<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                  FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                      COMMISSION FILE NUMBER   33-4734-D 
                                               ---------
             GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
                       (FORMERLY RILEY INVESTMENTS, INC.)
                       ----------------------------------

               (Exact name of registrant as specified in charter)


                    OREGON                                     93-0950786
                    ------                                     ----------
       (State or other jurisdiction of                      (I.R.S. Employer
        incorporation or organization)                     Identification No.)

211 EAST 7th STREET, 11th FLOOR, AUSTIN, TEXAS                    78701
----------------------------------------------                    -----
   (Address of principal executive offices)                    (Zip Code)


Registrant's telephone number, including area code                (512) 391-2000
                                                                  --------------
          Securities registered pursuant to section 12(b) of the Act:

       Title of Class                Name of each exchange on which registered
            NONE                                     NONE
            ----                                     ----


           Securities registered pursuant to section 12(g) of the Act:
                                      NONE
                                      ----
                                (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
                     ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB.   {X}

State issuer's revenues for its most recent fiscal year: $12,772,195.

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: As of April 7, 1998, the aggregate market price of the voting stock held
by non-affiliates was approximately $10,139,250.

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of April 7, 1998, the
Company had outstanding 3,021,412 shares of its common stock, par value
$0.0001.

                     Transitional Small Business Disclosure
                     Format (Check one):     Yes      No  X
                                  ---     ---
                 Page 1 of _____ consecutively numbered pages.
                     Exhibit index appears on page ______.

<PAGE>   2
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION                                                    PAGE
-----------------------                                                    ----
<S>                                                                        <C>
PART I                                                                        -

  ITEM 1.  DESCRIPTION OF BUSINESS                                            -
  ITEM 2.  DESCRIPTION OF PROPERTY                                            -
  ITEM 3.  LEGAL PROCEEDINGS                                                  -
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF
           SECURITY HOLDERS                                                   -

PART II                                                                       -

  ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS                                        -
  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION OR PLAN OF OPERATION                           -
  ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                        -
  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE                             -

PART III                                                                      -

  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
           CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
           OF THE EXCHANGE ACT                                                -
  ITEM 10. EXECUTIVE COMPENSATION                                             -
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT                                              -
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                     -
  ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                   -
</TABLE>
<PAGE>   3
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

     THE OFFERING

       The Company completed a public offering  (the "Offering") of 1,200,000
shares of its common stock on February 5, 1998 (subsequent to the 1997 year end
financials included in this report), at an offering price of  $5.00 per share.
The net proceeds to the Company were $5,230,000.  In anticipation of the
Offering, a majority of the Company's  shareholders approved a 1 for 7 reverse
stock split of the Company's common stock effective December 17, 1997 (the
"Reverse Stock Split"). The Company  filed a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended, with the Securities and
Exchange Commission (the "Commission") with respect to the Offering. For
further information, reference is made to the Registration Statement and
amendments thereof and to the exhibits thereto, which are available for
inspection without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates.

  The Company is publicly held and traded and files annual and other periodic
reports pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, and such reports and other information filed by the Company may be
inspected and copied at the public reference facilities of the Commission in
Washington, D.C., and can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a website that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission at http://www.sec.gov.

  The mailing address of the Company's principal executive offices is 211 East
7th Street, 11th Floor, Austin, Texas 78701, and its telephone number is (512)
391-2000.

  BUSINESS OF ISSUER

  The Company serves a portion of the travel industry known as "interliners"
through two divisions operated within its wholly-owned subsidiary. Interliners
are the active employees and retirees of the airline industry, who may fly on
many carriers for free or at a very significantly reduced fare, along with
their families and the friends to whom they pass along their allotments of
no-cost or low-cost flying privileges. One division (the "Publishing Division")
publishes a magazine and other promotional material directed at the interline
market, see "THE BUSINESS -- The Publishing Division," infra, and the other
(the "Marketing Division") offers travel accommodations to interliners. See
"THE BUSINESS -- The Marketing Division," infra. Primarily because interliners
have a high propensity to travel at the last minute or during off-peak periods
when "stand-by" space is available at hotels and resorts and on cruise ships,
interliners are generally able to procure hotel or resort accommodations in
destination locations, cabins on cruise ships and other travel products at
rates representing a courtesy discount of up to 50% off of established rates.
The discount is available because the travel industry views interline bookings
as incremental or marginal revenue that supplements normal marketing revenue. A
principal characteristic of the interline travel industry is that interliners
are generally unaware of the many opportunities, discounts and specials that
are available to them at any given time. The industry that exists to service
the interline market is highly fragmented, generally consisting of small
operators serving the market either as an adjunct to a retail tour operation or
by concentrating on an extremely narrow segment. There are a handful of major
interline companies that are established and offer relatively broad service,
yet none of these operations could be considered to have a dominant position.

  THE PUBLISHING DIVISION

The Products

  The Publishing Division produces, publishes and distributes Interline
Adventures (formerly Airfair Magazine), a 27- year-old, 4-color, 120 plus-page,
bi-monthly magazine, Interline Adventures (the "Magazine") provides general
travel editorial coverage and, in a section known as the Interline Vacation
Guide, a significant focus on cruise and tour opportunities for interliners.
The Publishing Division attempts to supplement and update the Magazine's
information on product availability via a smaller, 4-color, publication called
"Interline Update," which is also published bi-monthly. The Magazine, the Update
and all other Company market material are hereinafter referred to as the 
"Publications."
<PAGE>   4

  The Publications serve as the primary marketing channel for the Marketing 
Division, which advertises its products and services therein. In addition, the
Magazine provides an advertising outlet for the cruise lines, hotels and resorts
frequented by the Company's clients, generating revenue which subsidizes the
Company's marketing effort.

  The Publishing Division currently sends approximately 15,000 copies of the
Magazine to subscribers, mails up to another 80,000 to past customers on a
promotional basis, and distributes up to 20,000 more copies through the
Company's airline representatives. Copies of the Magazine not delivered directly
to subscribers, as well as updates and other Company publications are placed in
airport areas and rooms reserved for and frequented by airline employees
(hereinafter referred to as "Employee Areas"). Among these areas and rooms are
employee break rooms, reservation and office areas, and "pass bureaus." "Pass
bureaus" are offices maintained by each airline in an attempt to facilitate
employee travel on other airlines -- i.e., a Continental employee wishing to
make travel arrangements on American Airlines may utilize the services of
Continental's pass bureau. Airlines generally establish a pass bureau in their
"hub airports."

Marketing

  The Magazine derives revenue from sales of subscriptions to interliners and 
sales of advertising to hotels, resorts, cruise lines and other service 
providers located at or leaving from destination locations.

  The Magazine is marketed to potential subscribers and to existing subscribers
by subscription renewals and through advertising and promotions. Advertising and
subscription cards are placed within the brochures distributed by the Marketing
Division to Employee Areas. Complimentary copies of the Magazine are mailed to
selected interliners who have previously made purchases from the Marketing
Division. Additionally, groups of individuals are being invited to subscribe to
the magazine on a complementary basis. These groups are being invited in
cooperation with the airlines and with organizations affiliated with the
airlines. This effort is one of the measures the Company has undertaken in an
attempt to shift its distribution strategy to that of substantially a 
"controlled circulation" publication.

  The Company anticipates that an increase in the size of the Company's mailing
distribution will increase both the rates the Publishing Division can charge
for advertising within the Magazine and the number of customers within the
Marketing Division's customer base.

  Advertising space within the Magazine is marketed to hotels, resorts, cruise
lines and tour operators through direct telemarketing and distribution of media
kits to the advertisers and, on a selective basis, to agencies representing the
advertisers. Although many advertisers are hotels, resorts, cruise lines, and
tour operators who have rate agreements with the Marketing Division, and their
advertisements display the phone number of the Marketing Division, the Magazine
also sells advertising space to interline operators which have no agreement or
arrangement with the Marketing Division.  The Company has attempted to pursue
both advertisers that are adjuncts to the interline travel industry, such as
luggage manufacturers, and those that have no connection to the travel industry,
but the subscription base and total distribution base of the Magazine has
discouraged such advertisers. The Company offers many advertisers the
opportunity to purchase advertising space within the Magazine in exchange for
rooms in hotels, resort accommodations and cruise cabins, which it then
re-markets for cash at an additional profit. See "The Marketing Division,"
infra.

  Advertisers generally, and in particular advertisers who do not have rate
agreements with the Marketing Division, focus on subscriber base and total
distribution of publications in determining both in which publications to place
advertising and how much to pay for advertising space. To date the subscription
base and total distribution of the Magazine has been too small to attract
significant advertising sales. However, the Company's new "controlled
circulation" subscription policy should provide the Company with a sufficient
circulation basis for effective sales of advertising to non-travel related
entities.
<PAGE>   5
Competition

  The Magazine competes with other publications for readership and for
advertisers' patronage. Most information available to interline travelers
consists of brochures distributed by other interline companies, hotel and
resort operators, cruise lines and escorted tour operators. The Magazine is the
only four color publication available which is updated and published six times
annually. Within the interline segment, the Magazine has one primary
competitor, the ASU Travel Guide -- a 400-page guide, published quarterly, with
the look and feel of a paperback novel. It competes with the Magazine for
advertisements targeting interliners. The ASU Travel Guide has been published
successfully for a number of years and enjoys widespread circulation. The
Company hopes to compete for advertising sales by increasing distribution and
offering to accept room nights or other travel accommodations as payment from
some advertisers.

Sources of Materials

  The Magazine is printed and distributed by a contract printing operation at
prices negotiated from time to time between the Company and printers. There are
a number of printers who could print and distribute the Magazine. Chief among
the factors influencing the Company's expenses in printing and distributing the
Magazine is the price of paper.  Paper prices are volatile and, although
currently higher than historical averages and, in the belief of the Company's
management, not likely to rise significantly in the foreseeable future, the
possibility that paper prices will rise further cannot be completely
discounted. Significant increases in paper prices could have a materially
adverse effect on the printing expenses of the Magazine and the profitability
of the Company.

  THE MARKETING DIVISION

The Products

  The Marketing Division, under the name "Interline TravelReps," provides hotel
and resort accommodations (comprised of rooms or vacation packages consisting
of some combination of rooms, meals and services) and cabins on cruises and
seats on escorted tours. The hotel and resort accommodations offered by the
Marketing Division are located in North and South America and Europe, with
access to properties throughout the world and a particular focus on
accommodations in Mexico and the Caribbean. The Marketing Division offers space
on cruises and escorted tours and offers cruises on 27 lines with over 100
ships in various worldwide destinations and a wide variety of escorted tours,
primarily to England, Europe and Africa. Cruise lines and escorted tour
operators typically limit the interline companies that market their products or
commodities to those which have a demonstrated ability to effectively serve
interline travelers. The Company is permitted to market all of the major cruise
lines serving the interline market. The Company maintains an office in Boca
Raton, Florida, in order to facilitate its relations with the substantial
number of cruise lines that are located in that area. Retention of the ability
to sell cruise cabins to the interline market is key to the continued success
of the Company's and is subject to the continued satisfaction of the cruise
lines with the Company's service.

<PAGE>   6
  The Marketing Division markets its hotel and resort rooms and packages,
cruises, and escorted tour products through advertisements within the Magazine,
but also advertises in the magazines and newsletters published by or for a
given airline's employees and distributes brochures and flyers into airline
Employee Areas. The Marketing Division has a network of more than 500 current
and former airline employees who distribute the Publications in airport
Employee Areas throughout the United States, Canada, the United Kingdom and
western Europe. The Marketing Division's other significant marketing tools are
its reservation center and the reservation agents there who answer phone calls
placed by interliners in response to the Marketing Division's promotional
activities.

  The amount charged to the interline customer is established and published in
the Magazine and the other Publications and is quoted over the phone by the
Marketing Division's reservation specialists. The Company believes that the
market for interline products is very price sensitive and attempts to determine
prices with an awareness to this price sensitivity. The Marketing Division works
with all major cruise lines, and no single line accounted for more than 10% of
its $6.3 million in sales in 1996. For the year ended December 31, 1997, sales
of cruises and escorted tours totaled $7.9 million.

Seasonality

  As already noted, when airlines operate at nearly full capacity, interline
travel decreases -- as a consequence of the airlines having fewer open seats
for airline travelers to occupy, airline employees having less time for leisure
travel and, possibly, full occupancy rates at destinations frequented by retail
travelers during these traditional holiday periods. While the most dramatic
events that lead to full capacities (labor issues, airline failures and similar
occurrences) have happened infrequently, airlines usually operate at high
capacities during the holiday season -- from the middle of November through the
middle of January. The Marketing Division and the rest of the interline
industry has found that very few of its interline customers travel during this
period and, since the Company does not recognize income until a customer
travels, the Company's income during this eight-week period is substantially
lower than the income during the remainder of the year.

  The Company has found that, although actual travel is reduced during the
holiday season, reservation activity is not reduced -- presumably the airline
employees recognize the demands on their time during the holiday season and
plan to vacation after it. Management has taken a number of steps in an attempt
to address this seasonality, including the implementation of special
promotional campaigns and the procurement of a substantial supply of travel
accommodations at locations not traditionally frequented by holiday travelers.
The promotional campaigns have met with mixed success and management believes
that further refinement of this strategy will produce more uniform success.
There can be no assurance that this seasonality will not have a material
adverse effect on the Company or the Company's financial condition.

Sources of Supply

  The Marketing Division primarily procures its supply of hotel and resort
accommodations, cruise ship cabins, and tour reservations directly from the
operators of those businesses. The Marketing Division negotiates the prices,
terms and, in some cases, availability of hotel and resort accommodations over
the telephone or via facsimile machines and, occasionally, at industry
conferences where hotel and resort operators within a given region meet with
both interline companies and travel wholesalers (which typically buy blocks of
hotel rooms or resort accommodations and resell them to travel agencies). With
the exception of instances where the Company is able to procure a more
favorable rate as a result of volume guaranties or aggressive negotiations, the
Marketing Division usually procures the interline rate quoted by a given hotel
or resort operator to all interline operators. In contrast to hotel and resort
operators, most cruise lines and tour operators pay a commission based on a
pre-determined price to the interline customer.

  On a limited basis, the Marketing Division may also acquire access to travel
accommodations through dollar denominated non-cash arrangements. Most
typically, the Company provides advertising in the Magazine for room nights and
such room nights are then marketed to interline customers. No assurances can be
given that such non-cash
<PAGE>   7
transactions will yield a significant supply of travel products for sale by the
Marketing Division. In addition to these direct non-cash transactions, the
Company was a party to a marketing agreement with Inventory Merchandising
Services, Inc. ("IMS"), a subsidiary of BEI Holdings, Inc., pursuant to which
IMS has agreed to permit the Marketing Division, on an exclusive basis, to sell
travel accommodations which IMS acquires through barter transactions. See 
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."  The Company terminated this
agreement as of January 31, 1998.

