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                      SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549


                               FORM 10-K

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

      For the fiscal year ended December 31, 1998

                              OR

---
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
      SECURITIES EXCHANGE ACT OF 1934

      Commission File Number: 0-24795

                  AVIATION GENERAL, INCORPORATED
          (Exact name of registrant as specified in its charter)

      Delaware                                        73-1547645
      (State of Incorporation)                        (IRS Employer
                                                      Identification No.)

      7200 NW 63rd Street
      Hangar 8, Wiley Post Airport
      Bethany, Oklahoma                                                 73008
      (Address of principal executive offices)                        (Zip Code)

                              (405) 440-2255
      (Registrant's telephone number, including area code) Securities registered
      pursuant to Section 12(b) of the Act:
                  None

      Securities registered pursuant to Section 12(g) of the Act:
                  Common stock; $.50 par value


         Indicate by check mark whether the registrant (1) has filed all reports
      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 requirement for the Yes X No_____ past 90 days.

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

         Based on the closing sales price of March 10, 1999 the aggregate market
      value of the voting stock held by  non-affiliates  of the  registrant  was
      $2,332,872

         The number of shares outstanding of the registrant's common stock, $.50
      par value, was 7,280,548 at March 10, 1999.

      Total number of pages, including cover page  41

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<PAGE>


                                      PART 1

Item 1. Business

Aviation  General  Incorporated  (the  "company")  manufactures,   markets,  and
provides  support  services  for  single  engine,  high  performance   Commander
aircraft, as well as providing sales and brokerage service for pre-owned jet and
piston-powered  aircraft.  Originally incorporated in 1988 as Commander Aircraft
Company,  the company is one of the few manufacturers in the world that produces
single  engine high  performance  aircraft  certified  by the  Federal  Aviation
Administration (FAA).

Incorporated  under the laws of the  State of  Delaware  as a  holding  company,
Aviation General Incorporated  succeeded Commander Aircraft Company by a vote of
the shareholders effective August 4, 1998. The company does business through its
two wholly owned  subsidiaries:  Commander  Aircraft  Company and  Strategic Jet
Services, Inc., both located in Bethany, Oklahoma.

Commander  aircraft  are derived from a line of single  engine high  performance
aircraft  designed,  certified and produced by the General Aviation  Division of
Rockwell  International  in the 1970s.  Rockwell later sold its General Aviation
Division to  Gulfstream  Aerospace  Corporation,  from whom  Commander  Aircraft
Company  acquired  the rights to the single  engine high  performance  Commander
line.   Subsequently,   the  company   designed,   engineered  and   implemented
improvements  to the Commander  line. With an airframe design decades newer than
the competition, Commander aircraft are certified to Federal Aviation Regulation
(FAR) 23 through Amendment 7, meeting more stringent standards for single engine
high  performance  aircraft  than aircraft  certified  under the older Civil Air
Regulation (CAR) 3.

The company's first  production  model, the Commander 114B, was certified by the
FAA in 1992.  The  Commander  114B offers  substantially  improved  performance,
state-of-the-art  instrumentation  and avionics,  and a  luxuriously  appointed,
spacious  cabin,  while  retaining the proven airframe and other features of the
original Rockwell International design. The Commander 114B features an extensive
range of standard  equipment,  retractable  landing gear,  260  horsepower  fuel
injected  engine,  and a constant  speed  propeller.  The  aircraft has received
favorable  reviews in the aviation  press  worldwide and is  recognized  for its
beautiful design and its excellent flight, landing and handling characteristics.

The Commander  114B,  with a standard  range of 725 nautical  miles (833 statute
miles),  1,216 pound useful load,  maximum  cruise speed of 164 knots (188 miles
per hour),  large  luxurious four place cabin and low operating and  maintenance
costs, offers an optimum  combination of performance,  comfort,  style,  luxury,
utility  and safety.  The  Commander  114B is an ideal  airplane  for  pleasure,
business and flight training.

In 1994, the company added the Commander 114AT  All-Purpose  Trainer to its line
of single engine, high performance aircraft. The Commander 114AT is a four place
high performance trainer designed for military, professional and civilian flight
training.  An all-in-one  aircraft,  the Commander 114AT All-Purpose  Trainer is
ideal for primary 




<PAGE>



through  instrument flight training.  The Commander 114AT shares the same design
heritage as the luxurious  Commander 114B, with a modified  instrument panel and
utilitarian interior.

In 1995,  the  company  received  certification  from the FAA for the  Commander
114TC, a  turbocharged  version of the Commander  114B.  The Commander  114TC is
equipped  with the  same  beautiful,  expansive  interior  and  state-of-the-art
systems  as the  Commander  114B,  but  utilizes a 270  horsepower  turbocharged
Lycoming engine which provides speeds up to 197 knots (227 miles per hour).  The
Commander  114TC is certified  to an altitude of 25,000 feet,  which makes it an
excellent  aircraft for mountainous  regions,  as well as high density  altitude
environments.  Like its predecessor,  the 114B, the Commander 114TC has received
extensive favorable reviews by the aviation press.

The company  continues to upgrade its  products  each year with new standard and
optional equipment, such as long-range fuel tanks for the 114B, de-ice equipment
for all models, traffic alert system for increased safety in congested airspace,
and a variety of advanced avionics, moving maps and navigation displays.

Business Strategy

The  company's  business  strategy  is to  capture  a  significant  share of the
existing  domestic  and  international   market  for  the  single  engine,  high
performance  aircraft by offering a premium  updated  version of an  established
aircraft design.  Commander  aircraft have an airframe design decades newer than
the  competition  and are  certified to more  stringent  standards.  The company
believes  the  domestic  and  international  market  for its  aircraft  includes
individuals  and  corporations  that will  purchase the  company's  aircraft for
business  and  personal  travel,   and  governments,   commercial  and  military
organizations that will use the aircraft for training and other purposes.

