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, 1998

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 or 15(d) OF THE  SECURITIES
     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:  NONE.

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

                          COMMON STOCK, .001 PAR VALUE
                                (Title of class)

<PAGE>

     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. [X]

     On March 22,  1999,  the  aggregate  market  value of Common  Stock held by
non-affiliates  of the Registrant was approximately  $50,658,796.  The aggregate
market  value was based on the closing  price of Common Stock as reported by the
Nasdaq 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 22,  1999,  the number of shares of Common Stock  outstanding  was
8,868,798 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 June 4,  1999,  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.

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<PAGE>

                                TABLE OF CONTENTS

                                                                           PAGE

PART I

     Item 1.  Business.....................................................  4
     Item 2.  Properties................................................... 13
     Item 3.  Legal Proceedings............................................ 14
     Item 4.  Submission of Matters to a Vote of Security Holders.......... 14


PART II

     Item 5.  Market for the Registrant's Common Stock and Related
                 Stockholder Matters......................................  15
     Item 6.  Selected Financial Data.....................................  16
     Item 7.  Management's Discussion and Analysis of Financial Condition
                 and Results of Operations................................  18
     Item 7A. Quantitative and Qualitative Disclosures About Market Risk..  28
     Item 8.  Financial Statements and Supplementary Data.................  28
     Item 9.  Changes in and Disagreements With Accountants on
                  Accounting and Financial Disclosure.....................  29


PART III

     Item 10. Directors and Executive Officers of the Registrant..........  30
     Item 11. Executive Compensation......................................  30
     Item 12. Security Ownership of Certain Beneficial Owners and 
                  Management..............................................  30
     Item 13. Certain Relationships and Related Transactions..............  30


PART IV

     Item 14. Exhibits, Financial Statement Schedules and
                  Reports on Form 8-K.....................................  31


SIGNATURES................................................................ S-1

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                                     PART I

                           FORWARD-LOOKING STATEMENTS

     Certain  statements  made  herein,  in  documents  incorporated  herein  by
reference,  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.
These statements  discuss,  among other items, the Company's growth strategy and
anticipated trends in our business. Words and phrases such as "should be," "will
be," "believes," "expects," "anticipates," "plans," "intends", "may" and similar
expressions identify forward-looking statements.  Forward-looking statements are
made based upon our belief as of the date that such  statements are made.  These
forward-looking statements are based largely on our current expectations and are
subject  to a number of risks and  uncertainties,  many of which are  beyond our
control.  Actual  results  could differ  materially  from these  forward-looking
statements as a result of the factors described herein, including, among others,
regulatory or economic influences.  Examples of such uncertainties  include, but
are not limited  to, the  Company's  dependence  on its  relationships  with its
airline, merchant, and other partners, the ability of the Company to attract and
retain key  personnel,  especially  highly  skilled  technology  personnel,  the
ability of the  Company to secure  additional  capital to finance  its  business
strategy,  fluctuations in paper prices and airline fuel costs,  customer credit
risks,  competition  from other  catalog  companies,  retailers  and  e-commerce
companies,  and  the  Company's  reliance  on  technology  and  information  and
telecommunications  systems,  all of which are discussed more fully below and in
the Company's  other filings with 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.  See  "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS."


ITEM 1.  BUSINESS

GENERAL

     Founded in 1989,  SkyMall,  Inc.  capitalizes  on exclusive  agreements  to
create both print and e-commerce solutions for consumers and merchants. We offer
products and services to consumers through print and on-line media. Our products
and services are provided by more than 100 of the country's  leading  retailers,
including  Balducci's,  Brookstone(R),   Frontgate(R),  Hammacher  Schlemmer(R),
Improvements(R),  Lillian  Vernon(R),  Orvis(R),  Successories(R),  The  Sharper
Image(R) and The Wine  Enthusiast(TM).  The Company offers a diverse  variety of
products  from  numerous  product  categories,   including   clothing,   fashion
accessories,   health  and  beauty  aids,   children's  toys,  executive  gifts,
educational  products,  gourmet  cooking  aids,  exercise  equipment,   jewelry,
luggage,  travel aids, and home accessories.  Because most of our merchants ship
merchandise  directly to our customers,  the Company has little  inventory risk.
Our total revenues have increased  from  approximately  $30.3 million in 1994 to
approximately $66.3 million in 1998, for a compound annual growth rate of 21.6%.
Our  revenue  per  passenger  enplanement  for all of our  programs  on  flights
carrying  SkyMall  catalogs  increased  from  approximately  $0.06  in  1994  to
approximately $0.12 in 1998, for a compound annual growth rate of 18.9%.

     Currently,  our largest  distribution  channel is the  airline  seat pocket
through  which our in-flight  catalogs  were  available to more than 1.1 million
airline  passengers  each  day in 1998,  or  approximately  68% of all  domestic
airline passengers.  We also sell products through a number of other print media

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including catalogs  distributed through our international  airline  partnerships
and catalogs offering high quality logo merchandise distributed in the corporate
workplace.  Through  our  on-line  media  subsidiary,  SKYMALL.COM,  we offer an
expanded selection of products and services to on-line shoppers at our Web site,
WWW.SKYMALL.COM and through our affiliate program.

     We plan to  significantly  increase  our content  offering to  consumers by
attracting  new  merchants  to  the  SkyMall  program  and  offering   appealing
non-merchandise  travel-related  content to consumers through our on-line media.
We also plan to further broaden our distribution  channels and our customer base
through,  among other things,  electronic  commerce  initiatives,  international
expansion of our  in-flight  catalog  program and  implementation  of additional
workplace  marketing  programs.  From time to time, we may also consider further
expanding our media capabilities and distribution channels, either through joint
venture relationships, acquisitions or other arrangements.

     Unless the context indicates otherwise, the terms "SkyMall", the "Company,"
"we", "us" or "ours" refer to SkyMall, Inc. and its subsidiaries.

CUSTOMER RELATIONSHIPS

     SkyMall's  mission is to make shopping more convenient for consumers and we
have more than eight years of  experience in ensuring that shopping from SkyMall
is  convenient  and easy.  SkyMall  has  adopted the  following  strategies  for
satisfying  the needs of  time-pressed  consumers,  particularly  those who have
adopted the Internet as a preferred  method of shopping and have grown to expect
higher standards of customer service and convenience.

     PROVIDE CUSTOMERS WITH ONLY THE BEST-SELLING, HIGH-QUALITY MERCHANDISE FROM
WELL-KNOWN  BRANDS.  SkyMall  offers its customers more than 3,500 products from
over 100  well-known  merchants.  Our  print  media,  which  typically  includes
approximately  2,000 items per catalog,  provides  consumers with a selection of
only the best-selling products from our most well-known merchant partners.  This
ensures that  consumers  quickly see the most popular  items,  without having to
review  hundreds  of items that may be of little  interest.  Through our on-line
database,  we offer on-line  consumers a greater product selection and currently
offer more than 3,500 products for sale.  For the  convenience of our customers,
our on-line  database is  searchable  by a number of  parameters  that allow the
customer to quickly locate  products that are of interest to that  consumer.  We
plan to further  expand the  selection  and variety of our product  offering and
implement  additional  on-line  technologies  that will allow us to use customer
recommendation software to offer SkyMall customers personalized  recommendations
based  on  individual  tastes  and  preferences.  See  "TECHNOLOGY  --  CUSTOMER
RECOMMENDATION TECHNOLOGY".

     PROVIDE CUSTOMERS WITH A CONVENIENT ONE-STOP SHOPPING SERVICE. SkyMall is a
"one-stop"  shopping  source  for  customers  who  may  purchase  a  variety  of
merchandise from many different  well-known  merchants in a single  transaction.
Although most of the  merchandise  offered in the SkyMall  catalogs 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,  as well as its own Web site.  In  addition,  each
company  typically has different  customer  service hours and credit and payment
policies. By aggregating the merchandise of our various participating  merchants
into a single  location  in our print  catalogs  and on the Web,  we afford  our
customers access to thousands of products offered by more than 100 participating
merchants and the convenience of one-stop shopping.

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<PAGE>

     PROVIDE SUPERIOR  CUSTOMER SERVICE,  ORDER PROCESSING AND FULFILLMENT.  The
Company   maintains  a   well-trained,   in-house  staff  of  customer   service
representatives located in Phoenix,  Arizona, for its domestic business and uses
outsource  call  centers  with  expertise  in as  many as 16  languages  for its
international  orders.  Our global customers enjoy the convenience of being able
to shop  twenty-four  hours a day,  seven days a week.  The  Company's  customer
service representatives encourage customers to purchase additional products with
each order to increase the Company's  average  revenue per order.  Consumers can
shop  while  traveling  by  ordering  from  free  in-flight  phones or by phones
anywhere using our toll-free number. Consumers can also shop on-line wherever an
Internet connection is available.  Unlike many Internet  retailers,  the Company
offers telephone support to its on-line consumers twenty-four hours a day, seven
days a week,  providing  the  Company's  on-line  consumer  the  benefit of live
customer service  assistance.  On-line  consumers can also make customer service
inquiries via e-mail.  To  facilitate  prompt  delivery of products,  all orders
taken by the Company are forwarded to the Company's  merchant  partners who ship
merchandise directly to consumers. Although we currently offer a two-to-four day
expedited  shipping option for most products,  we plan to implement an overnight
delivery option in the future in order to further  improve our customer  service
capabilities.

     PROVIDE CUSTOMER  GUARANTEES AND EASY RETURNS.  We offer a no mark-up,  low
price guarantee under which we will refund the price  difference if the customer
finds the same item advertised elsewhere at a lower price. We also offer a total
satisfaction  guarantee that lets a customer  return  merchandise for any reason
within 60 days of  purchase.  SkyMall  distinguishes  itself from other  catalog
companies and on-line  retailers by providing its customers a simplified  return
process.  With each order, SkyMall  automatically  includes a pre-printed return
form,  allowing  customers to return the  merchandise  without  first  notifying
SkyMall to solicit a return  authorization.  Providing this  pre-printed form in
advance also allows our  customers to contact UPS or Federal  Express to pick up
the item directly  from the delivery  address,  eliminating  the need to travel,
stand in line, or request approval to return items.

PRINT MEDIA

     We market our  merchandise  through a number of print media,  including our
in-flight catalogs,  international  catalogs and workplace catalogs. We continue
to seek additional ways to expand our print media distribution and are currently
testing a number of new channels,  including  hotels,  consumer loyalty programs
and alliances with credit card companies who have access to significant customer
databases.  The merchandise  of each  participating  merchant in our catalogs is
presented in a separate section of each catalog to allow browsing from "store to
store,"  providing  the  convenience  and  variety of an upscale  shopping  mall
environment.

     SKYMALL DOMESTIC  IN-FLIGHT  CATALOGS.  Our in-flight  catalogs,  which are
placed in airline seat pockets, are our largest distribution  channel.  Over the
past  eight  years,  we have  experienced  substantial  growth  in our  domestic
in-flight  catalog  business,  which accounted for  approximately 93% of our net
merchandise  sales and substantially all of our placement fees and other revenue
in 1998.  During 1998, we had  exclusive  agreements to place our catalogs on 16
airlines,  making  our  catalog  available  to more  than  410  million  airline
passengers in 1998. These 16 airlines,  which carried  approximately  68% of all
domestic  passengers  in  1998,  include  America  West,   Continental,   Delta,
Southwest,  TWA, United and US Airways. The Company's catalogs carry the SkyMall
name on all participating  airlines,  except United and US Airways,  which offer
SkyMall  catalogs  under the names  "High  Street  Emporium"  and  "Selections,"
respectively.  In order to  enhance  the  appeal of our  product  offerings,  we
produce four new domestic  in-flight  catalogs per year.  To gain  efficiency in
production and printing,  the catalog content is substantially  the same for all
of our  airline  partners.  During the first  three  quarters  of the year,  our

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<PAGE>

catalogs  typically  average 170 pages.  During our peak  selling  season in the
fourth quarter of the year, we generally expand our catalog offering to over 225
pages.

     In February  1999, SkyMall entered into a three and one-half year exclusive
agreement with Northwest Airlines,  the world's  fourth-largest  airline,  which
will bring our in-flight catalogs to all domestic  Northwest  passengers by July
1, 1999,  increasing  the Company's  market share to  approximately  453 million
passengers per year, or approximately  75% of all domestic  airline  passengers.
SkyMall and Northwest have also agreed to develop additional  marketing programs
to   specifically   target   frequent   fliers  and  to  explore   international
opportunities for the in-flight catalogs.

     The  SkyMall  program  offers  airlines a low-risk  means of  incrementally
increasing  their  earnings.  In  exchange  for  placement  of our  catalogs  in
seat-back pockets, we pay 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 1998, 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
$2.5 million.  In addition to increasing airline earnings,  our airline partners
also benefit from  enhancing  the in-flight  experience  of their  passengers by
providing our catalogs as an additional amenity.  SkyMall's  agreements with its
airline  partners  generally have a term of at least one year and thereafter are
automatically  renewable on an annual basis,  subject to termination  with 60 to
180 days' advance  notice by either  SkyMall  or the  airline.  We  believe  our
relations with each of our airline partners are good.