  The Company's supply of travel products within a given travel destination,
whether offered by a given service provider or offered by a number of
providers, is often contingent upon the availability of excess supply of such
accommodations.  Travel providers who cannot anticipate the existence of future
excess capacity, and therefore unwilling to surrender the possibility of
selling rooms at retail prices, are typically unwilling to provide interline
companies with commitments for available space more than two-to-three weeks in
advance of a given travel date. Some travel providers, who are able to
anticipate the existence of future excess capacity, are able and desire to
provide the Company with committed availability for a given number of room
nights or cruise berths in an attempt to maximize their occupancy rates and
marginal revenues. Management of the Company believes that hotels operate at
occupancy rates of approximately 70%, although hotels in certain markets, and
hotels within almost any market over a given period, can experience higher
occupancy rates, thereby limiting the space available for sale by interline
companies. Although the Company has encountered a shortage of travel
accommodations in a given market only infrequently, the Company is aware of the
possibility that a substantial growth in its interline customer base may
produce a demand for interline travel accommodations in excess of the Company's
available supply. Cruise lines operate at substantially higher occupancy rates
and attain these rates by offering discounts on cruises where a lack of demand,
and therefore the existence of excess capacity, is anticipated. The Company is
offered these discounts with other retail and interline cruise marketers. The
Company believes that there is substantial excess capacity, both in the market
for interline products generally and in particular destinations, which is not
currently made available to the Company for inclusion within its product line
and that, as the Company's interline customer base grows, the Company will be
positioned to augment its product offerings to satisfy any increase in demand
or, alternatively, to offer products which are reasonable substitutes for
products which are not available. The Company's future success and ability to
meet its growth objectives may depend on its ability to procure additional and
more certain supplies of travel products in sufficient quantities to satisfy
the demands of its customer base.

Customer Loyalty Program

  The Company's management has implemented several product features in an
attempt to improve its products and differentiate them from the products and
services of competitors. In doing so, the Company has attempted to specifically
tailor the products offered to the needs and concerns of interliners. In July
1996, the Company launched PERX, a customer loyalty/referral program designed
to generate repeat travel business for the Marketing Division, as well as
subscribers to the Magazine. Membership in PERX allows eligible interliners to
receive points for each trip taken with the Marketing Division in a manner
similar to the many frequent flyer/guest programs operated by airlines and
hotels worldwide. In addition, PERX members receive points for travel by anyone
they directly refer to the program. Points are redeemable for discounts and/or
free trips. In July 1996, approximately 150,000 brochures containing an
application for the PERX program were distributed. Although there is no
enrollment fee for interliners who join PERX, the Company anticipates the
following benefits from wide enrollment in PERX: (i) increase in the Company's
share of the interline market, (ii) increase in the Magazine's circulation,
enabling the Company to adjust advertising rates and underwrite the Magazine's
production and distribution costs; (iii) creation of an enthusiastic sales team
not requiring additional compensation; and (iv) establishment of a mailing list
that will supplement the lists available through the Company's own records and
may contain the names of recipients that might otherwise be reached only
through more expensive channels (e.g., paid advertising). The Company's efforts
to date, which have been severely limited by the Company's shortage of
operating capital, have resulted in approximately 7,000 interline enrollees in
the PERX program. The Company plans to use a portion of the proceeds of the
Offering for increased marketing of the PERX program. No assurances can be given
that sufficient numbers of interliners will enroll in PERX so as to permit the
Company to realize any of the foregoing benefits.
<PAGE>   8
Competition

  Management of the Company believes that competition within the interline
industry is based on price, market visibility and the nature and variety of
products and services offered. As most interline companies are quoted the same
price by hotels, resorts, cruise lines and tour operators, price is not usually
the basis for a competitive advantage.  There are over 30 competitors in the
interline travel industry. None are publicly held so reliable sales information
is not available. However, two companies, Caesar's and Magellan, which have been
in the travel business for more than 20 years, currently may have greater sales,
resources, and management experience and depth than the Company and may be able
to compete very effectively with them. The balance of the Company's competition
is largely made up of smaller organizations formed by former airline employees
and retail travel operators which view the interline market as merely a portion
of their business. Most interline companies tend to focus on a specific
destination (Mexico and the Caribbean, Ski Trips, etc.) or specific airline
(e.g., only Continental). Others, like the Company, offer a more complete range
of interline products and services.

     THE MERGER AND INTEGRATION OF OPERATION DIVISIONS

  Effective October 10, 1996, the Company, then operating as Riley Investments,
Inc., acquired as a wholly-owned subsidiary, Airfair Publishing, Inc.
("Airfair"), an Austin, Texas based travel services group that consisted of the
businesses that now comprise the Company's operations. The acquisition was
accomplished by the merger (the "Merger") of a newly created, wholly-owned
subsidiary of the Company with and into Airfair, which was the surviving
corporation. The Merger was effected by the conversion of the issued and
outstanding shares of common stock of Airfair (the "Airfair Stock") into new
shares of common stock of the Company (the "Common Stock") on the basis of one
share of Common Stock for each share of Airfair Stock issued and outstanding,
or an aggregate of 9,125,000 shares of common stock, which represented
approximately 96% of the common stock of the Company. As adjusted for the
Reverse Stock Split, the number of shares of Common Stock issued to
shareholders of Airfair totaled 1,303,572. Following the Merger, the executive
officers and directors of Airfair, who were appointed to similar positions of
the Company, and owned approximately 65% of the issued and outstanding Common
Stock. To better reflect the nature of its business following the acquisition,
Riley changed its name to Grand Adventures Tour & Travel Publishing
Corporation.

  Airfair acquired its operation in two transactions -- in 1995 it acquired the
bulk of its hotel and resort operations from a former Continental Airlines
employee and in early 1996 it acquired the Magazine and the cruise and escorted
tours operations. Since the date of these acquisitions, the Company has
undertaken measures to integrate the hotel and resort operations with the
cruise and escorted tour operations, to expand the scope and improve the
quality of the Magazine, to enhance the products offered by the Marketing
Division both in terms of products offered and customer services, and to
upgrade the technical infrastructure underlying all of the Company's
operations. Management believes that it has made substantial progress in all of
these areas but such progress has yet to be reflected in tangible operating
results and there can be no assurance that such tangible operating results will
be forthcoming.

     OPERATIONS BEFORE THE MERGER

Before its activities under the name of Riley Investments, Inc., the Company
was known as Pace Group International, Inc., and operated until November 1,
1995, through its then wholly-owned subsidiary, Pace International Research,
Inc.  ("PIR"), which globally marketed English language training programs
developed by the Company's founder, Edwin T.  Cornelius, Jr. Despite the
proprietary nature of PIR's products, the then operating Company continually
failed to generate net income. Since disposing of its operating subsidiary in
late 1995, the Company has had no assets or operations until the Merger.

  RISK FACTORS

  RECENT OPERATING LOSSES

  The Company had net operating losses for each of the last 3 fiscal years
(since its inception). See, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." Management believes that the capital
infusion represented by the successful completion of the Offering will permit
the Company to fully implement its business plan and achieve ongoing
profitability, but there can be no assurances in this regard.
<PAGE>   9
  BUSINESS SEASONALITY

  As most travel by interliners takes place during times when there are both
empty seats on airlines and accommodations available at a given travel
location, travel volume for the interline industry tends to decrease when the
leisure travel industry generally, and airlines and cruise lines in particular,
experience high traffic volume. Accordingly, generally high traffic volumes,
together with a lack of available travel accommodations at traditionally
popular travel destinations, have generally resulted in low interline traffic
volumes from the middle of November through the middle of January. Management
has taken a number of steps in an attempt to address the seasonality which
confronts the Company, including the implementation of special promotional
campaigns and the procurement of a substantial supply of travel accommodations
at locations not traditionally frequented by holiday travelers. There can be no
assurance that this seasonality will not have a material adverse effect on the
Company or the Company's financial condition. See, "THE BUSINESS -- The
Marketing Division -- Seasonality" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

  COMPETITION

  The Company is aware of over 30 competitors in the interline travel industry,
all of which are privately-held and for which no reliable sales information is
available. Two of the companies, Caesar's and Magellan, have been in the travel
business for over 20 years and have an established market presence and variety
of products and services. In providing travel services, the Company believes
that competition in the interline industry is based on price, market visibility
and the nature and variety of products and services offered. The Company
believes that it benefits from being able to offer a broad variety of products
in a variety of destinations. The Company generally offers the prevailing
interline discount rate. See "THE BUSINESS -- The Marketing Division --
Competition." In publishing the Magazine, the Company competes with the ASU
Travel Guide, an approximately 400-page quarterly listing with a significant
readership.  The ASU Travel Guide is not affiliated with any reservation or
travel firm providing the types of support services offered by the Company.
Although the Company has designed its products and services and its expansion
strategy with a view to operating in this competitive environment, there can be
no assurance that the Company will be able to compete effectively or profitably.
Many of the Company's competitors have significant management and financial
resources and more established market niches than the Company. See "THE BUSINESS
-- The Publishing Division -- Competition."


  RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY; GENERAL ECONOMIC CONDITIONS

  The Company's results of operations will be dependent upon factors affecting
the travel industry. The Company's revenues and earnings are especially
sensitive to events that affect domestic and international air travel, cruise
travel and resort hotels in Mexico and the Caribbean. A number of factors, most
notably labor disturbances, but including political instability, armed
hostilities, international terrorism, extreme weather conditions, a rise in
fuel prices, a decline in the value of the U.S. dollar and excessive inflation,
could result in an overall decline in demand for interline travel. These types
of events could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, demand for the
Company's travel services may be significantly related to the general level of
economic activity and employment in the U.S. Therefore, any significant
economic downturn or recession in the U.S. could have a material adverse effect
on the Company's business, financial condition and results of operations.

RELIANCE ON SUPPLIERS

  Although the Company sells all of the major cruise lines serving the
interline market, many of the cruise lines are part of holding company
structures. Should one of these holding companies fail, the possible adverse
effects on the Company would be twofold. First, the Company would be denied a
significant supply of cruise berths to be sold to its interline travel
customers. Second, the amount of overall supply in the cruise industry would be
reduced, which would also reduce the amount of usual or "marginal" capacity
available for sale to interlines. To date, during the Company's operations
within the interline industry, no major cruise line operator has failed, making
it difficult to estimate with precision the impact such failure would have on
the Company's operation. 


  DEPENDENCE UPON TECHNOLOGY

  The Company's business is dependent upon a number of different
state-of-the-art information and telecommunication technologies to facilitate
its access to information and manage a high volume of inbound and outbound
calls. Any failure of this technology would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company is dependent upon certain third party vendors, including central
reservation systems operators such as the SABRE Group, for access to certain
information. Any failure of these
<PAGE>   10
systems or restricted access by the Company would have a material adverse
effect on the Company's business, financial condition and results of
operations. See, "ITEM 2. DESCRIPTION OF PROPERTY."


  POTENTIAL CONFLICTS OF INTEREST

  Certain of the officers and directors of the Company are also officers,
directors and shareholders of BEI Holdings, Inc. ("BEI"). Until January 31,
1998, the Company and Airfair were parties to a Marketing Agreement pursuant to
which the Company was permitted (i) to market travel accommodations held by a
BEI subsidiary to its customers and (ii) to retain a portion of each sale of
such accommodations as a commission. To date, the amount of such sales and such
commissions have been immaterial and, although the Company believes that the
commission to be retained by the Company was not less than the commission which
would have been received from a third party, the Company has not obtained an
independent appraisal of the fairness of such agreement. The Company has
undertaken to not engage in transactions with affiliates on terms less favorable
to the Company than might be received from independent third parties. See,
"CERTAIN RELATIONSHIPS AND MATERIAL TRANSACTIONS."


  FUTURE ISSUANCES OF COMMON STOCK

  The Company has issued warrants entitling the holders thereof to acquire a
total of 297,791 shares of Common Stock at a weighted average exercise price of
$6.87. See, "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS."



  SHARES ELIGIBLE FOR FUTURE SALE

  Future sales of shares of Common Stock by the Company or its existing
stockholders, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock. Approximately 3,021,400 shares of
Common Stock are outstanding. Of the outstanding shares, approximately
1,240,000 shares held by existing stockholders are tradeable without
restriction. The remaining shares of Common Stock are "restricted securities"
(the "Restricted Securities") within the meaning of Rule 144 under the
Securities Act and may not be publicly resold, except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144 promulgated under the
Securities Act.  The Company believes that the holders of approximately 400,000
of the Restricted Securities have satisfied the one-year holding period
mandated by Rule 144 and are capable of sale in accordance with the other
requirements of that rule. Approximately 32% of the outstanding shares of
Common Stock, in addition to being Restricted Securities, are subject to
agreements to not sell such Restricted Shares for a 12-month period or, in the
case of certain executive officers of the Company, a 48-month period.  Holders
of $500,000 of indebtedness entitling them to convert such indebtedness, and
the interest accrued thereon, into approximately 294,000 shares of Common Stock
have agreed with the Company that they will not sell the shares issuable upon
such conversion until November 5, 1998. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Common Stock. See "Shares Eligible For
Future Sale."

  In addition to the outstanding shares of Common Stock, there are 297,791
shares subject to outstanding warrants and options at a weighted average
exercise price of $6.87 per share. There are also 450,000 shares of Common
Stock reserved for issuance under the Company's stock option plans, of which
98,075 shares are subject to outstanding options at a weighted average exercise
price of $7.00 per share. See "MANAGEMENT -- Incentive Stock Option Plan."
Registration statements are expected to be filed to permit the resale of shares
issuable upon exercise and, the resale of the shares acquired upon exercise
could adversely affect the prevailing market price of the Common Stock. See
"Shares Eligible For Future Sale."
<PAGE>   11


  VOTING CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS

  The Company's executive officers and directors, entities affiliated with them
and employees of the Company and holders of at least 5% of the outstanding
Common Stock affiliated with the executive officers and directors beneficially
own shares of Common Stock representing more than 29% of the total voting power
of the Common Stock. These persons, if acting in concert, will be able to
exercise control over the Company's affairs and are likely to be able to
control the Board of Directors and the disposition of any matter submitted to a
vote of stockholders.

ITEM 2. DESCRIPTION OF PROPERTY


  The Company maintains an extensive phone and computer system with which it
handles the calls generated by its advertisements and completes the reservation
process through its reservation centers. The phone system and computer system
maintained by the Company are critical elements in the Marketing Division's
marketing efforts. The Company has installed an extensive phone system and
computer network which the Company believes is capable of handling the
Marketing Division's needs for the foreseeable future. However, the Company is
constantly evaluating new technologies, upgrades or product enhancements which
would serve to enhance the Company's operations. The Marketing Division's
ability to service interliners will be dramatically reduced should either the
phone or computer system become inoperable. The Company believes that it has
taken appropriate steps to assure that the phone and computer system are as
reliable and well protected as electronic equipment can reasonably be expected
to be. There can be no assurances, however, that the Company's electronic
equipment will at all times be usable by the Marketing Division in its efforts
to service interline customers.

  The Company has filed a federal trademark application to register the
trademark "Interline PERX Vacation Club" but has not yet heard any response
from the United States Patent and Trademark Office with respect to its
application. There can be no assurances that the Company will be able to obtain
a federal registration of this trade name. The Company has not filed trademark
applications with respect to any of the other trade names that it currently
uses.  There can be no assurances that the Company will ever be able to obtain
meaningful trademark protection for its trade names such as "Interline
Adventures" and Interline "TravelReps."

  The Company occupies approximately 10,500 square feet of office space at 211
East Seventh Street, Suite 1100, Austin, Texas 78701, its main office, and 630
square feet of office space at 1499 West Palmetto Park Road, Suite 222, Boca
Raton, Florida 33486. The Company's phone number is (512) 391-2000. The Company
owns no property other than office furniture, equipment and software.

  The Company employs 51 people, 46 of whom are full time and 5 of whom are
part time. It is anticipated that up to 200 additional personnel will be
required to meet the demands of the projected market over the next five years.
Most of these positions will be in the areas of reservations and operations
processing and servicing the Company's projected volume increases. None of the
Company's employees are members of a labor union and, since the date of the
Merger, the Company has not suffered any work stoppages or labor unrest.


ITEM 3. LEGAL PROCEEDINGS

  The Company is not a party to any material legal proceedings, and no material
legal proceedings have been threatened by or, to the best of the Company's 
knowledge, against the Company.

