<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              ---------------------


                                    FORM 10-K

(MARK ONE)

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

For the fiscal year ended  DECEMBER 31, 1997

                                       OR

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

For the transition period from ________________ to __________________

                        Commission File Number 000-21657


                                  SkyMall, Inc.
             (Exact name of Registrant as specified in its charter)

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

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

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

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

                                                  Name of each exchange on which
      Title of each class                                   registered
 None


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

                          Common Stock, .001 par value
                                (Title of class)
<PAGE>   2
         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

         On March 12, 1998, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $11,792,000. The aggregate
market value was based on the closing price of Common Stock as reported by the
Nasdaq Stock Market's National Market.

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

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

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

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

         At March 12, 1998, the number of shares of Common Stock outstanding was
8,489,600 and there were no shares of Preferred Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

        The Registrant's Definitive Proxy Statement for its Annual Meeting of
Shareholders, to be held on May 20, 1998, which will be filed pursuant to
regulation 14A within 120 days of the close of the Registrant's fiscal year, is
incorporated by reference in answer to Part III of this report, but only to the
extent indicated therein.
<PAGE>   3
                                TABLE OF CONTENTS

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


PART II
      Item 5.  Market for the Registrant's Common Stock and Related
                 Stockholder Matters......................................    10
      Item 6.  Selected Financial Data....................................    11
      Item 7.  Management's Discussion and Analysis of Financial
                 Condition and Results of Operations......................    13
      Item 7A. Quantitative and Qualitative Disclosure About Market Risk..    19
      Item 8.  Financial Statements and Supplementary Data................   F-1
      Item 9.  Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure......................    20


PART III
      Item 10. Directors and Executive Officers of the Registrant.........    20
      Item 11. Executive Compensation.....................................    20
      Item 12. Security Ownership of Certain Beneficial Owners
                 and Management...........................................    20
      Item 13. Certain Relationships and Related Transactions.............    20

PART IV
      Item 14. Exhibits, Financial Statement
                 Schedules and Reports on Form 8-K........................    20


SIGNATURES................................................................   S-1
<PAGE>   4
ITEM 1.  BUSINESS

GENERAL

         SkyMall, Inc. ("SkyMall" or the "Company"), the largest in-flight
catalog company in the United States, makes high-quality products and services
available to more than 400 million airline passengers per year. The Company
markets and sells a broad selection of premium merchandise provided by
participating merchants, including major catalog companies and specialty
retailers, such as Brookstone(R), Frontgate(R), Hammacher Schlemmer, Norm
Thompson(R)/Solutions(R), The Sharper Image(R) and the Wine Enthusiast(R). The
merchandise of each participating merchant is presented in a separate section of
the SkyMall catalog to allow browsing from "store to store," providing the
convenience and variety of an upscale shopping mall environment. Substantially
all of the merchandise sold by the Company is shipped directly to customers by
participating merchants, thus avoiding significant inventory risk. The Company
has exclusive agreements to place its catalogs in aircraft seat pockets on 16
airlines, which carried approximately 70 percent of all domestic passengers in
1997, including America West, Continental, Delta, Southwest, TWA, United and US
Airways. As a result, the Company believes the SkyMall catalog is available to
over 1.0 million domestic airline passengers each day. The Company has
experienced substantial growth since it restructured operations in 1994. Total
revenues have increased from approximately $30.3 million in 1994 to
approximately $60.8 million in 1997, for a compound annual growth rate of 26
percent. The Company's revenue per passenger enplanement on flights carrying the
SkyMall catalog increased from approximately $0.06 in 1994 to approximately
$0.11 in 1997, for a compound annual growth rate of 22 percent.

       The Company's foundation is built on its relationships with its
customers, airline, and merchant partners. The Company's customers enjoy the
convenience of being able to shop for a wide variety of innovative products
while traveling. The Company offers a no mark-up, fair price guarantee under
which the Company will refund the price difference if the customer finds the
same item advertised elsewhere at a lower price. In order to enhance the ongoing
appeal of its product offerings, the Company produces four new catalogs per
year. The Company maintains a toll free 24-hour telephone ordering service (from
air and ground phones), and an in-house staff of customer service
representatives who are trained to provide exemplary service in order to build
strong customer loyalty and increase revenue from repeat and referral business.

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

       Participating merchants obtain exposure for their products and services
to a demographically diverse group of potential customers with strong economic
profiles, generate additional revenues, and acquire new customers to add to
their own proprietary mailing lists. Under contracts with participating
merchants, the Company earns percentages of revenues generated by the Company's
sales, placement fees for inclusion of the merchants' products in the SkyMall
catalog, or a combination thereof. The SkyMall catalog typically features over
60 participating merchants.


MARKET OVERVIEW

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


                                      -1-
<PAGE>   5
         Although many products and services are offered to passengers while
in-flight through a number of media, the SkyMall catalog is unique in the
airline marketing industry because it is devoted exclusively to catalog
shopping. Most airlines provide their passengers with airline-sponsored
"in-flight" magazines, which are placed in airline seat pockets along with the
SkyMall catalog, as well as other magazines and periodicals. Many in-flight
magazines contain pages devoted exclusively to marketing products and services.
None of these in-flight magazines, however, is devoted solely to shopping.

         Video marketing is also conducted while passengers are in-flight in the
form of video promotions played on monitors located at the front of or
interspersed throughout passenger cabins and on seatback video displays. Video
marketing on the monitors frequently consists of various in-flight programming
prepared by the airline and sponsored by companies targeting airline passengers
with favorable economic profiles. Although video shopping has not historically
been a significant source of revenue for the Company, in recent years, the
Company has offered video shopping services on both video monitors and seatback
video displays on selected flights.

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

         Of the various media employed by merchants to market goods and services
to airline passengers, the Company believes the SkyMall catalog is among the
most effective, due in part to the increasing popularity of catalog shopping in
general. Over the past 15 years, consumers have increasingly relied on catalogs
and direct mail to purchase goods and services. Approximately 44 percent of
households in the United States ordered merchandise from catalogs in 1997,
generating an estimated $78.6 billion in consumer catalog sales. If current
trends continue, the Company believes in-flight catalog shopping will gain
increasing acceptance by airline passengers, particularly those who appreciate
the time-saving convenience of catalog shopping.

CUSTOMER RELATIONSHIPS

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

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

         Offer Competitive Pricing and a No Mark-Up, Fair Price Guarantee.
         SkyMall offers its customers the convenience of in-flight shopping at
         prices competitive with those of merchants offering the same or similar
         products. To emphasize its competitive pricing strategy, SkyMall offers
         its customers a no mark-up, fair price guarantee under which SkyMall
         will refund the price difference to the customer if the customer finds
         the same item advertised elsewhere at a lower price.

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


                                      -2-
<PAGE>   6
         Provide Customers with a Convenient One-Stop Shopping Service. SkyMall
         is a "one-stop" shopping source for customers who, with a single phone
         call, may purchase a variety of merchandise offered by many
         participating merchants. Although most of the merchandise offered in
         the SkyMall catalog is available from other catalog and retail
         companies, each of these companies typically has its own policies for
         shipping and handling charges, merchandise returns, sales taxes and
         price guarantees. In addition, each company typically has different
         customer service hours and credit and payment policies. Unlike SkyMall,
         few of these companies offer frequent flier credit for purchases. By
         compiling the merchandise of its various participating merchants into a
         single catalog, the Company affords its customers access to more than
         1,250 products offered by over 60 participating merchants and the
         convenience of uniform customer service policies.

         Provide Outstanding Customer Service and Toll-Free Ordering. The
         Company maintains an in-house staff of customer service representatives
         who are trained to resolve customer problems. The Company's customer
         service staff is friendly and helpful with customers and knowledgeable
         about the wide range of products sold by the Company. The Company's
         customer service representatives encourage customers to purchase
         additional products with each order to increase the Company's average
         revenue per order. The Company believes the customer goodwill developed
         by its customer service representatives builds strong customer loyalty
         and increases revenue from repeat and referral business. The Company
         also offers services designed to maximize convenience to the traveler,
         including 24-hour telephone, internet, and facsimile ordering,
         toll-free ordering from air phones, and a 60-day "no questions asked"
         return or exchange policy.

AIRLINE RELATIONSHIPS

         The Company has exclusive relationships with its airline partners,
which are a vital component of the Company's business strategy. The SkyMall
program offers airlines a low-risk means of incrementally increasing their
earnings. Since commencing operations in 1991, the Company has grown from a
single airline partner to 16 airline partners, including most of the major
domestic airlines. In exchange for placement of its catalogs in seat-back
pockets, the Company pays each airline partner a monthly commission based on net
merchandise revenues generated by the Company from sales to that airline's
passengers. Some agreements also require payment of a minimum monthly commission
or a boarding cost that reimburses the airline for the increased fuel costs
attributable to the weight of the catalogs. For 1997, total commissions paid or
payable to SkyMall's airline partners amounted to approximately $3.4 million
which included minimum monthly commissions and boarding costs of approximately
$2.2 million. In addition to increasing airline earnings, the Company's airline
partners also benefit from enhancing the in-flight experience of their
passengers by providing the Company's catalog as an additional amenity.
SkyMall's agreements with its airline partners generally have a term of at least
one year and thereafter annually are automatically renewable subject to
termination with 60 to 180 days' advance notice by either SkyMall or the
airline. The Company believes its relations with each of its airline partners
are good.


                                      -3-
<PAGE>   7
         SkyMall's catalogs are currently available on all domestic and selected
international flights of the following air carriers:

<TABLE>
<CAPTION>
                                        1997 DOMESTIC
               CARRIERS(1)              ENPLANEMENTS            INITIAL
                                      (IN MILLIONS)(2)        CATALOG(3)
         -------------------------    ------------------     --------------
<S>                                   <C>                    <C>
         Alaska                               13                 July 1991
         America West                         17                  Feb 1994
         Atlantic Southeast                    4                 July 1991
         Continental                          40                April 1991
         Delta                               103                 July 1991
         Frontier                              2                 Sept 1995
         Horizon                               4                 July 1991
         Midway                                2                 June 1994
         Pan Am                                1                  Nov 1997
         Reno Air                              4                April 1997
         SkyWest                               3                 July 1991
         Southwest                            56                 July 1996
         Sun Country                           3                  Jan 1995
         TWA                                  24                  Feb 1991
         United                               73                 June 1992
         US Airways                           57                 July 1991
                                      ------------------
                  Total                      406
                                      ==================
</TABLE>

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

(2) Source:  U.S. Monitor.