The company  believes  the market for its  products  will improve as a result of
attrition  of the  existing  fleet  of  aging  single  engine  high  performance
aircraft,   development  of  new  international  markets  for  general  aviation
aircraft,  increased use of single engine aircraft as a corporate tool for small
and medium-sized businesses, and demand for advanced single engine trainers.

Recognizing  that the size of the used aircraft market is  significantly  larger
than new aircraft sales, the company has structured a separate aviation services
division within the company to purchase,  refurbish and sell pre-owned  aircraft
at reasonable profit margins. The Aviation Services Division also acts as broker
for pre-owned  aircraft and serves as advisor to potential  aircraft  buyers and
sellers.

Marketing and Sales    

The company  markets its aircraft  through a factory  direct sales and marketing
organization comprised of regional sales personnel who are managed and supported
from the  company's  headquarters  in Oklahoma.  The marketing  organization  is
augmented by a worldwide network of Commander Authorized Service Centers (ASCs).
The  company's   marketing  program  utilizes  a  highly  focused  domestic  and
international  advertising and 


<PAGE>


public relations  program that includes product  advertising in leading business
and aviation publications.

The  company  has one of the most  comprehensive  worldwide  service and support
networks in its class. The company grants domestic Commander  Authorized Service
Centers the  non-exclusive  right to sell  Commander  aircraft.  Commander  ASCs
receive a referral fee for identifying purchasers, and provide a full complement
of service and support services,  including  financing,  insurance,  service and
support, hangar/storage, flight instruction, and professional pilot service. The
company  selects  ASCs from among  experienced  independent  aviation  sales and
service  organizations  that it believes to have excellent  facilities,  service
capabilities,  reputation and financial  strength.  Through its ASCs,  Commander
Aircraft  Company  offers a turn-key  aircraft  ownership  program  designed  to
stimulate  ownership of Commander aircraft by companies that have not previously
owned or operated  aircraft.  This flexible program can be tailored to meet each
customer's specific requirements.

Three new aircraft and two  pre-owned  aircraft  sold in 1998 were  delivered to
foreign customers accounting for $1,987,450 or 21% of the revenues from aircraft
sales.  Information  regarding the company's export sales and major customers is
incorporated herein by reference to Note H - Sales Concentrations,  of the Notes
to  Financial  Statements.  The company  anticipates  that  domestic  sales will
continue  to account  for a  significant  portion  of its market in the  future,
however it is anticipated  that  international  markets will continue to improve
and account for an increased portion of the company's sales in the future.

The company has been  dependent  upon its ability to sell a single  product line
for which a small  market  exists,  and sales in  sufficient  quantities  and at
prices that will allow it to recover operating costs and earn a profit. Although
the  company  believes  that the market for its new  aircraft  will grow and its
share will increase,  there can be no assurances  that economic  conditions will
not have an adverse effect on future sales.

Revenues  generated by The Aviation Services Division grew significantly in 1998
and are  expected  to  continue  to grow  in  1999.  In  addition,  the  company
established  a new  subsidiary,  Strategic  Jet  Services,  Inc.  during 1998 to
include sales and brokering of turboprop and jet aircraft.

Parts and Materials Availability

Aviation  General,  Incorporated  purchases  parts and  materials  from over 100
different suppliers.  Though some of these vendors are key to the manufacture of
the company's aircraft, there are no long term commitments or contracts with any
suppliers.  The company  considers  its  relationship  with its  suppliers to be
satisfactory and does not anticipate any shortages or interruption to production
due to lack of available components on a timely basis.

Competition

Purchasers of high performance  aircraft choose among competitive  models on the
basis  of  numerous  factors,   including   performance,   reliability,   price,
appearance,   quality  of  service  


<PAGE>


and  reputation  of  the  aircraft  and  the  manufacturer.   Aviation  General,
Incorporated  believes that it can favorably compete with its competitors on the
basis of the quality,  comfort, and performance of its aircraft, and the quality
and scope of the support  services the company  provides to its  customers.  The
company further believes its aircraft are competitively priced and have a number
of  features,   including  certification  to  stricter  standards,  newer,  more
attractive  design and larger cabin size,  which make them  competitive  with or
superior to the single engine,  high performance  aircraft  produced by its four
principal competitors: Beech Aircraft Corporation, which suspended production of
its F33A Bonanzas in 1994; Mooney Aircraft Corporation,  which produces a single
engine aircraft that is significantly  smaller than the 114B; New Piper Aircraft
Corporation,  which  produces  two single  engine,  six place  retractable  gear
aircraft with similar  performance;  and Socata whose marketing efforts are, for
the most part,  focused in Europe and Asia.  Each of these  competitors has been
well established in the general aviation  industry for years and may have access
to greater resources than are available to the company.

Insurance

The company  carries most types of insurance  customary  for a  manufacturer  of
general aviation aircraft,  including  coverage for general liability,  property
damage,  aircraft loss or damage and worker's  compensation,  but does not carry
product liability insurance.  There is no assurance that the amount of insurance
carried by the company would be sufficient to protect it fully in the event of a
serious  accident or liability  claim, but the company believes that the amounts
and coverage of its insurance  protection are reasonable and appropriate for the
company's business operations.  Although highly probable,  there is no assurance
that such  insurance  will continue to be available on  commercially  reasonable
terms.