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

  A special meeting of the Company's shareholders was held on December 17, 
1997.  Proposals to approve a 1-for-7 reverse stock split and to fix the number
of shares of common stock subject to the Company's long-term incentive stock
plan at 450,000 were approved.  The number of shares represented in person at
the meeting was 5,764,000 and no shares were represented by proxy.  Each
proposal received the  unanimous approval of the shareholders present at the
meeting (representing 5,764,000 shares) and no votes were cast against either of
the proposals.  The Company filed and delivered to its shareholders the
information mandated by Schedule 14C and did not solicit proxies.  The Company
has no information as to abstentions or broker non-votes with respect to either
of the proposals.
<PAGE>   12
  No actions were taken with respect to the election or removal of directors.

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

The Common Stock is currently traded in the NASDAQ SmallCap(R) Market under the
symbol "GATT." Prior to the Offering and the inclusion of the Common Stock in
the NASDAQ SmallCap(R) Market, the Common Stock was traded irregularly and
infrequently in the over-the-counter market and quoted on OTC EBB under the
same  symbol and quoted in the pink sheets published by the National Quotations
Bureau. Since May 1995, from time to time, a very small number of securities
broker-dealers published only intermittent quotations for the Common Stock, and
there was no continuous, consistent trading market.  During the above period,
the limited nature of the trading market created the potential for significant
changes in the trading price for the Common Stock as a result of relatively
minor changes in the supply and demand for Common Stock and perhaps without
regard to the Company's business activities. The following table sets forth,
for each of the Company last eight fiscal quarters, the high and low bid and
ask prices for the Common Stock. All of the transactions were effected prior to
the 1-for-7 reverse stock split effected in December, 1997:


<TABLE>
<CAPTION>
                                                    BID               ASK  
                                               --------------    --------------
               QUARTER ENDED                   HIGH      LOW     HIGH      LOW
-------------------------------------------    -----    -----    -----    -----
<S>                                            <C>      <C>      <C>      <C>
December 31, 1997 .........................      3/4     7/16    1 3/8    11/16
September 30, 1997 ........................    1 3/4    11/16    1 3/4        1
June 30, 1997 .............................    2 1/2    1 3/4    2 1/2       1/
March 31, 1997 ............................    2 1/2    1 1/8    2 1/2    1 7/8
December 31, 1996 .........................    2 5/8    1 1/2    3 1/2    2 1/4
September 30, 1996 ........................        3    2 1/4    4 5/8    3 1/4
June 30, 1996 .............................    2 3/4    2 1/4    4 1/4    3 1/2
March 31, 1996 ............................    2 1/4     3/10    3 7/8        2
December 31, 1995 .........................     3/10     3/10        3        3
</TABLE>

Because of the lack of specific transaction information and the Company's
belief that quotations during the period were particularly sensitive to actual
or anticipated volume of supply and demand, the Company does not believe that
such quotations during this period are reliable indicators of a trading market
for the Common Stock. Such prices are without retail mark-up, mark-down, or
commissions.

SHARES ELIGIBLE FOR FUTURE SALE

  Prior to the Offering, the Common Stock was traded on the National
Association of Security Dealers, Inc.'s electronic bulletin board. Trading
actively was very infrequent. Sales of substantial amounts of Common Stock in
the public market could adversely affect the market price of the Common Stock.

  As of March 31, 1998, the Company had approximately 3,021,400 shares of
Common Stock outstanding. Of these shares, approximately 1,240,000 shares are
transferable without restriction or further registration under the Securities
Act, unless they are held by "affiliates" of the Company within the meaning of
Rule 144 promulgated under the Securities Act. All of the remaining shares, 
which total approximately 1,781,400 shares are Restricted Securities and, as
such, may not be sold in the absence of registration under the Securities Act
or an exemption therefrom under Rule 144, and then only if they are not subject
to "lock-up" agreements summarized below. Approximately 476,288 shares have been
held for at least the one-year holding period specified by Rule 144, may now be
sold in compliance with that Rule (subject, in certain cases, to certain volume,
timing and other requirements of Rule 144) and are not subject to any lock-up
agreement.

  Of the remaining Restricted Shares, approximately 71,000 shares are 12-Month 
Lock-up Shares and another approximately 293,450 Restricted Shares are 9-Month
Lock-Up Shares. Upon expiration of the 12-month and 9-month periods,
respectively, both of which commence with the date of the Offering these shares
will be eligible for immediate resale subject, in certain cases, to certain
volume, timing and other requirements of Rule 144.

  In addition to the 12-Month Lock-up Shares and the 9-Month Lock-Up Shares,
approximately 829,000 shares of the Restricted Stock are 48-Month Lock-up
Shares. Small portions of the 48-month Lock-up Shares may be sold by the
holders thereof after the second and third anniversaries of the Offering and
the remainder may be sold after the fourth anniversary.
<PAGE>   13

  In addition to the outstanding shares of Common Stock, and exclusive of
options granted pursuant to the Company's employee stock option plan, there are
297,791 shares of Common Stock subject to outstanding warrants and options at a
weighted average exercise price of $6.87 per share (as adjusted for the Reverse
Stock Split). Such warrants are exercisable for periods expiring at various
dates between 1998 and 2002. The Company has granted the holders of such
warrants certain registration rights relating to the Common Stock purchasable
upon the exercise of such warrants. The Company has agreed with the Boston Stock
Exchange that it will not issue or grant warrants, options or other securities
convertible or exercisable into shares of the Common Stock at a conversion or
exercise price less than 85% of the market price of the Common Stock as of the
time of such issuance or grant.

  The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common
Stock, as well as impair the ability of the Company to raise capital through
the issuance of additional equity securities. Prior to the Offering, there was
no viable trading market for the Common Stock. The Company anticipates that the
trading market in the Common Stock, if any, will be limited based upon the
number of shares currently outstanding.

  The Company has reserved an aggregate of 450,000 shares of Common Stock for
issuance pursuant to the Company's stock option plan and options to purchase
98,075 shares were outstanding on December 31, 1997. As soon as practicable
following the Offering, the Company intends to file a registration statement
under the Securities Act to register shares of Common Stock reserved for
issuance under such plans. See "MANAGEMENT -- Stock Option Plan."
<PAGE>   14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
        OR PLAN OF OPERATION

  The financial information set forth in the following discussion should be
read in conjunction with, and qualified in its entirety by, the financial

statements of the Company included elsewhere herein.

THE OFFERING

  On February 5, 1998, (subsequent to the year end financials presented in
this report) the Company completed an underwriiten public offering for
1,200,000 shares of its Common Stock, $.0001 par value at $5.00 per share
through an underwriting syndicate led by Capital West Securities, Inc.  The
gross proceeds of the offering were $6,000,000.  After underwriting discount,
commissions and expenses, the net proceeds to the Company were $5,230,000.  In
February and March, 1998, the Company utilized a portion of these proceeds to:
(a) pay off all notes payable that did not convert to common stock in an amount
of approximately $821,000; (b) to pay offering expenses of $190,000; (c) to
purchase computer equipment of $82,000; and (d) to pay past due vendor payables
and operating and publishing expenses of $690,000.  The remaining
funds are anticipated to be used for implementing the Company's business plan
which focuses primarily on building the marketing and publishing areas of the
Company.  The Company is now substantially debt free, with the exception of 
normal operating expenses and accruals and holds a substantial cash reserve. See
"LIQUIDITY AND CAPITAL RESOURCES."

FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

The Company had a negative working capital of $620,849 as of December 31,1997,
as compared to a negative working capital of $1,569,859 at December 31, 1996.
The primary causes for this reduction in the working capital deficit between
years were the restructuring of $400,000 of notes payable which were to be due
in a lump sum in 1997 and were replaced with notes payable in monthly
installments through April, 2000, which transferred in excess of $150,000 from
short-term to long-term liabilities; the increase in monies held for the credit
card account of $138,000, an increase in advertising room/cabins held for sale
of $183,000 and an increase of the due from affiliate of $340,000.  The increase
in due from affiliate was created in large part because of overpayments by the
Company for rooms purchased under a marketing agreement with the affiliate.(See
"Results of Operations"). The Company ended the year with $1.6 million in
current liabilities as compared to $2.4 million for the prior year. This
decrease in current liabilities was a result of the Company's previously
mentioned debt restructuring as well as a decrease in the deferred revenue for
cruises and tours. At the end of 1996, as part of an agreement with the
Company's credit card processor, the Company ceased taking cruise passenger
Visa/Mastercard payments directly into the Company.  The processor wished to
reduce their exposure to these higher dollar charges because of the Company's
<PAGE>   15
financial condition at that time.  This proved beneficial to the Company
because the credit card fees paid to the processor had substantially reduced
the margins on the lower margin cruises sales.   Visa/Mastercard charges for
cruises are now passed directly to the cruise line for processing and the
Company receives the net profit (without any reduction for credit card
servicing fees) from the cruise line.  This change also substantially reduced
the amount of funds the Company owed to cruise lines and the amount prepaid
cruise and tour cost at the end of 1997. The Company does not book the credit
cards that are passed directly to the cruise lines as a sale and cost of goods
sold until the passenger has completed travel.

      At December 31, 1997, the largest components of current liabilities were
accounts payable of $420,000 (of which $253,000 were greater than 90 days past
due), as compared to $579,000 in accounts payable as of December 31, 1996, of
which $313,000 were more than 90 days past due; accrued expenses and negative
cash balances of $361,000; current portion of notes payable of $291,000, and
deferred revenues relating to hotels, cruises and tours and magazine
subscriptions of $529,000. A large portion of accounts payable are made up of
amounts due for telephone services and the publication of the Magazine. The
Company worked diligently during 1997 with its primary vendors to work out
payment schedules. During the year, six of the Company's  vendors agreed to
convert their trade payable balances of $159,000 to notes payable at interest
rates of 6 to 10% per annum. The Company has paid all these notes and a
substantial amount of past due accounts payable following the Offering.

      Accrued expenses of $335,000 as of December 31, 1997,are comprised
mainly of payroll, vacation, commissions, note interest, and publishing and
general administrative expenses. Deferred revenues for hotels and cruises
represent the moneys received from passengers that are deferred for revenue
recognition purposes until the passenger has completed travel. These deferred
liabilities are very short-term in nature due to the short time frame between
booking date and travel date. Amounts deferred for hotels were $285,000 and for
cruises $153,000 at December 31, 1997.  Prepaid cruise cost and deferred cruise
revenue were both overstated at December 31, 1996 by $110,000 due to refunds
being recorded as cost of goods sold instead as a reduction of revenue. The
1996 balance sheet has been restated to reflect this adjustment. There was no
effect on earnings. Deferred subscription revenue of $81,000 represents
subscription moneys received but not earned at year end. Magazine subscriptions
are normally paid in full in advance for the one- or two- year subscription
period. Revenue is earned on a prorata basis as the magazines are printed and
shipped to the subscribers.

      Total notes payable of $1.6 million are detailed in Note 7 of the
financial statements. The holder of the acquisition notes totaling approximately
$300,000 agreed to a substantially discounted payoff on these notes in April,
1997. The Company completely extinguished this debt through the payment of
$75,000 in cash in April, 1997. The discount amounted to a reduction of $225,000
in the debt balance and an equal reduction in the amount of goodwill created in
the acquisition. The Company obtained an additional $500,000 in financing during
the quarter ended June 30, 1997 through the issuance of convertible debentures
due April, 2000. These debentures bore interest at the rate of 7% per annum and
interest payments, due on each anniversary of the issuance date, could be paid
at the Company's option in cash or in shares of the Company's common stock at
the rate of one share for each $3.50 of interest due. The holders of the
debentures could convert the unpaid principal into shares of the Company's
common stock at a conversion price of $1.75 per share. These debentures were
issued with warrants expiring 95 days after the filing of this Report which
entitle the holders thereof to purchase 142,858 shares of the Company's common
stock at a exercise price of $7.00 per share, as adjusted for the Reverse Stock
Split. The Company also negotiated an agreement with the holder of an existing
note to lend an additional $80,000 so as to permit the Company to publish one
issue of the Magazine. Since September 1, 1997, the Company realized gross
proceeds of $500,050 from a private placement of Subordinated Promissory Notes
in an aggregate principal amount of $500,000 and 71,436 shares of Common Stock.
The Common Stock offered to the purchasers of Subordinated Promissory Notes was
sold for a per share consideration of $.0007. In connection with the issuance of
these shares of Common Stock, the Company recognize a one-time, non-recurring,
non-cash expense of $357,000, which equals the difference between the Company's
estimation of the fair market value of the Common Stock at the date of issuance
and the consideration paid by noteholders in connection with such issuance.
Subsequent to the Offering, holders of $862,000 of convertible debt elected to
convert their debt into approximately 389,127 shares of Common Stock.  All of
the remaining debt was repaid subsequent to the Offering.


      Included in other liabilities of the previous year besides the long term 
debt was a deferred discount of $55,000 that was received as a service discount
from the Company's long distance telephone carrier in 1996 upon the execution of
a long term agreement. The agreement required the Company to use a minimum of
$240,000 in annual long distance
<PAGE>   16
services for a period of three years. If the Company failed to utilize the
required minimum usage, the discount was to be forfeited. The Company
renegotiated this agreement during the current year and the deferred discount
was forgiven and became fully earned.

      The Company had $1.4 million in total assets at December 31, 1997 
compared to assets of $1.5 million at the end of December 31, 1996. The cash
balance of $181,000, represents escrow deposits required by the Company's
previous and current banks as a reserve for charge backs against the Company's
Visa/MasterCard credit card processing. The Company has ceased processing
Visa/MasterCard charges through its previous processor, who has agreed to
return all unused escrow funds to the Company by May, 1998. The Company has had
a history of minimal charge backs. The Company contracted with a another credit
card processor, as of July 1, 1997, to continue credit card processing. The new
processor is requiring a six-month rolling reserve of 5% of monthly credit card
receipts. Approximately 70% of the Company's hotel and resort sales are
generated through credit cards. The accounts receivable of $103,000 is
comprised primarily of advertising revenue from vendors that advertised in the
Magazine and updates. Prepaid tour cost and prepaid cruise cost of $134,000
represents funds paid to hotels and cruise lines as of December 31, 1997, for
travel dates that occur after that date. These prepaid items relate directly to
the previously discussed deferred revenues and are also very short-term in
nature. Goodwill consists of the excess of purchase price over net assets
acquired during the aforementioned acquisitions. However, goodwill associated
with the cruise and magazine divisions was reduced by $225,000 during the year
due to a reduced lump sum settlement of the notes due the prior owners of the
acquired assets.  Room/Cabins held for sale arises out of advertising
agreements where hotels and cruise lines allot rooms and cabins in exchange for
advertising in the Company's publications. There was also a balance due from
affiliates (BEI/IMS) of $255,000 which in part represents the overpayment for
hotel rooms referred to below. This receivable is secured by stock warrants in
a publicly traded company.

      The Company is currently negotiating a new banking relationship wherein
Visa/Mastercard credit card processing fees will be reduced by 1% of the gross
charged amount.