(3) The Company's catalog has been available on these airlines continuously from
the date the initial catalog was placed on the airline, except for (a) US
Airways, which suspended carrying the SkyMall catalog on July 1, 1996 but
resumed carrying the SkyMall catalog effective November 1, 1996 and (b) Pan Am,
which ceased operations in February 1998. To the extent Pan Am resumes
operations, the Company may continue to provide the SkyMall catalog to Pan Am.

         The following airline partners each accounted for in excess of 10
percent of the Company's net merchandise sales for the year ended 1997:

<TABLE>
<CAPTION>
                                      PERCENT OF NET MERCHANDISE SALES
         NAME OF AIRLINE                 THROUGH DECEMBER 31, 1997
         ----------------------       --------------------------------
<S>                                   <C>
         Delta                                     23%
         United                                    21%
         Continental                               16%
         Southwest Airlines                        10%
                                                   ---

                  Total                            70%
                                                   ===
</TABLE>


                                      -4-
<PAGE>   8
MERCHANT RELATIONSHIPS

         Merchant Agreements. The Company enters into agreements with merchants
who supply the products and services offered in the Company's catalog. Under its
contracts with participating merchants, the Company earns percentages of
revenues generated by the Company's sales or placement fees for inclusion of the
merchants' products in the SkyMall catalog, or a combination thereof.
Participating merchants agree to maintain sufficient levels of inventory to
satisfy customer demand and to ship all orders within 72 hours unless the
merchandise is out of stock. Generally, the Company's agreements with
participating merchants provide that prices for products included in the SkyMall
catalogs be honored by merchants as long as the Company receives orders from a
catalog edition. The agreements typically have an initial term of a single
quarterly catalog and automatically renew thereafter for successive catalog
editions. During 1997, the Company renegotiated many of its merchant partner
agreements to establish more favorable cost structures and in some cases to
extend the term of the arrangements to one year. The merchants typically agree
to indemnify the Company for any losses associated with injuries caused to
customers from the use of such merchant's product, to carry product liability
insurance that names SkyMall as an additional insured, and to indemnify the
Company against claims that their products infringe on the intellectual property
rights of third parties.

         Name Brand Stores in the SkyMall Catalog. The Company's catalogs
assemble premium, name brand merchandise and are formatted to allow the
traveling customer to browse from "store-to-store," providing the convenience
and variety of an upscale shopping mall environment. Its largest "stores" are
generally well-known catalog and retail companies that have chosen to
participate in the SkyMall program in order to generate additional revenue,
build name recognition and brand awareness, and acquire new customers to add to
their own proprietary mailing lists.

         The major catalog and retail companies currently featured in the
SkyMall catalog or those who have participated in recent editions of the catalog
include:

                    NAME BRAND STORES IN THE SKYMALL CATALOG

Balducci's                                        Mrs. Field's
British Links                                     Nightingale Conant
Brookstone(R)                                     Norm Thompson(R)/Solutions(R)
Calyx & Corrolla                                  Orvis(R)
Competitive Edge Golf(R)                          Successories(R)
Frontgate(R)                                      Sundance
Hammacher Schlemmer                               Syber Vision(R)
Hello Direct(R)                                   The Cigar Enthusiast
Huntington Clothiers(R)                           The Safety Zone
Johnston & Murphy                                 The Sharper Image(R)
Last Best Place                                   The Wine Enthusiast(R)
Mattel(R)

         Merchandise Selection. The Company continually responds to numerous
merchants who inquire about showcasing their products or services in the SkyMall
catalog. As a result, the Company has been able to identify and offer to its
customers the unique products they desire at competitive prices. Products are
selected for each catalog by the Company's merchandising staff with the help of
each of the major participating merchants. Approximately one-third of the
products in each new edition of the SkyMall catalog have not been previously
featured in the SkyMall catalog.

         Products Offered. The Company typically offers more than 1,250 products
in each of its catalogs, which average 168 pages per edition. In order to
enhance the ongoing appeal of its product offerings, the Company produces four
new catalogs per year and regularly replaces the products in its catalogs. The
Company seeks out new and unique items that may not be available in ordinary
retail stores, with an emphasis on upscale merchandise selling for $29.95 or
more. During 1997, the Company's more popular product categories included
household items, electronics, personal care items, clothing, multimedia items,
and travel accessories. In 1997, two merchants accounted for 16 percent and 13
percent, respectively, of the Company's net merchandise sales. No other merchant
in 1997 accounted for more than 10 percent of the Company's net merchandise
sales.


                                      -5-
<PAGE>   9
GROWTH STRATEGY

         Increase Revenue Per Passenger. The Company's primary growth strategy
is to increase its revenue per passenger enplanement. The Company's revenue per
passenger enplanement on flights carrying the SkyMall catalog has increased to
approximately $0.11 in 1997 from $0.06 in 1994, for a compound annual growth
rate of 22 percent. To increase revenue per passenger enplanement, the Company
has implemented or may implement the following programs:

                  Marketing and Promotional Programs. The Company has developed
         several innovative marketing and promotional programs, some of which
         are facilitated through the unique relationships between the Company
         and its airline partners. Some of these programs are modeled after
         historically successful "duty-free", in-flight sales programs offered
         on international flights. Although the Company does not plan to offer
         duty-free merchandise to airline passengers, it believes it can emulate
         several of the marketing aspects of duty-free shopping to increase
         sales of merchandise offered in the SkyMall catalog. The Company
         believes that duty-free merchandising is successful for many reasons,
         including (i) the high-level of awareness of duty-free shopping among
         airline passengers, (ii) the perception among duty-free shoppers that
         they are purchasing merchandise at a discount, (iii) the limited time
         offer of duty-free merchandise which requires passengers to purchase
         merchandise while the plane is in flight to take advantage of the
         perceived discount, (iv) the participation of commissioned flight
         attendants who encourage passengers to purchase merchandise, and (v)
         the optimal mix of duty-free products, some of which encourage
         "impulse" purchases by passengers.

                  Among the plans in various stages of implementation by the
         Company are (i) enhancing promotion of the Company's shopping services
         through on-board announcements, including video and audio programming,
         (ii) mailing inserts in frequent flyer statements in order to promote
         awareness of the Company's products and services, (iii) offering
         airlines and key airline employees incentives for promoting the use of
         the Company's catalogs among airline passengers, (iv) conducting
         in-flight, gate, and jetway promotions, such as gift certificates,
         discount certificates, and special offers to passengers who order while
         in-flight, (v) making the Company's catalogs available in airport
         lounges, (vi) continually upgrading and analyzing the appropriate mix
         of products for inclusion in the SkyMall catalog to encourage
         passengers to make purchases, and (vii) point-of-sale promotions. The
         Company believes the foregoing programs may increase revenue per
         passenger enplanement and may also increase the awareness of the
         SkyMall catalog generally so that airline passengers will be more
         likely to make purchases from the SkyMall catalog. However, there can
         be no assurance that the Company will be able to fully implement the
         foregoing marketing programs, including those modeled after successful
         duty-free programs, and there can be no assurance that the successful
         implementation of the foregoing programs will result in an increase in
         the Company's revenue per passenger enplanement.

                  Direct Marketing and Related Programs. Through its data
         management system, the Company maintains a database of customer
         information, including customer names, addresses, and product
         purchases. From this database, the Company obtains information about
         customer buying patterns and preferences. The Company strives to
         develop customer loyalty and to increase revenues from its existing
         customer base. To increase the number of repeat customer purchases, the
         Company has implemented various programs designed to develop customer
         loyalty and increase the customer's average order size. The Company may
         expand its direct marketing and related programs to selected customer
         groups and tailor the marketing materials to the preferences of those
         groups as demonstrated by their prior purchasing history.

         Increase Catalog Circulation and Develop New Distribution Channels. To
increase its customer base, the Company seeks to continually expand its catalog
circulation on major airlines and to establish new distribution channels when
appropriate. The Company has implemented or may implement a number of programs
designed to increase the circulation of the SkyMall catalog and reach new
customers, including the following:


                                      -6-
<PAGE>   10
                  Expanding Domestic Airline Partnerships. The Company seeks to
         secure agreements from additional major airlines to carry the SkyMall
         catalog. In addition, the Company from time-to-time includes a small
         selection of its products and services in in-flight magazine inserts to
         give new airlines the opportunity to test the Company's services and to
         make the Company's products and services available on smaller airlines
         where a full-length catalog is not cost effective.

                  Developing International Airline Partnerships. Although some
         duty-free and shopping catalogs are available on international flights,
         the Company believes that this market is substantially underserved. In
         1997, the Company launched a new international initiative with United
         Airlines and Empire Airport Service Co., Ltd., a Japan-based duty-free
         retail company, to provide a Japanese language catalog to the more than
         five million international passengers who travel each year on United
         Airlines' flights serving Tokyo and Osaka, Japan. The first edition of
         the Japanese language catalog, which was placed on board in January
         1998, features merchandise from some of SkyMall's long-standing
         merchant partners and is targeted to the tastes and preferences of the
         Japanese customer. As more information regarding the effectiveness of
         this program becomes available, the Company may consider additional
         controlled and carefully planned expansion into large international
         markets through cooperative ventures with its current domestic airline
         partners as well as new international partners.

                  Electronic Commerce Initiative. In the fourth quarter of 1997,
         the Company launched an electronic commerce initiative that included an
         improved Web site at www.skymall.com and a program for providing
         internet-based shopping to SkyMall's airline partners and other
         entities interested in providing SkyMall's merchandise to visitors to
         their own Web sites. The Company's Web site showcases products offered
         in the Company's print catalog and provides customers an additional
         channel of customer service and support. The Company plans to continue
         to evaluate the results of the electronic commerce initiative and may,
         depending on such results, consider expanding such initiative.

                  Other Distribution Channels. The Company believes its shopping
         services will appeal to consumers in airports as well as other
         locations and may test and, if effective, implement additional programs
         when appropriate. In 1997, the Company began testing several new
         distribution channels, including an electronic hotel shopping program
         and an upscale specialty catalog for one of its airline partners for
         distribution in its member-oriented lounges. The Company frequently
         receives inquiries from its airline partners and other third parties
         for similar programs. Based on the results of such testing, the Company
         may consider expanding or eliminating these additional distribution
         channels.

BUSINESS OPERATIONS

         Customer Service Center; Order Processing and Fulfillment. The Company
maintains a well-trained, in-house staff of customer service representatives
located in Phoenix, Arizona and outsources "overflow" calls to independent call
centers when appropriate. Sales calls are accepted 24 hours each day, 7 days a
week. The Company monitors the quality of its customer service operations
closely and regularly implements improvements in its customer service
operations.


