPA") regarding compliance with standards
for aircraft exhaust emissions and (iv) the Department of Justice regarding
certain merger and acquisition transactions. The EPA regulates operations,
including air carrier operations, which affect the quality of air in the U.S.
The Company has made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke emissions standards issued by the EPA.

The Company's international operations are generally governed by the network of
bilateral civil air transport agreements providing for the exchange of traffic
rights between governments which then select and designate air carriers
authorized to exercise such rights. In the absence of a bilateral agreement,
such international air services are governed by principles of comity and
reciprocity. Bilateral provisions pertaining to the wet lease services in which
the Company is primarily engaged vary considerably depending on the particular
country. Most bilateral agreements into which the U.S. has entered permit either
country to terminate the agreement with one year's

notification to the other. In the event a bilateral agreement is terminated,
international air service between the affected countries is governed by the
principles of comity and reciprocity.

Certain airports served by the Company are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, the Company has generally been successful
in obtaining the slots it needs in order to conduct planned operations. There
can be no assurance, however, that it will be able to do so in the future
because, among other factors, government policies regulating the distribution of
slots, both in the U.S., and in foreign countries, are subject to change.

Pursuant to federal law, no more than 25% of the voting interest in the Company
may be owned or controlled by foreign citizens. In addition, under existing
precedent and policy, actual control must reside in U.S. citizens. As a matter
of regulatory policy, the DOT has stated that it would not permit aggregate
equity ownership of a domestic air carrier by foreign citizens in an amount in
excess of 49%. The Company fully complies as of the date hereof with these U.S.
citizen ownership requirements.

Due to its participation in CRAF, the Company is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1996 and the next is anticipated to occur in 1998. As a result of
such inspections, the Company has been required to implement measures, such as
the establishment of a crew resource management course, beyond those required by
the DOT, FAA and other government agencies. The USAF may terminate its contract
with the Company if the Company fails to pass such inspection or otherwise fails
to maintain satisfactory performance levels, if the Company loses its
airworthiness certificate or if the aircraft pledged to the contracts lose their
U.S. registry or are leased to unapproved carriers.

The Company believes it is in compliance in all material respects with all
requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of the Company's DOT or FAA
authorizations or certificates could have a material adverse effect upon the
Company. The Company also is subject to state and local laws and regulations at
locations where it operates and the regulations of various local authorities
which operate the airports it serves. Certain airport operations have adopted
local regulations which, among other things, impose curfews and noise abatement
regulations. While the Company believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company.

EMPLOYEES

As of March 2, 1998, the Company had 801 full time employees classified as
follows:

Number of
Classification Full-Time Employees
- -------------- -------------------
Management..................................................... 8
Aministrative and Operations.................................. 298
Cockpit Crew (including pilots)................................ 298
Flight Attendants (active)..................................... 197
---
Total Employees............................................ 801
===

The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 1998.
Approximately 37% of the Company's employees are covered under the collective
bargaining agreement. The Company expects to begin negotiations in April 1998
and cannot predict the outcome of the negotiations or their possible impact on
the Company's financial condition and results of operations.

The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants argued the "scope clause" of the
collective bargaining agreement had been violated by the Company and challenged
the use of foreign flight attendant crews on the Company's flights for Malaysian
Airlines and Garuda Indonesia which has historically been the Company's
operating procedure. The Company is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter denied in 1997 the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. Subsequently, in 1997, the flight attendants challenged and filed
"scope clause" grievances with respect to four separate wet-lease contracts. The
Company and the Teamsters are presently in discussions regarding these
grievances. At this time, however, the Company can give no assurance that these
discussions will be successful and the grievances will not be submitted to
formal arbitration. The Company can provide no assurance as to how the
resolution of this matter will affect the Company's financial condition and
results of operations.

The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract was ratified in February 1996. Fewer than 12 Company employees are
covered by this collective bargaining agreement.

The Company is unable to predict whether any of its employees not currently
represented by a labor union, such as the Company's maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election by such employees of representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial results of the Company.

ITEM 2. PROPERTIES

FLIGHT EQUIPMENT

At December 31, 1997, the Company's aggregate operating fleet consisted of 12
leased aircraft as follows (see Note 11 "Long-Term Obligations" of the Company's
"Notes to Financial Statements" in Item 8):

Capacity
Aircraft (a) Passenger (seats)(b) Cargo (Tons) Total (c)
- ------------ -------------------- ------------ ---------

McDonnell Douglas MD-11 409 -- 3
McDonnell Douglas MD-11F -- 95 1
McDonnell Douglas MD-11CF 410 90 2
McDonnell Douglas MD-11ER 409 -- 2
McDonnell Douglas DC10-30 350 -- 3
McDonnell Douglas DC10-30CF 380 65 1
--
Total 12
==

Notes
a) "F" aircraft are freighters, "CF" are convertible freighters and
may operate in either passenger or freight configurations. "ER"
aircraft maintain extended-range capabilities. Aircraft with no
letter designation are passenger-only aircraft.
b) Based on standard operating configurations. Other configurations are
occasionally used.
(c) Lease terms expire between 1998 and 2020 (assuming exercise of all
lease extensions).

GROUND FACILITIES

The Company leases office space located near Washington Dulles International
Airport which houses its corporate headquarters and substantially all of the
administrative employees of the Company. In addition, the Company leases
additional office and warehouse space in Wilmington, Delaware; Philadelphia,
Pennsylvania; New York, New York; Los Angeles, California; Kuala Lumpur,
Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small offices and
maintenance material storage space are leased at often frequented airports to
provide administrative and maintenance support for commercial and military
contracts.

ITEM 3. LEGAL PROCEEDINGS

For a description of the Company's current legal proceedings, see Note 17,
"Commitments and Contingencies" of the Company's "Notes to Financial Statements"
in Item 8.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK & RELATED SECURITY HOLDER
MATTERS

The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM under the symbol: WLDA. The high and low sales prices of
the Company's common stock, as reported on the Nasdaq National Market, for each
quarter in the last two fiscal years are as follows:

Common Stock
----------------------
High Low
---- ---
1997
----
Fourth Quarter 9 1/2 6 3/8
Third Quarter 9 1/2 5 1/4
Second Quarter 9 3/4 6 1/4
First Quarter 10 1/2 7

1996
----
Fourth Quarter 11 1/8 6 5/8
Third Quarter 7 3/4 4 3/4
Second Quarter 11 1/4 6 3/4
First Quarter 11 1/8 6

The Company has not declared or paid any cash dividends or distributions on its
common stock since the payment of a distribution to WorldCorp in 1992. The
Company currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on its common stock will depend upon the
results of operations, financial condition, capital expenditure plans of the
Company, provisions of certain financing instruments as well as such other
factors as the Board of Directors, in its sole discretion, may consider
relevant.

Under the terms of the shareholders agreement among the Company, WorldCorp,
and MHS, the Company has agreed to declare and distribute all dividends properly
payable, subject to the requirements of law and general overall financial
prudence. The Credit Agreement with BNY Financial Corporation (as amended
subsequent to year end, the "Credit Agreement") contains restrictions on the
Company's ability to pay dividends or make any distributions of common stock in
excess of 5% of the total aggregate outstanding amount of stock, except that the
Company may make quarterly dividends so long as in any six month period, such
dividends do not exceed 50% of the Company's aggregate net income for the
previous six months.

WorldCorp is subject to the provisions of an indenture, expiring in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under the indenture. However, the indenture is not
applicable to World Airways if WorldCorp's ownership percentage is below 51% of
the issued and outstanding shares of common stock. As a result of the Company's
purchase of its common stock from MHS effective January 23, 1998, WorldCorp
owned approximately 51.2% of the outstanding common stock.

The approximate number of shareholders of record at March 13, 1998 is 71, and
does not include those shareholders who hold shares in street name accounts.