     The following  airline  partners each accounted for in excess of 10% of the
Company's net merchandise sales for the year ended 1998:

                                         PERCENT OF NET MERCHANDISE SALES
     NAME OF AIRLINE                        THROUGH DECEMBER 31, 1998

     Delta                                             23%
     United                                            21%
     Continental                                       11%
     Southwest Airlines                                10%
                                                       ---

          Total                                        65%
                                                       ===

     We  continue  to develop  marketing  and  promotional  programs  focused on
increasing  revenue per  passenger  enplanement,  some of which are  facilitated
through the unique  relationships  between the Company and our airline partners.
Among the plans in various stages of implementation are (i) enhancing  promotion
of our shopping  services through in-flight  announcements,  including video and
audio programming,  (ii) encouraging repeat customer purchases through discounts
and other special  offers,  (iii)  offering  airlines and key airline  employees
incentives for promoting the use of our catalogs among airline passengers,  (iv)
conducting   in-flight   promotions,   such  as  gift   certificates,   discount
certificates,  and special offers to passengers who order while  in-flight,  and
(v)  expanding  the number of merchants in our program as well as the  selection
and  variety of  products.  The  Company  has  tested a number of the  foregoing
initiatives  with some of its airline partners and, where  successful,  plans to
expand the programs to other airline partners.

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     SKYMALL  INTERNATIONAL  IN-FLIGHT CATALOGS. We believe that the demographic
and  technological  trends that are driving the domestic  consumer to shift from
traditional  retail  shopping  are also present in many  international  markets,
which we believe are  substantially  under-served.  In early 1998, we launched a
new international initiative with United Airlines under which we began providing
specialized catalogs to the more than five million international  passengers who
travel each year on United Airlines'  flights  originating from Tokyo and Osaka,
Japan and serving the Pacific Rim. These catalogs feature  merchandise  tailored
to this  audience  and are offered in three  languages:  English,  Japanese  and
Chinese.  Although  revenue from this program has been  immaterial  to date,  we
attribute this result  primarily to the poor economic  conditions in Asia and we
plan to continue this program for the foreseeable future.

     In March 1999,  the Company  began a  five-month  test program with British
Airways,  which began  offering  SkyMall  catalogs on most of its  transatlantic
flights originating from New York and Boston.  Pending the results of this test,
the Company and British Airways may consider expanding the program to additional
flights.  In addition,  in January  1999,  the Company  began  testing a Spanish
language order form on several Continental flights to Latin America.

     Although  international  sales were immaterial to our total net merchandise
sales in 1998, we plan to continue  exploring  opportunities  in these  markets.
SkyMall  continues to gain  experience in  international  markets,  including in
merchandising, customer service and fulfillment. The Company plans to enter into
other  controlled  and carefully  planned  expansions  into large  international
markets through cooperative ventures with its current domestic airline partners,
as well as new international  partners. The Company believes that its experience
in the domestic in-flight business, as well as its Web-based infrastructure that
allows it to quickly set-up call center  operations in foreign  countries,  will
enable it to expand into selected international markets, particularly those with
a strong  interest in U.S.  products or where remote  shopping  already has some
level of acceptance by consumers.

     WORKPLACE  MERCHANDISE CATALOGS. In October 1998, SkyMall acquired Durham &
Company, a 15-year-old  company with annual revenues of approximately $4 million
that supplies logo merchandise and recognition products to more than one million
employees  of a number  of  blue-chip  organizations,  primarily  through  print
catalogs.  Durham & Company  accounted for approximately 2% of the Company's net
merchandise  sales in 1998.  Competing  in the  highly  fragmented  $23  billion
incentive  industry,  Durham  distinguishes  itself  by  providing  high-quality
products and excellent  customer  service and focuses its  marketing  efforts on
large   organizations.   SkyMall  plans  to  provide  Durham's  clients  unique,
high-quality  merchandise offered through other SkyMall channels as well as logo
merchandise  and  recognition  products  for  corporate  gift  giving,  employee
recognition, sales promotions and incentives, and similar programs.

     Through  the Durham  acquisition,  SkyMall  began to further  leverage  its
existing  airline  relationships  by offering them the expanded logo merchandise
and recognition product lines. In February 1999, SkyMall and Durham entered into
an agreement with a third party pursuant to which Durham's logo  merchandise and
SkyMall's  products  are offered at United's  corporate  store at the  airline's
headquarters outside Chicago,  which serves United's employees and visitors.  In
addition, commencing in February 1999, Durham began providing a logo merchandise
catalog to United's 85,000 domestic employees.

     The Company  believes the number of women in the  workplace and the gaining
popularity of non-traditional  methods of shopping presents an ideal opportunity
to market its products to busy consumers in the  workplace.  We plan to continue
to increase our presence in the corporate  marketplace  by  leveraging  Durham's
quality logo merchandise with the unique products  typically  offered by SkyMall
and  attempting to secure  additional  corporate  clients.  With the  increasing
acceptance of the Internet in the workplace,  we also plan to explore electronic
commerce-based workplace programs.

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     OTHER PRINT CHANNELS

     GOLD POINTS. In November 1998, Gold Points Corporation  selected SkyMall as
a primary  merchandise  redemption  source for its Gold Points customer  loyalty
program.  Gold Points  Corporation  is a subsidiary of Carlson  Companies  Inc.,
which  owns such  well-known  brands as Regent  International  Hotels,  Radisson
Hotels Worldwide, Radisson Seven Seas Cruises, Country Inns & Suites By Carlson,
Carlson Wagonlit Travel, T.G.I.  Friday's and Italianni's,  and operates Carlson
Marketing  Group,  the  largest  relationship  marketing  company  in the United
States. Through a network of well-known brands in different industries, the Gold
Points program  offers  participants  the  opportunity to earn and redeem points
with a variety of network  merchants.  Participants  in the Gold Points  program
include  Carlson-owned  hospitality  and  service  companies,  as  well  as  MCI
Worldcom,  the American Bar & Grill and others.  The SkyMall  redemption catalog
will be available  from  participating  Gold Points  merchants in April 1999 and
will be the primary general  merchandise catalog promoted to consumers for point
redemption.  SkyMall will also  participate in the Gold Points merchant  network
and will award consumers Gold Points at their request.

     OTHER PRINT MEDIA  PROGRAMS.  We provide  unique,  upscale  catalogs to the
membership-oriented  airport lounges of one of our major airline  partners.  The
SkyMall catalogs are also available on certain Northeastern routes of Amtrak. We
also continue to test  distribution  of our print  catalogs in a number of other
venues,  including  hotels and in  connection  with other  loyalty and marketing
programs. We are also testing other alliances,  including with major credit card
companies. To the extent the test results of these programs prove successful, we
may expand our presence in these channels.

ELECTRONIC MEDIA

     GENERAL.  We launched  our first  Internet  Web site in January of 1996 and
since  then  have  continued  to  further  refine  and  develop  our  e-commerce
strategies.  Our  e-commerce  channels  showcase  products  offered in our print
catalogs  and provide  customers  an  additional  means of customer  service and
support.  In  addition,  because  the  Internet  does not pose the same size and
weight constraints as our paper catalogs,  we offer products and services from a
greater number of merchants and a full complement of products from merchants who
offer only their  best-selling  items in our catalogs.  Through our wholly-owned
subsidiary,  SKYMALL.COM, INC., we plan to increase our revenues from this media
by  developing  SkyMall's  Web site as a premier  Internet  shopping  and travel
destination  and increase the number of partners in our  affiliate  program.  We
also plan to increase our database of products.

     During  1998,  we  experienced  a  significant  increase in our  e-commerce
activity.  Net merchandise sales from our e-commerce initiatives for fiscal 1998
were $2.5 million  compared with net merchandise  sales in 1997 of approximately
$235,000;  an  increase  of  over  900%.  Our  e-commerce  sales  accounted  for
approximately  5% of our net  merchandise  sales in 1998.  We believe this trend
demonstrates  that the Internet is  increasingly  becoming a more popular way to
shop and we plan to continue  to  leverage  our  merchandise  content,  customer
service expertise,  off-line channels and back-end  infrastructure to capitalize
on the  opportunities of the Internet.  During 1999, we plan to make significant
additional  investments in our e-commerce  initiatives.  For further discussion,
see  "ELECTRONIC  MEDIA - GROWTH  STRATEGY"  and  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

     SKYMALL.COM'S  marketing  strategy is designed  to  strengthen  the SkyMall
brand name on-line, increase customer traffic to the SKYMALL.COM Web site, build
strong  customer   loyalty,   maximize  repeat  purchases  and  develop  revenue
opportunities.  SKYMALL.COM  seeks  to  build  customer  loyalty  by  creatively

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<PAGE>

applying  technology to deliver  personalized  programs and services, as well as
creative and  flexible  merchandising.  The Company  employs a variety of media,
marketing and promotional methods to achieve these goals.

     We believe our in-flight  readership  is a valuable  asset as we expand our
business, particularly our electronic commerce initiatives.  SkyMall is uniquely
positioned  among  Internet  retailers  because it promotes its Internet site at
virtually no cost to more than 1.1 million  airline  passengers each day through
the SkyMall  in-flight print catalogs.  As we grow our in-flight  presence,  the
brand awareness and visibility we gain with our high-profile  consumer  audience
strengthens  the  visibility of our Web  initiative and can be used as a tool to
promote  traffic  to our Web  site.  While  other  companies  expend  tremendous
resources on off-line  advertising  to reach a portion of our audience,  SkyMall
has the advantage of promoting its site in another proven distribution channel.

     AFFILIATE  PROGRAM.  In addition  to  developing  our own site,  we have an
affiliate  program  through  which we provide a turn-key  merchant  solution  to
businesses that are interested in providing SkyMall's merchandise to visitors to
their own Web sites. Our unique  proprietary  technology and other systems allow
us to quickly and  cost-effectively  implement affiliate site programs,  in many
cases with lead times of less than three weeks.  Visitors to SkyMall's affiliate
sites go directly to a SkyMall  site,  which is  typically  co-branded  with the
affiliate  partner,  for  shopping  services.  After  shopping,  the customer is
directed  back  exclusively  to the  site  from  which  they  began  so that the
affiliate partner does not lose the benefit of the traffic to its site. Although
we can private label an on-line store for our  affiliate  partners,  most of our
affiliate sites are co-branded to increase  SkyMall's brand awareness as well as
generate affinity for our on-line partners.

     Under our agreements with our affiliate  partners,  we typically pay them a
commission  based  on  net  merchandise  sales.  Our  affiliate  program  offers
advantages to both consumers and our partners.  Consumers  enjoy the convenience
of  SkyMall's  on-line  shopping  and our  partner  sites  enjoy the  benefit of
increased revenue, while ensuring their customers return to their site.

     Early  participants  in our affiliate  program  include some of our airline
partners,  such as Delta Air Lines,  Delta Crown Room and Continental Air Lines.
We also have arrangements  with a number of other high-traffic sites,  including
the site offered by the  best-selling  book  series,  Chicken Soup for the Soul,
Microsoft's  on-line  shopping  mall called MSN  Shopping and The Trip.com.  The
Company  continues to evaluate the success of its individual  affiliates and, in
some cases,  has terminated  relationships.  Gaining  additional  knowledge from
these  experiences,  the  Company  plans to  continue  to expand  its  affiliate
program.

     ELECTRONIC COMMERCE GROWTH STRATEGY. In 1999, we plan to devote substantial
financial,  marketing,  technical and personnel resources to further develop our
electronic  commerce  initiatives.  Our  strategies in this area include,  among
other  things,  (i)  significantly  improving  the look and feel, as well as the
speed,  performance  and  search  functionality  of our Web site,  (ii)  further
developing  our technology  and other  business  infrastructures  used to convey
orders and provide order status information to our customers,  (iii) undertaking
marketing  and other  promotional  campaigns  through  both on-line and off-line
media to enhance  brand  awareness of the SkyMall name and drive  traffic to our
Web site,  (iv)  significantly  increasing the selection and variety of products
for our programs, and (v) developing non-product  travel-related content for our
Web site that will encourage consumers to visit our site for information as well
as  shopping.  We also plan to further  our  marketing  initiatives  in order to
secure more affiliate relationships.  Implementation of our growth strategy will
require  the  addition  of  new  personnel  as  well  as  significant  financial
resources.  For further  discussion,  please see  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS
THAT MAY AFFECT FUTURE RESULTS."

                                       10
<PAGE>

COMPETITION

     PRINT MEDIA.  All aspects of the Company's  print media business are highly
competitive.  The  Company  competes  for  customers  to some  degree  with  all
retailers  and  catalog  companies,   including  airport  retailers,   duty-free
retailers,   specialty  stores,   incentive  and  logo  merchandise   companies,
department stores,  specialty catalog companies, and general merchandise catalog
companies.  Although the Company believes that its  long-standing  relationships
with its  business  partners  and  participating  merchants  create  substantial
barriers to competition,  many of its competitors and potential competitors have
greater  financial,  marketing,  and other  resources,  and may seek to enter or
expand penetration into the Company's markets.  In its in-flight  business,  the
Company  competes  with other  advertisers,  including  those who  advertise  in
in-flight magazines and other periodicals. 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.