In mid-1994,  Congress enacted the General Aviation Revitalization Act, S. 1458,
which established an 18-year statute of repose for general aviation aircraft and
component  manufacturers.  This legislation  prohibits  product  liability suits
against aircraft manufacturers when the aircraft involved in an accident is more
than 18 years old when the accident occurs.  This action eliminated all Rockwell
manufactured  Commanders  produced  in the 1970's from the  company's  liability
tail. The only aircraft that the company bears manufacturing  responsibility for
are the model 114B,  114AT and 114TC produced from 1992 through the present.  At
December 31, 1998 this totaled  approximately  143 aircraft,  which  includes 70
aircraft exported from the United States.

Through March 1, 1995, the company maintained  product liability  insurance with
coverage of $10 million per occurrence  and $10 million in the  aggregate,  with
deductible of $200,000 for aircraft built through March 1, 1995. To date,  there
has been only one claim filed  against the  company  with  respect to any of the
aircraft  manufactured  by  Rockwell  International  or any of the new  aircraft
manufactured by the company.  This action was dismissed by the court in December
1997.  Management believes that the interest of shareholders is better served by
vigorously defending claims through the services of highly qualified specialists
and  attorneys  rather than  retaining  product  liability  insurance  to settle
exorbitant  claims. As such, the company elected not to retain product liability
insurance  coverage  commencing  March 1, 1995.  The company could be exposed to
significant financial risks if losses from products liability were to occur.

The company does not carry business interruption or key man insurance.


<PAGE>


Governmental Regulation

In order for an aircraft model to be manufactured for sale, the FAA must issue a
Type Certificate for the aircraft model and, in order for a particular  aircraft
to be operated,  an Airworthiness  Certificate for that aircraft must be issued.
The company was issued a Type  Certificate  for the Commander 114B in 1992 and a
Type  Certificate  for the  Commander  114TC  in 1995.  The  company  owns  Type
Certificates  for all predecessor  single engine Commander  models.  The company
received a Production Certificate from The FAA in 1993, which allows the company
to issue  Airworthiness  Certificates  under authority  delegated by the FAA. An
Airworthiness  Certificate  is  issued  for a  particular  aircraft  when  it is
certified to have been built in accordance  with  specifications  approved under
the Type Certificate for that particular model aircraft.  Commander aircraft are
certified to FAR 23,  Amendment 7 meeting more  stringent  standards  for single
engine aircraft than aircraft  certified  under the older CAR 3 regulation.  The
following table compares these standards:

         Certification Requirements:                 FAR 23            CAR 3
                                              (through Amendment 7) 
         Increased gust loading                      50 ft/sec        30 ft/sec
         Fatigue evaluation -                        Fail-safe       Static load
            Wing and associated structures           Safe life          margin
         Fail-safe elevator control system              Yes               No
         Gear and door substantiation under
            all conditions                               Yes              No
         Flap actuated aural warning                     Yes              No
         More stringent usable fuel testing              Yes              No
         Non-siphoning fuel caps                         Yes              No
         Improved accessibility of fuel
            selector switch                              Yes              No
         More stringent lightning strike
            analysis                                     Yes              No

Employees

The  company  has  a  total  of  86  full-time   employees.   Aviation  General,
Incorporated  believes that its future  success will depend,  in part,  upon its
continued  ability to recruit  and retain  highly  skilled  employees.  Although
competition for qualified  personnel is strong,  the company has been successful
in attracting and retaining skilled employees.  None of the company's  employees
are  covered  by  a  collective  bargaining  agreement,  and  Aviation  General,
Incorporated considers its employee relations to be good.


Item 2.  Properties

The company's  103,650 square foot facility,  which consists of three  buildings
constructed in 1981, is located at the Wiley Post Airport in Bethany,  Oklahoma.
The facility is leased from the Oklahoma  City Airport Trust  Authority  under a
lease that expires in October 2003, with a five year renewal option. The company
performs all of its operations and services from this facility.  During the past
ten years, the company has improved its facility to assure safety and compliance
with environmental laws and regulations.


<PAGE>


A summary of lease  payments is  presented  in Note G - Leases,  of the Notes to
Financial Statements for 1998, which is hereby incorporated by reference.


Item 3.  Legal Proceedings

The company was not a party to any pending legal proceeding as of March 4, 1999.
The  company's  business  activities  may from time to time  subject it to legal
proceedings. See "Insurance" under Part 1, Item 1.



Item 4.  Submission of Matters to a Vote of Security Holders

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year covered by this report.






                                     PART II


Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters

The common stock of Commander  Aircraft  Company,  $.50 par value, was traded on
the NASDAQ  Small-Cap  Market  (symbol CMDR) prior to the merger in August 1988.
Subsequent  to the merger,  the stock  continues  to trade as Aviation  General,
Incorporated  (symbol AVGE).  This table presents its high and low market prices
during the past two years. The company has never paid dividends in the past, and
does not intend to pay dividends in 1999.

                                   Quarterly Common Stock Price Ranges 
                                   1998                             1997 
         Quarter           High             Low              High         Low
         -------           ----             ---              ----         ---
         1st              2 1/2            1 1/2            2 3/4        1 3/4
         2nd              3                1 3/8            2 1/2        1 1/4
         3rd              4 1/8            1 1/2            2 9/16       1 5/8
         4th              3 1/2            1 1/4            4 7/8        1 13/16

There were 315 holders of the  company's  common  stock as of October 14,  1998,
including  shareholders  whose shares are held in "street"  name. No shares were
issued or repurchased by the company during 1998.



