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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C 20549

                                    FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997     COMMISSION FILE NUMBER: 0-14646

                           AIRSHIP INTERNATIONAL LTD.
               --------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        NEW YORK                                      06-1113228
(STATE OF INCORPORATION)               (I.R.S. EMPLOYER IDENTIFICATION NUMBER)

    7380 SAND LAKE ROAD, SUITE 350, ORLANDO, FL                 32819
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

                                 (407) 351-0011
                         (REGISTRANT'S TELEPHONE NUMBER)
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                     COMMON STOCK, $.01 PAR VALUE PER SHARE.
                                (TITLE OF CLASS)
            CLASS A 8% CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK,
                            PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

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

                  Yes [X]                             No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant including Preferred Stock as of March 31, 1998 was $2,244,068.

The number of shares of Common Stock outstanding as of March 31, 1998 was
42,583,978 and the number of shares of Preferred Stock outstanding as of
March 31, 1998 was 2,448,179.

Documents Incorporated by Reference: None. A list of Exhibits to this Annual
Report on Form 10-K begins on page 24.



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                           AIRSHIP INTERNATIONAL LTD.
                              1996 FORM 10-K REPORT

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.   BUSINESS.........................................................  -1-

ITEM 2.   PROPERTIES.......................................................  -6-

ITEM 3.   LEGAL PROCEEDINGS................................................  -6-

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............  -8-

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS..........................................  -9-

ITEM 6.   SELECTED FINANCIAL DATA.......................................... -11-

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS.......................... -12-

ITEM 8.   FINANCIAL STATEMENTS AND SCHEDULES............................... -15-

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... -15-

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... -16-

ITEM 11.  EXECUTIVE COMPENSATION........................................... -17-

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT............................................... -20-

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... -20-

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND
              REPORTS ON FORM 8-K.......................................... -23-





                                      ii



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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forwardlooking statements. This Annual Report contains certain
forwardlooking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forwardlooking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.






                                      iii



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                                     PART I


ITEM 1. BUSINESS

GENERAL

        Airship International Ltd. (the "Company") operated lighter-than-air
airships, also commonly known as blimps, which were used to advertise and
promote the products and services of the Company's clients. The Company's
clients utilized its airships at major sporting and special events and over
urban and beach locations as an informative advertising and promotional vehicle.
The Company did not operate any airships during 1996 or 1997.

                  Since 1995, the Company generally has had no operations and no
opportunity to commence operations in the airship industry in which it has
historically conducted its business operations. As a result, the Company has
experienced significant operating losses and negative cash flow from its
operations in 1996 and 1997. Management's strategy for the future is to arrange
for funding from affiliated entities, of which there can be no assurance, and to
separately consider acquiring new business operations or merging (whether
through a direct, indirect, reverse or other form of merger) with an entity that
has ongoing business operations. As of the date hereof, the Company has no
agreements with any third party to effect any such acquisition or merger, and no
assurances can be given that any such acquisition or merger will in fact be
effected in the future. As noted in the auditor's report, there exists the
possibility that the Company may not have the ability to continue as a going
concern.

        The Company was incorporated in New York on June 9, 1982 and commenced
operations in August 1985 following the completion of the Company's initial
public offering in June 1985. The Company's principal executive offices are
located at 7380 Sand Lake Road, Suite 350, Orlando, Florida 32819 and its
telephone number is (407) 351-0011. The Company also maintains a small office in
New York, New York.

                  Set forth below is a description of the Company's business
operations during the period from 1985 to 1995.

AIRSHIPS

        For daytime advertising, each of the Airships and its ground support
vehicles were generally painted with the name and logo of the respective client.
In addition, the Company's operating personnel wore uniforms carrying the
client's logo or name.

        The Company's clients utilized its Airships as an aerial ambassador and
network-television camera platform for numerous major events.

        Each of the Company's airships was operated by a team employed by the
Company which included U.S. Federal Aviation Administration ("FAA") certified
airship pilots, mechanics, technicians and crew. The team supervised and
executed the flight schedule and activities which the client specified. The team
was supported by specially equipped ground support vehicles owned by the
Company, which were used in the operation and maintenance of the Airships. The
flight schedule of an airship could have included flights over a several hundred
mile geographical area. The Company could accommodate such requirements because
an airship's mooring support facilities are mobile and will travel with the
ground crew to each of the landing sites. The Company believes that this
mobility provides the flexibility for the use of the airships and implementation
of a client's promotional campaign. No specialized facility is required for use
as a landing site.

        Historically, substantially all of the Company's revenues were derived
from the operation of the Airships pursuant to aerial advertising contracts with
its clients. Fees were generally paid to the Company on a monthly basis and the
respective Airships were flown according to a flight schedule provided by the
client, subject to weather conditions, government regulations and maintenance
requirements. In the absence of advertising contracts, the Company has suffered
a material adverse impact on its revenues. However, the Company continues to
seek new aerial advertising contracts and clients.


                                      -1-



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AERIAL ADVERTISING AND OTHER CONTRACTS

        Set forth below are descriptions of the Company's aerial advertising
contracts which were in effect during the periods indicated below (for further
detail see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Revenue and Operating Costs -- 1997
to 1996").

        ARGENTINA AGREEMENTS. On December 15, 1994 the Company through its
wholly-owned subsidiary, Airship Operations, Inc. ("AOI") consummated the
Argentina Lease Agreement and the Argentina Operations Agreement, respectively,
with Mastellone, an Argentinean dairy company, for the promotion of the
products of Mastellone.

        Subsequently, on May 24, 1995, prior to commencement of flight
operations of the Argentina Airship and pursuant to the Purchase and Assignment
Agreement, the Argentina Airship and related equipment were sold and the
Argentina Lease Agreement was assigned to First Security. In consideration for
such sale and assignment, First Security assumed the Company's obligations under
the Argentina Lease Agreement. The initial terms of the Agreements were for a
period of four months, and commenced in July 1995. Such initial terms were
extended for a ten-month period by Mastellone pursuant to the provisions of the
Agreements.

        In addition, the Company had the option to repurchase the Airship for
120% of the out-of-pocket expenses and the assumption of all liabilities
incurred by First Security and Aviation Support Group Ltd. ("Aviation") in
connection with the Argentina Airship. Such option expired unexercised on
January 15, 1996.

        Concurrently with the execution and delivery of the Purchase and
Assumption Agreement, the Company sold to Aviation all of the issued and
outstanding shares of the capital stock of AOI. Mr. Julian Benscher,
a shareholder of the Company, is an officer and stockholder of Aviation. See
"Certain Relationships and Related Transactions".

        The Company's revenues were historically dependent on the Company's
aerial advertising contracts. For the years ended December 31, 1995 and 1994,
100% and 50%, respectively, of the Company's revenues were derived from
Anheuser-Busch. In addition, 19% of 1994 revenues were derived from
Kingstreet Tours and 29% from Gulf Oil. The Company has been adversely affected
from the time that any particular aerial advertising agreement terminated.
The Company had no aerial advertising contracts in effect in 1997 and 1996.

ACQUISITIONS, LEASES AND FINANCINGS

        Set forth below is a description of the Company's financing arrangements
in effect during the year ended December 31, 1997.

        ORIX LEASE

        In 1989 the Company executed, as lessee, an airship lease (the "Orix
Lease") with Orix USA, Inc. then known as Orix Commercial Credit Corporation
("Orix") for the Company's 600.05 Airship, which provided for an initial three
year term with two three-year renewal options. Pursuant to the Orix Lease, the
Company was obligated to pay a monthly lease payment of $121,000 (through
November 1995), and $35,000 per month from December 1995 to November 1998. As a
result of the termination of the Met Life Contract in October 1993, the Company
and Orix entered into amendments to the Orix Lease in January and May 1994 to
restructure the monthly payments. As a result of the reduced fees under the Bud
One Contract and the suspension of operations of the Gulf Oil Airship, several
required payments were not made. The Company again renegotiated its arrangement
with Orix and in October, 1995, entered into an Amended and Restated Lease
Agreement in the form of a Conditional Sales Contract effective as of June 2,
1995 (the "Amended Lease"). Pursuant to the Amended Lease,


                                      -2-



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<PAGE>




the payments to Orix are $20,000 per month for the first year, $40,000 plus
interest per month for the next 6 months, $60,000 plus interest per month for
the next 6 months and thereafter the greater of $80,000 per month or 50% of
annual cash flow for the proceeding 12 month period. The Amended Lease expires
June 2, 2002 at which time the Company can purchase the Airship for $1.00. The
Airship which is the subject of the Amended Lease is not currently operational,
as it requires a new envelope. To date, the envelope has not been replaced.

        As security for the Company's obligations under the Orix Lease and the
Amended Lease, Louis J. Pearlman, Chairman of the Board, President and Chief
Executive and Operating Officer of the Company ("Mr. Pearlman"), has personally
guaranteed the payment and performance of the obligations of the Company. In
addition, the Company's obligations to Orix are guaranteed by TransContinental
Airlines, Inc., an affiliate of the Company, which received common stock of the
Company in exchange for such guaranty. See "Certain Relationships and Related
Transactions."

        WDL LEASE

        Pursuant to an agreement effective May 16, 1993 (the "WDL Lease"), the
Company leased from Westdeutsche Luftwerbung Theodor Wullenkemper GMBH
("Westdeutsche") a used type WDL IB airship equipped with a NightSign`tm'
system. The Company entered into the WDL Lease to procure an airship to fulfill
its obligations under the Gulf Oil Contract when it became apparent that the
proposed acquisition of the assets of Slingsby Aviation Ltd. could not be
completed in time to provide an additional airship to fulfill the Company's
obligations under the Gulf Oil Contract. The Company began operating this
airship as the Gulf Oil Airship on June 25, 1993. On September 11, 1994, the
Gulf Oil Airship was damaged in an accident and its operations ended. As a
result of the damage to the Gulf Oil Airship, the Company sustained a loss of
$1,978,000, representing the cost of the airship less insurance proceeds and
credits allowed, including salvage value, when the airship was returned to WDL
in September 1994. At December 31, 1994, the Company owed WDL a total of
$2,866,000 under the WDL Lease including the $1,978,000 described above plus
lease and other operating costs through September 11, 1994. Pursuant to the
WDL Lease, the Company maintained a security deposit in a cash account
(the "Cash Escrow Account") with Trans Continental Airlines Inc., an affiliate
of the Company ("Trans Continental"). As of December 31, 1994, the Company had
on deposit in the Cash Escrow Account $1,800,000. During March 1995, the Company
paid the full balance of the Cash Escrow Account to WDL to reduce its liability
to WDL to $1,000,000. Pursuant to the WDL Lease, Trans Continental
collateralized the advances with a certificate of deposit in the amount of
$2,500,000 (see Note C to the Financial Statements included elsewhere herein).
The Company is currently indebted to WDL in the approximate amount of $911,000.

        ALLSTATE LOAN

        On November 16, 1994, the Company entered into an Aircraft Collateral
Funding Repayment Agreement (the "Allstate Agreement") with Allstate Financial
Corporation ("Allstate"). Pursuant to the Allstate Agreement, on December 6,
1994, the Company borrowed $1,500,000, (the "Allstate Loan") and as of December
31, 1994, the Company owed Allstate $1,250,000 plus approximately $47,000 of
accrued interest. The Allstate Loan bore interest at the rate of 37.5% annually
and required a minimum payment of $75,000 each month, the first payment of
$75,000 having been made on January 5, 1995. The Allstate Loan was guaranteed by
both Mr. Pearlman and Trans Continental. See "Certain Relationships and Related
Transactions." The guarantors agreed to subordinate


                                      -3-



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<PAGE>




any payments due to them from the Company while the Allstate Loan was
outstanding, and any payments that would otherwise be paid to the guarantors was
to be paid to Allstate and applied against the Allstate Loan.

        Subsequently on June 22, 1995 the Allstate Loan was repaid when
Trans Continental Leasing, Inc. ("TC Leasing"), a wholly-owned subsidiary of
Trans Continental Airlines, Inc., ("Trans Continental"), an affiliate of the
Company, entered into a Sale-Leaseback Agreement the ("S/L Agreement") with the
Company pursuant to which the Company's last remaining airship was sold to
TC Leasing for the purchase price of $2,060,000, which in turn leased such
airship back to the Company. TC Leasing borrowed the purchase price for the
airship (the "Phoenixcor Loan") from Phoenixcor, Inc. ("Phoenixcor"), which was
granted a pledge of the lease and a lien on the Bud One Airship. In addition,
the Phoenixcor Loan was guaranteed by the Company and Trans Continental. The
lease payments to be made under the S/L Agreement are equal to the payments to
be made under the Phoenixcor Loan.

        The Phoenixcor Loan was structured as a sale-leaseback for financing
purposes only.

        The Company entered into an arrangement with Senstar Capital
Corporation, ("Senstar") pursuant to which the sale leaseback arrangement with
TC Leasing was reversed such that the Company reacquired such airship and the
Company borrowed a total of $3,500,000 from Senstar (the "Senstar Loan"), part
of which has been used to repay the Phoenixcor Loan. The loan from Senstar was
repayable over 5 years in sixty monthly payments of approximately $63,000
each, with a balance due at the end of the five year term of approximately
$700,000, and was secured by a lien on the Airship and a guaranty by
Trans Continental. The Senstar Loan provided approximately $1,337,000 to the
Company after payment of the Phoenixcor Loan.

        On January 15, 1997 the Company entered into a sale-leaseback agreement
with TC Leasing, an affiliated company, with respect to the Company's 500.04
airship (formerly the "Bud One" airship) whereby the Company sold to TC Leasing
the airship and related equipment and then leased it back from TC Leasing. In
connection with the Sale-leaseback, TC Leasing retired the Company's
debt to Senstar Capital Corp. in the amount of $3,014,000. Additionally, TC
Leasing procured a new envelope from a third party and agreed to lease back the
entire assembled and operational airship to the Company. Pursuant to the
agreement, the Company further agreed that it would sell certain idle airship
components to TC Leasing provided that TC Leasing would undertake to pay the
operational costs of the 500.04 airship for a minimum of eight months.

        On December 24, 1996, TC Leasing obtained a loan with Norwest
Equipment Finance, Inc. in the amount of $4,709,000. The proceeds of this
refinancing were used to repay the Company's debt to Senstar and to provide
working capital to the Company in connection with the Sale-leaseback. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

ADDITIONAL AIRSHIPS; AIRSHIP ASSEMBLY

        In addition to providing clients with aerial advertising and promotion
with its airships, the Company also had acquired assets enabling it to partially
construct additional airships either to service existing or potential clients of
the Company or for lease or purchase by other parties. The Company owns
substantial airship replacement components and its experience in airship
assembly includes the assembly of four airships. The airship components that the
Company currently has in inventory, plus approximately $1,000,000 of additional
capital per airship, would enable the Company to construct up to five additional
airships. The Company believes that its inventory of spare airship components
will significantly reduce its cost for initial airship assembly and future
maintenance expenditures, should future clients be obtained. There can be no
assurance, however, that the Company would be able to obtain the financing
necessary to complete construction of any additional airships, or that it would
be able to consummate aerial advertising agreements with respect to any such
airships. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."


                                      -4-



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        Operation of the Company's airships is subject to suitable weather
conditions and an absence of mechanical failures, either of which could damage
or destroy an airship. During 1994, the 600.05 Airship was damaged in a storm
while attached to its mast and the Gulf Oil Airship was damaged in an accident.
Airships can be operated only in warm climates. Accordingly, during the winter
months airships can only operate in the southern states and west coast states.
Furthermore, maintenance of an airship requires that it cease operations for an
aggregate of approximately one month each year, including approximately two
weeks of in-hangar maintenance.