     ELECTRONIC  MEDIA.  The Internet on-line commerce market is relatively new,
rapidly evolving and intensely competitive. The Company expects that competition
in the on-line  commerce market will intensify in the future.  Barriers to entry
are  minimal  and  current  and new  competitors  can  launch new Web sites at a
relatively  low cost.  Many  competitors  in this area have  greater  financial,
technical  and  marketing   resources  than  the  Company.   In  addition,   new
technologies  and the  expansion  of  existing  technologies  may  increase  the
competitive   pressures  on  on-line  retailers,   including  the  Company.  See
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."

TECHNOLOGY

     We have  implemented  order entry,  transaction-processing  and fulfillment
services and systems using a combination of our own proprietary technologies and
commercially available licensed technologies.  The Company's current strategy is
to focus its  development  efforts on creating and  enhancing  the  specialized,
proprietary  software that is unique to its business and to license commercially
developed technology for other applications where available and appropriate.

     ORDER  ENTRY  AND  CUSTOMER  SERVICE  SYSTEM.  In July  1998,  we began the
implementation of our Microsoft Site Server 3.0  Internet-based  order entry and
customer  service system.  The system became fully  operational in November 1998
and provides a fully  integrated  order  management and customer service system.
Like other well-known companies,  including Dell Computers, Barnes and Noble and
1-800-Flowers,  we selected Microsoft Site Server 3.0 to decrease time-to-market
and reduce  development  costs.  Although  many  companies  are using  Microsoft
products for their  e-commerce  business,  we believe we are the only company of
significant size to use these products as the  infrastructure for both our print
and on-line media.  Our  Internet-based  system has already provided the Company
with  many   first-to-market   advantages,   including   giving  us  significant
flexibility in implementing  marketing  programs and other promotions,  allowing
quick  implementation  of affiliate  programs,  permitting us to establish  call
center operations in foreign  countries to support our  international  expansion
and enabling us to reduce costs in our print media business.

     CUSTOMER RECOMMENDATION  TECHNOLOGY. In December 1998, SkyMall entered into
a licensing agreement with Net Perceptions(TM) Inc., a leading Internet database
technology   provider  and   developer  of   real-time   customer   relationship
technologies,  to add advanced customer  recommendation  technology  software to
both its Web site and call center.  Using the software,  effective in the Spring
of 1999,  SkyMall will begin  offering  customers  personalized  recommendations

                                       11
<PAGE>

based on  individual  purchasing  behavior.  Because of our  Web-based  business
infrastructure,  we can offer this  technology to all of our  customers  whether
they order over the Internet or through our call center.

BUSINESS OPERATIONS

     MERCHANT AGREEMENTS. We enter into agreements with merchants who supply the
products  and  services  offered in our print and  on-line  media.  Under  these
contracts,  we earn percentages of revenues generated by sales or placement fees
for inclusion of the merchants'  products in SkyMall programs,  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 be honored by merchants
as long as the Company  receives orders for them. 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. The
Company  experienced  the  benefits of those  negotiations  in 1998,  with gross
margins  increasing  from 42.3% in 1997 to 49.4% in 1998;  however,  there is no
assurance  that these gross  margin  levels can be increased or sustained in the
future.  The merchants  typically  agree to indemnify the Company for any losses
associated  with injuries  caused to customers  from the use of such  merchant's
products,  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.  See
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS -- ADDITIONAL  FACTORS THAT MAY AFFECT FUTURE RESULTS."

     Some of the major  catalog  and  retail  companies  currently  featured  by
SkyMall and those who have participated in Company programs recently include:

<TABLE>
<CAPTION>
                    NAME BRAND STORES IN THE SKYMALL CATALOGS
<S>                         <C>                              <C>
1-800-Flowers(R)            Igia(R)                          Solutions(R)
Balducci's                  Improvements(R)                  Spilsbury Puzzle Co.
Brainstorms                 Intelihealth Healthy Home(R)     Sturbridge Yankee Workshop
Brookstone(R)               Lillian Vernon(R)                Successories(R)
Calyx & Corolla             Magellan's(R)                    Sundance Catalog Company
Competitive Edge Golf(R)    Mattel(R)                        The American Historic Society
Design Toscano(R)           Mrs. Beasley's(R)                The Cigar Enthusiast
Ethel M Chocolates          Mrs.  Field's                    The Golf Company by Golf Digest
Field Trips                 Nightingale Conant               The Safety Zone(R)
Fitness Quest, Inc.(R)      Orvis(R)                         The Sharper Image(R)
Frontgate(R)                Personal Creations(R)            The Wine Enthusiast(TM)
Gumps(R)                    Plow and Hearth                  Timex(R)
Hale Groves(R)              Pro Tour Memorabilla             Travel Tools(TM)
Hammacher Schlemmer(R)      Reliable Home Office             United States Postal Service(R)
Hello Direct(R)             Seiko                            Verbal Advantage(R)
Huntington Clothiers(R)     Silvo Home(TM)                   Welbilt(R)
</TABLE>

     ORDER PROCESSING,  CUSTOMER SERVICE AND FULFILLMENT.  At March 22, 1999, we
employed approximately 150 customer service  representatives.  We outsource part
of our call volume during peak order times. Our telephone equipment  distributes
calls  to  sales  representatives  and  provides  detailed  call  reporting  and
analysis,  assisting us with order processing and marketing efforts. Over 86% of
the Company's  daily orders are received on "toll-free"  numbers,  including 10%
from  toll-free air phones,  with the remaining  orders  arriving by U.S.  mail,

                                       12
<PAGE>

facsimile,  and the Internet. We typically receive approximately 3,000 calls per
day in off-peak seasons and approximately 7,400 calls per day during the peak of
the Holiday season.  We maintain no significant  inventory.  Therefore,  once we
receive a customer's  order, it is transmitted to the  appropriate  merchant who
ships the merchandise  directly to the customer.  Although  expedited service is
available,  most orders are delivered to customers within seven-to-ten days. The
Company's  average  order  size  is  approximately  $98.  Our  customer  service
representatives are given incentives for increasing order size.

REGULATION

     Our 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  Federal  Trade
Commission  regulations applicable to our operations impose various requirements
on the  processing  of customer  orders,  including  shipping  deadlines,  delay
notices,  order cancellations,  and refunds.  Our subsidiary,  Durham & Company,
operates  a small  manufacturing  facility  where it  manufacturers  recognition
jewelry  and  related  products.  These  operations  involve  certain  hazardous
chemicals that are used in the manufacturing  process and are subject to various
federal, state and local environmental laws and regulations.

EMPLOYEES

     At March 22, 1999, the Company had 323 employees, including 26 employees of
SKYMALL.COM  and 44  employees  of  Durham & Company.  Approximately  90% 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.

     The Company  believes  that its future  success  will depend in part on its
continued  ability  to  attract,  hire  and  retain  qualified  personnel.   See
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS -- ADDITIONAL  FACTORS THAT MAY AFFECT FUTURE RESULTS."

TRADEMARKS AND TRADE NAMES

     SkyMall(R)  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

     Our  executive  offices  are located in  Phoenix,  Arizona,  where we lease
approximately  seven acres of land under long-term leases expiring in 2012, with
an option to extend to 2062. We own the  improvements to this land which include
offices, storage facilities,  and a small retail shopping center,  consisting of
an aggregate of approximately  50,000 square feet. Our subsidiary,  SKYMALL.COM,
also leases  approximately  7,500  square feet of office  space in New York City
under a month-to-month lease. Our logo merchandise subsidiary, Durham & Company,
leases approximately 18,000 square feet of space in an industrial park in Tempe,
Arizona,  under a lease expiring in 2002,  where it houses a small warehouse and
manufacturing facility as well as administrative offices.

                                       13
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     The  Company is  involved in legal  actions in the  ordinary  course of its
business.  Although the outcomes of any such legal actions  cannot be predicted,
in the opinion of management,  there is no legal proceeding  pending or asserted
against  or  involving  the  Company  for which the  outcome is likely to have a
material adverse effect upon the consolidated  financial  position or results of
operations of the Company.

     On May 13, 1998,  Kathy Jordan,  a purchaser of products  through a SkyMall
catalog in March 1998, filed an action in the District Court of Cherokee County,
Oklahoma, styled as Kathy Jordan, Plaintiff v. SkyMall, Inc. a corporation,  and
John Doe(s),  et al.,  Defendants,  which is designated  as Case No.  CJ-98-208.
Plaintiff alleges that SkyMall  improperly  collected from her certain state and
local taxes relating to her purchase.  Plaintiff brought the action on behalf of
herself  and a class of persons in the United  States  similarly  situated.  She
alleges causes of action for unjust enrichment,  fraud, breach of contract,  and
declaratory judgement,  and seeks return of allegedly unlawful revenue collected
with interest,  an injunction against collecting taxes improperly,  compensatory
and punitive  damages,  and attorneys' fees and costs.  The Company believes Ms.
Jordan's claims are without merit and intends to vigorously defend this action.

     On January 29, 1999, a securities  class action complaint was filed against
SkyMall and Robert Worsley, the Company's Chief Executive Officer,  Chairman and
principal  shareholder,  in  connection  with  certain  disclosures  made by the
Company in December 1998 relating to its Internet sales. The complaint was filed
in  the  United  States   District   Court,   District  of  Arizona,   Case  No.
CIV-99-0166-PHX-ROS. The complaint alleges unlawful manipulation of the price of
the Company's stock and insider selling during the period from December 28, 1998
through December 30, 1998. The complaint seeks  unspecified  damages for alleged
violations of federal  securities  laws.  SkyMall  believes that the allegations
against it and Mr.  Worsley are without merit and intends to  vigorously  defend
the lawsuit.


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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1998.

                                       14
<PAGE>

                                     PART II


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

     SkyMall's  Common  Stock is traded on the Nasdaq  Stock  Market's  National
Market under the symbol "SKYM".  The following table sets forth, for the periods
indicated,  the high and low sales  prices per share of the Common Stock for the
two most recent  fiscal years as reported on Nasdaq.  As of March 22, 1999,  the
closing sale price for  SkyMall's  Common  Stock was $12.125 per share.  On that
date,  there were 193 holders of record of SkyMall's  Common Stock.  This figure
does not reflect beneficial stockholders whose shares are held in nominee names.

          YEAR ENDED 1998             HIGH               LOW

          1st Quarter                $ 5.375           $4.000
          2nd Quarter                $ 7.500           $4.000
          3rd Quarter                $ 5.625           $2.250
          4th Quarter                $48.000           $1.875

          YEAR ENDED 1997             HIGH               LOW

          1st Quarter                $10.500           $8.000
          2nd Quarter                $ 8.500           $5.500
          3rd Quarter                $ 7.750           $4.125
          4th Quarter                $ 6.875           $4.125

     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.

                                       15
<PAGE>

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, 1998 are derived from the Consolidated  Financial Statements of the
Company and its  subsidiaries,  which have been audited by Arthur  Andersen LLP,
independent  public  accountants,  and  should be read in  conjunction  with the
Consolidated  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,
                                                 -----------------------------------------------------------------
                                                     1998          1997         1996          1995         1994
                                                 -----------   -----------  -----------   -----------  -----------
<S>                                              <C>           <C>          <C>           <C>          <C>       
STATEMENT OF OPERATIONS DATA:

Merchandise sales, net                           $    49,320   $    42,844  $    30,978    $   26,883   $   22,062
Placement fees and other                              16,937        17,974       12,707        16,198        8,241
                                                 -----------   -----------  -----------    ----------   ----------
     Total revenues                                   66,257        60,818       43,685        43,081       30,303

Cost of goods sold                                    33,507        35,099       24,257        24,564       16,266
                                                 -----------   -----------  -----------    ----------   ----------
     Gross Margin                                     32,750        25,719       19,428        18,517       14,037
                                                 -----------   -----------  -----------    ----------   ----------

Catalog expenses                                      11,155         9,082        7,670         9,532        9,644
Selling expenses                                       3,474         3,450        2,476         2,229        2,754
Customer service and fulfillment expenses              5,567         4,438        2,823         2,136        2,919
General and administrative expenses                    8,700         6,340        3,340         3,112        5,886
Restructure charges                                        0             0            0             0        4,332
                                                 -----------   -----------  -----------    ----------   ----------
     Total operating expenses                         28,896        23,310       16,309        17,009       25,535
                                                 -----------   -----------  -----------    ----------   ----------

Income (loss) from operations                          3,854         2,409        3,119         1,508      (11,498)
Interest and other income (expense), net                 404           462         (651)         (750)        (688)
                                                 -----------   -----------  -----------    ----------   ----------
Income (loss) before income taxes                      4,258         2,871        2,468           758      (12,186)

Income taxes                                           1,707           300          280             0            0
                                                 -----------   -----------  -----------    ----------   ----------
Net income (loss)                                      2,551         2,571        2,188           758      (12,186)
Preferred stock dividends                                  0             0           77             0            0
                                                 -----------   -----------  -----------    ----------   ----------
Net income (loss) available for
  Common shares                                  $     2,551   $     2,571  $     2,111    $      758   $  (12,186)
                                                 ===========   ===========  ===========    ==========   ==========

Diluted net income (loss) per common share       $       .30   $       .30  $       .38    $      .14   $    (3.43)

Diluted weighted average shares outstanding        8,540,592     8,675,803    5,599,443     5,431,337    3,557,787

</TABLE>


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                 ----------------------------------------------------------------
                                                     1998          1997         1996          1995         1994
                                                 -----------   -----------  -----------   -----------  ----------
<S>                                              <C>           <C>          <C>           <C>          <C>       
SELECTED OPERATING DATA (UNAUDITED):

Number of domestic enplanements
  (in 000's)(1)                                      604,169       579,822      530,661      498,611      481,755
Domestic enplanement percentage (2)                      68%           70%          63%          64%          72%
Revenue per passenger enplanement (3)            $      0.12   $      0.11  $      0.09   $     0.08   $     0.06
Number of airlines at end of period (4)                   16            16           15           20           21
Number of catalogs produced (in 000's) (5)            17,973        16,933       15,729       17,162       15,747
Average number of pages per catalog (6)                  192           168          148          137          133
Revenue per catalog produced (7)                 $      2.74   $      2.53  $      1.97   $     1.57   $     1.40
Revenue per page printed (8)                     $     0.014   $     0.015  $     0.013   $    0.011   $    0.011

BALANCE SHEET DATA:

Cash and cash equivalents                        $     7,785   $     9,412  $    11,491   $      775   $      896
Working capital (deficit)                              4,838         6,050        6,692       (4,734)      (7,540)
Total assets                                          32,666        26,634       19,721        4,726        5,913
Long-term debt                                            44            66          139       10,818        8,082
Shareholders' equity (deficit)                   $    14,263   $    10,307  $     8,601    $ (15,033)  $  (15,791)
</TABLE>

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

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

(2)  Approximate  number of passenger  enplanements  on domestic  airlines  that
     carried the SkyMall  catalogs  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 from all Company
     programs  for the period  divided  by the  approximate  number of  domestic
     enplanements  during the period on all  scheduled  domestic  airlines  that
     carried the SkyMall catalogs.

