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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                             --------------------------
                           COMMISSION FILE NUMBER 0-25732

                                   ATLAS AIR, INC.
               (Exact name of registrant as specified in its charter)

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                   DELAWARE                                      84-1207329
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)

     538 COMMONS DRIVE, GOLDEN, COLORADO                           80401
   (Address of principal executive offices)                      (Zip Code)
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       Registrant's telephone number, including area code: (303) 526-5050

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

 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
                              VALUE $.01 PER SHARE

     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 (sec. 229.405 of this chapter) 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]

     As of March 16, 1998, there were 22,511,659 shares of common stock
outstanding. The aggregate market value of such shares held by non-affiliates of
the registrant was approximately $749,216,151.

                      DOCUMENTS INCORPORATED BY REFERENCE

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                 DESCRIPTION OF DOCUMENT                             PART OF THE FORM 10-K
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<S>                                                         <C>
Portions of the Definitive Proxy Statement to be used in
  connection with the registrant's 1998 Annual Meeting of
  Stockholders............................................    Part III (Item 10 through Item 13)
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                                     PART I

ITEM 1. BUSINESS

GENERAL

     Atlas Air, Inc. ("Atlas" or the "Company") is the world's largest air cargo
outsourcer, with an all Boeing fleet of 747 freighter aircraft. The Company
provides reliable airport-to-airport cargo transportation services throughout
the world to major international air carriers generally under three- to
five-year fixed-rate contracts which typically require that the Company supply
aircraft, crew, maintenance and insurance (the "ACMI Contracts"). The Company's
customers currently include China Airlines Ltd. ("China Airlines"), KLM Royal
Dutch Airlines ("KLM"), Lufthansa Cargo AG ("Lufthansa"), British Airways World
Cargo ("British Airways"), Scandinavian Airlines System ("SAS"), The
International Airline of the United Arab Emirates ("Emirates"), Thai Airways
International Public Company Limited ("Thai Airways"), Fast Air Carrier, S.A.
("Fast Air") and Lineas Aereas Suramericanas, S.A. ("LAS"). The Company is able
to provide efficient, cost effective service to its customers primarily as a
result of its productive work force, the outsourcing of a significant part of
its regular maintenance work on a fixed-cost basis and the advantageous cost
economies realized in the operation of its fleet, comprised solely of Boeing 747
aircraft which are configured for service in long-haul cargo operations.

     The Company's fleet currently consists of 17 Boeing 747-200 freighter
aircraft in service and two 747-200 passenger aircraft undergoing conversion to
freighter configuration. The 747-200 passenger aircraft undergoing conversion to
freighter configuration are expected to be placed in service in the second
quarter and early in the third quarter of 1998. On June 9, 1997, the Company
entered into an agreement with The Boeing Company ("Boeing") to purchase 10 new
747-400 freighter aircraft to be powered by engines acquired from General
Electric Company ("GE"), with options to purchase up to 10 additional 747-400
aircraft (the "Boeing Purchase Agreement"). The 747-400 aircraft has
significantly longer range, greater payload capability, lower maintenance costs
and increased fuel efficiency compared to the Boeing 747-200 freighter aircraft.
The Company expects to place the 747-400 aircraft in service with both existing
and prospective customers, who the Company believes should be willing to pay
higher ACMI Contract rates to achieve operating benefits derived from the unique
performance capabilities of the 747-400 aircraft.

     The Company attributes its leading market position and continued
opportunities for growth to the following competitive strengths:

          Long-Term Customer Contracts Which Provide Revenue Stability. The
     Company's ACMI Contracts with its customers, which accounted for 96% of the
     Company's total operating revenues in 1997, generally provide for its
     customers to guarantee monthly minimum aircraft utilization levels at fixed
     hourly rates and are typically in force for periods of three to five years,
     subject in certain limited cases to early termination provisions. These
     ACMI Contracts typically require that the Company supply aircraft, crew,
     maintenance and insurance and that its customers bear all other operating
     expenses, including fuel and fuel servicing; marketing costs associated
     with obtaining cargo; airport cargo handling; landing fees; ground
     handling, aircraft push-back and de-icing services; and specific cargo and
     mail insurance. The Company's customers are also responsible under these
     contracts for utilizing the cargo capacity of each of the contracted
     aircraft. The ACMI Contracts, therefore, minimize for the Company the load
     factor, yield risk and fuel cost risk traditionally associated with the air
     cargo business and provide the Company with a minimum annual revenue base
     and more predictable profit margins. The Company also periodically engages
     in ad hoc charter or scheduled air service depending on availability of
     aircraft for these uses. In addition, the Company differentiates itself
     from other air cargo companies by not directly or indirectly competing with
     its customers by offering its services to freight forwarders or shippers
     who do business with the Company's customers.

          Low Cost Structure. The Company has established itself as a low cost,
     efficient and reliable provider of air cargo transportation primarily due
     to the outsourcing of many of its own required services, the advantageous
     economies of scale realized from the operation of a standardized fleet of
     long-haul Boeing 747-200 aircraft, and its productive work force. The
     uniformity of the 747-200 aircraft fleet allows for

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     standardization in maintenance and crew training, resulting in substantial
     cost savings in these areas. In particular, Atlas has advantageous,
     long-term contracts on a fixed-cost per flight hour basis with leading
     maintenance providers such as GE and KLM for a significant portion of its
     on-going aircraft and engine maintenance requirements. As a result of these
     efficiencies, the Company's high service standards and increased airline
     industry pressure to reduce costs, the Company's airline customers have
     determined that outsourcing portions of their air cargo business to the
     Company can be significantly less costly and offer greater operational
     flexibility than expanding their cargo operations by purchasing additional
     aircraft and adding other resources such as personnel and systems. The new
     747-400 aircraft are expected to have even greater operational capabilities
     than the Boeing 747-200 aircraft and will allow the Company to continue to
     maintain its low cost structure. The new aircraft's higher level of
     operational reliability and warrantied condition will result in lower
     maintenance costs during the early years of operation, typically for at
     least five years. In addition, the acquisition of the 10 747-400 freighter
     aircraft will make Atlas the largest operator of this aircraft type to date
     and will enable the Company to achieve economies of scale from the
     standardization in maintenance and crew training.

          Expanding Business Base. The growth in demand for air cargo services,
     combined with the lower rate of growth in passenger-airline cargo capacity
     and the continuing pressure on the airline industry to reduce operating
     costs, is expected to provide the Company with the opportunity to expand
     its air cargo outsourcing services. The primary business focus of most of
     the Company's customers is on the transportation of passengers, not air
     cargo. Nevertheless, most passenger airlines have air cargo customers that
     require quick and dependable air cargo service between hubs serviced by
     these carriers. To the extent that airlines have cargo capacity on their
     scheduled flights, which are generally scheduled for the convenience of
     passengers rather than for the needs of air cargo customers, air cargo
     service can be provided by them to meet such demand. However, there is a
     growing trend in the passenger-airline business toward replacing existing
     widebody passenger aircraft and combination passenger/cargo aircraft with
     smaller, more efficient (for passenger operations) twin-engine aircraft
     which have limited cargo space. The Company's customers have therefore
     found that outsourcing to meet their additional cargo transportation needs
     rather than allocating significant resources and expanding their fleet of
     freighter aircraft to effectively service their air cargo customers
     provides a cost-effective alternative for them to maintain and expand that
     portion of their business.

          Increasing Cargo Market Share. The Company has successfully increased
     its customer base from a single customer in 1992 to nine customers in 1998.
     In addition, the Company has operated under short-term, seasonal ACMI
     Contracts with Federal Express Corporation ("FedEx"), Kitty Hawk Aircargo,
     Inc. ("Kitty Hawk") and United Parcel Service ("UPS") and anticipates
     providing other short-term, seasonal service. This increased market share
     is a result of the Company's ability to provide a cost-effective service
     which has gained acceptance within the industry due to the Company's
     successful market development efforts. The addition of the 747-400 aircraft
     will provide the Company with the opportunity to increase its market share
     to new and existing customers who have a need for the greater payload,
     extended range and operational reliability of the 747-400, but for whom the
     purchase of a limited number of 747-400 freighter aircraft would not be
     cost-effective. In addition, the 747-400 aircraft will give the Company a
     competitive advantage with new customers who choose to utilize only new or
     relatively new aircraft or are restricted by local regulations limiting the
     operation of older aircraft.

INDUSTRY BACKGROUND

     While the air cargo industry is highly competitive, the Company believes
that current industry trends are favorable to the continued growth of its
business. The world air cargo market is expected to more than triple over the
next 20 years. It has grown at an average rate of 7.2% per year from 1986 to
1997. The average annual percentage growth through 2017 is expected to average
6.5%, with international air cargo market growth outpacing U.S. domestic growth.
The Company believes this growth has been fueled, in part, by economic growth,
the relaxation of international trade barriers (as indicated by the passage of
the NAFTA and GATT treaties), reductions in the price of shipping by air,
manufacturers' search for low-cost labor in developing countries, and the
increasingly time-sensitive nature of product-delivery schedules due to shorter
product life-

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cycles and "just-in-time" inventory management. In addition to growth in the
global air cargo market, the Company expects to benefit from growth in the
export-driven economies of the countries in the Pacific Rim, where the Company
has focused a significant amount of its flight operations. According to a Boeing
report, eastbound and westbound Trans-Pacific cargo volumes grew at an average
annual rate of 6.9% and 14.3%, respectively, between 1986 and 1996, and are
projected to grow at an average annual rate of 8.0% and 8.1% between 1996 and
2016. Similarly, northbound and southbound air cargo volumes between North
America and South America increased at an average annual rate of 9.4% and 8.8%,
respectively, between 1986 and 1996, and are projected to grow at an average
annual rate of over 6.5% from 1996 to 2016. Additionally, eastbound and
westbound North Atlantic air cargo volumes increased at an average annual rate
of 8.4% and 5.9%, respectively, between 1986 and 1996 and are projected to grow
at average annual rates of 6.7% and 7.2%, respectively, from 1996 to 2016. The
Company believes that, as a U.S. certificated "flag" carrier, it is well
positioned to benefit from the progressive expansion of international trade and
the consequential growth in global air cargo markets, particularly in Asia,
South America and Europe, where the Company has concentrated a significant
portion of its resources. The Company has not experienced any adverse impact on
its business as a result of the recent turmoil in the Asian financial markets,
although there can be no assurances that there will not be any future impact.

ACMI CONTRACTS

     The Company's ACMI Contracts with its customers, which accounted for 96% of
the Company's operating revenues in 1997, typically provide for its customers to
guarantee monthly minimum aircraft utilization levels at fixed hourly rates and
are typically in force for periods of three to five years, subject in certain
limited cases to early termination provisions. These contracts typically require
that the Company supply aircraft, crew, maintenance and insurance and that its
customers bear all other operating expenses, including fuel and fuel servicing;
marketing costs associated with obtaining cargo; airport cargo handling; landing
fees; ground handling, aircraft push-back and de-icing services; and specific
cargo and mail insurance. These contracts, therefore, minimize for the Company
the load factor and yield risk traditionally associated with the air cargo
business. The ACMI Contracts typically require minimum air freight capacity to
be provided to its customers by the Company. All of the Company's revenues, and
virtually all of its costs, are in U.S. dollars, thus avoiding currency risks
normally associated with doing business primarily overseas.

     The Company is currently operating under 15 ACMI Contracts: five with China
Airlines, two each with Fast Air and LAS and one each with British Airways,
Emirates, KLM, Lufthansa, SAS and Thai Airways. In most cases, one aircraft is
dedicated under each contract. In addition, the Company recently reached an
agreement with China Airlines for a sixth ACMI Contract, which the Company
expects to commence in the second quarter of 1998. China Airlines, Fast Air and
Lufthansa accounted for approximately 34%, 11% and 8%, of the Company's total
revenues, respectively, for the year ended December 31, 1997. In addition, the
Company has also operated short-term, seasonal ACMI Contracts with FedEx, Kitty
Hawk and UPS and anticipates doing so in the future from time to time.

     Certain of the Company's ACMI Contracts allow the Company's customers to
cancel up to a maximum of approximately 5% of the guaranteed hours of aircraft
utilization over the course of a year. The Company's customers most often
exercise such cancellation options early in the first quarter or late in the
fourth quarter of the year, when the demand for air cargo capacity has been
historically lower. The Company has found that such cancellations provide a
timely opportunity for the scheduling of maintenance on its aircraft, to the
extent possible. See "-- Maintenance." The ACMI Contracts are typically in force
for periods of three to five years, subject in certain limited cases to early
termination provisions. The Company believes that its relationships with its
customers are mutually satisfactory, as evidenced by the fact that within the
last three years, it has renewed twelve ACMI Contracts and added nine ACMI
Contracts with its existing customers, although there can be no assurance that
future such contracts will not be canceled in accordance with their terms.

     All of the ACMI Contracts provide that each of the Company's aircraft be
deemed to be at all times under the exclusive operating control, possession and
direction of the Company and that, in order to service the routes designated by
the contract, the Company obtain the authority from the governments having
jurisdiction over the route. See "-- Governmental Regulation." Additionally, if
the Company is required to use the customer's "call sign" in identifying itself
throughout its route, the customer must also have obtained

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underlying authority from the governments having jurisdiction over the route.
Therefore, the Company's route structure is limited to areas in which it can
gain access from the appropriate governments.

OTHER FLIGHT OPERATIONS

     To the extent the Company has available excess aircraft capacity at any
time, it will seek to obtain ad hoc charter service contracts, which the Company
believes are generally readily available. In addition, in the past the Company
has provided service to FedEx, Kitty Hawk and UPS pursuant to short-term,
seasonal ACMI Contracts during periods of excess aircraft capacity.

SALES AND MARKETING

     From its offices in Colorado, New York and Miami, the Company services its
air cargo customers and solicits ACMI Contract business. The Company's efforts
to obtain new ACMI Contract business focus principally on international airlines
with established air cargo customers, high operating costs and hub and spoke
systems which gather cargo at a particular location and which have the need for
long-distance capacity to move such cargo to another distribution point. On
occasion, the Company may utilize independent cargo brokers to obtain new ACMI
Contracts. The Company markets its services by guaranteeing its customers a
reliable, low-cost dedicated aircraft with the capacity to ensure the efficient
linkage of such customers' distribution points without the customers having to
purchase and maintain additional aircraft, schedule additional flights and add
other resources. The Company expects to place the 747-400 aircraft in service
with both existing and prospective customers, which the Company believes should
be willing to pay higher ACMI Contract rates to achieve operating benefits
derived from the unique performance capabilities of the 747-400 aircraft such as
its longer range, greater payload and increased fuel efficiency.

MAINTENANCE

     Due to the average age of the Company's Boeing 747-200 fleet, it is likely
that the aircraft will require greater maintenance than newer aircraft such as
the 747-400 aircraft. See "-- Aircraft." Aircraft maintenance includes, among
other things, routine daily maintenance, maintenance every six weeks (an "A
Check"), significant maintenance work every 18 months (a "C Check") and major
maintenance events every five years or 25,000 flight hours, whichever comes
later if the aircraft is over the age of 18 years, or every six years or 25,000
flight hours, whichever comes later for aircraft under the age of 18 years, with
a maximum interval in either case of nine years (a "D Check"). The Company
attempts to schedule major maintenance on its aircraft in the first quarter of
the calendar year, when the demand for air cargo capacity has historically been
lower, taking advantage of cancellations of flights by the Company's customers
that generally occur most frequently during these periods.

     Pursuant to a maintenance contract with KLM (the "Maintenance Contract") in
effect until January 2005, a significant part of the regular maintenance
(principally C Checks and engine overhauls, excluding D Checks) of certain of
the Company's aircraft and their GE engines is undertaken by KLM, primarily at
its maintenance base located at Schiphol International Airport in Amsterdam, The
Netherlands. KLM supplies engineering and diagnostic testing for each aircraft
and its components in compliance with the Federal Aviation Administration (the
"FAA") and other applicable regulations. The Maintenance Contract provides that
KLM, subject to certain terms and conditions, will perform repairs and
maintenance of the Company's aircraft on the same basis and order of priority as
repairs to its own fleet. Such service is provided to the Company at a cost, for
which a large part is a fixed rate per flight hour, subject to a 3.5% annual
escalation factor for the first five years. Pratt & Whitney Corporation ("P&W")
engines are serviced elsewhere, each at a cost based upon the actual time and
material necessary for such service. Under the terms of the Maintenance
Contract, in the event that the Company wishes to maintain more than 12 of its
aircraft under such contract, the terms of the contract are subject to
adjustment by KLM. Twelve of the Company's aircraft are currently subject to the
Maintenance Contract.

     In June 1996, the Company entered into a ten year engine maintenance
agreement with GE for the engine maintenance of up to 15 aircraft powered by
CF6-50E2 engines at a fixed rate per flight hour, subject

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to an annual formula increase. The agreement commenced in the third quarter of
1996 with the acceptance of engines associated with aircraft acquired in the
third and fourth quarter of 1996. Effective in the year 2000, the Company has an
option to add not less than 40 engines to the program.

     During the initial operating period, the 747-400 aircraft's airframe and
engines will be covered under manufacturer's warranties. As a result, the
Company does not expect to incur significant maintenance expense in connection
with the 747-400 aircraft during the warranty period. In addition, the 747-400
aircraft's limited maintenance requirements will provide a higher operational
reliability with lower maintenance costs during the early years of operation,
typically for at least five years. The Company will incur expenses associated
with routine daily maintenance of both the airframe and the engines. In
connection with the GE engine purchase agreement, the Company is currently in
negotiations with GE to provide ongoing maintenance on the 747-400 aircraft
engines.

     The Company believes that fixed-cost contracts provide the most efficient
means of ensuring the continued service of its aircraft fleet and the most
reliable way by which to predict its maintenance costs; however, the Company
believes it is more cost effective for routine line maintenance and A Checks to
be performed on a time and material basis due to the frequency of such
maintenance. The Company also has a contract with B.F. Goodrich Co. to perform
maintenance on its brakes and for the replacement of tires.

     The Company has an agreement, subject to acceptable rates, terms and
conditions, with Linee Aeree Italiane S.p.A. ("Alitalia") to utilize, or find
other parties to utilize, an amount of Alitalia's maintenance services with an
aggregate cost of $25 million over a five-year period ending in June 2000.

GOVERNMENTAL REGULATION

     Under the Federal Aviation Act of 1958 (the "Aviation Act"), the Department
of Transportation (the "DOT") and the FAA exercise regulatory authority over the
Company. The DOT's jurisdiction extends primarily to economic issues related to
the air transportation industry, including, among other things, air carrier
certification and fitness, insurance, certain leasing arrangements, the
authorization of proposed scheduled and charter operations, tariffs, consumer
protection, unfair methods of competition, unjust discrimination and deceptive
practices. The FAA's regulatory authority relates primarily to air safety,
including aircraft certification and operations, crew licensing/training and
maintenance standards.

     To provide air cargo transportation services under long-term contracts with
major international airlines, the Company relies primarily on its worldwide
charter authorities. The Company requires separate DOT and FAA approval for each
long-term ACMI Contract. In addition, FAA approval is required for each of the
Company's short-term, seasonal ACMI Contracts.

     In order to engage in its air transportation business, the Company is
required to maintain a Certificate of Public Convenience and Necessity (a
"CPCN") from the DOT. Prior to issuing a CPCN, the DOT examines a company's
managerial competence, financial resources and plans and compliance disposition
in order to determine whether a carrier is fit, willing and able to engage in
the transportation services it has proposed to undertake, and whether a carrier
conforms with the Aviation Act requirement that the transportation services
proposed are consistent with the public convenience and necessity. Among other
things, a company holding a CPCN must qualify as a United States citizen, which
requires that it be organized under the laws of the United States or a State,
Territory or Possession thereof; that its Chief Executive Officer and at least
two-thirds of its Board of Directors and other managing officers be United
States citizens; that not more than 25% of its voting stock be owned or
controlled, directly or indirectly, by foreign nationals; and that it not
otherwise be subject to foreign control. The DOT may impose conditions or
restrictions on such a CPCN.

     The DOT has issued the Company a CPCN to engage in interstate and overseas
air transportation of property and mail, and a CPCN to engage in foreign air
transportation of property and mail between the U.S. and Taiwan. Both CPCNs are
subject to standard terms, conditions and limitations. By virtue of holding
those CPCNs, the Company possesses worldwide charter authorities. It also holds
limited-term DOT exemption authority to engage in scheduled air transportation
of property and mail between certain points in the U.S. and Hong Kong.