MARKETING

        The Company marketed its airship services directly to potential clients
through a sales effort conducted by its management, including a Director of
Marketing. During 1997, the Company continued pursuing potential new clients,
both for aerial advertising contracts and for the purchase of new airships; none
of such contracts or purchases was consummated.

SUPPLIERS

        Airships are manufactured by a limited number of suppliers worldwide.
The Company's Airships were manufactured by Airship UK, a United Kingdom
supplier no longer doing business, and by Slingsby Aviation Ltd. Due to asset
purchases and expertise described above in "Additional Airships; Airship
Assembly," the Company could be in a position to manufacture or assemble up
to five additional airships, subject to financing requirements.

COMPETITION

        Historically, the Company's direct competition was limited to those
companies which had airships legally permitted to operate in the United States.
The Company competed with Airship Management Service (AMS), the operator of the
Fuji airship, and Icarus Aircraft, Inc. ("IAI"), a privately-held firm which
operates lightships, which are small airships approximately 1/3 the size of the
Company's airships. Currently, IAI is operating for MetLife. The Lightship
Group, Inc. (formerly Virgin Lightships Inc. and American Blimp Company) owns
and operates the smaller airships on behalf of numerous advertising clients in
the United States. MetLife and Anheuser-Busch are former clients of the Company
which did not renew its agreement with the Company, at least in part due to
these alternative airship providers.

        In addition, Airship Operations, Inc. operates airships within the same
class of airships which the Company has historically operated. AOI is owned by
Mr. Julian Benscher, a shareholder of the Company. See "Certain Relationships
and Related Transactions."

GOVERNMENTAL REGULATION

        Operation of airships in the United States is regulated by the Federal
aviation laws of the United States. The Company currently holds all necessary
Federal Aviation Administration ("FAA") and U.S. Department of Transportation
authorizations to operate all of its existing airships, including a Standard
airworthiness Certificate issued by the FAA with respect to each of the
airships. In addition, the Company holds an FAA "Type Certificate" which
certifies that the design for the Company's airships meets air-worthiness
requirements of Federal aviation regulations, and an FAA facilities license
which permits the Company to assemble, repair and maintain airships. However,
there can be no assurance that the federal government will not impose additional
requirements on the operation of airships in the future, which might require the
Company to incur additional expense, or which might otherwise have a material
adverse effect on the Company's operations.


                                      -5-



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EMPLOYEES

        As of December 31, 1997, the Company had two officers, who have managed
its affairs.

INSURANCE

        There are risks inherent in the ownership and operation of airships. The
Company has maintained insurance in such amounts and for such coverage as
management has determined to be appropriate and as has been required from time
to time under its contracts with Orix and various financing companies and
airship aerial advertisers. Currently, the Company maintains insurance for its
spare parts, as well as property coverage and general liability insurance. The
Company has also maintained Aircraft Hull All Risk Insurance for the periods
when its Airships are operational.

ITEM 2.  PROPERTIES

        The Company had leased its principal executive offices pursuant to the
terms of a five-year lease, which commenced May 7, 1991 and ended May 6, 1996,
for approximately 7,000 square feet in Orlando, Florida, the home base of the
Company. The annual rent under such lease was approximately $132,000. Since May
7, 1996, the Company has subleased approximately 500 square feet of such
facility from Trans Continental Airlines, Inc. on a month-to-month basis for
monthly rental payments of approximately $770. The Company stores various
spare parts for its existing airships at a warehouse located in Kissimmee,
Florida. and intends to do so for the foreseeable future.


ITEM 3. LEGAL PROCEEDINGS

        Tenerten and Drake, Inc. On September 15, 1994, Tenerten and Drake, Inc.
("TDI") filed a complaint against the Company. The complaint alleges that the
Company failed to pay certain sums of money due and owing to TDI under an
agreement to perform advertising and related services for the Company. The
Company filed its answer and raised its affirmative defenses to said complaint
alleging that the services allegedly performed by TDI were defective in numerous
respects. On June 13, 1995, the parties entered into a Settlement Stipulation
whereby the Company agreed to make certain payments to Tenerten and Drake, Inc.
On July 20, 1995, Tenerten and


                                      -6-



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Drake, Inc. filed its Motion for Final Judgment alleging that the Company failed
to make a payment under the Settlement Stipulation. A Final Judgment was entered
against the Company on July 20, 1995. The Company filed its Notice of Appeal on
or about September 19, 1995 and posted a cash bond in the amount of $24,190.76.
The Company has since settled all remaining claims instituted by Tenerton and
Drake, Inc. by agreeing to the release of the cash bond to Tenerton and Drake,
Inc. and by paying to Tenerton and Drake, Inc. the additional sum of $4,100.


        Watermark. In January, 1993, a second amended complaint to a lawsuit,
which was initially commenced in March 1991 and subsequently dismissed twice
without prejudice, was filed in the Circuit Court of the State of Florida
against the Company and its President by Watermark Group PLC and Von Tech
Corporation, as general partners of Company Communications (collectively, the
"WNT Plaintiffs") alleging breach of an alleged joint venture agreement
involving Company Communications and Airship Enterprises Ltd. (a company that
was owned by Mr. Pearlman and that was not in any way owned or controlled by the
Company), breach of an alleged agreement by the Company regarding the lease and
operation of a particular airship; and breach of an alleged oral commission
agreement by the Company relating to the Company's acquisition of two airships
it presently owns. The WNT Plaintiffs seek various legal and equitable remedies,
including monetary damages against the Company and Mr. Pearlman in excess of
$800,000 together with a claim for some portion of the advertising revenue the
Company has received, and will continue to receive, from the operation of some
of its airships. On October 3, 1995, the parties entered into a Mutual Release
and Joint Stipulation for Settlement whereby the Company agreed to make payments
to Watermark in the total amount of $40,000. Such payments were made during 1995
and 1996.

        In March 1993, the second amended complaint was dismissed without
prejudice. Since the Company denies any involvement with any of the transactions
set forth in the second amended complaint, the Company believes that its
liability, if any, on the claims made by the WNT Plaintiffs will not be
material.

        Capital Funding Group Ltd. In February 1992, Capital Funding Group Ltd.
("CFG") commenced an action against the Company and others in excess of
$1,000,000 in damages based on the alleged failure by the Company to provide
adequate collateral and security in connection with certain alleged financial
agreements with CFG. The Company retained CFG in July 1991, paid a commitment
fee (which was written off in 1991) and received a commitment from CFG which
then failed to provide the funding. The Company and the other defendants
answered the complaint in February 1992 by denying all of the substantive
allegations and asserting several affirmative defenses. In addition, the Company
asserted certain counterclaims against CFG and its two principals for breach of
a commitment letter pursuant to which CFG was to arrange for a $9 million loan
to the Company, breach of a compromise agreement accepted by CFG in January
1992, pursuant to which CFG was to provide funding to the Company in the amount
of $7 million, breach of an escrow agreement, pursuant to


                                      -7-



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<PAGE>




which CFG was to return $200,000 of the commitment fee paid by the Company and
various other counterclaims. In March 1993, the Company was awarded a default
judgment of $8,000,000 against CFG and the complaint against the Company was
dismissed. No balances have been returned to the Company as of December 31,
1997.

        Due to the weakening financial position of the Company at the time, the
Company was unable to complete its audit for the year ended December 31, 1994 or
to conduct audits for the years ended December 31, 1995 and 1996. Accordingly,
the Company had not filed any periodic reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, for the quarterly and annual
periods ended December 31, 1994 through March 31, 1997 or any Current Reports on
Form 8-K during such periods until July 11, 1997, on which date the Company
filed its Current Report on Form 8-K reporting a change of accountants. On July
18, 1997, the Company entered into a Consent and Undertaking with the Securities
and Exchange Commission pursuant to which the Company agreed, among other
things, to file this Annual Report on Form 10-K, Annual Reports on Form 10-K
for the years ended December 31, 1994, 1995 and 1996 and all reports due under
Sections 13 and 15 of the Securities Exchange Act of 1934, as amended, for all
subsequent periods. Judgement was entered on August 21, 1997. The Company is
current with filing its reports.

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

        The Company has not held any meetings of, nor has it submitted any
matters to a vote by, shareholders since April 11, 1995.





                                      -8-



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                                     PART II

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

        The Company's Common Stock, Preferred Stock, and Class B Warrants had
been listed on the Nasdaq SmallCap Market under the symbols BLMP, BLMPP and
BLMPL, respectively, until Nasdaq's delisting of the Company's securities on
July 5, 1995 (the "Delisting") as a result of the Company's failure to timely
file this Annual Report on Form 10-K. Since the Delisting, the Company's Common
Stock and Preferred Stock have traded on the over-the-counter market under the
symbols "BLMPE" and "BLMPPE," respectively. The price ranges presented below
represent the highest and lowest quoted bid prices during each quarter reported
by the National Quotation Bureau, Inc and Nasdaq. The quotes represent prices
between dealers and do not reflect mark-ups, markdowns or commissions and
therefore may not necessarily represent actual transactions.

                                  COMMON STOCK:

    1995                       High Bid                            Low Bid
1st Quarter                    $.125                               $.0625
2nd Quarter                    $.0625                              $.03125
3rd Quarter*
4th Quarter                    $.25                                $.125


    1996                       High Bid                            Low Bid
1st Quarter                    $.3125                              $.03125
2nd Quarter                    $.3125                              $.04
3rd Quarter                    $.1                                 $.04
4th Quarter                    $.085                               $.05
------------------------

*       Prior to the Delisting. Price ranges during the third quarter of 1995
        include quotations on NASDAQ SmallCap Market up to such date. The Common
        Stock and the Preferred Stock are currently traded on the Nasdaq OTC
        Electronic Bulletin Board.



                                      -9-



<PAGE>
<PAGE>




    1997                       High Bid                               Low Bid
1st Quarter                    $.175                                  $.08
2nd Quarter                    $.175                                  $.09
3rd Quarter                    $.115                                  $.075
4th Quarter                    $.0775                                 $.035

    1998
1st Quarter                    $.046                                  $.02


                                Preferred Stock:

    1995                       High Bid                               Low Bid
1st Quarter                    $.59375                                $.40625
2nd Quarter                    $.46875                                $.375
3rd Quarter                    $.325                                  $.325
4th Quarter                    $.25                                   $.125

    1996                       High Bid                               Low Bid
1st Quarter                    $.1875                                 $.1875
2nd Quarter                    $1.625                                 $.375
3rd Quarter                    $.71875                                $.385
4th Quarter                    $.59375                                $.28125

    1997                       High Bid                               Low Bid
1st Quarter                    $1.125                                 $.51
2nd Quarter                    $1.09375                               $.53125
3rd Quarter                    $.59375                                $.38
4th Quarter                    $.40625                                $.26

    1998
1st Quarter                    $.375                                  $.21875

        As reported by the Nasdaq OTC Bulletin Board, on March 31, 1998 the
closing sale price of the Common Stock was $0.045 per share and the closing bid
price of the Preferred Stock was $0.375.

        As of March 31, 1998, there were 1,561 holders of record of the
Company's Common Stock and 80 holders of record of the Preferred Stock,
respectively.

        No dividends were declared or paid on the Common Stock during the
foregoing periods and the Company does not anticipate paying any dividends on
its Common Stock in the foreseeable future.

        Dividends on the Preferred Stock are payable quarterly on February 15,
May 15, August 15 and November 15 of each year (each such date a "Dividend
Payment Date") and accrue at the annual rate of $.48 per share, to the extent
payable in cash and $.60 per share, to the extent payable in shares of Common
Stock. The first four dividend payments were paid 50% in cash and 50% in
registered shares of Common Stock computed on an annual basis, the last such
dividend payment being made on February 15, 1994. The cash portion of such
dividend payments was paid with a portion of the proceeds of the 1993 Offering,
which had been reserved for


                                      -10-



<PAGE>
<PAGE>




such purposes. Beginning May 15, 1994, dividends were payable in cash from the
available cash derived from the adjusted earnings of the Company for the fiscal
quarter immediately preceding the Dividend Payment Date to the extent available,
according to a formula based on adjusted earnings. Such formula provides that
the available cash will be determined as one half of the difference between
airship operating revenues and the sum of operating costs, interest and
principal payments on debt, selling, general and administrative expenses
(limited to a ceiling based on historical numbers with stated annual percentage
increases thereafter) and airship related capital expenditures (limited to
$2,000,000 in any given year). The components of the above formula are to be
determined in accordance with generally accepted accounting principles as
applied in the Company's financial statements as filed with the Securities and
Exchange Commission (the "Commission"). At its option, the Company may pay cash
dividends in excess of the available cash determined by the above formula. The
May 15, 1994 dividend was paid in registered shares of Common Stock. The Company
has deferred and accrued the cash dividend on the Preferred Stock due on August
15, 1994 and subsequent quarterly dividends until a later payment date. The
Company does not anticipate paying such dividends in the near future, and
intends to continue to defer and accrue such dividends.

        Concern had been expressed by management and various shareholders of the
Company over the dilutive effects of issuances of shares of Common Stock in
payment of dividends accrued on the Preferred Stock. The Company is submitting
to the Company's shareholders a proposal to amend the terms of the Preferred
Stock which proposal will be voted upon by the Company's shareholders at the
Company's annual meeting.

ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected financial data should be read in conjunction with
the Company's financial statements and related notes and Management's Discussion
and Analysis of Financial Discussion and Analysis of Financial Condition and
Results of Operation appearing elsewhere herein.
 

 
<TABLE>
<CAPTION>

OPERATING STATEMENT DATA:
                                                                 YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------------------------
                                            1997           1996           1995           1994           1993
                                         -----------    -----------    -----------    -----------    -----------
<S>                                      <C>            <C>            <C>            <C>            <C>
Gross revenues........................   $   --         $    --         $ 2,620,000   $  3,980,000    $ 9,748,000

Net loss..............................   $(2,294,000)   $(2,506,000)    $(4,867,000)  $(20,635,000)   $(5,406,000)

Net loss per share....................   $     (0.09)   $     (0.10)    $     (0.18)  $      (0.74)   $     (0.24)

<CAPTION>
BALANCE SHEET DATA:
 

                                                                   AT DECEMBER 31,
                                         -----------------------------------------------------------------------
                                            1997           1996           1995           1994           1993
                                         -----------    -----------    -----------    -----------    -----------
<S>                                      <C>            <C>            <C>            <C>            <C>
Total assets..........................   $  4,374,000   $  4,496,000   $  5,073,000    $ 9,819,000    $26,077,000
Long-term obligations.................   $  4,080,000   $  3,016,000   $  3,348,000    $ 3,258,000    $ 2,380,000
Obligations under capital lease.......   $  2,477,000   $  3,158,000   $  3,689,000    $(3,258,000)   $   --     
Total liabilities.....................   $ 22,057,000   $ 18,334,000   $ 14,680,000    $13,070,000    $ 7,842,000
Stockholders' equity (deficit)........   $(17,683,000)  $(13,838,000)  $ (9,607,000)   $(3,251,000)   $18,235,000
</TABLE>




                                      -11-



<PAGE>
<PAGE>



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

OVERVIEW

The Company commenced operations in August 1985 following the completion of the
Company's initial public offering in June 1985. Historically, substantially all
of the Company's revenues were derived from the operation of the airships
pursuant to aerial advertising contracts with its clients. Fees were generally
paid to the Company on a monthly basis and the respective Airships were flown
according to a flight schedule provided by the client, subject to weather
conditions, government regulations and maintenance requirements. In the absence
of advertising contracts, the Company has suffered a material adverse affect on
its revenues. Although the Company has not had a contract in effect since 1995
the Company continues to seek new aerial advertising contracts and clients.