(4)  Represents  the number of  airlines at end of period with which the Company
     had an  agreement  to carry the  SkyMall  catalogs.  During  the year ended
     December 31, 1996, the Company eliminated  unprofitable  circulation of the
     SkyMall catalogs by eliminating  routes on certain airlines and terminating
     agreements with certain smaller regional airlines.

(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  catalogs  during the
     period.

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

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

                                       17
<PAGE>

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  Consolidated  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.


                                                     Year Ended December 31,
                                                -------------------------------
                                                 1998        1997         1996
                                                ------      ------       ------

Net merchandise sales                             74%         70%          71%
Placement fees and other                          26%         30%          29%
                                                 ----        ----         ----
     Total revenues                              100%        100%         100%
                                                 ----        ----         ----

Gross margin                                      49%         42%          44%
                                                 ----        ----         ----

Catalog expenses                                  17%         15%          17%
Selling expenses                                   5%          6%           6%
Customer service and fulfillment expenses          8%          7%           6%
General and administrative expenses               13%         10%           8%
                                                 ----        ----         ----
     Total operating expenses                     43%         38%          37%
                                                 ----        ----         ----

Income from operations                             6%          4%           7%
                                                 ====        ====         ====


1998 COMPARED TO 1997

     CONSOLIDATED  REVENUE AND GROSS MARGIN.  Net  merchandise  sales  increased
15.2% to $49.3 million in 1998 from $42.8  million in 1997.  The increase is due
to revenue  generated from an increase in catalog  distribution of 6.1%, a 14.3%
increase in average pages per catalog and the acquisition of Durham & Company in
the fourth  quarter  of 1998,  which  contributed  1.7% of the  Company's  total
revenue.  Placement fees and other  revenues  decreased 6.1% to $16.9 million in
1998 from $18.0 million in 1997.  Gross margin  increased 27.6% to $32.8 million
in 1998 from $25.7 million in 1997.  The decrease in placement fees and increase
in gross  margin was  primarily  due to a change in the mix of  agreements  with
merchants,  emphasizing more variable  compensation  associated with merchandise
sales versus fixed placement fees.

     CONSOLIDATED  OPERATING  EXPENSES.  Total operating  expenses  increased to
$28.9 million, or 43.6% of total revenues in 1998 from $23.3 million or 38.3% of
total revenues in 1997. Catalog expenses increased to $11.2 million, or 16.8% of
total  revenues in 1998 from $9.1 million,  or 14.9% of total  revenues in 1997.
The increase is due  primarily to increases in (i) average  pages per catalog of
14.3% and (ii) average  equivalent  paper cost per hundred weight to $47 in 1998
from $41 in 1997, or 14.6%. The total number of catalogs  distributed  increased
6.1% in 1998 from 1997 levels.  Selling  expenses,  which represent  commissions

                                       18
<PAGE>

paid to airline and  marketing  partners and are  generally  variable in nature,
decreased as a percentage of revenue to 5.2% in 1998 from 5.7% in 1997. Customer
service and fulfillment expenses,  which include a full-service customer contact
and  order  fulfillment  center,  increased  to $5.6  million,  or 8.4% of total
revenues in 1998  compared to $4.4 million,  or 7.3% of total  revenues in 1997.
The increase in customer service and fulfillment expense is primarily due to the
addition  of  management  and  call  center  personnel  along  with  outsourcing
solutions  and other  expenditures  designed to improve the  Company's  customer
service levels.  General and administrative  expenses increased to $8.7 million,
or 13.1% of total revenues in 1998 from $6.3 million, or 10.4% of total revenues
in 1997.  The  increase  is  primarily  due to the  addition  of key  management
personnel, marketing promotions,  information technology personnel, depreciation
and other  infrastructure  investments  relating to the  Company's  new business
initiatives.

     CONSOLIDATED  INCOME  FROM  OPERATIONS.  Income  from  operations  was $3.9
million,  or 5.8% of total  revenues in 1998, an increase from $2.4 million,  or
4.0% of total revenues in 1997, as a result of the items discussed above.

     CONSOLIDATED  INCOME TAXES. Income tax expense totaled $1.7 million in 1998
compared  to $300,000 in 1997.  Income tax  expense  for 1998  approximated  the
statutory  rate.  Income tax expense for 1997 was lower than the statutory  rate
due to a reduction in certain timing differences,  as well as the elimination of
the valuation allowance for deferred tax asset items.

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%. The  increase is primarily  due to
increases  over  the  prior  year  in  catalog  distribution  of 8%  and  in net
merchandise  revenue per page printed of 13%.  Placement fees and other revenues
increased to $18.0  million in 1997 from $12.7  million in 1996,  or 41%.  Gross
margin  increased to $25.7  million in 1997 from $19.4  million in 1996, or 32%;
however,  gross  margin  declined  to 42% of total  revenues in 1997 from 44% 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% of total  revenues  in 1997 from $16.3  million or 37% 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%. The
increase is due to increases in catalog  distribution of 8% and in average pages
per  catalog of 14% 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.  Selling
expenses,  which represent  commissions paid to airlines and marketing partners,
remained  constant at 6% of total  revenues.  Customer  service and  fulfillment
expenses,  which include a full-service  customer contact and order  fulfillment
center,  increased to $4.4 million, or 7% of total revenues, in 1997 compared to
$2.8 million, or 6% 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 the 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 expanded
electronic  commerce   initiative,   and  a  specialty  catalog  distributed  in
membership-oriented airport lounges.

     INCOME FROM  OPERATIONS.  Income from  operations was $2.4 million or 4% of
total  revenues in 1997, a decrease from $3.1 million or 7% of total revenues in
1996, as a result of the items discussed above.

                                       19
<PAGE>

     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.

LIQUIDITY AND CAPITAL RESOURCES

     Cash provided by operating  activities  was $4.3 million,  $2.6 million and
$2.2 million in 1998,  1997, and 1996,  respectively.  The increase in 1998 cash
provided by operating  activities  compared to 1997  resulted  primarily  from a
change in the  billing  methods  of the  Company,  timing of cash  receipts  and
disbursements and the positive tax effects of certain transactions. The increase
in 1997 over 1996 cash provided by operating  activities resulted primarily from
an increase in net income and timing of cash receipts and cash disbursements.

     Cash used in  investing  activities  was $6.1  million,  $2.8  million  and
$448,000 in 1998,  1997 and 1996,  respectively.  During 1998,  the Company paid
$2.9  million in  connection  with the  purchase  of Durham & Company.  Building
improvements  and  purchases  of computer  hardware  and  software  totaled $3.2
million  in 1998.  During  1997,  cash used in  investing  activities  consisted
primarily  of  building  improvements,  furniture  and  fixtures,  and  computer
hardware and software  relating to the  Company's  customer  service  center and
corporate  offices.  During 1996,  cash used in investing  activities  consisted
primarily  of  telecommunications  and  computer  hardware,  and  furniture  and
fixtures.

     Cash  provided by financing  activities  totaled  $123,000 in 1998.  During
1998, the Company  received  $310,000 from the issuance of the Company's  common
stock. The Company used cash to repurchase  shares of the Company's common stock
for $127,000  and to make  payments on capital  leases of $60,000 in 1998.  Cash
used in financing  activities  totaled $1.9  million in 1997.  During 1997,  the
Company made payments on notes payable of $1.0 million and repurchased shares of
the Company's common stock for $900,000.  Cash provided by financing  activities
totaled $9.0  million in 1996.  The Company  received  cash from (i) its initial
public offering  resulting in net proceeds of $14.0 million and (ii) issuance of
preferred  stock for $2.5 million.  The Company used $7.5 million for payment of
debt obligations in 1996.

WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS

     The Company  plans to spend  substantial  additional  resources  in 1999 in
connection  with its  electronic  commerce  and other  growth  initiatives.  The
Company  anticipates  that  such  expenditures  will  approximate  $20  million,
including approximately $8.0 million in capital expenditures, and plans to spend
such funds on a number of activities, including improving the Company's Web user
interface, improving the speed, stability and functionality of the Company's Web
site, implementing marketing and public relations initiatives to raise awareness
of the SkyMall  brand name,  securing  additional  content for the Company's Web
site,  improving the  selection and variety of products  offered by the Company,
and recruiting and hiring additional personnel, particularly technology managers
and developers.  Although the Company has been  profitable in recent years,  the
Company expects that the significant  investment  spending it plans to undertake
in 1999 will  cause it to incur  losses  in 1999 in the  range of  approximately
$1.00 to $1.20 per share.

     At December 31, 1998, the Company had net working  capital of $4.8 million,
which  included cash and cash  equivalents  of $7.8 million.  Additionally,  the
Company  maintains a reducing  revolving line of credit at a bank with a maximum
available line of $3.0 million.  As of March 22, 1999, the entire balance of the
revolving line of credit was unused. Existing working capital is insufficient to
permit the Company to fully  implement  its business  plan and growth  strategy.

                                       20
<PAGE>

Management  plans to finance its working capital needs and capital  expenditures
through a  combination  of funds  from  operations,  the  existing  bank line of
credit,  and by securing  additional  capital  resources through the issuance of
debt or equity  securities.  There can be no assurance  that the Company will be
able to secure additional capital to meet its working capital needs or to secure
such capital on terms favorable to the Company. A failure to secure such capital
may be detrimental to the Company and cause it to reduce or eliminate its growth
initiatives. See also, "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."

CHANGES IN SECURITIES AND USE OF PROCEEDS

     The Company  conducted  its initial  public  offering (the  "Offering")  in
December  1996,  pursuant  to  a  Form  S-1  Registration  Statement  (File  No.
333-17609),  declared effective on December 11, 1996. The Company sold 2,000,000
shares of Common  Stock to the  public at a price of $8.00 per  share,  or $16.0
million in the aggregate.

     The Company's actual expenses incurred in connection with the Offering were
approximately  $2.0 million in the aggregate,  resulting in approximately  $14.0
million in net  proceeds to the Company.  For the period from  December 16, 1996
through  December  31,  1998,  the  Company  used the net  proceeds  as follows:
approximately  (i) $1.2  million  for  building  improvements  to the  corporate
offices and the customer contact center,  (ii) $3.3 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)
$700,000  for  marketing  and  promotional   expenses,   (v)  $1.6  million  for
development  of  additional   circulation  media,  (vi)  $1.0  million  for  the
repurchase of 164,400 of the Company's common shares, and (vii) $2.2 million for
the acquisition of Durham & Company in October 1998. 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,  the reduction of the
line  of  credit,  the  repurchase  of  the  Company's  common  shares  and  the
acquisition of Durham & Company  discussed in items (i), (ii),  (iii),  (vi) and
(vii) above,  the  Company's  use of proceeds,  as  described  herein,  does not
represent  a material  change  from that  described  in the  Prospectus  for the
Offering.

     In October 1996,  the Company issued  180,000  warrants to purchase  Common
Stock of the Company to preferred  shareholders  in a private  placement,  at an
exercise price of $8.00 per share (the "Pre-IPO  Warrants").  As of December 31,
1998,  20,400 of the  Pre-IPO  Warrants  had been  exercised,  resulting  in net
proceeds to the Company for fiscal 1998 of  $163,200.  In  addition,  during the
first  quarter of the 1999 fiscal  year,  129,900 of the Pre-IPO  Warrants  were
exercised,  resulting  in net proceeds to the Company of  $1,039,200.  Total net
proceeds  from the  exercise  of the  Pre-IPO  Warrants as of March 22, 1999 was
$1,202,400.  All of such proceeds are designated for general corporate purposes.
The shares issued upon exercise of the Pre-IPO  Warrants were issued in reliance
upon the exemption provided under Section 4(2) of the Securities Act of 1933 and
Regulation D thereunder.