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     International air services are generally governed by a network of bilateral
civil air transport agreements in which rights are exchanged between
governments, which then select and designate air carriers authorized to exercise
such rights. Insofar as scheduled service is involved, bilateral agreements may
prohibit services to certain countries. For countries in which service is
authorized, these bilateral agreements specify the city-pair markets that may be
served; may restrict the number of carriers that may be designated; may provide
for prior approval by one or both governments of the prices the carriers may
charge; may limit frequencies or the amount of capacity to be offered in the
market; and, in various other ways, may impose limitations on the operations of
air carriers. To obtain authority under a bilateral agreement, it is often
necessary to compete against other carriers in a DOT proceeding. At the
conclusion of the proceeding, the DOT awards all route authorizations. The
provisions of bilateral agreements pertaining to charter services vary
considerably from country to country. Some agreements limit the number of
charter flights that carriers of each country may operate. The Company is
subject to various international bilateral air services agreements between the
U.S. and the countries to which the Company provides service. The Company also
operates on behalf of foreign flag air carriers between various foreign points
without serving the U.S. These services are subject to the bilateral agreements
of the respective governments. Furthermore, these services require FAA approval
but not DOT approval. The Company must obtain permission from the applicable
foreign governments to provide service to foreign points.

     The Company has obtained an operating certificate issued by the FAA
pursuant to Part 121 of the Federal Aviation Regulations. The FAA has
jurisdiction over the regulation of flight operations generally, including the
licensing of pilots and maintenance personnel; the establishment of minimum
standards for training and retraining; maintenance of technical standards for
flight, communications and ground equipment; security programs; and other
matters affecting air safety. In addition, the FAA mandates certain
recordkeeping procedures. The Company must obtain and maintain FAA certificates
of airworthiness for all of its aircraft. The Company's aircraft, flight
personnel and flight and emergency procedures are subject to periodic
inspections and tests by the FAA. All air carriers operating to, from or within
the United States are subject to the strict scrutiny of the FAA to ensure proper
compliance with FAA regulations.

     The DOT and the FAA have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended and recodified, and under the Airport Noise
and Capacity Act of 1990, to monitor and regulate aircraft engine noise. All of
the Company's existing fleet of aircraft comply with Stage III Standards -- the
highest standard issued by the FAA.

     Under the FAA's Directives issued under its "Aging Aircraft" program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Twelve
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated cost of
approximately $6.0 million. As part of the FAA's overall Aging Aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished prior to the aircraft reaching 20,000 cycles. The average cycle
time for the 17 aircraft in service is approximately 12,000 cycles and the
average cycles operated per year is approximately 800 cycles. The Company
estimates that the modification costs per aircraft will range between $2 million
and $3 million. Between now and the year 2000, only one aircraft is expected to
reach the 20,000 cycle limit and nine additional aircraft will require
modification prior to the year 2009. The remaining seven aircraft have already
undergone such modifications. The two aircraft undergoing modification to
freighter configuration will receive the Nacelle Strut Modification as part of
the freighter conversion. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Directives applicable to the types of aircraft or engines
included in the Company's fleet could be issued in the future, the cost of which
could be substantial.

     The Company is also subject to the regulations of the Environmental
Protection Agency regarding air quality in the U.S. With respect to aircraft
that it operates, the Company meets the fuel venting requirements and smoke
emissions standards established by the Environmental Protection Agency.

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COMPETITION

     The market for air cargo services is highly competitive. A number of
airlines currently provide services for themselves and for others similar to the
services offered by the Company and new airlines may be formed that would also
compete with the Company. Such airlines may have substantially greater financial
resources than the Company. The Company believes that the most important factors
for competition in the air cargo business are the range, payload and cubic
capacities of the aircraft and the price, flexibility, quality and reliability
of service. The ability of the Company to achieve its strategic plan depends in
part upon its success in convincing major international airlines that
outsourcing some portion of their air cargo business remains more cost-
effective than undertaking cargo operations with their own incremental capacity
and resources and the ability of the Company to obtain higher ACMI Contract
rates in connection with the 747-400 aircraft compared to those currently
obtained in connection with existing Boeing 747-200 aircraft. The Company
believes that such higher rates will be obtainable as a result of the unique
operating benefits associated with the 747-400 aircraft. These operational
benefits include a longer range, greater payload capability and increased fuel
efficiency relative to the Boeing 747-200 aircraft.

FUEL

     Although fuel costs are typically the largest operating expense for
airlines, the Company has limited exposure to the fluctuation of fuel costs and
disruptions in supply as a result of its ACMI Contracts, which require the
customers to provide fuel for the aircraft. However, an increase in fuel costs
could reduce the Company's cost advantages because of its older Boeing 747-200
aircraft fleet, which are not as fuel-efficient as newer cargo aircraft such as
the 747-400 aircraft. In addition, to the extent the Company operates scheduled
cargo or ad hoc charter services, or positions its aircraft, it is responsible
for fuel and other costs that are normally borne by the customers under the ACMI
Contracts. In 1997, approximately 2% of the Company's block hours represented
scheduled cargo, ad hoc charter services or positioning its aircraft for its own
account. The Company may, at times, have excess capacity in which case it may
deploy such aircraft in scheduled cargo or ad hoc charter services.

EMPLOYEES

     As of March 1, 1998, the Company had 676 employees, 382 of whom were air
crew members. The Company expects to hire additional pilots in 1998 associated
with the delivery of additional aircraft, including the 747-400 aircraft. The
Company maintains a comprehensive training program for its pilots in compliance
with FAA requirements in which each pilot regularly attends update programs. The
Company believes that its current training program can be sufficiently modified
to provide training required for pilots for the 747-400 aircraft. In addition,
as part of the Boeing Purchase Agreement, to defray a portion of the costs,
Boeing will train a limited number of the Company's pilots and crew to be
assigned to the 747-400 aircraft. However, the Company may incur incremental
costs associated with ongoing training with regard to the 747-400 aircraft.

     The Company believes that its employees' participation in the growth and
profitability of its business is essential to maintain its productivity and low
cost structure, and has therefore established programs for that purpose such as
a profit sharing plan, a stock purchase plan, and a Company percentage
contribution of the employee deferral contribution to a retirement plan
(Internal Revenue Code of 1986, as amended, Section 401(k) plan). Such programs
are designed to allow employees to share financially in the Company's success
and to augment base salary levels and retirement income. The Company considers
its relations with its employees to be good.

     The Company's labor relations are covered under Title II of the Railway
Labor Act of 1926, as amended, and are subject to the jurisdiction of the
National Mediation Board. None of the Company's employees is subject to a
collective bargaining agreement; however, many airline industry employees are
subject to such agreements and the Company's employees have been and are
routinely solicited by union representatives seeking to organize them. In
January 1998, the Company's pilots rejected union representation by the Air Line
Pilots Association.

                                        8
<PAGE>   9

INSURANCE

     The Company is vulnerable to potential losses which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims involving injury to persons or
property. The Company is required by the DOT to carry liability insurance on
each of its aircraft, and each of the Company's aircraft leases and ACMI
Contracts also requires the Company to carry such insurance. While the Company
carries this insurance, any extended interruption of the Company's operations
due to the loss of an aircraft could have a material adverse effect on the
Company. The Company currently maintains public liability and property damage
insurance and aircraft hull and liability insurance for each of the aircraft in
the fleet in amounts consistent with industry standards. The Company maintains
baggage and cargo liability insurance if not provided by its customers under
ACMI Contracts. Although the Company believes that its insurance coverage is
adequate, there can be no assurance that the amount of such coverage will not be
changed upon renewal or that the Company will not be forced to bear substantial
losses from accidents. Substantial claims resulting from an accident could have
a material adverse effect on the Company's financial condition and could affect
the ability of the Company to obtain insurance in the future. The Company
believes that it has good relations with its insurance providers.

ITEM 2. PROPERTIES

AIRCRAFT

     The Company's utilization of Boeing 747 aircraft provides significant
marketing advantages because these aircraft, relative to most other cargo
aircraft that are commercially available, have higher maximum payload and cubic
capacities, and longer range. The uniformity of the Company's current Boeing
747-200 aircraft fleet allows for standardization in maintenance and crew
training, resulting in substantial cost savings in these areas. The new 747-400
aircraft are expected to have greater operational capabilities than the 747-200
aircraft and will allow the Company to continue to maintain its low cost
structure despite their higher acquisition cost. The new aircraft's limited
maintenance requirements will provide a higher level of operational reliability
with lower maintenance costs during the early years of operation, typically for
at least five years. In addition, the acquisition of the 10 747-400 freighter
aircraft will make Atlas the largest operator of this aircraft type to date and
will enable the Company to capitalize on economies of scale from the
standardization in maintenance and crew training.

     In January 1998, the Company's leases for five Boeing 747-200 from FedEx
expired and the aircraft were returned. The Company expects to make up this loss
of capacity through the utilization of the two aircraft in conversion and with
the delivery of five 747-400 aircraft during the second half of 1998.

     The following table describes, as of March 16, 1998, the Company's existing
fleet, aircraft currently undergoing passenger to freighter modification and the
747-400 aircraft subject to the Boeing Purchase Agreement.

                                 FLEET PROFILE

<TABLE>
<CAPTION>
                                                 NUMBER       AIRCRAFT                      YEAR OF
                                               OF AIRCRAFT      TYPE      OWNED/LEASED    MANUFACTURE
                                               -----------    --------    ------------    -----------
<S>                                            <C>            <C>         <C>             <C>
Existing fleet:..............................      16         747-200         Owned(1)     1974-1986
                                                    1         747-200        Leased(2)          1976
Modification aircraft:.......................       2         747-200         Owned(3)          1979
747-400 aircraft on order:...................      10         747-400              (4)     1998-2000
</TABLE>

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

(1) Two aircraft are powered by P&W engines and 14 are powered by GE engines.

(2) The aircraft is leased from a third party under a lease expiring in March
    2010 and is powered by GE engines.

                                        9
<PAGE>   10

(3) These passenger aircraft are powered by GE engines and are currently
    undergoing conversion to freighter configuration by Boeing. The aircraft are
    expected to be placed in service in the second quarter and early in the
    third quarter of 1998.

(4) The Company has agreed to purchase 10 new Boeing 747-400 freighter aircraft,
    with options to purchase an additional 10 aircraft. The first 10 aircraft
    are scheduled to be delivered as follows: five in 1998, two in 1999 and
    three in 2000. See "-- 747-400 Aircraft Acquisition." These aircraft will be
    powered by GE engines. Debt financing for the first five aircraft has been
    secured through the EETCs (see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent Developments").
    In addition, the Company may arrange for tax-oriented long-term leases on
    some or all of these aircraft.

     The Company has been successful in obtaining new customers, or additional
arrangements with existing customers coincident with the delivery of aircraft
into the fleet, or soon thereafter. However, from time to time, the Company
accepts delivery of aircraft that have not been committed to a particular ACMI
Contract. These aircraft have been utilized temporarily as replacement aircraft
during scheduled and unscheduled maintenance of other aircraft, as well as for
ad hoc charter arrangements. Although the Company intends to have new ACMI
Contracts in place upon delivery of aircraft, including the 747-400 aircraft,
there can be no assurance that such arrangements will have been made.

     From time to time, the Company engages in discussions with third parties
regarding possible acquisitions of aircraft that could expand the Company's
operations. The Company is in discussions with third parties for the possible
acquisition of additional aircraft for delivery in 1998 and beyond.

747-400 AIRCRAFT ACQUISITION

     In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. The
747-400 freighter aircraft are currently scheduled to be delivered as follows:
five in 1998, two in 1999 and three in 2000. Due to production problems at
Boeing, the Company believes that each of the 1998 delivery positions of the
747-400 aircraft may be delayed up to 60 days. While Boeing will compensate the
Company for defined delays in delivery of the 747-400 aircraft, any such delays
may adversely impact the Company's ability to initiate service with prospective
customers in a timely fashion. The Boeing Purchase Agreement also provides the
Company with options to purchase up to 10 additional 747-400 freighter aircraft
for delivery from 1999 through 2002. As a result of the Company being the
largest purchaser of 747-400 freighter aircraft to date, it was able to
negotiate from Boeing and GE a significant discount off the aggregate list price
of $1.7 billion for the 10 747-400 freighter aircraft, four installed engines
per aircraft and five spare engines. In addition, the Company also obtained
certain ancillary products and services at advantageous prices.

FACILITIES

     The Company's principal executive offices are located in a 7,000 square
foot office building owned by the Company at 538 Commons Drive, Golden,
Colorado. The Company also rents 2,500 square feet of office space in an
adjacent building.

     The Company presently occupies a 22,000 square foot facility located at
John F. Kennedy International Airport ("JFK"). This facility includes
administrative offices, maintenance work areas and hangar and parts storage
facilities, as well as flight dispatch operations. The Company occupies this
facility pursuant to a lease agreement with Japan Airlines ("JAL") for a
five-year period with two five-year renewal rights from JAL, which began on June
1, 1995, at a monthly rate of approximately $55,000. The Company believes the
JAL facility is adequate to support the near term growth in operations that will
result from the anticipated acquisition of additional aircraft. In addition, the
Company leases 7,750 square feet of warehouse space at JFK for the storage of
aircraft components, tires and other aircraft related equipment at a monthly
lease rate of $5,000. The initial lease term expires at the end of August 1999
and provides for two one-year renewal option periods beginning September 1,
1999.

                                       10
<PAGE>   11

     Due to increased operations at Miami International Airport, the Company
entered into a month-to-month office lease and a month-to-month warehouse lease
with Dade County, Florida in March 1997 at a combined monthly lease rate of
approximately $6,000. The leased warehouse space is used to store aviation
equipment and aircraft components used to maintain aircraft operated by the
Company.

ITEM 3. LEGAL PROCEEDINGS

     On February 24, 1997, the Company filed a complaint for declaratory
judgment in the Colorado District Court, Jefferson County against Israel
Aircraft Industries Ltd. ("IAI") for mechanical problems the Company experienced
with respect to an aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be offset by the
amount, if any, the Company owes IAI pursuant to the sub-lease. IAI had the case
removed to the U.S. District Court, District of Colorado on April 21, 1997 and
has filed counterclaims alleging damages of approximately $9 million based on
claims arising from the sub-lease. The Company intends to vigorously defend
against all of IAI's claims.

     In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against the Company in the U.S. District Court, Eastern District of New York
alleging actual and punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it is owed for
allegedly arranging certain ACMI Contracts. The Company intends to vigorously
defend against all of ASI's claims.

     While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no other material legal proceedings
pending against the Company or to which any of its property is subject.

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

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

                                    PART II

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

     In November 1997, the Company's common stock commenced trading on the New
York Stock Exchange ("NYSE") under the symbol "CGO." Prior to that, the
Company's common stock traded on the Nasdaq National Market ("Nasdaq/NM") under
the trading symbol "ATLS." The approximate number of shareholders of record at
March 16, 1998 was 248.

     The following table sets forth for the periods indicated the high and low
bid quotations, as quoted by the NYSE and Nasdaq/NM. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                  1997               1996
                                                              -------------      -------------
                                                              HIGH      LOW      HIGH      LOW
                                                              ----      ---      ----      ---
<S>                                                           <C>       <C>      <C>       <C>
QUARTER ENDED
  March 31..................................................  $47 3/4   $19 7/8  $41 7/8   $15
  June 30...................................................   35 7/8    24       64 1/4    36 3/4
  September 30..............................................   34 1/4    21 3/8   58 1/4    36 3/4
  December 31...............................................   29 1/4    21 7/8   50 7/8    28 1/8
</TABLE>

     The Company has not declared any cash dividends and does not plan to do so
in the foreseeable future. The indentures governing the Company's 12 1/4% Senior
Secured Notes due 2002 (the "Equipment Notes") and the Company's unsecured
10 3/4% Senior Notes due 2005 (the "Senior Notes") in certain circumstances may
restrict the Company from paying dividends or making other distributions on its
common stock. See Note 3 to the Consolidated Financial Statements of the
Company.

                                       11
<PAGE>   12

ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented below have been derived from the
consolidated financial statements of the Company. This information should be
read in conjunction with the consolidated financial statements and related
notes, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this report.

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            1997       1996       1995       1994       1993
                                          --------   --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues......................  $401,041   $315,659   $171,267   $102,979   $ 41,263
Operating income........................    56,002     88,063     42,674     13,894        446
Income (loss) before extraordinary
  item..................................     6,689     37,838     17,831      3,586     (8,023)
Net income (loss).......................    23,429     37,838     17,831      3,586     (8,023)
Basic EPS:
  Income (loss) before extraordinary
     item per common share..............       .30       1.76       1.06        .24       (.53)
  Net income (loss) per common share....      1.04       1.76       1.06        .24       (.53)
  Weighted average common shares
     outstanding during the period......    22,450     21,503     16,783     15,000     15,000
Diluted EPS:
  Income (loss) before extraordinary
     item per common share..............       .30       1.72       1.06        .24       (.53)
  Net income (loss) per common share....      1.04       1.72       1.06        .24       (.53)
  Weighted average common shares
     outstanding during the period......    22,585     21,779     16,852     15,000     15,000
</TABLE>

<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                         ------------------------------------------------------
                                            1997        1996       1995       1994       1993
                                         ----------   --------   --------   --------   --------
                                                             (IN THOUSANDS)
<S>                                      <C>          <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and short-term investments........  $  152,969   $124,663   $ 96,990   $ 10,524   $  6,198
Working capital (deficit)..............      80,363     98,675     81,022     (1,937)    (5,291)
Total assets...........................   1,297,415    773,707    447,323    162,731    125,005
Long-term debt, net of current
  portion..............................     736,026    462,868    335,902    158,730    129,663
Deferred Aircraft Obligations..........     163,167         --         --         --         --
Stockholders' equity (deficit).........     238,829    215,785     68,715    (15,753)   (19,339)
</TABLE>

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

RESULTS OF OPERATIONS

     The cargo operations of the Company's airline customers are seasonal in
nature, with peak activity occurring traditionally in the second half of the
year, and with a significant decline occurring in the first quarter. This
decline in cargo activity is largely due to the decrease in shipping that occurs
following the December and January holiday seasons associated with the
celebration of Christmas and the Chinese New Year. Certain of the Company's
customers have, in the past, elected to use that period of the year to exercise
their contractual options to cancel a limited number (generally not more than 5%
per year) of guaranteed hours with the Company, and are expected to continue to
do so in the future. As a result, the Company's revenues typically decline in
the first quarter of the year as its contractual aircraft utilization level
temporarily decreases. The Company seeks to schedule, to the extent possible,
its major aircraft maintenance activities during this period to take advantage
of any unutilized aircraft time.

                                       12
<PAGE>   13

     The aircraft acquisitions, lease arrangements and modification schedule are
described in Note 6 of the Company's December 31, 1997 Consolidated Financial
Statements. The timing of when an aircraft enters the Company's fleet can affect
not only annual performance, but can make quarterly results vary, thereby
affecting the comparability of operations from period to period.

     The tables below set forth selected financial and operating data for the
four quarters of the years ended December 31, 1997, 1996 and 1995 (dollars in
thousands).