Since 1995, the Company generally has had no operations and no opportunity to
commence operations in the airship industry in which it has historically
conducted its business operations. As a result, the Company has experienced
significant operating losses and negative cash flow from its operations in 1996
and 1997. Management's strategy for the future is to arrange for funding from
affiliated entities, of which there can be no assurance, and to separately
consider acquiring new business operations or merging (whether through a direct,
indirect, reverse or other form of merger) with an entity that has ongoing
business operations. As of the date hereof, the Company has no agreements with
any third party to effect any such acquisition or merger, and no assurances can
be given that any such acquisition or merger will in fact be effected in the
future. As noted in the auditor's report, there exists the possibility that the
Company may not have the ability to continue as a going concern.

In addition, during the past several years, the Company has been approached by
other entities, which have expressed an interest in effecting an acquisition or
merger of the Company primarily due to the fact that the Company is a
publicly-held corporation. In addition, the Company has incurred Net Operating
Losses ("NOLs"), which to a lessor degree, may make the Company attractive to a
prospective suitor.

Year Ended December 31, 1997, as compared to Year Ended December 31, 1996

Overall Financial Situation. The Company had a stockholders' deficit at
December 31, 1997 in the amount of $17,683,000, an increase of $3,845,000 from a
stockholders' deficit at December 31, 1996 of $13,838,000. This increase is
primarily due to the accrual of dividends on the outstanding shares of preferred
stock in the amount of $1,551,000 and a net loss for 1997 of $2,294,000. The
Company did not have revenues during 1997 or 1996. As was expected, operating
costs were substantially lower in 1997 than in 1996 by approximately $793,000 or
69%, while selling general and administrative expenses increased slightly from
1996 by $48,000 or 7%, resulting in a loss from operations of $1,094,000 for
1997. Interest expense increased by more than $470,000 or 61% for 1997 from
1996.

Results of  Operations.  The Company did not have any revenues  from  operations
during 1997 or 1996.

Operating costs for 1997 were $357,000, a decrease of $793,000 or 69% compared
to operating costs of $1,150,000 for 1996. The primary reason that operating
expenses decreased from 1996 is a result of having no Airships in operation
during any part of 1997. Operating costs primarily relate to usage of the
Company's one operational gondola and the utilization of the support vehicles.
Periodic usage of such assets promotes the airships for additional business. In
addition, the Company uses the airships to promote other related party
businesses. (See Item 13. "Certain Relationships and Related Transactions").


                                      -12-



<PAGE>
<PAGE>



Selling, general and administrative costs for 1997 were $737,000, an increase of
$48,000 or 7% compared to costs of $689,000 for 1996. An increase of $263,000 in
professional fees during 1997 were incurred in connection with the Company's
filing of its 1994, 1995 and 1996 annual reports with the Securities Exchange
Commission. The Company also experienced decreases in salaries and related
benefits in the amount of $243,000.

Interest expense. Interest expense for 1997 was $1,245,000, an increase of
$477,000 or 62% from interest expense of $768,000 in 1996. This increase was due
to the increase in debt to TC Leasing and advances from Trans Con.

Year Ended December 31, 1996, as compared to Year Ended December 31, 1995

Results of Operations. The Company did not have any revenues from operations
during 1996 as compared with $2,620,000 during 1995. All contracts had either
expired or were cancelled during 1996.

Operating costs for 1996 were $1,150,000, a decrease of $2,877,000 or 71%
compared to operating costs of $4,027,000 for 1995. The primary reason that
operating expenses decreased from 1996 was a result of having no Airships in
operation during any part of 1996. Operating costs primarily relate to
periodic usage of the Company's one operational gondola and the utilization of
the support vehicles. Periodic usage of such assets promotes the airships for
additional business. In addition, the Company uses the airships to promote other
related party businesses. (See Item 13. "Certain Relationships and Related
Transactions").

Selling, general and administrative costs for 1996 were $689,000, a decrease of
$1,204,000 or 64% compared to costs of $1,893,000 for 1995. The Company has made
certain restructuring changes to include the reduction of salaries of certain of
its management, office and operations personnel and a reduction in the cost of
insurance and other costs normally incurred when operating of its Airships.

Interest expense. Interest expense for 1996 was $768,000, a decrease of $335,000
or 30% from interest expense of $1,103,000 in 1995. This decrease was due to the
decrease in debt to Orix and Senstar and the utilization of funds provided by
the Company's certificate of deposits held by Trans Continental.

Other income. As a result of the sale of Airship components to one of the
Company's stockholders, the Company realized a non-recurring gain of $548,000 in
1994.

New Accounting Standards - SFAS No. 128, "Earnings per Share." In February 1997,
the FASB issued SFAS No. 128, "Earnings per Share," which is effective for
financial statements issued for periods ending after December 15, 1997. This
pronouncement establishes standards for computing and presenting earnings per
share (EPS) for entities with publicly-held common stock or potential common
stock. SFAS No. 128 simplifies the standards for computing EPS and makes them
comparable to international EPS standards. Early application of this statement
is not permitted.



                                      -13-



<PAGE>
<PAGE>



SFAS No. 130, "Reporting Comprehensive Income." In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which requires the
reclassification of earlier financial statements for comparative purposes. SFAS
No. 130 requires that changes in amounts of certain terms, including foreign
currency translation adjustments and gains and losses on certain securities be
shown in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. SFAS No. 130 is effective for financial statements
for periods beginning after December 15, 1997.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and related Information." SFAS No. 131 will
change the way public companies report information about segments of their
business in annual financial statements and requires them to report selected
segment information in their quarterly reports issued to stockholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997.

The Company intends to adopt the provisions of SFAS No.'s 128, 130 and 131
during its fiscal year ended December 31, 1998, and does not expect their
application to have a material impact on the financial statements of the
Company.

LIQUIDITY AND CAPITAL RESOURCES

As shown in the accompanying financial statements, the Company has experienced
significant operating losses and negative cash flow from operations in recent
years and has an accumulated deficit of $54,645,000 at December 31, 1997. During
the years ended December 31, 1997 and 1996, the Company did not generate any
revenues from airship operations. The Company also reported net losses of
$2,294,000 and $2,506,000 for the years ended December 31, 1997 and 1996,
respectively and had working capital deficiencies of $15,992,000 and $12,598,000
at 1997 and 1996, respectively. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.

Management's plans to improve the financial position and operation with the goal
of sustaining the Company's operations for the next twelve months and beyond
include:

Arranging with Trans Continental Airlines, Inc. or other related parties common
directorship and ownership to provide funds on a monthly basis as a loan, and
separately, acquiring assets and operations of one or more entities, with which
the Company has been in negotiation. At this time, there are no agreements or
understandings relating to any such acquisition or transaction, and there can
be no assurance that any such transaction will be consummated. The expectation
is that such business combination, if completed, would provide additional cash
flow and net income to the Company.

Though management believes the Company will secure additional capital and/or
attain one or more of the above goals, there can be no assurance that any
acquisition, financing, or other plan will be effected. Any acquisition or
securities offering is subject to the Company's due

                                      -14-



<PAGE>
<PAGE>



diligence,  the state of the general  securities  markets,  and of the  specific
market for the Company's securities, and any necessary regulatory review.

While the Company believes that its plans for additional funding or for
obtaining a possible business combination have a reasonable possibility of
improving the Company's financial situation and ensuring the continuation of its
business, there can be no assurance that the Company will be successful in
carrying out its plans and the failure to achieve them could have a material
adverse effect on the Company.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                              1997              1996
                                                        ----------------- -----------------
<S>                                                       <C>               <C>
Net cash used in operating activities                     ($2,283,000)       ($2,135,000)
Net cash used in investing activities                       ( 159,000)          ( 30,000)
Net cash provided by financing activities                   2,442,000          2,141,000
Net increase (decrease) in cash and                        $        -          ($ 24,000)
  cash equivalents
</TABLE>

During 1997, the Company's operations used $2,283,000 compared to using
approximately $2,135,000 during 1996. This increase in cash used by operations
was primarily attributable to the reduction in depreciation expense during 1997
from 1996 and an increase in accrued interest for 1997 over 1996.

Cash was used by investing activities in the amount of $159,000 and $30,000 in
1997 and 1996, respectively, for working capital loans to certain related
parties. Also during 1996, cash was provided by the sale of airship components
in the amount of $88,000.

Cash was provided by financing activities in the amount of $2,442,000 and
$2,141,000 in 1997 and 1996, respectively. Cash provided by financing
activities in 1997 and 1996 was primarily from the working capital financing
provided by Trans Continental. Also in 1997, the Company obtained additional
financing from TC Leasing in the amount of $4,709,000. This financing was
obtained by TC Leasing from Norwest. The Company used these funds to repay
debt owed to Senstar in the amount of $3,003,000 and for working capital.

INFLATION

Since the formation of the Company in August 1985, the rate of inflation has
remained low and the cost of the Company's operations has not been significantly
affected by inflationary trends in the economy.

ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES

        The report of the Company's Independent Auditor, Financial Statements,
Notes to Financial Statements and Financial Statement Schedules appear herein
commencing on Page F-1.

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

        In June 1997 the Company retained C.M. Meeks & Company, P.A. (formerly
Charlie M. Meeks, C.P.A., P.A.) as its independent auditor due the added
expense of continuing with a large audit firm such as Grant Thornton.

                                      -15-



<PAGE>
<PAGE>





                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth information, as of March 31, 1998,
relating to each director and executive officer of the Company.


<TABLE>
<CAPTION>

Name                  Age            Positions with the Company                 Position Held Since

<S>                   <C>            <C>                                      <C>
Louis J. Pearlman     44             Chairman of the Board of Directors,        June 1982
                                     President and Chief Executive,
                                     Finanical and Operating Officer

James J. Ryan         50             Director                                   July 1986
Alan A. Siegel        34             Secretary and Director                     October 1989

</TABLE>

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


        The following sets forth the business experience of each director,
executive officer, including principal occupations, at present and for at least
the past five years.

        Louis J. Pearlman has been Chairman of the Board, President, Chief
Executive and Operating Officer and Treasurer of the Company since June 1982.
Since November 1976, Mr. Pearlman has been President and Chief Operating
Officer, a director and a 21% shareholder of Trans Continental. See "Certain
Relationships and Related Transactions." Mr. Pearlman currently devotes
approximately 50% of his time to Trans Continental and the remainder of his time
to the Company.

        James J. Ryan has been a director of the Company since July 1986. Until
1994 for more than 20 years he had been employed with Alexander and Alexander
Inc., an international insurance brokerage firm and its predecessor firm, where
he most recently held the title of Senior Vice President of the Aviation and
Aerospace Division. Mr. Ryan is currently Executive Director of Sedgwick
Aviation of North America, an international insurance brokerage firm.


                                      -16-



<PAGE>
<PAGE>




        Alan A. Siegel has been a director of the Company since December 1991
and Secretary of the Company since October 1989. From 1985 to 1989, Mr. Siegel
was Senior Account Manager of the Company and since 1989 has served as the
Company's General Manager. Mr. Siegel has also been Senior Account Manager for
Trans Continental since 1986.

        The Company's directors are elected for a period of one year and until
their successors are duly elected and qualified. Directors who are not employees
of the Company are compensated at a rate of $500 for each meeting of the full
Board of Directors which they attend in person, up to a maximum of $2,000 in any
one year, plus expenses for attending such meetings. Officers are appointed
annually by the Board of Directors and serve at the discretion of the Board.

        To the knowledge of management of the Company, except as set forth
above, no director of the Company holds any directorship in any other company
with a class of securities registered pursuant to Section 12, or subject to the
requirements of Section 15(d), of the Securities Exchange Act of 1934 or in any
company registered as an investment company under the Investment Company Act of
1940.

        There are currently three members of the Board of Directors. The Company
and its principal shareholders had agreed to use their best efforts to elect two
designees of the underwriters of the 1993 Offering to the Company's Board of
Directors which right expires in April 1998. Due to the Company's failure to pay
a specified portion of dividends on the Preferred Stock in cash, the holders of
the Preferred Stock, voting as a class, have the right to designate two
additional members of the Company's Board of Directors. Marvin Palmquist, who
had been a director of the Company from 1984, died on February 18, 1998. The
Board has not filled the vacancy left by him, and the Company intends to have
only 3 directors in the future.

ITEM 11.  EXECUTIVE COMPENSATION

        The following table summarizes all compensation earned by or paid to the
Company's Chief Executive Officer for services rendered in all capacities to the
Company for the three years ended December 31, 1997 and all officers who earned
over $100,000 ("named executive officers"). No other executive officer's or
employee's annual salary and bonus exceeded $100,000 during the Company's past
three fiscal years.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

Name and Principal       Fiscal   Salary      Bonus   Other Annual   Restricted  Securities     Other
Position                 Year                         Compensation  Stock Award  Underlying  Compensation
                                                                                Options
                         -----    ----------- ------  -------------  ----------- ---------- ------------
<S>                      <C>      <C>       <C>        <C>           <C>        <C>         <C> 

Louis J. Pearlman,       1997     $4,423
Chairman,                1996     $118,921     $     0
President, Chief         1995     $112,277     $     0     --            --         --          --
Executive and
Operatng Officer

Alan A. Siegel,          1997     $ 55,200
Secretary, General       1996(1)  $ 61,530     $     0
Manager and Director     1995(1)  $ 58,140     $70,000


</TABLE>

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

(1)   Mr. Siegel deferred $25,000 of his salary in each of 1995 and 1996.


1994 EMPLOYEE SHARE PURCHASE PLAN

        The Company has an employee share option plan (the "Plan") for employees
of the Company and any present or future "subsidiary corporations." The Company
intends the Plan to be an "employee stock purchase 


                                      -17-



<PAGE>
<PAGE>




plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan, approved by the Company's shareholders on April 11,
1995, was effective November 1, 1994. All employees are eligible to participate
in the Plan, except that the Company's appointed committee may exclude any or
all of the following groups of employees from any offering: (i) employees who
have been employed for less than 2 years; (ii) employees whose customary
employment is 20 hours or less per week; (iii) employees whose customary
employment is not more than 5 months in any calendar year; and (iv) highly
compensated employees (within the meaning of Code Section 414(q). The shares
issuable under the Plan shall be common shares of the Company subject to certain
restrictions up to a maximum of 1,000,000 shares. The committee shall determine
the length of each offering but no offering may exceed 27 months. The option
price for options granted in each offering may not be less than the less of (i)
85% of the fair value of the shares on the day of the offering, or (ii) 85% of
the fair market value of the shares at the time the option is exercised.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

        There were no option grants in 1997.



                                      -18-



<PAGE>
<PAGE>





                       AGGREGATED OPTION EXERCISES IN 1996
                     AND 1996 FISCAL YEAR-END OPTION VALUES



There were no options exercises in 1997.




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


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        The Board of Directors of the Company does not have a compensation
committee. Messrs. Pearlman and Siegel determine executive compensation, based
on corporate performance and market conditions. See "Employment Agreements."

EMPLOYMENT AGREEMENTS

         The Company had an employment agreement with Louis J. Pearlman which
expired in 1994. The Company and Mr. Pearlman have not entered into a new
employment agreement.  Mr. Pearlman's compensation is determined by the
Company's Board of Directors, of which Mr. Pearlman is the Chairman. The Company
currently owes approximately $391,000 to Mr. Pearlman for accrued salary and
bonus which Mr. Pearlman has deferred in order to permit the Company to meet
some of its other obligations.