     In December 1996, the Company  issued 200,000  Warrants to purchase  Common
Stock of the  Company  to the  underwriters  in the  Company's  Offering,  at an
exercise price of $9.60 per share (the "Underwriter  Warrants").  As of December
31,  1998,  160,000 of the  Underwriter  Warrants  were  exercised  by  cashless
exercise.  In addition, in January 1999, the remaining 40,000 of the Underwriter
Warrants were  exercised by cashless  exercise.  The Company did not receive any
proceeds  as a result of these  warrant  exercises.  The shares were issued upon
exercise of the Underwriter Warrants in reliance on the exemption provided under
Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.

                                       21
<PAGE>

     During the 1998 fiscal  year,  105,536  Options  were  exercised  under the
Company's 1994 Stock Option Plan at exercise  prices ranging from $4.38 to $8.00
per  share,  resulting  in net  proceeds  from the  exercise  of the  Options of
$549,375 including a receivable from an employee of approximately  $401,000 that
was collected  subsequent to December 31, 1998. Such proceeds are designated for
general corporate purposes.

FLUCTUATION 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  typically
recognizes its highest sales levels during the fourth  quarter,  and during 1998
the fourth quarter  accounted for  approximately 41% of the Company's annual net
merchandise sales.

     The following  table sets forth  certain  unaudited  information  about the
Company's  revenue and results of operations  on a quarterly  basis for 1998 and
1997.

<TABLE>
<CAPTION>
                                                         Year Ended                            Year Ended
                                                      December 31, 1998                     December 31, 1997
                                             ----------------------------------    ----------------------------------
                                             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                       $ 9,234 $ 10,131  $ 9,657  $20,298    $ 8,084  $ 8,596  $ 9,175  $16,989
Placement fees and other                       3,930    3,639    3,935    5,433      3,507    3,703    3,793    6,971
                                             -------  -------  -------  -------    -------  -------  -------  -------
Total revenues                                13,164   13,770   13,592   25,731     11,591   12,299   12,968   23,960
                                             -------  -------  -------  -------    -------  -------  -------  -------
Gross margin                                   6,355    6,639    7,225   12,531      4,981    5,346    5,261   10,131
                                             -------  -------  -------  -------    -------  -------  -------  -------
Catalog expenses                               2,663    2,717    2,723    3,052      1,889    2,033    2,004    3,156
Selling expenses                                 864      821      816      973        670      702      736    1,342
Customer service and fulfillment expenses      1,099      912      940    2,616        987      987      912    1,552
General and administrative expenses            1,761    1,939    2,224    2,776      1,092    1,443    1,394    2,411
                                             -------  -------  -------  -------    -------  -------  -------  -------
Total operating expenses                       6,387    6,389    6,703    9,417      4,638    5,165    5,046    8,461
                                             -------  -------  -------  -------    -------  -------  -------  -------
Income from operations                       $  (32)  $   250  $   522  $ 3,114    $   343  $   181  $   215  $ 1,670
                                             =======  =======  =======  =======    =======  =======  =======  =======
</TABLE>

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging  Activities.  The  Statement  establishes  accounting  and reporting
standards  requiring  that  every  derivative   instrument   (including  certain
derivative  instruments  embedded in other contracts) be recorded in the balance
sheet as either an asset or liability  measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized  currently in
earnings unless specific hedge accounting  criteria are met. Special  accounting
for qualifying  hedges allows a derivative's  gains and losses to offset related
results on the hedged item in the income statement,  and requires that a company
must formally document,  designate, and assess the effectiveness of transactions
that receive hedge accounting.

     Statement 133 is effective for fiscal years  beginning after June 15, 1999.
A company may also  implement  the  Statement as of the  beginning of any fiscal
quarter after  issuance  (that is, fiscal  quarters  beginning June 16, 1998 and
thereafter).  Statement 133 cannot be applied retroactively.  Statement 133 must
be applied to (a) derivative  instruments and (b) certain derivative instruments


                                       22
<PAGE>

embedded  in hybrid  contracts  that were  issued,  acquired,  or  substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).  Application of the Statement's 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.

SEGMENT DISCLOSURE

     During the fourth quarter of 1998, the Company  acquired  Durham & Company.
This  acquisition  created two reportable  segments as required under  Financial
Accounting  Standards  Board  SFAS No. 131  "DISCLOSURES  ABOUT  SEGMENTS  OF AN
ENTERPRISE AND RELATED INFORMATION." Operating segment information pertaining to
revenues, gross margins, operating income and assets is provided in the Notes to
Consolidated Financial Statements filed herewith.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

     In addition to other  information  in this Annual Report on Form 10-K,  the
following  important  factors  should be carefully  considered in evaluating the
Company and its  business  because  such factors  currently  have a  significant
impact or may have a significant  impact on the Company's  business,  prospects,
financial condition and results of operations.

     WE MAY NOT BE PROFITABLE IN THE FUTURE. Although we have been profitable in
recent  years,  we  plan  to  significantly  increase  spending  on  our  growth
initiatives  from  historical  levels  and we  expect  to  incur  losses  in the
foreseeable future. We estimate that we will incur losses of approximately $1.00
- $1.20 per share in 1999.  In addition,  although we plan to spend  significant
additional  resources in connection  with the execution of our growth  strategy,
including for marketing,  technological  development and personnel costs,  there
can be no assurance that we can successfully deploy such resources to accomplish
the  objectives  of our growth  strategies  and  increase  the  revenues  of the
Company.

     WE MAY  NOT BE  ABLE TO  RAISE  SUFFICIENT  CAPITAL.  Our  current  working
capital, along with our existing line of credit, is not sufficient to permit the
Company to fully  implement its business  plan. In order to fully  implement our
growth strategy,  we will need to raise additional capital from third parties or
otherwise secure additional financing for the Company. There can be no assurance
that the Company will be able to successfully raise additional capital or secure
other  financing,  or that such  funding  will be  available  on terms  that are
favorable  to the  Company.  To the  extent we are  unable  to raise  sufficient
additional  capital  or  secure  other  financing,  we may be  unable  to  fully
implement our planned growth strategy.

     OUR  BUSINESS  MAY NOT GROW IN THE  FUTURE.  Since our  inception,  we have
rapidly expanded our operations, growing from total revenues of $200,000 in 1990
to total  revenues of $66.3 million in 1998.  Our  continued  future growth will
depend to a  significant  degree on our  ability to increase  revenues  from our
existing businesses, maintain existing channel partner relationships and develop
new channel partner  relationships,  expand our product and content  offering to
consumers,  while  maintaining  adequate  gross  margins,  and  implement  other
programs  that  increase  the  circulation  of the SkyMall  print  catalogs  and
generate  traffic for our  e-commerce  programs.  Our ability to  implement  our
growth strategy will also depend on a number of other factors, many of which are
or may be beyond our control,  including (i) our ability to select products that
appeal to our customer base and effectively  market them to our target audience,
(ii) sustained or increased  levels of airline travel,  particularly in domestic
airline  markets,  (iii)  increasing  adoption by  consumers of the Internet for
shopping, (iv) the continued perception by participating merchants that we offer
an effective  marketing  channel for their  products and  services,  and (v) our
ability to attract,  train and retain qualified employees and management.  There
can be no assurance  that we will be able to  successfully  implement our growth
strategy.



                                       23
<PAGE>

     OUR FUTURE GROWTH IS IN PART  DEPENDENT  UPON THE  CONTINUED  GROWTH OF THE
ELECTRONIC  COMMERCE  MARKET.  The market for the sale of products  and services
over the  Internet  is a new and  rapidly  evolving  market.  Our future  growth
strategy  is  partially  dependent  upon the  widespread  acceptance  and use of
on-line services as an avenue for retail purchases. Consumers have only recently
begun to make  purchases  over the Internet and there is no assurance  that they
will  continue  to do so in the  future.  In order  for us to grow  our  on-line
customer base, we will need to attract  purchasers who have historically  relied
upon  traditional  venues for making their retail  purchases.  If use of on-line
services  does  not  continue  to  grow  as  expected,  or if the  technological
infrastructure  for the  Internet is unable to  effectively  support its growing
use, our growth strategy may be materially adversely affected.

     WE MAY BE UNABLE TO  MANAGE  THE  POTENTIAL  GROWTH  OF OUR  BUSINESS.  Our
potential growth may place  significant  demands upon our personnel,  management
and  financial  resources.  In order to manage this growth,  we may have to hire
additional personnel and develop additional management infrastructure.  There is
no  assurance  that  people with the  necessary  skills and  experience  will be
available as needed or on terms  favorable to us. There is no assurance that our
current and planned personnel, systems, procedures and controls will be adequate
to support our future operations,  that we will be able to attract, hire, train,
retain,  motivate and manage necessary personnel, or that our management will be
able  to  identify,   manage  and  exploit  existing  and  potential   strategic
relationships and market  opportunities.  If we are unable to effectively manage
any potential  growth,  our business and financial  condition could be adversely
affected.

     OUR PLANS FOR INTERNATIONAL  EXPANSION POSE ADDITIONAL RISKS. A significant
aspect of our growth strategy is to expand our business internationally, through
our  in-flight  catalog  program  as  well  as the  Internet.  We  have  limited
experience in selling our products and services internationally.  Such expansion
will place  additional  burdens upon our  management,  personnel  and  financial
resources and may cause the Company to incur losses. We will also face different
and  additional   competition  in  these  international  markets.  In  addition,
international   expansion  has  certain   unique   risks,   such  as  regulatory
requirements,  legal uncertainty  regarding  liability,  tariffs and other trade
barriers,  difficulties  in staffing and  managing  foreign  operations,  longer
payment cycles,  political instability and potentially adverse tax implications.
To the  extent we  expand  our  business  internationally,  we will also  become
subject to risks associated with international  monetary exchange  fluctuations.
Any one of these risks could  impair our  ability to expand  internationally  as
well as have a material  adverse  impact upon our overall  business  operations,
growth and financial condition.

     WE FACE INTENSE COMPETITION. The distribution channels for our products are
highly  competitive.  From  time  to  time  in  our  airline  catalog  business,
competitors,  typically  other  catalog  retailers,  have  attempted  to  secure
contracts  with  various  airlines  to offer  merchandise  to  their  customers.
American  Airlines  currently  offers  merchandise  catalogs to their  customers
through a competitor.  Various  international  airlines  also offer  merchandise
catalogs to their passengers  through our competitors.  We also face 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 we have.  In
addition, we compete for customers with other in-flight marketing media, such as
airline-sponsored  in-flight  magazines  and airline video  programming.  In our
electronic  commerce  sales,  we face  intense  competition  from other  content
providers  and  retailers who seek to offer their  products  and/or  services at
their own Web sites or those of other  third  parties.  The  success  of on-line
marketing cannot be currently determined, and further penetration in this market
will  require  substantial   additional  financial  resources,   acquisition  of
technology,  investments in marketing and contractual  relationships  with third
parties.  Results  will also be  affected  by  existing  competition,  which the
Company anticipates will intensify, and by additional entrants to the market who
may already have the necessary  technology and expertise,  many of whom may have
substantially greater resources than the Company.

                                       24
<PAGE>

     DEPENDENCE ON CHANNEL RELATIONSHIPS.  Our business depends significantly on
our  relationships  with the  airlines,  affiliate  Web sites,  hotels and other
channel  partners.  Our  agreements  with our  channel  partners  are  typically
short-term allowing the partner to terminate the relationship on 60 to 180 days'
advance  notice.  There is no assurance that our channel  partners will continue
their  relationships  with  us and the  loss  of one or more of our  significant
channel partners could have a material adverse effect on our financial condition
and results of operations.

     WE MAY BE UNABLE TO MAINTAIN  HISTORICAL MARGIN LEVELS.  Although our gross
margin levels on sales of our products have increased in recent years, we may be
unable to further  increase or maintain our gross margins at historical  levels,
particularly for our electronic commerce initiatives.  As competition in on-line
shopping  intensifies,  our merchant  participants may be unable or unwilling to
participate in our programs when more  favorable  economic  arrangements  may be
available  from  other  third  parties.  Although  many  of our  merchants  have
participated with us for several years, most of our relationships are short-term
and may be  re-negotiated by the merchant every 90 days. To the extent our gross
margins decline from historical levels,  our financial  condition and results of
operations may be adversely affected.

     WE FACE CREDIT RISKS. Some participating merchants agree to pay a placement
fee to us for including their merchandise in our programs.  We record an account
receivable  from the merchant for the placement  fee. In some cases,  we collect
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 us, we may experience credit losses
which  could have a  material  adverse  effect on our  financial  condition  and
results of operations.

     WE ARE VULNERABLE TO INCREASES IN PAPER COSTS AND AIRLINE FUEL PRICES.  The
cost of paper  used to print  our  catalogs  and the fees  paid to  airlines  to
reimburse  them for the  increased  fuel  costs  associated  with  carrying  our
catalogs are  significant  expenses of our operations.  Historically,  paper and
airline fuel prices have fluctuated  significantly  from time to time. Prices in
the paper  market can and often do change  dramatically  over a short  period of
time. Any significant  increases in paper or airline fuel costs that we must pay
could have a material  adverse effect on our financial  condition and results of
operations.