<TABLE>
<CAPTION>
                                                                  1997
                                        ---------------------------------------------------------
                                                        4TH         3RD         2ND         1ST
                                        CUMULATIVE    QUARTER     QUARTER     QUARTER     QUARTER
                                        ----------    --------    --------    --------    -------
<S>                                     <C>           <C>         <C>         <C>         <C>
Total operating revenues..............   $401,041     $120,893    $104,197    $ 93,902    $82,049
Operating expenses....................    345,039       93,112      82,464     104,556     64,907
Operating income (loss)...............     56,002       27,781      21,733     (10,654)    17,142
Other (expense).......................    (45,469)     (13,383)    (11,930)    (10,908)    (9,248)
Net income............................     23,429        9,143       6,225       3,048      5,013
Block hours...........................     75,254       22,333      19,937      17,541     15,443
Average aircraft operated.............       19.5         20.9        20.4        19.5       17.2
Operating margin (deficit)............       14.0%        23.0%       20.9%      (11.4)%     20.9%
</TABLE>

<TABLE>
<CAPTION>
                                                                  1996
                                        ---------------------------------------------------------
                                                        4TH         3RD         2ND         1ST
                                        CUMULATIVE    QUARTER     QUARTER     QUARTER     QUARTER
                                        ----------    --------    --------    --------    -------
<S>                                     <C>           <C>         <C>         <C>         <C>
Total operating revenues..............   $315,659     $104,715    $ 79,681    $ 72,614    $58,649
Operating expenses....................    227,596       74,775      59,635      49,947     43,239
Operating income......................     88,063       29,940      20,046      22,667     15,410
Other (expense).......................    (28,475)      (8,569)     (7,207)     (6,982)    (5,717)
Net income............................     37,838       13,397       8,201      10,037      6,203
Block hours...........................     59,445       18,803      15,444      14,073     11,125
Average aircraft operated.............       14.7         18.4        15.4        14.0       10.8
Operating margin......................       27.9%        28.6%       25.2%       31.2%      26.3%
</TABLE>

<TABLE>
<CAPTION>
                                                                  1995
                                        ---------------------------------------------------------
                                                        4TH         3RD         2ND         1ST
                                        CUMULATIVE    QUARTER     QUARTER     QUARTER     QUARTER
                                        ----------    --------    --------    --------    -------
<S>                                     <C>           <C>         <C>         <C>         <C>
Total operating revenues..............   $171,267     $ 56,142    $ 47,769    $ 38,418    $28,938
Operating expenses....................    128,593       39,982      34,844      28,370     25,397
Operating income......................     42,674       16,160      12,925      10,048      3,541
Other (expense).......................    (16,435)      (4,014)     (4,805)     (4,287)    (3,330)
Net income............................     17,831        8,352       5,568       3,861         50
Block hours...........................     33,265       10,809       9,076       7,568      5,812
Average aircraft operated.............        7.7          9.4         8.2         6.9        6.1
Operating margin......................       24.9%        28.8%       27.1%       26.2%      12.2%
</TABLE>

  1997 Compared to 1996

     Operating Revenues and Results of Operations. Total operating revenues for
the year ended December 31, 1997 increased to $401.0 million compared to $315.7
million for 1996, an increase of approximately 27%. The average number of
aircraft in the Company's fleet during 1997 was 19.5 compared to 14.7 during
1996. Total block hours for 1997 were 75,254 compared to 59,445 for 1996, an
increase of approximately 27%, principally reflecting the increase in the size
of the Company's fleet. Revenue per block hour increased by approximately .4% to
$5,329 for 1997 compared to $5,310 for 1996. The Company's operating results
decreased from an $88.1 million operating profit in 1996 to a $56.0 million
operating profit in 1997, primarily due to the largely non-cash charge to
earnings of $27.1 million in the second quarter of 1997. The after-tax effect of
this second quarter charge was substantially offset by the after-tax effect of
the extraordinary gain on

                                       13
<PAGE>   14

early extinguishment of debt in the same quarter of 1997. Net income of $37.8
million for 1996 declined to a net income of $23.4 million for 1997, primarily
due to the increase in interest expense associated with the increase in aircraft
in service year over year and the higher maintenance costs with respect to the
aircraft sub-leased from FedEx.

     Operating levels increased during the second quarter of 1997 as a result of
placing in service two additional aircraft upon completion of their respective
cargo modifications by Boeing, one in March 1997 and one in May 1997. In
addition, the Company placed in service the fifth FedEx aircraft in April 1997.
In August 1997 and at the end of September 1997, the Company took delivery of
the fifth and sixth Thai Aircraft, respectively, upon completion by Boeing of
its modification to cargo configuration. At the end of 1997, the Company removed
from revenue service the five aircraft sub-leased from FedEx in preparation for
the return of these aircraft to FedEx in the first quarter of 1998, as provided
for in the sub-leases.

     The Company's operating levels increased moderately during 1997 as a result
of these aircraft acquisitions. Block hours increased from 15,443 in the first
quarter of 1997 to 22,333 in the fourth quarter of 1997, reflecting the growth
in the average fleet size from 17.2 aircraft to 20.9 aircraft for the two
periods. Total operating revenue increased from $82.0 million in the first
quarter to $120.9 million in the fourth quarter, representing slightly higher
block hour rates for the fourth quarter compared to those of the first quarter
of 1997, primarily due to the seasonality of the business of the Company's
customers. The Company achieved $27.8 million operating income and $9.1 million
net income in the fourth quarter of 1997, compared to $17.1 million operating
income and $5.0 million net income in the first quarter of 1997.

     In the second quarter of 1997, the Company recorded a largely non-cash
charge of $27.1 million to operating income. This charge included the write-off
of the Company's remaining balance sheet investment in the five aircraft
sub-leased from FedEx, as well as the establishment of certain reserves
associated with costs necessary to return the aircraft in the first quarter of
1998 and other non-recurring items. Excluding this charge, operating income was
$83.1 million for 1997 compared to $88.1 million for 1996, or a decrease of
approximately 6%. There were an average of 4.4 aircraft subleased from FedEx
operating in 1997 compared to an average of 1.7 aircraft sub-leased from FedEx
operating in 1996. Maintenance costs with respect to the FedEx aircraft were
substantially higher than for the rest of the Company's fleet. In addition, the
Company incurred $1.2 million of costs in the first quarter of 1997 related to
the return of two leased aircraft to their respective lessors. In the second
quarter of 1997, the realization of an after-tax extraordinary gain of $16.7
million, resulting from the receipt of a prepayment incentive credit associated
with the refinancing of approximately $228 million of indebtedness during the
second quarter, for the most part offset the $17.2 million after-tax impact of
the non-recurring charge discussed above.

     Operating Expenses. The Company's principal operating expenses include
flight crew salaries and benefits; other flight-related expenses; maintenance;
aircraft and engine rentals; fuel costs and ground handling; depreciation and
amortization; and selling, general and administrative expenses.

     Flight crew salaries and benefits include all such expenses for the
Company's pilot work force. Flight crew salaries and benefits increased to $30.2
million in 1997 compared to $25.0 million in 1996, due to increases in the
number of aircraft in the Company's fleet and aircraft block hours. While actual
expense increased by approximately 21% during 1997, on a block hour basis this
expense declined by approximately 5% to $401 per block hour for 1997 from $421
per block hour for 1996. This reduction was due to increased efficiency in
staffing levels and scheduling resulting from the increased level of operations.

     Other flight-related expenses include hull and liability insurance on the
Company's fleet of Boeing 747-200 aircraft, crew travel and meal expenses,
initial and recurring crew training costs and other expenses necessary to
conduct its flight operations.

     Other flight-related expenses increased to $28.8 million in 1997 compared
to $27.4 million in 1996, or approximately 5%. The impact of the larger fleet
size for 1997 compared to the prior year was partially offset by a reduction in
the Company's aircraft hull and liability insurance rates based on its increased
size and favorable operating history. As a result of this and other operating
efficiencies, on a block hour basis, other

                                       14
<PAGE>   15

flight-related expenses declined by approximately 17% to $383 per block hour for
1997 compared to $461 per block hour for 1996.

     Maintenance expenses include all expenses related to the upkeep of the
aircraft, including maintenance, labor, parts, supplies and maintenance
reserves. The costs of C Checks, D Checks and engine overhauls not otherwise
covered by maintenance reserves are capitalized as they are incurred and
amortized over the life of the maintenance event. In addition, in January 1995
the Company contracted with KLM for a significant part of its regular
maintenance operations and support on a fixed cost per flight hour basis.
Effective October 1996, certain aircraft engines were accepted into the GE
engine maintenance program, also on a fixed cost per flight hour basis, pursuant
to a 10 year maintenance agreement.

     Maintenance expense increased to $123.8 million in 1997 from $84.3 million
in 1996, or approximately 47%, partially due to the increase in the Company's
average fleet size and partially due to the higher maintenance costs with
respect to the aircraft sub-leased from FedEx. On a block hour basis,
maintenance expense increased year over year by approximately 16%, primarily due
to higher maintenance costs associated with the aircraft sub-leased from FedEx.

     Aircraft and engine rentals include the cost of leasing aircraft and spare
engines, as well as the cost of short-term engine leases required to replace
engines removed from the Company's aircraft for either scheduled or unscheduled
maintenance and any related short-term replacement aircraft lease costs.

     Aircraft and engine rentals were $31.6 million in 1997 compared to $27.3
million in 1996, or an increase of approximately 16%, of which approximately
$2.6 million was due to higher lease rates in 1997 compared to 1996 and $3.1
million was due to an additional .5 aircraft leased in 1997 over 1996. This
increase was partially offset by a $1.4 million decrease in engine rentals year
over year, due to additional spare engines purchased by the Company in 1997.

     Because of the nature of the Company's ACMI contracts with its airline
customers, under which the Company is responsible only for the ownership cost
and maintenance of the aircraft and for supplying aircraft crews and insurance,
the Company's airline customers bear all other operating expenses, including
fuel and fuel servicing; marketing costs associated with obtaining cargo;
airport cargo handling; landing fees; ground handling; aircraft push-back and
de-icing services; and specific cargo and mail insurance. As a result, the
Company incurs fuel and ground handling expenses only when it operates on its
own behalf, either in scheduled services, for ad hoc charters or for ferry
flights. Fuel expenses for the Company's non-ACMI contract services include both
the direct cost of aircraft fuel as well as the cost of delivering fuel into the
aircraft. Ground handling expenses for non-ACMI contract service include the
costs associated with servicing the Company's aircraft at the various airports
to which it operates as well as other direct flight related costs.

     Fuel and ground handling costs increased to $10.8 million for 1997 compared
to $10.6 million for 1996, or an increase of approximately 3%. This was due to
higher fuel prices in 1997 compared to 1996, partially offset by the relative
decrease in scheduled service, charter and other non-ACMI block hours to 1,787
block hours in 1997 from 2,042 block hours in 1996.

     Depreciation and amortization expense includes depreciation on aircraft,
spare parts and ground equipment, and the amortization of capitalized major
aircraft maintenance and engine overhauls.

     Depreciation and amortization expense increased to $42.9 million in 1997
from $25.5 million in 1996, or approximately 68%. This increase reflected an
increase of approximately 50% in owned aircraft, an approximate two-fold
increase in owned spare engines and an increase of approximately 100% in spare
parts for 1997 over 1996. In addition, Other Revenues include $1.5 million of
depreciation for 1997, associated with the net lease of two owned aircraft which
were in passenger configuration.

     Other operating expenses include salaries, wages and benefits for all
employees other than pilots; accounting and legal expenses; supplies; travel and
meal expenses, excluding those of the aircraft crews; commissions; and other
miscellaneous operating costs.

     Other operating expenses increased to $49.8 million in 1997 from $27.5
million in 1996, or approximately 81%, reflecting the increase in the Company's
operations. On a block hour basis, these expenses increased to
                                       15
<PAGE>   16

$661 per block hour in 1997 from $462 per block hour in 1996, or approximately
43%. This increase in cost was due primarily to additional personnel and other
resources necessary to properly manage the Company's increased operations and to
prepare for the introduction of the 747-400 aircraft.

     Other income (expense) consists of interest income and interest expense.
Interest income for 1997 was $7.4 million compared to $7.1 million for 1996, due
to achieving higher interest rates in 1997 compared to 1996 on a slightly lower
short-term investment level in 1997 compared to 1996. Interest expense increased
to $52.8 million in 1997 from $35.6 million in 1996, or approximately 49%,
primarily resulting from an increase of approximately 50% in financed flight
equipment between these periods.

     Income Taxes. Pursuant to the provisions of SFAS No. 109 "Accounting for
Income Taxes," the Company has recorded a tax provision based on tax rates in
effect during the period. Accordingly, the Company accrued taxes at the rate of
36.5% during 1997 and 1996. Due to significant capital costs, which are
depreciated at an accelerated rate for tax purposes, a majority of the Company's
tax provision in these periods is deferred.

  1996 Compared to 1995

     Operating Revenues and Results of Operations. Total operating revenues for
the year ended December 31, 1996 increased to $315.7 million compared to $171.3
million for 1995, an increase of approximately 84%. The average number of
aircraft in the Company's fleet during 1996 was 14.7, compared to 7.7 during
1995. Total block hours for 1996 were 59,445 compared to 33,265 for 1995, an
increase of approximately 79%. Revenue per block hour increased by 3% to $5,310
for 1996 compared to $5,149 for the year-earlier period reflecting a slight
increase in the level of charter and scheduled service hours. While charter and
scheduled service activity provides a higher revenue rate per block hour, costs
are also higher due to fuel and ground handling costs which the Company must
bear. The Company's operating results improved from a $42.7 million operating
profit for 1995 to an operating profit of $88.1 million for 1996, or
approximately 106%. Net income of $17.8 million for 1995 improved to a net
income of $37.8 million for 1996, or approximately 112%.

     Operating levels increased during the first quarter of 1996 as a result of
placing in service four additional aircraft. In January 1996, the Company placed
in service one aircraft upon completion of its cargo modification by Hong Kong
Aircraft Engineering Company. Two additional aircraft were re-delivered to the
Company upon completion of their modification by Boeing in March 1996. Finally,
at the close of the first quarter, the Company took delivery of the first
aircraft sub-leased from FedEx. During the third quarter of 1996, the Company
placed in service the next three aircraft sub-leased from FedEx. At the end of
the third quarter the Company took delivery of a Boeing 747-200 passenger
aircraft acquired from Thai Airways upon completion by Boeing of its
modification to cargo configuration. In the fourth quarter of 1996, a second
Boeing 747-200 passenger aircraft acquired from Thai Airways was placed in
service upon its delivery by Boeing subsequent to modification to cargo
configuration. At the end of 1996, two leased aircraft were taken out of service
for required maintenance prior to re-delivery to the lessors.

     The Company's operating levels increased significantly during 1996 as a
result of these aircraft acquisitions. Block hours increased from 11,125 in the
first quarter of 1996 to 18,803 in the fourth quarter of 1996, relative to the
growth in average fleet size from 10.8 aircraft to 18.4 aircraft for the two
periods. Total operating revenue increased from $58.6 million in the first
quarter to $104.7 million in the fourth quarter, representing slightly higher
block hour rates for the fourth quarter compared to those of the first quarter
of 1996, primarily due to the seasonality of the business of the Company's
customers. The Company achieved $29.9 million operating income and $13.4 million
net income in the fourth quarter of 1996, compared to $15.4 million operating
income and $6.2 million net income in the first quarter of 1996.

     The Company's operating levels increased substantially during 1995 also as
a result of aircraft acquisitions. Block hours rose from 5,812 hours in the
first quarter of 1995 to 10,809 in the fourth quarter, as the average number of
aircraft in the Company's fleet grew from 6.1 aircraft to 9.4 aircraft over the
corresponding period. Total operating revenue increased from $28.9 million in
the first quarter of 1995 to $56.1 million in the fourth quarter, with the
Company's operating income increasing from $3.5 million to $16.2 million and its
net income improving from $0.1 million to $8.4 million over that same period.
For the
                                       16
<PAGE>   17

year 1995, total block hours were 33,265 and the average fleet size was 7.7
aircraft. Total operating revenue was $171.3 million, operating income was $42.7
million and net income was $17.8 million.

     Operating Expenses. Expenses for flight crew salaries and benefits
increased to $25.0 million in 1996 from $14.6 million in 1995, primarily as a
result of the increase in the Company's fleet of Boeing 747 aircraft from an
average of 7.7 aircraft in 1995 to 14.7 aircraft in 1996, while aircraft block
hours increased from 33,265 to 59,445, or 79%, over such period. On a block hour
basis, this expense declined to $421 per hour for 1996 from $438 per hour for
1995, or approximately 4%, due to increased staffing and scheduling efficiencies
associated with increased operations.

     Other flight-related expenses rose to $27.4 million in 1996 from $12.4
million in 1995, or approximately 120%, primarily due to fleet expansion and
higher travel costs associated with operational difficulties related to the
aircraft sub-leased from FedEx. On a per block hour basis, other flight-related
expenses increased from $372 per block hour in 1995 to $461 per block hour in
1996, or approximately 24%.

     Maintenance expense increased to $84.3 million in 1996 from $42.6 million
in 1995, or approximately 98%, due to the increase in average fleet size and
certain increased costs associated with introducing the aircraft sub-leased from
FedEx into the Company's fleet and higher ongoing maintenance costs. The
aircraft sub-leased from FedEx are not covered by the Company's maintenance
contracts with KLM and GE described above. On a block hour basis, maintenance
expense increased by 11%, primarily due to parts support requirements associated
with scheduled and unscheduled maintenance events, and due to the maintenance
costs for the aircraft sub-leased from FedEx discussed above.

     Aircraft and engine rentals were $27.3 million in 1996 compared to $22.9
million in 1995, representing an increase of 19%. Lease costs in 1996 for the
aircraft sub-leased from FedEx represented $9.7 million of this increase, offset
by a $2.4 million decrease in sub-service rentals in 1996 compared to 1995. In
addition, the lease costs for one aircraft in 1995 exceeded the lease costs in
1996 by $1.6 million, due to the Company's purchase of the aircraft in the
second quarter of 1996. Engine rentals decreased by $1.8 million in 1996 to $1.8
million, due to the purchase of eight spare engines which reduced the Company's
need for leased engines.

     Fuel and ground handling costs increased to $10.6 million in 1996 from $5.0
million in 1995, or approximately 110%. This increase was primarily due to an
increase in block hours for scheduled service, charters, ferry and other from
1,070 in 1995 to 2,042 in 1996, or approximately 91%. In addition, the airline
industry experienced a rise in fuel costs over the period.

     Depreciation and amortization expense increased to $25.5 million in 1996
from $14.8 million in 1995, reflecting the increase in the number of owned
aircraft in the Company's fleet. On a per block hour basis, this expense
decreased from $445 per block hour in 1995 to $429 per block hour in 1996, or
approximately 4%. The proportion of owned aircraft to leased aircraft was
relatively the same for 1996 as it was for 1995.

     Other operating expenses increased to $27.5 million in 1996 from $16.4
million in 1995, or approximately 68%. On a block hour basis, other operating
expenses decreased from $492 per block hour in 1995 to $462 per block hour in
1996, or approximately 6%, reflecting a lower rate of growth in the Company's
overhead as compared to its operational growth.

     Other Income (Expense). Interest income increased to $7.1 million for 1996
from $2.0 million in 1995. This increase was primarily due to the investment of
$99.6 million of funds received from the secondary public offering ("SPO") in
May 1996, as well as funds retained from the Company's initial public offering
("IPO") in August 1995. Interest expense increased to $35.6 million in 1996 from
$18.5 million in 1995, resulting from the increase in financed flight equipment
between these periods.

     Income Taxes. Pursuant to the provisions of SFAS No. 109, "Accounting for
Income Taxes," the Company has recorded a tax provision based on tax rates in
effect during the period. Accordingly, the Company accrued taxes at the rate of
36.5% in 1996 and 32.0% in 1995. Due to significant capital costs, which are
depreciated at an accelerated rate for tax purposes, a majority of the Company's
tax provision in 1996 and 1995 is deferred.

                                       17
<PAGE>   18

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company had cash and cash equivalents of
approximately $41.3 million, short-term investments of approximately $111.6
million and working capital of approximately $80.4 million. During 1997, cash
and cash equivalents increased approximately $31.5 million, principally
reflecting cash provided from operations of $87.7 million, proceeds from
equipment financings of $815.8 million and net proceeds from the sale and
purchase of short-term investments of $3.2 million, partially offset by the net
sale and purchase of investments in flight and other equipment of $364.0
million, principal reductions of indebtedness of $494.1 million, debt issuance
costs of $16.6 million and net treasury stock purchases of $0.4 million.

     At December 31, 1996, the Company had cash and cash equivalents of
approximately $9.8 million, short-term investments of approximately $114.9
million and working capital of approximately $98.7 million. During 1996, cash
and cash equivalents decreased $87.2 million, principally reflecting investments
in flight and other equipment of $289.7 million, the net purchase of $114.9
million of short-term investments, debt issuance costs of $6.0 million,
principal reductions of indebtedness of $21.6 million and net treasury stock
purchases of $0.5 million, partially offset by cash provided from operations of
$84.4 million, proceeds from equipment financings of $154.8 million, net common
stock issuances of $106.3 million, including the $99.6 million received from the
SPO in the second quarter of 1996.