RESULTS OF OPERATIONS

Overall Operating Results

      The Company had a net loss for the year ended December 31, 1997 of 
$598,000, as compared to a loss of $873,000 for the previous year. The Company
incurred a one time, non-recurring, non-cash charge of $357,000 in the last
quarter of 1997 that related to the aforementioned private placement (the
"One-Time Charge"). The net loss from operations without this charge would have
been $241,000 or a decrease of $631,000 from 1996. The decrease in the loss is
attributable to a $1.8 million increase in sales (which produced an additional
$366,000 in margin over 1996 levels), a reduction in  operating expenses by
$265,000 (excluding the One-Time Charge) and a repricing of hotel rooms
purchased from IMS in accordance with the Marketing Agreement. See Note 7 Due to
Affiliate within the financial statements and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." The Company had previously estimated the cost of these room
purchases until adequate data was available in order to properly cost out this
contractual agreement. The result of the recalculation was that the Company had
overpaid IMS approximately $159,000 for the purchase of the utilized hotel rooms
and therefore had overstated cost of goods sold. The Company has terminated this
agreement as of January 31, 1998. The following schedule reflects the effects of
this repricing applied to the periods in which incurred:

<TABLE>
<CAPTION>
                           QUARTERLY NET        ADJUSTMENT FOR     ALLOCATION OF COST      QUARTERLY NET
                          INCOME (LOSS AS     REDUCTION OF COST    REDUCTION TO PERIOD   INCOME (LOSS) AS
                              REPORTED        ON REPRICED ROOMS         INCURRED             ADJUSTED  
                          ---------------    ------------------    -------------------   ----------------
 <S>                      <C>                <C>                   <C>                   <C>
 March 31, 1996 .......     $(163,546)                                    18,353           $(145,193)
 June 30, 1996 ........        11,316                                     15,383              26,699
 September 30, 1996 ...      (250,509)                                    17,439            (233,070)
 December 31, 1996 ....      (469,916)                                     8,418            (461,498)
                            ---------                                  ---------           --------- 
 Total 1996  ..........     $(872,655)           $       0             $  59,593           $(813,062)
 March 31, 1997 .......     $ (75,323)                                    26,933           $ (48,390)
 June 30, 1997 ........        20,220                                     34,148              54,368
 September 30, 1997 ...        72,779             (159,835)               39,161             (47,895)
                            ---------            ---------             ---------           --------- 
 Total 9 Months
   1997  ..............     $  17,676            $(159,835)            $ 100,242           $ (41,917)
 Total Adjustment .....                          $(159,835)              159,835
</TABLE>
<PAGE>   17
  The Company believes that the increase in sales for 1997 was primarily
attributed to an increase in the size and quality of the Magazine, repeat
customer sales, a larger property portfolio and an additional year of experience
in the cruise market. The Magazine's production schedule was to be increased to
every two months as opposed to every three months before the Company's
acquisition of the Magazine. The Company also produces an update brochure
promoting hotel and cruise specials for bulk distribution through airport
offices. Management believes that increased circulation will increase the value
of the publications to both advertisers and subscribers. Prior to the Offering,
the funding of publications has come primarily from funding provided by the debt
instruments mentioned previously.

Revenue

  Gross revenue for the year ended December 31, 1997, was $12.8 million, an
increase of $1.8 million or 16% over 1996.  Hotel sales increased 1% while
cruises/tours increased 24% in 1997 over 1996 levels. Since the Offering, the
Company has increased the quantity, distribution and frequency in the production
of its publications and has utilized a portion of the proceeds of the Offering
in this effort. Sales increased in spite of the fact that the Company lacked
sufficient operating capital to develop a strong marketing representative base
or produce the Company's publications on a consistent basis. Management
anticipates that sales should grow during 1998 with the aid of a stronger
distribution network and a consistent publishing schedule. The Company
recognizes hotel and cruise revenues on a "booked, paid, traveled" basis, (i.e.
revenue is not earned until the passenger has completed travel).

  Subscription and advertising revenues reflect a 55% increase for the current
year. This was the result of Management's intent on upgrading the quality and
size of the publications. Management (with the use of Offering proceeds) plans
to shift from a "paid" to a "controlled" circulation. Management anticipates
that this shift will increase circulation and thereby make the Magazine more
attractive to advertisers. There can be no assurances in this regard.


  Gross revenue for the fourth quarter of 1997 was $3.2 million an increase of
$682,000 or 26% over the fourth quarter of 1996. The fourth quarter is
typically a seasonal low for Company sales. Management believes that these
increases are attributable to an increased presence in the marketplace.

Cost of Goods Sold

  Hotel cost has been restated in the following schedule to reflect the effects
of repricing of the IMS rooms aforementioned:

<TABLE>
<CAPTION>
                                                                    ADJUSTMENT FOR     ALLOCATION OF                
                                                                   REDUCTION OF COST   COST REDUCTION   ADJUSTED    
                                     HOTEL REVENUE   HOTEL COST       ON REPRICED        TO PERIOD        ROOM      
                                      AS REPORTED    AS REPORTED         ROOMS            INCURRED        COST      
                                    --------------  ------------   -----------------   --------------  -----------  
 <S>                                <C>             <C>            <C>                 <C>             <C>          
 March 31, 1996 ..............            $915,177       710,827                          (18,353)     $   692,474  
 June 30, 1996 ...............           1,264,958       963,240                          (15,383)         947,857  
 September 30, 1996 ..........           1,206,751       933,536                          (17,439)         916,097  
 December 31, 1996 ...........             862,568       665,949                           (8,418)         657,531  
                                        ----------    ----------     ---------          ---------      -----------  
 Total 1996  .................          $4,249,454    $3,273,552     $       0          $ (59,593)     $ 3,213,959  
 March 31, 1997 ..............          $1,044,379       813,848                          (26,933)     $   786,915  
 June 30, 1997 ...............           1,324,238     1,018,773                          (34,148)         984,625  
 September 30, 1997 ..........           1,105,218       687,600       159,835            (39,161)         808,274  
                                        ----------    ----------     ---------          ---------      -----------  
 Total 9 months                                                                                                     
   1997  .....................          $3,473,835     2,520,221     $ 159,835          $(100,242)     $ 2,579,814  
 Total Adjustment ............                                         159,835           (159,835)                  
</TABLE>
<PAGE>   18
Cost of sales increased proportionately with the increase in 1997 sales. The
average margin for hotel sales was 26% for the year as compared to 23% for the
previous year.  Cruise and tour average gross margin for the 1997 period was
11% of sales. The comparable 1996 margin for cruises and tours was 12%. The
larger 1996 cruise margin percentage is attributable , in large part, to one
unusual under-booked cruise in June 1996 on which the Company was able to
acquire berths which were then resold to produce a margin of approximately
$84,000 on sales of approximately $110,000.

Operating Expenses

  Operating expenses for the year ended December 31, 1997, were $3.0 million
(inclusive of the One-Time Charge) Excluding this unusual charge, the Company's
operating expenses would have been 9% less than 1996 expenses. In 1997, the
Company incurred increased computer programming cost for modifications to the
reservation system, commissions incurred for the relatively new Germany and
Canada operations which receive 60% of the margins on their production (in
recognition of their obligations to bear their own operating costs), a material
increase in the discount fee charged by the new credit card processors,
increased travel to industry trade and vendor meetings, and increased expenses
associated with disseminating advertising material to the airline employees
such as the weekly fax communications, printing expenses of the Germany Guide.
Contracts were negotiated during the year with separate travel operators in
Germany and Canada where they are able to sell the Company's properties to
their respective markets. These operations are expected to significantly
increase Company sales over time. The Company has recently completed a similar
agreement with an operator in Mexico.

  Another major expense area is management fees. Airfair, the Company's
wholly-owned subsidiary, entered into a management agreement with BEI and IMS
effective March 1, 1996. See, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Under this agreement, BEI permitted Airfair to use office space and certain
equipment leased by BEI, and BEI and IMS provided Airfair insurance, payroll
services, office supplies and other minor office services. IMS and BEI charged
Airfair a management fee equal to 0.5% of Airfair's gross revenue per month for
these services. In addition, pursuant to the terms of the Management Agreement,
IMS, BEI, and Airfair agreed that Airfair would reimburse BEI for a portion of
the direct payroll expenses of certain members of management who serve BEI,
IMS, and Airfair (the "Shared Management Members"). The proportion was intended
to correspond with the amount of time expended by the Shared Management Members
on the business matters of Airfair. These management fees and the payroll
reimbursements for Shared Management Members totaled $175,000 for the year
ended December 31, 1997, as compared to a $68,000 for 1996. Prior to the
management agreement, all general and administrative expenses of BEI were
allocated 70% to Airfair and 30% to IMS. In February 1996, BEI incurred a large
one-time gain which exceeded its expenses for that month. As such, both Airfair
and IMS were the beneficiaries of an expense credit for that month. Airfair's
portion of that allocation was a credit of approximately $142,000. The Company
terminated that management services agreement January 1, 1998, and will
directly acquire all services being furnished under that agreement. With the
exception of a new lease agreement, discussed below, the Company does not 
anticipate a material increase in expenses above what was incurred under the
management services agreement.

  On December 1, 1997, the Company finished negotiating a new lease agreement
for office space. The terms of the lease agreement call for 10,567 square feet
of net rentable area for a period of five years and three months with an option
to renew for five years. Monthly rent payments over the initial term of the
lease are $10,567 beginning March 1, 1998 to February 28, 1999; $11,448 from
March 1, 1999 to February 28, 2000; $12,328 from March 1, 2000 to February 28,
2001; $12,478 from March 1, 2001 to February 28, 2003. The option year rates
will be based on market conditions upon the renewal date. The Company was paying
its portion of rent under that certain management services agreement with
BEI/IMS previously mentioned. 

  Operating expenses for the fiscal year ended December 31, 1996 were generally
high due to expenses associated with the acquisition and operation of the
Company's cruise and magazine divisions. In addition, during the first quarters
of 1996, the Company incurred approximately $85,000 in legal expenses
associated with its acquisition of its interline and magazine assets and the
merger between the Company and Airfair Publishing Corporation.

  The Company anticipates that operating expenses will increase substantially
for the remainder of 1998. These increases will be incurred primarily in the
areas of marketing and publishing. However, the Company feels that these
expense increases will be more than offset by increased sales.
<PAGE>   19
LIQUIDITY AND CAPITAL RESOURCES

  The Company has an accumulated deficit of $2.4 million ($544,000 of this
deficit is attributable to periods prior to the Company's commencement of
operations within the interline travel industry and $357,000 is attributable to
the One-Time Charge).  The Company's auditors for fiscal year 1996 included in
their audit opinions a qualification regarding the Company's ability to
continue as a going concern. As a result of the successful completion of the
Offering, the Company's auditors have not included a similar qualification in
their audit opinion for fiscal year 1997.

  The Company borrowed approximately $1.4 million from various parties during 
the 1997 calendar year in order to fund operations. All notes have subsequently
been repaid or converted to stock. Since the Offering, the Company is virtually
debt free except for normal recurring vendor payables, leases as described
herein and client receipts for reservations in advance of travel. The Company
continues to hold a substantial cash reserve in order to implement future plans
of the Company.                                                       

NEW ACCOUNTING PRONOUNCEMENTS

  The Company has adopted FASB Statement 128, a recently issued accounting
standard. It is not expected that the Company will be impacted by other
recently issued standards. FASB Statement 128 presents new standards for
computing and presenting earnings per share (EPS). The Statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997.

  FASB Statement 131 presents news standards for disclosures about segment
reporting. The Company does not believe that this accounting standard applies
to the Company as all operations of the Company are integrated for financial
reporting and decision making purposes.

  The SEC Divisions of Corporation Finance and Investment Management issued
Staff Legal Bulletin No. 5 to remind companies of their disclosure obligations
with the year 2000 computer problems. The Company's accounting system and
reservation system programs have been either modified or upgraded to
accommodate the year 2000 and beyond.

INFLATION

  The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future because of the short time frame between reservation
bookings and the dates of travel.

FORWARD-LOOKING INFORMATION

  From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange
Commission. Words or phases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project or projected", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The Company wishes to ensure that such statements are accompanied by
meaningful cautionary statements, so as to maximize to the fullest extent
possible the protections of the safe harbor established in the Reform Act.
Accordingly, such statements are qualified in their entirety by reference to
and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from such forward-looking
statements.

  Management is currently unaware of any trends or conditions other than those
previously mentioned in this management's discussion and analysis that could
have a material adverse effect on the Company's consolidated financial
position, future results of operations, or liquidity. However, investors should
also be aware of factors that could have a negative impact on the Company's
prospects and the consistency of progress in the areas of revenue generation,
liquidity, and generation of capital resources. These include: (i) variations
in the mix of hotel, cruise, and magazine
<PAGE>   20
revenues, (ii) possible inability to attract investors for its equity
securities or otherwise raise adequate funds from any source should the Company
seek to do so, (iii) increased governmental regulation, (iv) increased
competition, (v) unfavorable outcomes to litigation involving the Company or to
which the Company may become a party in the future and, (vi) a very competitive
and rapidly changing operating environment. Furthermore, reference is also made
to other sections of this report that include factors that could adversely
impact the Company's business and financial performance.

The risks identified here are not all inclusive. New risk factors emerge from
time to time and it is not possible for Management to predict all of such risk
factors, nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon
as a prediction of actual results.
<PAGE>   21
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>   22
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY

                              FINANCIAL STATEMENTS
                           AND REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

                           DECEMBER 31, 1997 AND 1996
<PAGE>   23
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                                     PAGE
<S>                                                                                                                  <C>
Report of Andersen, Andersen & Strong, Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Changes in Stockholders' Equity  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

</TABLE>




                                      F-1
<PAGE>   24
To The Board of Directors
  of Grand Adventures Tour & Travel Publishing Corporation and Subsidiary
Austin, Texas

We have audited the accompanying consolidated balance sheets of Grand
Adventures Tour & Travel Publishing Corporation (formerly Riley Investments,
Inc.) and its subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grand
Adventures Tour & Travel Publishing Corporation and subsidiary  as of December
31, 1997 and 1996, and the results of their consolidated operations and their
consolidated cash flows for the years referred to above, in conformity with
generally accepted accounting principles.

On December 17, 1997, the Board of Directors approved a reverse stock split
whereby, the Company issued 1 share of common stock for every 7 shares of
common stock held by existing shareholders at the date of the transaction. As
discussed in Note 11 of the financial statements, all share transactions,
outstanding shares and related share amounts throughout the accompanying
financial statements have been adjusted to take into effect the 1-for-7 reverse
stock split.


ANDERSEN ANDERSEN & STRONG, L.C.