     OUR INFORMATION AND  TELECOMMUNICATIONS  SYSTEMS MAY FAIL OR BE INADEQUATE.
We process a large volume of relatively small orders. Consequently,  our success
depends to a significant  degree on the effective  operation of our  information
and  telecommunications  systems.  These  systems  could fail for  unanticipated
reasons or they may be  inadequate  to process any  increase in our sales volume
that may occur. Any extended  failure of our information and  telecommunications
systems  could have a material  adverse  effect on our  financial  condition and
results of operations.

     WE FACE RISKS  ASSOCIATED WITH ON-LINE  SECURITY  BREACHES OR FAILURES.  In
order to successfully  make sales over the Internet,  it is necessary that we be
able to ensure the secure transmission of confidential customer information over
public  telecommunications  networks.  We employ certain  technology in order to
protect such information,  including customer credit card information.  However,
there is no assurance that such information  will not be intercepted  illegally.
Advances  in  cryptography  or other  developments  that  could  compromise  the
security  of  confidential  customer  information  could have a direct  negative
impact upon our electronic  commerce  business.  In addition,  the perception by
consumers  that  making  purchases  over the  Internet  is not  secure,  even if
unfounded,  will mean that fewer consumers are likely to make purchases  through
that medium.  Finally,  any breach in  security,  whether or not a result of our
acts or omissions, may cause us to be the subject of litigation,  which could be
very time-consuming and expensive to defend.

                                       25
<PAGE>

     OUR  BUSINESS IS  SEASONAL.  Our  business is seasonal in nature,  with the
greatest volume of sales typically  occurring  during the Holiday selling season
of the  fourth  calendar  quarter.  During  1998,  approximately  41% of our 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 our
results of operations.

     WE  FACE  RISKS  OF  INCREASED  GOVERNMENTAL  REGULATION  AND  OTHER  LEGAL
UNCERTAINTIES.  Our electronic  commerce activities are not currently subject to
significant  regulation,  other than those  applicable to businesses  generally.
However,  electronic  commerce is a new market and it is likely that regulations
and laws may be  enacted  in the  future  which  would  apply to our  electronic
commerce  activities.  Any such laws or  regulations  could result in additional
costs associated with such activities,  reduce or inhibit the growth of Internet
use, thereby reducing the growth of our electronic  commerce  business,  or have
other  adverse   effects.   Additionally,   certain   states  or   international
jurisdictions  could  enact  laws that  would  require  us to  register  in such
jurisdictions, pay fees or otherwise increase our costs of doing business.

     WE FACE A RISK OF PRODUCT  LIABILITY  CLAIMS.  Our catalogs and  electronic
commerce sites typically feature over 3,500 products and services from more than
100 participating merchants.  Generally, our agreements with these participating
merchants   require  the  merchants  to  indemnify  us  and  thereby  be  solely
responsible  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,  we maintain  product  liability  insurance in the aggregate amount of
$2.0  million  and $1.0  million  per  occurrence.  If a merchant  was unable or
unwilling  to  indemnify  us as  required,  and any  such  losses  exceeded  our
insurance coverage or were not covered by our insurer,  our financial  condition
and results of operations could be materially adversely affected.

     WE RELY  UPON OUR  PRESIDENT  AND  OTHER  KEY  PERSONNEL.  We depend on the
continued  services of Robert M.  Worsley,  our  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 our business.

     THE WORSLEYS CAN CONTROL MANY IMPORTANT COMPANY DECISIONS.  As of March 22,
1999,  Mr.  Worsley and his wife (the  "Worsleys")  beneficially  own  4,577,416
shares, or approximately 52% of our outstanding  Common Stock. As a result,  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.

     THE PRICE OF OUR COMMON  STOCK IS EXTREMELY  VOLATILE.  The market price of
our Common  Stock has been  highly  volatile.  Occurrences  that could cause the
trading  price of our  Common  Stock to  fluctuate  dramatically  in the  future
include:

     o    new merchant agreements
     o    the acquisition or loss of one or more airline, electronic commerce
          or other channel partners
     o    fluctuations in our operating results
     o    analyst reports, media stories, Internet chat room discussions, 
          news broadcasts and interviews 
     o    market conditions for retailers in general
     o    changes in airline fuel, paper or our other significant expenses
     o    decreases in the commissions we are able to negotiate with our
          merchants

                                       26
<PAGE>

     The stock market has from time to time experienced extreme price and volume
fluctuations that have particularly affected the market price for companies that
do some or all of  their  business  on the  Internet.  Although  Internet  sales
represent  only a small portion of our  business,  the price of our Common Stock
may nonetheless be impacted by these or other trends.

     WE FACE RISKS ASSOCIATED WITH THE YEAR 2000

     BACKGROUND. Many software programs use only two digits to identify the year
in the date field. If such programs are not corrected, data that includes a date
in the Year  2000 or later  could  cause  many  computer  applications  to fail,
lock-up or generate  erroneous results.  Further,  certain computer programs may
not properly  process the dates of September 9, 1999 or February 29, 2000.  This
potential  problem is  generally  referred to as the "Year 2000  Issue." We have
initiated a program to evaluate and address our exposure to the Year 2000 Issue.
If not  corrected,  many computer  applications  could fail or create  erroneous
results.

     OUR STATE OF  READINESS.  We have a program  in  process  to  identify  our
exposure  to the Year 2000  Issue and we have  begun to  implement  measures  to
mitigate any problems.  We believe we have identified all  significant  internal
systems and applications that require attention of some form in order to address
Year 2000 Issue risks.

     Our information or production  systems which consist of order entry,  order
conveyance and customer  service are primarily  based on the Microsoft  suite of
products and the hardware is  principally  late model  Compaq  servers,  both of
which  are  designed  and  represented  to  meet  Year  2000  Issue   functional
requirements.  We are in the process of testing  these  systems to confirm  that
they are Year 2000 compliant.

     We have other  non-production  systems such as internal  security  systems,
telephone systems,  and network computer equipment,  which we are also currently
reviewing for Year 2000 compliance.  In addition, we are surveying certain third
parties, such as our vendor partners,  banks and telephone service providers, to
attempt to determine the Year 2000 Issue  capability of their  critical  systems
upon which our essential business operations are dependent.

     COSTS.  The financial  and resource  demands of our Year 2000 Issue project
are  estimated  to total  less than  $100,000.  Much of this  amount  represents
existing  resources which will be used to survey third parties,  review internal
and external systems  environments,  analyze  potential impacts and document our
efforts.

     RISKS.  We  believe  that our most  significant  worst case Year 2000 Issue
scenarios  involve the  inability  of our vendors to process  orders and conduct
business such as arranging deliveries to customers and replenishing inventories.
We do not  currently  have  enough data to make an  accurate  assessment  of the
potential impact of a material failure of our vendors to be adequately  prepared
for the Year 2000 Issue.

     CONTINGENCY  PLANS. We have not yet developed formal  contingency  plans to
address the possibility that our critical  systems,  as well as those of our key
business partners on which we rely, will experience significant  interruption as
a result of the Year 2000 Issue. We will develop contingency plans in the coming
months if such plans are deemed  necessary  after a more thorough  evaluation of
all of our mission critical systems and the results of our review of the systems
of our third-party providers.

     UNCERTAINTY.  To the extent we are unable to adequately identify,  evaluate
and address all of the Year 2000 Issues relating to our business,  or are unable
to develop and implement  effective  contingency  plans,  we could  experience a
significant disruption of our ability to receive and process customer orders, in
which case our financial  condition and results of operations would be likely to
be materially adversely affected.

                                       27
<PAGE>

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

     Not Applicable.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEX TO FINANCIAL STATEMENTS

                                                                           PAGE

Report of Independent Public Accountants....................................F-1

Consolidated Balance Sheets as of December 31, 1998 and 1997................F-2

Consolidated Statements of Income for the Years Ended 
   December 31, 1998, 1997 and 1996.........................................F-3

Consolidated Statements of Shareholders' Equity (Deficit) for the 
   Years Ended December 31, 1998, 1997 and 1996.............................F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 
   1998, 1997 and 1996......................................................F-5

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

                                       28
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of SkyMall, Inc.:


We have audited the accompanying consolidated balance sheets of SkyMall, Inc. (a
Nevada corporation) and subsidiaries,  as of December 31, 1998 and 1997, and the
related  consolidated  statements of income,  shareholders' equity (deficit) and
cash flows for the three years in the period  ended  December  31,  1998.  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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of SkyMall,  Inc. and
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations and their cash flows for the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.




Phoenix, Arizona,
   March 1, 1999.

                                      F-1
<PAGE>

                                  SKYMALL, INC.

                           CONSOLIDATED BALANCE SHEETS
               (Amounts in thousands, except shares and par value)
<TABLE>
<CAPTION>
                                                                December 31,
                                                            -------------------
                                                             1998         1997  
                                                            ---------  --------
<S>                                                         <C>        <C>    
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                  $ 7,785   $ 9,412
   Accounts receivable, net                                    12,351    10,427
   Inventories                                                    630      -
   Prepaid catalog costs and other                              1,513     1,863
   Deferred income taxes                                          709       500
                                                            ---------  --------
                Total current assets                           22,988    22,202

PROPERTY AND EQUIPMENT, net                                     6,474     4,133

GOODWILL, net                                                   3,022      -

OTHER ASSETS, net                                                 182       299
                                                            ---------  --------
                Total assets                                  $32,666   $26,634
                                                            =========  ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                            $11,665   $13,669
  Accrued liabilities                                           1,217     1,863
  Unearned revenue                                              4,281      -
  Income taxes                                                    761       556
  Current portion of notes payable and capital leases             226        64
                                                            ---------  --------
                Total current liabilities                      18,150    16,152

DEFERRED INCOME TAXES                                             209       109

NOTES PAYABLE AND CAPITAL LEASES, net of current portion           44        66
                                                            ---------  --------
                Total liabilities                              18,403    16,327
                                                            ---------  --------
COMMITMENTS AND CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY:
   Common stock, $0.001 par value; 50,000,000 
     shares authorized; issued and outstanding
     shares - 8,725,415 in 1998 and 8,516,600
     in 1997                                                        9         9
   Additional paid-in capital                                   8,128     6,723
   Retained earnings                                            6,126     3,575
                                                            ---------  --------
                Total shareholders' equity                     14,263    10,307
                                                            ---------  --------
                Total liabilities and shareholders' equity  $  32,666  $ 26,634
                                                            =========  ========
</TABLE>
              The accompanying notes are an integral part of these
                          consolidated balance sheets.

                                      F-2
<PAGE>

                                  SKYMALL, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
               (Amounts in thousands, except shares and per share)
<TABLE>
<CAPTION>
                                                      For the Year Ended December 31,
                                                  -------------------------------------
                                                      1998          1997        1996
                                                  -----------  -----------  -----------
<S>                                               <C>          <C>          <C>        
REVENUES:
   Merchandise sales, net                         $    49,320  $    42,844  $    30,978
   Placement fees and other                            16,937       17,974       12,707
                                                  -----------  -----------  -----------
                  Total revenues                       66,257       60,818       43,685

COST OF GOODS SOLD                                     33,507       35,099       24,257
                                                  -----------  -----------  -----------
                  Gross margin                         32,750       25,719       19,428
                                                  -----------  -----------  -----------
OPERATING EXPENSES:
   Catalog expenses                                    11,155        9,082        7,670
   Selling expenses                                     3,474        3,450        2,476
   Customer service and fulfillment expenses            5,567        4,438        2,823
   General and administrative expenses                  8,700        6,340        3,340
                                                  -----------  -----------  -----------
                  Total operating expenses             28,896       23,310       16,309
                                                  -----------  -----------  -----------
INCOME FROM OPERATIONS                                  3,854        2,409        3,119

   Interest expense                                       (32)         (71)         (60)
   Interest expense to shareholders                      -             (28)        (669)
   Interest and other income                              436          561           78
                                                  -----------  -----------  -----------
INCOME BEFORE INCOME TAXES                              4,258        2,871        2,468

Income taxes                                            1,707          300          280
                                                  -----------  -----------  -----------
NET INCOME                                              2,551        2,571        2,188

PREFERRED STOCK DIVIDENDS                                -            -              77
                                                  -----------  -----------  -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS       $     2,551  $     2,571  $     2,111
                                                  ===========  ===========  ===========
BASIC NET INCOME PER COMMON SHARE                 $       .30  $       .30  $       .40
                                                  ===========  ===========  ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING           8,512,623    8,620,482    5,303,181
                                                  ===========  ===========  ===========
DILUTED NET INCOME PER COMMON SHARE               $       .30  $       .30  $       .38
                                                  ===========  ===========  ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING         8,540,592    8,675,803    5,599,443
                                                  ===========  ===========  ===========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-3
<PAGE>

                                  SKYMALL, INC.