     In May 1996, the Company entered into a $175 million revolving credit
facility (the "Aircraft Acquisition Credit Facility") with Goldman Sachs Credit
Partners L.P. ("Goldman Sachs"), as Syndication Agent, and Bankers Trust Company
("BTCo"), as Administrative Agent. This revolving loan facility provides for the
acquisition and conversion of flight equipment. The Aircraft Acquisition Credit
Facility was subsequently amended and restated in conjunction with certain
refinancings. The Third Amended and Restated Credit Facility provides for a $250
million revolving credit facility as of September 5, 1997 with a two-year
revolving period and a subsequent three-year term loan period in the event that
permanent financing has not been obtained for any flight equipment financed
under the facility. At the time of each borrowing, the Company must select
either a Base Rate Loan (prime rate, plus 1.5% through May 8, 1998, thereafter
plus 2.0%) or a Eurodollar Rate Loan (Eurodollar rate, plus 2.5% through May 8,
1998, thereafter plus 3.0%). The Eurodollar Rate Loan was selected by the
Company for substantially all borrowings in 1996 and 1997. The weighted average
interest rate on borrowings outstanding under the Aircraft Acquisition Credit
Facility was 8.38% at December 31, 1997. Each borrowing is secured by a first
priority security interest in the collateral flight equipment of that borrowing.
Certain tests must be met before each purchase of aircraft and related drawdown
on the facility. To date, the Company has met these tests. If in the future, the
Company cannot meet all the tests because of the difficult sequencing of
aircraft acquisition, aircraft conversion and customer contracts, the Company
believes that other financing sources would be available to the Company or that
it would acquire aircraft using its internal cash or seek a waiver of any
necessary conditions. As of December 31, 1997, the Company had $85.0 million
outstanding under the Aircraft Acquisition Credit Facility. Covenants with
respect to the Aircraft Acquisition Credit Facility require specific levels of
insurance, as well as contain requirements regarding possession, maintenance,
and lease or transfer of the flight equipment. Certain covenants applicable to
the Company include, among other restrictions, limitations on indebtedness,
liens, investments, contingent obligations, restricted junior payments, capital
expenditures and leases. The Company was in compliance with all of its covenants
at December 31, 1997.

     In March 1997, the Company refinanced one of its aircraft with Nationsbanc
Leasing Corporation ("Nationsbanc"). This aircraft was previously financed
through the Aircraft Acquisition Credit Facility. As such, this refinancing
increased the availability of funds under the Aircraft Acquisition Credit
Facility by approximately $25 million. The Nationsbanc financing is a seven year
term loan (extendible under certain circumstances to ten years) which provides
for a fixed interest rate of 9.16%. The loan is secured by a first priority
security interest in this aircraft.

     In April 1997, the Company purchased the fifth and sixth aircraft from Thai
Airways. These aircraft were placed into service in the third quarter of 1997
subsequent to undergoing modification to cargo configuration

                                       18
<PAGE>   19

by Boeing. These aircraft were initially financed under the Aircraft Acquisition
Credit Facility and were subsequently refinanced as part of the AFL II Term Loan
Facility (see below).

     In May 1997, the Company acquired from Citicorp Investor Lease, Inc.
("Citicorp") one 747-200 passenger aircraft for a purchase price of $25 million,
including two spare engines. In connection with the purchase of the aircraft
from Citicorp, the Company agreed to assume Citicorp's lessor interest in the
lease of such aircraft to Philippine Airlines ("PAL") for the remainder of the
lease term. This aircraft is financed under the Aircraft Acquisition Credit
Facility. See "-- Recent Developments."

     In May 1997, the Company formed a wholly-owned subsidiary, Atlas Freighter
Leasing, Inc. ("AFL"), for the purpose of entering into the $185 million AFL
Term Loan Facility (the "AFL Term Loan Facility") to refinance six Boeing
747-200 aircraft previously financed through Internationale Nederlanden Aviation
Lease B.V. ("ING Bank"). Concurrent with entering into the AFL Term Loan
Facility, the proceeds of the AFL Term Loan Facility were used to repay all
existing principal and interest due under the ING Bank debt. Interest is based
on the Eurodollar rate, plus 2.5% for the first three years and 3.0% thereafter,
and is payable quarterly. The interest rate on borrowings outstanding under the
AFL Term Loan Facility was 8.38% at December 31, 1997. Quarterly scheduled
principal payments of $2.5 million commenced in February 1998 and increase to
$5.7 million in August 1998 with a final payment of $50.0 million in May 2004.
The AFL Term Loan Facility is secured by a first priority interest in the six
subject aircraft and is restrictive with respect to limitations on indebtedness,
liens, investments, contingent obligations, restricted junior payments, capital
expenditures, amendments of material agreements, leases, transactions with
shareholders and affiliates and the conduct of business. AFL was in compliance
with all of its covenants as of December 31, 1997.

     In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. The
747-400 freighter aircraft are currently scheduled to be delivered as follows:
five in 1998, two in 1999 and three in 2000. Due to production problems at
Boeing, the Company believes that each of the 1998 delivery positions of the
747-400 aircraft may be delayed up to 60 days. While Boeing will compensate the
Company for defined delays in delivery of the 747-400 aircraft, any such delays
may adversely impact the Company's ability to initiate service with prospective
customers in a timely fashion. The Boeing Purchase Agreement also provides the
Company with options to purchase up to 10 additional 747-400 freighter aircraft
for delivery from 1999 through 2002. As a result of the Company being the
largest purchaser of 747-400 freighter aircraft to date, it was able to
negotiate from Boeing and GE a significant discount off the aggregate list price
of $1.7 billion for the 10 747-400 freighter aircraft, four installed engines
per aircraft and five spare engines. In addition, the Company also obtained
certain ancillary products and services at advantageous prices. The Boeing
Purchase Agreement requires that the Company pay Pre-Delivery Deposits to Boeing
prior to the delivery date of each 747-400 freighter aircraft in order to secure
delivery of the 747-400 freighter aircraft and to defray a portion of the
manufacturing costs. The Company expects the maximum total amount of
Pre-Delivery Deposits at any time outstanding will be approximately $155
million, approximately $105.1 million of which was paid as of December 31, 1997.
For the years 1998 and 1999, the Company expects to pay $67.6 million and $42.6
million, respectively, in accordance with the Pre-Delivery Deposits schedule. In
addition, the Boeing Purchase Agreement provides for a deferral of a portion of
the Pre-Delivery Deposits (Deferred Aircraft Obligations) for which the Company
accrues and pays interest quarterly at 6-month LIBOR, plus 2.00%. As of December
31, 1997, there was $163.2 million of Deferred Aircraft Obligations outstanding
and the combined interest rate was 7.97%.

     In August 1997, the Company completed the offering of its unsecured 10 3/4%
Senior Notes due 2005 ("Senior Notes"). The proceeds from the offering of the
Senior Notes were used to, among other things, repay short-term indebtedness
incurred by the Company to make pre-delivery deposits to Boeing for the purchase
of 10 new freighter aircraft and for additional pre-delivery deposits as they
become due. Interest on the Senior Notes began to accrue from their date of
original issuance and is payable semi-annually in arrears on February 1 and
August 1 of each year, commencing February 1, 1998, at the rate of 10 3/4% per
annum. The Senior Notes are redeemable, in whole or in part, at the option of
the Company, on or after August 1, 2001, at established redemption prices, plus
accrued interest to the date of redemption. In addition, at any time on or prior
to August 1, 2000, the Company, at its option, may redeem up to 35% of the
aggregate principal amount of the Senior Notes originally issued with the net
cash proceeds of one or more public equity offerings, at a
                                       19
<PAGE>   20

redemption price equal to 110.75% of the principal amount thereof plus accrued
interest to the date of redemption; provided that at least 65% of the aggregate
principal amount of the Senior Notes originally issued remains outstanding
immediately after any such redemption. The Senior Notes are general unsecured
obligations of the Company which rank pari passu in right of payment to any
existing and future unsecured senior indebtedness of the Company. The Senior
Notes are effectively subordinated, however, to all secured indebtedness of the
Company and to all indebtedness of the Company's subsidiaries. Covenants with
respect to the Senior Notes contain certain limitations on the ability of the
Company and its subsidiaries to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with affiliates,
incur liens, create restrictions on the ability of a subsidiary to pay dividends
or make certain payments, sell or issue preferred stock of subsidiaries to third
parties, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company. The Company was in compliance with all of its covenants as of
December 31, 1997.

     In September 1997, the Company formed another wholly-owned subsidiary,
Atlas Freighter Leasing II, Inc. ("AFL II") for the purpose of entering into the
$185 million AFL II Term Loan Facility (the "AFL II Term Loan Facility") to
refinance four of the aircraft previously financed under the Aircraft
Acquisition Credit Facility, plus nine spare engines, in order to provide the
Company with greater financial flexibility in anticipation of the financing
requirements for the future acquisition of additional freighter aircraft.
Interest is based on the Eurodollar rate, plus 2.25%, less a pricing reduction,
if any, in effect from time to time, and is payable quarterly. The interest rate
on borrowings outstanding under the AFL II Term Loan Facility was 8.13% at
December 31, 1997. Quarterly scheduled principal payments of $2.5 million
commenced in February 1998 and increase to $5.7 million in August 1998 with a
final payment of $50.0 million in May 2004. The AFL II Term Loan Facility is
secured by a first priority interest in the four subject aircraft, plus nine
spare engines, and is restrictive with respect to limitations on indebtedness,
liens, investments, contingent obligations, restricted junior payments, capital
expenditures, amendments of material agreements, leases, transactions with
shareholders and affiliates and the conduct of business. AFL II was in
compliance with all of its covenants as of December 31, 1997.

     In October 1997, Atlas Flightlease, Inc. ("AFI"), a wholly-owned subsidiary
of the Company, secured a 2-year LIBOR based financing with Bankers Trust
Company for approximately 80% of the purchase price of a 1988 Canadair
Challenger passenger aircraft (the "Challenger"). AFI purchased the Challenger
from MAC Flightlease, Inc. ("MAC Flightlease"), an entity wholly-owned by the
wife of the Company's Chairman, President and CEO (see Note 7 to the
Consolidated Financial Statements), in the third quarter of 1997. In December
1997, AFI refinanced the Challenger for approximately 100% of its purchase price
with Nationsbanc under a 5-year loan which was guaranteed by the Company.
Interest is based on the Eurodollar rate, plus 2.35%, and is payable quarterly
with concurrent scheduled payments of principal. The interest rate on borrowings
outstanding under the Nationsbanc debt was 8.26% at December 31, 1997. The loan
is secured by a first priority security interest in the Challenger. Covenants
with respect to this financing require specific levels of insurance, as well as
contain requirements regarding use, maintenance, configuration, liens and
disposition of the Challenger, among other things. AFI was in compliance with
all of its covenants as of December 31, 1997.

     Due to the contractual nature of the Company's business, the Company's
management does not consider its operations to be highly working
capital-intensive in nature. Because most of the non-ACMI costs normally
associated with operations are borne by and directly paid for by the Company's
customers, the Company does not incur significant costs in advance of the
receipt of corresponding revenues. Moreover, ACMI costs, which are the
responsibility of the Company, are generally incurred on a regular, periodic
basis ranging from flight hours to months. These costs are largely matched by
revenue receipts, as the Company's contracts require regular payments from its
customers, based upon current flight activity, generally every two to four
weeks. As a result, the Company has not in the past had a requirement for a
working capital facility. The Company is exploring the possibility of entering
into an unsecured line of credit for general working capital purposes.

     Under the FAA's Directives issued under its Aging Aircraft program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the
                                       20
<PAGE>   21

problem of corrosion and structural fatigue. In November 1994, Boeing issued
Nacelle Strut Modification Service Bulletins which have been converted into
Directives by the FAA. Twelve of the Company's Boeing 747-200 aircraft will have
to be brought into compliance with such Directives within the next three years
at an estimated cost of approximately $6.0 million. As part of the FAA's overall
aging aircraft program, it has issued Directives requiring certain additional
aircraft modifications to be accomplished prior to the aircraft reaching 20,000
cycles. The average cycle time for the 17 aircraft in service is approximately
12,000 cycles and the average cycles operated per year is approximately 800
cycles. The Company estimates that the modification costs per aircraft will
range between $2 million and $3 million. Between now and the year 2000, only one
aircraft is expected to reach the 20,000 cycle limit and nine additional
aircraft will require modification prior to 2009. The remaining seven aircraft
in service have already undergone such modifications. The two aircraft
undergoing modification to freighter configuration will receive the Nacelle
Strut Modification as part of the freighter conversion. Other Directives have
been issued that require inspections and minor modifications to Boeing 747-200
aircraft. It is possible that additional Directives applicable to the types of
aircraft or engines included in the Company's fleet could be issued in the
future, the cost of which could be substantial. Upon acquisition of an aircraft,
the Company determines whether or not the aircraft is in compliance with
Airworthiness Directives and tries to anticipate all future compliance
requirements. The necessary work to bring the aircraft into compliance is then
scheduled at the time of conversion of the aircraft to freighter configuration,
in order to minimize unscheduled maintenance events.

     The Company has initiated a review of its internal information systems for
any Year 2000 transition problems through a company-wide effort, assisted by
Year 2000 experienced consultants, to address internal Year 2000 system issues,
and jointly with industry trade groups, to address issues related to key
business partners which are common to other air carriers. The Company has not
completed the development of the remediation approach for all affected areas. As
a result, the Company cannot estimate what the total cost will be to implement
remediation efforts for all critical operational systems. However, due to the
Company's relatively young systems, the Company's advanced client server and
data base architecture, and the Company's partial reliance on vendor
representations regarding Year 2000 compliant third-party systems, the Company
is confident that such remediation efforts will not be material. The Company
expects to complete the assessment and development stages of this plan by
mid-1998, at which time it expects to be able to make a reasonable cost
estimate. Implementation of all remediation efforts is scheduled to be completed
in early 1999.

     The Company has started an ongoing program to review the status of key
supplier Year 2000 compliance efforts. While the Company believes it is taking
all appropriate steps to assure Year 2000 compliance, it is dependent on key
business partner compliance to some extent. The Year 2000 problem is pervasive
and complex, as virtually every computer operation will be affected in some way.
Consequently, no assurance can be given that Year 2000 compliance can be
achieved without costs that might affect future financial results or cause
reported financial information not to be necessarily indicative of future
operating results or future financial condition.

     From time to time the Company engages in discussions with third parties
regarding possible acquisitions of aircraft that could expand the Company's
operations. The Company is in discussions with third parties for the possible
acquisition of additional aircraft for delivery in 1998 and beyond.

RECENT DEVELOPMENTS

     In January and February 1998, pursuant to an early lease termination
agreement negotiated in November 1997, the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from Marine Midland in
December 1996 and the aircraft acquired from Citicorp in May 1997. These
aircraft are expected to be re-delivered to the Company in the second quarter
and early in the third quarter of 1998, respectively. The financing for the
modification to cargo configuration is secured under the Aircraft Acquisition
Credit Facility.

     In February 1998, the Company completed an offering of $538.9 million of
pass-through certificates, also known as enhanced equipment trust certificates
(the "EETCs"). The EETCs are not direct obligations of, or guaranteed by, the
Company and therefore will not be included in the Company's consolidated
financial

                                       21
<PAGE>   22

statements. The cash proceeds from the transaction were deposited with an escrow
agent and will be used to finance (through either leveraged leases or secured
debt financings) the debt portion of the acquisition cost of five of the 10 new
747-400 freighter aircraft from Boeing scheduled to be delivered to the Company
during the period July 1998 through December 1998. In connection therewith, the
Company intends to seek certain owner participants who will commit lease equity
financing to be used in leveraged leases of such aircraft. If any funds remain
as deposits with the escrow agent for such EETCs at the end of the delivery
period, such funds will be distributed back to the certificateholders. Such
distribution will include a make-whole premium payable by the Company. In
November and December 1997, the Company entered into three Treasury Note hedges,
approximating $300 million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are the basis for the
pricing of the EETCs which were priced in January 1998. The effect of the hedge
resulted in a deferred cost of $6.3 million, which will be amortized over the
expected twenty-year life associated with this financing.

     There can be no assurance that the Company will be able to obtain
sufficient financing to fund the purchase of the remaining five 747-400
freighter aircraft, or if such financing is available, that it will be available
on a commercially reasonable basis. If it is unable to do so, the Company could
be required to modify its expansion plans or to incur higher than anticipated
financing costs, which could have a material adverse effect on the Company.

     The Company is currently negotiating for the possibility of refinancing two
aircraft in the amount of approximately $86 million, currently financed under
the Aircraft Acquisition Credit Facility. There is no assurance that this
refinancing will be consummated.

     The Company believes that cash on hand, the cash flow generated from its
operations and the proceeds from the May 1996 SPO and the August 1997 placement
of the Senior Notes, coupled with availability under the Aircraft Acquisition
Credit Facility and the proceeds of the EETCs, will be sufficient to meet its
normal ongoing liquidity needs for 1998.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The purpose of SFAS No. 128 is to simplify the
computation of earnings per share ("EPS") and to make the U.S. standard for
computing EPS more compatible with the EPS standards of other countries and with
that of the International Accounting Standards Committee. SFAS No. 128 requires
the dual presentation of basic earnings per share ("basic EPS"), which replaces
primary earnings per share, and diluted earnings per share ("diluted EPS").
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Diluted
EPS is computed similar to basic EPS except that the weighted-average number of
common shares outstanding during the period is adjusted for the incremental
shares attributed to outstanding options to purchase common stock.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS No. 130 is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Comprehensive income includes net income plus other comprehensive income (other
revenues, expenses, gains, and losses that under generally accepted accounting
principles bypass net income). The Company does not expect other comprehensive
income to be material. The effective date for the application of SFAS No. 130
for both interim and annual periods is for fiscal years beginning after December
15, 1997 with earlier application permitted.

FORWARD-LOOKING STATEMENTS

     To the extent that any of the statements contained herein relating to the
Company's expectations, assumptions and other Company matters are
forward-looking, such statements are based on current

                                       22
<PAGE>   23

expectations that involve a number of uncertainties and risks that could cause
actual results to differ materially from those projected in the forward-looking
statements, including, but not limited to, risks associated with: worldwide
business and economic conditions; product demand and the rate of growth in the
air cargo industry; the impact of competitors and competitive aircraft and
aircraft financing availability; the ability to attract and retain new and
existing customers; normalized aircraft operating costs and reliability;
management of growth; the continued productivity of its workforce; dependence on
key personnel; and regulatory matters.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Consolidated Financial Statements and schedules that constitute Item 8
follow the text of this report. An index to the Consolidated Financial
Statements appears in Item 14(a) of this report.

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

     None.

                                    PART III

     Certain information required by Part III is omitted from this report since
the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the year
covered by this report, and certain information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information concerning the Company's executive officers and directors
required by this Item is incorporated by reference from the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this Item is incorporated by reference from the
Proxy Statement.

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

     The information required by this Item is incorporated by reference from the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item is incorporated by reference from the
Proxy Statement.

                                    PART IV

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

     (A)(1) FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Index to Consolidated Financial Statements..................  F-1
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statements of Stockholders' Equity (Deficit)...  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

     (A)(2) FINANCIAL STATEMENT SCHEDULES

     None required.

                                       23
<PAGE>   24

     (A)(3) LIST OF EXHIBITS.