ITEM 6. SELECTED FINANCIAL DATA

WORLD AIRWAYS, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)

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

RESULTS OF OPERATIONS:

Operating revenues $ 309,412 $ 309,587 $ 242,386 $ 180,715 $ 178,736
Operating expenses 292,555(1) 287,942 226,488 185,916(2) 186,065(3)
Operating income (loss) 16,857 21,645 15,898 (5,201) (7,329)
Earnings (loss) from continuing
operations before income taxes 12,230 19,032 14,748 (9,027) (8,985)
Earnings (loss) from continuing
operations 11,967 18,353 14,146 (9,001) (9,048)
Discontinued operations (515) (32,375) (5,250) -- --
Net earnings (loss) 11,452 (14,022) 8,896 (9,001) (9,048)
Cash dividends -- -- -- -- --
Basic earnings (loss) per common share(5):
Continuing operations $ 1.16 $ 1.55 $ 1.35 $ (0.92) $ (1.02)
Discontinued operations (0.05) (2.74) (0.50) -- --
Net earnings (loss) 1.11 (1.19) 0.85 (0.92) (1.02)
Weighted average common stock
outstanding(4) 10,302 11,806 10,477 9,812 8,874
Diluted earnings (loss) per common share(5):
Continuing operations $ 1.09 $ 1.55 $ 1.34 $ * $ *
Discontinued operations (0.05) (2.74) (0.50) * *
Net earnings (loss) 1.04 (1.19) 0.84 * *
Weighted average common stock and
common equivalent shares outstanding(4) 12,279 11,806 10,572 9,939 9,000

FINANCIAL POSITION:

Cash and restricted short-term
investments $ 25,887 $ 8,075 $ 26,180 $ 4,722 $ 11,746
Total assets 149,148 127,524 130,695 78,051 88,512
Notes payable and long-term obligations
including current maturities 88,966 50,538 37,112 33,826 42,256
Common stockholders' equity (deficit) (4,771) 8,362 30,340 (1,367) (7,756)
Dividends -- -- -- -- --

(1) Operating expenses in 1997 include a $0.9 million reversal of aircraft costs
incurred in 1996 relating to reimbursements for disputed spare engine lease
charges and a $1.0 million reversal of accrued maintenance expense in excess
of the cost of an overhaul of a DC-10 aircraft.
(2) Operating expenses in 1994 include a $4.2 million reversal of excess accrued
maintenance reserves associated with the expiration of three DC10-30
aircraft leases during 1994.
(3) Operating expenses in 1993 include $2.3 million of termination fees related
to the early return of three DC10-30 aircraft.
(4) All share and per share data for the periods presented have been restated
to reflect the 1-for-88, 737 reverse stock split which was effectuated in
February 1994.
(5) Earnings per share for the periods presented have been calculated in
accordance with Financial Accounting Standards Board's Statement of
Financial Accounting Standard No. 128, Earnings Per Share.

* Diluted earnings per share are anti-dilutive.

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

OVERVIEW

BACKGROUND

Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below relates to the operations of World Airways, Inc.
("World Airways" or "the Company") as reflected in its financial statements.

The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore, this
report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the reliance on key strategic
alliances, fluctuations in operating results and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
These risks could cause the Company's actual results for 1998 and beyond to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.

World Airways was organized in March 1948 and became a wholly owned subsidiary
of WorldCorp, Inc. ("WorldCorp") in a holding company reorganization in 1987. In
February 1994, pursuant to an October 1993 agreement, WorldCorp sold 24.9% of
its ownership to MHS Berhad ("MHS"), a Malaysian aviation company. Effective
December 31, 1994, WorldCorp increased its ownership in the Company to 80.1%
through the purchase of 5% of World Airways common stock held by MHS. In October
1995, the Company completed an initial public offering in which 2,000,000 shares
were issued and sold by the Company and 900,000 shares were sold by WorldCorp.
On September 18, 1997, the Company purchased 3,227,000 shares of its common
stock from WorldCorp. At December 31, 1997, WorldCorp and MHS owned 46.3% and
24.9%, respectively, of the outstanding common stock of World Airways. The
balance was publicly traded. Effective January 23, 1998, the Company purchased
773,000 shares of its common stock from MHS in accordance with the shareholders
agreement (see Note 1 of "Notes to Financial Statements" in Item 8). Therefore,
effective January 23, 1998, WorldCorp and MHS own 51.2% and 16.8%, respectively,
of the outstanding common stock of World Airways, with the balance publicly
traded.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures (the "Debentures") due
in 2004 (the "Offering"). The Debentures were subsequently registered with the
Securities and Exchange Commission. The Debentures are unsecured obligations,
convertible into shares of the Company's common stock at $8.90 per share,
subject to adjustment in certain events, and subordinated to all present and
future senior indebtedness of the Company. In the event of a change in control
of the Company, as defined, the holders of the Debentures could require the
Company to repurchase the outstanding Debentures. The Debentures are not
redeemable by the Company prior to August 26, 2000. The Company's intended use
of net proceeds of the Offering was to repurchase approximately 4.0 million
shares of its common stock, repay certain indebtedness, increase working capital
and for general corporate purposes. After completion of the Offering, the
Company repaid approximately $3.8 million as full settlement of an outstanding
spare parts loan. In addition, failure by the Company to repurchase at least
4.0 million shares of common stock within 150 days after the sale of the
Debentures would constitute a repurchase event whereby each holder of the
Debentures would have the right, at the holder's option, to require the Company
to repurchase such holder's Debentures at 100% of their principal amount, plus
accrued interest. As discussed below, the Company fulfilled its 4.0 million
share repurchase requirement in accordance with the terms stipulated in the
Offering.

In 1996, World Airways instituted a program to purchase up to one million shares
of its publicly-traded Common Stock pursuant to open market transactions. As of
March 6, 1998, World Airways had purchased 770,000 shares of Common Stock at an
aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.

In connection with the above-mentioned Offering, the Company and WorldCorp, Inc.
("WorldCorp") entered into an agreement (the "Agreement") for the purchase by
World Airways of up to 4.0 million shares of common stock owned by WorldCorp at
a purchase price of $7.65 per share. On September 18, 1997, the Company
purchased 3,227,000 shares of its common stock from WorldCorp for approximately
$24.7 million. MHS has certain rights

under a shareholders agreement, dated as of February 3, 1994, as amended, among
WorldCorp, MHS and the Company. This agreement includes a provision that
provides that if WorldCorp were to dispose of its holdings in the Company with
the result that WorldCorp's ownership interest in the Company falls below 51% of
the outstanding shares of common stock, then MHS may either sell its shares to a
third party or require WorldCorp to sell a pro rata number of shares held by MHS
to the party purchasing WorldCorp's Company shares. Therefore, as a result of
the purchase of 3,227,000 shares of common stock by World Airways from
WorldCorp, MHS had the right to sell, and accordingly sold, 773,000 shares of
common stock to World Airways for approximately $5.9 million, effective January
23, 1998.

GENERAL

World Airways is a global provider of long-range passenger and cargo air
transportation outsourcing services to major international airlines under fixed
rate contracts. The Company's passenger and freight operations employ 12
wide-body aircraft which are currently operated under contracts, a substantial
portion of which are with Pacific Rim airlines. These contracts generally
require the Company to supply aircraft, crew, maintenance and insurance ("ACMI"
or "wet lease"), while the Company's customers are responsible for a large
portion of the other operating expenses, including fuel. World Airways' airline
customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offers greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is one of the largest suppliers of
commercial airlift services to the United States Air Force's Air Mobility
Command ("U.S. Air Force" or "USAF").

In July 1996, World Airways restructured its business to focus on ACMI contract
services. As such, the Company ceased all scheduled passenger and scheduled
charter services as of October 27, 1996, taking a one-time charge of $21.0
million as of June 30, 1996 (see "Discontinuation of Scheduled Service
Operations").