April 9, 1998
Salt Lake City, Utah





                                      F-2
<PAGE>   25
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                               1997              1996 
                                                                           ------------      ------------
<S>                                                                        <C>               <C>         
ASSETS
CURRENT ASSETS
    Restricted cash (Note 2)                                               $    181,375      $     43,240
    Accounts receivable, net of allowance for doubtful accounts
         of $12,020 in 1997 and $8,810 in 1996 (Note 2)                         103,310            19,911
    Due from affiliate (Note 6)                                                 255,361                --
    Prepaid hotel cost (Note 2)                                                  53,027           252,344
    Prepaid offering costs                                                      113,508                --
    Prepaid cruise and tour cost (Note 2)                                        80,482           468,710
    Rooms/Cabins held for sale (Note 2)                                         182,978                -- 
                                                                           ------------      ------------
             Total Current Assets                                               970,041           784,205
                                                                           ------------      ------------
PROPERTY AND EQUIPMENT, at cost, net of
    accumulated depreciation (Notes 2 and 3)                                     58,851            63,070
                                                                           ------------      ------------
OTHER ASSETS
    Other assets                                                                 37,179                --
    Intangible assets, net of accumulated
         amortization (Notes 2 and 5)                                           375,919           622,009
                                                                           ------------      ------------
                                                                           $  1,441,990      $  1,469,284
                                                                           ============      ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Cash overdraft                                                         $     26,095      $     50,723
    Accounts payable                                                            420,303           578,988
    Other current liabilities                                                   335,294           129,145
    Due to affiliate (Note 6)                                                        --            88,213
    Current portion of long-term debt (Note 7)                                  290,562           502,573
    Deferred hotel revenue (Note 2)                                             284,939           385,852
    Deferred cruise and tour revenue (Note 2)                                   153,056           513,510
    Deferred subscription revenue (Note 8)                                       80,641           105,060
                                                                           ------------      ------------
             Total Current Liabilities                                        1,590,890         2,354,064
                                                                           ------------      ------------
OTHER LIABILITIES
    Long-term debt (Note 7)                                                   1,282,812           254,223
    Deferred discount (Note 9)                                                       --            54,644
                                                                           ------------      ------------
             Total Other Liabilities                                          1,282,812           308,867
                                                                           ------------      ------------
STOCKHOLDERS' (DEFICIT)
    Preferred stock, no par value; authorized
         10,000,000 shares; none issued and outstanding                              --                --
    Common stock $.0001 par value; authorized
         30,000,000 shares; issued and outstanding
         1,431,858 and 1,358,432 shares in 1997 and 1996,
         respectively (as adjusted for 1-for-7 stock split)
         (Note 11)                                                                  143               136
    Additional paid-in capital                                                  959,447           599,024
    Accumulated deficit                                                      (2,391,302)       (1,792,807)
                                                                           ------------      ------------
             Total Stockholders' (Deficit)                                   (1,431,712)       (1,193,647)
                                                                           ------------      ------------
                                                                           $  1,441,990      $  1,469,284
                                                                           ============      ============
</TABLE>

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





                                      F-3
<PAGE>   26
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                           DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                       1997            1996 
                                                   ------------    ------------
<S>                                                <C>             <C>         
REVENUES
  Hotel revenue                                    $  4,294,918    $  4,249,454
  Cruise and tour revenue                             7,878,461       6,339,179
  Magazine subscription and advertising revenue         581,176         374,789
  Merchandise and other revenue                          17,640          39,904
                                                   ------------    ------------
      Total Revenues                                 12,772,195      11,003,326
                                                   ------------    ------------
COST OF SALES
  Hotel cost                                          3,158,938       3,273,552
  Cruise and tour cost                                7,000,289       5,562,876
  Magazine publishing cost                              155,672          75,120
  Merchandise cost                                        1,410           2,340
                                                   ------------    ------------
      Total Cost of Sales                            10,316,309       8,913,888
                                                   ------------    ------------
      Gross Profit                                    2,455,886       2,089,438
OPERATING EXPENSES
  Selling, general and administrative expenses        1,548,649       1,816,025
  Wages                                               1,108,745       1,111,081
  Promissory note financing charge (Note 11)            357,130              --
  Depreciation and amortization                          39,857          34,987
                                                   ------------    ------------
      Total Operating Expenses                        3,054,381       2,962,093
                                                   ------------    ------------
Net Loss Before Income Taxes                           (598,495)       (872,655)
Income Tax Expense                                           --              -- 
                                                   ------------    ------------
Net (Loss)                                         $   (598,495)   $   (872,655)
                                                   ============    ============
Net (Loss) Per Common Share (Note 2)               $       (.44)   $       (.64)
                                                   ============    ============
Weighted Average Common Shares Outstanding            1,371,289       1,361,430
                                                   ============    ============

</TABLE>



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





                                      F-4
<PAGE>   27
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                      COMMON STOCK             ADDITIONAL
                                               --------------------------       PAID-IN          RETAINED
                                                 SHARES          AMOUNT         CAPITAL          DEFICIT            TOTAL
                                               ----------      ----------      ----------      ------------      -----------
<S>                                            <C>             <C>             <C>             <C>               <C>         
All share transactions are adjusted
for 1-for-7 reverse stock split (see
Note 11)

BALANCE AT DECEMBER 31, 1995                    1,300,000      $    1,300      $   (1,300)     $   (375,992)     $  (375,992)
Cancellation of shares                            (84,096)             (9)              9                --               --
Effect of 1-for-15 reverse stock
  split (exclusive of fractional shares)         (689,690)            (69)             69                --               --
Issuance of common shares
  ($7.00 per share)                                 3,571               4          24,996                --           25,000
Exchange of Airfair shares for shares
  in the Company                                  828,647          (1,090)        575,250          (544,160)          30,000
Net loss                                               --              --              --          (872,655)        (872,655)
                                               ----------      ----------      ----------      ------------      -----------

BALANCE AT DECEMBER 31, 1996                    1,358,432             136         599,024        (1,792,807)      (1,193,647)
Issuance of shares for services
  ($.25 per share)                                  1,857              --           3,250                --            3,250
Issuance of shares in connection with
  promissory note ($5.00 per share)                71,436               7         357,173                --          357,180
Issuance of shares for reverse stock split            133              --              --                --               --
Net loss                                               --              --              --          (598,495)        (598,495)
                                               ----------      ----------      ----------      ------------      -----------

BALANCE AT DECEMBER 31, 1997                    1,431,858      $      143      $  959,447      $ (2,391,302)     $(1,431,712)
                                               ==========      ==========      ==========      ============      ===========

</TABLE>



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





                                      F-5
<PAGE>   28
             GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                   1997            1996
                                                               ------------    ------------
<S>                                                            <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                       $   (598,495)   $   (872,655)
Adjustments to reconcile net loss to cash provided by
    operating activities:
      Depreciation and amortization                                  39,857          34,987
      Provision for losses on accounts receivable                     3,210           8,810
      Promissory note financing charge                              357,130              --
    Changes in operating assets and liabilities
      Restricted cash                                              (138,135)        (43,240)
      Accounts receivable                                           (86,609)        (28,720)
      Prepaid offering costs                                       (113,508)             --
      Prepaid hotel cost                                            199,317        (225,260)
      Rooms/cabins held for sale                                   (182,978)             --
      Prepaid cruise and tour cost                                  388,228        (578,915)
      Other assets                                                  (37,179)             --
      Accounts payable                                             (158,685)        629,710
      Accrued expenses                                              206,149          71,636
      Payable to affiliates and other                              (343,574)       (387,397)
      Deferred hotel revenue                                       (100,913)        344,728
      Deferred cruise and tour revenue                             (360,454)        623,715
      Deferred subscription revenue                                 (24,419)        105,060
      Deferred discount                                             (54,644)         54,643
                                                               ------------    ------------
             Net Cash Used by Operating Activities               (1,005,702)       (262,898)
                                                               ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capitalized legal fees                                               --         (16,337)
    Purchase of property and equipment                              (14,510)        (30,000)
    Proceeds from sale of equipment                                      --          10,507
                                                               ------------    ------------
             Net Cash Used by Investing Activities                  (14,510)        (35,830)
                                                               ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of common stock                                3,300          55,000
    Proceeds from notes payable                                   1,377,956         345,674
    Repayments of notes payable                                    (336,416)       (152,669)
                                                               ------------    ------------
             Net Cash Provided by Financing Activities            1,044,840         248,005
                                                               ------------    ------------
    Net Increase (Decrease) in Cash                                  24,628         (50,723)
    Cash at Beginning of Period (Overdraft)                         (50,723)             -- 
                                                               ------------    ------------
    Cash at End of Period (Overdraft)                          $    (26,095)   $    (50,723)
                                                               ============    ============
SUPPLEMENTAL CASH FLOW INFORMATION
    Cash paid during the year for interest                     $     83,171    $     38,402
</TABLE>




                                      F-6
<PAGE>   29
             GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

<TABLE>
<CAPTION>
                                                                             1997         1996 
                                                                           --------     --------
<S>                                                                        <C>          <C>     
During 1996, the Company acquired certain assets of Interline
Representatives Ltd and Airfair Publishing Corp. for $593,791
 (see Note 4). The acquisition price consisted of cash, assumption
of liabilities and notes payable as follows:

  Cash                                                                     $     --     $ 30,000
  Assumption of liabilities                                                      --      204,326
  Notes payable                                                                  --      359,465
                                                                           --------     --------
  Total acquisition price                                                        --      593,791
                                                                           ========     ========
Cancellation of indebtedness and reduction of intangibles                   224,963           --
Acquisition of rooms and cabin credits in exchange for
  advertising                                                               182,978           --
Recognition of promissory note financing charge in connection
  with issuance of common shares                                            357,130           --
Issuance of common shares in payment of advisory services                     3,250           --
</TABLE>



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





                                      F-7
<PAGE>   30
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996

1.  BUSINESS ACTIVITIES

The Company serves a portion of the travel industry known as "interliners".
Interliners are the active employees and retirees of the airline industry, who
may fly on many carriers for free or at a very significantly reduced fare,
along with their families and the friends to whom they pass along their
allotments of no-cost or low-cost flying privileges.  Interliners are generally
able to procure hotel or resort accommodations in destination locations, berths
on cruise ships and other travel products at rates representing a courtesy of
up to 50% off of established rates, primarily because interliners have a high
propensity to travel and tend to travel during off-peak periods when "stand-by"
space is available at hotels and resorts and on cruise ships. These factors
have led the travel industry to view interline bookings as incremental revenue
that supplements normal marketing revenue.

The Company serves both interline travelers and operators (hotels, resort,
cruise lines and others) segments of the interline industry through three
distinct business units: Interline Adventures, a publication formerly titled
Airfair Magazine: Interline Travel, which markets hotel-resort space to
interliners and specializes in Mexican and Caribbean locations: and, Interline
Representatives, Ltd., which markets cruise and escorted tour packages to
interliners.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Travel revenue is recognized on a "booked, paid, traveled" basis. This means
that all client funds received and all funds paid to travel suppliers prior to
the travel date are deferred for income recognition until such time as the
client has traveled and the Company has completed its commitment to the client
and the travel suppliers. Subscription sales are deferred for income
recognition until magazines are delivered to subscribers. (See Note 8.)

The assets "Prepaid Hotel Cost",  "Prepaid Cruise and Tour Cost" and
"Rooms/Cabins Held for Sale"  represent expenses paid for tours and cruises
which have been booked but not yet taken by the customer. The liabilities
"Deferred Hotel Revenue" and "Deferred Cruise and Tour Revenue" represent
payments received for tours and cruises booked but not recognized as revenue
until the customer completes the tour or cruise.

Cash and Cash Equivalents

Substantially all of the balance in the cash account consists of escrow
deposits required by Bank One (the previous processor) and Humboldt Bank (the
current processor) as a reserve for credit card processing. The Company agreed
to establish an escrow balance of 5% of Visa/Mastercard charges until a six
month rolling reserve is established with Humboldt Bank. The prior Bank One
reserve was partially released in October, 1997. The remaining $42,876 of that
reserve at December 31, 1997, will be reviewed by the bank on a month to month
basis and funds will be returned to the Company on gradual basis until fully
released by March, 1988. The reserves with Humboldt Bank totaled $138,636 at
December 31, 1997.





                                      F-8
<PAGE>   31
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-

Cash and Cash Equivalents (continued)

The Company considers all highly liquid instruments purchased with a maturity
at the time of purchase of less than three months to be cash equivalents.

Allowance for Uncollectible Accounts

The Company provides an allowance for accounts receivable which are doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors.  Ultimate losses may vary from the current estimates and, as additions
to the allowance become necessary, they are charged against earnings in the
period in which they become known. Losses are charged and recoveries are
credited to the allowance.

Income (Loss) Per Share

During the year ended December 31, 1997, the Company adopted FASB Statement No.
128, Earnings Per Share. Statement 128 requires presentation of basic earnings
per share and diluted earnings per share. Basic earnings per share excludes
potential dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted earnings per
share is computed similarly to fully diluted earnings per share under previous
generally accepted accounting principles in the United States. Prior year
earnings(loss) per share data are restated to conform with Statement 128 for
consistent presentation of all periods. During the years ended December 31 1997
and 1996, diluted loss per share has not been presented due to the antidilutive
effect of including options in the weighted-average number of shares
outstanding.

Depreciation and Amortization

Property and equipment are stated at cost. Depreciation is computed on the
straight-line method for financial statement purposes. Estimated useful lives
range from 5 to 7 years. Intangibles, consisting of  "excess of cost over net
assets acquired" and non-compete covenants are stated at cost and are being
amortized over  40- year and 3-year periods, respectively.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany transactions have been
eliminated.





                                      F-9
<PAGE>   32
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.123, Accounting for Stock-Based Compensation.
The Company currently accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Since the Company is not required to adopt the
fair value based recognition provisions prescribed under SFAS No. 123, it has
elected to comply with the disclosure requirements set forth in the Statement,
which includes disclosing pro forma net income as if the fair value based
method of accounting had been applied. (See Note 14.)

Estimates and Assumptions

Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.

Impairment of Long-Lived Assets

Intangible assets represent the excess of the purchase price over the fair
value of the net assets of acquired companies. The Company carries its
intangible assets at their purchase prices, less amortized amounts, but subject
to annual review for impairment. In performing an evaluation, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value is
required. The Company intends to annually assess the carrying value of its
long-lived assets using the analysis described above.

Marketing and Advertising Costs

All costs relating to marketing and advertising are expensed in the year
incurred.





                                      F-10
<PAGE>   33
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-

Prepaid Offering Costs

Professional fees, filing fees, registration and other costs of a Public
Offering (Offering) of the Company's common stock (see Note 13) will be
recorded as a reduction of additional paid-in capital upon the successful
completion of the Offering in 1998.

3.  PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                        1997            1996
                                                     ----------      ----------
               <S>                                   <C>             <C>
               Property and equipment                $  108,306      $   93,795
               Less accumulated depreciation            (49,455)        (30,725)
                                                     ----------      ----------
               Net property and equipment            $   58,851      $   63,070
                                                     ==========      ==========
</TABLE>

Depreciation expense for the years ending December 31, 1997 and 1996 was
$18,730 and $9,601, respectively.

4.  ACQUISITIONS

On December 1, 1994, Inventory Merchandising Services, Inc. (IMS) (a wholly
owned subsidiary of Barter Exchange, Inc.  (BEI)), acquired the net assets of a
business owned by Lou and Claudia Nackos (Nackos) for the assumption of certain
liabilities in the amount of $144,394. This resulted in a new operating
division called Interline Travel (Interline).

Assets acquired from Nackos consist of the following:

<TABLE>
         <S>                                                              <C>
         Cash                                                        $    814
         Excess of cost over net assets acquired                       74,278
         Furniture and fixtures                                        69,302
                                                                     --------
         Total assets acquired                                       $144,394
                                                                     ========
</TABLE>

Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately subsequent to incorporation of Airfair, the assets and
liabilities of Interline were transferred by IMS into Airfair. Additionally,
existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares issued (1,214,286 shares as adjusted
for 1-for-7 reverse stock split). An additional 600,000





                                      F-11
<PAGE>   34
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


4.  ACQUISITIONS (Continued)

shares (85,714 shares as adjusted) were authorized by the Board of Directors
and issued to two shareholders, resulting in a total of 9,100,00 shares
(1,300,000 shares as adjusted) issued pursuant to the spin-off of the Interline
division in IMS to Airfair. Capital of $30,000 was contributed to Airfair by
BEI.

On January 13, 1996, (Closing Date) [effective December 31, 1995 (Effective
Date)] Airfair acquired certain assets and assumed certain liabilities of
Interline Representatives Ltd. and Airfair Publishing Corp. (IRL/APC) for
$593,791.