        The Company entered into an employment agreement as of December 31, 1992
with Alan A. Siegel. Mr. Siegel's agreement expired on January 1, 1998. Mr.
Siegel's agreement provided for an annual salary of $75,000 for the first year
of the agreement and for annual increases thereafter in an amount equal to the
greater of 5% of his previous year's salary or the increase, if any, in the
Consumer Price Index for All Urban Consumers, Central Florida 1967 -- 100. The
agreement also provides for an annual bonus payable to Mr. Siegel in an amount
equal to 1 1/2% of the Company's net after-tax profits for such fiscal year plus
an amount determined in the discretion of the Board. The Company has not entered
into a new employment agreement with Mr. Siegel. The Board of Directors
determines Mr. Siegel's compensation. Mr. Siegel is a member of the Board of
Directors.


                                      -19-



<PAGE>
<PAGE>





ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth the number and percentage of shares of
Common Stock beneficially owned, as of March 31, 1998, by (i) all persons
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) the Company's Chief Executive Officer and "named executive
officers," and (iv) all executive officers and directors of the Company as a
group (3 persons).

<TABLE>
<CAPTION>

                      SHARES OWNED OF RECORD    PERCENTAGE OF OUTSTANDING           PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS(4)      OR BENEFICIALLY          SHARES OF COMMON STOCK             SHARES OF PREFERRED STOCK
----------------        -----------------        ------------------------            -------------------------
<S>                   <C>                              <C>                                <C>  
Louis J. Pearlman(1)    9,302,291                      21.8%                              *
Alan A. Siegel(2)        51,130                         *                                 *
James J. Ryan(5)         97,000                         *                                 *
Trans Continental(3)    3,666,862                       8.6%                              *
All officers and        9,450,421                      22.19%                             *
directors as a group
(3 persons)(2)


</TABLE>

----------
*       Denotes less than 1%.

(1)  Mr. Pearlman has an address at: c/o Airship International Ltd., 7380 Sand
     Lake Road, Suite 350, Orlando, Florida 32819. Includes 2,000,000 warrants
     and 500,000 options which are exercisable for 2,500,000 shares of Common
     Stock in the aggregate. This table is based upon 42,583,978 shares of
     Common Stock which were issued and outstanding on March 31, 1998.

(2)  Includes 50,000 options granted under the Company's Incentive Stock Option
     Plan.

(3)  Such shares of Common Stock were granted to Trans Continental Airlines,
     Inc. in consideration for its guaranty of the Company's obligations under
     the Allstate Loan, the Phoenixcor Loan, the Senstar Loan, the Argentina
     Lease Agreement and the Argentina Operations Agreement, and a corporate
     credit card issued for the Company's benefit. See "Certain Relationships
     and Related Transactions".

(4)  Mr. Marvin Palmquist was a member of the Company's Board of Directors in
     1997. Mr. Palmquist died on February 18, 1998. Mr. Palmquist did not own
     any shares of the Company's stock.

(5)  Includes 67,000 options exercisable for 67,000 shares of Common Stock.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        As of January 1, 1998, the Company owed Mr. Pearlman an aggregate amount
of approximately $2,028,000 which amount represented accrued and unpaid salary
and bonus, and principal and accrued and unpaid interest on loans made to the
Company by Mr. Pearlman for general operation purposes. On June 30,1993, the
Company made a $789,000 loan (the "June 1993 Loan") to an individual who had
previously facilitated financing for the Company. Mr. Pearlman has guaranteed
repayment of the Loan and in addition, has agreed that


                                      -20-



<PAGE>
<PAGE>




the Company's obligation to repay principal and interest on Mr. Pearlman's
loan to the Company shall be reduced proportionately to reflect the amount of
the then outstanding Loan for so long as the Loan shall remain outstanding. The
loan from Mr. Pearlman bears interest at the rate of 8.5%. In consideration for
Mr. Pearlman's guaranteeing repayment of the Loan and agreeing that the Loan can
be offset against his loan, the Company has treated the $789,000 as a reduction
of the amount due to Mr. Pearlman.

         On behalf of the Company, Trans Continental guaranteed the Company's
obligations to Orix USA Corporation ("Orix") pursuant to a lease, dated June 2,
1995, for one of the Company's airships. Trans Continental has been lending
funds to the Company in order to provide the Company with working capital. Some
of these funds have been used by the Company to make the lease payments to Orix.
During the year ended December 31, 1997, the Company was advanced approximately
$1.6 million by Trans Continental, and as of December 31, 1997 the Company owes
to Trans Continental approximately $5.5 million, representing approximately $4.9
million of principal and approximately $600,000 of accrued interest with respect
to the Orix debt. Mr. Louis J. Pearlman owns 21% of Trans Continental and is the
Company's Chairman of the Board, President and principal shareholder.

        On October 9, 1995 the Company granted to Trans Continental 3,666,862
shares of Common Stock representing 10% of the issued and outstanding Common
Stock of the Company. Such grant was made in consideration of Trans
Continental's guaranty of the Company's obligations under the Allstate Loan, the
Phoenixcor Loan and the Senstar Loan and the Argentina Lease and Operations
Agreements. In addition, Trans Continental has procured, for the Company's
benefit, a corporate credit card.

        On December 24, 1996, Trans Continental Leasing, Inc. ("TC Leasing")
obtained a loan with Norwest Equipment Finance, Inc. in the amount of
$4,709,000. The proceeds of this refinancing were used to repay the Company's
debt to Senstar and to provide working capital to the Company. TC Leasing is a
wholly owned subsidiary of Trans Continental. The Company owes to TC Leasing the
aggregate amount of approximately $4,090,000, consisting of approximately
$4,060,000 and approximately $30,000 of interest.

        The Company advanced Airship Airways, Inc. ("AAI") $137,500 in August
1994. At such time, Mr. Pearlman was a principal stockholder of AAI, owning
approximately 44% of its stock. Subsequent to such transaction Mr. Pearlman has
reduced his ownership interest in AAI to approximately 4%. The advance was made
in connection with a proposed merger (the "Merger") transaction between the
Company and AAI. At the present time the Company believes that it is unlikely
that the Merger will be consummated. In connection with the advance, AAI issued
to the Company its promissory note (the "AAI Note") in the amount of $137,500 in
October 1994. The AAI Note is secured by certain aircraft and equipment owned by
AAI. The AAI Note bore interest at the rate of 8% per annum, and was due and
payable on or before February 23,1995. On February 8, 1995 AAI repaid the AAI
Note in full by paying the Company $82,100 and cancelling two promissory notes
that had been issued by the Company to AAI in the respective principal amounts
of $25,000 and $30,400. These notes had been issued in connection with expenses
incurred in connection with the Merger, and reductions in rental payments on
office space obtained with the cooperation of AAI, and which were due and
payable on February 23, 1995 and May 1, 1996, respectively.

                                      -21-



<PAGE>
<PAGE>




        On December 31, 1991, Mr. Julian Benscher and the Company entered into a
Line of Credit Agreement, pursuant to which Mr. Benscher loaned the Company
$1,000,000 in 1992. As partial consideration for making these loans, the Company
issued to Mr. Benscher warrants to purchase 775,000 shares of Common Stock and
issued additional warrants to purchase 325,000 shares of Common Stock to certain
parties designated by Mr. Benscher. The Company has granted Mr. Benscher
registration rights with respect to all shares of Common Stock and warrants
owned by him. These warrants were to expire on December 31, 1994; however, for
continued assistance provided to the Company by Mr. Benscher, the Company
extended the expiration date of these warrants to December 31, 1996, on which
date the warrants expired unexercised. Mr. Benscher currently owns approximately
212,500 shares of the Company's Common Stock, and together with designees, his
ownership represents less than 5% of the outstanding Common Stock. Mr. Benscher
and the Company continue to engage in business transactions in which the Company
provides Mr. Benscher with the use of an airship and related parts and equipment
and Mr. Benscher pays the costs relating to the operation of the airship. In
addition, the Company uses its airships to promote other related party
businesses.

        The Company sold the Argentina Airship to First Security for the benefit
of Aviation, in June, 1995 in consideration for First Security's assumption of
the Company's liabilities under the Argentina Lease Agreement and AOI's
obligations under the Argentina Operations Agreement. In connection with such
sale, the Company assigned the Argentina Lease Agreement to First Security, and
Aviation purchased all of the issued and outstanding Capital Stock of AOI. See
"Business-Aerial Advertising and Other Contracts-Argentina Airship."

        The Company has purchased hull insurance for the Company's airships
through Sedgwick Aviation of North America, an international insurance brokerage
firm of which Mr. James J. Ryan is the Executive Director.


                                      -22-



<PAGE>
<PAGE>



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

<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----
<S>   <C>                                                                        <C>
(a)   (1)    The following financial statements of the Company have been
             filed as part of this report:

             A.    Report of Independent Certified Public Accountant                F-1

             B.    Balance Sheets as of December 31, 1997 and 1996                  F-2

             C.    Statements of Operations for the years ended December 31,
                     1997, 1996 and 1995                                            F-3

             D.    Statements of Changes in Stockholders' Equity for the years
                     ended December 31, 1997, 1996 and 1995                         F-4

             E.    Statements of Cash Flows for the years ended December 31,
                   1997, 1996 and 1995                                              F-5

             F.    Notes to Financial Statements                                 F-6 to F-18
</TABLE>

<TABLE>
<CAPTION>

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  
   3.1      Certificate of incorporation of the Company filed June 9, 1992.                      Exhibit 2(12)

   3.2      Amendment to Certificate of Incorporation filed September 18, 1984.                  Exhibit 3(12)

   3.3      Amendment to Certificate of Incorporation filed April 8, 1985.                       Exhibit 4(12)

   3.4      Amendment to Certificate of Incorporation filed August 1, 1986.                      Exhibit 5(12)

   3.5      Amendment to Certificate of Incorporation filed January 27, 1989.                    Exhibit 6(12)

   3.6      Amendment to Certificate of Incorporation filed August 5, 1992.                      Exhibit 7(12)

   3.7      Certificate of Correction to Amendment of Certificate of Incorporation filed         Exhibit 8(12)
            on February 26, 1993.

   3.8      Amendment to Certificate of Incorporation filed February 26, 1993.                   Exhibit 9(12)

   3.9      By-laws of the Company.                                                              Exhibit 3.9(19)

   4.1      Warrant Agreement dated February 14, 1991 between the Company and                    Exhibit 4.1(4)
            American Securities Transfer, Inc. including form of Class A Warrant and
            form of Class B. Warrant.

   4.2      Warrant dated February 7, 1991 issued to Stephen M. Bathgate.                        Exhibit 4.2(4)

   4.3      Two warrants dated respectively December 31, 1991 and February 25, 1992              Exhibit 4.3(4)
            issued to Julian M. Benscher.

   4.4      Two warrants dated respectively February 7, 1991 and March 23, 1991                  Exhibit 4.4(4)
            issued to Kenneth S. Bernstein.

   4.5      Two warrants dated respectively February 7, 1991, and May 23, 1991                   Exhibit 4.5(4)
            issued to Chatfield Dean & Co., Inc.

   4.6      Warrant dated September 26. 1991 issued to Dr. Joseph C. F. Chow and                 Exhibit 4.6(4)
            Cynthia B. Chow.

   4.7      Warrant dated September 26, 1991 issued to Cohig & Associates, Inc.                  Exhibit 4.7(4)

   4.8      Warrant dated May 1, 1991 issued to Daliz Associates.                                Exhibit 4.8(4)

   4.9      Two warrants dated respectively February 8, 1990, and February 21, 1991              Exhibit 4.9(4)
            issued to Emanuel and Company.

  4.10      Warrant dated December 10, 1991 issued to After Falkowitz.                           Exhibit 4.10(4)

  4.11      Four warrants dated respectively June 5, 1990, December 5, 1990,                     Exhibit 4.11(4)
            December 17,1 990, and February 21, 1991 issued to Alfonso Figlioia.

  4.12      Two warrants dated respectively, May 23, 1991 and February 7, 1992                   Exhibit 4.12(4)
            issued to Sanford D. Greenberg.

  4.13      Warrant dated December 7, 1991 issued to Edward C. Larkin.                           Exhibit 4.13(4)

</TABLE>

                                      -23-



<PAGE>
<PAGE>



<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  

  4.14      Warrant dated December 4, 1991 issued to David Mathis.                               Exhibit 4.14(4)

  4.15      Warrant dated February 7, 1991 issued to Eugene McColley.                            Exhibit 4.15(4)

  4.16      Warrant dated February, 1992 issued to Nour Collection, Inc.                         Exhibit 4.16(4)

  4.17      Warrant dated November 3, 1989 issued to ORIX Commercial Credit                      Exhibit 10.29(5)
            Corporation ("ORIX").

  4.18      Warrant date February, 1992 issued to Chahram Pahlavi.                               Exhibit 4.18(4)

  4.19      Warrant dated April 7, 1992 issued to Jim Ryan.                                      Exhibit 4.19(4)

  4.20      Warrant dated May 1, 1992 issued to Sterling Capital Group, Inc.                     Exhibit 4.20(4)

  4.21      Warrant dated May 1, 1991 issued to Jonathan Turk.                                   Exhibit 4.21(4)

  4.22      Warrant dated February 7, 1991 issued to Steven R. Hinkle.                           Exhibit 4.22(4)

  4.23      Warrant dated April 1. 1992 issued to Simon Zamet.                                   Exhibit 4.23(4)

  4.24      Warrant dated May 8, 1992 issued to Louis J. Pearlman.                               Exhibit 4.24(6)

  4.25      Two Warrants dated April 17, 1992 issued to Emanuel and Company.                     Exhibit 4.25(6)

  4.26      Representatives' Preferred Stock Warrant issued to Emanuel and Company
            and Chatfield Dean & Co. Inc.

  4.27      Action by Written Consent of the Board of Directors dated April 15, 1997                    *
            extending warrant granted to Louis J. Pearlman.

  10.1      Amended and Restated Loan Agreement dated as May 8, 1992 between the                 Exhibit 10.1(6)
            Company and Louis J. Pearlman.

  10.2      Form of Subscription Agreement between the Company and certain                       Exhibit 10.2(6)
            investors relating to the 1992 Private Placement.

  10.3      Letter Agreement dated April 17, 1992, between the Company and Emanuel               Exhibit 10.3(6)
            and Company in connection with the 1992 Private Placement.

  10.4      Incentive Stock Option Plan as amended, of the Company.                              Exhibit 10.2(1)

  10.5      Amendment to Incentive Stock Option Plan dated December 9, 1991.                     Exhibit 10.2(4)

  10.6      Aerial Airship Agreement dated October 26, 1987 by and between the                   Exhibit 10.29(7)
            Company and the Metropolitan Life Insurance Company ("MetLife").

  10.7      Amendment dated as of March 15, 1988 to the Advertising Agreement                    Exhibit B.1(3)
            between the Company and MetLife.

  10.8      Amendment dated as of March 15, 1988 to the Aerial Advertising                       Exhibit 10.14(5)
            Agreement between the Company and MetLife.

  10.9      Amendment dated as of March 15, 1988 to the Aerial Advertising                       Exhibit 10.15(5)
            Agreement between the Company and MetLife.

  10.10     Amendment dated as of March 15, 1988 to the Aerial Advertising                       Exhibit 19.4(8)
            Agreement between the Company and MetLife.

  10.11     Airship Advertising Agreement dated as to April 27, 1990 between the                 Exhibit 10.8(4)
            Company, Airship Industries (USA), Inc. ("AIUSA") and Anheuser Busch
            Companies, Inc. ("Anheuser").

</TABLE>

                                      -24-



<PAGE>
<PAGE>



<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  

  10.12     Termination Agreement dated as of January 1, 1991 between the Company,               Exhibit 19.2(8)
            Anheuser, and AIUSA.