The Company generally charges customers on a block hour basis rather than a per
seat or per pound basis. "Block hours" are defined as the elapsed time computed
from the moment the aircraft first moves under its own power at the point of
origin to the time it comes to rest at its final destination. The Company
provides most services under two types of contracts: wet lease contracts and
full service contracts. Under wet lease contracts, the Company provides the
aircraft, cockpit crew, maintenance and insurance and the customer provides all
other operating services and bears all other operating expenses, including fuel
and fuel servicing, marketing costs associated with obtaining passengers and/or
cargo, airport passenger and cargo handling fees, landing fees, cabin crews,
catering, ground handling and aircraft push-back and de-icing services. Under
full service contracts, the Company provides fuel, catering, ground handling,
cabin crew and all related support services as well. Accordingly, the Company
generally charges a lower rate per block hour for wet lease contracts than full
service contracts, although it does not necessarily earn a lower profit. Because
of shifts in the mix between full service contracts and wet lease contracts,
fluctuations in revenues are not necessarily indicative of volume trends or
profitability. It is important, therefore, to measure the Company's business
volume by block hours flown and to measure profitability by operating income per
block hour.

The Company's operating philosophy is to build on its existing ACMI
relationships to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts which shift yield, load factor and certain cost
risks to the customer. The customer bears the risk of filling the aircraft with
passengers or cargo and assumes a portion of the operating expenses, including
fuel. World Airways has elected to emphasize its ACMI business because the
Company perceives a number of opportunities created by a growing global economy,
particularly growth in second and third world economies where the demand for
airlift exceeds capacity. World Airways attempts to maximize profitability by
combining its multi-year ACMI contracts with short term, higher-yielding ACMI
agreements which meet the peak seasonal requirements of its customers. The
Company responds opportunistically to rapidly changing market conditions by
maintaining a flexible fleet of aircraft that can be deployed in a variety of
configurations.

As noted above, the Company has focused its business on ACMI contract
services. As is common in the air transportation industry, the Company has
relatively high fixed aircraft costs. World Airways operates a fleet of eight
MD-11 and four DC10-30 wide-body aircraft, and while the Company believes that
the lease rates on its MD-11 aircraft are favorable relative to lease rates of
other MD-11 operators, the Company's MD-11 aircraft have higher lease costs
(although lower operating costs) than its DC10-30 aircraft. Therefore, achieving
high average daily utilization of its aircraft (particularly its MD-11 aircraft)
at attractive yields are important factors to the Company's financial results.
In addition to fixed aircraft costs, a portion of the Company's labor costs are
fixed due to monthly minimum guarantees to cockpit crewmembers and flight
attendants. Factors that affect the Company's ability to achieve high
utilization in its ACMI business include the compatibility of the Company's
aircraft with customer needs and the Company's ability to react on short notice
to customer requirements (which can be unpredictable due to changes in traffic
rights, aircraft delivery schedules and aircraft maintenance requirements).
Other factors that affect the ACMI business include particular domestic and
foreign regulatory requirements, as well as a trend toward aviation deregulation
which is increasing the number of alliances and code share arrangements.

SIGNIFICANT CUSTOMER RELATIONSHIPS

In 1997, the Company's business relied heavily on its contracts with Malaysian
Airline System Berhad ("Malaysian Airlines"), Philippine Airlines, Inc.
("Philippine Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air
Force. For the year ended December 31, 1997, these customers provided
approximately 21%, 31%, 10% and 25%, respectively, of the Company's revenues and
23%, 34%, 11% and 16%, respectively, of total block hours. In 1996, these
customers provided approximately 34%, 15%, 13%, and 25%, respectively, of the
Company's revenues and 42%, 17%, 14%, and 17%, respectively, of total block
hours flown from continuing operations.

Malaysian Airlines. World Airways has provided wet lease services to Malaysian
Airlines since 1981, providing wet lease services for Malaysian Airlines'
scheduled passenger and cargo operations as well as transporting passengers for
the annual Hadj pilgrimage. MHS, which owned 16.8% of the Company as of January
23, 1998, also owns 28% of Malaysian Airlines. The Company also entered into a
32-month agreement for year-round operations (including the Hadj) with Malaysian
Airlines whereby the Company is providing two passenger aircraft with cockpit
crews, maintenance and insurance to Malaysian Airlines' newly-formed charter
division through May 1999. However, the Company agreed to a five month reduction
in the utilization of one aircraft during 1997, although the aircraft was
redeployed in other activity. Malaysian Airlines has not informed the Company
of any reductions for 1998. The Company provided three aircraft for 1997 Hadj
operations. MAS received notice from the Malaysian Hadj Board that MAS
would not participate in the 1998 Hadj pilgrimage. As a result, MAS
entered into an agreement on behalf of the Company for the Company to provide
two DC-10 aircraft to fly in the 1998 Indian Hadj.

The Company has a long-term contract to operate three MD-11 cargo aircraft for
Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by
the parties, World Airways redeployed two cargo aircraft, which had been
operating under these contracts, into another contract which ended in February
1998. The Company and Malaysian Airlines are currently discussing the
redeployment of these aircraft back into Malaysian Airlines' operations during
1998 in order to meet the contracts' original obligations. The Company can
provide no assurances, however, that the Company will, in fact, be able to do
so.

Malaysian Airlines is subject to the financial difficulties associated with the
adverse economic conditions in Malaysia and the Asia Pacific Region, but it has
remained current with its payments for committed block hour minimums provided in
the contracts. Failure by Malaysian Airlines to meet its aircraft lease
obligations, if not offset by other business, would have a material adverse
effect on the financial condition, cash flows and results of operations of the
Company.

Garuda. The Company has flown for Garuda periodically since 1973 and yearly
since 1988. Since 1988, the Company has been one of the largest providers of
passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj
pilgrimage is the world's largest due to the size of Indonesia's Islamic
population. In 1997, approximately 40,000 of the 200,000 Indonesians who
traveled to Jeddah for the Hadj pilgrimage flew on the Company's aircraft. The
Company has reached an agreement with Garuda to operate six aircraft during the
1998 pilgrimage.

Philippine Airlines. The Company had agreements with Philippine Airlines to
operate four passenger aircraft until November 1997. As a result of the economic
distress experienced in the Philippines, the Company negotiated to terminate the
agreements on two of the aircraft effective in August 1997, and received monthly
termination payments totaling $3.0 million through the original end of the
agreements in November 1997. In addition, the contracts on the remaining two
aircraft were extended until February 1998 and the per block hour rates for
those two aircraft were reduced slightly. The two aircraft which were removed
from Philippine Airlines service were redeployed by the Company under agreements
with other customers. The contract with Philippine Airlines expired in February
1998.

U.S. Air Force. The Company has provided international air transportation to the
U.S. Air Force since 1956. In exchange for requiring pledges of aircraft to the
Civil Reserve Air Fleet ("CRAF") for use in times of national emergency, the
U.S. Air Force grants awards to CRAF participants for peacetime transportation
of personnel and cargo. Although the Company's agreements with the USAF provide
for full service contracts with certain minimum performance requirements, the
Company has risks similar to an ACMI agreement because the USAF agreements are
cost-plus contracts at attractive rates. The overall downsizing of the U.S.
military places a premium on the mobility of the U.S. armed forces. This is
reflected in the stable size over the past several years of the USAF's
procurement of commercial airlift services. It is uncertain, however, what
impact, if any, the instability within the Middle East will have upon the
Company's future flight operations.

The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. The Company utilizes such teaming arrangements to maximize
the value of potential awards. The Company leads a contractor teaming
arrangement that enjoys a large market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, the Company's portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $73.4 million for the
government's 1997-98 fiscal year. The current annual contract commenced on
October 1, 1997 and expires on September 30, 1998. World Airways, however,
cannot determine how future cuts in military spending may affect future
operations with the U.S. Air Force.

VASP. The Company leased a cargo plane to Viacao Aereo Sao Paulo ("VASP"),
a Brazilian airline, under an ACMI contract which began in June 1997 and
terminated prior to December 31, 1997. World Airways also during 1997 entered
into a Memorandum of Agreement with VASP for the lease of two MD-11 passenger
aircraft for a six-month term with a six-month renewal option. This contract
was not finalized in 1997 and the Company currently is not contracting with VASP
for any aircraft. The aircraft intended for VASP have been redeployed to other
customers of the Company.

Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements. See Note 2 of the Company's "Notes to Financial Statement" in
Item 8.