<PAGE>




Item 6.  Selected Financial Data

The  selected  financial  data  presented  below  for each year in the five year
period ended  December 31, 1998 have been  derived  from the  company's  audited
financial statements. This data should be read in conjunction with the Financial
Statements and related notes thereto and other financial  information  appearing
elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                     Year Ended December 31                      
                                    (Amounts in thousands, except per share data)
                           1998             1997              1996              1995             1994
                           ----             ----              ----              ----             ----
<S>                      <C>                <C>             <C>               <C>               <C>
   Operation Data:

   Net sales                $10,712          $8,062            $7,958            $9,398           $7,619

   Net loss                $(1,849)         $(2,140)          $(3,408)          $(2,559)         $(4,976)

   Loss per share            $(.25)            $(.31)           $(.51)            $(.39)           $(.84)


   Balance Sheet Data:

   Total assets            $10,148          $10,940           $11,060           $14,715          $12,790
   Long-term debt                -                -           $ 2,446               -            $ 5,325
</TABLE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Results of Operations:

                                  1998 vs.1997

Total revenues  increased by 33% in 1998 to $10,711,827 from $8,062,369 in 1997,
and the net loss was reduced by  approximately  14% to  $1,849,400  in 1998 from
$2,140,637  in 1997.  Net loss per share  decreased to $.25 in 1998 from $.31 in
1997.

New aircraft  deliveries  increased  to 13 units in 1998 from 12 in 1997,  while
pre-owned and consigned  aircraft sales increased to 29 aircraft in 1997 from 22
in 1997.  Revenues from aircraft sales  increased 37% to $9,375,478 in 1998 from
$6,860,413  in 1997.  The increase was due to higher unit prices,  especially in
pre-owned aircraft, coupled with an increase in volume of aircraft delivered.

Revenues generated by service and parts sales increased by more than 11% in 1998
to $1,336,349 from  $1,201,956 in 1997. This  improvement was due to an increase
in  refurbishment  work in the Service  Center,  along with an increase in spare
parts sales.

Aircraft  cost  of  sales  increased  nearly  30% in  1998  to  $8,751,936  from
$6,750,525  in 1997.  The increase  was due  primarily to the volume of aircraft
sold in 1998.  Margins on both new and  pre-owned  aircraft  improved due to the
company's  products  commanding  higher prices and continued  cost controls that
reduced the incremental unit costs. Service 




<PAGE>


and parts cost of sales  increased  in  proportion  to the increase in revenues,
increasing to $1,094,075 in 1998 from $1,025,367 in 1997.

Engineering  and product  development  costs  decreased  more than 2% in 1998 to
$308,772 from $316,158 in 1997. This reduction in expense occurred primarily due
to the completion of the flight into known icing project, which was certified by
the FAA in  1998.  Most  of the  costs  in 1998  were  incurred  for  sustaining
engineering and routine product improvements.

Sales  and  marketing  expenses  increased  in  1998 by 18% to  $1,745,732  from
$1,483,439 in 1997.  Expenditures  for  advertising and trade shows increased by
nearly $217,000 in 1998, as new advertising was strategically  placed in various
business and trade  publications.  Other sales and marketing  expenses increased
slightly in 1998.  General and  administrative  expenses increased 8% in 1998 to
$916,266 from $850,233. Legal and administrative fees associated with the merger
accounted for  approximately  $20,000 in 1998.  Printing  costs,  healthcare and
professional  fees  accounted  for the  balance of the  increase  in general and
administrative  costs in 1998.  Included in selling,  general and administrative
expenses for 1998, is $128,000 for costs  associated with the creation and start
up of Strategic Jet Services, Inc., a wholly owned subsidiary.

Interest  income  increased  in 1998 to  $324,043  from  $292,949  in 1997.  The
increase was due to the interest  earned on  certificates of deposit during 1998
and interest  earned on the note due from an affiliated  company.  Interest from
notes receivable  decreased slightly as only one aircraft is now financed by the
company.  All  other  notes  receivable  have  been  paid in full.  Income  from
miscellaneous sources totaled $83,346 in 1998 compared to $73,848 in 1997.

Interest expense decreased to $12,619 in 1998 from $131,768 in 1997. The company
had virtually no debt outstanding during 1998 and most of the expense arose from
trade payables and miscellaneous sources.


                                  1997 vs. 1996

Revenues  increased  slightly more than 1% in 1997 to $8,062,369 from $7,958,138
in 1996,  and the net loss  from  operations  was  reduced  by more  than 37% to
$2,140,637 in 1997 from $3,408,200 in 1996. Net loss per share decreased to $.31
in 1997 from $.51 in 1996. During 1997 the company delivered 12 new aircraft and
22 pre-owned or consigned  aircraft compared to 15 new aircraft and 18 pre-owned
or consigned  aircraft in 1996.  Overall,  1997 revenues from aircraft  sales of
$6,860,413 were relatively flat compared to 1996 revenues from aircraft sales of
$6,893,896.

Revenues  from  service  and  parts  increased  13% to  $1,201,956  in 1997 from
$1,064,242  in 1996.  The  increase  was due to  additional  pre-owned  aircraft
serviced by the company's service facility prior to their resale and an increase
in  revenues   generated  by  refurbishment  of   customer-owned   aircraft  and
sub-contracted paint work.

Aircraft cost of sales changed very little, totaling $6,750,525 in 1997 compared
to $6,814,750 in 1996, as revenues from aircraft sales remained relatively flat.
Cost of sales 



<PAGE>

for service and parts  increased  approximately  11% in 1997 to $1,025,367  from
$921,089 in 1996.  The increase in cost was due to the increase in the volume of
revenue from service work and parts sales in 1997.