                                      -7-
<PAGE>   11
         At March 12, 1998, the Company employed approximately 140 customer
service representatives. In 1997, the Company expanded its customer contact
center by 133 telephone service stations, bringing the total capacity of the
customer contact center to 211. The Company's telephone equipment distributes
calls to sales representatives and provides detailed call reporting and
analysis, assisting the Company with order processing and marketing efforts. The
Company's customer service representatives are given incentives for outstanding
service. The Company maintains no significant inventory. Therefore, once the
Company receives a customer order, it is transmitted to the appropriate merchant
which ships the merchandise directly to the customer. Most orders are delivered
to customers within seven to ten days. The Company's average order size is
approximately $95.

         Over 87 percent of the Company's daily orders are received on
"toll-free" numbers, including seven percent from toll-free air phones, with the
remaining orders arriving by U.S. mail, facsimile, and the internet. Air phones
offer customers a convenient way to order goods and services from the Company
while in flight. Most airline passengers who have access to air phones are able
to place orders with the Company while in flight by using a "speed dial" number
programmed into the air phone. In late 1997, the Company renegotiated its
agreements with air phone service providers which serve substantially all of the
Company's airline partners. These new arrangements, which include joint
marketing programs, have enabled the Company to more actively promote ordering
via the air phone. The Company plans to continue testing various air phone
promotions and implementing new programs when appropriate to promote "impulse"
purchasing from the SkyMall catalog while in flight.

         Credit Sales. Most of the more than 550,000 customer orders received by
the Company during 1997 were billed to customer credit cards. The remaining
customers generally paid for their purchases by personal check. To minimize
credit losses, the Company obtains approval from the customer's credit card
company prior to processing each order. In addition, when the customer requests
that his or her merchandise be shipped to an address that is different than the
customer's billing address, the Company typically verifies the charge
authorization directly with the credit card holder at his or her billing
address. The Company verifies personal bank checks received from customers with
an independent service bureau prior to processing the customer's order. Although
the Company's credit losses are generally immaterial, under its agreements with
participating merchants, the Company has the right to obtain reimbursement from
the merchants for any credit losses it reasonably incurs.

         Information Systems. The Company maintains an information system that
is used primarily to capture and process customer orders. The Company typically
receives approximately 2,200 calls per day in off-peak seasons and approximately
6,400 calls per day during the peak of the holiday season. The Company's
information system has the capacity to process approximately 10,000 calls per
day.

         After the Company processes an order in its information system, the
order is forwarded to a merchant to be filled. In late 1996, the Company began
implementation of a uniform electronic transmission system which allows the
Company to transmit customer orders to merchants electronically. Under this
system, orders received through the Company's information system are forwarded
to a third party, the LitleNet Direct Commerce Network(SM) (the "Network"), for
further processing. The Network has developed a proprietary system that
electronically delivers order information to the merchants in a form that is
compatible with each such merchant's information systems. The Company contracts
for access to the Network on a per transaction basis, permitting the Company to
expand the capabilities of its information systems without additional
infrastructure development, maintenance, and upgrade expense. Currently,
approximately 50 percent of the Company's orders are processed electronically
via the Network.

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


                                      -8-
<PAGE>   12
HOUSE FILE

         The Company maintains a customer database or "house file" which
contains a variety of information about the more than one million customers who
have purchased merchandise or services from the Company. In addition to the
customer's name and address, the Company's house file also contains a detailed
history of purchases made by customers with the Company. This information serves
as a useful tool in evaluating the effectiveness of marketing efforts and in
identifying the Company's best customers. Like other catalog companies, the
Company "rents" its house file for a fee. By renting its house file, the Company
is able to generate incremental revenues without incurring significant costs.
The house file is updated on a daily basis as orders are received. In 1997, the
Company undertook various database analysis initiatives with some of its airline
partners that enabled the Company to learn more about the buying habits and
preferences of the Company's existing customers as well as frequent flyers in
general. This information has been used by the Company to better merchandise the
SkyMall catalog, develop marketing programs, and to cost effectively evaluate
certain new business initiatives.

COMPETITION

         In-Flight Shopping. The Company believes that its long standing
relationships with its airline partners and participating merchants create
substantial barriers to competition in the in-flight catalog shopping business.
However, in 1997, Northwest Airlines began offering a merchandise catalog to its
customers though a competitor of the Company. Some competitors of the Company
have greater financial, marketing, and other resources, and may seek to enter or
expand penetration into the in-flight catalog shopping market in competition
with the Company.

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

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

REGULATION

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

EMPLOYEES

         At March 12, 1998, the Company had 190 employees. Approximately 90
percent of the Company's employees are full-time employees. The Company makes
significant use of temporary and part-time employees to process orders during
the holiday season. The Company believes it has good relations with its
employees.


                                      -9-
<PAGE>   13
TRADEMARKS AND TRADE NAMES

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

ITEM 2.  PROPERTIES

         The Company's executive offices are located in Phoenix, Arizona, where
the Company leases approximately seven acres of land under long-term leases
expiring in 2012, with an option to extend to 2062. The Company owns the
improvements to this land which include offices, warehouses, storage facilities,
and a small retail shopping center, consisting of an aggregate of approximately
50,000 square feet.

ITEM 3.  LEGAL PROCEEDINGS

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

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

         None.



                                     PART II

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

         The Company's Common Stock is traded on the Nasdaq Stock Market's
National Market under the symbol "SKYM". The high and low closing prices of the
Company's Common Stock from December 16, 1996 (the date of the Company's initial
public offering) through December 31, 1997 are set forth in the following table.
As of March 12, 1998, the Company had 74 record holders of its Common Stock.

<TABLE>
<CAPTION>
                         1997                     1996
                  ------------------       ------------------
                   High        Low           High       Low
                  -------    -------       -------    -------
<S>               <C>        <C>           <C>        <C>
         Q1       $10.500    $ 8.000         N/A        N/A
         Q2       $ 8.500    $ 5.500         N/A        N/A
         Q3       $ 7.750    $ 4.125         N/A        N/A
         Q4       $ 6.875    $ 4.125        $9.125     $8.250
</TABLE>

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


                                      -10-
<PAGE>   14
ITEM 6.  SELECTED FINANCIAL DATA


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

     The selected financial data as of and for each of the five years ended
December 31, 1997 are derived from the Financial Statements of the Company,
which have been audited by Arthur Andersen LLP, independent public accountants,
and should be read in conjunction with the Financial Statements included
elsewhere in this Form 10-K and the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                 --------------------------------------------------------------------------
                                                    1997           1996            1995            1994            1993
                                                 -----------    -----------     -----------     -----------     -----------
<S>                                              <C>            <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:

Merchandise sales, net                           $    42,844    $    30,978     $    26,883     $    22,062     $    24,507
Placement fees and other                              17,974         12,707          16,198           8,241           2,560
                                                 -----------    -----------     -----------     -----------     -----------

     Total revenues                                   60,818         43,685          43,081          30,303          27,067
Cost of goods sold                                    35,099         24,257          24,564          16,266          13,691
                                                 -----------    -----------     -----------     -----------     -----------

     Gross Margin                                     25,719         19,428          18,517          14,037          13,376
                                                 -----------    -----------     -----------     -----------     -----------
Catalog expenses                                       9,082          7,670           9,532           9,644           6,890
Selling expenses                                       3,450          2,476           2,229           2,754           2,921
Customer service and fulfillment expenses              4,438          2,823           2,136           2,919           4,514
General and administrative expenses                    6,340          3,340           3,112           5,886           4,530
Restructure charges                                       --             --              --           4,332              --
                                                 -----------    -----------     -----------     -----------     -----------
     Total operating expenses                         23,310         16,309          17,009          25,535          18,855
                                                 -----------    -----------     -----------     -----------     -----------
Income (loss) from operations                          2,409          3,119           1,508         (11,498)         (5,479)
Interest and other income
  (expense), net                                         462           (651)           (750)           (688)           (287)
                                                 -----------    -----------     -----------     -----------     -----------
Income (loss) before income taxes                      2,871          2,468             758         (12,186)         (5,766)

Income taxes                                             300            280              --              --              --
                                                 -----------    -----------     -----------     -----------     -----------
Net income (loss)                                      2,571          2,188             758         (12,186)         (5,766)
Preferred stock dividends                                 --             77              --              --              --
                                                 -----------    -----------     -----------     -----------     -----------
Net income (loss) available for
  common shares                                  $     2,571    $     2,111     $       758     $   (12,186)    $    (5,766)
                                                 ===========    ===========     ===========     ===========     ===========
Diluted net income (loss) per common share       $       .30    $       .38     $       .14     $     (3.43)    $     (1.69)

Diluted weighted average shares outstanding        8,675,803      5,599,443       5,431,337       3,557,787       3,413,073

SELECTED OPERATING DATA (UNAUDITED):

Number of domestic enplanements (in 000's) (1)       579,822        530,661         498,611         481,755         448,647
Domestic enplanement percentage (2)                       70%            63%             64%             72%             76%
Revenue per passenger enplanement (3)            $      0.11    $      0.09     $      0.08     $      0.06     $      0.07
Number of airlines at end of period (4)                   16             15              20              21              15
Number of catalogs produced (in 000's) (5)            16,933         15,729          17,162          15,747          15,661
Average number of pages per catalog (6)                  168            148             137             133             102
Revenue per catalog produced (7)                 $      2.53    $      1.97     $      1.57     $      1.40     $      1.56
Revenue per page printed (8)                     $     0.015    $     0.013     $     0.011     $     0.011     $     0.015
</TABLE>


                                      -11-
<PAGE>   15
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                 --------------------------------------------------------------------------
                                                    1997           1996            1995            1994           1993
                                                 -----------    -----------     -----------     -----------     -----------
<S>                                              <C>            <C>             <C>             <C>             <C>
BALANCE SHEET DATA:
Cash and cash equivalents                        $     9,412    $    11,491     $       775     $       896     $       171
Working capital (deficit)                              6,050          6,692          (4,734)         (7,540)         (3,580)
Total assets                                          26,634         19,721           4,726           5,913          10,394
Long-term debt                                            66            139          10,818           8,082           2,978
Shareholders' equity (deficit)                   $    10,307    $     8,601     $   (15,033)    $   (15,791)    $    (3,603)
</TABLE>

----------
(1)      Represents the total number of revenue passengers flown on scheduled
         domestic airlines in the given period.

(2)      Represents the passenger enplanements on domestic airlines that carried
         the SkyMall catalog during the period as a percentage of total domestic
         passenger enplanements in the period by all scheduled domestic
         airlines.