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           +2.1          -- Plan of Reorganization and Merger Agreement dated as of
                            July 12, 1995 by and between Holdings and the Company.
           +3.2          -- Restated Certificate of Incorporation of the Company.
           +3.3          -- Amended and Restated By-Laws of the Company.
          ++4.1          -- Form of Indenture between the Company and First Fidelity
                            Bank, N.A., as Trustee.
          ++4.2          -- Form of Second Indenture between the Company and First
                            Fidelity Bank, N.A., as Trustee.
          ++4.3          -- Form of Pass Through Trust Agreement between the Company
                            and First Fidelity Bank, N.A., as Trustee (with form of
                            Pass Through Certificate attached as exhibit thereto).
          ++4.4          -- Form of Pass Through Agreement between the Company and
                            First Fidelity Bank, N.A., as Trustee (with form of Pass
                            Through Certificate attached as exhibit thereto).
          +10.14         -- Boeing 747 Maintenance Agreement dated January 1, 1995,
                            between the Company and KLM Royal Dutch Airlines, as
                            amended.
          +10.15         -- Atlas Air, Inc. 1995 Long Term Incentive and Stock Award
                            Plan.
          +10.16         -- Atlas Air, Inc. Employee Stock Purchase Plan.
          +10.17         -- Atlas Air, Inc. Profit Sharing Plan.
          +10.18         -- Atlas Air, Inc. Retirement Plan.
         ++10.19         -- Employment Agreement between the Company and Michael A.
                            Chowdry.
         ++10.20         -- Employment Agreement between the Company and Richard H.
                            Shuyler.
         ++10.23         -- Employment Agreement between the Company and James T.
                            Matheny.
          +10.26         -- Maintenance Agreement between the Company and Hong Kong
                            Aircraft Engineering Company Limited dated April 12,
                            1995, for the performance of certain maintenance events.
          +10.30         -- Conditional Sales Agreement dated as of September 22,
                            1994 by and between Lufthansa and the Company relating to
                            B747-230 aircraft, registration D-ABYS.
          +10.31         -- Conditional Sales Agreement dated as of September 22,
                            1994 by and between Lufthansa and the Company relating to
                            B747-230 aircraft, registration D-ABYL.
          *10.36         -- Aircraft Purchase Agreement, dated as of January 19, 1996
                            between Langdon Asset Management, Inc. and the Company.
        ***10.52         -- Employment Agreement dated as of November 18, 1996
                            between the Company and R. Terrence Rendlerman.
        ***10.53         -- Secured Loan Agreement by and between the Company and
                            Finova Capital Corporation dated April 11, 1996.
        ***10.54         -- Second Amended and Restated Credit Agreement among the
                            Company and the Lenders listed therein, Goldman Sachs
                            Credit Partners L.P. (as syndication agent) and Bankers
                            Trust Company (as Administrative Agent) dated February
                            28, 1997.
   ***/****10.55         -- Engine Maintenance Agreement between the Company and
                            General Electric Company dated June 6, 1996.
         **10.56         -- Employment Agreement dated as of May 1, 1997 between the
                            Company and Stanley G. Wraight.
</TABLE>

                                       24
<PAGE>   25

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         **10.58         -- Third Amended and Restated Credit Agreement among the
                            Company, the Lenders listed therein, Goldman Sachs Credit
                            Partners L.P. (as Syndication Agent) and Bankers Trust
                            Company (as Administrative Agent) dated September 5,
                            1997.
         **10.59         -- Credit Agreement among Atlas Freighter Leasing, Inc., the
                            Lenders listed therein and Bankers Trust Company, as
                            agent, dated May 29, 1997.
         **10.60         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N516MC.
         **10.61         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N508MC.
         **10.62         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee relating to B747-200
                            aircraft. U.S. Registration No. N507MC.
         **10.63         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N509MC.
         **10.64         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N808MC.
         **10.65         -- Lease Agreement between Atlas Freighter Leasing Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N505MC.
         **10.66         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N808MC.
         **10.67         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent relating to B747-200 aircraft U.S.
                            Registration No. N507MC.
         **10.68         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N509MC.
         **10.69         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N505MC.
         **10.70         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N508MC.
         **10.71         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N516MC.
         **10.72         -- Form of Indenture, dated August 13, 1997, between the
                            Company and State Street Bank and Trust Company, as
                            Trustee, relating to the 10 3/4% Senior Notes (with form
                            of Note attached as exhibit thereto).
         **10.73         -- Purchase Agreement, dated August 8, 1997, between the
                            Company and BT Securities Corporation relating to the
                            10 3/4% Senior Notes.
         **10.74         -- Registration Rights Agreement, dated August 13, 1997,
                            between the Company and BT Securities Corporation
                            relating to the 10 3/4% Senior Notes.
         **10.75         -- Credit Agreement among Atlas Freighter Leasing II, Inc.,
                            the Lenders listed therein, Bankers Trust Company (as
                            Administrative Agent) and Goldman Sachs Credit Partners
                            L.P. (as Syndication Agent) dated September 5, 1997.
</TABLE>

                                       25
<PAGE>   26

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         **10.76         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N527MC and Spare Engine Nos. 517538,
                            517539 and 455167.
         **10.77         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N523MC and Spare Engine Nos. 530168 and
                            517530.
         **10.78         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N524MC and Spare Engine Nos. 517790 and
                            517602.
         **10.79         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N526MC and Spare Engine Nos. 517544 and
                            517547.
         **10.80         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N523MC and Spare
                            Engine Nos. 530168 and 517530.
         **10.81         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N524MC and Spare
                            Engine Nos. 517790 and 517602.
         **10.82         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N526MC and Spare
                            Engine Nos. 517544 and 517547.
         **10.84         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N527MC and Spare
                            Engine Nos. 517538, 517539 and 455167.
         **10.85         -- First Amendment to Lease Agreement among Atlas Freighter
                            Leasing, Inc. and Bankers Trust Company, as agent, dated
                            September 5, 1997.
    **/****10.86         -- Purchase Agreement Number 2021 between The Boeing Company
                            and the Company dated June 6, 1997.
         **10.87         -- Aircraft General Terms Agreement between The Boeing
                            Company and the Company dated June 6, 1997.
           10.88         -- Placement Agreement, dated January 26, 1998, among the
                            Company, Morgan Stanley & Co. Incorporated, BT Alex.
                            Brown Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation and Goldman, Sachs & Co. relating
                            to the Pass Through Certificates Series 1998-1.
           10.89         -- Registration Rights Agreement, dated February 9, 1998,
                            among the Company, Morgan Stanley & Co. Incorporated, BT
                            Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation and Goldman, Sachs & Co. relating
                            to the Pass Through Certificates Series 1998-1.
           10.90         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1A-0.
</TABLE>

                                       26
<PAGE>   27

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           10.91         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1A-S.
           10.92         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1B-0.
           10.93         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1B-S.
           10.94         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1C-0.
           10.95         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1C-S.
           10.96         -- Deposit Agreement (Class A), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary.
           10.97         -- Deposit Agreement (Class B), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary
           10.98         -- Deposit Agreement (Class C), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary
           10.99         -- Indemnity Agreement, dated as of February 9, 1998,
                            between ABN AMRO Bank N.V., acting through its Chicago
                            Branch, as Depositary, and the Company.
           10.100        -- Escrow and Paying Agent Agreement (Class A), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.101        -- Escrow and Paying Agent Agreement (Class B), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.102        -- Escrow and Paying Agent Agreement (Class C), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.103        -- Revolving Credit Agreement (1998-1A), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and ABN AMRO Bank N.V., acting
                            through its Chicago Branch as Liquidity Provider.
</TABLE>

                                       27
<PAGE>   28

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           10.104        -- Revolving Credit Agreement (1998-1B), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and Morgan Stanley Capital Services,
                            Inc., as Liquidity Provider.
           10.105        -- Revolving Credit Agreement (1998-1C), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and Morgan Stanley Capital Services,
                            Inc., as Liquidity Provider.
           10.106        -- Guarantee, dated as of February 9, 1998, from Morgan
                            Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
                            Pass Through Trust 1998-B relating to Class B Liquidity
                            Facility.
           10.107        -- Guarantee, dated as of February 9, 1998, from Morgan
                            Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
                            Pass Through Trust 1998-C relating to Class C Liquidity
                            Facility.
           10.108        -- Intercreditor Agreement, dated as of February 9, 1998,
                            among Wilmington Trust Company, not in its individual
                            capacity but solely as Trustee, ABN AMRO Bank N.V.,
                            acting through its Chicago Branch, as Class A Liquidity
                            Provider, Morgan Stanley Capital Services, Inc., as Class
                            B Liquidity Provider and Class C Liquidity Provider, and
                            Wilmington Trust Company.
           10.109        -- Note Purchase Agreement, dated as of February 9, 1998,
                            among the Company, Wilmington Trust Company and First
                            Security Bank, National Association.
           10.110        -- Employment Agreement dated as of February 16, 1998
                            between the Company and Stephen C. Nevin.
           21.1          -- Subsidiaries of the Registrant.
           27            -- Financial Data Schedule.
</TABLE>

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

+    Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 33-90304).

++   Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 33-97892).

*    Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 333-2810).

**   Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-4 (No. 333-36305).

***  Incorporated by reference to the exhibits to the Company's Annual Report
     for 1996 on Form 10-K.

**** Portions of this document, for which the Company has been granted
     confidential treatment, have been redacted and filed separately with the
     Securities and Exchange Commission.

     (B) REPORTS ON FORM 8-K

     No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.

                                       28
<PAGE>   29

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March, 1998.

                                            ATLAS AIR, INC.

                                            By:    /s/ STEPHEN C. NEVIN
                                              ----------------------------------
                                                       Stephen C. Nevin
                                                   Vice President-Finance,
                                                   Chief Financial Officer
                                                 Principal Accounting Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                        TITLE                        DATE
                      ---------                                        -----                        ----
<C>                                                      <S>                                <C>

               /s/ MICHAEL A. CHOWDRY                    Chairman of the Board of              March 27, 1998
-----------------------------------------------------      Directors, Chief Executive
                 Michael A. Chowdry                        Officer and President

               /s/ RICHARD H. SHUYLER                    Executive Vice President --           March 27, 1998
-----------------------------------------------------      Strategic Planning, Treasurer
                 Richard H. Shuyler                        and Director

                  /s/ BERL BERNHARD                      Director                              March 27, 1998
-----------------------------------------------------
                    Berl Bernhard

              /s/ LAWRENCE W. CLARKSON                   Director                              March 27, 1998
-----------------------------------------------------
                Lawrence W. Clarkson

               /s/ DAVID T. MCLAUGHLIN                   Director                              March 27, 1998
-----------------------------------------------------
                 David T. McLaughlin

                   /s/ BRIAN ROWE                        Director                              March 27, 1998
-----------------------------------------------------
                     Brian Rowe
</TABLE>

                                       29
<PAGE>   30

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>

Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets as of December 31, 1997 and
  December 31, 1996.........................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1996 and 1995..........................  F-4
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1997, 1996 and 1995......  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

                                       F-1
<PAGE>   31

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Atlas Air, Inc.:

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

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

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

                                            ARTHUR ANDERSEN LLP

Denver, Colorado
February 13, 1998.

                                       F-2
<PAGE>   32

                        ATLAS AIR, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                 1997         1996
                                                              ----------    --------
<S>                                                           <C>           <C>
Current assets:
  Cash and cash equivalents.................................  $   41,334    $  9,793
  Short-term investments....................................     111,635     114,870
  Accounts receivable and other, net........................      55,702      49,603
                                                              ----------    --------
          Total current assets..............................     208,671     174,266
Property and equipment:
  Flight equipment..........................................   1,154,562     638,630
  Other.....................................................       7,607       3,933
                                                              ----------    --------
                                                               1,162,169     642,563
  Less accumulated depreciation.............................     (98,959)    (58,293)
          Net property and equipment........................   1,063,210     584,270
Other assets:
  Debt issuance costs, net of accumulated amortization......      21,705      12,382
  Deposits..................................................       3,829       2,789
                                                              ----------    --------
                                                                  25,534      15,171
                                                              ----------    --------
          Total assets......................................  $1,297,415    $773,707
                                                              ==========    ========
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................  $   40,049    $ 21,561
  Accounts payable and accrued expenses.....................      88,105      47,763
  Income tax payable........................................         154       6,267
                                                              ----------    --------
          Total current liabilities.........................     128,308      75,591
Long-term debt, net of current portion......................     736,026     462,868
Deferred aircraft obligations...............................     163,167          --
Deferred income tax payable.................................      31,085      19,463
Commitments and contingencies
Stockholders' equity:
  Preferred Stock, $1 par value; 10,000,000 shares
     authorized; no shares issued...........................          --          --
  Common Stock, $0.01 par value; 50,000,000 shares
     authorized; 22,450,229 shares issued...................         225         225
  Additional paid-in capital................................     176,253     176,253
  Retained earnings.........................................      62,803      39,543
  Treasury Stock, at cost; 19,073 and 5,850 shares,
     respectively...........................................        (452)       (236)
                                                              ----------    --------
          Total stockholders' equity........................     238,829     215,785
                                                              ----------    --------
          Total liabilities and stockholders' equity........  $1,297,415    $773,707
                                                              ==========    ========
</TABLE>

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

                                       F-3
<PAGE>   33

                        ATLAS AIR, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenues:
  Contract services........................................  $383,824    $296,289    $166,070
  Scheduled services.......................................     7,171       6,005       1,335
  Charters and other.......................................    10,046      13,365       3,862
                                                             --------    --------    --------
          Total operating revenues.........................   401,041     315,659     171,267
Operating expenses:
  Flight crew salaries and benefits........................    30,153      25,020      14,584
  Other flight-related expenses............................    28,784      27,404      12,361
  Maintenance..............................................   123,820      84,305      42,574
  Aircraft and engine rentals..............................    31,644      27,341      22,902
  Fuel and ground handling.................................    10,816      10,554       5,027
  Depreciation and amortization............................    42,945      25,515      14,793
  Other....................................................    49,777      27,457      16,352
  Write-off of capital investment and other................    27,100          --          --
                                                             --------    --------    --------
          Total operating expenses.........................   345,039     227,596     128,593
Operating income...........................................    56,002      88,063      42,674
Other income (expense):
  Interest income..........................................     7,365       7,102       2,025
  Interest expense.........................................   (52,834)    (35,577)    (18,460)
                                                             --------    --------    --------
                                                              (45,469)    (28,475)    (16,435)
                                                             --------    --------    --------
Income before income taxes.................................    10,533      59,588      26,239
Provision for income taxes.................................    (3,844)    (21,750)     (8,408)
                                                             --------    --------    --------
Income before extraordinary item...........................     6,689      37,838      17,831
Extraordinary item:
  Gain from extinguishment of debt, net of applicable taxes
     of $9,622.............................................    16,740          --          --
                                                             --------    --------    --------
          Net income.......................................  $ 23,429    $ 37,838    $ 17,831
                                                             ========    ========    ========
Basic earnings per share:
  Income before extraordinary item.........................  $    .30    $   1.76    $   1.06
  Extraordinary item.......................................       .74          --          --
                                                             --------    --------    --------
  Net income...............................................  $   1.04    $   1.76    $   1.06
                                                             ========    ========    ========
  Weighted average common shares...........................    22,450      21,503      16,783
                                                             ========    ========    ========
Diluted earnings per share:
  Income before extraordinary item.........................  $    .30    $   1.75    $   1.06
  Extraordinary item.......................................       .74          --          --
                                                             --------    --------    --------
  Net income...............................................  $   1.04    $   1.75    $   1.06
                                                             ========    ========    ========
  Weighted average common shares...........................    22,536      21,682      16,852
                                                             ========    ========    ========
</TABLE>

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

                                       F-4
<PAGE>   34

                        ATLAS AIR, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                            TOTAL
                                                   COMMON STOCK     ADDITIONAL   RETAINED               STOCKHOLDERS'
                                                  ---------------    PAID-IN     EARNINGS    TREASURY      EQUITY
                                                  SHARES   AMOUNT    CAPITAL     (DEFICIT)    STOCK       (DEFICIT)
                                                  ------   ------   ----------   ---------   --------   -------------
<S>                                               <C>      <C>      <C>          <C>         <C>        <C>
Balance, December 31, 1994......................  15,000    $150     $     --    $(15,903)   $    --      $(15,753)
  Issuance of Common Stock......................   4,600      46       66,591          --         --        66,637
  Net income....................................      --      --           --      17,831         --        17,831
                                                  ------    ----     --------    --------    -------      --------
Balance, December 31, 1995......................  19,600     196       66,591       1,928         --        68,715
  Issuance of Common Stock......................   2,300      23       99,625          --         --        99,648
  Exercise of stock options, including income
     tax benefits of $3,412.....................     550       6       10,037          --         --        10,043
  Purchase of Treasury Stock....................      --      --           --          --       (933)         (933)
  Issuance of Treasury Stock....................      --      --           --        (223)       697           474
  Net income....................................      --      --           --      37,838         --        37,838
                                                  ------    ----     --------    --------    -------      --------
Balance, December 31, 1996......................  22,450     225      176,253      39,543       (236)      215,785
  Purchase of Treasury Stock....................      --      --           --          --     (1,051)       (1,051)
  Issuance of Treasury Stock....................      --      --           --        (169)       835           666
  Net income....................................      --      --           --      23,429         --        23,429
                                                  ------    ----     --------    --------    -------      --------
Balance, December 31, 1997......................  22,450    $225     $176,253    $ 62,803    $  (452)     $238,829
                                                  ======    ====     ========    ========    =======      ========
</TABLE>

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

                                       F-5
<PAGE>   35

                        ATLAS AIR, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                           -----------------------------------
                                                              1997         1996        1995
                                                           -----------   ---------   ---------
<S>                                                        <C>           <C>         <C>
OPERATING ACTIVITIES:
Net income...............................................  $    23,429   $  37,838   $  17,831
Adjustments to reconcile net income to net cash provided
  by operating activities:
  Depreciation and amortization..........................       44,506      25,156      14,793
  Amortization of debt issuance costs....................        3,620       2,278         546
  Net gain on disposition of property and equipment......       (1,029)         --          --
  Write-off of capital investment and other..............       27,100          --          --
  Interest financed......................................           --          --       1,258
  Change in deferred income tax payable..................       11,622      14,731       8,144
  Extraordinary gain.....................................      (26,363)         --          --
  Changes in operating assets and liabilities:
     Accounts receivable and other.......................      (16,052)    (31,009)    (10,751)
     Deposits............................................       (1,040)        592       5,716
     Accounts payable and accrued expenses...............       27,992      28,824       5,770
     Income tax payable..................................       (6,113)      6,003         264
                                                           -----------   ---------   ---------
          Net cash provided by operating activities......       87,672      84,413      43,571
INVESTMENT ACTIVITIES:
Purchase of property and equipment.......................     (367,787)   (289,675)   (190,807)
Proceeds from sale of property and equipment.............        3,750          --          --
Purchase of short-term investments.......................   (2,505,530)   (246,387)         --
Maturity of short-term investments.......................    2,508,765     131,517          --
Advances of notes receivable.............................           --          --        (550)
                                                           -----------   ---------   ---------
          Net cash used in investing activities..........     (360,802)   (404,545)   (191,357)
FINANCING ACTIVITIES:
Issuance of Common Stock.................................           --     106,279      66,637
Purchase of Treasury Stock...............................       (1,051)       (933)         --
Issuance of Treasury Stock...............................          666         474          --
Borrowings on notes payable..............................      815,767     154,808     181,680
Principal payments on notes payable......................     (494,121)    (21,640)     (7,792)
Debt issuance costs......................................      (16,590)     (6,053)     (4,573)
Advances from affiliate, net.............................           --          --      (1,700)
                                                           -----------   ---------   ---------
          Net cash provided by financing activities .....      304,671     232,935     234,252
                                                           -----------   ---------   ---------
          Net increase (decrease) in cash................       31,541     (87,197)     86,466
Cash and cash equivalents at beginning of period.........        9,793      96,990      10,524
                                                           -----------   ---------   ---------
Cash and cash equivalents at end of period...............  $    41,334   $   9,793   $  96,990
                                                           ===========   =========   =========
</TABLE>

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

                                       F-6
<PAGE>   36

                        ATLAS AIR, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Organization

     Atlas Air, Inc. (the "Company") provides airport to airport cargo services
throughout the world to major international airlines pursuant to contractual
arrangements with its customers in which the Company provides the aircraft,
crew, maintenance and insurance ("ACMI"), referred to as "contract services."
The Company also provides charter services and scheduled services on an ad hoc
basis. The principal markets served by the Company are Asia and the Pacific Rim
from the United States and Europe, and between South America and the United
States.

  Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.

  Use of Estimates

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

  Property and Equipment

     Owned aircraft are stated at cost. Expenditures for major additions,
improvements, flight equipment modifications and certain overhaul and
maintenance costs are capitalized. A significant portion of scheduled and
unscheduled maintenance is contracted with two maintenance providers under
long-term agreements pursuant to which monthly reserve payments are made to the
providers based on flight-hours and such amounts are charged to expense
currently. Other maintenance and repairs are charged to expense as incurred,
except for significant engine overhaul maintenance which is capitalized and
charged to expense on a flight-hour basis and D checks which are capitalized and
amortized over the corresponding life. Owned aircraft are depreciated over their
estimated useful lives of 20 years, using the straight-line method and estimated
salvage values of 10% of cost. The cost and accumulated depreciation of property
and equipment disposed of are removed from the related accounts and any gain or
loss is reflected in the results of operations. Substantially all property and
equipment is specifically pledged as collateral for indebtedness of the Company.
Whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, management evaluates the recorded asset
balances, net of accumulated depreciation, for impairment based on the
undiscounted cash flows associated with the asset. Management believes that
there have been no events or changes in circumstances which would require review
of such recoverability.