  10.13     Airship Advertising Agreement dated as of January 1, 1991 between the                Exhibit 19.3(8)
            Company and Anheuser.

  10.14     Amendment to Airship Advertising Agreement dated May 31, 1991 between                Exhibit 10.11(4)
            the Company and Anheuser.

  10.15     Passenger Airship Agreement dated May 31, 1991 between the Company                   Exhibit 19.12(4)
            and Anheuser.

  10.16     Airship Advertising Agreement dated March 12, 1992 between the                       Exhibit 10.13(4)
            Company and Anheuser.

  10.17     Term Loan Agreement dated as of February 27. 1990, between State Bank                Exhibit 10.3(9)
            of South Australia and the Company in the principal amount of $250,000.

  10.18     Airship Lease dated February 27, 1990 between the Company and the State              Exhibit 10.23(5)
            Bank of South Australia together with Lease Supplement No. 1 thereto.

  10.19     Subordination Agreement dated February 27, 1990, between the Company,                Exhibit 10.16(4)
            State Bank of South Australia and Louis J. Pearlman.

  10.20     Line of Credit Agreement dated December 31, 1991 between Julian                      Exhibit 10.17(4)
            Benscher and the Company in the amount of $1,000,000, as amended on
            February 20, 1992 and Secured and Credit Note dated December 31, 1991
            from the Company to Julian Benscher in the principal amount of
            $1,000,000.

  10.21     Loan Agreement dated December 8, 1988 between the Company and Louis                  Exhibit C.1(3)
            J. Pearlman relating to a loan of $500,000.

  10.22     Promissory note dated December 8, 1988 of the Company.                               Exhibit D.1(3)

  10.23     Demand Note dated as of December 31, 1988 of the Company to Louis J.                 Exhibit H.1(3)
            Pearlman, in the principal amount of $324,929.76.

  10.24     Term Note for the principal amount of $850.000 dated January 31, 1990                Exhibit 10.21(4)
            from the Company to Louis J. Pearlman.

  10.25     Stock Option Agreement dated January 1, 1989 between the Company and                 Exhibit E.1(3)
            Louis J. Pearlman to purchase 1,000,000 shares.

  10.26     Amendment to Stock Option Agreement between the Company and Louis J.                 Exhibit 10.24(4)
            Pearlman dated as of February 7, 1991.

  10.27     Exchange Agreement dated January 29, 1992 between Slingsby Aviation                  Exhibit 10.28(4)
            Limited and the Company.

  10.28     Purchase Agreement Assignment dated November 2, 1989 between the                     Exhibit 10.26(5)
            Company and ORIX and Consent by Airship UK.

  10.29     Letter of Credit dated November 2,1989 between the Company and ORIX.                 Exhibit 10.309(5)

  10.30     Assignment of (MetLife) Aerial Advertising Agreement and Consent dated              Exhibit 10.27(5)
            as of November 2, 1989 between the Company and Airship (UK).


</TABLE>


                                      -25-



<PAGE>
<PAGE>



<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  

  10.31     Guaranty of Louis J. Pearlman in favor of ORIX dated as of November 2,               Exhibit 10.28(5)
            1989.

  10.32     Note and Warrant Purchase Agreement dated as of November 2, 1989                     Exhibit 109.33(5)
            between the Company and ORIX

  10.33     Agreement dated November 12, 1990 among the Company the Receiver for                 Exhibit 10.30(10)
            Airship UK, AIUSA and others.

  10.34     Corporate Financial Consulting Agreement dated February 14, 1991                     Exhibit 10.38(4)
            between the Company and Cohig & Associates.

  10.35     Engagement Letter dated September 22, 1988 between Emanuel and                       Exhibit K.1(3)
            Company and the Company.

  10.36     Agreement dated August 28, 1992 between Seoul Olympic Sports Promotion               Exhibit 10.45(11)
            Foundation and the Company.

  10.37     Fifth Amendment to Aerial Advertising Agreement effective as of                      Exhibit 10.46(11)
            September 1, 1992 between Metropolitan Life and the Company.

  10.38     Loan  Agreement dated October 14, 1992 between Sequel Capital Corporation and        Exhibit 10.47(11)
            the Company.

  10.39     Agreement dated December 17, 1992 between J&B Enterprises Limited                    Exhibit 10.48(11)
            (UK) Corp. Julian Benscher and the Company.

  10.40     Airship Mortgage dated December 17, 1992 between the Company and J&B                 Exhibit 10.49(11)
            Enterprises Limited (UK) Corp.

  10.41     Employment Agreement dated as of December 31, 1992 between the                       Exhibit 10.50(11)
            Company and Seth Bobet.

  10.42     Employment Agreement dated as of December 31, 1992 between the                       Exhibit 10.51(11)
            Company and Alan Siegel.

  10.43     Employment Agreement dated as of December 31, 1992 between the                       Exhibit 10.52(11)
            Company and Frank Sicoli.

  10.44     Amended Employment Agreement dated as of February 15,1993 between                    Exhibit 10.53(11)
            the Company and Louis J. Pearlman

  10.45     Second Amendment to Stock Option Agreement between the Company and                   Exhibit 10.54(11)
            Louis J. Pearlman date as of February 15.l 1993.

  10.46     Mast Sale Agreement dated December 30, 1992 between J&B Enterprises                  Exhibit 10.55(11)
            Limited (UK) Corp. Julian Benscher and the Company.

  10.47     Mortgage dated December 30, 1992 between the Company and J&B                         Exhibit 10.56(11)
            Enterprises Limited (UK) Corp.

  10.48     Subscription Agreements between the Company and certain investors                    Exhibit 10.57(11)
            relating to the 1992 Private Placement.

  10.49     Sublease Agreement between Westinghouse Airships, Inc. and the Company               Exhibit 10.58(13)
            dated November 9, 1992.

</TABLE>

                                      -26-



<PAGE>
<PAGE>



<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  
  10.50     Amendment to Sublease Agreement between Westinghouse Airships, Inc.                  Exhibit 10.59(13)
            and the Company dated November 9, 1992.

  10.51     Lease Agreement between Sand Lake IV-A Limited Partnership and the                   Exhibit 10.60(13)
            Company dated February 25, 1991.

  10.52     Lease Agreement between T&L Leasing and the Company dated January                    Exhibit 10.61(13)
            13. 1992.

  10.53     Lease Agreement between Westdeutsche Luftwerbung Theodor                             Exhibit 10.52(15)
            Wullenkemper GMBH and the company dated May 16, 1993.

  10.54     Manufacturers Agreement between WDL Luftschiffgesellschaft MBH and                   Exhibit 10.53(15)
            the Company dated may 16, 1993.

  10.55     Escrow Agreement between and among Westdeutsche Lufterbung Theodor                   Exhibit 10.54(15)
            Wullenkemper GMBH & Co., WDL Luftschiffgesellschaft MBH, Trans                       Exhibit 10.55(15)
            Continental Airlines Inc., and the Company dated May 15, 1993.

  10.56     Aerial Advertising Agreement between the Company and Catamount                       Exhibit 10.56(15)
            Petroleum Limited Partnership dated May 28, 1993.

  10.57     Amendment to Aerial Advertising Agreement between the Company and                    Exhibit 10.57(15)
            Catamount Petroleum Limited Partnership dated July 27, 1993.

  10.58     Second Amendment to Aerial Advertising Agreement between the Company                 Exhibit 10.58(15)
            and Catamount Petroleum Limited Partnership dated August 9, 1993.

  10.59     Third Amendment to Aerial Advertising Agreement between the Company                  Exhibit 10.59(15)
            and Catamount Petroleum Limited Partnership dated October 13, 1993.

  10.60     Fourth Amendment to Aerial Advertising Agreement between the Company                 Exhibit 10.60(15)
            and Catamount Petroleum Limited Partnership dated November 9, 1993.

  10.61     Aerial Advertising Agreement between Kingstreet Tours Limited and the                Exhibit 10.61(15)
            Company dated as of January 18, 1994.

  10.62     Passenger Airship Agreement between Anheuser-Busch Companies, Inc.                   Exhibit 10.62(15)
            and the Company dated as of January 2, 1994.

  10.63     Amendment to Airship Advertising Agreement dated March 12, 1992,                     Exhibit 10.63(15)
            between the Company and Anheuser-Busch Companies, Inc. dated March 4,
            1994 and related letter agreement dated February 11, 1994.

  10.64     Amendment to note agreement dated as of November 2, 1989 between the                 Exhibit 10.64(15)
            Company and ORIX dated January 11, 1994.

  10.65     Loan Agreement between Don Golden and the Company dated June 30,                     Exhibit 10.65(15)
            1993.

  10.66     Guarantee of Louis J. Pearlman in favor of the Company dated as of June              Exhibit 10.66(15)
            30, 1993.

  10.67     Loan Agreement between Superbound Limited and the Company dated                      Exhibit 10.67(15)
            December 7, 1993.

</TABLE>


                                      -27-



<PAGE>
<PAGE>



<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  
  10.68     Guarantee of James Stuart Tucker in favor of the Company dated as of                 Exhibit 10.68(19)
            December 7, 1993.

  10.69     Kingstreet Tours Limited Aerial Advertising Agreement dated January 18,              Exhibit 10.69(19)
            1994, by and between the Company and Kingstreet Tours Limited.

  10.70     Amended and Restated Airship Advertising Agreement, dated July 8, 1994,              Exhibit 10.70(19)
            by and between the Company and Anheuser-Busch Companies, Inc.

  10.71     Aircraft Lease Agreement, dated December 15, 1994, by and between the                Exhibit 10.71(19)
            Company and Mastellone Hnos., S.A.

  10.72     Airship Operations Agreement, dated December 15, 1994, by and between                Exhibit 10.72(19)
            Airship Operations (USA), Inc. and Mastellone Hnos, S.A.

  10.73     Passenger Airship Agreement, dated as of January 2, 1994, by and between             Exhibit 10.73(19)
            the Company and Anheuser-Busch Companies, Inc.

  10.74     Letter Agreement Modification, dated January 11, 1994, by and between                Exhibit 10.74(19)
            the Company and ORIX USA Corporation.

  10.75     Amendment to Lease, dated May 12, 1994, by and between the Company                   Exhibit 10.75(19)
            and ORIX USA Corporation.

  10.76     Collateral and Security Agreement, dated as of May 10, 1994, by and                  Exhibit 10.76(19)
            between the Company and ORIX USA Corporation.

  10.77     Aircraft Collateral Funding Repayment Agreement, dated as of November                Exhibit 10.77(19)
            16, 1994, by and between the Company and Allstate Financial Corporation.

  10.78     Guaranty, dated December 6, 1994, of Louis J. Pearlman.                              Exhibit 10.78(19)

  10.79     Guaranty, dated December 6, 1994, of Trans-Continental Airlines, Inc.                Exhibit 10.79(19)

  10.80     Aircraft Lease Agreement, dated as of May 31, 1995, by and between                   Exhibit 10.80(19)
            Trans Continental Leasing, Inc., as Lessor and the Company, as Lessee.

  10.81     Full Warranty Bill of Sale, dated as of May 31, 1994, by the Company to              Exhibit 10.81(19)
            Trans Continental Leasing, Inc.

  10.82     Credit Agreement, dated November 30, 1995, by and between the Company                Exhibit 10.82(19)
            and Senstar Capital Corporation.

  10.83     Term Note, dated November 30, 1995, of the Company to Senstar Capital                Exhibit 10.83(19)
            Corporation.

  10.84     Aircraft Mortgage and Security Agreement, dated November 30, 1995, by                Exhibit 10.84(19)
            and between the Company and Senstar Capital Corporation.

  10.85     Assignment of Contract Rights, dated November 30, 1995, by and between               Exhibit 10.85(19)
            the Company and Senstar Capital Corporation.

  10.86     Agreement of Guaranty and Suretyship, dated November 30, 1995, by and                Exhibit 10.86(19)
            between Trans Continental Airlines and Senstar Capital Corporation.

</TABLE>

                                      -28-



<PAGE>
<PAGE>




<TABLE>
<CAPTION>

                                  Exhibit Index
                                  --------------

 Exhibit                                                                                          Incorporated by
 Number                             Description                                                   Reference to 
-------                             -----------                                                   ---------------
<S>                                                                                              <C>  

  10.87     Release and Settlement Agreement, dated September 20, 1993, by and                   Exhibit 10.87(19)
            between the Company and Sequel Capital Corporation and Louis J.
            Pearlman.

  10.88     Promissory Note, dated October __, 1994, of Louis J. Pearlman to Airship             Exhibit 10.88(19)
            Airways, Inc.

  10.89     Promissory Note, dated October 26, 1994, of Louis J. Pearlman to Airship             Exhibit 10.89(19)
            Airways, Inc.

  10.90     Form of Share Subscription Agreement, dated August 11, 1994, between                 Exhibit 10.90(19)
            the Company and _______________.

  10.91     List of Purchasers in the 1994 Private Placement.                                    Exhibit 10.91(19)

  10.92     Secured Promissory Note, dated October 26, 1994, of Airship Airways, Inc. to         Exhibit 10.92(19)
            the Company.

  10.93     Option Agreement, dated as of August 11, 1994, between the Company and               Exhibit 10.93(19)
            Louis J. Pearlman.

  10.94     Airship International Ltd. Employee Share Purchase Plan.                             Exhibit 1(18)

  10.95     Amended and Restated Lease Agreement, dated June 2, 1995, between
            Orix USA Corporation, and The Company                                                      *

  11.1      Statement re: Computation of Per Share Earnings.                                           *

  16.1      Letter of Wiss & Co. dated June 22, 1993                                             Exhibit 16.1(14)

  16.2      Letter of Grant Thornton dated July 7, 1997.                                         Exhibit 16(16)

  16.3      Letter of Grant Thornton dated July 22, 1997                                         Exhibit 16(17)

  21.1      List of Subsidiaries                                                                 Exhibit 21.1(19)

  27.1      Financial Data Schedule                                                                      *

</TABLE>



            *Filed herewith.


(1)  The Company's Registration Statement on Form S 18 Registration No. 2.96334
     NY as filed with the Securities and Exchange Commission (the "SEC") on
     March 9, 1985.
(2)  The Company's Registration Statement on Form S-1 Registration No. 33-7830,
     as filed with the SEC on August 7, 1986.
(3)  The Company's Annual Report on Form 10-K for fiscal year ended December 31,
     1988.
(4)  The Company's Annual Report on Form 10-K for fiscal year ended December 31,
     1991.
(5)  The Company's Registration Statement on Form S-2, Registration No.
     33-32619, as filed with the SEC on December 18, 1989.
(6)  The Company's Post-effective Amendment No. 1 on Form S-3 to Form S-2,
     Registration No. 33-38076, as filed with the SEC on May 14,1 992.
(7)  The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1987.
(8)  The Company's Report on Form 8 dated August 14, 1991.
(9)  The Company's Report on Form 8-K dated February 27, 1990.
(10) The Company's Registration Statement on Form S-2, Registration No.
     33038076. as filed with the SEC on December 5. 1990.



                                      -29-



<PAGE>
<PAGE>



(11) The Company's Registration Statement on Form S-1, Registration No.
     33-56382, as filed with the SEC on February 16, 1993.
(12) The Company's Registration Statement on Form 8-A, as filed with SEC on
     March 16, 1993.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1992.
(14) The Company's Report on Form 8-K dated July 9, 1993.
(15) The Company's Annual Report on Form 10-K for the fiscal year ended
     December 31, 1993.
(16) The Company's Report on Form 8-K, as filed with the SEC on July 11, 1997.
(17) The Company's Report on Form 8-K/A, as filed with the SEC on July 22, 1997.
(18) The Company's Proxy Statement, as filed with the SEC on March 20, 1995.
(19) The Company's Annnual Report on Form 10-K for the year ended December 31,
     1994.