(3)      Revenue per passenger enplanement is net merchandise sales for the
         period divided by the number of domestic enplanements during the period
         on all scheduled domestic airlines that carried the SkyMall catalog.

(4)      Represents the number of airlines at end of period with which the
         Company had an agreement to carry the SkyMall catalog. During the year
         ended December 31, 1996, the Company eliminated unprofitable
         circulation of the SkyMall catalog by eliminating routes on certain
         airlines and terminating agreements with certain smaller regional
         airlines. See "Management's Discussion and Analysis of Financial
         Condition and Results of Operations."

(5)      Represents the number of SkyMall catalogs produced by the Company
         during the period for distribution to airlines.

(6)      Represents the average number of pages in the SkyMall catalog during
         the period.

(7)      Represents net merchandise sales for the period divided by the number
         of SkyMall catalogs produced by the Company during the period.

(8)      Represents net merchandise sales for the period divided by the number
         of SkyMall catalogs produced multiplied by the average number of pages
         per catalog during the period.


                                      -12-
<PAGE>   16
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. The discussion should
be read in conjunction with the Financial Statements and the related notes
thereto, and the Selected Financial and Operating Data contained elsewhere
herein.


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                         YEAR ENDED
                                                                         DECEMBER 31,
                                                          --------------------------------------
                                                             1997          1996          1995
                                                          ----------    ----------    ----------
<S>                                                       <C>           <C>           <C>
         Net merchandise sales                                    70%           71%           62%
         Placement fees and other                                 30%           29%           38%
                                                          ----------    ----------    ----------
         Total revenues                                          100%          100%          100%
                                                          ----------    ----------    ----------
         Gross margin                                             42%           44%           43%
                                                          ----------    ----------    ----------
         Catalog expenses                                         15%           17%           22%
         Selling expenses                                          6%            6%            5%
         Customer service and fulfillment expenses                 7%            6%            5%
         General and administrative expenses                      10%            8%            7%
                                                          ----------    ----------    ----------
         Total operating expense                                  38%           37%           39%
                                                          ==========    ==========    ==========
         Income from operations                                    4%            7%            4%
                                                          ==========    ==========    ==========
</TABLE>

1997 COMPARED TO 1996

         Revenue and Gross Margin. Net merchandise sales increased to $42.8
million in 1997 from $31.0 million in 1996, or 38 percent. The increase is
primarily due to increases over the prior year in catalog distribution of eight
percent and in net merchandise revenue per page printed of 13 percent. Placement
fees and other revenues increased to $18.0 million in 1997 from $12.7 million in
1996, or 41 percent. Gross margin increased to $25.7 million in 1997 from $19.4
million in 1996, or 32 percent; however, gross margin declined to 42 percent of
total revenues in 1997 from 44 percent in 1996. The decrease in gross margin
percentage was primarily due to a change in the mix of agreements with merchants
which resulted in higher placement fees but retention of a lower percentage of
net merchandise sales in 1997.

         Operating Expenses. Total operating expenses increased to $23.3 million
or 38 percent of total revenues in 1997 from $16.3 million or 37 percent of
total revenues in 1996. Catalog expenses, consisting of catalog production,
paper, and printing costs, increased to $9.1 million in 1997 from $7.7 million
in 1996, or 17 percent. The increase is due to increases in catalog distribution
of eight percent and 14 percent in average pages per catalog in 1997 compared to
1996, offset in part by a decrease in average paper cost per hundred weight to
$41 in 1997 from $55 in 1996. The Company's paper costs are anticipated to be
approximately $45 to $48 per hundred weight in 1998. Selling expenses, which
represent commissions paid to airlines and marketing partners, remained constant
at six percent of total revenues. Customer service and fulfillment expenses,
which include a full-service customer contact center and a drop-ship and
order-coordination center increased to $4.4 million, or seven percent of total
revenues, in 1997 compared to $2.8 million, or six percent of total revenues, in
1996. The increase in customer service and fulfillment expense in 1997 is due
primarily to the addition of call center personnel. General and administrative
expenses increased to $6.3 million in 1997 from $3.3 million in 1996. The
increase is due primarily to addition of key management personnel and other
infrastructure investments to support anticipated future business growth. During
fourth quarter of 1997, the Company launched several new business initiatives
including an international catalog, an electronic commerce initiative, and a
specialty catalog distributed in membership-oriented airport lounges.


                                      -13-
<PAGE>   17
         Income from Operations. Income from operations was $2.4 million or four
percent of total revenues in 1997, a decrease from $3.1 million or seven percent
of total revenues in 1996, as a result of the items discussed above.

         Income Taxes. Income tax expense amounted to $300,000 in 1997 compared
to $280,000 in 1996. Income tax expense in 1997 was lower than the statutory
rate due to a reduction in certain temporary differences, as well as the
elimination of the valuation allowance for deferred tax asset items. Income tax
expense in 1996 was lower than the statutory rate due to the conversion from an
S corporation to a C corporation in October, 1996.

1996 COMPARED TO 1995

         Revenue and Gross Margin. Net merchandise sales increased to $31.0
million in 1996 from $26.9 million in 1995, or 15 percent. Placement fees and
other revenues decreased to $12.7 million in 1996 from $16.2 million in 1995, or
22 percent. The increase in net merchandise sales and decrease in placement fees
is a result of changes in participating merchant agreements and the composition
of the pages within the catalog year over year. The net result of these changes
increased gross margins as a percentage of total revenues to 44 percent in 1996
compared to 43 percent in 1995.

         Operating Expenses. Total operating expenses decreased to $16.3 million
in 1996 from $17.0 million in 1995, or four percent, due primarily to a $1.9
million reduction in catalog expenses. This reduction resulted from elimination
of unprofitable circulation of the SkyMall catalog by eliminating routes on
certain airlines, terminating agreements with certain regional airlines, and
lower pricing on the Company's printing contract. The reduction in catalog
expense was offset in part by increases of $0.3 million, $0.7 million, and $0.2
million in selling, customer service and fulfillment, and general and
administrative expenses, respectively.

         Income from Operations. Income from operations increased to $3.1
million or seven percent of total revenues in 1996 from $1.5 million or four
percent of revenues in 1995, as a result of the items discussed above.

         Income Taxes. Prior to October 21, 1996, the Company elected to be
taxed under Subchapter S of the Internal Revenue Code and corresponding
provisions of Arizona tax laws. As a result of the election, federal and state
income taxes on the net income of the Company were payable personally by
shareholders; accordingly, statements of income for periods prior to 1996 do not
include a provision for federal and state income taxes. Had the Company been a C
corporation for these periods, no federal or state income taxes would have been
due as a result of net operating loss carry-forwards from the earlier years. In
the fourth quarter of 1996 and thereafter, the Company became subject to
federal and state income taxes as a result of its conversion from an S
corporation to a C corporation and no net operating losses incurred while the
Company was an S corporation are available to the Company to offset future
earnings. As a result of the change from an S corporation to a C corporation,
the Company recorded a provision for income taxes of $280,000 in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         Cash provided by operating activities was $2.6 million in 1997 compared
to $2.2 million in 1996 and $1.1 million in 1995. The improvement year over year
is primarily due to increases in net income.

         Cash used in investing activities was $2.8 million in 1997 consisting
primarily of building improvements, furniture and fixtures, and computer
software and hardware relating to the Company's customer contact center and
corporate offices. Cash used in investing activities for 1996 and 1995 amounted
to $0.4 million and $0.2 million, respectively, relating to telecommunications
and computer equipment and furniture and fixtures. During 1998, management
anticipates that capital expenditures will amount to $1.5 million relating
primarily to building improvements and computer software and hardware.


                                      -14-
<PAGE>   18
         Cash used in financing activities amounted to $1.9 million in 1997
relating to payments on notes payable of $1.0 million and the repurchase of
137,400 shares of the Company's common stock for $0.9 million. In addition, on
March 9, 1998, the Company repurchased an additional 27,000 shares of the
Company's common stock for $0.1 million. In 1996, the Company was recapitalized
resulting in net cash provided by financing activities of $9.0 million,
including net proceeds of the Company's initial public offering of common stock
of $14.0 million, proceeds from issuance of preferred stock of $2.5 million,
offset by a use of cash of $7.5 million for payment of debt obligations. For
1995, cash used in financing activities amounted to $1.0 million, including $2.2
million for payment on shareholder notes payable and $1.2 million from note
proceeds from shareholders.

         At December 31, 1997, the Company had net working capital of $6.1
million, which included cash and cash equivalents of $9.4 million. Additionally,
the Company maintains a reducing revolving line of credit at a bank with a
maximum available line of $4.0 million. As of March 12, 1998, the entire balance
of the revolving line of credit was unused. Typically, cash provided from
operations is adequate to supply working capital and provide for investing
activities.

CHANGES IN SECURITIES AND USE OF PROCEEDS

         On December 11, 1996, the Company's Registration Statement on Form S-1
(File No. 333-17609) (the "Form S-1"), was declared effective by the U.S.
Securities and Exchange Commission. The Form S-1 was prepared in connection with
an initial public offering by the Company of 2,000,000 shares (the "Shares") of
common stock (the "Offering"). The Offering commenced on December 11, 1996 and
terminated December 16, 1996, the date on which all of the Shares were sold. The
Offering was underwritten by Josephthal Lyon & Ross Incorporated and Cruttenden
Roth Incorporated on a firm commitment basis. The Shares were offered to the
public at a price of $8.00 per share, or $16.0 million in the aggregate for all
2,000,000 Shares offered, all of which were sold as of the date the offering
terminated.

         The Company's actual expenses incurred in connection with the issuance
and distribution of the Shares registered pursuant to the Form S-1 equaled
approximately $2.0 million in the aggregate, which consisted of the following:
(i) $1.1 million in aggregate underwriting discounts and commissions, (ii) $0.2
million in expenses paid to or for the underwriter, and (iii) $0.7 million in
other expenses. Of the $0.7 million in other expenses, no direct or indirect
payments were made to the Company's officers, directors, holders of 10 percent
or more of any class of the Company's outstanding securities or other affiliated
parties (collectively "Affiliates").