Engineering and product  development  expenses decreased 13% in 1997 to $316,158
from  $363,215 in 1996.  Development  efforts  were  limited to routine  product
improvements  and  production  refinements.  The  majority  of the  cost  of the
company's de-icing project certification was borne by the equipment supplier.

Sales and  marketing  expenses  were reduced by 40% to  $1,483,439  in 1997 from
$2,482,025 in 1996. The decrease was  accomplished by a consolidation of several
sales  territories,  a reduction in personnel  and  substantial  re-focusing  of
advertising  expenditures.  General and  administrative  expenses  decreased  to
$850,234 in 1997 from  $862,788  in 1996.  The  decrease  was due to lower legal
expenses as all litigation was brought to a successful  conclusion by the end of
1997.

Interest  income  decreased  to  $292,949  in 1997 from  $377,517  in 1996.  The
decrease  was due to  Commander  International  reducing its note payable to the
company by over $1.1  million  during  1997,  and  payment in full of one of the
three  remaining  notes for retail  financing held by the company.  Other income
resulting  from  miscellaneous  sales and  adjustments  totaled  $73,848 in 1997
compared to $41,223 in 1996.

Interest  expense  totaled  $131,768  for 1997  compared to $316,913 for 1996. A
total of  $86,795  interest  was  recognized  on the  demand  notes,  which were
exchanged for equity February 1, 1997 or redeemed October 15,1997. An additional
$34,251  interest expense was incurred on borrowings under the company's line of
credit at Will Rogers  Bank.  Interest  expense  for 1996  related to the demand
notes totaled $275,998 and $40,915 for the bank line at Will Rogers Bank.


Liquidity and Capital Resources

Working capital  decreased  $1,788,773 during 1998 primarily due to the net loss
of $1,849,400 incurred during the year. Cash, including certificates of deposit,
decreased  $1,601,163 during 1998, while investment in securities from a related
party increased by $1,000,000.  Accounts receivable decreased by $335,976 due to
the  collection  of the final  payment  in early  January  1998 for an  aircraft
delivered in late 1997. Notes receivable  decreased  $155,439 during 1998 as one
of the two remaining  aircraft  notes were paid in full.  The company holds only
one note receivable for aircraft financed,  which is due in February 2005. Notes
receivable  from related  parties  increased  slightly during 1998 to $1,507,843
plus  accrued  interest of  $143,588.  The note is secured by Aviation  General,
Incorporated  stock pledged,  as well as a personal guarantee from the principal
shareholder of Commander International.

Raw materials and work in process  inventories  remained virtually  unchanged at
the end of 1998 at $3,714,714 compared to $3,721,240 at December 31, 1997. Three
new  demonstration  aircraft were on hand at the end of 1998  totaling  $987,325
compared  to four new  aircraft  on hand at a cost of  $1,132,713  at the end of
1997.  Six pre-owned  


<PAGE>


aircraft  were on hand as of December 31, 1998  carried at a cost of  $1,081,359
compared to four used aircraft on hand December 31, 1997 at $756,176.

Accounts  payable  were  $352,364  higher at the end of 1998 due  primarily to a
pre-owned aircraft purchased on terms allowing a final payment in February 1999.
Other trade payables  increased slightly in 1998 from 1997. Accrued expenses for
payroll taxes, 401(k) costs, and other expenses increased  approximately $30,000
at the end of 1998.  Deposits increased as of December 31, 1998 to $252,498 from
$75,180 the  previous  year end due  primarily  to a large  deposit  received to
rebuild a customer's  aircraft  damaged in Mexico.  The company had no long-term
debt as of December 31, 1998 and 1997.

Capital   expenditures   totaled   $167,936  in  1998.   The  company   invested
approximately  $70,000 in leasehold  improvements,  primarily to provide offices
for Strategic Jet Services, at the corporate headquarters. Approximately $45,000
was spent for new  computer  equipment to insure  compliance  with the year 2000
change,  and $20,000 was invested in a new telephone system.  The balance of the
expenditures  for  capital  assets was used for new  tooling  and  manufacturing
equipment

The  company  maintains  a line of  credit  with a local  bank in the  amount of
$600,000. At December 31, 1998 borrowings under this line totaled $600,000.  The
revolving  notes bear  interest at 9.25% and are secured by aircraft.  The notes
mature May 1, 1999, and have been  classified as short-term debt at December 31,
1998.  Management  expects  the line of credit to be  extended  for at least one
year.

The  company has  financed  its cash needs since  inception  with debt,  private
investor  capital,  proceeds from an initial public offering and from subsequent
stock issuances. The company plans to secure a line of credit to be used for the
expansion of its Aviation Services Division in 1999 and to provide funds if cash
requirements  exceed  income.  Management  does not believe  additional  outside
funding will be required in 1999. A more  detailed  discussion  of the company's
plans to maintain liquidity for 1999, are included in Note M - Management Plans,
of the Notes to Financial Statements for 1998.

Management Plans

Since  commencement  of  production  in 1992,  annual  revenues  have  increased
significantly  and annual losses have  substantially  declined,  concurrent with
ongoing  investment.  The company has had losses and net cash outflows since its
inception,  and its independent  public accountants have indicated that there is
doubt  about its ability to continue  as a going  concern.  In 1997,  management
implemented plans to improve the company's operational performance and liquidity
and capital  resources.  The principal elements of these plans are (i) to expand
its  Aviation  Services  Division,  which  purchases,   refurbishes,  and  sells
pre-owned  aircraft;  (ii) offer additional  options on its new aircraft;  (iii)
reduce  inventory costs through  just-in-time  production  scheduling;  and (iv)
reduce marketing expenses through more focused advertising and implementation of
a more efficient marketing organization.