  Capitalized Interest

     Interest attributable to funds used to finance the acquisition and
modification of aircraft is capitalized as an additional cost of the related
aircraft. Interest is capitalized at the Company's weighted average interest
rate on long-term debt, or where applicable, the interest rate related to
specific borrowings. Capitalization of interest ceases when the aircraft is
placed in service. Capitalized interest was $16,115,000, $5,347,000, and
$3,573,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

                                       F-7
<PAGE>   37
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Deferred Costs

     Costs associated with the issuance of debt are capitalized and amortized
over the life of the respective debt obligation, using the effective interest
method for amortization. In May 1997, $3,647,000 of unamortized deferred loan
costs was charged against the extraordinary gain recognized upon early
extinguishment of certain debt (see Note 3). Amortization of debt issuance costs
was $3,620,000, $2,278,000 and $546,000 for the years ended December 31, 1997,
1996 and 1995, respectively.

 Cash Equivalents

     All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents, except certain investments in debt
securities which are classified as short-term investments.

  Short-Term Investments

     All investments in debt securities, other than money market funds, with a
current maturity of less than one year, are considered to be short-term
investments (see Note 2).

  Earnings per Share

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
effective for financial statements for both interim and annual periods ending
after December 15, 1997. SFAS No. 128 requires the dual presentation of basic
earnings per share ("basic EPS"), which replaces primary earnings per share, and
diluted earnings per share ("diluted EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS is computed similar to basic
EPS except that the weighted-average number of common shares outstanding during
the period is adjusted for the incremental shares attributed to outstanding
options to purchase common stock. Options to acquire 405,000, 399,000 and
294,720 shares in 1997, 1996 and 1995, respectively, were not included in the
computation of diluted EPS because the option price was greater than the average
market price of the Company's common stock.

  Income Taxes

     The Company provides for income taxes using the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this method
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.

  Fair Value of Financial Instruments

     The Company's financial instruments consist of cash, certificates of
deposit, short-term investments, short-term trade receivables and payables,
long-term debt and deferred aircraft obligations. The carrying values of cash,
certificates of deposit, and short-term trade receivables and payables
approximate fair value. The fair value of long-term debt is estimated based on
current rates available for similar debt with similar maturities and security
(see Note 3). The fair value of deferred aircraft obligations is based upon the
fair value of the purchase contracts associated with the obligations.

                                       F-8
<PAGE>   38
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Hedges

     The Company may from time to time enter into swaps to reduce exposure to
interest rate fluctuations in connection with certain debt. The cash flows of
the swaps mirror those of the underlying exposures. The premiums on the swaps,
as measured at inception, are amortized over their respective lives as
components of interest expense. Any gains or losses realized upon the early
termination of these swaps are deferred and recognized in income over the
remaining life of the underlying exposure.

  Significant Customers and Concentration of Credit Risk

     For the year ended December 31, 1997, China Airlines Ltd. ("China
Airlines"), Fast Air Carrier, S.A. ("Fast Air") and Lufthansa Cargo AG
("Lufthansa") accounted for approximately 34%, 11% and 8%, of the Company's
total revenues, respectively. For the year ended December 31, 1996, China
Airlines, KLM Royal Dutch Airlines ("KLM") and Lufthansa accounted for
approximately 34%, 12% and 11%, of the Company's total revenues, respectively.
For the year ended December 31, 1995, China Airlines, KLM and Varig Brazilian
Airlines ("Varig") accounted for approximately 60%, 19% and 11% of the Company's
total revenue, respectively. Accounts receivable from these principal customers
were $18,963,000 and $18,344,000 in the aggregate at December 31, 1997 and 1996,
respectively. The Company is in dispute with one of its customers with respect
to the validity of certain charges for materials and labor that the customer has
invoiced to the Company, and with respect to certain ACMI billings.

  Reclassifications

     Certain prior year amounts have been reclassified to conform to current
year presentation.

  Supplemental Cash Flow Information

     The aggregate interest payments made by the Company, net of amounts
capitalized, were $55,097,000, $30,744,000 and $15,563,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Prior to December 1995, the
required monthly payment under the ING Bank loan agreement was less than the
accrued interest, thus causing $1,258,000 of accrued interest in 1995 to be
financed by the lender as an increase in the principal balance (see Note 3).

     The Company made federal and state income tax payments of approximately
$7,959,000, $750,000 and $399,000 in the years ended December 31, 1997, 1996 and
1995, respectively.

  Reporting Comprehensive Income

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS No. 130 is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Comprehensive income includes net income plus other comprehensive income (other
revenues, expenses, gains, and losses that under generally accepted accounting
principles bypass net income). The Company does not expect other comprehensive
income to be material. The effective date for the application of SFAS No. 130
for both interim and annual periods is for fiscal years beginning after December
15, 1997 with earlier application permitted.

2. SHORT-TERM INVESTMENTS

     Proceeds from the secondary public offering of the Company's common stock
("SPO") in May 1996, plus additional funds, were invested in various
held-to-maturity securities, as defined in SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires investments in debt
                                       F-9
<PAGE>   39
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

securities to be classified as held-to-maturity and measured at amortized cost
only if the reporting enterprise has the positive intent and ability to hold
those securities to maturity. The following table sets forth the aggregate fair
value, gross unrealized holding gains, gross unrealized holding losses, and
amortized/accreted cost basis by major security type as of December 31, 1997 (in
thousands):

<TABLE>
<CAPTION>
                                 AGGREGATE    GROSS UNREALIZED   GROSS UNREALIZED   (AMORTIZATION)
         SECURITY TYPE           FAIR VALUE    HOLDING GAINS      HOLDING LOSSES      ACCRETION
         -------------           ----------   ----------------   ----------------   --------------
<S>                              <C>          <C>                <C>                <C>
Commercial Paper...............   $ 56,466          $ --               $  7             $(406)
U.S. Government Agencies.......     16,061             2                  1              (138)
Corporate Notes................      4,995            --                 --                (3)
Market Auction Preferreds......     23,800            --                 --                --
Adjustable Rate Mortgages......     10,000            --                 --                --
                                  --------          ----               ----             -----
          Totals...............   $111,322          $  2               $  8             $(547)
                                  ========          ====               ====             =====
</TABLE>

In addition, accrued interest on short-term investments at December 31, 1997 was
approximately $307,000. Interest earned on these investments and maturities of
these investments are reinvested in similar securities.

3. LONG-TERM DEBT

     Long-term debt and current maturities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
ING Bank Debt...............................................  $     --    $225,112
Lufthansa Debt..............................................        --       9,556
Equipment Notes.............................................   100,000     100,000
Finova Debt.................................................    30,048      32,503
Aircraft Acquisition Credit Facility........................    85,000     113,469
Nationsbanc.................................................    23,056          --
AFL Term Loan Facility......................................   185,000          --
AFL II Term Loan Facility...................................   185,000          --
Senior Notes................................................   150,000          --
Nationsbanc -- AFI Debt.....................................    14,984          --
Other.......................................................     2,987       3,789
                                                              --------    --------
                                                               776,075     484,429
Current maturities..........................................   (40,049)    (21,561)
                                                              --------    --------
Long-term debt, net.........................................  $736,026    $462,868
                                                              ========    ========
</TABLE>

  ING Bank Debt

     In December 1994, the Company renegotiated its loan agreement with ING
Bank. Pursuant to the new loan agreement, ING Bank agreed to provide up to $231
million of financing to the Company for the purpose of refinancing its existing
loan, financing additional aircraft and the associated costs of converting those
aircraft to freighter configuration, among other things. Subsequently, ING Bank
increased the size of its commitment under the new loan agreement to $232.9
million.

     For all but $30,000,000 of the total indebtedness to ING Bank (which amount
was financed at a fixed interest rate of 11.53% through September 1995, at which
time the interest rate was converted to one-month LIBOR ("London Interbank
Offered Rate") plus 2.65%), the loan agreement accrued interest at one-month
LIBOR plus 2.65%. Certain debt covenants under the ING Bank debt precluded one
of the Company's

                                      F-10
<PAGE>   40
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiaries from declaring dividends, redeeming its own stock for value, or
returning any capital to its stockholders.

     In May 1997, the Company used proceeds from the AFL Term Loan Facility (see
below) and approximately $7.6 million in cash to extinguish its ING Bank debt.
The Company recognized an extraordinary gain of $16.7 million (net of taxes of
$9.6 million) as a result of such extinguishment.

  Lufthansa Debt

     In the first quarter of 1995, the Company purchased two aircraft in
passenger configuration from Lufthansa, which financed approximately $12.5
million of the purchase price of each aircraft, for which the Company accrued
interest at an annual rate of 8.8%. In May 1997, the Company paid $6.3 million
to satisfy the remaining Lufthansa debt balance in conjunction with the
refinancing of these aircraft under the AFL Term Loan Facility (see below).

  Equipment Notes

     In November 1995, the Company sold $100 million of 12 1/4% Pass Through
Certificates. Each 12 1/4% Pass Through Certificate due 2002 (each a
"Certificate") represents a fractional undivided interest in the Atlas Air Pass
Through Trust (the "Trust") formed pursuant to a pass through trust agreement
between the Company and First Fidelity Bank, N.A., as trustee under the Trust.
The property of the Trust consists of 12  1/4% Senior Secured Notes due 2002
(the "Equipment Notes") issued by the Company to finance, together with funds
from the Company, the acquisition and conversion cost of three Boeing 747
aircraft (the "Collateral Aircraft") that were acquired by the Company in the
fourth quarter of 1995 and converted to freighter configuration in the first
quarter of 1996. The Company issued the related Equipment Notes during the
fourth quarter of 1995 and the first quarter of 1996 at or prior to the time
pre-delivery deposits and final purchase price payments were required to be made
with respect to the Collateral Aircraft.

     Interest on the Equipment Notes is passed through to the Certificateholders
on June 1 and December 1 of each year, at a rate per annum of 12 1/4%. The
Equipment Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 1998 at redemption prices ranging from
108% in 1998 to 100% in 2001 and thereafter, together with accrued and unpaid
interest, if any, to the date of redemption. The Company is required to provide
for the retirement of one-third of the aggregate principal amount of the
Equipment Notes on December 1 in each of 2000 and 2001 through the operation of
a sinking fund at a redemption price of 100% of the principal amount thereof,
together with accrued interest thereon to the redemption date.

     Covenants with respect to the Collateral Aircraft require specific levels
of insurance, as well as contain requirements regarding possession, maintenance,
lease or transfer of the aircraft. Certain covenants applicable to the Company
include, among other restrictions, limitations on indebtedness, restricted
payments and restriction on certain asset sales. The Company was in compliance
with all of its covenants as of December 31, 1997.

  Finova Debt

     The Company obtained financing from Finova Capital Corporation for
approximately 80% of the total acquisition and conversion cost of the first of
six aircraft purchased from Thai Airways International Public Company Limited
(the "Thai Aircraft") (see below), or $32.8 million. The loan accrues interest
at 10.13% and matures on October 1, 2003. The loan is secured by a first
priority security interest in the first Thai Aircraft.

                                      F-11
<PAGE>   41
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Aircraft Acquisition Credit Facility

     In May 1996, the Company entered into a $175 million revolving credit
facility (the "Aircraft Acquisition Credit Facility") with Goldman Sachs Credit
Partners L.P. ("Goldman Sachs"), as Syndication Agent, and Bankers Trust Company
("BTCo"), as Administrative Agent. This revolving loan facility provides for the
acquisition and conversion of flight equipment. The Aircraft Acquisition Credit
Facility was subsequently amended and restated in conjunction with certain
refinancings. The Third Amended and Restated Credit Facility provides for a $250
million revolving credit facility as of September 5, 1997 with a two-year
revolving period and a subsequent three-year term loan period in the event that
permanent financing has not been obtained for any flight equipment financed
under the facility. At the time of each borrowing, the Company must select
either a Base Rate Loan (prime rate, plus 1.5% through May 8, 1998, thereafter
plus 2.0%) or a Eurodollar Rate Loan (Eurodollar rate, plus 2.5% through May 8,
1998, thereafter plus 3.0%). The Eurodollar Rate Loan was selected by the
Company for substantially all borrowings in 1996 and 1997. The weighted average
interest rate on borrowings outstanding under the Aircraft Acquisition Credit
Facility was 8.38% at December 31, 1997. Each borrowing is secured by a first
priority security interest in the collateral flight equipment of that borrowing.
Certain tests must be met before each purchase of aircraft and related drawdown
on the facility. To date, the Company has met these tests. If in the future, the
Company cannot meet all the tests because of the difficult sequencing of
aircraft acquisition, aircraft conversion and customer contracts, the Company
believes that other financing sources would be available to the Company or that
it would acquire aircraft using its internal cash or seek a waiver of any
necessary conditions. As of December 31, 1997, the Company had $85.0 million
outstanding under the Aircraft Acquisition Credit Facility.

     Covenants with respect to the Aircraft Acquisition Credit Facility require
specific levels of insurance, as well as contain requirements regarding
possession, maintenance, and lease or transfer of the flight equipment. Certain
covenants applicable to the Company include, among other restrictions,
limitations on indebtedness, liens, investments, contingent obligations,
restricted junior payments, capital expenditures and leases. The Company was in
compliance with all of its covenants at December 31, 1997.

  Nationsbanc

     In March 1997, the Company refinanced one of its aircraft with Nationsbanc
Leasing Corporation ("Nationsbanc"). This aircraft was previously financed
through the Aircraft Acquisition Credit Facility. As such, this refinancing
increased the availability of funds under the Aircraft Acquisition Credit
Facility by approximately $25 million. The Nationsbanc financing is a seven year
term loan (extendible under certain circumstances to ten years) which provides
for a fixed interest rate of 9.16%. The loan is secured by a first priority
security interest in this aircraft.

  AFL Term Loan Facility

     In May 1997, the Company formed a wholly-owned subsidiary, Atlas Freighter
Leasing, Inc. ("AFL"), for the purpose of entering into the $185 million AFL
Term Loan Facility (the "AFL Term Loan Facility") to refinance six Boeing
747-200 aircraft previously financed through the ING Bank debt (see above).
Concurrent with entering into the AFL Term Loan Facility, the proceeds of the
AFL Term Loan Facility were used to repay all existing principal and interest
due under the ING Bank debt. Interest is based on the Eurodollar rate, plus 2.5%
for the first three years and 3.0% thereafter, and is payable quarterly. The
interest rate on borrowings outstanding under the AFL Term Loan Facility was
8.38% at December 31, 1997. Quarterly scheduled principal payments of $2.5
million commenced in February 1998 and increase to $5.7 million in August 1998
with a final payment of $50.0 million in May 2004. The AFL Term Loan Facility is
secured by a first priority interest in the six subject aircraft and is
restrictive with respect to limitations on indebtedness, liens, investments,
contingent obligations, restricted junior payments, capital expenditures,

                                      F-12
<PAGE>   42
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amendments of material agreements, leases, transactions with shareholders and
affiliates and the conduct of business. The Company was in compliance with all
of its covenants as of December 31, 1997.

  AFL II Term Loan Facility

     In September 1997, the Company formed another wholly-owned subsidiary,
Atlas Freighter Leasing II, Inc. ("AFL II") for the purpose of entering into the
$185 million AFL II Term Loan Facility (the "AFL II Term Loan Facility") to
refinance four of the aircraft previously financed under the Aircraft
Acquisition Credit Facility, plus nine spare engines, in order to provide the
Company with greater financial flexibility in anticipation of the financing
requirements for the future acquisition of additional aircraft. Interest is
based on the Eurodollar rate, plus 2.25%, less a pricing reduction, if any, in
effect from time to time and is payable quarterly. The interest rate on
borrowings outstanding under the AFL II Term Loan Facility was 8.13% at December
31, 1997. Quarterly scheduled principal payments of $2.5 million commenced in
February 1998 and increase to $5.7 million in August 1998 with a final payment
of $50.0 million in May 2004. The AFL II Term Loan Facility is secured by a
first priority interest in the four subject aircraft, plus nine spare engines,
and is restrictive with respect to limitations on indebtedness, liens,
investments, contingent obligations, restricted junior payments, capital
expenditures, amendments of material agreements, leases, transactions with
shareholders and affiliates and the conduct of business. The Company was in
compliance with all of its covenants as of December 31, 1997.

  Senior Notes

     In August 1997, the Company completed the offering of its unsecured 10 3/4%
Senior Notes due 2005 ("Senior Notes"). The proceeds from the offering of the
Senior Notes were used to, among other things, repay short-term indebtedness
incurred by the Company to make pre-delivery deposits to The Boeing Company
("Boeing") for the purchase of 10 new freighter aircraft (see Note 6) and for
additional pre-delivery deposits as they become due.

     Interest on the Senior Notes began to accrue from their date of original
issuance and is payable semi-annually in arrears on February 1 and August 1 of
each year, at the rate of 10 3/4% per annum. The Senior Notes are redeemable, in
whole or in part, at the option of the Company, on or after August 1, 2001, at
105.375%, 102.688% and 100.000% for the years 2001, 2002 and 2003 and
thereafter, respectively, plus accrued interest to the date of redemption. In
addition, at any time on or prior to August 1, 2000, the Company, at its option,
may redeem up to 35% of the aggregate principal amount of the Senior Notes
originally issued with the net cash proceeds of one or more public equity
offerings, at a redemption price equal to 110.75% of the principal amount
thereof plus accrued interest to the date of redemption; provided that at least
65% of the aggregate principal amount of the Senior Notes originally issued
remains outstanding immediately after any such redemption.

     The Senior Notes are general unsecured obligations of the Company which
rank pari passu in right of payment to any existing and future unsecured senior
indebtedness of the Company. The Senior Notes are effectively subordinated,
however, to all secured indebtedness of the Company and to all indebtedness of
the Company's subsidiaries.

     Covenants with respect to the Senior Notes contain certain limitations on
the ability of the Company and its subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, create restrictions on the ability of a subsidiary to
pay dividends or make certain payments, sell or issue preferred stock of
subsidiaries to third parties, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The Company was in compliance
with all of its covenants as of December 31, 1997.

                                      F-13
<PAGE>   43
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Nationsbanc - AFI Debt

     In October 1997, Atlas Flightlease, Inc. ("AFI"), a wholly-owned subsidiary
of the Company, secured a 2-year LIBOR based financing with Bankers Trust
Company for approximately 80% of the purchase price of a 1988 Canadair
Challenger passenger aircraft (the "Challenger"). AFI purchased the Challenger
from MAC Flightlease, Inc. ("MAC Flightlease"), an entity wholly-owned by the
wife of the Company's Chairman, President and CEO (see Note 7), in the third
quarter of 1997. In December 1997, AFI refinanced the Challenger for
approximately 100% of its purchase price with Nationsbanc under a 5-year loan
which was guaranteed by the Company. Interest is based on the Eurodollar rate,
plus 2.35%, and is payable quarterly with concurrent scheduled payments of
principal. The interest rate on borrowings outstanding under the Nationsbanc
debt was 8.26% at December 31, 1997. The loan is secured by a first priority
security interest in the Challenger. Covenants with respect to this financing
require specific levels of insurance, as well as contain requirements regarding
use, maintenance, configuration, liens and disposition of the Challenger, among
other things. AFI was in compliance with all of its covenants as of December 31,
1997.

  Hedges

     In September 1997, the Company entered into an interest rate swap with BTCo
for the purpose of hedging its floating rate debt. The notional amount of the
interest rate swap is $210 million, decreasing over a term of eight years. The
Company pays a fixed interest rate of 5.72%, increasing .25% annually, and
receives a floating interest rate based on 3-month LIBOR, whereby the net
interest settles quarterly. The 3-month LIBOR rate for the quarterly interest
period which included December 31, 1997 was 5.88%.

  Fair Value of Long-Term Debt

     Based on current rates available for similar debt with similar maturities
and security, the fair values of the debt in the above table at December 31,
1997, are estimated to be their carrying values. The Equipment Notes and the
Senior Notes are publicly traded. Based on published trading prices at December
31, 1997, the fair values of the Equipment Notes and the Senior Notes are
estimated to be $111.3 million and $105.6 million, respectively.