(c) The Company had not filed any reports on form 8-K during the last quarter of
the period covered by this report.

                                      -30-



<PAGE>
<PAGE>




                                   SIGNATURES

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

                                            AIRSHIP INTERNATIONAL LTD.

Dated:  April 14, 1998                      By: /s/ Louis J. Pearlman
                                               -----------------------
                                                 Louis J. Pearlman
                                                 Chairman of the Board of
                                                 Directors, President and
                                                 Treasurer (Principal Executive
                                                 and Financial Officer)


        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.

<TABLE>
<CAPTION>
      Signature                 Title                                        Date
      ---------                 -----                                        ----
<S>                             <C>                                     <C>
/s/ Louis J. Pearlman           Chairman of the Board, President,       April 14, 1998
--------------------------      Treasurer and Director
Louis J. Pearlman               (Principal Executive and Financial
                                Officer)


/s/ Alan A. Siegel              Secretary and Director                  April 14, 1998
--------------------------
Alan A. Siegel


/s/ James J. Ryan               Director                                April 14, 1998
--------------------------
James J. Ryan

</TABLE>




                                        -31-



<PAGE>
<PAGE>




ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
                                                                                  Page
<S>     <C>     <C>                                                             <C>
(a)   (1)     The following financial statements of the Company have been
                filed as part of this report:

                A.   Report of Independent Certified Public Accountant            F-1

                B.   Balance Sheet as of December 31, 1997 and 1996               F-2

                C.   Statements of Operations for the years ended
                     December 31, 1997, 1996, and 1995                            F-3

                D.   Statements of Changes in Stockholders' Equity for
                     the years ended December 31, 1997, 1996, and 1995            F-4

                E.   Statements of Cash Flows for the years ended
                     December 31, 1997, 1996, and 1995                            F-5

                F.   Notes to Financial Statements                            F-6 to F-18

</TABLE>



<PAGE>
<PAGE>




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Airship International Ltd.
Orlando, Florida

We have audited the accompanying balance sheets of Airship International Ltd. as
of December 31, 1997 and 1996, and the related statement of operations,
stockholders' deficit, and cash flows for the years ended December 31, 1997,
1996, and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Airship International Ltd. at
December 31, 1997 and 1996, the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note B to the
financial statements, the Company has experienced significant operating losses,
an accumulated deficit and negative working capital at December 31, 1997 and
1996. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty, with the
exception of the effects of applying Statement of Financial Accounting Standards
No. 121, "Impairment of Long-Lived Assets to be Disposed Of", as described in
Note A.

C.M. Meeks & Company, P.A.
Longwood, Florida
March 31, 1998

                                      F-1



<PAGE>
<PAGE>



                                  AIRSHIP INTERNATIONAL LTD.
                                        BALANCE SHEETS
                                  DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                              1997                1996
----------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>       
                       ASSETS
Airships and Related Equipment:
Airships                                                  $2,294,000             $2,294,000
Vehicles                                                     645,000              1,384,000
Parts and equipment                                          850,000              1,216,000
Airship components                                         1,606,000              1,605,000
----------------------------------------------------------------------------------------------
                                                           5,395,000              6,499,000
Less: Accumulated  depreciation and amortization           1,485,000              2,292,000
----------------------------------------------------------------------------------------------
                                                           3,910,000              4,207,000
Cash and cash equivalents                                      2,000                  2,000
Prepaid insurance                                             22,000                    -
Due from related parties                                     434,000                275,000
Other assets                                                   6,000                 12,000
----------------------------------------------------------------------------------------------
                                                          $4,374,000             $4,496,000
==============================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Accounts payable - trade                                  $1,525,000             $1,615,000
Customer payment on future services                          514,000                553,000
Insurance financing                                           45,000                 38,000
Accrued expense and other liabilities                      5,983,000              4,536,000
Obligations under capital leases                           2,477,000              3,158,000
Notes payable                                              4,080,000              3,016,000
Deferred gain on sale of airship                             766,000                810,000
Due to stockholders                                        6,667,000              4,608,000
----------------------------------------------------------------------------------------------
Total liabilities                                         22,057,000             18,334,000

Contingencies and commitments
----------------------------------------------------------------------------------------------
Stockholders' Deficit
Preferred stock, $.01 par value:  Authorized -
10,000,000 shares, issued and outstanding - 2,459,000         24,000                 27,000
shares in 1997 and 2,712,000 in 1996
Common stock, $.01 par value: Authorized -
80,000,000 shares, issued and outstanding - 42,523,000
shares in 1997 and 41,002,000 in 1996                        425,000                410,000
Capital in excess of par value - Preferred Stock          14,447,000             14,444,000
Capital in excess of par value - Common Stock             22,066,000             22,081,000
Accumulated deficit                                      (54,645,000)           (50,800,000)
----------------------------------------------------------------------------------------------
Total stockholders' deficit:                             (17,683,000)           (13,838,000)
----------------------------------------------------------------------------------------------
                                                       $   4,374,000          $   4,496,000
==============================================================================================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-2



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                            STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
                                                         1997          1996          1995
--------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>          <C>
Airship Revenue                                       $      -      $     -      $ 2,620,000
--------------------------------------------------------------------------------------------
Costs and expenses:
     Operating costs                                     357,000     1,150,000     4,027,000
     Selling, general and administrative expenses        737,000       689,000     1,893,000
--------------------------------------------------------------------------------------------
                                                       1,094,000     1,839,000     5,920,000
Loss from operations                                  (1,094,000)   (1,839,000)   (3,300,000)
--------------------------------------------------------------------------------------------
Other income (expense):
     Gain (loss) on sale of airship components to
        a stockholder                                          -        13,000      (548,000)
     Realized gain on sale leaseback                      45,000        44,000        26,000
     Loss on insurance settlement                              -          -              -
     Interest expense                                 (1,245,000)     (768,000)   (1,103,000)
     Interest, royalties and other income                      -        44,000        58,000
--------------------------------------------------------------------------------------------
                                                      (1,200,000)     (667,000)   (1,567,000)
--------------------------------------------------------------------------------------------
Net loss                                            ($ 2,294,000)  ($2,506,000)  ($4,867,000)
============================================================================================

Weighted average number of common shares
   and equivalents outstanding                        42,181,000    40,879,000    36,008,000
--------------------------------------------------------------------------------------------

Net loss applicable to common stock:
     Net loss                                       ($ 2,294,000)  ($2,506,000)  ($4,867,000)
     Less preferred stock dividend                  (  1,551,000)  ( 1,725,000)  ( 1,725,000)
--------------------------------------------------------------------------------------------

Net loss applicable to common stock                 ($ 3,845,000)  ($4,231,000)  ($6,592,000)
============================================================================================
Net loss per share                                  ($       .09)  ($      .10)  ($     0.18)
============================================================================================

SIGNIFICANT AMOUNTS APPLICABLE TO
      RELATED PARTIES:

Selling, general and administrative:
     Interest expense                                $   437,000    $  293,000    $ 101,000
     Interest income                                 $   -          $      -      $  23,000
</TABLE>



        The accompanying notes are an integral part of these statements.

                                      F-3



<PAGE>
<PAGE>




                           AIRSHIP INTERNATIONAL LTD.
                      STATEMENTS OF STOCKHOLDERS' DEFICIT
                        FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                               Capital in Excess of
                                                                                    Par Value
                                Preferred Stock           Common Stock        ----------------------
                                ---------------           ------------        Preferred     Common    Accumulated
                               Shares    Par Value     Shares     Par Value     Stock       Stock      Deficit
------------------------------------------------------------------------------------------------------------------------

<S>                            <C>           <C>       <C>           <C>        <C>         <C>        <C>
Balance at December 31, 1994      2,875,000     29,000    31,356,000    314,000    14,442,000  21,931,000  (39,977,000)

Conversion of preferred stock
  into common stock                 (78,000)    (1,000)      467,000      5,000         1,000      (5,000)       -

Exercise of stock options              -         -         5,000,000     50,000          -         50,000        -
  as compensation
Issuance of common stock to Trans
 Continental for loan                  -         -         3,667,000     36,000          -        110,000        -
   guarantee
Dividends paid on
 preferred stock:
  Accrued common stock dividend        -         -           -            -              -            -     (1,725,000)
Loss                                   -         -           -            -              -            -     (4,867,000)
------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995      2,797,000     28,000    40,490,000    405,000    14,443,000  22,086,000  (46,569,000)

Conversion of preferred
 stock into common stock            (85,000)    (1,000)      512,000     5,000         1,000      (5,000)      -

Accrued common stock dividend          -          -            -            -         -             -       (1,725,000)
Loss                                   -          -            -            -         -             -       (2,506,000)
------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1996      2,712,000     27,000    41,002,000    410,000    14,444,000  22,081,000  (50,800,000)

Conversion of preferred
 stock into common stock           (253,000)    (3,000)    1,521,000     15,000         3,000     (15,000)      -
Exercise of options as
 compensation 
Accrued common stock dividend          -           -            -           -          -            -       (1,551,000)
Loss                                   -           -            -           -          -            -       (2,294,000)

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

Balance at December 31, 1997      2,459,000     24,000    42,523,000    425,000    14,447,000  22,066,000  (54,645,000)
========================================================================================================================
</TABLE>




        The accompanying notes are an integral part of these statements.

                                      F-4



<PAGE>
<PAGE>




                           AIRSHIP INTERNATIONAL LTD.
                            STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>

                                                          1997          1996           1995
----------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>            <C>         
Cash flows form operating activities
   Net loss                                           ($2,294,000)  ($2,506,000)   ($4,867,000)
   Adjustments to reconcile net loss to net
      cash flows used in operating activities:
      Issuance of common stock through exercise
         of options                                       -             -              100,000
      Issuance of common stock in exchange for
         Trans Continental debt guarantee                 -             -              146,000
      Depreciation and amortization                       219,000       462,000        661,000
      Realized gain on sale leaseback                     (44,000)      (44,000)       (26,000)
      Loss from impairment of long-lived assets           -             -            1,462,000
      Gain (loss) on disposition of airship
        components and related assets                      78,000       (34,000)       704,000
      Changes in operating assets and liabilities:
         Prepaid insurance                                (22,000)       81,000        545,000
         Other assets                                       6,000        74,000         95,000
         Accounts payable - trade                         (90,000)      (75,000)    (2,378,000)
         Customer payments on future services             (39,000)      -             (813,000)
         Insurance financing                               (7,000)      (66,000)      (187,000)
         Accrued expenses and other liabilities          (104,000)      (27,000)      (329,000)
----------------------------------------------------------------------------------------------
            Net cash flows used in operating          
              activities                               (2,283,000)   (2,135,000)    (4,887,000)
----------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Proceeds from sale of airship components                -             88,000         20,000
   Acquisition of airships and related equipment           -            (19,000)       (21,000)
   Net change in due from Trans Continental              (159,000)      (99,000)     1,632,000
----------------------------------------------------------------------------------------------
      Net cash flows provided by (used in)
         investing activities                            (159,000)      (30,000)     1,631,000
----------------------------------------------------------------------------------------------
Cash flows from financing activities:

   Proceeds from issuance of notes payable              4,787,000       -            3,500,000
   Principal payments on capital leases and loans      (4,404,000)     (863,000)    (1,415,000)
   Proceeds from loans by stockholder                   2,059,000     3,004,000        654,000
----------------------------------------------------------------------------------------------
      Net cash flows from financing activities          2,442,000     2,141,000      2,739,000
----------------------------------------------------------------------------------------------

Net changes in cash and equivalents                        -            (24,000)       517,000)
Cash and cash equivalents, beginning of year                2,000        26,000        543,000
----------------------------------------------------------------------------------------------

Cash and equivalents, end of year                     $     2,000     $   2,000     $   26,000
==============================================================================================
</TABLE>




        The accompanying notes are an integral part of these statements.

                                      F-5



<PAGE>
<PAGE>




                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES

Nature of Business - The Company operates lighter-than-air airships used to
advertise and promote the products and services of the Company's clients. At
December 31, 1997, the Company had no airships in operation.

Cash and Equivalents - The Company considers unrestricted short-term, highly
liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents.

Revenue Recognition - Airship revenues, when available, are recognized during
the period in which services are provided. Whenever significant flight time is
owed to a customer, the incremental cost of providing services is accrued. No
amounts are accrued at December 31, 1997 or 1996.

Flight Crew Training Costs - Significant flight crew training costs for new
blimps are amortized over twelve months from the date related revenues commence.

Airships and Related Equipment - Property and Equipment are stated at cost.
Depreciation is provided by the straight line method over the estimated useful
lives of the assets - 10 to 20 years (airships), 4 to 8 years (vehicles), 3 to 5
years (parts and equipment) and 2 to 3 years (improvements). Airship components
are not depreciated until placed in service.

Deferred Financing and Offering Costs - Costs incurred to obtain debt financing
are capitalized and amortized over the terms of the related loans. Such costs
include incremental payments to consultants, lenders and other out of pocket
expenses, as well as the fair value of options and warrants issued to persons
other than lenders. The fair value of options and warrants issued to lenders are
reported as debt discount and amortized over the term of the related loan. In
determining the fair value of warrants issued, substantial discounts have been
provided for the effects of restrictions on sale, the volume of shares involved
and other factors.

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

Income Taxes - The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting For Income Taxes", which requires the
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect when these
differences are expected to reverse. Valuation allowances are established when
appropriate, to reduce deferred tax assets to the amount expected to be
realized.

                                      F-6



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES (Continued)

Impairment of Long-Lived Assets - In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of
("SFAS 121"). SFAS 121 requires that long-lived assets held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of this standard in the fourth quarter of the fiscal year ended
December 31, 1994 resulted in an adjustment of $9,634,000 or $0.32 per share to
the Company's financial statements. The Company obtained an independent
appraisal on its airship components in August 1997, which reflects a range of
values from $2,174,000 (on a liquidation sale value) to $5,096,000 (on a market
value basis). Based on the fact that the Company had two airships in operation
at December 31, 1994, the Company adjusted the carrying value to $3,635,000 or
the midpoint of the above range. At December 31, 1995, the Company decided to
write down the balance of the airship components to liquidation sale value,
which resulted in an additional adjustment of $1,462,000 or $0.04 per share. The
Company reviews all of its long-lived assets for impairment in accordance with
SFAS 121. Prior to the adoption of SFAS 121, all long-lived assets, were
reviewed for impairment by comparing the carrying value of such assets to future
expected net cash flows.

Stock Based Compensation - Effective January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock Based Compensation." As it relates to stock
options granted to employees, SFAS No. 123 permits companies who have not done
so already, to either adopt the accounting method promulgated by Accounting
Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to
Employees", to measure compensation, or to adopt the fair value base method
prescribed by SFAS No. 123. If APB No. 25's method is followed, pro forma
disclosures are required as if SFAS No. 123 accounting recognition method was
adopted. SFAS No. 123 pertains to stock options granted after December 31, 1995.
Management has determined not to adopt SFAS No. 123's accounting recognition
provisions related to stock options granted to employees and, accordingly, will
continue following APB No. 25's accounting provisions. All other provisions of
SFAS No. 123 have been implemented effective January 1, 1996. The implementation
of SFAS No. 123 did not have an effect on the Company's financial statements.

Net Loss Per Share - Net loss per share is based on the weighted average number
of shares outstanding during the periods. When losses have been incurred,
warrants and options are not included since the effect would dilute loss per
share, however, preferred stock dividends are included in the loss per share
calculation. When net income is reported, warrants and options are included
using the treasury stock method, provided exercise prices are less than the
average market price; warrants convertible into common stock are included when
such inclusion results in further dilution.