Assets acquired from IRL/APC consist of the following:

<TABLE>
      <S>                                                             <C>
      Furniture and equipment                                         $  35,000
      Covenant-not-to compete                                            30,000
      Excess of cost over net assets acquired                           528,791
                                                                      ---------

      Total assets acquired                                           $ 593,791
                                                                      =========
</TABLE>

Liabilities (unadjusted) assumed from IRL/APC consist of the following:

<TABLE>
      <S>                                                              <C>
      Subscription, prepaid advertising, and tour ledger               $204,326
                                                                       --------

      Net assets acquired                                              $389,465
                                                                       ========
</TABLE>

Payment for the net assets acquired from IRL/APC is as follows:

<TABLE>
      <S>                                                              <C>
      Cash                                                             $ 30,000
      Note payable #1 (see below)                                       201,879
      Note payable #2 (see below)                                       157,586
                                                                       --------

      Total payments (unadjusted)                                      $389,465
                                                                       ========
</TABLE>

Both of the promissory notes described above, have identical terms (except as
specified) as follows: The annual interest rate on unpaid principal is 12% per
annum. Interest only will be due on the unpaid balance on January 31, 1996,
February 29, 1996, and March 31, 1996. Thereafter, principal and interest shall
be due and payable in monthly installments of $5,593 on Note #1 and $4,366 on
Note #2, each payable on the last day of each month, beginning April 30, 1996,
until December 31, 1999, when the entire principal and accrued interest
remaining unpaid, shall be due and payable in full. In April of 1997, the notes
were renegotiated to a balance of $75,000. The balance was adjusted as a
reduction of intangibles.

The purchase method of accounting was used to account for the above
transactions.





                                      F-12
<PAGE>   35
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


4.  ACQUISITIONS (Continued)

The following unaudited pro forma information has been prepared assuming that
the above acquisitions had occurred at the beginning of 1995. Permitted pro
forma adjustments include only the effects of events directly attributable to a
transaction that are factually supportable and expected to have a continuing
impact. Pro forma adjustments reflecting anticipated "efficiencies" in
operation resulting from a transaction are, under most circumstances, not
permitted. As a result of the limitations imposed with regard to the types of
permitted pro forma adjustments, the Company believes that this unaudited pro
forma information is not indicative of future results of operations, nor the
results of historical operations had the above acquisitions been consummated as
of the assumed date.

<TABLE>
<CAPTION>
                                                                     Unaudited
                                                                       1995   
                                                                   -----------
      <S>                                                          <C>
      Revenues                                                     $ 9,077,000
      Gross profit                                                   1,825,000
      Net (loss)                                                      (414,000)
      Net (loss) per weighted average
         common share (as adjusted for
         1-for-7 stock split)                                             (.28)
</TABLE>

Effective July 19, 1996, Riley Investments, Inc. (Riley)  and Airfair executed
an Agreement that provided for the merger of MergerCo, a newly-created,
wholly-owned subsidiary of Riley, with and into Airfair, which became the
surviving corporation, and the conversion of the issued and outstanding Airfair
stock into shares of Riley stock on the basis of one share of Riley stock for
each share of Airfair stock outstanding on the Effective date. On October 7,
1996, articles of amendment were filed on behalf of Riley wherein the name was
changed to Grand Adventures Tour & Travel Publishing Corporation (the Company)
with authority to issue 10,000,000, no par, preferred shares and 30,000,000
common shares with a par value of $.0001. The transaction was accounted for as
a reverse acquisition.

5. INTANGIBLE ASSETS

Intangible assets at December 31, 1997 and 1996 are as follows:

As explained in Note 4 to the financial statements, on December 31, 1994, IMS
acquired the net assets of a business owned by Nackos (referred to herein as
Interline) and assumed certain liabilities. Of the $144,394 total purchase
price, $74,278 represented the excess of the cost over the fair value of net
assets acquired. The excess of cost over net assets acquired is amortized on a
straight-line basis over 40 years.

As explained in Note 4 to the financial statements, on January 13, 1996,
(Closing Date) [effective December 31, 1995 (Effective Date)] Airfair acquired
certain assets and assumed certain liabilities of Interline Representatives
Ltd. and Airfair Publishing Corp. (IRL/APC) . Of the $593,791 total purchase
price, $528,791





                                      F-13
<PAGE>   36
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


5.  INTANGIBLE ASSETS (Continued)-

represented the excess of the cost over the fair value of net assets acquired
and $30,000 represented a covenant-not-to compete. Also amortizable are $16,336
of additional legal and acquisition costs. The excess of cost over net assets
acquired is amortized on a straight-line basis over 40 years and the covenant
is amortized over 3 years. In April of 1997, promissory notes related to the
acquisition of intangibles were renegotiated, resulting in a reduction of
intangible assets of approximately $225,000.

At December 31, 1997 and 1996, the unamortized cost consists of the following:

<TABLE>
<CAPTION>
                                                        1997            1996
                                                     ----------      ----------
<S>                                                  <C>             <C>       
         Cost                                        $  424,443      $  649,405
         Less accumulated amortization                  (48,524)        (27,396)
                                                     ----------      ----------

         Net                                         $  375,919      $  622,009
                                                     ==========      ==========

</TABLE>

Amortization expense for the years ended December 31, 1997 and 1996, was
$21,127 and $25,386, respectively.

6. DUE TO AFFILIATE

The Company entered into a Management Services Agreement with BEI and IMS
whereby BEI agreed to permit the Company to use office space and certain
computer and telephone equipment leased by the Company, BEI and IMS agreed to
provide to the Company certain services including accounting, payroll,
services, and the services of certain executive officers and personnel who
perform services for Airfair, BEI, and IMS. The Company agreed to pay to BEI
and IMS, collectively, a cash sum equal to 1/2% of the Company's gross cash
receipts during any month in which the Agreement remains in effect.

The Company and IMS have also entered into an Inventory Marketing Agreement
whereby the Company sells certain IMS inventories. The Company is required to
make monthly payments to IMS equaling (I) the cash value of the inventory sold
plus (ii) 25% of the collected revenue generated from such sales less such cash
value.

At December 31, 1997, BEI owed the Company $255,361 and at December 31, 1996,
the Company owed BEI $88,213. The receivable at December 31, 1997 is
collateralized by investment securities held by BEI.





                                      F-14
<PAGE>   37
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


7.  LONG-TERM DEBT

At December 31, 1997 and 1996 long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                   1997           1996 
                                                                                ----------     ----------
<S>                                                                             <C>            <C>       
Notes payable to shareholders, due April 30, 2000
including interest at 12% per annum payable in
monthly installments, convertible into common stock
at a conversion price of $.50 principal amount for each share                   $  333,017     $  400,000

Note payable at $1,163 per month, including interest
at 14% per annum, convertible into common stock
at the conversion price of $1.00 principal amount for each
common share, subordinated to senior indebtedness                                   43,234         50,000

Note payable (acquisition of IRL/APC - see Note 4) at
$5,593 per month, including interest at 12% per annum,
collateralized by assets acquired                                                       --        172,300

Note payable (acquisition of IRL/APC - see Note 4) at
$4,366 per month, including interest at 12% per annum,
collateralized by assets acquired                                                       --        134,496

Convertible debentures due April 2000, 7% interest only
due on each anniversary with principal due at maturity,
interest may be paid in shares of common stock at the
option of the Company at the rate one share for each $.50 of
interest due, unpaid principal is convertible into common stock
at a conversion price of $.25 per share                                            500,000             --

Note payable at $1,000 per month for six months beginning
April 25, 1997, then $1,500 per month for six months, then
$2,000 per month until paid in full, with interest at 8% per annum                  44,002             --

Note payable at $4,246 per month beginning April 1997, with
interest at 6% per annum                                                            10,283             --

Note payable at $1,154 per month beginning April 1997, with
interest at 10% per annum, maturity date of March 1999, unpaid
balance can be converted into common stock at $.50 per share                        16,203             --

</TABLE>




                                      F-15
<PAGE>   38
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


7.  LONG-TERM DEBT (Continued)

<TABLE>
<S>                                                                             <C>            <C>
Note payable at $1,000 per month beginning May 15, 1997,
remaining unpaid balance due June 15, 1998, interest at 9% per
annum                                                                               21,508             --

Note payable at $556 per month beginning August 5, 1997,
with interest at 8% per annum, maturity date of August 5, 1998                       3,797             --

Note payable at $300 per month beginning June 15, 1997
for 35 months at 10% interest per annum                                              7,330             --

Note payable to be paid out of proceeds of offering or any receipts
on pledged advertising accounts receivable with interest at 10% per
annum, maturity date of March 23, 1998                                              70,000             --

Note payable with interest payable quarterly beginning January 1,
1998, interest rate of 10% per annum, principal due September 30,
1999.                                                                               24,000             --

Promissory notes payable with interest payable quarterly beginning
January 1, 1998, bearing interest at 10% per annum, principal due
September 30, 1999                                                                 500,000             -- 
                                                                                ----------     ----------

                                                                                 1,573,374        756,796
Less current portion                                                              (290,562)      (502,573)
                                                                                ----------     ----------

Total                                                                           $1,282,812     $  254,223
                                                                                ==========     ==========

</TABLE>

The annual maturities of long-term debt for the next five years are as follows:

<TABLE>
<CAPTION>
Year ending
December 31,                                        Amount
------------                                      ----------
<S>                                               <C>
1998                                              $  290,562
1999                                                 705,729
2000                                                 564,126
2001                                                  12,957
                                                  ----------

Total                                             $1,573,374
                                                  ==========
</TABLE>





                                      F-16
<PAGE>   39
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


8.  DEFERRED SUBSCRIPTION REVENUE

Subscription sales are deferred as unearned income at the time of sale.
Magazine customers normally pay for a one-year or two-year subscription in
advance. As magazines are delivered to subscribers, the proportionate share of
the subscription price is taken into revenue. Magazine subscription selling
expenses are deferred and charged to operations over the same period as the
related subscription income is earned.

9.  DEFERRED DISCOUNT

In April of 1996, the Company entered into an agreement with a telephone
long-distance service provider wherein the Company receives a discount (credit)
against its telephone charges provided that its annual volume of telephone
usage is equal to at least $240,000 for a period of three years. If the Company
fails to meet the minimum usage requirement, the discount will be forfeited.
The discount credit balance as of December 31, 1996 was $54,644. The Company
renegotiated this contract during 1997 and as a result, the discount became
earned and was recognized during the year,

10.  INCOME TAXES

The components of the provision for income taxes at December 31, 1997 and 1996
are as follows:

<TABLE>
<CAPTION>

                                                            1997         1996
                                                          --------     --------
         <S>                                              <C>          <C>
         Current tax expense                              $     --     $     --
         Deferred tax expense                                   --           --
                                                          --------     --------
         Income tax expense                               $     --     $     --
                                                          ========     ========

</TABLE>

The tax effects of temporary differences and carryforwards that give rise to
significant portions of  deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
                                                        1997            1996
                                                     ----------      ----------
<S>                                                  <C>             <C>       
         Deferred tax assets:
            Accounts receivable                      $    4,087      $    2,995
            Net operating loss carryforwards            507,108         299,517
                                                     ----------      ----------
         Gross deferred tax assets                      511,195         302,512
            Valuation allowance                        (492,516)       (290,770)
                                                     ----------      ----------
         Total deferred tax assets                       18,679          11,742
                                                     ----------      ----------
         Deferred tax liabilities:
            Fixed assets                                  3,914           4,513
            Intangible assets                            14,765           7,229
                                                     ----------      ----------
         Total deferred tax liabilities                  18,679          11,742
                                                     ----------      ----------
         Net deferred tax asset (liability)          $       --      $       -- 
                                                     ==========      ==========

</TABLE>

There are no significant reconciling items between the statutory U.S. federal
rate and effective rates for the years ended December 31, 1997 and 1996.





                                      F-17
<PAGE>   40
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


10.  INCOME TAXES (Continued)-

At December 31, 1997, the Company has a net operating loss  carryforward
totaling approximately $1,491,000 that may be offset against future taxable
income. If not used, $880,000 of the carryforward  will expire in 2011 and
$611,000 will expire in 2012.

11.  COMMON STOCK

On December 17, 1997, the Board of Directors approved a reverse stock split
whereby, the Company would issue 1 share of common stock for every 7 shares of
common stock held by existing shareholders at the date of the transaction. All
share transactions, outstanding shares, and related share amounts have been
adjusted to take into effect the 1-for-7 reverse stock split.

Riley Investments, Inc. was incorporated as Pace Group International, Inc.,
("Pace") in October, 1987 under the laws of the State of Oregon. On September
20, 1995, the stockholders approved a name change of the Company to Riley
Investments, Inc. As of November 1, 1995, after the effects of the transaction
described below, the Company had no operating assets and was dormant.

On May 23, 1995, the Chairman of the Board, Edwin T. Cornelius, Jr.
("Cornelius"), the Secretary/Treasurer, Joanne Cornelius, and two sons of Mr.
and Mrs. Cornelius entered into an option agreement to sell 2,905,486 common
shares (415,069 shares as adjusted) of Pace they owned to Bridgeworks Capital.
The above shareholders, together with another shareholder who was also the son
of Mr. and Mrs. Cornelius, owned an aggregate of 3,984,000 common shares
(569,143 shares as adjusted) of Pace. The option agreement, among other
provisions, was subject to shareholder approval of a 1- for-15 reverse stock
split of the outstanding shares of Pace common stock and an exchange of
substantially all net assets of Pace, including its ownership of 100% of the
outstanding common stock of Pace International Research, Inc., for notes
payable and unpaid accrued interest thereon owed to Cornelius which
approximated $422,000 as of October 31, 1995. The above transaction was
approved by the shareholders on September 20, 1995 and became effective
November 1, 1995.

Prior to the consummation of the option agreement, Cornelius also transferred
450,000 shares (64,286 shares as adjusted) of Pace common stock to two
investors who had previously advanced the Company $525,000 in 1987 pursuant to
profit- sharing agreements. Under the terms of those profit-sharing agreements,
the investors were to be paid in full from certain Pace profits.

The remaining Pace common stock owned by the Cornelius family, which aggregated
628,514 shares  (89,788 shares as adjusted), were returned to the Company and
588,674 shares (84,096 shares as adjusted) were canceled as of December 31,
1996.





                                      F-18
<PAGE>   41
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


11.  COMMON STOCK (Continued)

Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately Subsequent to incorporation of Airfair on January 6, 1996,
the existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares (1,214,286 shares as adjusted)
issued. An additional 600,000 shares (85,714 shares as adjusted) were
authorized by the Board of Directors and issued to two shareholders, resulting
in a total of 9,100,000 shares (1,300,000 shares as adjusted) issued pursuant
to the spin-off of the Interline division in IMS to Airfair. (See Note 4.)
Capital of $30,000 was contributed to Airfair by BEI.

In September of 1996, 25,000 shares (3,571 shares as adjusted) of common stock
were issued for $25,000.

During 1996, 151,107 options were granted to note holders and shareholders to
purchase common shares at option prices ranging from $3.50 to $7.00 per share.

Effective July 19, 1996, Riley and Airfair executed an Agreement that provided
for the merger of MergerCo, a newly- created, wholly-owned subsidiary of Riley,
with and into Airfair, which became the surviving corporation, and the
conversion of the issued and outstanding Airfair stock into shares of Riley
stock on the basis of one share of Riley stock for each share of Airfair stock
outstanding on the Effective date. Airfair shares outstanding on the Effective
date totaled 9,125,000 (1,303,571 shares as adjusted). On October 7, 1996,
articles of amendment were filed on behalf of Riley wherein the name was
changed to Grand Adventures Tour & Travel Publishing Corporation with authority
to issue 10,000,000, no par, preferred shares and 30,000,000 common shares with
a par value of $.0001. Existing shareholders in Riley at the date of conversion
held 384,024 shares (54,861 shares as adjusted).