During 1998 these plans were  further  refined and  implemented.  Revenues  from
aircraft  deliveries  rose 37% from 1997.  Most of this  increase was due to the
expansion of the 


<PAGE>


Aviation Services  Division's  efforts to buy, refurbish and sell more pre-owned
aircraft.  Strategic Jet Services was created to add the potential for increased
profits  in  the  jet  brokerage  business.  Management  continues  to  minimize
inventory costs through  just-in-time  scheduling as planned.  Efforts to reduce
marketing expenses have been successful while increasing the number of potential
customer  contacts.  The  programs to optimize  marketing  costs  continue to be
refined in 1999.  The company has  reorganized  its  service  center,  paint and
upholstery facilities into a completion center to effectively meet the growth in
refurbishment  and  pre-owned  aircraft  sales.  The creation of  Strategic  Jet
Services gives the company an opportunity to expand into the more lucrative used
jet aircraft sales and brokerage business.


Year 2000 Compliance

The Y2K problem, or millennium bug, refers to the possibility that computers may
not perform properly on or after January 1, 2000,  because their programming may
recognize dates ending with 00 as the year 1900,  rather than the year 2000. The
problem  is  worldwide  in scope and  affects  computers  both  large and small,
including  virtually  any machine or  electronic  equipment  that uses  computer
chips.

Aviation  General,  Incorporated,  like  most  organizations  from  industry  to
government,  has taken the Y2K  challenge  seriously.  During 1998,  the company
invested  considerable  effort,  as well as  $45,000  to  upgrade  its  computer
hardware and software to be year 2000 compliant. The Information Systems Manager
led the review and upgrade of internal software applications affecting virtually
all areas of the company including invoicing,  receivables, payroll, purchasing,
inventory  control,  engineering,  manufacturing,  accounts  payable,  sales and
marketing and general ledger. The company's fixed asset and depreciation  system
will be replaced by mid-1999  with a year 2000  compliant  system,  which is the
last internal  module  requiring  updating.  One additional  file server will be
purchased in 1999 to insure complete system  reliability and to speed processing
time.  The  estimated  costs of additional  equipment  and  software,  including
installation,  are not expected to exceed $10,000. The company is confident that
its internal systems are year 2000 compliant.

The company's  ability to produce and service  aircraft is dependent upon timely
receipt of parts and equipment. Accordingly, the company has requested its major
suppliers to provide  information  regarding  their efforts to address year 2000
compliance  issues.  Most  suppliers  responded  that  they have  evaluated  and
addressed  the impact of Y2K on their  operations,  and are either  compliant or
nearing  compliance.  If a major  supplier is not  successful  in resolving  Y2K
problems  and is unable to  provide  critical  parts to the  company,  delays in
delivery of aircraft,  parts and services  could occur.  Even though the company
maintains certain critical parts in inventory and expects to locate  alternative
suppliers, it is possible that it may not be able to do so, or may be able to do
so only at increased expense.

Over the past year,  the company has invested a  substantial  amount of time and
money to  insure  that it will be  ready  and able to  continue  its  operations
uninterrupted  after  December 31,  1999.  The effort  included  upgrades of all
internal information, production and communication systems, as well as inquiries
into   supplier's   readiness   plans.   In  May  



<PAGE>


1999,  the Federal  Aviation  Administration  (FAA) will conduct a review of the
company's Y2K plan during a quality  assurance audit.  Although the company does
not believe  that the key systems in its  aircraft,  its  internal  systems,  or
critical materials or services supplied by outside sources will be affected, the
complexity of the year 2000 challenge and the interdependence between companies,
government agencies, utilities, financial institutions and other entities, it is
impossible to guarantee that the company's  year 2000 readiness  program will be
completely successful.

The Information  Systems Manager,  along with senior  management,  is evaluating
contingency  plans  should  the Y2K  problem  result  in  unexpected  delays  or
shortages resulting from external sources. This contingency plan, expected to be
complete by July 31, 1999, will address all known potential  problems that could
result from financial and banking failures, utility and communication shutdowns,
parts and equipment shortages, government operations problems and other possible
scenarios.

Market Risk

The  company's  market risk is impacted  by changes in interest  rates,  foreign
currency exchange rates and certain commodity prices.  The notes receivable held
by the company include a quarterly  adjustment clause, which permits the company
to increase or  decrease,  the amount of  interest  charged  based on bank prime
rates. Virtually all transactions with international  customers are made in U.S.
dollars,  thereby  minimizing the risk associated with foreign currency exchange
rates. The company has no significant risk associated with commodity prices. The
company has no other financial  instruments  that are subject to material market
risk.


Inflation

Management believes that the overall effects of inflation on the company's costs
of materials  and supplies  has been  minimal.  For each of the past five years,
cost of sales was  virtually  the same as it would  have been on a current  cost
basis.  The company uses a moving average cost for inventory  valuation and cost
changes are not readily recognized in the short-term.








<PAGE>







Item 8.  Financial Statements and Supplementary Data

         Index to Financial Statements and Supplementary Data:

                                                                            Page
            Report of Independent Public Accountant                          15

            Financial Statements:

                     Balance Sheets December 31, 1998 and 1997               16

                     Statements of Operations for the years ended            17
                        December 31, 1998, 1997 and 1996

                     Statement of  Stockholder's Equity for the              19
                        years ended December 31, 1998, 1997 and 1996

                     Statements of Cash Flows for the years ended            20
                        December 31, 1998, 1997 and 1996

                     Notes to Financial Statements                           21


            Supplementary Financial Data:

                     Selected Quarterly Financial Data for the years ended
                          December 31, 1998 and 1997 (unaudited)             34











<PAGE>




            Report of Independent Certified Public Accountants


Stockholders
Aviation General, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Aviation
General, Inc. (a Delaware corporation) and Subsidiaries (Note A), as of December
31,  1998 and 1997,  and the  related  consolidated  statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Aviation General,
Inc. and  Subsidiaries,  as of December 31, 1998 and 1997, and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended  December 31, 1998 in conformity  with generally
accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note M to the
financial  statements,  the Company has suffered  recurring  losses and net cash
outflows  from  operations  that raise  substantial  doubt  about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  M.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.