New Accounting Standards - SFAS No. 128, "Earnings per Share." In February 1997,
the FASB issued SFAS No. 128, "Earnings per Share," which is effective for
financial statements issued for periods ending after December 15, 1997. This
pronouncement establishes standards for computing and presenting earnings per
share (EPS) for entities with publicly-held common stock or potential common
stock. SFAS No. 128 simplifies the standards for computing EPS and makes them
comparable to international EPS standards. Early application of this statement
is not permitted.

SFAS No. 130, "Reporting Comprehensive Income." In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which requires the
reclassification of earlier financial

                                      F-7



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES (Continued)

statements for comparative purposes. SFAS No. 130 requires that changes in
amounts of certain terms, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. SFAS No.
130 is effective for financial statements for periods beginning after December
15, 1997.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and related Information." SFAS No. 131 will
change the way public companies report information about segments of their
business in annual financial statements and requires them to report selected
segment information in their quarterly reports issued to stockholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997.

The Company intends to adopt the provisions of SFAS No.'s 128, 130 and 131
during its fiscal year ended December 31, 1998, and does not expect their
application to have a material impact on the financial statements of the
Company.

NOTE B - SIGNIFICANT  UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING
DIFFICULTIES AND MEET CASH REQUIREMENTS

As shown in the accompanying financial statements, the Company has experienced
significant operating losses and negative cash flow from operations in recent
years and has an accumulated deficit of $54,645,000 at December 31, 1997. During
the year ended December 31, 1997, the Company did not generate any revenues from
airship operations and it reported a net loss of $2,294,000 and has negative
working capital of $15,992,000 at December 31, 1997. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.

Management's plans to improve the financial position and operations with the
goal of sustaining the Company's operations for the next twelve months and
beyond include:

Arranging with Trans Continental Airlines, Inc. ("Trans Continental"),
a company related through common directorship and ownership, to provide funds
on a monthly basis as a loan, and separately, acquiring assets and operations
of one or more entities, which the Company has been exploring. Management's
hope is that such business combination, if completed, would provide additional
cash flow and net income to the Company.

While the Company believes that its plans for additional funding or possible
business combination have the reasonable capability of improving the Company's
financial situation and ensuring the continuation of its business, there can be
no assurance that the Company will be successful in carrying out its plans and
the failure to achieve them could have a material adverse effect on the Company.

Though management believes the company will secure additional capital and/or
attain one or more of the above goals, there can be no assurance that any
acquisition, financing or other plan will be effected. Any acquisition or
securities offering is subject to the Company's due diligence, the state of

                                      F-8



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE B - SIGNIFICANT  UNCERTAINTIES AND MANAGEMENT'S PLANS TO OVERCOME OPERATING
DIFFICULTIES AND MEET CASH REQUIREMENTS (Continued)

the general securities markets and of the specific market for the Company's
securities, and any necessary regulatory review.

NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES AND OTHERS

Due from Affiliate - At December 31, 1994, the Company made advances netting to
$1,809,000 to Trans Continental, an affiliated aircraft leasing company and
stockholder of the Company. Louis J. Pearlman ("Mr. Pearlman") owns 21% of
Trans Continental and is the Company's Chairman of the Board, President and
Principal Stockholder. Trans Continental pledged a $2,500,000 money market
account as collateral for this advance. The deposit was returned to the Company
during 1995. Interest earned on this deposit amounted to $23,467 for the year
ended December 31, 1995. No interest was earned during the year ended
December 31, 1996 or 1997, as the Company used these funds to reduce liabilities
during the year ended December 31, 1995.

Personal Guarantees - Mr. Pearlman and Trans Continental have guaranteed all
capital leases and loans of the Company (see Note E).

Loans from Principal Stockholder - In May 1992, all amounts due to Mr. Pearlman,
consisting of 10% notes payable, accrued salaries, bonuses and interest were
consolidated into one single loan of $1,845,000. The loan was payable in equal
quarterly installments of $135,000 per year including interest at 8 1/2% per
annum, and commenced in July 1992. This payment schedule continued until a loan
payable to a bank for the SeaWorld airship was paid (with the preferred stock
proceeds - see Note H), at which time the loan became payable at the discretion
of the Company. All unpaid principal and interest was due in May 1997 and has
been deferred by Mr. Pearlman for an indefinite period of time. Interest on the
loan payable was $96,000, $93,000, and $85,000 for the years ended 1997, 1996,
and 1995, respectively.

On June 30, 1993, the Company made a $789,000 loan (the "Loan") to an individual
who had previously facilitated financing for the Company. Mr. Pearlman has
guaranteed repayment of the Loan. The Loan is being repaid by Mr. Pearlman in
equal monthly installments of $6,209 per month, including interest at the rate
of 8.75%. The remaining unpaid principal balance of the Loan was due on June 30,
1995. It has been agreed that the Company's obligation to repay principal and
interest on the loan to Mr. Pearlman shall be reduced to reflect the outstanding
balance on this Loan for so long as it shall remain outstanding. Amounts due to
Mr. Pearlman at December 31, 1997 and 1996 totaled $1,238,000 and $1,137,000,
respectively, net of unamortized discount.

During the period from December 31, 1995 through 1997, Trans Continental
advanced the Company funds that were used for operations in the amount of
$4,872,000. The balance owed to Trans Continental is accruing interest at the
rate of 10% per annum and is due on demand. Interest expense accrued on these
advances amounts to $341,000, $200,000 and $16,000 for the years ended December
31, 1997, 1996 and 1995, respectively.

                                      F-9



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

   NOTE C - TRANSACTIONS WITH STOCKHOLDERS, RELATED PARTIES AND
                      OTHERS - (Continued)

Transactions  with  Stockholder  and His Affiliate - Mr. Julian  Benscher  ("Mr.
Benscher")  beneficially  owns less than 5% of the common stock of the Company
at December 31, 1997. The Company and Mr. Benscher continue to engage in
business transactions in which the Company provides to Mr. Benscher the use of
an airship, along with certain related components and equipment, and
Mr. Benscher pays the cost relating to the operation of the airship.

Rental Arrangement and Travel Agency Service - Trans Continental serves as the
Company's travel agent for substantially all of its travel arrangements and the
Company is its principal customer. In the opinion of management, the terms and
prices received from the corporation are similar to those available from other
travel agencies. During 1997, 1996 and 1995, the Company utilized the travel
agency services for reservations, while primarily paying certain costs directly
to the provider.

Hull and Liability Insurance - The Company purchases hull and liability
insurance with respect to the Company's airships through Alexander Howden, Inc.,
an international insurance brokerage firm of which James J. Ryan is the Senior
Vice President of its Aviation Aerospace Division. Mr. Ryan is also a director
of the Company. Insurance expense for Alexander Howden was $131,000 in 1995.

Warrants - Reference should be made to Note H for warrants issued in connection
with certain of the above transactions.

NOTE D - INCOME TAXES

At December 31, 1995, the Company had net operating loss carryforwards for
income taxes of approximately $43,105,000 available as offsets against future
taxable income. During 1991, the Company experienced changes in the Company's
ownership as defined in Section 382 of the Internal Revenue Code ("IRC"). The
effect of these changes in ownership is to limit the utilization of certain
existing net operating loss carryforwards for income tax purposes. Operating
losses incurred after the ownership change are not limited. As a result, only
approximately $28,694,000 of the operating losses which occurred after the
ownership change are not limited. The operating losses incurred prior to the
ownership change are limited to a certain dollar amount each year. The net
operating loss carryforwards expire during the years 2000 to 2013. The company
also has unused investment tax credits of $140,000 which expire principally in
the year 2000.

The tax effect of temporary differences that give rise to significant positions
of the deferred tax assets and deferred tax liabilities, consist of the
following at December 31:

<TABLE>
<CAPTION>
                                                                    1997              1996
------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>
Deferred tax assets
   Net operating loss                                            $14,677,000       $13,651,000
   Investment tax credits                                            140,000           140,000
   Airships and related equipment                                      -                34,000
   Accrued interest on stockholder loans                             542,000           394,000
------------------------------------------------------------------------------------------------

                                                                 $15,359,000        14,219,000
   Less: Valuation allowance                                      14,962,000        14,219,000
------------------------------------------------------------------------------------------------
                                                                       -                 -

Deferred tax liabilities:
   Airships and related equipment                                    397,000             -
------------------------------------------------------------------------------------------------
                                                                    (397,000)            -
------------------------------------------------------------------------------------------------
Net deferred tax asset                                                 -           $     -
================================================================================================
</TABLE>


                                     F-10



<PAGE>
<PAGE>


                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE D - INCOME TAXES (Continued)

The net change in the valuation allowance was approximately $743,000 relating to
net operating losses from 1997.

NOTE E - CAPITAL LEASES AND LOANS PAYABLE

Capital Leases - In October 1989, the Company purchased a new Skyship 600 Series
airship (the "MetLife airship") from Airship UK. The MetLife airship and related
equipment were financed primarily by net proceeds of $6,200,000 from a capital
lease obtained through ORIX Commercial Credit Corp. ("ORIX"). The capital lease
initially required monthly payments of $135,000 through November 1992. In
December 1992, the lease was renewed for an additional three-year term at
monthly payments of $121,000. At the end of the additional three year term the
Company had the option to purchase this airship for $1,000,000 or renew the
lease for another three year term at monthly payments of $35,000. At the
completion of the third lease term, title is to be transferred to the Company
upon payment of $1. On January 11, 1994 the Company renegotiated the lease to
reduce the $121,000 payments. Even after the payment modifications the Company
was unable to make the payments and went into default. Effective June 2, 1995,
the lease was renegotiated calling for payments of principle only of $20,000 for
twelve months. At the end of the initial twelve-month period, the Company began
to make principle and interest payments at the rate of prime plus 1% of $40,000
for the next six months, followed by payments of $60,000 for an next six months
and finally payments equaling the higher of $80,000 or 50% of the annual cash
flows for the fiscal year immediately prior to the commencement of each
applicable twelve-month period for the remaining term of the lease until the
lease is fully amortized or a larger payment is made based upon the annual cash
flow of the year. Based upon the revised payment schedule, the payments are not
sufficient to cover the interest expense. Thus negative amortization results in
1994 and 1995 and the ending principal balance is increased. The balance under
this capital lease amounted to $2,477,000 and $3,158,000 at December 31, 1997
and 1996, respectively.

The airship and related equipment financed by the capital leases had a cost of
$6,687,000 and accumulated depreciation of $1,077,000 at December 31, 1993.
During 1994 the leased airship was damaged and taken out of service. A cost of
$2,699,000 and accumulated depreciation of $1,232,000 were written off due to
the damage. The remaining cost basis of approximately $3,500,000 was transferred
to spare parts and airship components. The resulting net book value was later
analyzed as part of the SFAS 121 writedown as described in Note A.

The following is a schedule by year of future minimum lease payments pursuant to
the capital leases together with the present value of the net minimum lease
payments as of December 31, 1997:

                       1998                                         $   960,000
                       1999                                             960,000
                       2000                                             960,000
                       Thereafter                                        28,000
                                                          ---------------------
                          Total minimum lease payments                2,908,000
                          Less amount representing interest             431,000
                                                          ---------------------

                       Present value of net minimum lease 
                          payments                                   $2,477,000
                                                          =====================



                                     F-11



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE E - CAPITAL LEASES AND LOANS PAYABLE  (Continued)

WDL LEASE - Pursuant to an agreement effective May 16, 1993 (the 'WDL Lease'),
the Company leased from Westdeutsche Luftwerbung Theodor Wullenkemper GMBH
('Westdeutsche') a used type WDL airship equipped with a NightSign'tm' system.
The Company entered into the WDL Lease to procure an airship to fulfill its
obligations under the Gulf Oil Contract when it became apparent that the
proposed acquisition of the assets of Slingsby could not be completed in time to
provide an additional airship to fulfill the Company's obligations under the
Gulf Oil Contract. The Company began operating this airship as the Gulf Oil
Airship on June 25, 1993. On September 11, 1994, the Gulf Oil Airship was
damaged in an accident and its operations ended. As a result of the damage to
the Gulf Oil Airship, the Company sustained a loss of $1,978,000, representing
the cost of the airship less insurance proceeds and credits allowed, including
salvage value, when the airship was returned to WDL in September 1994. At
December 31, 1994, the Company owed WDL a total of $2,866,000 under the
WDL Lease, including the $1,978,000 described above plus lease and other
operating costs through September 11, 1994. Pursuant to the WDL Lease,
the Company maintained a security deposit in a cash account (the 'Cash
Escrow Account') with Trans Continental Airlines, Inc., an affiliate of
the Company ('Trans Continental'). As of December 31, 1994, the Company
had on deposit in the Cash Escrow Account $1,800,000. During March 1995,
the Company paid the full balance of the Cash Escrow Account to WDL to reduce
its liability to WDL to $1,000,000. Pursuant to the WDL Lease, Trans Continental
collateralized the advances with a certificate of deposit in the amount of
$2,500,000 (see Note C to the Financial Statements included elsewhere herein).
The Company is currently indebted to WDL in the approximate amount of $911,000.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'

Loan Payable - The Company entered into an accounts receivable factoring
security agreement on September 19, 1994 which was modified on November 16, 1994
and November 23, 1994. The maximum borrowing amount under the November 23rd
agreement was $1,500,000. The loan balance was to be reduced by $75,000 per
month beginning December 1, 1994. A fee of 0.125% per month is payable
each month on the higher of funds outstanding or $1,500,000. The loan
was used to payoff certain liabilities and provide a source of working capital.
The balance due to Allstate Financial Corp. ("Allstate") as of December 31,
1994 amounted to $1,250,000. The loan was secured by accounts receivable,
inventory, certain airships and equipment.

On June 22, 1995, the Allstate loan was repaid when Transcontinental Leasing,
Inc. ("TC Leasing"), a wholly-owned subsidiary of Trans Continental, entered
into a sale-leaseback agreement with the Company. TC Leasing obtained financing
for this transaction from Phoenixcor, Inc. Pursuant to the Allstate
Transactions, the Bud One Airship was sold by the Company to TC Leasing for the
purchase price of $2,060,000, which in turn was leased back to the Company.
In accordance with SFAS No. 98 "Accounting for Leases," any gain on the sale is
deferred and amortized in proportion to the amortization of the leased asset.
The resulting gain of $873,000 was capitalized as part of the airship cost
and is being amortized over 20 years equal to the corresponding increased
depreciation.

On November 30, 1995, the Company entered into an arrangement with
Senstar Capital Corporation ("Senstar") pursuant to which the sale-leaseback
arrangement with TC Leasing was reversed. The Company borrowed a total of
$3,500,000 from Senstar, part of which has been used to repay the loan from
Phoenixcor, Inc., the lender for TC Leasing's transaction. The loan from Senstar
is repayable over 5 years in sixty monthly payments of approximately $63,000
each, with a balance due at the end of the five year term of approximately
$700,000, and secured by a lien on the Airship and is guaranteed by Trans
Continental. The balance due under this loan amounted to $3,004,000 at
December 31, 1996.

TC Leasing entered into a loan agreement, dated December 30, 1996, with Norwest
Equipment Finance, Inc. ("Norwest") on behalf of the Company. The proceeds of
the loan were used to repay the Senstar loan which had a balance due of
approximately $3,000,000 at the time of repayment, and to provide working
capital to the Company. The Company has made the payments required under the
Norwest loan directly to Norwest. Such payments amounted to approximately
$648,000 during 1997, TC Leasing is the obligor under the Norwest loan and
the Company owes to TC Leasing with respect to the Norwest loan the
aggregate amount of approximately $4,090,000, consisting of $4,060,000 of
principal and approximately $30,000 of interest. The transaction with Norwest
facilitated the Sale-leaseback arrangement between the Company and TC Leasing.