As a result of these and other contracts, the Company had an overall contract
backlog at December 31, 1997 of $305.8 million, compared to $468.0 million at
December 31, 1996. Approximately $199.4 million of the backlog relates to
operations during 1998. The Company's backlog for each contract is determined by

multiplying the minimum number of block hours guaranteed under the applicable
contract by the specified hourly rate under such contract. Approximately 57% of
the backlog relates to its contracts with Malaysian Airlines, included in which
are the revenues associated with the three cargo aircraft for Malaysian
Airlines (see "Significant Customer Relationships - Malaysian Airlines" for
further discussion of these contracts). Consistent with prior years, the Company
has substantial uncontracted capacity in the third and fourth quarters of
1998 and beyond. Although there can be no assurance that it will be able to
secure additional business to reduce this excess capacity, the Company is
actively seeking customers for 1998 and beyond, and has historically been
successful in obtaining new customers. The Company's financial results and
financial condition would be affected adversely if the Company is unable to
secure additional business to reduce this excess capacity.

The information regarding major customers and foreign revenue is contained in
Note 15 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.

COMPETITION

The market for outsourcing air passenger and cargo ACMI services is highly
competitive. Certain of the passenger and cargo air carriers against which the
Company competes possess substantially greater financial resources and more
extensive facilities and equipment than those which are now, or will in the
foreseeable future become, available to the Company. The Company believes that
the most important bases for competition in the ACMI outsourcing business are
the age of the aircraft fleet, the passenger, payload and cubic capacities of
the aircraft, and the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the ACMI outsourcing market
include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of the Company to continue to grow depends upon its
success in convincing major international airlines that outsourcing some portion
of their air passenger and cargo business remains more cost-effective than
undertaking passenger or cargo operations with their own incremental capacity
and resources.

The allocation of military air transportation contracts by the USAF is based
upon the number and type of aircraft a carrier, alone or through a teaming
arrangement, makes available for use in times of national emergencies. The
formation of competing teaming arrangements comprised of larger partners than
those sponsored by the Company, an increase by other air carriers in their
commitment of aircraft to the emergency program, or the withdrawal of the
Company's current partners, could adversely affect the size of the USAF
contracts, if any, which are awarded to the Company in future years.

CYCLICAL NATURE OF AIR CARRIER BUSINESS

The Company operates in a challenging business environment. The air
transportation industry is highly sensitive to general economic conditions.
Since a substantial portion of passenger airline travel (both business and
personal) is discretionary, the industry tends to experience severe adverse
financial results during general economic downturns and can be adversely
affected by unexpected global political developments. The financial results of
air cargo carriers are also adversely affected by general economic downturns due
to the reduced demand for air cargo transportation. In 1993 and 1994, the
combination of a generally weak global economy and the depressed state of the
air transportation industry adversely affected the Company's operating
performance.

SEASONALITY

Historically, the Company's business has been significantly affected by seasonal
factors. During the first quarter, the Company typically experiences lower
levels of utilization and yields due to lower demand for passenger and cargo
services relative to other times of the year. The Company experiences higher
levels of utilization and yields in the second quarter, principally due to peak
demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1998, the Company's flight operations associated with the Hadj

pilgrimage will occur from February 28 to May 12. Because the Islamic calendar
is a lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12
days earlier each year relative to the Western (Gregorian) calendar. As a
result, revenues resulting from future Hadj pilgrimage contracts will continue
to shift from the second quarter to the first quarter over the next several
years.

GEOGRAPHIC CONCENTRATION

The Company derives a significant percentage of its revenues and block hours
from its operations in the Pacific Rim region. Any further economic decline or
any military or political disturbance in this area may interfere with the
Company's ability to provide service in this area. In 1997, the affects of the
adverse economic conditions in Malaysia and Indonesia and other countries in the
Asia Pacific Region included a national liquidity crisis, significant
depreciation in the value of the ringgit and rupiah, higher domestic interest
rates, reduced opportunity for refinancing or refunding of maturing debts, and a
general reduction in spending throughout the region. These conditions and
similar conditions in other countries in the Asia Pacific Region could have a
material adverse effect on the operations of Malaysian Airlines and Garuda
Indonesia, and therefore on the operations of the Company. However, management
also believes these conditions could provide new opportunities to wet lease
aircraft to airlines customers, particularly those who have deferred or canceled
new aircraft orders but are still in need of providing additional airlift.

UTILIZATION OF AIRCRAFT

Due to the large capital costs of leasing and maintaining World Airways'
aircraft, each of World Airways' aircraft must have high utilization at
attractive rates in order for World Airways to operate profitably. Although
World Airways' strategy is to enter into long-term contracts with its customers,
the terms of World Airways' existing customer contracts are substantially
shorter than the terms of World Airways' lease obligations with respect to the
aircraft. As mentioned above, a significant portion of World Airways' contract
backlog at December 31, 1997, relates to its multi-year contracts with Malaysian
Airlines which is subject to the financial difficulties associated with the
adverse economic conditions in Malaysia and the Asia Pacific Region. In
addition, the Company has substantial uncontracted capacity in the third
and fourth quarters of 1998 and beyond. There can be no assurance that World
Airways will be able to enter into additional contracts with new or existing
customers or that it will be able to obtain enough additional business to fully
utilize each aircraft. World Airways' financial position and results of
operations could be materially adversely affected even by relatively brief
periods of low aircraft utilization and yields. In order to maximize aircraft
utilization, World Airways does not intend to acquire new aircraft unless such
aircraft would be necessary to service existing needs or World Airways has
obtained additional ACMI contracts for the aircraft to service. World Airways is
seeking to obtain additional ACMI contracts with new and existing customers, to
which such new aircraft would be dedicated when placed in service, but World
Airways can provide no assurance that it will obtain new ACMI contracts or that
existing ACMI contracts will be renewed or extended.

AIRCRAFT FLEET

World Airways' strategy is to attempt to ensure that each of the aircraft in its
fleet is to a large extent contractually dedicated by World Airways to the
service of one or more customers, with limited aircraft available to provide
back-up capability. Therefore, in the event the use of one or more of World
Airways' aircraft was lost, World Airways might have difficulty fulfilling its
obligations under one or more of these contracts, if it were unable to obtain
substitute aircraft. On October 24, 1997, one of the Company's MD-11 aircraft
was damaged upon landing. The aircraft was out of service for approximately two
and a half months while certain repairs were made. The Company expects insurance
to cover repair and certain related costs, but the Company's loss of revenues
that would have been generated by the aircraft's use had an adverse effect on
the Company's financial condition and results of operations for the fourth
quarter of 1997.

MAINTENANCE

Engine maintenance accounts for most of the Company's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. The Company outsources major airframe maintenance and power plant
work to several suppliers. The Company has a 10-year contract expiring in August
2003 with United Technologies Corporation's Pratt & Whitney Group for all
off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under
this contract, the manufacturer agreed to provide such maintenance services at a
cost not to exceed specified rates per hour during the term of the contract. The
specified rates per hour are subject to annual escalation, increasing
substantially in 1998. Accordingly, while the Company believes the terms of this
agreement have resulted in lower engine maintenance costs than it otherwise
would incur, engine maintenance costs will increase substantially during the
last five years of the agreement. The Company began to accrue these increased
expenses in 1997 and such expenses will continue to increase during the
remainder of the term of the contract as the Company's aircraft fleet ages.

OPERATING LOSSES

While the Company generated operating income each year from 1987 through 1992
and in 1995, it sustained operating losses in 1993 and 1994 of $7.3 million and
$5.2 million, respectively, and net losses of $9.0 million in each of these two
years. For the year ended December 31, 1996, the Company incurred a net loss of
$14.0 million, which resulted from operating losses incurred in the Company's
scheduled service operations, which were discontinued in 1996, and the related
estimated loss on disposal. Earnings from continuing operations were $18.4
million for 1996. While the Company generated operating income for the year
ended December 31, 1997 of $16.9 million, there can be no assurance that the
Company will be able to continue generating operating income for 1998 or future
years.