  Five Year Debt Maturities

     At December 31, 1997 principal repayments on long-term debt for the next
five years were as follows (in thousands):

<TABLE>
<CAPTION>
                            1998      1999       2000       2001       2002     THEREAFTER
                           -------   -------   --------   --------   --------   ----------
<S>                        <C>       <C>       <C>        <C>        <C>        <C>
Equipment Notes..........  $    --   $    --   $ 33,333   $ 33,333   $ 33,334    $     --
Finova Debt..............    2,709     3,001      3,317      3,672      4,084      13,263
Aircraft Acquisition
  Credit Facility........       --     7,083     28,334     28,333     21,250          --
Nationsbanc..............    2,865     3,139      3,439      3,768      4,128       5,718
AFL Term Loan Facility...   16,350    22,600     22,600     22,600     22,600      78,250
AFL II Term Loan
  Facility...............   16,350    22,600     22,600     22,600     22,600      78,250
Senior Notes.............       --        --         --         --         --     150,000
Nationsbanc - AFI Debt...      719       789      1,396      1,516      1,643       8,921
Other....................    1,056       553        452        488        181         258
                           -------   -------   --------   --------   --------    --------
                           $40,049   $59,765   $115,471   $116,310   $109,820    $334,660
                           =======   =======   ========   ========   ========    ========
</TABLE>

                                      F-14
<PAGE>   44
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. DEFERRED AIRCRAFT OBLIGATIONS

     In June 1997, the Company entered into an agreement with Boeing to purchase
10 new 747-400 freighter aircraft (the "Boeing Purchase Agreement") (see Note
6). The Boeing Purchase Agreement requires the Company to pay "Pre-Delivery
Deposits" in order to secure delivery of the 747-400 freighter aircraft and to
defray a portion of the manufacturing costs. In addition, the Boeing Purchase
Agreement provides for a deferral of a portion of the Pre-Delivery Deposits
(Deferred Aircraft Obligations) for which the Company accrues and pays interest
quarterly at 6-month LIBOR, plus 2.00%. As of December 31, 1997, there was
$163.2 million of Deferred Aircraft Obligations outstanding and the combined
interest rate was 7.97%. The Company will settle its Deferred Aircraft
Obligations upon delivery of each of the 10 aircraft, which are scheduled for
delivery as follows: five in 1998, two in 1999 and three in 2000. Financing for
the first five aircraft has been secured through the EETCs (see Note 16). In
addition, the Company may arrange for tax-oriented long-term leases on some or
all of these aircraft.

5. INCOME TAXES

     The Company had net operating loss carryforwards of approximately
$122,692,000 as of December 31, 1997 which expire between 2008 and 2017. The
Company has generated approximately $8,665,000 of alternative minimum tax credit
carryforwards which are available in subsequent years to reduce its regular tax
liability subject to statutory limitations. All tax years of the Company that
are statutorily open are subject to examination by the Internal Revenue Service
("IRS"), as well as state and local tax authorities. Currently, the fiscal year
ended March 31, 1994, the short year ended December 31, 1994 and the calendar
year ended December 31, 1995 are under examination by the IRS. The Company
believes that it has adequately provided for all income tax liabilities and that
final resolution of any IRS examination will not have a material effect on its
financial position or results of operations.

     The provision for income taxes consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Current:
  Federal.............................................  $ 1,704    $ 6,625    $   251
  State and local.....................................      140        394         13
Deferred:
  Federal.............................................   11,622     14,731      8,144
  State and local.....................................       --         --         --
                                                        -------    -------    -------
     Provision for income taxes.......................  $13,466    $21,750    $ 8,408
                                                        =======    =======    =======
</TABLE>

     The provisions for income taxes were at rates different from the U.S.
federal statutory rate for the following reasons:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                          --------------------------------
                                                           1997         1996         1995
                                                          ------       ------       ------
<S>                                                       <C>          <C>          <C>
Statutory federal income tax provision rate.............   35.00%       35.00%       35.00%
State and local income taxes, net of federal tax
  benefit...............................................    1.04          .66           --
Nondeductible items.....................................    2.36         2.04         1.44
Reversal of prior year valuation allowance..............      --           --        (4.83)
Benefit of net operating loss...........................   (1.90)       (1.20)          --
Other...................................................      --           --          .43
                                                          ------       ------       ------
  Effective tax provision rate..........................   36.50%       36.50%       32.04%
                                                          ======       ======       ======
</TABLE>

                                      F-15
<PAGE>   45
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The net deferred income tax liability components are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               AT DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Deferred tax liabilities:
  Tax depreciation in excess of book depreciation...........  $96,147    $57,127
  Other.....................................................    1,372      1,564
                                                              -------    -------
          Total deferred tax liabilities....................   97,519     58,691
Deferred tax assets:
  Tax benefit of net operating loss carryforwards...........   44,218     20,804
  Tax benefit of alternative minimum tax credits............    8,665      7,020
  Other.....................................................   13,551     11,404
                                                              -------    -------
          Total deferred tax assets.........................   66,434     39,228
                                                              -------    -------
          Net deferred tax liability........................  $31,085    $19,463
                                                              =======    =======
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

  Aircraft

     Minimum annual rental commitments under noncancelable aircraft operating
leases for years ending December 31, are approximately (in thousands):

<TABLE>
<S>                                                           <C>
1998 (one Boeing 747-200 aircraft)..........................  $ 4,500
1999 (one Boeing 747-200 aircraft)..........................    4,500
2000 (one Boeing 747-200 aircraft)..........................    4,500
2001 (one Boeing 747-200 aircraft)..........................    4,500
2002 (one Boeing 747-200 aircraft)..........................    4,500
Thereafter (one Boeing 747-200 aircraft)....................   32,625
</TABLE>

     The above commitments do not include the potential lease financing (if any)
of Boeing 747-400 freighter aircraft scheduled for delivery during 1998, 1999
and 2000. In addition to the above commitments, the Company leases engines under
short-term lease agreements on an as needed basis.

     Aircraft and engine rentals, including short-term rentals, were
$31,644,000, $27,341,000 and $22,902,000 for the years ended December 31, 1997,
1996 and 1995, respectively.

  Boeing Purchase Agreement

     In June 1997, the Company entered into the Boeing Purchase Agreement to
purchase 10 new 747-400 freighter aircraft to be powered by GE engines. The
747-400 freighter aircraft are currently scheduled to be delivered as follows:
five in 1998, two in 1999 and three in 2000. Due to production problems at
Boeing, the Company believes that each of the 1998 delivery positions of the
747-400 aircraft may be delayed up to 60 days. While Boeing will compensate the
Company for defined delays in delivery of the 747-400 aircraft, any such delays
may adversely impact the Company's ability to initiate service with prospective
customers in a timely fashion. The Boeing Purchase Agreement also provides the
Company with options to purchase up to 10 additional 747-400 freighter aircraft
for delivery from 1999 through 2002. As a result of the Company being the
largest purchaser of 747-400 freighter aircraft to date, it was able to
negotiate from Boeing and GE a significant discount off the aggregate list price
of $1.7 billion for the 10 747-400 freighter aircraft, four installed engines
per aircraft and five spare engines. In addition, the Company also obtained
certain ancillary

                                      F-16
<PAGE>   46
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

products and services at advantageous prices. The Boeing Purchase Agreement
requires that the Company pay Pre-Delivery Deposits to Boeing prior to the
delivery date of each 747-400 freighter aircraft in order to secure delivery of
the 747-400 freighter aircraft and to defray a portion of the manufacturing
costs. The Company expects the maximum total amount of Pre-Delivery Deposits at
any time outstanding will be approximately $155 million, approximately $105.1
million of which was paid as of December 31, 1997. For the years 1998 and 1999,
the Company expects to pay $67.6 million and $42.6 million, respectively, in
accordance with the Pre-Delivery Deposits schedule. In addition, the Boeing
Purchase Agreement provides for a deferral of a portion of the Pre-Delivery
Deposits (Deferred Aircraft Obligations -- see Note 4) for which the Company
accrues and pays interest quarterly at 6-month LIBOR, plus 2.00%. As of December
31, 1997, there was $163.2 million of Deferred Aircraft Obligations outstanding
and the combined interest rate was 7.97%.

  Cargo Modification

     In December 1997, the Company supplemented its modification contract with
Boeing to provide for the cargo configuration of two aircraft (acquired in
December 1996 and May 1997) under lease to Philippines Airlines Limited ("PAL"),
which were utilized in passenger configuration by PAL during 1997 and in early
1998. The initial deposit for such modification is recorded in Flight Equipment
in the December 31, 1997 balance sheet. The remaining commitments to Boeing and
other vendors as of December 31, 1997 for both of these aircraft totaled
approximately $20.2 million. These commitments are expected to be paid during
the first three quarters of 1998.

  Maintenance Agreements

     In January 1995, the Company entered into a maintenance agreement with one
of its principal customers. This agreement includes a provision which requires
the Company to remit a fixed amount per flight hour each month to the customer,
subject to a 3.5% annual escalation factor for the first five years, for which
the customer will perform most regular maintenance on a substantial portion of
the aircraft in the Company's fleet. The agreement extends for a period of ten
years. Pursuant to its maintenance agreement, engines may be upgraded when
inducted into the maintenance pool in order to improve engine reliability and to
lower Company operating costs. When such costs are incurred and identified, they
are capitalized and amortized over the remaining life of each applicable engine.
As of December 31, 1997, the Company had paid the customer $7.5 million for such
costs. The Company expects to incur approximately an additional $2 million to $3
million for such upgrades over the term of the contract.

     The Company has an agreement, subject to acceptable rates, terms and
conditions, with Linee Aeree Italiane S.p.A. ("Alitalia") to utilize, or find
other parties to utilize, an amount of Alitalia's maintenance services with an
aggregate cost of $25 million over a five-year period ending in June 2000.

     In June 1996, the Company entered into a ten year engine maintenance
agreement with GE for the engine maintenance of up to 15 aircraft powered by
CF6-50E2 engines at a fixed rate per flight hour, subject to an annual formula
increase. The agreement commenced in the third quarter of 1996 with the
acceptance of engines associated with aircraft acquired in the third and fourth
quarters of 1996. Pursuant to its maintenance agreement and upon the first time
shop visit, the Company is invoiced for certain one-time charges, which the
Company capitalizes and amortizes over the lesser of the remaining life of the
asset or the remaining life of the maintenance agreement. As of December 31,
1997, the Company had been invoiced for and paid $4.9 million of such charges.
Effective in the year 2000, the Company will have an option to add not less than
40 engines to the program.

  Office and Warehouse

     In 1995, the Company entered into an operating lease for office space
expiring in the year 2000, with two five year renewal provisions. In addition,
the Company leases warehouse space for which the initial lease term
                                      F-17
<PAGE>   47
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expires at the end of August 1999, and provides for two one-year renewal option
periods. Future minimum rental commitments by year are as follows for the years
ending December 31: 1998 -- $728,000; 1999 -- $708,000; 2000 -- $277,000. Rental
expense, including short-term rentals, was $905,000, $615,000 and $579,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

  Employment Agreements

     The Company has entered into employment agreements with certain key
employees. Such employment agreements provide for, among other things, base
annual salary, certain bonuses, the grant of options to purchase common stock of
the Company under the 1995 Stock Option Plan (see Note 14), and in certain
circumstances relocation and severance benefits.

  FAA Airworthiness Directives

     Under the FAA's Directives issued under its "Aging Aircraft" program, the
Company is subject to extensive aircraft examinations and may be required to
undertake structural modifications to address the problem of corrosion and
structural fatigue. In November 1994, Boeing issued Nacelle Strut Modification
Service Bulletins which have been converted into Directives by the FAA. Twelve
of the Company's Boeing 747-200 aircraft will have to be brought into compliance
with such Directives within the next three years at an estimated cost of
approximately $6.0 million. As part of the FAA's overall aging aircraft program,
it has issued Directives requiring certain additional aircraft modifications to
be accomplished prior to the aircraft reaching 20,000 cycles. The average cycle
time for the 17 aircraft in service is approximately 12,000 cycles and the
average cycles operated per year is approximately 800 cycles. The Company
estimates that the modification costs per aircraft will range between $2 million
and $3 million. Between now and the year 2000, only one aircraft is expected to
reach the 20,000 cycle limit and nine additional aircraft will require
modification prior to 2009. The remaining seven aircraft in service have already
undergone such modifications. The two aircraft undergoing modification to
freighter configuration will receive the Nacelle Strut Modification as part of
the freighter conversion. Other Directives have been issued that require
inspections and minor modifications to Boeing 747-200 aircraft. It is possible
that additional Directives applicable to the types of aircraft or engines
included in the Company's fleet could be issued in the future, the cost of which
could be substantial.

     Upon acquisition of an aircraft, the Company determines whether or not the
aircraft is in compliance with Airworthiness Directives and tries to anticipate
all future compliance requirements. The necessary work to bring the aircraft
into compliance is then scheduled at the time of conversion of the aircraft to
freighter configuration, in order to minimize unscheduled maintenance events.

  Legal Proceedings

     On February 24, 1997, the Company filed a complaint for declaratory
judgment in the Colorado District Court, Jefferson County against Israel
Aircraft Industries Ltd. ("IAI") for mechanical problems the Company experienced
with respect to an aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be offset by the
amount, if any, the Company owes IAI pursuant to the sub-lease. IAI had the case
removed to the U.S. District Court, District of Colorado on April 21, 1997 and
has filed counterclaims alleging damages of approximately $9 million based on
claims arising from the sub-lease. The Company intends to vigorously defend
against all of IAI's claims.

     In March 1997, Air Support International, Inc. ("ASI") filed a complaint
against the Company in the U.S. District Court, Eastern District of New York
alleging actual and punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it is owed for
allegedly arranging certain ACMI Contracts. The Company intends to vigorously
defend against all of ASI's claims.
                                      F-18
<PAGE>   48
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no other material legal proceedings
pending against the Company or to which any of its property is subject.

7. RELATED PARTY TRANSACTIONS

     In June 1995, the Company extended a non-interest bearing loan to an
officer of the Company in the amount of $125,000 in connection with such
officer's relocation to Colorado, which the Company forgave in July 1995.

     In August and September 1995, the Company extended demand loans to three
senior vice presidents of the Company in the aggregate amount of $550,000,
bearing interest at an annual rate of 7.50%. Two of the loans plus interest were
paid in full in April and May 1996, and the third loan plus interest was paid in
full in December 1997. A loan of up to $750,000, bearing interest at 5.87%, was
extended in June 1996 to one officer for the purpose of constructing a
residence. As of December 31, 1997 the outstanding balance of officer demand
loans was $735,000.

     In November 1995, the Company began renting a Cessna Citation SP, on an as
needed basis, from MAC Flightlease for the purpose of corporate business travel.
MAC Flightlease is wholly-owned by the wife of the Company's Chairman, President
and CEO. The Company paid $265,000 in 1996 and $52,000 in 1995 for such travel,
at rates which are considered by the Company to be at fair market value.

     In October 1997, AFI purchased from MAC Flightlease the Challenger for
corporate business travel. Initially, AFI secured a 2-year LIBOR based financing
with BTCo for approximately 80% of the purchase price of the Challenger. In
December 1997, AFI refinanced the Challenger for approximately 100% of its
purchase price with Nationsbanc under a 5-year LIBOR based loan which was
guaranteed by the Company. The Company paid $15.3 million for the Challenger,
which is considered by the Company to be at fair market value.

8. ACCOUNTS RECEIVABLE AND OTHER

     The components of accounts receivable and other are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                               1997         1996
                                                              -------      -------
<S>                                                           <C>          <C>
Accounts receivable-trade...................................  $58,817      $41,687
Insurance and vendor claims.................................    2,250        5,952
Employee receivables........................................      771          606
Prepaids and other..........................................    3,139        1,979
Less: Allowance for doubtful accounts.......................   (9,275)        (621)
                                                              -------      -------
                                                              $55,702      $49,603
                                                              =======      =======
</TABLE>

                                      F-19
<PAGE>   49
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     The components of accounts payable and accrued expenses are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                               1997         1996
                                                              -------      -------
<S>                                                           <C>          <C>
Accounts payable-trade......................................  $12,291      $15,745
Accrued salaries and wages..................................    6,779        5,547
Accrued maintenance.........................................   19,012       11,621
Accrued interest............................................   13,581        3,348
Loss reserves (see Note 10).................................   18,550           --
Other accrued expenses......................................   17,892       11,502
                                                              -------      -------
                                                              $88,105      $47,763
                                                              =======      =======
</TABLE>

10. WRITE-OFF OF CAPITAL INVESTMENT AND OTHER

     In conjunction with the June 1997 agreement with Boeing to purchase 10 new
747-400 freighter aircraft, the Company reassessed the economic viability of
renewing on a longer-term basis its sub-leases with Federal Express Corporation
("FedEx") for five 747-200 freighter aircraft. Based on the results of this
assessment in the second quarter of 1997, the Company decided to schedule the
return of these aircraft in the first quarter of 1998. The Company wrote-off its
remaining investment in the five FedEx aircraft and established certain other
reserves.

     The impact of the various largely non-recurring charges was $27.1 million,
or $17.2 million on an after-tax basis, which comprised write-offs of various
leasehold improvements associated with the Company's sub-leases with FedEx of
the five 747-200 aircraft and reserves for costs necessary to return the
aircraft upon the termination of the sub-leases. In addition, the Company
established reserves primarily related to certain customers and vendors for
out-of-period items for which the Company is currently in negotiations. In
addition, the reserves include estimates for litigation costs and other costs
not expected to re-occur.

11. SAVINGS AND RETIREMENT PLAN

     The Company implemented a 401(k) Retirement Plan (the "Plan") in June 1994,
under which eligible employees may contribute up to 15% of their total pay. The
Plan covers substantially all employees. The Company did not make contributions
to the Plan in 1995. Effective May 1, 1996, the Plan was amended to provide for
Company contributions equal to 50% of the first 10% of contributions made by
employees, for which the Company incurred an expense of $1,255,000 and $559,000
for the years ended December 31, 1997 and 1996, respectively.

12. BUSINESS SEGMENTS

     The Company operates in one business segment, which is to provide the
common carriage of freight over various worldwide routes.

     The assets of the Company, principally flight equipment, support its entire
worldwide transportation system and are not readily identifiable by geographic
area. Property and equipment, other than flight equipment, located in foreign
locations is not significant.

     Foreign sales accounted for 99%, 98% and 99% of total revenues for the
years ended December 31, 1997, 1996 and 1995, respectively. All foreign sales
were U.S. dollar denominated.

                                      F-20
<PAGE>   50
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. PREFERRED STOCK

     The Board of Directors is authorized under the restated certificate of
incorporation to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of common stock, including the loss of voting control to others. At
present, the Company has no plans to issue any shares of Preferred Stock.

14. STOCK-BASED COMPENSATION PLANS

  Employee Stock Purchase Plan

     In 1995, the Company established an Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Employees eligible to participate in the Stock Purchase
Plan are those who have completed at least one year of employment with the
Company, but excluding employees whose customary employment is not more than
five months in any calendar year or 20 hours or less per week. The Stock
Purchase Plan is administered by the Compensation Committee of the Board of
Directors of the Company which determines the terms and conditions under which
shares are offered and corresponding options granted under the Stock Purchase
Plan for any Purchase Period, as defined in the Stock Purchase Plan. Employees
may contribute up to 15% of their gross base compensation subject to certain
limitations. The price per share at which the common stock is purchased pursuant
to the Stock Purchase Plan is the lesser of 85% of the fair market value of the
common stock on the first or last day of the applicable Purchase Period. The
maximum number of shares of common stock which may be issued on the exercise of
options purchased under the Stock Purchase Plan is 1,000,000 shares. As of
December 31, 1997, 47,984 shares were issued at a weighted average cost of
$23.28 to 161 employees who have participated in the Stock Purchase Plan.

  1995 Stock Option Plan

     In 1995, the Company adopted the 1995 Stock Option Plan ("1995 Plan"),
whereby employees may be granted options, incentive stock options, share
appreciation rights, and restricted shares. The portion of the 1995 Plan
applicable to employees is administered by the Compensation Committee of the
Board of Directors of the Company which also establishes the terms of the
awards. The 1995 Plan also provides for certain automatic grants of nonqualified
stock options to non-employee directors which become exercisable on the date of
grant and expire on the tenth anniversary of the date of grant. Originally, an
aggregate of 1,800,000 shares were reserved for issuance in connection with
awards and director's options under the 1995 Plan. Following shareholder
approval, an additional 300,000 shares were reserved.

  Director Stock Plan

     In August 1996, the Company established the Director Stock Plan (the
"Director Plan"), which provides the Company's non-employee directors the option
to receive all or a portion of their quarterly remuneration in common stock
instead of cash. If a non-employee director elects at the commencement of any
quarter to receive his quarterly remuneration, or a portion thereof, in common
stock, the number of shares received is determined by dividing the average price
for the 30-day period immediately preceding the end of the quarter into the
amount of compensation earned for the quarter which the non-employee director
chooses not to receive in cash. The effective date of the Director Plan was
January 1, 1997. As of December 31, 1997, 861 shares were issued at a weighted
average cost of $27.62 to two directors who have participated in the Stock
Purchase Plan.