Other Long-Term Debt - The Company has other long-term debt in the amount of
$10,000 and $12,000 at December 31, 1997 and 1996, respectively. These loans
mature through December 31, 2001 at various annual interest rates. The
transaction with Norwest facilitaged the Sale-leaseback arrangement between
the Company and TC Leasing.

   Current maturities of long-term are as follows:

                                                           1998    $    937,000
                                                           1999         928,000
                                                           2000       1,013,000
                                                           2001       1,202,000
                                                                   -------------
                                                           Total   $  4,080,000
                                                                   =============


                                     F-12



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE F - LEGAL PROCEEDINGS

Capital Funding Group Ltd. - In February 1992, Capital Funding Group Ltd.
("CFG") commenced an action against the Company and others seeking in excess of
$1,000,000 in damages based on the alleged failure by the Company to provide
adequate collateral and security in connection with certain alleged financial
agreements with CFG. The Company retained CFG in July 1991, paid a commitment
fee (which was written off in 1991) and received a commitment from CFG which
then failed to provide the funding. The Company and the other defendants
answered the complaint in February 1992 by denying all of the substantive
allegations and asserting several affirmative defenses. In addition, the Company
asserted certain counterclaims against CFG and its two principals for breach of
a commitment letter pursuant to which CFG was to arrange for a $9 million loan
to the Company, breach of a compromise agreement accepted by CFG in January
1992, pursuant to which CFG was to provide funding to the Company in the amount
of $7 million, breach of an escrow agreement, pursuant to which CFG was to
return $200,000 of the commitment fee paid by the Company and various other
counterclaims. In March 1993, the Company was awarded a default judgment of
$8,000,000 against CFG. No balances have been returned to the Company as of
December 31, 1997.

Watermark Group PLC and Von Tech Corporation - In January 1993, a second amended
complaint to a lawsuit, which was initially commenced in March 1991 and
subsequently dismissed twice without prejudice, was filed against the Company
and Mr. Pearlman by Watermark Group PLC and Von Tech Corporation, a general
partner of Company communications (collectively the "W/VT Plaintiffs") alleging
breach of an alleged joint venture agreement involving Company Communications
and Airship Enterprises Ltd. (a company that was owned by Mr. Pearlman and that
was not in any way owned or controlled by the Company); breach of an alleged
agreement by the Company regarding the lease and operation of a particular
airship; and breach of an alleged oral commission agreement by the Company
relating to the Company's acquisition of two airships it presently owns.

The W/VT Plaintiffs seek various legal and equitable remedies, including
monetary damages against the Company and Mr. Pearlman in excess of $800,000
together with a claim for some portion of the advertising revenue the Company
has received, and will continue to receive, from the operation of some of its
airships. In March 1993, the second amended complaint filed against the Company
and Mr. Pearlman by W/VT Plaintiffs was dismissed without prejudice. Since the
Company denies any involvement with any of the transactions set forth in the
second amended complaint, the Company believes that its liability, if any, on
the claims made by the W/VT Plaintiffs will not be material. This case was
settled on October 3, 1995 for $40,000.

Tenerten and Drake, Inc. - On September 15, 1994, Tenerten and Drake, Inc.
("TDI") filed a complaint against the Company. The complaint alleges that the
Company failed to pay certain sums of money due to TDI under an agreement to
perform advertising and related services for the Company. The Company filed its
answer and raised its affirmative defenses to said complaint alleging that the
services allegedly performed by TDI were defective in numerous respects. A final
judgment was entered against the Company on July 20, 1995 in the amount of
$24,000, which has been placed in escrow pending appeal. The Company has since
settled all remaining claims instituted by TDI by agreeing to the release of
the cash bond to TDI and by paying to TDI the additional sum of $4,100.

                                     F-13



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE F - LEGAL PROCEEDINGS (Continued)

Westinghouse Airships, Inc. - On September 14, 1994, Westinghouse Airships, Inc.
("WAI") filed a complaint against the Company alleging that the Company and Mr.
Pearlman breached an agreement to purchase two gondolas from WAI. Specifically,
the complaint alleges that WAI delivered both gondolas at issue and that the
Company failed to make certain installments to WAI under the agreement. The
complaint also alleges that the Company breached a sub-lease to occupy certain
hanger space located in North Carolina. On June 19, 1995, the Company and WAI
agreed to settle the case for $32,000.

Other Proceedings - The Company is a defendant in a number of other legal
proceedings, which occurred in the normal the course of business. Those cases in
which the ultimate settlement is known or estimable have been accrued in the
financial statements. It is not possible at this time to predict the outcome of
the unsettled legal actions; however, in the opinion of management and informal
advice of counsel, the disposition of these other lawsuits will not have a
material effect on the financial statements.

NOTE G - COMMITMENTS AND CONTINGENCIES

Possible Future Tax Claims - Because blimp advertising services differ from many
other forms of advertising, state and local tax authorities may assert claims
based on interpretations of law which differ from interpretations by management.
In the opinion of management, its positions are consistent with similar
entities.

Employment Agreements - In 1993 the Company and Mr. Pearlman entered into an
employment agreement which expired in December 1994. The agreement provided for
an annual salary to Mr. Pearlman of $200,000 for the first year of the agreement
and for annual increases thereafter in an amount equal to the greater of 5% of
his previous year's salary or the increase, if any, in the Consumer Price Index
for All Urban Consumers, Central Florida. The agreement also provided for an
annual bonus payable to Mr. Pearlman in an amount equal to 4% of the first $1
million of the Company's net after-tax profits for such fiscal year. Pursuant to
this agreement, Mr. Pearlman's annual compensation, including salary and bonus
was limited to $340,000 per year. Accrued and unpaid salaries through December
31, 1995 are $391,000 and are included in amounts due to related party.

On March 1, 1994 the Company agreed to reimburse Mr. Pearlman $4,000 per month
in expenses, effective January 1, 1993, due to Mr. Pearlman's out-of-pocket
expenses for the Company's business.

The Company entered into employment agreements as of January 1, 1993 with each
of two officers and another employee. Each agreement expires on January 1, 1998
and provides for annual salaries of $75,000 for the first year of the agreement
and annual increases thereafter in an amount equal to the greater of 5% of his
previous years salary or the increase, if any, in the Consumer Price Index for
All Urban Consumers, Central Florida. Each agreement also provides for an annual
bonus payable in an amount equal to 1 1/2% of the Company's net after-tax
profits for such fiscal year plus an additional amount determined at the
discretion of the Board of Directors.

                                     F-14



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE H - STOCKHOLDERS' EQUITY

Preferred Stock - In February 1993, the Company completed a public offering
("the Offering") of 2,875,000 shares of its Class A 8% Cumulative Convertible
Voting Preferred Stock ("Preferred Stock") at $6.00 per share.

Each share of Preferred Stock is convertible, at any time after the earlier of
February 16, 1994 or a date determined by the underwriters at their sole
discretion (which date was not to be prior to April 19, 1993), into 6 shares of
common stock, subject to future adjustment. Dividends on the Preferred Stock are
payable quarterly and the first four dividends were paid, on an annualized
basis, 50% in cash and 50% in shares of the Company's common stock. The
Preferred Stock accrues dividends at the annual rate of $.60 per share for
dividends paid in shares of common stock, and $.48 per share for dividends paid
in cash. If available cash is not sufficient to pay any or all of the subsequent
dividend payments, the balance of the dividend will be paid in shares of the
common stock. The Company has total accrued dividends on Preferred Stock in the
amount of $5,864,000 and $4,313,000 at December 31, 1997 and 1996, respectively.

The Preferred Stock is redeemable at the option of the Company, in whole or in
part, at $6.60, together with all accrued and unpaid dividends, at any time
after February 16, 1996. The liquidation preference of the Preferred Stock is
$6.00 per share.

In connection with the offering, the Company issued to the two representatives
of the several underwriters, warrants to purchase an additional 10% of the
Preferred Stock sold in the Offering. The Preferred Stock warrants are
exercisable for four years commencing February 1994 at an exercise price equal
to 165% of the initial offering price of the Preferred Stock, subject to certain
anti-dilution provisions.

Warrants and Options - Outstanding Warrants and Options at December 31, 1997,
all of which are currently exercisable, after giving effect to adjustments
through such date for Warrants and Options anti-dilution provisions and
exercisable price reductions are as follows:

<TABLE>
<CAPTION>
                                                                 Exercise
                                                Shares            Price           Expiration
                                               Issuable         Per Share            Date
---------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>             <C>    

Warrants:
   Issued to Company President
    in May 1992 in consideration
    of restructing terms of loans
    due                                       2,000,000            $0.10           May 1999

Options:
   Issued to Company President in 1989
    for guarantee of capital lease,
    cancelled and reissued in 1991              500,000            $0.01        November 1998

   Issued in connection with public
      offering in 1991:                                                             through
         Officers  and others in 1989 and 1991  715,000        $0.01 to $1.28     October 2001
---------------------------------------------------------------------------------------------------
</TABLE>




                                     F-15



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE H - STOCKHOLDERS' EQUITY (Continued)

Employee Share Purchase Plan - The Company has an employee share option plan
(the "Plan") for employees of the Company and any present or future "subsidiary
corporations." The Company intends the Plan to be an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan was effective November 1, 1994. All employees are
eligible to participate in the Plan, except that the Company's appointed
committee may exclude any or all of the following groups of employees from any
offering: (i) employees who have been employed for less than 2 years; (ii)
employees whose customary employment is 20 hours or less per week; (iii)
employees whose customary employment is not more that 5 months in any calendar
year; and (iv) highly compensated employees within the meaning of Code Section
414(q). The shares issuable under the Plan shall be common shares of the Company
subject to certain restrictions up to a maximum of 1,000,000 shares. The
committee shall determine the length of each offering but no offering may exceed
27 months. The option price for options granted in each offering may not be less
than the less of (i) 85% of the fair value of the shares on the day of the
offering, or (ii) 85% of the fair market value of the shares at the time the
option is exercised.

NOTE I - AIRSHIP REVENUES, MAJOR CUSTOMERS AND CREDIT
         CONCENTRATION

Anheuser-Busch/Bud One - In March 1992, the Company entered into an agreement
with Anheuser-Busch for the use of the Bud One airship. Pursuant to this
agreement, the Company agreed to convert the Bud One airship (then being used
as a passenger airship) into an airship operated to promote the goods and
products of Anheuser-Busch. The agreement provides for an initial term
of six months with renewals for additional terms totaling three years.
Anheuser-Busch could terminate the agreement during the first or at the
end of the second annual period by giving proper notice to the Company
(see Note L). The Company had operated this airship to advertise and promote
the Sea World theme park from September 1991 to March 1992 under a prior
agreement with Anheuser-Busch which enabled the Company to operate sightseeing
tours for passengers on a fee basis at Kissimmee Airport.

Pursuant to an amendment dated March 4, 1994, monthly fees under the Bud One
agreement were reduced by 50% effective February 1994 through July 1994 and the
term of the contract ended in August 1994. The Bud One contract was amended in
July 1994 and provided for operations at the full price from August 1994 through
December 1996. However, during December 1995 it was determined that the envelope
was in need of replacement. Therefore, the Company removed the airship from
service.

Catamount Petroleum Corporation/Gulf Oil - In May 1993, the Company entered into
an agreement with Catamount Petroleum Corporation for the use of the Gulf
airship. The initial term of the agreement is for three years. Notwithstanding
this term, the agreement may be terminated by either party upon proper written
notice. During 1993, the airship was in operation from July through October upon
which, at the request of Catamount, the agreement was suspended through April
1994, at which time the airship resumed operations through October 1994.

                                     F-16



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE I - AIRSHIP REVENUES, MAJOR CUSTOMERS AND CREDIT
                 CONCENTRATION (Continued)

The Company was responsible for all costs associated with the operation of the
Gulf airship, including repairs, maintenance, insurance and taxes.

Mastellone Hnos, S.A. - On December 15, 1994, the Company and its wholly-owned
subsidiary Airship Operations, Inc. consummated an Aircraft Lease Agreement (the
"Argentina Lease Agreement") and an Airship Operations Agreement (the "Argentina
Operations Agreement"), respectively, with Mastellone Hnos, S.A. ("Mastellone")
for the promotion of the products of Mastellone (the "Argentina Airship"). The
Company received a deposit from Mastellone in the amount of $500,000. The
xxxxx for the Argentina Airship were never commenced. On May 24, 1995,
prior to commencement of operations of the Argentina Airship and pursuant to an
Aircraft Purchase and Lease Assignment and Assumption between the Company and
First Security Bank of Utah, as trustee for the benefit of Aviation Support
Group, Ltd. ("Aviation"), the Argentina Airship was sold and the Argentina Lease
Agreement was assigned to First Security for the amount of $500,000. Pursuant to
such arrangement, operations for the Argentina Airship were never commenced
by the Company. On May 24, 1995, prior to commencement of operations of the
Argentina Airship and pursuant to an Aircraft Purchase and Lease Assignment and
Assumption between the Company and First Security Bank of Utah, as trustee for
the benefit of Aviation Support Group, Ltd. ("Aviation"), the Argentina Airship
was sold and the Argentina Lease Agreement was assigned to First Security.
In consideration for such sale and assignment, First Security assumed the
Company's obligations under the Argentina Lease Agreement. The Company is
entitled to receive, during a ten-month renewal term provided for in the
Argentina Lease and Argentina Operations Agreements, a portion of the rental
income generated should Mastellone exercise its right to extend the terms
of such agreement.

In addition, by notifying First Security prior to December 15, 1995 (extended to
January 15, 1996), the Company had the right to repurchase the airship for 120%
of the out-of-pocket expenses and the assumption of all liabilities incurred by
First Security and Aviation in connection with the Argentina Airship. The
Company did not exercise the right to repurchase the airship.

Concurrently with the execution and delivery of the Purchase and Assumption
Agreement, the Company sold to Aviation all of the issued and outstanding shares
of the capital stock of Airship Operations, Inc. Mr. Benscher, who holds
indirectly through designees less than 5% of the Company's common stock, is
a principal stockholder of Aviation. See Note C - Transactions With
Stockholders, Related Parties And Others.

Hampstead Technologies Limited, In December 1995, the Company entered into an
Envelope Purchase agreement with Hampstead Technologies Limited, an affiliated
company of Julian Benscher, for the purchase of a new envelope for the Bud One
Airship. The Company made a non-refundable deposit of $630,000. This purchase
was never consummated and the deposit was written off in 1995.

NOTE J - EMPLOYEE SAVINGS PLAN

The Company has an employee savings plan (the "Savings Plan") that qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue

                                     F-17



<PAGE>
<PAGE>



                           AIRSHIP INTERNATIONAL LTD.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

NOTE J - EMPLOYEE SAVINGS PLAN (Continued)

Service annual contribution limit of 15% of the employee's salary. The Company
matches 25% of each employee's contributions for 1993 and 5% for 1995 and 1994,
depending on length of service, up to a maximum of 6% of the employee's
earnings. The Company's matching contributions to the Savings Plan was $1,948
for 1995.

NOTE K - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                          1997          1996           1995
----------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>           <C>       
Cash paid during the year for:
   Interest                                            $  679,000    $  475,000    $1,018,000
Supplemental non-cash activity:
   Accrued common stock dividend                       $1,551,000    $1,725,000    $1,725,000
</TABLE>



                                     F-18






<PAGE>