         After deducting the foregoing expenses, the Offering resulted in
approximately $14.0 million in net proceeds to the Company. For the period from
December 16, 1996 through December 31, 1997, the Company used the net proceeds
as follows: approximately (i) $1.0 million for building improvements to the
corporate offices and the customer contact center, (ii) $1.7 million for the
purchase and installation of telephone and computer software and equipment,
(iii) $4.0 million for the reduction of the Company's revolving line of credit,
(iv) $0.4 million for marketing and promotional expenses, (v) $0.4 million for
development of additional circulation media, (vi) $0.9 million for the
repurchase of 137,400 of the Company's common shares, and (vii) $5.6 million for
temporary investments consisting primarily of money market funds. None of the
above mentioned amounts consist of direct or indirect payments to Affiliates.
The preceding discussion of the Company's use of net proceeds is based upon
reasonable estimates by management. Except for capital expenditures and the
repurchase of the Company's common shares discussed in items (i), (ii), and (iv)
above. The Company's use of proceeds from the Offering, as described herein,
does not represent a material change from that described in the Prospectus
included in the Form S-1. The Company continues to evaluate the use and
allocation of the Offering proceeds and, as discussed in the Form S-1, may
re-allocate or use the Offering proceeds for different purposes as business
conditions warrant.


                                      -15-
<PAGE>   19
FLUCTUATIONS IN QUARTERLY RESULTS

         The Company's operating results may fluctuate from period to period as
a result of the seasonal nature of the retail industry. The Company recognizes
its highest sales levels during the fourth quarter holiday season, and the
fourth quarter typically accounts for approximately 40 percent of the Company's
annual merchandise sales.

         The following table sets forth certain unaudited information about the
Company's revenue and results of operations on a quarterly basis for 1997 and
1996.

<TABLE>
<CAPTION>
                                        YEAR ENDED                              YEAR ENDED
                                     DECEMBER 31, 1997                       DECEMBER 31, 1996
                           -------------------------------------   -------------------------------------
                           1ST QTR   2ND QTR   3RD QTR   4TH QTR   1ST QTR   2ND QTR   3RD QTR   4TH QTR
                           -------   -------   -------   -------   -------   -------   -------   -------
<S>                        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Merchandise sales, net     $ 8,084   $ 8,596   $ 9,175   $16,989   $ 5,882   $ 6,550   $ 6,474   $12,072

Placement fees and other     3,507     3,703     3,793     6,971     3,073     2,720     2,838     4,076
                           -------   -------   -------   -------   -------   -------   -------   -------
Total revenues              11,591    12,299    12,968    23,960     8,955     9,270     9,312    16,148
                           -------   -------   -------   -------   -------   -------   -------   -------
Gross margin                 4,981     5,346     5,261    10,131     4,259     4,414     4,139     6,616
                           -------   -------   -------   -------   -------   -------   -------   -------
Catalog expenses             1,889     2,033     2,004     3,156     2,151     1,828     1,726     1,965

Selling expenses               670       702       736     1,342       514       620       531       811

Customer service and
Fulfillment expenses           987       987       912     1,552       457       515       539     1,312

General and
Administrative
Expenses                     1,092     1,443     1,394     2,411       753       695       842     1,050
                           -------   -------   -------   -------   -------   -------   -------   -------
Total operating
expenses                     4,638     5,165     5,046     8,461     3,875     3,658     3,638     5,138
                           -------   -------   -------   -------   -------   -------   -------   -------
Income from operations     $   343   $   181   $   215   $ 1,670   $   384   $   756   $   501   $ 1,478
                           =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>

RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"),
respectively (collectively, the "Statements"). The Statements are effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting of comprehensive income and its components in annual financial
statements. SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS 130
and SFAS 131, respectively. Application of the Statements' requirements is not
expected to have a material impact on the Company's financial position, results
of operations or earnings per share data as currently reported.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

         Certain statements herein, in future filings by the Company with the
Securities and Exchange Commission and in the Company's written and oral
statements made by or with the approval of an authorized executive officer
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words and phrases "should be," "will be,"
"believes," "expects," "anticipates," "plans," "intends", "may" and similar
expressions identify forward-looking statements. These forward looking
statements reflect the Company's current views with respect to future events and
financial performance, but are subject to many uncertainties and factors
relating to the Company's operations and business environment which may cause
the actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements. Examples of
such uncertainties include, but are not limited to, the Company's dependence on
its relationships with its airline partners, fluctuations in paper prices and
airline fuel costs, customer credit risks, competition from other catalog
companies and retailers, and the Company's reliance on information and
telecommunications systems, all of which are discussed more fully below and in
the Company's other filings with


                                      -16-
<PAGE>   20
the Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements whether as a result of
new information, future events, or otherwise.

RISK FACTORS

     Limited History of Profitable Operations; No Assurance of Continued
Profitability. The Company commenced operations in late 1990, and prior to
1995 the Company incurred substantial losses. There can be no assurance
that the Company's operations will remain profitable.

     No Assurance of Continued Growth. Since its inception, SkyMall has rapidly
expanded its operations, growing from total revenues of $0.02 million in 1990 to
total revenues of $60.8 million in 1997. The Company's continued growth will
depend to a significant degree on its ability to increase revenue per passenger,
broaden its customer base by entering into relationships with new domestic and
foreign airlines, and implement other programs that increase the circulation of
the SkyMall catalog. The Company's ability to implement its growth strategy will
also depend on a number of other factors, many of which are or may be beyond the
Company's control, including (i) the ability of the Company to select products
for its catalog that appeal to its customer base, (ii) sustained or increased
levels of airline travel, particularly in domestic airline markets, (iii) the
continued perception by participating merchants that the Company offers an
effective marketing channel for their products and services, (iv) the Company's
ability to attract, train, and retain qualified employees and management, and
(v) the continued profitability of existing operations. There can be no
assurance that the Company will be able to successfully implement its growth
strategy or that its planned expansion will be profitable.

     Dependence on Airline Relationships. The Company's business depends
significantly on its relationships with airlines and its ability to have its
catalogs placed on a substantial portion of domestic airline flights. The
Company's agreements with its airline partners typically have one-year terms,
but generally permit the airline to terminate the relationship on 60 to 180
days' advance notice. There can be no assurance that the Company's airline
partners will continue their relationships with the Company and the loss of one
or more of the Company's significant airline partners could have a material
adverse affect on the Company's financial condition and results of operations.

     Increases in Paper Costs and Airline Fuel Prices. The cost of paper used to
print the Company's catalogs and the fees paid to airlines to reimburse them for
the increased fuel costs associated with carrying the Company's catalogs are
significant expenses of the Company's operations. Historically, paper and
airline fuel prices have fluctuated significantly from time to time. Prices in
the paper market remain volatile and the Company anticipates that its paper
costs will increase in 1998 in comparison to 1997. Any significant increases in
paper or airline fuel costs reimbursable by the Company could have a material
adverse effect on the Company's financial condition and results of operations.

     Credit Risk. Some participating merchants agree to pay a placement fee to
the Company for inclusion of their merchandise in the SkyMall catalog. The
Company records an account receivable from the merchant for the placement fee
ratably for each month of the catalog issue. In some cases, the Company collects
the placement fee either from the merchant or by withholding it from amounts due
to the merchant for merchandise sold. To the extent that the placement fee
receivable exceeds the sales of the merchant's products and the merchant is
unable or unwilling to pay the difference to the Company, the Company may
experience credit losses which could have a material adverse effect on the
Company's financial condition and results of operations.

     Competition. From time to time, competitors, typically other catalog
retailers, have attempted to secure contracts with airlines to offer merchandise
to their passengers. In 1997, Northwest Airlines began offering a merchandise
catalog to its customers through a competitor of the Company. Various
international airlines also offer merchandise catalogs to their passengers
through competitors of the Company. The Company also faces competition for
customers from airport-based retailers, duty-free retailers, specialty stores,
department stores, and specialty and general merchandise catalogs, many of which
have greater financial and marketing resources than the Company. In addition,
the Company competes for customers with other in-flight marketing media, such as
airline-sponsored in-flight magazines and airline video programming. All of the
products and services offered by the Company can also be found in other retail
stores and catalogs.


                                      -17-
<PAGE>   21
     Reliance on Information and Telecommunications Systems. The Company
processes a large volume of relatively small orders. Consequently, the Company's
success depends to a significant degree on the effective operation of its
information and telecommunications systems. Any extended failure of the
Company's information and telecommunications systems could have a material
adverse effect on the Company's financial condition and results of operations.

     Year 2000 Compliance. Many software programs use only two digits to
identify the year in the date field. If such programs are not corrected, date
data concerning the Year 2000 could cause many computer applications to fail,
lock-up or generate erroneous results. The Company has committed personnel and
resources to resolve potential Year 2000 issues, and is in the process of
identifying and assessing its mission-critical systems related to the Year 2000.
Although the Company plans to address Year 2000 issues with respect to its
mission-critical internal systems in sufficient time prior to the century
rollover, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. There can also be no
assurance that there will not be interruption of operations as a result of
potential limitations of systems of the parties with whom the Company has
relationships for product fulfillment and distribution. The Company is currently
assessing the cost to remediate its Year 2000 issues. Although the actual cost
to remediate these issues is not yet fully known, based upon information to
date, it is not expected that the remediation will have a material impact on the
Company's financial condition or operating results.

     Seasonality. The Company's business is seasonal in nature, with its sales
peak typically occurring during the holiday selling season of the fourth
quarter. During 1997, approximately 40 percent of the Company's net merchandise
sales were generated in the fourth quarter. Any substantial decrease in sales
for the fourth quarter could have a material adverse effect on the Company's
results of operations.

     Product Liability. The Company's catalog typically features over 1,250
products and services from more than 60 participating merchants. Generally, the
Company's agreements with its participating merchants require the merchants to
indemnify the Company for any losses arising from product liability claims made
by customers, including the costs of defending any such claims, and to carry
product liability insurance that names SkyMall as an additional insured. In
addition, the Company maintains product liability insurance in the aggregate
amount of $2.0 million and $1.0 million per occurrence. To the extent that a
merchant was unable or unwilling to indemnify the Company as required, and any
such losses exceeded the Company's insurance coverage or were not covered by the
Company's insurer, the Company's financial condition and results of operations
could be materially adversely affected.

     Reliance on Key Personnel. The Company is dependent on the services of
Robert M. Worsley, its chairman, president and chief executive officer, and on
the services of certain other executive officers. The loss of Mr. Worsley's
services or of the services of certain other executive officers could have a
material adverse effect on the Company.

     Control by Shareholder. As of March 12, 1998, Mr. Worsley and his wife (the
"Worsleys") own and have options to purchase approximately 63.2% of the
Company's outstanding Common Stock. Accordingly, the Worsleys have the ability
to significantly influence the affairs of the Company and matters requiring a
shareholder vote, including the election of the Company's directors, the
amendment of the Company's charter documents, the merger or dissolution of the
Company, and the sale of all or substantially all of the Company's assets. The
voting power of the Worsleys may also discourage or prevent any proposed
takeover of the Company pursuant to a tender offer.