CONTROL BY WORLDCORP; POTENTIAL CONFLICTS OF INTEREST

As of January 23, 1998, WorldCorp owned approximately 51.2% of the
outstanding World Airways common stock. WorldCorp is a holding company that owns
positions in two companies: InteliData and World Airways. WorldCorp is highly
leveraged and therefore requires substantial funds to cover debt service each
year. As a holding company, all of WorldCorp's funds are generated through its
subsidiaries, neither of which is expected to pay dividends in the foreseeable
future. As a result of WorldCorp's cash requirements, it may be required to sell
additional shares of common stock, and such sales, or the threat of such sales,
could have a material adverse effect on the market price of the common stock.
Except as limited by contractual arrangements with MHS, WorldCorp also is in a
position to control the outcome of many issues submitted to World Airways'
stockholders, including the election of all of World Airways' Board of
Directors, adoption of amendments to World Airways' Certificate of
Incorporation, and approval of mergers.

In connection with a $15.0 million loan from a commercial bank (the "Bank
Loan"), WorldCorp had pledged all of the shares of common stock beneficially
owned by WorldCorp (the "WorldCorp Shares"). The Bank Loan was scheduled to
mature on September 29, 1997. On September 18, 1997, the Company purchased
3,227,000 of its common stock from WorldCorp for approximately $24.7 million in
cash. WorldCorp used a portion of these proceeds to retire the Bank Loan prior
to its maturity.

Subsequent to year-end, the Company loaned WorldCorp $1.75 million, which
was used by WorldCorp to pay debt obligations. The loan is collateralized by one
million shares of the Company's stock owned by WorldCorp and bears interest at
prime plus 2.5%.

RESULTS OF OPERATIONS

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

Total block hours decreased 6,745 hours, or 13%, to 43,780 hours in 1997 from
50,525 hours in 1996, with an average of 12.9 available aircraft per day in 1997
compared to 14.1 in 1996. Average daily utilization (block hours flown per day
per aircraft) decreased to 9.3 hours in 1997 from 9.8 hours in 1996. In 1997,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1997, wet lease
contracts accounted for 81% of total block hours, an increase from 68% in 1996.

Continuing Operations

Block hours from continuing operations decreased slightly to 43,780 hours in
1997 from 43,897 hours in 1996.

Operating Revenues. Revenues from flight operations increased $9.9 million, or
3%, in 1997 to $306.8 million from $296.9 million in 1996. Revenues in 1997
included approximately $11.2 million related to minimum guarantee payments
received from Malaysian Airlines for flying levels which did not meet the
minimum monthly levels specified in the contracts, and $3.0 million related to
contract modification payments received from Philippine Airlines, for which the
Company incurred no related variable costs.

Operating Expenses. Total operating expenses increased $4.7 million, or 2%,
in 1997 to $292.6 million from $287.9 million in 1996.

Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft costs, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $2.7 million, or 4%, in
1997 to $71.8 million from $69.1 million in 1996. This increase resulted
primarily from higher crew costs relating to an accrual for the profit sharing
bonus plan, an increase in wage rates including an increase in the guarantee
payment, and an increase in training costs relating to crewmember attrition,
partially offset by the shift in the mix of business from full service to wet
lease operations. Flight attendant costs remained consistent despite the shift
to wet lease operations as a result of flight attendants receiving minimum
guarantee payments.

Maintenance expenses increased $5.5 million, or 9%, in 1997 to $66.0 million
from $60.5 million in 1996. This increase resulted primarily from the increase
in the number of aircraft dedicated to the Company's continuing
operations and the integration of additional aircraft into the fleet during
1996. In addition, the Company experienced an increase in costs associated with
the MD-11 aircraft and related engines as a result of certain manufacturer
guarantees and warranties which began to expire in 1995 and will fully expire by
1998. The Company expects its maintenance expense to increase further in 1998
due to escalations in the specified rates per hour under the Company's
maintenance agreement. The increase was partially offset by a reversal in 1997
of $1.0 million of accrued maintenance expense in excess of the cost of an
overhaul of a DC-10 aircraft.

Aircraft costs increased $6.2 million, or 7%, in 1997 to $91.4 million from
$85.2 million in 1996. This increase resulted from the increase in the number of
aircraft dedicated to the Company's continuing operations, primarily due to the
lease of two MD-11ER aircraft in March 1996, and the lease of additional spare
engines necessary to maintain the expanded fleet. This increase was partially
offset by the reversal of approximately $0.9 million in lease costs, which had
been recorded in 1996, as a result of a settlement with the engine manufacturer
for reimbursements related to disputed spare engine lease charges.

Fuel expenses decreased $1.7 million, or 9%, in 1997 to $17.6 million from $19.3
million in 1996. This decrease is due primarily to the shift from full service
to wet lease operations where the Company is not responsible for fuel costs.
This decrease was partially offset by an increase in price per gallon.

Promotions, sales and commissions increased $1.4 million, or 17%, in 1997 to
$9.6 million from $8.2 million in 1996. This increase resulted primarily from an
increase in commissions related to increased flying during 1997 under the
Philippine Airlines contract.

Depreciation and amortization increased $0.7 million, or 9%, in 1997 to $8.7
million from $8.0 million in 1996. This increase resulted primarily from
depreciation on the increased levels of spare parts required to support the
additional MD-11 aircraft described above, partially offset by a decrease in the
amortization of certain intangible assets.

General and administrative expenses increased $0.2 million, or 1%, in 1997 to
$24.9 million from $24.7 million in 1996. This increase was primarily due to the
hiring of additional administrative personnel, beginning in the second quarter
of 1996, necessary to support the growth in the Company's core business and
related marketing efforts and an increase in property tax accruals. This
increase was partially offset by a reduction in certain legal and professional
fees.

Interest expense increased $1.9 million, or 54%, in 1997 to $5.4 million from
$3.5 million in 1996. This increase resulted primarily from the issuance of
$50.0 million of 8% senior subordinated debentures on August 26, 1997.

Discontinued Operations

The Company commenced service between Tel Aviv and New York in July 1995. In the
first quarter of 1996, the Company generated $4.2 million in losses related to
these operations. In the second quarter of 1996, the Company expanded its
scheduled service operations with service between the United States and South
Africa and introduced scheduled charter operations between the United States and
various destinations within Europe. As the Company was unable to operate these
scheduled service operations profitably, in July 1996, the Company announced its
decision to exit its scheduled service operations by October 1996 and focus its
operations on its core wet lease operations. Consistent with this decision,
World Airways ceased all scheduled operations as of October 27, 1996. As a
result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results were
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) was recorded as of June 30,
1996. The Company recognized an additional $0.5 million of expense in the fourth
quarter of 1997 and believes that substantially all the costs relating to the
disposal have been recorded as of December 31, 1997. The Company is subject to
claims arising as a result of the discontinuance of its scheduled service
operations, but the Company believes it has substantial defenses to these
actions.

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

Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996 from
37,342 hours in 1995, with an average of 14.1 available aircraft per day in 1996
compared to 10.3 in 1995. Average daily utilization (block hours flown per day
per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In 1996,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1996, wet lease
contracts accounted for 68% of total block hours, consistent with 70% in 1995.
Total operating revenues increased $67.2 million, or 28%, to $309.6 million in
1996 from $242.4 million in 1995.

Continuing Operations

Block hours from continuing operations increased 8,269 hours, or 23%, to 43,897
hours in 1996 from 35,628 hours in 1995.

Operating Revenues. Revenues from flight operations increased $64.3 million, or
28%, to $296.9 million in 1996 from $232.6 million in 1995. This increase was
primarily attributable to an increase in military flying and an increase in
revenues generated from its 1996 Hadj operations and services to certain
international carriers, partially offset by a decrease in cargo operations
resulting from a shift in the mix of business during 1996.

Operating Expenses. Total operating expenses increased $61.4 million, or 27%,
in 1996 to $287.9 million from $226.5 million in 1995.

Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $5.5 million, or 9%, in
1996 to $69.1 million from $63.6 million in 1995. This increase resulted
primarily from an increase in block hours flown and higher crew costs and
up-front training expenses in connection with the integration of additional
aircraft into the fleet. These increases were partially offset by a decrease in
accrued profit sharing expenses. In 1995, the Company accrued profit sharing
expenses as a result of earnings experienced during that period. No such accrual
was necessary in 1996 as a result of losses from the discontinuation of
scheduled service operations.

Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5 million
from $41.8 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown. In addition, the Company experienced an increase in costs
associated with the MD-11 aircraft and related engines as a result of certain
manufacturer guarantees and warranties which began to expire in 1995 and will
fully expire by 1998.

Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million from
$67.3 million in 1995. This increase was primarily due to the lease of two
MD-11ER aircraft in the first quarter of 1996 and the lease of incremental
DC10-30 aircraft which began in the second and fourth quarters of 1995 and the
first quarter of 1996, partially offset by the return of two DC10-30 aircraft to
the lessor in the third quarter of 1995.

Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million from
$16.7 million in 1995. This increase is due primarily to an increase in fuel
utilized in connection with its military operations and a slight increase in
price per gallon.

Promotions, sales and commissions increased $4.6 million in 1996 to $8.2 million
from $3.6 million in 1995. This increase resulted primarily from commissions
paid in connection with the new Philippine Airlines contract and an increase in
teaming arrangement commissions associated with the larger fixed-award contract
received from the U.S. Air Force beginning October 1995.

Depreciation and amortization increased $1.9 million, or 31%, in 1996 to $8.0
million from $6.1 million in 1995. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above.

General and administrative expenses increased $6.5 million, or 36%, in 1996 to
$24.7 million from $18.2 million in 1995. This increase was primarily due to the
hiring of additional administrative personnel necessary to support the growth in
the Company's core business and an increase in certain legal and professional
fees.

Discontinued Operations

The Company commenced service between Tel Aviv and New York in July 1995. In
the first quarter of 1996, the Company generated $4.2 million in losses
related to these operations. In the second quarter of 1996, the Company expanded
its scheduled service operations with service between the United States and
South Africa and introduced scheduled charter operations between the United
States and various destinations within Europe. As the Company was unable to
operate these scheduled service operations profitably, in July 1996, the Company
announced its decision to exit its scheduled service operations by October 1996
and focus its operations on its core wet lease operations. Consistent with this
decision, World Airways ceased all scheduled operations as of October 27, 1996.
As a result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results were
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) was recorded as of June 30,
1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company is highly leveraged. The Company incurred substantial debt and lease
commitments during the past four years in connection with its acquisition of
MD-11 aircraft and related spare parts. In addition, the Company issued $50.0
million of convertible debentures in August 1997, as discussed below. As of
December 31, 1997, the Company had outstanding long-term debt and capital leases
of $75.1 million, and notes payable and current maturities of long-term
obligations, including debt service costs, of $20.6 million. In addition, the
Company has significant future long-term obligations under aircraft lease
obligations relating to its aircraft.

The Company has historically financed its working capital and capital
expenditure requirements out of cash flow from operating activities, public and
private sales of its common stock, secured borrowings, and other financings from
banks and other lenders. The degree to which the Company is leveraged could have
important consequences to holders of common stock, including the following: (i)
World Airways' ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be limited;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness; (iii)
World Airways' degree of leverage and related debt service obligations, as well
as its obligations under operating leases for aircraft, may make it more
vulnerable than some of its competitors in a prolonged economic downturn; (iv)
World Airways' ability to meet its payment obligations under existing and future
indebtedness, capital leases and operating leases may be limited; and (v) World
Airways' financial position may restrict its ability to pursue new business
opportunities and limit its flexibility in responding to changing business
conditions.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures due in 2004, which were
subsequently registered with the Securities and Exchange Commission. The
Debentures are unsecured obligations, convertible into shares of the Company's
common stock at $8.90 per share, subject to adjustment in certain events, and
subordinated to all present and future senior indebtedness of the Company. In
the event of a change in control of the Company, as defined, the holders of the
Debentures could require the Company to repurchase the outstanding Debentures.
The Debentures are not redeemable by the Company prior to August 26, 2000. The
Company's intended use of the net proceeds was to repurchase approximately 4.0
million shares of its common stock, repay certain indebtedness, increase working
capital and for general corporate purposes. After completion of the Offering,
the Company repaid approximately $3.8 million as full settlement of an
outstanding spare parts loan. In addition, failure by the Company to repurchase
at least 4.0 million shares of common stock within 150 days after the sale of
the Debentures would constitute a repurchase event whereby each holder of the
Debentures would have the right, at the holder's option, to require the Company
to repurchase such holder's Debentures at 100% of their principal amount, plus
accrued interest.

In connection with the above-mentioned Offering, the Company and WorldCorp
entered into an agreement on August 20, 1997 for the purchase by World Airways
of up to 4.0 million shares of common stock owned by WorldCorp at a purchase
price of $7.65 per share. On September 18, 1997, the Company purchased 3,227,000
shares of its common stock from WorldCorp for approximately $24.7 million. MHS
has certain rights under a shareholders agreement, dated as of February 3, 1994,
as amended, among WorldCorp, MHS and the Company. This agreement includes a
provision that provides that if WorldCorp were to dispose of its holdings in the
Company with the result that WorldCorp's ownership interest in the Company falls
below 51% of the outstanding shares of common stock, then MHS may either sell
its shares to a third party or require WorldCorp to sell a pro rata number of
shares held by MHS to the party purchasing WorldCorp's shares. Therefore, as a
result of the repurchase of 3,227,000 shares of common stock by World Airways
from WorldCorp, MHS had the right to sell, and accordingly sold, 773,000 shares
of common stock to World Airways for approximately $5.9 million, effective
January 23, 1998.

World Airways' cash and cash equivalents at December 31, 1997 and December 31,
1996 were $25.9 million and $7.0 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit. At
December 31, 1997, World Airways' current assets were $54.1 million and current
liabilities were $55.9 million. World Airways has substantial long-term aircraft
lease obligations with respect to its current aircraft fleet. In addition,
subsequent to year-end, the Company used approximately $5.9 million of its cash
balance to purchase the aforementioned 773,000 shares of common stock, and
loaned WorldCorp $1.75 million, which was used by WorldCorp to pay debt
obligations.

In 1996, World Airways instituted a program to purchase up to one million shares
of its publicly-traded common stock pursuant to open market transactions. As of
March 6, 1998, World Airways had purchased 770,000 shares of common stock at an
aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.

In the event that World Airways enters into leases for additional aircraft,
World Airways will need to make capital expenditures for additional spare
engines and parts. No assurances can be given, however, that World Airways will
obtain all of the financing required for such capital expenditures.

Although there can be no assurances, World Airways believes that the combination
of its existing contracts and additional business which it expects to obtain for
1998, along with its existing cash and financing arrangements, will be
sufficient to allow World Airways to meet its cash requirements related to the
operating and capital requirements for 1998.

CASH FLOWS FROM OPERATING ACTIVITIES

Operating activities provided $22.1 million in cash for the year ended December
31, 1997 compared to using $1.5 million of cash in the comparable period in
1996. This increase in cash in 1997 resulted primarily from the increase in net
earnings and a decrease in accounts receivable, partially offset by a decrease
in accounts payable.

CASH FLOWS FROM INVESTING ACTIVITIES

Investing activities used $4.3 million in cash for the year ended December 31,
1997, compared to $9.1 million in the comparable period in 1996. In 1997, cash
was used primarily for the purchase of rotable spare parts required to maintain
the current fleet as well as leasehold improvements on the aircraft. In 1996,
cash was used primarily for the purchase of rotable spare parts required for the
integration of two MD-11 aircraft and incremental aircraft and leasehold
improvements required on one of the DC-10 aircraft obtained in late 1995.

CASH FLOWS FROM FINANCING ACTIVITIES

Financing activities provided $1.1 million in cash for the year ended December
31, 1997 compared to using $7.6 million in the comparable period in 1996. This
increase in cash resulted primarily from the $50.0 million proceeds of the
Offering in 1997 offset by the purchase of shares of the Company's common stock
from WorldCorp for an aggregate cost of $24.7 million and the repayment of debt.