                                         GRANT THORNTON LLP


Oklahoma City, Oklahoma
February 5, 1999



<PAGE>



                     Aviation General, Inc. and Subsidiaries


                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                                                     December 31,
                                    ASSETS                                                   1998               1997       
                                                                                      ------------------ ------------------
<S>                                                                                   <C>                 <C>
CURRENT ASSETS
    Cash and cash equivalents                                                         $      645,706      $   1,022,024
    Certificates of deposit                                                                      -            1,224,845
    Investment in debt securities - related party                                          1,000,000                -
    Accounts receivable                                                                        6,941            342,917
    Notes receivable from related party                                                    1,507,843          1,496,971
    Current portion of notes receivable                                                       21,286             55,269
    Inventories                                                                            5,783,398          5,610,129
    Prepaid expenses and other assets                                                        259,860            203,815
                                                                                       -------------      -------------

                  Total current assets                                                     9,225,034          9,955,970

PROPERTY AND EQUIPMENT - AT COST
    Office equipment and furniture                                                           347,565            296,729
    Vehicles and aircraft                                                                     84,021             84,021
    Manufacturing equipment                                                                  358,332            354,837
    Tooling                                                                                  525,536            518,648
    Leasehold improvements                                                                   309,144            237,161
                                                                                       -------------      -------------
                                                                                           1,624,598          1,491,396
       Less accumulated depreciation                                                         850,313            777,940
                                                                                       -------------      -------------
                                                                                             774,285            713,456

OTHER ASSETS
    Notes receivable, less current maturities                                                148,649            270,105
                                                                                       -------------      -------------

                                                                                        $ 10,147,968       $ 10,939,531
                                                                                         ===========        ===========
</TABLE>



                                   16


<PAGE>

<TABLE>
<CAPTION>



           LIABILITIES AND STOCKHOLDERS' EQUITY                                              1998               1997       
                                                                                      ------------------ ------------------
<S>                                                                                   <C>                <C>
CURRENT LIABILITIES
    Accounts payable                                                                  $      622,618     $      270,254
    Accrued expenses                                                                         343,100            312,945
    Refundable deposits                                                                      252,498             75,180
    Notes payable                                                                            600,000            102,000
                                                                                         -----------        -----------
                  Total current liabilities                                                1,818,216            760,379

COMMITMENTS AND CONTINGENCIES                                                                    -                  -

STOCKHOLDERS' EQUITY
    Preferred stock - $.01 par value; authorized, 5,000,000 shares; none issued                  -                  -
    Common stock - $.50 par value; authorized, 20,000,000 shares; issued and
    outstanding, 7,280,548 shares in 1998 and 1997                                         3,640,274          3,640,274
    Additional paid-in capital                                                            37,178,230         37,178,230
    Accumulated deficit                                                                  (32,488,752)       (30,639,352)
                                                                                         -----------        -----------
                                                                                           8,329,752         10,179,152







                                                                                        $ 10,147,968       $ 10,939,531
                                                                                         ===========        ===========
</TABLE>








      The  accompanying  notes are an integral part of these statements.

                                      17







<PAGE>



                     Aviation General, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                   Year ended December 31,
                                                                            1998              1997               1996      
                                                                      ----------------  ----------------   ----------------
<S>                                                                   <C>                <C>               <C>
NET SALES
    Aircraft                                                          $  9,375,478        $ 6,860,413       $ 6,893,896
    Service                                                              1,336,349          1,201,956         1,064,242
                                                                       -----------         ----------        ----------
                                                                        10,711,827          8,062,369         7,958,138

COST OF SALES
    Aircraft                                                             8,751,936          6,750,525         6,814,750
    Service                                                              1,094,075          1,025,367           921,089
                                                                       -----------         ----------       -----------
                                                                         9,846,011          7,775,892         7,735,839
                                                                       -----------         ----------        ----------

                  Gross margin                                             865,816            286,477           222,299

OTHER OPERATING EXPENSES
    Product development and engineering costs                              308,772            316,158           363,215
    Selling, general, and administrative expenses                        2,792,826          2,333,673         3,344,813
                                                                       -----------         ----------        ----------
                                                                         3,101,598          2,649,831         3,708,028
                                                                       -----------         ----------        ----------

                  Operating loss                                        (2,235,782)        (2,363,354)       (3,485,729)

OTHER INCOME (EXPENSES)
    Interest income                                                        324,043            292,949           377,517
    Other income                                                            83,346             73,848            41,223
    Interest expense                                                       (12,619)          (131,768)         (316,913)
    Other expense                                                           (8,388)           (12,312)          (24,298)
                                                                      ------------        -----------      ------------
                                                                           386,382            222,717            77,529
                                                                      ------------        -----------      ------------

                  NET LOSS                                            $ (1,849,400)       $(2,140,637)      $(3,408,200)
                                                                       ===========         ==========        ==========

BASIC AND DILUTED LOSS PER SHARE
    Weighted average common shares outstanding                           7,280,548          6,980,494         6,720,548
                                                                       ===========         ==========        ==========
 
    Loss per share                                                    $       (.25)        $     (.31)       $     (.51)
                                                                      =============        ==========        ==========
</TABLE>



         The accompanying notes are an integral part of these statements.