     Volatility of Stock Prices. The trading price of the Common Stock is
subject to wide fluctuations in response to variations in the Company's
operating results, announcements by the Company or others, developments
affecting the Company or its competitors, and other events and factors. In
addition, the stock market has experienced extreme price and volume fluctuations
in recent years. These fluctuations have had a substantial effect on the market
prices for many companies, often unrelated to their performance, and may
adversely affect the market price for the Company's Common Stock.

     No Dividends. The Company has not paid dividends on its Common Stock since
its inception and does not expect to pay cash or stock dividends on its Common
Stock in the foreseeable future.


                                      -18-
<PAGE>   22
     Issuance of Preferred Stock; Barriers to Takeover. The Board of Directors
may issue one or more series of Preferred Stock, without any action on the part
of the shareholders of the Company, the terms of which may adversely affect the
rights of holders of Common Stock. Further, the issuance of Preferred Stock may
be used as an "anti-takeover" device without further action on the part of the
shareholders. Issuance of Preferred Stock, which may be accomplished through a
public offering or a private placement to parties favorable to current
management, may dilute the voting power of holders of Common Stock (such as by
issuing Preferred Stock with super-voting rights) and may render more difficult
the removal of current management, even if such removal may be in the
shareholders' best interests. Any such issuance of Preferred Stock could prevent
the holders of Common Stock from realizing a premium on their shares. The
Company's Articles of Incorporation and Bylaws also contain a certain number of
provisions which could deter takeover attempts.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

         Not Applicable.


                                      -19-
<PAGE>   23
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                                     <C>
Report of Independent Public Accountants.............................................................   F-2

Balance Sheets as of December 31, 1997 and 1996......................................................   F-3

Statements of Income for the Years Ended December 31, 1997, 1996 and 1995............................   F-4

Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995....   F-5

Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995........................   F-6

Notes to Financial Statements........................................................................   F-7
</TABLE>


                                      F-1
<PAGE>   24
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of SkyMall, Inc.:

     We have audited the accompanying balance sheets of SkyMall, Inc. (a Nevada
corporation) as of December 31, 1997 and 1996, and the related statements of
income, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkyMall, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

                                    ARTHUR ANDERSEN LLP

Phoenix, Arizona,
     February 17, 1998.


                                      F-2
<PAGE>   25
                                  SKYMALL, INC.

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

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                                   1997         1996
                                                                                ---------     --------
<S>                                                                             <C>           <C>
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                    $   9,412     $ 11,491
   Accounts receivable, net                                                        10,427        4,150
   Prepaid catalog costs and other                                                  1,863        1,914
   Deferred income taxes                                                              500           59
                                                                                ---------     --------
         Total current assets                                                      22,202       17,614
PROPERTY AND EQUIPMENT, net                                                         4,133        1,949
OTHER ASSETS, net                                                                     299          158
                                                                                ---------     --------
         TOTAL ASSETS                                                           $  26,634     $ 19,721
                                                                                =========     ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                             $  13,669     $  8,623
   Accrued liabilities                                                              1,863          792
   Income taxes                                                                       556          280
   Reserve for restructure charges                                                     --          165
   Current portion of notes payable and capital leases                                 64          942
   Notes payable to shareholders                                                       --          120
                                                                                ---------     --------
         Total current liabilities                                                 16,152       10,922

DEFERRED INCOME TAXES                                                                 109           59
NOTES PAYABLE AND CAPITAL LEASES, net of
   current portion                                                                     66          139
                                                                                ---------     --------
         Total liabilities                                                         16,327       11,120
                                                                                ---------     --------

COMMITMENTS AND CONTINGENCIES (Note 6)

SHAREHOLDERS' EQUITY:
   Preferred stock, $0.001 par value; 10,000,000 shares authorized;
      no shares issued and outstanding                                                 --           --
   Common stock, $0.001 par value; 50,000,000 shares authorized;
     Issued and outstanding shares -
     8,516,600 in 1997 and 8,654,000 in 1996                                            9            9
   Additional paid-in capital                                                       6,723        7,588
   Retained earnings                                                                3,575        1,004
                                                                                ---------     --------
         Total shareholders' equity                                                10,307        8,601
                                                                                ---------     --------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $  26,634     $ 19,721
                                                                                =========     ========
</TABLE>

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


                                      F-3
<PAGE>   26
                                  SKYMALL, INC.

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


<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED
                                                              DECEMBER 31,
                                               -----------------------------------------
                                                   1997           1996           1995
                                               -----------    -----------    -----------
<S>                                            <C>            <C>            <C>
REVENUES:
   Merchandise sales, net                      $    42,844    $    30,978    $    26,883
   Placement fees and other                         17,974         12,707         16,198
                                               -----------    -----------    -----------
         Total revenues                             60,818         43,685         43,081
COST OF GOODS SOLD                                  35,099         24,257         24,564
                                               -----------    -----------    -----------
         Gross margin                               25,719         19,428         18,517
                                               -----------    -----------    -----------
OPERATING EXPENSES:
   Catalog expenses                                  9,082          7,670          9,532
   Selling expenses                                  3,450          2,476          2,229
   Customer service and fulfillment expenses         4,438          2,823          2,136
   General and administrative expenses               6,340          3,340          3,112
                                               -----------    -----------    -----------
         Total operating expenses                   23,310         16,309         17,009
                                               -----------    -----------    -----------

INCOME FROM OPERATIONS                               2,409          3,119          1,508

   Interest expense                                    (71)           (60)           (92)
   Interest expense to shareholders                    (28)          (669)          (663)
   Interest and other income                           561             78              5
                                               -----------    -----------    -----------
INCOME BEFORE INCOME TAXES                           2,871          2,468            758

   Income taxes                                        300            280             --
                                               -----------    -----------    -----------
NET INCOME                                           2,571          2,188            758

PREFERRED STOCK DIVIDENDS                               --             77             --
                                               -----------    -----------    -----------
NET INCOME AVAILABLE
   TO COMMON SHAREHOLDERS                      $     2,571    $     2,111    $       758
                                               ===========    ===========    ===========
BASIC NET INCOME  PER
   COMMON SHARE                                $       .30    $       .40    $       .15
                                               ===========    ===========    ===========
BASIC WEIGHTED AVERAGE
   SHARES OUTSTANDING                            8,620,482      5,303,181      5,150,000
                                               ===========    ===========    ===========
DILUTED NET INCOME  PER
   COMMON SHARE                                $       .30    $       .38    $       .14
                                               ===========    ===========    ===========
DILUTED WEIGHTED AVERAGE
   SHARES OUTSTANDING                            8,675,803      5,599,443      5,431,337
                                               ===========    ===========    ===========
</TABLE>

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


                                      F-4
<PAGE>   27
                                  SKYMALL, INC.

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


<TABLE>
<CAPTION>
                                                                                                            RETAINED
                                                                                               ADDITIONAL   EARNINGS/
                                        CONVERTIBLE PREFERRED STOCK       COMMON STOCK          PAID-IN    (ACCUMULATED
                                            SHARES       AMOUNT        SHARES       AMOUNT      CAPITAL      DEFICIT)      TOTAL
                                          ----------   ----------    ----------   ----------   ----------   ----------   ----------
<S>                                     <C>            <C>           <C>          <C>          <C>         <C>           <C>
BALANCE, January 1, 1995                          --   $       --     5,150,000   $        5   $   18,438   $  (34,234)  $  (15,791)
   Net income                                     --           --            --           --           --          758          758
                                          ----------   ----------    ----------   ----------   ----------   ----------   ----------
BALANCE, December 31, 1995                        --           --     5,150,000            5       18,438      (33,476)     (15,033)
   Issuance of preferred shares,
     net of issuance costs                     3,000        2,555            --           --           --           --        2,555
   Conversion of shareholder debt
     to preferred shares                       5,000        5,000            --           --           --           --        5,000
   Payment of dividend on preferred
     shares                                       --          (77)           --           --           --           --          (77)
   Issuance of common shares upon
     conversion of preferred shares           (8,000)      (7,478)    1,504,000            2        7,476           --           --
   Issuance of shares pursuant to IPO,
     net of issuance costs                        --           --     2,000,000            2       13,966           --       13,968
   Elimination of accumulated
     deficit upon conversion from S
     to C corporation                             --           --            --           --      (32,292)      32,292           --
   Net income                                     --           --            --           --           --        2,188        2,188
                                          ----------   ----------    ----------   ----------   ----------   ----------   ----------
BALANCE, December 31, 1996                        --           --     8,654,000            9        7,588        1,004        8,601

   Repurchase of common
     shares for cash                              --           --      (137,400)          --         (865)          --         (865)
   Net income                                     --           --            --           --           --        2,571        2,571
                                          ----------   ----------    ----------   ----------   ----------   ----------   ----------
BALANCE, December 31, 1997                        --   $       --     8,516,600   $        9   $    6,723   $    3,575   $   10,307
                                          ==========   ==========    ==========   ==========   ==========   ==========   ==========
</TABLE>

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


                                      F-5
<PAGE>   28
                                  SKYMALL, INC.