CAPITAL COMMITMENTS/FINANCING DEVELOPMENTS

In October 1992 and January 1993, the Company signed a series of agreements to
lease seven new MD-11 aircraft for initial lease terms of two to five years,
renewable for up to 10 years (and in the case of one aircraft, for 13 years) by
the Company with increasing rent costs. As of March 1995, the Company had taken
delivery of all seven aircraft, consisting of four passenger MD-11 aircraft, one
freighter MD-11, and two passenger/cargo convertible MD-11s. The Company
returned one aircraft in August 1997. As part of the lease agreements, the
Company was assigned purchase options for four additional MD-11 aircraft. In
1992, the Company made non-refundable deposits of $1.2 million toward the option
aircraft and the purchase options were terminated. In March 1996, the Company
signed an agreement with the manufacturer to lease two MD-11ER aircraft. Under
the agreement, the Company leased each aircraft for a term of 24 years with an
option to return the aircraft after a seven-year period with certain fixed
termination fees. As part of the agreement, the above-mentioned deposits were
applied towards the deposits required on these two aircraft. In addition, the
Company agreed to assume an existing lease of two additional MD-11 freighter
aircraft for 20 years, beginning in 1999, in the event that the existing lessee
terminates its lease with the manufacturer at that time.

As of December 31, 1997, World Airways maintains leases for four DC10-30
aircraft. Three of the leases expire in 1998 and one expires in 2003. Subsequent
to December 31, 1997, the Company extended one of the leases expiring in 1998
for an additional 12 months.

Subsequent to year-end, the Company renewed and amended a revolving line of
credit facility of up to $25.0 million, collateralized by certain receivables,
inventory and equipment. The proceeds from this facility will be used to
increase working capital and for general corporate purposes.

In September 1995, the Company agreed to purchase a spare engine which was
delivered in March 1996. The engine cost approximately $8.0 million. The Company
entered into an agreement with the engine's manufacturer to finance 80% of the
purchase price over a seven-year term. The Company made payments of $0.7
million, $0.4 million and $1.2 million towards this purchase in 1997, 1996, and
1995, respectively.

In January 1996, the Company agreed to purchase an additional engine and
received a commitment from the engine manufacturer to finance 85% of its
purchase price over a seven-year term with an interest rate to be fixed at the
time of delivery. In June 1997, the Company took delivery of the engine and
signed a note for $6.3 million. The note bears interest at a rate of 8.18% and
is payable over an 84-month period at approximately $48,000 per month with the
balance of $2.2 million due on June 18, 2004.

As discussed above, the Company signed an agreement for the lease of two MD-11ER
aircraft beginning in the first quarter of 1996 to provide additional capacity
for growth opportunities. As part of the agreement for the MD-11 aircraft, the
Company received spare parts financing from the lessor of $9.0 million of which
$3.0 million was made available with the delivery of each aircraft, and the
remaining $3.0 million was made available in December 1996.
As of December 31, 1997, approximately $7.9 million had been received.

As of December 31, 1997, annual minimum payments required under the Company's
aircraft and lease obligations totaled $79.5 million for 1998. The Company
anticipates that its total capital expenditures in 1998 will approximate $4.1
million, which the Company expects to fund from its working capital. As of
December 31, 1997, the Company held approximately $3.2 million (at book value)
of aircraft spare parts currently available for sale.

OTHER MATTERS

LEGAL AND ADMINISTRATIVE PROCEEDINGS

World Airways has periodically received correspondence from the FAA with respect
to minor noncompliance matters. In November 1996, as the FAA has increased its
scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of
$810,000 in connection with certain security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. Under 49
U.S.C., Section 46301, any violation of pertinent provisions of 49 U.S.C.
Subsection 40101 or related rules is subject to a civil penalty for each
violation. Upon review of the evidence or facts and circumstances relating to
the violation, the statute allows for the compromise of proposed
civil penalties. The penalties were proposed by the FAA in connection with
recent inspections at foreign airport facilities and relate primarily to ground
handling services provided by World Airways' customers in connection with their
operations; specifically, the inspection procedures of its aircraft, passengers
and associated cargo. In each of these instances, World Airways was in
compliance with international regulations, but not the more stringent U.S.
requirements, despite the fact that the flights in question did not originate or
terminate in the United States. World Airways has taken steps to comply with the
U.S. requirements. In September 1997, the Company entered into a consent order
and settlement agreement with the FAA in connection with the above-mentioned
alleged violations. Pursuant to this agreement, the Company is liable for the
sum of $610,000, of which $405,000 was paid in September. The remaining $205,000
was suspended and will be forgiven if the Company complies with the provisions
of the settlement agreement, including not incurring any security violations
during the one year period following the execution of the settlement agreement.
While World Airways believes it is currently in compliance in all material
respects with all appropriate standards and has all required licenses and
authorities, any material non-compliance by World Airways therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the financial condition or results of operations of World
Airways.

World Airways and WorldCorp (the "World Defendants") were defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation in August 1992, captioned Washington Bancorporation v. Boster et.
al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the "Boster Litigation"). Under a
settlement agreement, the plaintiff agreed to dismiss with prejudice the Boster
Litigation against all defendants, including the World Defendants, with each
party to bear its own costs. Under the settlement agreement, the World
Defendants do not have any further liability in the Boster Litigation.

In connection with the discontinuance of World Airways' scheduled service
operations, World Airways is subject to claims by various third parties and may
be subject to further claims in the future. One claim which had been filed in
connection with World Airways' discontinuance of scheduled service to South
Africa, and which sought approximately $37.8 million in compensatory and
punitive damages, has been settled by the parties for approximately $0.7
million. Also, a claim has been filed in Germany against the Company by a tour
operator seeking approximately $3.5 million in compensation related to the
cancellation of a summer program in 1996. The Company believes it has
substantial defenses to this action, although no assurance can be given of the
eventual outcome of this litigation.

In addition, World Airways is party to routine litigation and administrative
proceedings incidental to its business, none of which is believed by World
Airways to be likely to have a material adverse effect on the financial
condition and results of operations of World Airways.

EMPLOYEES

The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 1998.
Approximately 37% of the Company's employees are covered under the collective
bargaining agreement. The Company expects to begin negotiations in April 1998
and cannot predict the outcome of the negotiations or their possible impact on
the Company's financial condition and results of operations.

The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants argued the "scope clause" of the
collective bargaining agreement had been violated by the Company and challenged
the use of foreign flight attendant crews on the Company's flights for Malaysian
Airlines and Garuda Indonesia which has historically been the Company's
operating procedure. The Company is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter denied in 1997 the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. Subsequently, in 1997, the flight attendants challenged and filed
"scope clause" grievances with respect to four separate wet-lease contracts. The
Company and the Teamsters are presently in discussions regarding these
grievances. At this time, however, the Company can give no assurance
that these discussions will be successful and the grievances will not be
submitted to formal arbitration. The Company can provide no assurances as to how
the resolution of this matter will affect the Company's financial condition and
results of operations.

The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract was ratified in February 1996. Fewer than 12 Company employees are
covered by this collective bargaining agreement.

The Company is unable to predict whether any of its employees not currently
represented by a labor union will elect to be represented by a labor union or
collective bargaining unit. The election by such employees of representation in
such an organization could result in employee compensation and working condition
demands that could have a material adverse effect on the financial results of
the Company.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends or distributions on its
common stock since the payment of a distribution to WorldCorp in 1992. The
Company currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on its common stock will depend upon the
results of operations, financial condition, capital expenditure plans of the
Company, provisions of certain financing instruments as well as such other
factors as the Board of Directors, in its sole discretion, may consider
relevant.

Under the terms of the shareholders agreement among the Company, WorldCorp, and
MHS, the Company has agreed to declare and distribute all dividends properly
payable, subject to the requirements of law and general overall financial
prudence. The Credit Agreement with BNY Financial Corporation (as amended in
March 1998, the "Credit Agreement") contains restrictions on the Company's
ability to pay dividends or make any distributions of common stock in excess of
5% of the total aggregate outstanding amount of stock, except that the Company
may make quarterly dividends so long as in any six month period, such dividends
do not exceed 50% of the Company's aggregate net income for the previous six
months.