            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                      (Amounts in thousands, except shares)

<TABLE>
<CAPTION>
                                                Convertible                                          Retained
                                              Preferred Stock        Common Stock      Additional    Earnings/
                                           --------------------  --------------------   Paid-in    (Accumulated)
                                            Shares      Amount   Shares       Amount    Capital       Deficit)        Total
                                           ---------  ---------  ---------  ---------  ----------  -------------   ----------
<S>                                        <C>         <C>       <C>        <C>        <C>         <C>             <C>
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 corporation 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                 -           -       (137,400)      -           (865)          -            (865)
  Net income                                  -           -           -          -           -             2,571        2,571
                                           ---------  ---------  ---------  ---------  ----------  -------------   ----------
BALANCE, December 31, 1997                    -           -      8,516,600          9       6,723          3,575       10,307
  Repurchase of common shares                 -           -        (27,000)      -           (127)          -            (127)
  Stock option plans and other, net
     of mature shares exchanged               -           -        235,815       -          1,432           -           1,432
  Net income                                  -           -           -          -           -             2,551        2,551
  Warrants issued in connection
    with asset purchase                       -           -           -          -            100           -             100
                                           ---------  ---------  ---------  ---------  ----------  -------------   ----------
BALANCE, December 31, 1998                    -       $   -      8,725,415  $       9  $    8,128  $       6,126   $   14,263
                                           =========  =========  =========  =========  ==========  =============   ==========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<PAGE>
                                  SKYMALL, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                             For the Year Ended December 31,
                                                                        ---------------------------------------
                                                                           1998           1997          1996
                                                                        -----------   -----------   -----------
<S>                                                                     <C>           <C>           <C>        
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
  Net income                                                            $     2,551   $     2,571   $     2,188
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization                                             1,118           609           344
    Provision for doubtful accounts                                             281           343          -
    Deferred income taxes and other tax effects, net                            878          (391)         -
    Change in assets and liabilities, net of effects of acquisition:
      (Increase) decrease in:
        Accounts receivable                                                  (1,329)       (6,620)       (3,258)
        Inventory                                                                22          -             - 
        Prepaid catalog costs and other                                         351            51          (652)
        Other assets                                                            117          (174)           (2)
      (Decrease) increase in:
        Accounts payable                                                     (2,256)        5,046         3,928
        Accrued liabilities                                                  (1,413)        1,071           463
        Unearned revenue                                                      3,818          -             - 
        Income taxes                                                            205           276           280
        Reserve for restructure charges                                        -             (165)       (1,111)
                                                                        -----------   -----------   -----------
                 Net cash provided by operating activities                    4,343         2,617         2,180
                                                                        -----------   -----------   -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Purchase of property and equipment                                         (3,193)       (2,760)         (448)
  Payments for acquisition, net of cash acquired                             (2,900)         -             - 
                                                                        -----------   -----------   -----------
                 Net cash used in investing activities                       (6,093)       (2,760)         (448)
                                                                        -----------   -----------   -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
  Payments on notes payable and capital leases                                  (60)         (951)       (4,090)
  Payments on notes payable to shareholders                                    -             (120)       (3,372)
  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                 310          -           13,968
  Repurchase of common shares                                                  (127)         (865)         - 
                                                                        -----------   -----------   -----------
                Net cash provided by (used in) financing activities             123        (1,936)        8,984
                                                                        -----------   -----------   -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (1,627)       (2,079)       10,716

CASH AND CASH EQUIVALENTS, beginning of year                                  9,412        11,491           775
                                                                        -----------   -----------   -----------
CASH AND CASH EQUIVALENTS, end of year                                  $     7,785   $     9,412   $    11,491
                                                                        ===========   ===========   ===========
INCOME TAXES PAID                                                       $       623   $       415   $      - 
                                                                        ===========   ===========   ===========
TOTAL INTEREST PAID                                                     $        32   $        99   $     1,217
                                                                        ===========   ===========   ===========
INTEREST PAID TO SHAREHOLDERS                                           $      -      $        28   $     1,157
                                                                        ===========   ===========   ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
  Notes payable incurred with business acquisition                      $       200   $      -      $      - 
                                                                        ===========   ===========   ===========
  Capital leases incurred                                               $      -      $      -      $       204
                                                                        ===========   ===========   ===========
  Notes payable to shareholders converted to preferred stock            $      -      $      -      $     5,000
                                                                        ===========   ===========   ===========
  Employee receivable for stock options exercised                       $       401   $      -      $      - 
                                                                        ===========   ===========   ===========
  Mature shares received for stock options exercised                    $       208   $      -      $      - 
                                                                        ===========   ===========   ===========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-5
<PAGE>

                                  SKYMALL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


(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   in-flight   catalogs  placed  in  domestic  and
international airlines, through the Company's Web site and through employee logo
and incentive  merchandise  catalogs.  The Company  maintains  substantially  no
inventory related to retail  merchandise sold through the in-flight catalogs and
Web site.  Substantially  all  products  displayed  in the  Company's  in-flight
catalogs and Web site are carried and fulfilled by participating  merchants.  At
December  31,  1998,  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:

       PRINCIPLES OF CONSOLIDATION

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

       USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The  preparation  of  consolidated   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 consolidated
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 period.

       RECLASSIFICATIONS

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

                                      F-6
<PAGE>

       REVENUE RECOGNITION

The Company  has two  primary  sources of  revenue,  net  merchandise  sales and
placement fees. Net merchandise  sales represent  product sales at retail prices
and are  recognized  as revenue  upon  shipment  of  product  by the  Company or
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  net  amounts  paid  to  participating
merchants for products sold and manufacturing costs including  materials,  labor
and overhead. Usually, the higher the placement fee the higher the percentage of
retail price of product  sales  remitted to  participating  merchants.  Unearned
revenue  represents  amounts  charged  to  participating  merchants  for  future
placement fees and consumer credit cards in which all related  products for that
charge have not been shipped.

       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 participating  merchants for provided fulfillment  services.  Any net amount
remaining is included in placement  fees and other  revenue in the  accompanying
consolidated  financial statements and is not significant for any of the periods
presented.

       IMPAIRMENT OF LONG-LIVED ASSETS

The  Company  assesses  the  recoverability  of  long-lived  assets,   including
equipment,   leasehold  improvements,   goodwill  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, 1998 and 1997,  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, 1998 and 1997,
was  approximately  $1,205,000  and  $222,000,  respectively.  In  addition,  at
December  31,  1997,   the  Company  had   approximately  $400,000  in   credits
recorded  in  accounts  receivable  and  accounts  payable  related to non-trade


                                      F-7
<PAGE>

receivable allowances.  Although these amounts were not included in the accounts
receivable  reserve at December 31, 1997,  they  represent  additional  reserves
which could be used for accounts receivable write-offs.

       INVENTORIES

Inventories  are  primarily  related  to Durham & Company  and are stated at the
lower of cost or  market.  Cost is  determined  using  the  first-in,  first-out
method. Such cost includes raw materials, direct labor and overhead.

       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.

       GOODWILL

Goodwill  represents the excess of the purchase price and related costs over the
value  assigned to net tangible  assets in connection  with the  acquisition  of
Durham & Company in October 1998.  Goodwill is amortized using the straight-line
method over 15 years. Amortization expense for 1998 was $52,192. At December 31,
1998, accumulated amortization of goodwill was $52,192.

       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 for 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.  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 requiring  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  disclosures  with  respect to stock  compensation  and the
assumptions  used to determine  the pro forma  effects of SFAS No. 123 (see Note
8).


                                      F-8
<PAGE>

       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 to 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):
                                                      For the Years Ended
                                                           December 31,
                                               ---------------------------------
                                                  1998        1997        1996  
                                               ---------   ---------   ---------

Basic net income per common share:
  Income available to common shareholders      $   2,551   $   2,571   $   2,111
                                               =========   =========   =========
  Weighted average common shares                   8,513       8,621       5,303
                                               =========   =========   =========
  Basic per share amount                       $     .30   $     .30   $     .40
                                               =========   =========   =========

                                                      For the Years Ended
                                                           December 31,
                                               ---------------------------------
                                                  1998        1997        1996  
                                               ---------   ---------   ---------
Diluted net income per common share:
  Income available to common shareholders      $   2,551   $   2,571   $   2,111
                                               =========   =========   =========
  Weighted average common shares                   8,513       8,621       5,303
  Dilutive effect of options and warrants 
    assumed converted                                 28          55         296
                                               ---------   ---------   ---------
  Total common shares plus assumed conversions     8,541       8,676       5,599
                                               =========   =========   =========
  Diluted per share amount                     $     .30   $     .30   $     .38
                                               =========   =========   =========

                                       F-9
<PAGE>

       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.

(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):

                                           Estimated
                                            Useful              December 31,
                                             Life         ---------------------
                                            (Years)          1998        1997  
                                           ---------      ---------   ---------

   Equipment and software                    2-10         $   6,461   $   4,051
   Buildings and leasehold improvements     15-40             2,735       2,022
   Furniture, fixtures and other              3-7               668         586
                                                          ---------   ---------
                                                              9,864       6,659
       Accumulated depreciation                              (3,390)     (2,526)
                                                          ---------   ---------
                                                          $   6,474   $   4,133
                                                          =========   =========

(4)  OTHER ASSETS:

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

                                           Estimated
                                            Useful              December 31,
                                             Life         ---------------------
                                            (Years)          1998        1997  
                                           ---------      ---------   ---------

   Purchased airline contracts                 10         $     323   $     323
   Other, primarily noncurrent prepaid 
     expenses                                                   108         195
                                                          ---------   ---------
                                                                431         518
   Accumulated amortization                                    (249)       (219)
                                                          ---------   ---------
                                                          $     182   $     299
                                                          =========   =========

                                      F-10
<PAGE>

(5)  NOTES PAYABLE AND CAPITAL LEASES:

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

                                                                December 31,
                                                            -------------------
                                                              1998       1997
                                                            --------   --------
     Capital leases, interest at varying rates
     of 18% to 23%, due in monthly installments
     (including interest) of approximately $5,000
     through May 2001, secured by equipment                 $     70   $    130

     Note payable, interest at 9%, due October 12, 1999          200       - 
                                                            --------   --------
                                                                 270        130
     Less - current portion                                     (226)       (64)
                                                            --------   --------
                                                            $     44   $     66
                                                            ========   ========

At December 31, 1998,  aggregate  annual  maturities  of capital  leases were as
follows (amounts in thousands):

              1999                                          $    226
              2000                                                28
              2001                                                16
                                                            --------
                                                            $    270
                                                            ========

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%, or
LIBOR plus 2.25 to 3.25%,  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, 1998 or 1997.

(6)  SEGMENT AND RELATED INFORMATION:

The Company  adopted SFAS No. 131,  DISCLOSURES  ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED  INFORMATION,  in 1998 which  changes  the way the  Company  reports
information about its operating segments.  The information for 1996 and 1997 has
been restated from the prior year's presentation in order to conform to the 1998
presentation.

During  1998,  the  Company was engaged  principally  in two lines of  business:
retail  merchandise  services that provide retail  merchandise  service  through
in-flight catalogs placed in domestic and international airlines and through the
Company's Web site; and workplace merchandise services, since the acquisition of
Durham & Company in October  1998,  that  provide  employee  logo and  incentive
merchandise service through catalogs.

                                      F-11
<PAGE>

The  accounting  policies  of the  reportable  segments  are the  same as  those
described in Note 2 of Notes to Consolidated  Financial Statements.  The Company
evaluates  the  performance  of its  operating  segments  based on income before
taxes. Intersegment transactions are not significant.

Summarized financial information concerning the Company's reportable segments is
shown in the following table (amounts in thousands).

          1998                         Retail      Workplace      Total
   ---------------------             ----------    ---------    ---------

   Revenues                          $   65,135    $   1,122    $  66,257
   Gross margins                         32,300          450       32,750
   Income before taxes                    4,127          131        4,258
   Total assets                          28,294        4,372       32,666

          1997                         Retail      Workplace      Total
   ---------------------             ----------    ---------    ---------

   Revenues                          $   60,818    $    -       $  60,818
   Gross margins                         25,719         -          25,719
   Income before taxes                    2,871         -           2,871
   Total assets                          26,634         -          26,634

          1996                         Retail      Workplace      Total
   ---------------------             ----------    ---------    ---------

   Revenues                          $   43,685    $    -       $  43,685
   Gross margins                         19,428         -          19,428
   Income before taxes                    2,468         -           2,468
   Total assets                          19,721         -          19,721

(7)  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.

       LEASES

The  Company  has  entered  into  several  operating  leases for  equipment  and
facilities.  As of December 31, 1998,  the future  minimum  payments under these
leases are as follows (amounts in thousands):

              1999                                              $     221
              2000                                                    208
              2001                                                    205
              2002                                                     47
              Thereafter                                              554
                                                                ---------
                                                                $   1,235
                                                                =========

                                      F-12
<PAGE>

Other equipment and property are leased on a monthly basis.  Total lease expense
for the years ended December 31, 1998, 1997 and 1996 was approximately $141,000,
$106,000, and $140,000, 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  $74,000,
$99,000,  and  $118,000 for the years ended  December  31, 1998,  1997 and 1996,
respectively,  is  included  in interest  and other  income in the  accompanying
financial statements.  As of December 31, 1998, future minimum lease payments to
be received under non-cancelable leases are as follows (amounts in thousands):

              1999                                              $   127
              2000                                                  118
              2001                                                  109
              2002                                                   23
                                                                -------
                                                                $   377
                                                                =======
       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% of the first 6% a participant's contributions.