                            STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           FOR THE YEAR ENDED
                                                                               DECEMBER 31,
                                                                     ------------------------------
                                                                       1997       1996       1995
                                                                     --------   --------   --------
<S>                                                                  <C>        <C>        <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
   Net income                                                        $  2,571   $  2,188   $    758
   Adjustments to reconcile net income to net cash
     provided by operating activities-
     Depreciation and amortization                                        609        344        244
     Provision for doubtful accounts                                      343         --         --
     Deferred income taxes                                               (391)        --         --
     (Increase) decrease in:
         Accounts receivable                                           (6,620)    (3,258)       174
         Prepaid catalog costs and other                                   51       (652)       612
         Other assets                                                    (174)        (2)        --
     (Decrease) increase in:
         Accounts payable                                               5,046      3,928        341
         Accrued liabilities                                            1,071        463       (283)
         Income taxes                                                     276        280         --
         Reserve for restructure charges                                 (165)    (1,111)      (768)
                                                                     --------   --------   --------
         Net cash provided by operating activities                      2,617      2,180      1,078
                                                                     --------   --------   --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
   Purchase of property and equipment                                  (2,760)      (448)      (164)
                                                                     --------   --------   --------
         Net cash used in investing activities                         (2,760)      (448)      (164)
                                                                     --------   --------   --------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
   Payments on notes payable and capital leases                          (951)    (4,090)    (2,235)
   Proceeds from (payments on) notes payable to shareholders, net        (120)    (3,372)     1,200
   Proceeds from issuance of preferred stock, net of issuance costs        --      2,555         --
   Payment of dividends on preferred stock                                 --        (77)        --
   Proceeds from issuance of common stock, net of issuance costs           --     13,968         --
   Repurchase of common shares                                           (865)        --         --
                                                                     --------   --------   --------
         Net cash provided by (used in) financing activities           (1,936)     8,984     (1,035)
                                                                     --------   --------   --------
INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                                    (2,079)    10,716       (121)

CASH AND CASH EQUIVALENTS,
   beginning of year                                                   11,491        775        896
                                                                     --------   --------   --------
CASH AND CASH EQUIVALENTS,
   end of year                                                       $  9,412   $ 11,491   $    775
                                                                     ========   ========   ========
Income taxes paid                                                    $    415   $     --   $     --
                                                                     ========   ========   ========
Total interest paid                                                  $     99   $  1,217   $    356
                                                                     ========   ========   ========
Interest paid to shareholders                                        $     28   $  1,157   $    272
                                                                     ========   ========   ========
SUPPLEMENTAL DISCLOSURE OF
   NONCASH ACTIVITY:
   Notes payable converted to notes payable to shareholders          $     --   $     --   $  4,000
                                                                     ========   ========   ========
   Capital leases incurred                                           $     --   $    204   $     --
                                                                     ========   ========   ========
   Notes payable to shareholders converted to preferred stock        $     --   $  5,000   $     --
                                                                     ========   ========   ========
</TABLE>

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


                                      F-6
<PAGE>   29
                                  SKYMALL, INC.

                          NOTES TO FINANCIAL STATEMENTS


(1)      THE COMPANY:

     Nature of Organization

     SkyMall, Inc. ("the Company") was incorporated in 1989 as an Arizona
corporation (and reincorporated in Nevada in October 1996). The Company provides
retail merchandise service through inflight catalogs placed on domestic and
international airlines. The Company maintains substantially no inventories. All
products displayed in the Company's catalogs are carried and fulfilled by
participating merchants. The Company performs order taking and payment
processing services for participating merchants. At December 31, 1997, the
Company had agreements with 16 airlines to place its catalogs in aircraft seat
pockets. The Company operates on a calendar year end of December 31.


(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Use of Estimates in Preparation of Financial Statements

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

     Reclassifications

     Certain reclassifications have been made in prior period financial
statements to conform to the current presentation.

     Revenue Recognition

     The Company has two primary sources of revenue, net merchandise sales and
placement fees. Net merchandise sales represent catalog product sales at retail
prices and are recognized as revenue upon shipment of product by participating
merchants, net of estimated returns and allowances. Placement fees represent
fees paid to the Company by participating merchants for inclusion of their
products in the Company's catalogs. Placement fee revenue is recognized on a
straight-line basis over the circulation period of a catalog, generally three
months. Cost of goods sold represents amounts paid to participating merchants
for products sold in the Company's catalogs. Usually, the higher the placement
fee the higher the percentage of retail price of product sales remitted to
participating merchants.

     Shipping and Handling Charges

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


                                      F-7
<PAGE>   30
     Impairment of Long-Lived Assets

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

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

     Cash and Cash Equivalents

     Cash equivalents include investments purchased with an original maturity of
three months or less.

     Accounts Receivable

     Accounts receivable at December 31, 1997 and 1996 include amounts due from
credit card companies, items shipped but not billed, and merchant placement
fees. The allowance for doubtful accounts as of December 31, 1997 and 1996 was
approximately $222,000 and $175,000, respectively.

     Prepaid Catalog Costs and Other

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

     Income Taxes

     Through October 21, 1996, the stockholders of the Company elected to
utilize the provisions of subchapter S of the Internal Revenue Code. In lieu of
corporate income taxes, the shareholders of a subchapter S corporation are taxed
on their portion of the Company's taxable income. Therefore, no provision or
liability for Federal income taxes was recorded through October 21, 1996.
Effective October 22, 1996, the Company's S corporation status was terminated in
connection with its issuance of preferred stock, and the Company became a C
corporation. Pursuant to the rules of the Securities and Exchange Commission,
the accumulated deficit at October 22, 1996 of $32,292,000 has been reclassified
to additional paid-in capital. Concurrently with this change in tax status, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS No. 109").

     Stock-based Compensation

     The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, ("APB No. 25"), under which no
compensation cost is recognized. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123
requires companies that account for stock-based compensation as prescribed by
APB No. 25 to disclose the pro forma effects on earnings and earnings per share
as if SFAS No. 123 had been adopted and certain other disclosures with respect
to stock compensation and the assumptions used to determine the pro forma
effects of SFAS No. 123. See Note 7 for these disclosures.


                                      F-8
<PAGE>   31
     Concentration of Credit Risk

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

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

     Net Income Per Common Share

     The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share", resulting in the restatement of earnings per share
for all periods presented. Basic net income per common share is based upon the
weighted average shares outstanding. Outstanding stock options and warrants are
treated as common stock equivalents for the purposes of computing diluted net
income per common share and represent the difference between basic and diluted
weighted average shares outstanding. The following is a summary of the
computation of basic and diluted net income per common share (amounts in
thousands except per share amounts):


<TABLE>
<CAPTION>
                                                         FOR THE YEAR ENDED
                                                            DECEMBER 31,
                                                -------------------------------------
                                                   1997         1996          1995
                                                ----------   ----------    ----------
<S>                                             <C>          <C>           <C>
Basic net income per common share:
     Income available to common shareholders    $    2,571   $    2,111    $      758
                                                ==========   ==========    ==========
     Weighted average common shares                  8,621        5,303         5,150
                                                ==========   ==========    ==========
     Basic per share amount                     $      .30   $      .40    $      .15
                                                ==========   ==========    ==========


<CAPTION>
                                                          FOR THE YEAR ENDED
                                                             DECEMBER 31,
                                                -------------------------------------
                                                   1997         1996          1995
                                                ----------   ----------    ----------
<S>                                             <C>          <C>           <C>
Diluted net income per common share:
     Income available to common shareholders    $    2,571   $    2,111    $      758
                                                ==========   ==========    ==========
     Weighted average common shares                  8,621        5,303         5,150
     Options and warrants assumed converted             55          296           281
                                                ----------   ----------    ----------
     Total common shares plus assumed
       conversions                                   8,676        5,599         5,431
                                                ==========   ==========    ==========
        Diluted per share amount                $      .30   $      .38    $      .14
                                                ==========   ==========    ==========
</TABLE>

     Financial Instruments

     The Company's financial instruments include cash, accounts receivable,
accounts payable, notes payable, and capital leases. Due to the short-term
nature of cash, accounts receivable, and accounts payable, the fair value of
these instruments approximates their recorded value. In the opinion of
management, based upon current information, the fair value of notes payable and
capital leases approximates market value. The Company does not have material
financial instruments with off-balance sheet risk.


                                      F-9
<PAGE>   32
     Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to
have a material impact on the Company's financial position, results of
operations or earnings per share data as currently reported.


(3)      PROPERTY AND EQUIPMENT:

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


<TABLE>
<CAPTION>
                                                    ESTIMATED           DECEMBER 31,
                                                      USEFUL      ----------------------
                                                   LIFE (YEARS)      1997        1996
                                                   -----------    ---------    ---------
<S>                                                <C>            <C>          <C>
        Equipment and software                         3-10       $   4,051    $   2,342
        Buildings and leasehold improvements          15-31           2,022        1,320
        Furniture, fixtures and other                  3-7              586          273
                                                                  ---------    ---------
                                                                      6,659        3,935
        Accumulated depreciation                                     (2,526)      (1,986)
                                                                  ---------    ---------
                                                                  $   4,133    $   1,949
                                                                  =========    =========
</TABLE>


 (4)     OTHER ASSETS:

     The following is a summary of other assets which are amortized using the
straight-line method over their estimated useful lives (amounts in thousands):


<TABLE>
<CAPTION>
                                                           ESTIMATED           DECEMBER 31,
                                                             USEFUL      ----------------------
                                                          LIFE (YEARS)     1997         1996
                                                          -----------    ---------    ---------
<S>                                                       <C>            <C>          <C>
        Purchased airline contracts                            10        $     323    $     326
        Other, primarily non-current prepaid expenses                          195           21
                                                                         ---------    ---------
                                                                               518          347
        Accumulated amortization                                              (219)        (189)
                                                                         ---------    ---------
                                                                         $     299    $     158
                                                                         =========    =========
</TABLE>


                                      F-10
<PAGE>   33
(5)      NOTES PAYABLE AND CAPITAL LEASES:


    Notes payable consisted of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                                --------------------
                                                                                  1997        1996
                                                                                --------    --------
<S>                                                                             <C>         <C>
    Capital leases, interest at varying rates of 18% to 23%, due in monthly
        installments (including interest) of approximately $7,000
        through May 2001, secured by equipment                                  $    130    $    180

    Note payable, interest at 8%, satisfied June 1997                                 --          20

    Notes payable to merchants, satisfied November 1997                               --         881
                                                                                --------    --------
                                                                                     130       1,081
    Less:  current portion                                                           (64)       (942)
                                                                                --------    --------
                                                                                $     66    $    139
                                                                                ========    ========
</TABLE>

     At December 31, 1997, aggregate annual maturities of capital leases were as
follows (amounts in thousands):

<TABLE>
<S>                                                   <C>
                  1998                                $    64
                  1999                                     26
                  2000                                     28
                  2001                                     12
                                                      -------
                                                      $   130
                                                      =======
</TABLE>

     In January 1997, the Company obtained a $5 million reducing, revolving line
of credit ("the Line") from a bank. Available borrowings are reduced by $1
million annually, until February 2002, when the Line expires. At the Company's
option, advances made on the Line bear interest at either Prime to Prime plus
1.5 percent, or LIBOR plus 2.25 to 3.25 percent, depending on certain financial
ratios at the time of advance. The Line is collateralized by substantially all
assets of the Company, and contains covenants that require maintenance of
certain financial ratios. No balance was outstanding on the Line at December 31,
1997.

     At December 31, 1996, the Company had current notes payable to shareholders
in the amount of $120,000 relating to royalties and accrued interest. These
notes were satisfied in February 1997.


(6)  COMMITMENTS AND CONTINGENCIES:

     Litigation

     The Company is from time-to-time subject to complaints and claims arising
in the ordinary course of business. Management believes that none of the claims
and complaints of which it is currently aware will materially affect its
business, financial position or future operating results, although no assurance
can be given with respect to the ultimate outcome of any such claims or with
respect to the occurrence of any future claims.