On July 16, 1997, 1,857 shares of common stock were issued in exchange for
advisory services valued at $3,250. On October 24, 1997, the Company issued
71,436 common shares valued at $5.00 per share to holders of $500,000
promissory Notes (Notes) in conjunction with an offering whereby, one share
(.14 share adjusted) of common stock was issued for each $1 of indebtedness
represented by the Notes. $50 in cash was received for the shares and $357,130
was recorded as a financing charge. Also, during 1997, 133 additional shares
were issued and approved by the Board of Directors for fractional shares
resulting from the 1-for-7 reverse stock split. During 1997, 541,987 options
were granted to noteholders and shareholders to purchase common shares at
option prices ranging from $3.50 to $7.00 per share.

12.  LEASING ARRANGEMENTS

On December 1, 1997, the Company entered into a lease agreement for office
space. The terms of the lease agreement call for 10,567 square feet of net
rentable area for a period of five years and three months with an option to
renew for five years. Monthly rent payments over the initial term of the lease
are $12,328 from March 1, 2000 to February 28, 2001 and $12,478 from March 1,
2001 to February 28, 2003. The option year rates





                                      F-19
<PAGE>   42
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


12.  LEASING ARRANGEMENTS (Continued)-

will be based on market conditions upon the renewal date. The Company was
paying its portion of rent under a management services agreement on January 1,
1998 and will directly acquire all services being furnished under that
agreement.

The following is a schedule of future minimum rentals under the lease agreement
at December 31, 1997.

<TABLE>
<CAPTION>
Year ending
December 31:                                                             Amount
------------                                                            --------
<S>                                                                     <C>
     1998                                                               $105,670
     1999                                                                135,614
     2000                                                                146,176
     2001                                                                149,436
     2002                                                                149,736
                                                                        --------
                                                                        $686,632
                                                                        ========
</TABLE>

13. SUBSEQUENT EVENTS

On February 5, 1998, the Company issued stock pursuant to a public offering
(Offering) whereby, 1,200,000 common shares were issued for $5.00 per share.
Gross proceeds from the Offering totaled $6,000,000 with net proceeds (after
underwriting discount, commissions and expenses) to the Company of $5,230,100.
In conjunction with the Offering, $861,948 of debt was converted into 389,127
shares of common stock.

14. STOCK OPTION PLAN

The Company has a long-term stock incentive plan (LTSIP) that authorizes an
aggregate of 450,000 shares (as adjusted for 1-for-7 reverse stock split) of
common stock for future grants. Options to purchase shares of Airfair common
stock granted under the previous Airfair stock option plan were exchanged for
comparable options granted under the LTSIP for an equivalent number of shares
pursuant to the terms of the Merger as explained in Note 4 to the financial
statements.  The exercise price of each employee option is $7.00 (price
adjusted for 1-for-7 reverse stock split). An option's maximum term is five
years. Employee options were granted on August 1, 1996 and February 1, 1997 and
vest in three years.

A summary of the status of the Company's stock option grants (as adjusted for
1-for-7 stock reverse stock split) as of December 31, 1997 and 1996, and the
changes during the years ending December 31, 1997 and 1996 is presented below:
(The fair value of each option grant is estimated on the grant date using an
option-pricing model with the following weighted-average assumptions used for
grants in 1997 and 1996: risk-free interest rate of 6%, and expected lives of 5
years for the options.)





                                      F-20
<PAGE>   43
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


14.  STOCK OPTION PLAN (Continued)-

<TABLE>
<CAPTION>
                                                                  1997                                 1996                   
                                                        --------------------------           -------------------------
                                                             Weighted Average                       Weighted Average
                                               Shares         Exercise Price          Shares         Exercise Price      
                                             ----------      ------------------   ---------------  ------------------
<S>                                          <C>                   <C>                <C>           <C>
Fixed Options
-------------
Balance, Beginning of Year                       43,571            $7.00                     --          $     --

Granted                                          60,874             7.00                 43,571              7.00
Exercised                                            --               --                     --                --
Forfeited                                        (6,370)            7.00                     --                --
                                             ----------                               ---------             

Balance, End of Year                             98,075             7.00                 43,571
                                             ==========                               =========

Exercisable at End of Year                       38,450                                  14,523
                                             ==========                               =========
Weighted-average fair value of options
    granted during the year                  $     2.60                               $    2.66
                                             ==========                               =========
</TABLE>

The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (as adjusted for 1-for-7 reverse stock split):

<TABLE>
<CAPTION>
                                                                           Outstanding Options                                
                                                            ------------------------------------------------
Exercisable Options       
-------------------
                                              Weighted-
                                              Average
                           Number            Remaining             Weighted-             Number            Weighted-
        Range of        Outstanding         Contractual             Average            Exercisable         Average
    Exercise Prices      12/31/97              Life             Exercise Price         at 12/31/97      Exercise Price
    ----------------   -------------     ----------------       --------------         -----------      --------------
         <S>               <C>                <C>                   <C>                   <C>              <C>
         $7.00             37,201             3 years               $7.00                 22,734           $ 7.00
          7.00             60,874             4 years                7.00                 15,716             7.00
                           ------                                                        -------                 
                           98,075                                                         38,450
                           ======                                                        =======
</TABLE>

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with FASB Statement 123, compensation cost for the years ended
December 31, 1997 and 1996 would have increased by $64,000 and $38,400,
respectively and the Company's net loss and loss per share wold have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                                           1997            1996  
                                                                                         -------         --------
<S>                                        <C>                <C>                    <C>              <C>
Net (loss)                                                    As reported            $ (598,495)      $ (872,655)
                                                              Pro forma                (662,495)        (911,055)
Net (loss) per common share                As reported              (.44)                  (.64)
                                                              Pro forma                    (.48)            (.67)
</TABLE>





                                      F-21
<PAGE>   44
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


15.  GOING-CONCERN

As shown in the accompanying financial statements, the Company incurred net
losses during the years ended December 31, 1997 and 1996 of $598,495 and
$872,655, respectfully, and as of December 31, 1997 and 1996, current
liabilities exceeded its current assets by $620,849 and $1,569,859,
respectively. Those factors could create an uncertainty about the Company's
ability to continue as a going concern.

As discussed in Note 13 to the financial statements, on February 5, 1998, the
Company issued stock pursuant to a Public Offering (Offering) whereby,
1,200,000 common shares were issued for $5.00 per share. Gross proceeds from
the Offering totaled $6,000,000 with net proceeds (after underwriting discount,
commissions and expenses) to the Company of $5,230,100. In conjunction with the
Offering, $861,948 of debt was converted into 389,127 shares of common stock.

These factors tend to alleviate substantial doubt about the entity's ability to
continue as a going concern for a reasonable period of time. Management
believes that its working capital after accomplishing the above, together with
cash generated from existing operations will be sufficient to satisfy
anticipated sales growth. There can be no assurance, however, that even with
the provided equity investment that the Company will not encounter adverse
effects on its business, financial conditions or results of operations in the
future.

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reflected in the consolidated balance sheets for
restricted cash, accounts receivable, cash overdraft, accounts payable and
notes payable approximate the respective values due the short maturities of
those instruments. The estimated fair values have been determined by the
Company using appropriate valuation methodologies and available market
information. Considerable judgement is necessarily required in interpreting
market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. A comparison of the carrying value of
those financial instruments, none of which are held for trading purposes, is as
follows:

<TABLE>
<CAPTION>
                                             Carrying             Fair
                                              Amount              Value
                                           -----------          --------- 
<S>                                        <C>                  <C>
Assets:
Restricted cash                            $   181,375          $ 181,375
Accounts receivable                            103,310            103,310
Liabilities:
Cash overdraft                                  26,095             26,095
Accounts payable                               420,303            420,303
Short-term debt                                290,562            290,562
Long-term debt                               1,282,812          1,282,812
</TABLE>





                                      F-22
<PAGE>   45
                   GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
                           CORPORATION AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1997 AND 1996


16.  FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)-

Restricted cash, cash overdraft, accounts receivable and accounts payable. The
carrying value of such items approximates their fair value at December 31,
1997.

Short-term debt and long-term debt. Fair value of such debt is based on rates
currently available to the Company for debt of similar terms and remaining
maturities. There are no quoted prices for the debt or similar debt.

17.  RECLASSIFICATION

For the year ended December 31, 1996, a reclassification reduced "Prepaid
Cruise and Tour Cost" and reduced "Deferred Cruise and Tour Revenue" by
$110,205 each. There was no effect on net loss for the year.





                                      F-23
<PAGE>   46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE

In connection with the Merger in 1996, the Company dismissed Isler & Co.,
certified public accountants, as the Company's independent auditor and selected
Andersen, Andersen & Strong, L.C., to audit and report on the Company's
financial statements for the years ended December 31, 1996 and 1997, which
dates shall be the end of the Company's fiscal year.  See Item 7. "Financial
Statements and Supplementary Data."

The board of directors has approved the change of auditors.

The report of Isler & Co. on the Company's financial statements, consisting of
consolidated balance sheets as of October 31, 1995 and 1994, and the related
statements of operations, statements of net capital deficiency, and cash flows
for each of the two years in the period ended October 31, 1995, did not contain
an adverse opinion or disclaimer of opinion and was not qualified of modified
as to uncertainty, audit scope, or accounting principles.

During the Company's two most recent fiscal years and the subsequent interim
period preceding the dismissal of Isler & Co., the Company was not advised by
Isler & Co. that internal controls necessary for the Company to develop
reliable financial statements did not exist nor that information came to its
attention that led it to no longer be able to rely on management's
representations or that made it unwilling to be associated with the financial
statements prepared by management.  The Company has not been advised by Isler &
Co. of the need to expand significantly the scope of the Company's audit, or
has the Company been advised that during the two fiscal years preceding its
dismissal, information has come to the attention of Isler & Co. that on further
investigation may (i) materially impact the fairness or reliability of either a
previously issued audit report or the underlying financial statements of
financial statements issued covering the fiscal period immediately subsequent
to October 31, 1995, or (ii) cause Isler & Co. to be unwilling to rely on
management's representations or be associated with the Company's financial
statements.  The Company has not been advised by Isler & Co. that information
has come to its attention that it concluded materially impacts the fairness or
reliability of either (i) a previously issued audit report or the underlying
financial statements, or (ii) the financial statements issued covering the
fiscal period immediately subsequent to October 31, 1995, and, due to the
dismissal of Isler & Co., such issue was not resolved to its satisfaction prior
to its dismissal.

No consultations occurred between the Company and Andersen Andersen & Strong,
L.C.'s appointment regarding the application of accounting principles to a
specific completed or contemplated transaction, the type of audit opinion, or
other information considered by the Company in reaching a decision as to an
accounting, auditing, or financial reporting issue.

                                    PART III

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

  The following table sets forth information concerning the directors and
executive officers of the Company and their age and position with the Company.
Each director holds office until the next annual stockholders' meeting and
thereafter until the individual's successor is elected and qualified. Officers
serve at the pleasure of the board of directors.

<TABLE>
<CAPTION>
         NAME                    AGE               POSITION
 ----------------------------   ----   ---------------------------------------------
 <S>                              <C>  <C>
 Matthew O'Hayer ............     42   Chairman, Chief Executive Officer
 Joseph S. ("Jay") Juba .....     34   President, Chief Operating Officer, Secretary
 Darrell Barker .............     49   Chief Financial Officer, Treasurer
 Fernando Cruz Silva ........     37   Senior Vice President of Sales & Marketing
 Patti Macchi ...............     52   Vice President of Cruise Sales & Marketing
 Robert Sandner .............     44   Director
 Robert G. Rader ............     62   Director
</TABLE>



  Matthew O'Hayer has served as Chairman and Chief Executive Officer of the
Company since the Merger and of Airfair since its inception. Mr. O'Hayer
founded Barter Exchange, Inc. (now known as BEI Holdings, Inc. "BEI") in 1983,
served as its President and Chief Executive Officer from its founding until
1995 and has served as its Chairman and Chief Executive Officer since 1995. Mr.
O'Hayer also serves on the boards of several small businesses and non-profit
organizations.

  Joseph S. ("Jay") Juba has served as President and Chief Operating Officer of
the Company since the Merger and of Airfair since its inception. He was elected
to the same offices of BEI in January, 1996. Mr. Juba joined BEI in 1991 as
Director of Advertising after working for more than five years in the
advertising industry. From May 1994 through December 1995, Mr. Juba served as
Senior Vice President of BEI.





                                       41
<PAGE>   47
  Darrell Barker, a Certified Public Accountant, has served as Chief Financial
Officer of the Company and BEI since March 1996. Mr. Barker provided consulting
services with respect to accounting from October 1995 through February 1996.
From June 1994 to October 1995, Mr. Barker served as Senior Vice-President of
Finance for USA Health Network of Phoenix, Arizona. From May 1993 until June
1994, Mr. Barker was President and co-owner of Texas Medical Billing
Administrators, Inc., a physician services company located in San Antonio,
Texas. Mr. Barker served as Vice-President of Finance and was a director for
Texas Savings Life Insurance Company in Austin, Texas from October 1987 until
April 1993.

  Fernando Cruz Silva, serves as Senior Vice President of Sales and Marketing.
Prior to joining Airfair in January 1996, Mr. Silva held the same titles at
Inventory Merchandising Services, Inc. ("IMS"), a subsidiary of BEI. Mr. Silva
became employed by IMS in May of 1994 after having worked as Director of Sales
and Marketing at the Fiesta Americana Hotel in Cancun, Mexico, and the Las
Brisas resort in Acapulco, Mexico and served in senior sales capacities at the
Hyatt and Fiesta Americana hotels in Puerto Vallarta, Mexico City, and Cancun.

  Patti Macchi is Vice President of Sales for the Company but also contributes
editing and marketing expertise to the magazine. Ms. Macchi joined the Company
in 1990 after working for six years with Norwegian Caribbean Line. Ms. Macchi
is responsible for negotiating rates and maintaining relationships with the 27
cruise lines represented in IRL's product offering.

  Robert Sandner has served as a director of Airfair since February 1996 and of
the Company since the Merger. A co- founder of BEI, Mr. Sander has served as
director of BEI and IMS throughout the last five years. Mr. Sandner served as
President of Cellular Resources, Inc. of South Texas a cellular service
provider based in Uvalde, Texas from its inception in 1991 and until its sale
in August 1996. Prior to the organization of Cellular Resources, Inc., Mr.
Sandner held various offices within BEI and operated a barter franchise office
in San Antonio, Texas.

  Robert G. Rader became a director of the Company as of February 3, 1998.
Since the founding of Capital West Securities, Inc. ("Capital West") in 1995,
Mr. Rader has served as its Managing Director of Corporate Finance. Capital
West served as the managing underwriter of the Offering.





                                       42
<PAGE>   48
ITEM 10. EXECUTIVE COMPENSATION

  The following table reflects compensation paid to the two mostly highly
compensated executive officers of the Company.
<TABLE>
<CAPTION>
                                                                                  LONG TERM COMPENSATION
                                                                            ----------------------------
                                                                                     AWARDS  
                                                                            -----------------
                                                                                                       PAYOUTS
                                                                                                       -------
                                                ANNUAL COMPENSATION         RESTRICTED   SECURITIES
                                        ---------------------------------                          
                                                                                STOCK    UNDERLYING    LTIP       ALL OTHER
                                         SALARY(1)(2)  BONUS(3)      OTHER      AWARD     OPTIONS     PAYOUTS    COMPENSATION
   NAME AND PRINCIPAL POSITION    YEAR       ($)         ($)          ($)        ($)      SARS(#)       ($)          ($)    
 -----------------------------    ----   -----------  ---------      -----     --------  ----------   -------    ------------ 
 <S>                              <C>    <C>          <C>            <C>       <C>       <C>         <C>        <C>
 Matthew O'Hayer . . . . . . .    1997     $31,363     $20,000         $ 0           $0         0           0          $ 0
   Chairman & CEO

 Joseph S. ("Jay") Juba, . . .    1997     $50,400      20,000         $ 0           $0         0           0          $ 0
   President, COO and Secretary
</TABLE>
------------------
(1)      The above compensation schedule reflects that portion of shared
         management members compensation allocated to the Company within the
         terms of a management agreement among the Company, BEI Holdings, Inc.
         ("BEI"), and Inventory Merchandising Services, Inc. a wholly-owned
         subsidiary of BEI, See "CERTAIN RELATIONSHIPS AND RELATED
         TRANSACTIONS."