                                      F-21
<PAGE>   51
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Other

     In July 1995, options to purchase 125,000 and 71,430 shares of the
Company's common stock were granted to an officer ("July 1995 Grant"), who
subsequently resigned from his position with the Company to accept a position
with an affiliate of the Company, at exercise prices of $10.00 per share and
$14.00 per share, respectively.

  Statement of Financial Accounting Standards No. 123

     SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS No. 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value based method
prescribed by Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," provided that pro forma disclosures are made of
net income or loss and net income or loss per share, assuming the fair value
based method of SFAS No. 123 had been applied. The Company has elected to
account for its stock-based compensation plans under APB Opinion No. 25;
accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair value of all options granted during 1997, 1996 and
1995, using the Black-Scholes pricing model and the following weighted average
assumptions:

<TABLE>
<CAPTION>
             ASSUMPTIONS -- 1995 PLAN                 1997        1996         1995
             ------------------------                -------    --------    ----------
<S>                                                  <C>        <C>         <C>
Risk-free interest rates...........................  6.51%      6.31%       6.04%
Expected dividend yields...........................  --         --          --
Expected lives.....................................  5 years    5 years     2.5 years
Expected volatility................................  65.33%     73.44%      73.44%
</TABLE>

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's pro forma net income and pro forma
net income per common share would have been reported as follows:

<TABLE>
<CAPTION>
                                                           1997       1996       1995
                                                          -------    -------    -------
<S>                                          <C>          <C>        <C>        <C>
Net income (in thousands):.................  As Reported  $23,429    $37,838    $17,831
                                             Pro Forma     17,875     35,211     15,857
Net income per common share (basic EPS):...  As Reported     1.04       1.76       1.06
                                             Pro Forma        .80       1.64        .94
Net income per common share (diluted
  EPS):....................................  As Reported     1.04       1.75       1.06
                                             Pro Forma        .79       1.62        .94
</TABLE>

                                      F-22
<PAGE>   52
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of the 1995 Plan and the July 1995 Grant at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table below:

<TABLE>
<CAPTION>
                                       1997                         1996                        1995
                             -------------------------   --------------------------   -------------------------
                                           WEIGHTED                     WEIGHTED                    WEIGHTED
                                           AVERAGE                      AVERAGE                     AVERAGE
                              SHARES    EXERCISE PRICE    SHARES     EXERCISE PRICE    SHARES    EXERCISE PRICE
                             --------   --------------   ---------   --------------   --------   --------------
<S>                          <C>        <C>              <C>         <C>              <C>        <C>
Outstanding at beginning of
  year.....................   635,962       $30.09         853,650       $12.99             --           --
Granted....................   143,146        26.39         369,000        41.44        853,650       $12.99
Exercised..................        --           --        (550,229)       12.11             --           --
Forfeited..................        --           --         (36,459)       16.00             --           --
                             --------       ------       ---------                    --------
Outstanding at end of
  year.....................   779,108        29.41         635,962        30.09        853,650        12.99
                             ========                    =========                    ========
Exercisable at end of
  year.....................   401,762        22.71         166,273        14.21        561,930        10.54
Weighted average fair value
  of options granted.......  $  15.68                    $   27.27                    $   5.02
</TABLE>

     The following table summarizes information with regard to the options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                     ------------------------------------   ----------------------
                                                    WEIGHTED
                                                     AVERAGE     WEIGHTED                 WEIGHTED
                                                    REMAINING    AVERAGE                  AVERAGE
   RANGE OF                            NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
EXERCISE PRICES                      OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
---------------                      -----------   -----------   --------   -----------   --------
<S>             <C>                  <C>           <C>           <C>        <C>           <C>
$10.00 -- $14.00...................    111,930     3.6 years..    $12.20      111,930      $12.20
 16.00 --  24.00...................     156,032    7.8 years..     16.05      103,686       16.08
 26.00 --  38.25...................     192,146    6.5 years..     29.49      117,146       27.11
 41.75 --  56.38...................     319,000    8.3 years..     41.94       69,000       42.29
                                       -------                                -------
 10.00 --  56.38...................     779,108    7.1 years..     29.41      401,762       22.72
</TABLE>

15. PROFIT SHARING PLAN

     Employees who have been employed by the Company for at least twelve months
as full-time employees are eligible to participate in the Company's Profit
Sharing Plan, which was adopted in 1994. The Profit Sharing Plan provides for
payments to eligible employees in semiannual distributions based on the
Company's pretax profits. The Company is obligated to make an annual profit
sharing contribution of ten percent of the Company's pretax profits, which is
defined as net income before taxes, but excluding (i) any income or loss related
to charges or credits for unusual or infrequently occurring items or related to
intangible assets, and (ii) extraordinary items. Annual profit sharing
contributions may be in the form of cash or common stock of the Company. For the
years 1997, 1998 and 1999, beginning with an employee's thirteenth month of
employment, an employee is entitled to receive a guaranteed profit sharing
payment of 10% of salary, except for captains, who receive a guarantee of 20%.
The expense for the Profit Sharing Plan for the years ended December 31, 1997,
1996 and 1995 was $4,004,000, $6,779,000 and $2,768,000, respectively.

16. SUBSEQUENT EVENTS (UNAUDITED)

     In January and February 1998, pursuant to an early lease termination
agreement negotiated in November 1997, the Company delivered to Boeing for
modification to cargo configuration the aircraft acquired from Marine Midland in
December 1996 and the aircraft acquired from Citicorp in May 1997. These
aircraft are expected to be re-delivered to the Company in the second quarter
and early in the third quarter of

                                      F-23
<PAGE>   53
                        ATLAS AIR, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1998, respectively. The financing for the modification to cargo configuration is
secured under the Aircraft Credit Facility.

     In February 1998, the Company completed an offering of $538.9 million of
pass-through certificates, also known as enhanced equipment trust certificates
(the "EETCs"). The EETCs are not direct obligations of, or guaranteed by, the
Company and therefore will not be included in the Company's consolidated
financial statements. The cash proceeds from the transaction were deposited with
an escrow agent and will be used to finance (through either leveraged leases or
secured debt financings) the debt portion of the acquisition cost of five of the
10 new 747-400 freighter aircraft from Boeing scheduled to be delivered to the
Company during the period July 1998 through December 1998. In connection
therewith, the Company intends to seek certain owner participants who will
commit lease equity financing to be used in leveraged leases of such aircraft.
If any funds remain as deposits with the escrow agent for such EETCs at the end
of the delivery period, such funds will be distributed back to the
certificateholders. Such distribution will include a make-whole premium payable
by the Company. In November and December 1997, the Company entered into three
Treasury Note hedges, approximating $300 million of principal, for the purpose
of minimizing the risk associated with the fluctuations in interest rates, which
are the basis for the pricing of the EETCs which were priced in January 1998.
The effect of the hedge resulted in a deferred cost of $6.3 million, which will
be amortized over the expected twenty-year life associated with this financing.

     The Company is currently negotiating for the possibility of refinancing two
aircraft in the amount of approximately $86 million, currently financed under
the Aircraft Acquisition Credit Facility. There is no assurance that this
refinancing will be consummated.

17. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         INCOME
                                                                         (LOSS)                  INCOME (LOSS) BEFORE
                                          OPERATING   INCOME (LOSS)      BEFORE                   EXTRAORDINARY ITEM      NET INCOME
                                           INCOME        BEFORE       EXTRAORDINARY     NET     -----------------------   ----------
                               REVENUE     (LOSS)     INCOME TAXES        ITEM        INCOME    BASIC EPS   DILUTED EPS   BASIC EPS
                               --------   ---------   -------------   -------------   -------   ---------   -----------   ---------
<S>                            <C>        <C>         <C>             <C>             <C>       <C>         <C>           <C>
1997
 First Quarter...............  $ 82,049   $ 17,141      $  7,894        $  5,013      $ 5,013     $ .22        $ .22        $.22
 Second Quarter..............    93,902    (10,654)      (21,562)        (13,692)       3,049      (.61)        (.61)        .14
 Third Quarter...............   104,197     21,733         9,804           6,225        6,225       .28          .28         .28
 Fourth Quarter..............   120,893     27,781        14,397           9,142        9,142       .41          .41         .41
1996
 First Quarter...............  $ 58,649   $ 15,410      $  9,693        $  6,203      $ 6,203     $ .32        $ .31        $.32
 Second Quarter..............    72,614     22,667        15,685          10,037       10,037       .47          .46         .47
 Third Quarter...............    79,681     20,046        12,839           8,201        8,201       .37          .36         .37
 Fourth Quarter..............   104,715     29,940        21,371          13,397       13,397       .60          .59         .60

<CAPTION>

                               NET INCOME
                               -----------
                               DILUTED EPS
                               -----------
<S>                            <C>
1997
 First Quarter...............     $.22
 Second Quarter..............      .14
 Third Quarter...............      .28
 Fourth Quarter..............      .41
1996
 First Quarter...............     $.31
 Second Quarter..............      .46
 Third Quarter...............      .36
 Fourth Quarter..............      .59
</TABLE>

                                      F-24
<PAGE>   54

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           +2.1          -- Plan of Reorganization and Merger Agreement dated as of
                            July 12, 1995 by and between Holdings and the Company.
           +3.2          -- Restated Certificate of Incorporation of the Company.
           +3.3          -- Amended and Restated By-Laws of the Company.
          ++4.1          -- Form of Indenture between the Company and First Fidelity
                            Bank, N.A., as Trustee.
          ++4.2          -- Form of Second Indenture between the Company and First
                            Fidelity Bank, N.A., as Trustee.
          ++4.3          -- Form of Pass Through Trust Agreement between the Company
                            and First Fidelity Bank, N.A., as Trustee (with form of
                            Pass Through Certificate attached as exhibit thereto).
          ++4.4          -- Form of Pass Through Agreement between the Company and
                            First Fidelity Bank, N.A., as Trustee (with form of Pass
                            Through Certificate attached as exhibit thereto).
          +10.14         -- Boeing 747 Maintenance Agreement dated January 1, 1995,
                            between the Company and KLM Royal Dutch Airlines, as
                            amended.
          +10.15         -- Atlas Air, Inc. 1995 Long Term Incentive and Stock Award
                            Plan.
          +10.16         -- Atlas Air, Inc. Employee Stock Purchase Plan.
          +10.17         -- Atlas Air, Inc. Profit Sharing Plan.
          +10.18         -- Atlas Air, Inc. Retirement Plan.
         ++10.19         -- Employment Agreement between the Company and Michael A.
                            Chowdry.
         ++10.20         -- Employment Agreement between the Company and Richard H.
                            Shuyler.
         ++10.23         -- Employment Agreement between the Company and James T.
                            Matheny.
          +10.26         -- Maintenance Agreement between the Company and Hong Kong
                            Aircraft Engineering Company Limited dated April 12,
                            1995, for the performance of certain maintenance events.
          +10.30         -- Conditional Sales Agreement dated as of September 22,
                            1994 by and between Lufthansa and the Company relating to
                            B747-230 aircraft, registration D-ABYS.
          +10.31         -- Conditional Sales Agreement dated as of September 22,
                            1994 by and between Lufthansa and the Company relating to
                            B747-230 aircraft, registration D-ABYL.
          *10.36         -- Aircraft Purchase Agreement, dated as of January 19, 1996
                            between Langdon Asset Management, Inc. and the Company.
        ***10.52         -- Employment Agreement dated as of November 18, 1996
                            between the Company and R. Terrence Rendlerman.
        ***10.53         -- Secured Loan Agreement by and between the Company and
                            Finova Capital Corporation dated April 11, 1996.
        ***10.54         -- Second Amended and Restated Credit Agreement among the
                            Company and the Lenders listed therein, Goldman Sachs
                            Credit Partners L.P. (as syndication agent) and Bankers
                            Trust Company (as Administrative Agent) dated February
                            28, 1997.
   ***/****10.55         -- Engine Maintenance Agreement between the Company and
                            General Electric Company dated June 6, 1996.
         **10.56         -- Employment Agreement dated as of May 1, 1997 between the
                            Company and Stanley G. Wraight.
</TABLE>
<PAGE>   55

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         **10.58         -- Third Amended and Restated Credit Agreement among the
                            Company, the Lenders listed therein, Goldman Sachs Credit
                            Partners L.P. (as Syndication Agent) and Bankers Trust
                            Company (as Administrative Agent) dated September 5,
                            1997.
         **10.59         -- Credit Agreement among Atlas Freighter Leasing, Inc., the
                            Lenders listed therein and Bankers Trust Company, as
                            agent, dated May 29, 1997.
         **10.60         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N516MC.
         **10.61         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N508MC.
         **10.62         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee relating to B747-200
                            aircraft. U.S. Registration No. N507MC.
         **10.63         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N509MC.
         **10.64         -- Lease Agreement between Atlas Freighter Leasing, Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N808MC.
         **10.65         -- Lease Agreement between Atlas Freighter Leasing Inc., as
                            lessor, and the Company, as lessee, relating to B747-200
                            aircraft. U.S. Registration No. N505MC.
         **10.66         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N808MC.
         **10.67         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent relating to B747-200 aircraft U.S.
                            Registration No. N507MC.
         **10.68         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N509MC.
         **10.69         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N505MC.
         **10.70         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N508MC.
         **10.71         -- Security Agreement and Chattel Mortgage between the
                            Company, Atlas Freighter Leasing, Inc. and Bankers Trust
                            Company, as agent, relating to B747-200 aircraft. U.S.
                            Registration No. N516MC.
         **10.72         -- Form of Indenture, dated August 13, 1997, between the
                            Company and State Street Bank and Trust Company, as
                            Trustee, relating to the 10 3/4% Senior Notes (with form
                            of Note attached as exhibit thereto).
         **10.73         -- Purchase Agreement, dated August 8, 1997, between the
                            Company and BT Securities Corporation relating to the
                            10 3/4% Senior Notes.
         **10.74         -- Registration Rights Agreement, dated August 13, 1997,
                            between the Company and BT Securities Corporation
                            relating to the 10 3/4% Senior Notes.
         **10.75         -- Credit Agreement among Atlas Freighter Leasing II, Inc.,
                            the Lenders listed therein, Bankers Trust Company (as
                            Administrative Agent) and Goldman Sachs Credit Partners
                            L.P. (as Syndication Agent) dated September 5, 1997.
</TABLE>
<PAGE>   56

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         **10.76         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N527MC and Spare Engine Nos. 517538,
                            517539 and 455167.
         **10.77         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N523MC and Spare Engine Nos. 530168 and
                            517530.
         **10.78         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N524MC and Spare Engine Nos. 517790 and
                            517602.
         **10.79         -- Lease Agreement dated September 5, 1997 between Atlas
                            Freighter Leasing II, Inc., as lessor, and the Company,
                            as lessee, relating to B747-200 aircraft, U.S.
                            Registration No. N526MC and Spare Engine Nos. 517544 and
                            517547.
         **10.80         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N523MC and Spare
                            Engine Nos. 530168 and 517530.
         **10.81         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N524MC and Spare
                            Engine Nos. 517790 and 517602.
         **10.82         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N526MC and Spare
                            Engine Nos. 517544 and 517547.
         **10.84         -- Security Agreement and Chattel Mortgage dated September
                            5, 1997 between Atlas Freighter Leasing II, Inc., the
                            Company and Bankers Trust Company, as Agent, relating to
                            B747-200 aircraft, U.S. Registration No. N527MC and Spare
                            Engine Nos. 517538, 517539 and 455167.
         **10.85         -- First Amendment to Lease Agreement among Atlas Freighter
                            Leasing, Inc. and Bankers Trust Company, as agent, dated
                            September 5, 1997.
    **/****10.86         -- Purchase Agreement Number 2021 between The Boeing Company
                            and the Company dated June 6, 1997.
         **10.87         -- Aircraft General Terms Agreement between The Boeing
                            Company and the Company dated June 6, 1997.
           10.88         -- Placement Agreement, dated January 27, 1998, among the
                            Company, Morgan Stanley & Co. Incorporated, BT Alex.
                            Brown Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation and Goldman, Sachs & Co. relating
                            to the Pass Through Certificates Series 1998-1.
           10.89         -- Registration Rights Agreement, dated February 9, 1998,
                            among the Company, Morgan Stanley & Co. Incorporated, BT
                            Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation and Goldman, Sachs & Co. relating
                            to the Pass Through Certificates Series 1998-1.
           10.90         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1A-0.
</TABLE>
<PAGE>   57

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           10.91         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1A-S.
           10.92         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1B-0.
           10.93         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1B-S.
           10.94         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1C-0.
           10.95         -- Pass Through Trust Agreement, dated as of February 9,
                            1998, between the Company and Wilmington Trust Company,
                            as Trustee, relating to the Atlas Air Pass Through Trust
                            1998-1C-S.
           10.96         -- Deposit Agreement (Class A), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary.
           10.97         -- Deposit Agreement (Class B), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary
           10.98         -- Deposit Agreement (Class C), dated as of February 9,
                            1998, between First Security Bank, National Association,
                            as Escrow Agent, and ABN AMRO Bank N.V., acting through
                            its Chicago Branch, as Depositary
           10.99         -- Indemnity Agreement, dated as of February 9, 1998,
                            between ABN AMRO Bank N.V., acting through its Chicago
                            Branch, as Depositary, and the Company.
           10.100        -- Escrow and Paying Agent Agreement (Class A), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.101        -- Escrow and Paying Agent Agreement (Class B), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.102        -- Escrow and Paying Agent Agreement (Class C), dated as of
                            February 9, 1998, among First Security Bank, National
                            Association, as Escrow Agent, Morgan Stanley & Co.
                            Incorporated, BT Alex. Brown Incorporated, Donaldson,
                            Lufkin & Jenrette Securities Corporation and Goldman,
                            Sachs & Co., as Placement Agents, Wilmington Trust
                            Company, not in its individual capacity, but solely as
                            Pass Through Trustee, and Wilmington Trust Company, as
                            Paying Agent.
           10.103        -- Revolving Credit Agreement (1998-1A), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and ABN AMRO Bank N.V., acting
                            through its Chicago Branch as Liquidity Provider.
</TABLE>
<PAGE>   58

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           10.104        -- Revolving Credit Agreement (1998-1B), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and Morgan Stanley Capital Services,
                            Inc., as Liquidity Provider.
           10.105        -- Revolving Credit Agreement (1998-1C), dated as of
                            February 9, 1998, between Wilmington Trust Company, not
                            in its individual capacity but solely as Subordination
                            Agent, as Borrower, and Morgan Stanley Capital Services,
                            Inc., as Liquidity Provider.
           10.106        -- Guarantee, dated as of February 9, 1998, from Morgan
                            Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
                            Pass Through Trust 1998-B relating to Class B Liquidity
                            Facility.
           10.107        -- Guarantee, dated as of February 9, 1998, from Morgan
                            Stanley, Dean Witter, Discover & Co. to Atlas Air, Inc.
                            Pass Through Trust 1998-C relating to Class C Liquidity
                            Facility.
           10.108        -- Intercreditor Agreement, dated as of February 9, 1998,
                            among Wilmington Trust Company, not in its individual
                            capacity but solely as Trustee, ABN AMRO Bank N.V.,
                            acting through its Chicago Branch, as Class A Liquidity
                            Provider, Morgan Stanley Capital Services, Inc., as Class
                            B Liquidity Provider and Class C Liquidity Provider, and
                            Wilmington Trust Company.
           10.109        -- Note Purchase Agreement, dated as of February 9, 1998,
                            among the Company, Wilmington Trust Company and First
                            Security Bank, National Association.
           10.110        -- Employment Agreement dated as of February 16, 1998
                            between the Company and Stephen C. Nevin.
           21.1          -- Subsidiaries of the Registrant.
           27            -- Financial Data Schedule.
</TABLE>

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

+    Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 33-90304).

++   Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 33-97892).

*    Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-1 (No. 333-2810).

**   Incorporated by reference to the exhibits to the Company's Registration
     Statement on Form S-4 (No. 333-36305).

***  Incorporated by reference to the exhibits to the Company's Annual Report
     for 1996 on Form 10-K.

**** Portions of this document, for which the Company has been granted
     confidential treatment, have been redacted and filed separately with the
     Securities and Exchange Commission.