                                      F-11
<PAGE>   34
     Leases

     The Company has entered into several operating leases for equipment and
facilities. As of December 31, 1997, the future minimum payments under these
leases are as follows (amounts in thousands):

<TABLE>
<S>                                                   <C>
                  1998                                $    92
                  1999                                     54
                  2000                                     43
                  2001                                     43
                  2002                                     43
                  Thereafter                              554
                                                      -------
                                                      $   829
                                                      =======
</TABLE>

     Other equipment and property are leased on a monthly basis. Total lease
expense for the years ended December 31, 1997, 1996 and 1995 was approximately
$106,000, $140,000, and $193,000, respectively.

     Lease Revenue

     The Company leases certain of its facilities to others under non-cancelable
leases and month-to-month agreements. Lease revenue of approximately $99,000,
$118,000, and $110,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, is included in interest and other income in the accompanying
financial statements. As of December 31, 1997, future minimum lease payments to
be received under non-cancelable leases are as follows (amounts in thousands):

<TABLE>
<S>                                                   <C>
                  1998                                $   112
                  1999                                    103
                  2000                                     68
                  2001                                     68
                  2002                                     23
                                                      -------
                                                      $   374
                                                      =======
</TABLE>

     401(k) Plan

     Under the Company's 401(k) plan (the "Plan") adopted in 1992, eligible
employees may direct that a portion of their compensation, up to a legally
established maximum, be withheld by the Company and contributed to their
account. All contributions are placed in a trust fund which is invested by the
Plan's trustee. The Plan permits participants to direct the investment of their
account balances among mutual or investment funds and the Company provides a
matching contribution of 50 percent of the first six percent a participant's
contributions.

     The total contributions made by the Company during the years ended December
31, 1997, 1996 and 1995 were approximately $33,000, $13,000 and $5,000,
respectively.

     Employment contracts

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


                                      F-12
<PAGE>   35
(7)      STOCK-BASED COMPENSATION:

     Stock Option Plans

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

     Under the Officer and Employee Plan, the option exercise price equals or
exceeds the stock's fair market value on date of grant. The Plan options
generally fully vest on varying schedules upon completion of three years of
employment; options expire ten years after the date of grant or three months
after grantee's employment termination.

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

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

     A summary of the status of the Company's Plans at December 31, 1997, 1996
and 1995, and changes during the years ended December 31, 1997, 1996 and 1995,
is presented in the table below:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                     -----------------------------------------------------------
                                           1997                  1996                1995
                                     -----------------    -----------------    -----------------
                                               Weighted             Weighted             Weighted
                                               Average              Average              Average
                                      Shares   Exercise    Shares   Exercise    Shares   Exercise
                                      (000)     Price      (000)     Price      (000)     Price
                                     -------   -------    -------   -------    -------   -------
<S>                                  <C>       <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of period       458   $  6.21        271   $  7.39        271   $  7.39
Granted                                  319      6.52        187      5.82         --        --
Exercised                                 --        --         --        --         --        --
Cancel shares repriced                    --        --       (135)     7.39         --        --
Shares repriced                           --        --        135      5.56         --        --
Forfeited                               (173)     6.13         --        --         --        --
Expired                                   --        --         --        --         --        --
                                     -------   -------    -------   -------    -------   -------
Outstanding at end of period             604   $  6.39        458   $  6.21        271   $  7.39
                                     =======   =======    =======   =======    =======   =======
Exercisable at end of period             284                  314                  173
                                     =======              =======              =======
</TABLE>


                                      F-13
<PAGE>   36
     The Company accounts for its stock-based compensation plans under APB No.
25, under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to or in excess of the fair value of
the Company's common stock on the date of grant. The Company estimated the fair
value of each option grant as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 5.5 percent, expected life of 1 to 10 years, dividend rate of
zero, and expected volatility of approximately 45, 50 and 50 percent for 1997,
1996 and 1995, respectively. Using these assumptions, the fair value of the
stock options granted in 1997, 1996, and 1995 is approximately $709,000,
$461,000, and zero respectively, which would be amortized as compensation
expense over the vesting period of the options. Options generally vest over
three years. Had compensation costs been determined consistent with SFAS No.
123, utilizing the assumptions detailed above, the Company's net income and net
income per common share would have been reduced to the following pro forma
amounts (amounts in thousands):

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED
                                                           DECEMBER 31,
                                               -----------------------------------
                                                 1997         1996         1995
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>
Net income available to common shareholders:
     As reported                               $   2,571    $   2,111    $     758
     Pro forma                                     2,378        1,866          758

Basic net income per common share
     As reported                               $     .30    $     .40    $     .15
     Pro forma                                       .28          .35          .15

Diluted net income per common share
     As reported                               $     .30    $     .38    $     .14
     Pro forma                                       .27          .33          .14
</TABLE>

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

     In January and February 1998, the Company granted 23,500 options at
exercise prices ranging from $5.00 to $5.06 under the Officer and Employee plan.


     Stock Warrants

     In October 1996, the Company issued 200,000 warrants to underwriters,
180,000 warrants to preferred shareholders, and 58,824 warrants to a merchant to
purchase common stock at exercise prices of $9.60, $8.00, and $8.00 per
share, respectively. In October 1997, the Company issued 100,000 warrants to
outside consultants to purchase common stock at an exercise price of $8.00 per
share.

(8)    INCOME TAXES:

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

     During 1997, the Company's valuation allowance was entirely eliminated in
light of sustained profitability since termination of the S Corporation status.

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


                                      F-14
<PAGE>   37
     Significant components of the Company's deferred tax assets and liabilities
are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -----------------
                                                               1997      1996
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax liabilities:
     Tax depreciation in excess of  book depreciation         $   109   $    59
                                                              -------   -------
Total deferred tax liabilities                                    109        59
                                                              -------   -------

Deferred tax assets:
     Nondeductible reserves for bad debts and sales returns       252       787
     Restructure reserve                                           --        86
     Accrued liabilities                                          248        94
                                                              -------   -------
Total deferred tax assets                                         500       967
     Valuation allowance                                           --      (908)
                                                              -------   -------
Net deferred tax assets                                           500        59
                                                              -------   -------
Net deferred taxes                                            $   391   $    --
                                                              =======   =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,
                                                              -----------------
                                                               1997      1996
                                                              -------   -------
<S>                                                           <C>       <C>
Current:
     Federal                                                  $   587   $   190
     State                                                        104        90
                                                              -------   -------
       Total current                                              691       280
                                                              -------   -------
Deferred:
     Federal                                                     (332)       --
     State                                                        (59)       --
                                                              -------   -------
       Total deferred                                            (391)       --
                                                              -------   -------

Income tax expense                                            $   300   $   280
                                                              =======   =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,
                                                              -----------------
                                                               1997      1996
                                                              -------   -------
<S>                                                           <C>       <C>
Federal statuory rate                                              34%       34%
State taxes, net of federal benefit                                 6         7
Income attributable to S corporation                               --       (29)
Change in deferred tax asset valuation allowance                  (32)       --
Other                                                               2        (1)
                                                              -------   -------
Income tax expense                                                 10%       11%
                                                              =======   =======
</TABLE>

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


                                      F-15
<PAGE>   38
(9)    MAJOR MERCHANTS AND AIRLINES:

     The following table sets forth net merchandise sales and placement fees as
a percentage of the total of each category for the Company's largest
participating merchant:

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED
                                                            DECEMBER 31,
                                                    ---------------------------
                                                     1997      1996      1995
                                                    -------   -------   -------
<S>                                                 <C>       <C>       <C>
Net merchandise sales                                    16%       24%       49%
Placement fees                                           11%       12%       44%
</TABLE>

     In 1997, another participating merchant accounted for approximately 13
percent of net merchandise sales. No other merchants accounted for greater than
10 percent of any category listed above.

     Net merchandise sales of the Company's products on the five largest
airlines represent approximately 79 percent, 86 percent, and 80 percent of total
net merchandise sales for the years ended December 31, 1997, 1996 and 1995,
respectively.


(10)     TRANSACTIONS WITH RELATED PARTIES:

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

     The Company has an agreement with a company, which is owned by one of the
Company's directors, to provide order conveyance services commencing in January
1997. The agreement provides for annual fees of approximately $200,000 and can
be terminated at any time by either party.


                                      F-16
<PAGE>   39
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

         None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information with respect to the directors and executive officers of the
Company is incorporated herein by reference to the Definitive Proxy Statement
relating to the Company's Annual Meeting to be held on May 20, 1998.

ITEM 11. EXECUTIVE COMPENSATION

         Information with respect to executive compensation is incorporated
herein by reference to the Definitive Proxy Statement relating to the Company's
Annual Meeting to be held on May 20, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Definitive Proxy Statement relating to the Company's Annual Meeting to be held
on May 20, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information with respect to certain relationships and related
transactions is incorporated herein by reference to the Definitive Proxy
Statement relating to the Company's Annual Meeting to be held May 20, 1998.


                                     PART IV

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

         (a)(1) Financial Statements.

         Balance Sheets as of December 31, 1997 and 1996
         Statements of Income for the Years Ended December 31, 1997, 1996
         and 1995
         Statements of Shareholders' Equity (Deficit) for the Years ended
         December 31, 1997, 1996 and 1995
         Statements of Cash Flows for the Years Ended December 31,
         1997, 1996 and 1995
         Notes to Financial Statements

         (a)(2) and (d)

         None.

         (b)    Reports on Form 8-K.

         None.

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


                                      -20-
<PAGE>   40
                                    EXHIBITS


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

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


                                      -21-
<PAGE>   41
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 30
day of March, 1998.

                                    SkyMall, Inc.


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

                                POWER OF ATTORNEY

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

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

   SIGNATURE                         TITLE                             DATE
   ---------                         -----                             ----

/s/ Robert M. Worsley      Chairman of the Board,
-----------------------    President (Chief Executive Officer)   March 30, 1998
Robert M. Worsley

/s/ Allen R. Westergard    Vice President-Finance
-----------------------    (Chief Financial and Principal
Allen R. Westergard        Accounting Officer)                   March 30, 1998


/s/ Alan C. Ashton         Director                              March 30, 1998
-----------------------
Alan C. Ashton

/s/ Lyle R. Knight         Director                              March 30, 1998
-----------------------
Lyle R. Knight

/s/ Thomas J. Litle IV     Director                              March 30, 1998
-----------------------
Thomas J. Litle IV

/s/ Randy Petersen         Director                              March 30, 1998
-----------------------
Randy Petersen


                                       S-1