The total  contributions made by the Company during the years ended December 31,
1998,  1997  and  1996,  were  approximately  $77,000,   $33,000,  and  $13,000,
respectively.

       EMPLOYMENT CONTRACTS

The Company  entered into  employment  contracts  with its president and certain
officers  which expire in September  1999 and January  2002,  respectively.  The
contracts may be terminated  earlier under terms and circumstances  described in
the agreements. Under certain circumstances,  the president and certain officers
may receive the  remaining  amounts under the contract  upon  termination  which
total $1,040,000, $850,000 and $850,000 for 1999, 2000 and 2001, respectively.

(8)  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  1,500,000  shares of common stock at an exercise
price of not less than fair market value at the date of grant.

                                      F-13
<PAGE>

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, 1998,  1997 and
1996, and changes  during the years ended December 31, 1998,  1997 and 1996, are
presented in the table below (share amounts in thousands):
<TABLE>
<CAPTION>
                                                                   December 31,                      
                                             ---------------------------------------------------------
                                                   1998                1997                1996       
                                             -----------------   -----------------   -----------------
                                                       Average             Average             Average
                                                      Exercise            Exercise            Exercise
                                             Shares     Price    Shares     Price    Shares     Price
                                             ------   --------   ------   --------   ------   --------
<S>                                          <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period              604   $   6.39      458   $   6.21      271   $   7.39
Granted                                         312       4.66      319       6.52      187       5.82
Exercised                                      (106)      6.89       -         -         -          - 
Cancel shares repriced                           -          -        -         -       (135)      7.39
Shares repriced                                  -          -        -         -        135       5.56
Forfeited                                      (266)      6.67     (173)      6.13       -         - 
Expired                                          -          -        -         -         -         - 
                                             ------   --------   ------   --------   ------   --------
Outstanding at end of period                    544   $   5.82      604   $   6.39      458   $   6.21
                                             ======   ========   ======   ========   ======   ========
</TABLE>

Stock options  outstanding  and exercisable at December 31, 1998, are as follows
(option amounts in thousands):

                               Outstanding                   Exercisable
                      ------------------------------    --------------------
        Exercise                            Average                Average
         Price                   Average    Exercise               Exercise
         Range        Options    Life(a)     Price      Options     Price
     -------------    -------    -------    --------    -------    -------

     $ 2.63-$5.56         358       9.17    $   4.03        107    $  5.00
       8.00-12.56         186       9.22        9.25        154       8.54
     -------------    -------    -------    --------    -------    -------
     $ 2.63-$12.56        544       9.19    $   5.82        261    $  7.09
     =============    =======    =======    ========    =======    =======

(a)  Average contractual life remaining

                                      F-14
<PAGE>

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 %,  expected life of 1 to 10 years,  dividend rate of zero,
and expected  volatility of approximately  77%, 45%, and 50% for 1998, 1997, and
1996, respectively. Using these assumptions, the fair value of the stock options
granted  in  1998,  1997,  and 1996 is  approximately  $930,000,  $709,000,  and
$461,000,  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 except per common share amounts):

                                                        For the Years Ended
                                                            December 31,
                                                   ---------------------------
                                                     1998      1997      1996
                                                   -------   -------   -------
  Net income available to common shareholders:
    As reported                                    $ 2,551   $ 2,571   $ 2,111
    Pro forma                                        2,433     2,378     1,866

  Basic net income per common share:
    As reported                                    $  .30    $  .30    $   .40
    Pro forma                                         .29       .28        .35

  Diluted net income per common share:
    As reported                                    $  .30    $  .30    $   .38
    Pro forma                                         .28       .27        .33


       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. As
of December 31, 1998,  160,000  warrants to underwriters  and 20,400 warrants to
preferred shareholders had been exercised.

(9)  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.

                                      F-15
<PAGE>

Significant  components of the Company's deferred tax assets and liabilities are
as follows (amounts in thousands):

                                                                 December 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
   Deferred tax liabilities:
     Tax depreciation in excess of book depreciation          $  209    $  109
                                                              ------    ------
   Total deferred tax liabilities                                209       109
                                                              ------    ------
   Deferred tax assets:
     Nondeductible reserves for bad debts and sales returns      526       252
     Accrued liabilities                                         113       248
     Other                                                        70       - 
                                                              ------    ------
   Total deferred tax assets                                     709       500
                                                              ------    ------
   Net deferred taxes                                         $  500    $  391
                                                              ======    ======

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

                                                         For the Years Ended
                                                            December 31,
                                                     --------------------------
                                                      1998      1997      1996 
                                                     ------    ------    ------
   Current:
     Federal                                         $1,374    $  587    $  190
     State                                              364       104        90
                                                     ------    ------    ------
         Total current                                1,738       691       280
                                                     ------    ------    ------
   Deferred:
     Federal                                            (26)     (332)      - 
     State                                               (5)      (59)      - 
                                                     ------    ------    ------
         Total deferred                                 (31)     (391)      - 
                                                     ------    ------    ------
   Income tax expense                                $1,707    $  300    $  280
                                                     ======    ======    ======

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

                                                         For the Years Ended
                                                            December 31,
                                                     --------------------------
                                                      1998      1997      1996 
                                                     ------    ------    ------

   Federal statutory rate                               34%       34%       34%
   State taxes, net of federal benefit                   6         6         7
   Income attributable to S corporation                 -         -        (29)
   Change in deferred tax asset valuation allowance     -        (32)       - 
   Other                                                -          2        (1)
                                                     ------    ------    ------
   Income tax expense                                   40%       10%       11%
                                                     ======    ======    ======

                                      F-16
<PAGE>

(10) BUSINESS ACQUISITION:

In October 1998,  the Company  acquired all the  outstanding  shares of Durham &
Company, an employee logo and incentive merchandise company, for $2.9 million in
cash and a note payable of $200,000 totaling $3.1 million.  This acquisition has
been accounted for as a purchase,  and the results of operations of the acquired
business have been included in the consolidated  financial  statements since the
date of acquisition. The excess purchase price over the fair value of net assets
acquired was $3,074,206 and has been recorded as goodwill and is being amortized
on a  straight-line  basis over 15 years.  The purchase  price was  allocated as
follows:

     Accounts receivable                              $     476,110
     Inventory                                              651,790
     Property, equipment and other assets                   170,514
     Goodwill                                             3,074,206
     Liabilities assumed                                 (1,272,620)
                                                      -------------
                                                      $   3,100,000
                                                      =============

The following  unaudited  consolidated pro forma  information is presented as if
the Durham & Company  acquisition  had occurred at the  beginning of the periods
presented.

                                                   Years Ended December 31,
                                                   ------------------------
                                                      1998          1997 
                                                   ----------    ----------
     Net merchandise sales                         $   69,189    $   65,240
     Net income                                    $    2,390    $    2,453

     Basic net income per common share             $      .28    $      .29
     Diluted net income per common share           $      .28    $      .28

The consolidated pro forma  information  includes  adjustments to give effect to
amortization and goodwill.  The unaudited  consolidated pro forma information is
not necessarily  indicative of the combined results that would have occurred had
the acquisition been made at the beginning of the periods  presented,  nor is it
indicative of the results that may occur in the future.

(11) MAJOR MERCHANTS AND AIRLINES:

Revenue generated through net merchandise sales and fixed placement fees for the
Company's largest participating merchants for the years ended December 31, 1998,
1997 and 1996, is as follows:

                                                    1998      1997      1996  
                                                   ------    ------    ------

     Number of merchants                              2         2         1
     Percentage of total merchandise sales and
       placement fees                                21%       24%       21%


There were no other merchants that exceeded 10% of total revenues.

                                      F-17
<PAGE>

Net merchandise sales originating from the Company's five largest  participating
airlines  approximated 72%,  79% and 86% for the years ended  December 31, 1998,
1997 and 1996, respectively.

(12)  TRANSACTIONS WITH RELATED PARTIES:

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.  Expenses related to this agreement  totaled $343,000 and $200,000 for the
years ended December 31, 1998 and 1997, respectively.

At  December  31,  1998,  the  Company   recorded  an  employee   receivable  of
approximately  $401,000 for the exercise price of employee  stock options.  This
receivable was collected subsequent to December 31, 1998.

                                      F-18
<PAGE>

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

     None.

                                       29
<PAGE>

                                    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 June 4, 1999.


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 June 4, 1999.


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 June 4,
1999.


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 June 4, 1999.

                                       30
<PAGE>

                                     PART IV


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

     (a)(1) Consolidated Financial Statements.

            Consolidated  Balance  Sheets as of December 31, 1998
               and 1997  Consolidated  Statements  of Income for the
               Years Ended December 31, 1998, 1997 and 1996
            Consolidated Statements of Shareholders' Equity for the Years Ended
               December 31, 1998, 1997 and 1996
            Consolidated Statements of Cash Flows for the Years Ended
               December 31, 1998, 1997 and 1996
            Notes to Consolidated Financial Statements

     (a)(2) and (d) Consolidated Financial Statement Schedules.

            None.

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

<TABLE>
<CAPTION>
    Exhibit                                                                         Method
    Number       Description                                                      of Filing
    -------      -----------                                                      ---------
    <S>          <C>                                                              <C>
     3.1a        Articles of Incorporation of Registrant                             (1)
     3.1b        Certificate of Amendment to Articles of Incorporation               (1)
      3.2        Bylaws of Registrant                                                (1)
      4.1        Amended Certificate of Designation for Preferred Stock              (1)
      4.2        Form of Common Stock Certificate                                    (1)
      4.3        Form of Representative's Warrant Agreement                          (1)
     10.1        Employment Agreement between Robert M.  Worsley                     (1)
                    and SkyMall, Inc.
     10.2        Form of Airline Customer Services Agreement                         (1)
     10.2a       Schedule of Omitted Material Terms from Material                    (1)
                    Airline Customer Services Agreement
     10.2b       Airline Customer Services Agreement between SkyMall, Inc.           (1)
                    and Continental Airlines, Inc., dated January 1, 1992,
                    as amended
     10.2c       Airline Customer Services Agreement between SkyMall, Inc.           (1)
                    and United Airlines, Inc., dated May 1, 1992
     10.3        Form of Tax Indemnification Agreement                               (1)
     10.4        SkyMall, Inc.  1994 Stock Option Plan, as amended                   (2)
</TABLE>


                                       31
<PAGE>
<TABLE>
<CAPTION>

    Exhibit                                                                         Method
    Number       Description                                                      of Filing
    -------      -----------                                                      ---------
    <S>          <C>                                                              <C>
     10.5        Non-Employee Director Stock Option Plan                             (3)
     10.6a       Lease Agreement between Pasqualetti Properties, Inc.  and           (1)
                    Smitty's Super Valu, Inc.  dated June 24, 1960
     10.6b       Agreement between Rose Pasqualetti Perkins, Amos                    (1)
                    Pasqualetti, Anthony Pasqualetti, Ben Pasqualetti and
                    Smitty's Super Valu, Inc.  dated March 2, 1961
     10.6c       Addendum to Lease between Amos Pasqualetti, Ben S.                  (1)
                    Pasqualetti, Rose Pasqualetti Jenkins, Estate of
                    Anthony J.  Pasqualetti and Smitty's Super Valu, Inc.
                    dated May 11, 1966
     10.6d       Sublease between Schwan Brothers Properties and                     (1)
                    Smitty's Super Valu, Inc.  dated August 1, 1984
     10.6e       Lease Amending Agreement between Smitty's Super Valu,               (1)
                    Inc., Pasquo Investments, and Amos Pasqualetti and
                    Victoria McFarland dated October 1, 1984
     10.6f       Addendum to Sublease between Smitty's Super Valu, Inc.              (1)
                    and Schwan Brothers Properties dated January 1, 1985
     10.6g       Assignment of Sublease from Pima Partners to SkyMall, Inc.          (1)
                    dated July 12, 1990
      21         Subsidiaries of Registrant                                           *
      23         Consent of Independent Public Accountants                            *
      24         Powers of Attorney                                                  See
                                                                                Signature Page
      27         Financial Data Schedule                                              *
---------------

*   Filed herewith.
(1)      Incorporated by reference to Form S-1 Registration Statement (File No.  333-14539).
(2)      Incorporated by reference to Form S-8 Registration Statement (File No.  333-50881).
(3)      Incorporated by reference to Form S-8 Registration Statement (File No.  333-14543).
</TABLE>

     (b) Reports on Form 8-K

         The Company filed one report on Form 8-K during  the fourth  quarter of
1998.

                                       32
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 29th
day of March, 1999.

                                            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 STEPHEN R. PETERSON,  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     March 29, 1999
--------------------------   and Chief Executive Officer
Robert M.  Worsley           (Principal Executive Officer)

/s/ Stephen R. Peterson      Chief Financial Officer              March 29, 1999
--------------------------   (Principal Financial and
Stephen R.  Peterson         Accounting Officer)

/s/ Lyle R. Knight           Director                             March 29, 1999
--------------------------
Lyle R.  Knight

/s/ Thomas J. Litle          Director                             March 29, 1999
--------------------------
Thomas J.  Litle

/s/ Randy Petersen           Director                             March 29, 1999
--------------------------
Randy Petersen

                                      S-1