WorldCorp is subject to the provisions of an indenture, expiring in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under the indenture. However, the indenture is not
applicable to World Airways if WorldCorp's ownership percentage is below 50% of
the issued and outstanding shares of common stock. As of January 23, 1998,
WorldCorp owned approximately 51.2% of the outstanding common stock.

INCOME AND OTHER TAXES

As of December 31, 1997, World Airways had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $92.2 million ($27.8
million of which is subject to a $6.9 million annual limitation as a result of
an ownership change of World Airways for tax purposes in 1991). These NOLs, if
not utilized to offset taxable income in future periods, would expire between
1998 and 2011. Use of World Airways' NOLs in future years could be further
limited if an Ownership Change were to occur in the future. While World Airways
believes that as of December 31, 1997, no Ownership Change has occurred since
the 1991 Ownership Change, the application of the Internal Revenue Code (the
"Code") in this area is subject to interpretation by the Internal Revenue
Service. The NOLs are subject to examination by the IRS and, thus, are subject
to adjustment or disallowance resulting from any such IRS examination. In
addition, conversion of the Debentures or future transactions in the Company's
common stock or the common stock of the Company's stockholders, including
conversions of a portion of the outstanding WorldCorp debentures into common
stock, may cause an Ownership Change, which could result in a substantial
reduction in the annual limitation in the use of the NOLs and the loss of a
substantial portion of the NOLs available to the Company.

YEAR 2000

The Company has begun a comprehensive review of its computer system to identify
the systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversion are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company. The Company
has not yet estimated the cost of modifying its computer systems.

EFFECTS OF NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income". FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted, however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company believes that the disclosure of
comprehensive income in accordance with the provisions of FAS No. 130 will not
materially impact the manner of presentation of its financial statements as
currently and previously reported.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information". FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted, however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.

INFLATION

The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WORLD AIRWAYS, INC.
BALANCE SHEETS
ASSETS
(IN THOUSANDS)

December 31,
----------------------------
1997 1996
----------- ----------

CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $498 at December 31, 1997 and
$338 at December 31, 1996 (Note 17) $ 25,887 $ 7,028

Restricted short-term investments (Notes 7 and 17) -- 1,047

Trade accounts receivable, less allowance for
doubtful accounts of $498 at December 31, 1997
and $413 at December 31, 1996 (Notes 10 and 15) 7,747 14,093

Other receivables (Note 11) 9,485 4,464

Due from affiliate, less allowance for doubtful accounts
of $475 at December 31, 1997 (Note 5) 2,471 5,548

Prepaid expenses and other current assets (Note 8) 7,995 7,778

Assets held for sale (Notes 9 and 11) 500 500
------- ------

Total current assets 54,085 40,458
------- -------

ASSETS HELD FOR SALE (Notes 9 and 11) 2,734 3,426

EQUIPMENT AND PROPERTY (Notes 9 and 11)
Flight and other equipment 86,774 72,089
Equipment under capital leases 12,266 11,466
------- -------
99,040 83,555
Less: accumulated depreciation and amortization 25,603 18,553
------- -------

Net equipment and property 73,437 65,002
------- -------

LONG-TERM OPERATING DEPOSITS (Note 11) 16,059 15,951

OTHER ASSETS AND DEFERRED CHARGES,
NET (Notes 5 and 8) 2,833 2,687
------- --------

TOTAL ASSETS $ 149,148 $ 127,524
======= =======

(Continued)

WORLD AIRWAYS, INC.
BALANCE SHEETS
(CONTINUED)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

December 31,
---------------------------
1997 1996
----------- -----------

CURRENT LIABILITIES
Notes payable (Note 10) $ 4,039 $ 11,386
Current maturities of long-term obligations (Note 11) 9,856 9,046
Accounts payable 19,824 22,349
Net liabilities of discontinued operations (Note 3) -- 1,834
Unearned revenue 2,486 3,046
Accrued maintenance in excess of reserves paid 2,481 9,770
Accrued salaries and wages 10,976 9,351
Accrued taxes 1,386 1,225
Due to affiliate (Note 5) 3,304 1,850
Other accrued liabilities 1,553 157
-------- --------
Total current liabilities 55,905 70,014
-------- --------

LONG-TERM OBLIGATIONS, NET (Note 11) 75,071 30,106

OTHER LIABILITIES
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $20,156 at December
31, 1997 and $19,099 at December 31, 1996 5,195 6,252
Accrued maintenance in excess of reserves paid 10,575 6,867
Accrued postretirement benefits (Note 12) 2,752 2,545
Other liabilities 4,421 3,378
-------- --------
Total other liabilities 22,943 19,042
-------- --------

TOTAL LIABILITIES 153,919 119,162
-------- --------

COMMON STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1, 4, 5, 11, 12 and 16)
Common stock, $.001 par value (40,000,000 shares authorized;
12,000,064 shares issued and 8,003,064 outstanding at December 31, 1997
and 12,000,064 shares issued and
11,282,064 outstanding at December 31, 1996) 12 12
Preferred stock, $.001 par value (5,000,000 shares authorized and
no shares issued or outstanding at December 31, 1997 and 1996) -- --
Additional paid-in capital 42,522 42,522
Contributed capital 3,000 3,000
Accumulated deficit (17,554) (29,006)
ESSOP guaranteed bank loan (Note 12) (227) (805)
Treasury stock, at cost (3,997,000 shares at December 31, 1997 and
718,000 shares at December 31, 1996) (Notes 1, 4 and 5) (32,524) (7,361)
-------- ---------
Total common stockholders' equity (deficit) (4,771) 8,362
-------- ---------

COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 5, 10, 11, 12, 14, 15 and 17)

TOTAL LIABILITIES AND COMMON STOCKHOLDERS'
EQUITY (DEFICIT) $ 149,148 $ 127,524
======= =======
See accompanying Notes to Financial Statements

WORLD AIRWAYS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

Years Ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----

OPERATING REVENUES (Note 15)
Flight operations $ 306,800 $ 296,930 $ 232,623
Flight operations subcontracted
to other carriers 2,058 11,726 8,598
Other 554 931 1,165
-------- -------- --------
Total operating revenues 309,412 309,587 242,386
------- ------- -------

OPERATING EXPENSES
Flight 71,845 69,128 63,584
Maintenance (Notes 5, 11 and 17) 65,972 60,462 41,843
Aircraft costs (Notes 5 and 11) 91,422 85,227 67,331
Fuel 17,615 19,255 16,704
Flight operations subcontracted
to other carriers 2,603 12,932 9,096
Promotions, sales and commissions 9,569 8,229 3,634
Depreciation and amortization 8,651 8,032 6,056
General and administrative 24,878 24,677 18,240
------- ------- -------
Total operating expenses 292,555 287,942 226,488
------- ------- -------

OPERATING INCOME 16,857 21,645 15,898
------- ------- -------

OTHER INCOME (EXPENSE)
Interest expense (Notes 10 and 11) (5,379) (3,529) (3,486)
Interest income 1,506 1,230 933
Other, net (Notes 9 and 11) (754) (314) 1,403
-------- -------- --------
Total other expense (4,627) (2,613) (1,150)
-------- -------- --------

EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 12,230 19,032 14,748

INCOME TAX EXPENSE (Note 14) 263 679 602
-------- -------- --------

EARNINGS FROM CONTINUING OPERATIONS 11,967 18,353 14,146

DISCONTINUED OPERATIONS (Note 3)
Loss from discontinued operations (less applicable
income tax benefit of $83 and $306 in 1996 and
1995, respectively) -- (11,720) (5,250)
Loss on disposal (less applicable income tax
benefit of $562 in 1996) (515) (20,655) --
-------- -------- ---------

NET EARNINGS (LOSS) $ 11,452 $ (14,022) $ 8,896
======== ======== ========

(continued)

WORLD AIRWAYS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(CONTINUED)

Years Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----

BASIC EARNINGS (LOSS) PER COMMON
EQUIVALENT SHARE (Note 13):
Continuing operations $ 1.16 $ 1.55 $ 1.35
Discontinued operations (0.05) (2.74) (0.50)
--------- --------- ---------
Net earnings $ 1.11 $ (1.19) $ 0.85
========= ========= =========

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,302 11,806 10,477