(2)      Messrs. O'Hayer and Juba accepted salary reductions of 40% and 25%,
         respectively, for fiscal year 1997, meaning that the salaries
         allocable to Messrs. O'Hayer and Juba for fiscal year 1997 would be
         $31,363 and $50,400, respectively.  Their salaries were reinstated to
         there original amounts effective January 1, 1998.

(3)      Messrs. O'Hayer, Juba and Barker each received cash bonuses of $20,000
         and Messr Sandner received $5,000 for fiscal year 1997.

COMPENSATION OF DIRECTORS

  The Company does not currently compensate directors for any services provided
as a director.

  Mark T. Waller, a former director of the Company, entered into an advisory
services agreement in October 10, 1996. Mr.  Waller was also granted a
non-qualified stock option in August, 1996. See, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

EMPLOYMENT CONTRACTS

  Matthew O'Hayer, who serves as the Company's Chairman of the Board and Chief
Executive Officer is not party to an employment agreement with the Company or
any affiliate thereof.

  Joseph S. Juba, the President and Chief Operating Officer of the Company has
signed an employment agreement with BEI Holdings, Inc. ("BEI"), and pursuant to
the terms of a management agreement (the "Management Agreement") executed by
Airfair, BEI Holdings, Inc. ("BEI") and Inventory Merchandising Services, Inc.
("IMS" and, together with Airfair and BEI, the "Employers"), the Company
reimburses BEI for that portion of Mr. Juba's time allocable to the Company.
See, "CERTAIN RELATIONSHIPS AND TRANSACTIONS." The following is a description
of the terms and conditions of Mr. Juba's employment agreement which was
entered into March 1, 1995:

  Mr. Juba is paid $84,000 per year with 7% annual increases, commencing with
the first anniversary of the employment agreement, and a bonus equal to 2% of
both BEI's and Airfair's company's Pre-Tax Net Income after allocations of
corporate overhead, based upon audited financial statements. Such bonus to be
calculated on an annual basis, with quarterly draws of up to 50% of bonus due
with respect to each quarter's net income. Mr. Juba was granted shares of
common stock of BEI and Airfair, subject to repurchase rights which lapse over
time. Mr. Juba was paid an auto allowance of $420 per month for two years
commencing in April, 1996. Mr. Juba is subject to three-year prohibitions
(commencing with the date of employment termination) on competition,
non-disclosure and non-use of proprietary information, contact with current or
future customers or interference with the Employers' relationship with any
current or future customers, but if terminated without cause, the prohibitions
on competition and interference are terminated. If the Employers terminate the
agreement without cause or if the Employer materially reduces the
responsibilities of the employee, (i) the employee is to be paid all non-salary
monetary compensation accrued through the date of termination and (ii) the
employee is to receive, for a period of months equal to the number of years of
the employee's service to one or more of the Employers since September 5, 1991,
a monthly cash severance payment equal to the highest monthly salary paid to
the employee. The employee is indemnified against any lawsuits or claims by any
third party arising out of any action taken in good faith by the employee in
the performance of his duties.

  The Company also has an Advisory Services Agreement with Mark T. Waller, one
of the Company's former directors, dated October 10, 1996. During the term of
this Agreement, the Company will engage the Consultant to provide advisory
services in connection with designing and implementing a long-term strategic
plan to enhance the Company's ability to attain its goals following the Merger.
The term of the Advisory Services Agreement is for 5 years from October 10,
1996.  Compensation for advisory services is $100 per year plus

                                       43
<PAGE>   49
reimbursement for Company approved actual expenses incurred when performing the
above services. The consultant serves as an independent contractor.

LONG-TERM INCENTIVE PLAN

  The Company has a long-term stock incentive plan (LTSIP) that reserves shares
of Common Stock for grants to employees and others who are determined to be key
to the future operational success of the Company.

  The Company's shareholders have recently enacted measures to reduce the
number of shares subject to the LTSIP from a total of 1,000,000 to a total of
450,000.

  Pursuant to the terms of the Merger, options to purchase shares of Airfair
common stock granted under the previous Airfair stock option plan were
exchanged for comparable options granted under the LTSIP for an equivalent
number of shares. The exercise price of each employee option is $7.00 after
Reverse Stock Split. An option's maximum term is five years. Employee options
were granted on August 1, 1996 and vest in three years. The fair value of each
option grant is estimated on the grant date using an option-pricing model with
the following weighted-average assumptions used for grants in 1996: risk-free
interest rate of 6%, and expected lives of 5 years for the options.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

PRINCIPAL STOCKHOLDERS

  The following table sets forth, as of December 31, 1997, as adjusted for the
Reverse Stock Split and for the Conversion, the name and shareholdings,
including options to acquire Common Stock, of each person who owns of record,
or was known by the Company to own beneficially, 5% or more of the shares of
the Common Stock currently issued and outstanding; the name and shareholdings,
including options to acquire the Common Stock, of each director; and the
shareholdings of all executive officers and directors as a group. The address
of each of the individuals listed below is the address of the Company.

<TABLE>
<CAPTION>
                                                                PERCENTAGE OF    PERCENTAGE OF
                                     NATURE OF    NUMBER OF       OWNERSHIP        OWNERSHIP
      NAME OF PERSON OR GROUP        OWNERSHIP  SHARES OWNED   BEFORE OFFERING  AFTER OFFERING
   -------------------------------   ---------  ------------  ----------------  --------------
 <S>                                 <C>        <C>           <C>                <C>
 Matthew O'Hayer . . . . . . . .     Direct       557,714           30.5%            18.4%
 Joseph S. "Jay" Juba  . . . . .     Direct       157,142            8.6%             5.2%
 Fernando Cruz Silva . . . . . .     Direct        44,285            2.4%             1.5%
 Robert Sandner  . . . . . . . .     Direct       114,285            6.3%             3.8%
 All executive officers and
 directors as a                      Direct       873,426           47.8%            28.9%
   group (seven persons) . . . .
                                     Options       21,427            1.2%              .7%
           Total . . . . . . . .                  894,853           49.0%            29.6%
</TABLE>

The Company's executive officers and directors, entities affiliated with them
and employees of the Company and holders of at least 5% of the outstanding
Common Stock affiliated with the executive officers and directors will
beneficially own shares of Common Stock representing more than 29% of the total
voting power of the Common Stock after giving effect to the Offering. These
persons, if acting in concert, will be able to exercise control over the
Company's affairs and are likely to be able to control the Board of Directors
and the disposition of any matter submitted to a vote of stockholders.





                                       44
<PAGE>   50
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Prior to the Offering, the Company had only one disinterested director. The
Company has agreed with the state securities administrators of certain states,
as well as the Boston Stock Exchange and the Nasdaq SmallCap(SM) Market, that
from and after the consummation of the Offering, the Company will have at least
two directors who are independent and capable of exercising independent
judgment. The Company represents that (A) all future material affiliated
transactions and loans will be made or entered into on terms that are no less
favorable to the Company than those that can be obtained from unaffiliated
third parties; and (B) all future material affiliated transactions and loans,
and any forgiveness of loans, will be approved by a majority of the Company's
independent directors who (i) do not have an interest in the transactions and
(ii) have access, at the Company's expense, to the Company's or independent
legal counsel. Unless otherwise indicated, the terms of the following
transactions were not the results of arm's length negotiations, but in the
opinion of management of the Company each transaction is on terms as fair to
the Company as could be obtained in arm's length negotiations in similar
circumstances.

ACQUISITION OF INTERLINE TRAVEL DIVISION

  On December 1, 1994, IMS acquired assets from Louis J. and Claudia Nackos in
exchange for the assumption by IMS of $144,394 in liabilities. These assets are
the basis of the Marketing Division's hotel operations. In connection with the
formation of Airfair on January 6, 1996, IMS transferred certain interline
travel operating assets to Airfair in exchange for Airfair's assumption of the
related liabilities. At the time of such transfer and assumption by Airfair,
Airfair lacked sufficient disinterested directors to certify such transactions.

ORGANIZATION OF THE COMPANY'S SUBSIDIARY

  Airfair, the Company's operating subsidiary, was initially organized in
January 1996 as a subsidiary of BEI Holdings, Inc. ("BEI"). In anticipation of
distributing its shares of Airfair's common stock to the shareholders of BEI,
and in order to provide Airfair's executive officers with an increased equity
stake in Airfair, BEI granted 71,429 shares of Airfair common stock (as
adjusted for Reverse Stock Split) to Joseph S. Juba and 14,286 shares to
Fernando Cruz Silva.  At the time of the grant, Mr. Juba was President, Chief
Operating Officer and Secretary of BEI and Airfair, and Mr. Cruz Silva was
Senior Vice President of Sales and Marketing for both companies.

  From organization of the Company through March 1, 1996, the Company obtained
the services of its principal executives, Matthew O'Hayer, Jay Juba, and after
his employment on March 25, 1996, Darrell Barker, together with computer
access, accounting services, rental space and related administrative support,
from BEI, which allocated 70% of the direct costs of such items to the Company
and the remaining 30% to Inventory Merchandising Services, Inc., a wholly-owned
subsidiary of BEI ("IMS"). Effective March 1, 1996, the Company entered into a
management agreement with IMS under which it agreed to provide the Company with
such executive services and administrative support for a fee equal to 0.5% of
the Company's gross revenue per month plus a portion of the direct payroll
expenses of certain members of management who serve BEI, IMS, and Airfair.
These management fees amounted to approximately $174,965 and $68,475 for the
years ended December 31, 1997 and 1996 respectively. Such management fees
include reimbursement for an allocable portion of the time of such executives
devoted to the business affairs of the Company as follows: Matthew O'Hayer,
approximately 70% of his time at an annual salary of $130,680; Joseph S. Juba,
approximately 80% of his time at an annual salary of $84,000; and Darrell
Barker, approximately 50% of his time at an annual salary of $60,000. The
Management Agreement terminated on December 31, 1997, when the Company moved to
new office space. At the time the Management Agreement was agreed upon, the
Company lacked sufficient disinterested directors to ratify its terms and
conditions.

  Airfair and IMS have also entered into an inventory marketing agreement
whereby Airfair sells certain IMS inventories.  Airfair is required to make
monthly payments to IMS equaling (i) the cash value of IMS's acquisition cost
in the inventory plus (ii) 25% of the collected revenue generated from such
sales less such cash value. The Marketing Agreement has been terminated, by
agreement of Airfair and IMS, as of January 31, 1998. At the time the Marketing
Agreement was agreed upon, the Company lacked sufficient disinterested
directors to ratify its terms and conditions.

ACQUISITION OF INTERLINE REPRESENTATIVES, LTD., AND AIRFAIR PUBLISHING CORP.

  On January 13, 1996, effective January 1, 1996, Airfair acquired the cruise
line operations of the Marketing Division and the Magazine and the related
assets, by assuming liabilities of $204,326 (which assumed liabilities have
been paid), paying $30,000 in cash, and delivering promissory notes aggregating
$359,465. The promissory notes were personally guaranteed by Matthew O'Hayer.





                                       45
<PAGE>   51
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

a)  1.  Financial Statements

    The following financial statements are filed as a part of this Form 10-KSB:

    The Index to Consolidated Financial Statements is set out in Item 7 herein.

    Exhibit 27.01 Financial Data Schedule

    The following financial statements are incorporated by reference from Form
    8-K filed October 15, 1996:
    FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
       Report of Andersen Andersen & Strong, L.C., independent public 
       accountants
       Airfair Publishing, Inc., condensed balance sheet as of December 31, 1994
       Airfair Publishing, Inc., pro forma condensed balance sheet as of 
       December 31, 1995
       Airfair Publishing, Inc., pro forma condensed statement of operations 
       for the year ended December 31,1994
       Airfair Publishing, Inc., pro forma condensed statement of operations 
       for the year ended December 31, 1995
       Airfair Publishing, Inc., notes to condensed historical financial 
       statements as of December 31, 1995 and 1994
       Airfair Publishing, Inc., notes to condensed pro forma financial 
       statements (unaudited) as of December 31, 1995 and 1994
       Airfair Publishing, Inc., condensed balance sheet as of June 30, 1996
       Airfair Publishing, Inc., condensed statement of operations for the six
       months ended June 30, 1996
       Airfair Publishing, Inc., notes to condensed financial statements

    PRO FORMA FINANCIAL INFORMATION
        Unaudited pro forma condensed financial statements
        Unaudited pro forma condensed combined balance sheet as of July 31, 1996
        Unaudited pro forma condensed combined statement of operations for the
        six months ended July 31, 1996
        Notes to unaudited pro forma condensed combined financial statements

    2.  Employment Contracts are set out in Item 10 herein.

b)      Reports on Form 8-K

    The following exhibits are incorporated by reference from Form 8-K filed
    October 15, 1996:

    Exhibits
    2.01         Agreement and Plan of Merger entered into effective July
                 19,1996, by and between Riley Investments, Inc, and Airfair
                 Publishing, Inc.
    3.01         Restated Articles of Incorporation of Grand Adventures Tour &
                 Travel Publishing, Corporation
    10.01        Advisory Services Agreement effective October 10, 1996 by and
                 between Riley Investments, Inc. to Mark Waller
    10.02        Long Term Stock Incentive Option Plan
    10.03        Non-Qualified Stock Option granted effective August 19, 1996
                 by Riley Investments, Inc. to Mark Waller
    10.04        Indemnification and Pledge Agreement
    16.01        Letter from Isler & Co., former Company auditors
    12.01        Consent of Andersen, Andersen & Strong, L.C.

    The following exhibits are incorporated by reference from the Registration
    Statement on Form SB-2 filed October 24, 1997:

    3.02         Bylaws
    21.1         Subsidiaries of the Registrant

                                       46
<PAGE>   52
                                   SIGNATURES

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


            (Registrant)  Grand Adventures Tour & Travel Publishing Corporation
                          -----------------------------------------------------
                    By   /s/  Joseph S. Juba
                         -------------------
                         Joseph S. Juba,  President/ Chief Operating Officer

                  Date   April 15, 1998
                         -------------- 
          


In accordance with the Exchange Act, this report has been signed below by the 
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

                    By   /s/  Darrell W. Barker
                         ----------------------
                         Darrell W. Barker,  Chief Financial Officer

                  Date   April 15, 1998 
                         -------------- 
          

                    By   /s/  Matthew O'Hayer
                         --------------------
                         Matthew O'Hayer, Chairman of the Board and Chief 
                         Executive Officer           

                  Date   April 15, 1998
                         --------------

                    By   /s/  Robert Sandner
                         -------------------
                         Robert Sandner,  Director

                  Date   April 15, 1998
                         --------------

                    By   /s/  Robert Rader
                         -----------------
                         Robert Rader,  Director

                  Date   April 15, 1998
                         --------------





                                       47
<PAGE>   53
                                EXHIBIT INDEX

EXHIBIT
NUMBER                          DESCRIPTION
-------                         -----------

27.1                   Financial Data Schedule