                                   18




<PAGE>



                     Aviation General, Inc. and Subsidiaries

                    CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                    Years ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>

                                                                             Additional                        Total
                                                        Common stock            paid-in    Accumulated     stockholders'
                                                     Shares     Amount          capital      deficit           equity     
<S>                                               <C>          <C>          <C>            <C>              <C>
Balance at January 1, 1996                         6,720,548   $3,360,274   $31,770,862    $(25,090,515)    $10,040,621

Net loss                                                 -             -            -        (3,408,200)    (3,408,200)
                                                   ---------    ---------    ----------     -----------     -----------

Balance at December 31, 1996                       6,720,548    3,360,274    31,770,862     (28,498,715)      6,632,421

Exchange of notes payable for common stock           200,000      100,000     1,987,368             -         2,087,368

Sale of common stock                                 360,000      180,000     3,420,000             -         3,600,000

Net loss                                                 -              -           -         (2,140,637)    (2,140,637)
                                                   ---------    ---------    ----------     -----------     -----------

Balance at December 31, 1997                       7,280,548    3,640,274    37,178,230     (30,639,352)     10,179,152

Net loss                                                 -              -            -        (1,849,400)    (1,849,400)
                                                   ---------    ---------    ----------     -----------     -----------

Balance at December 31, 1998                       7,280,548   $3,640,274   $37,178,230    $(32,488,752)   $  8,329,752
                                                   =========    =========    ==========     ===========     ===========

</TABLE>



       The accompanying notes are an integral part of these statements.

                                   19



<PAGE>

                     Aviation General, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,

<TABLE>
<CAPTION>

                                                                                 1998           1997            1996      
                                                                              -----------   ------------   ------------
<S>                                                                          <C>             <C>           <C>
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities
   Net loss                                                                   $(1,849,400)   $(2,140,637)   $(3,408,200)
   Adjustments to reconcile net loss to net cash used in operating activities
         Depreciation and amortization                                            106,130        101,853        165,523
         Sale of aircraft and parts on notes receivable                           (17,044)       (73,352)       (97,820)
         Receipts on aircraft notes receivable                                    161,611        952,147      2,485,324
         (Gain) loss on retirement of property and equipment                          (91)        (8,425)         3,542
         Changes in assets and liabilities
            (Increase) decrease in
              Accounts receivable                                                 335,976       (319,479)       243,794
              Inventories                                                        (173,269)     1,697,969        851,524
              Prepaid expenses and other assets                                   (56,045)      (199,893)        97,391
            Increase (decrease) in
              Accounts payable                                                    352,364       (237,390)      (850,016)
              Accrued expenses                                                     30,155       (264,271)      (174,458)
              Refundable deposits                                                 177,318         65,200        (17,820)
                                                                              -----------   ------------   ------------

              Net cash used in operating activities                              (932,295)      (426,278)      (701,216)

Cash flows from investing activities
   Change in short-term investments                                             1,224,845     (1,106,453)       (94,541)
   Capital expenditures                                                          (167,936)       (23,356)       (43,572)
   Proceeds on sales of property and equipment                                      1,068         42,700          8,000
   Purchase of debt securities                                                 (1,000,000)             -               -  
                                                                              -----------   ------------   ------------

              Net cash provided by (used in) investing activities                  57,977     (1,087,109)      (130,113)

Cash flows from financing activities
   Proceeds from borrowings                                                       873,000        645,000      1,645,600
   Payments on borrowings                                                        (375,000)    (1,788,500)      (850,100)
   Proceeds from sale of stock                                                        -        3,600,000             -  
                                                                              -----------   ------------   ------------

              Net cash provided by financing activities                           498,000      2,456,500        795,500
                                                                              -----------     ----------    -----------

              NET INCREASE (DECREASE) IN CASH
              AND CASH EQUIVALENTS                                               (376,318)       943,113        (35,829)

Cash and cash equivalents at beginning of year                                  1,022,024         78,911        114,740
                                                                               ----------   ------------    -----------

Cash and cash equivalents at end of year                                     $    645,706    $ 1,022,024  $      78,911
                                                                              ===========     ==========   ============
Cash paid during the year for:

   Interest                                                                $        8,368   $    104,666   $    277,690
   Income taxes                                                                       -              -              -
</TABLE>

Noncash investing and financing activities:

1997
   Transfer of  aircraft  with a net book value of $178,778  from  property  and
   equipment  to  inventory  and  exchange of $484,765 in notes  receivable  and
   $65,235 in accrued  interest  receivable from related party for used aircraft
   inventory.  Exchange of  $2,000,000  in notes  payable and $87,368 in accrued
   interest for 200,000 shares of common stock.

                                   20

<PAGE>

                      Aviation General, Inc. and Subsidiaries
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            December 31, 1998 and 1997

NOTE A - ORGANIZATION AND OPERATIONS

    Aviation  General,  Inc. ("AGI") was  incorporated  August 4, 1998 under the
    laws of the State of Delaware,  and is the  successor to the  operations  of
    Commander Aircraft Company ("CAC").  AGI is a holding company which, through
    its wholly-owned subsidiaries,  CAC and Strategic Jet Services, Inc. ("SJS")
    (collectively  referred to as the  "Company"),  manufactures,  markets,  and
    provides  support  services for single engine,  high  performance  Commander
    aircraft  and to a lesser  extent  provides  sales and service of other used
    aircraft.  On  August  5,  1998,  CAC  (incorporated  under  the laws of the
    Commonwealth  of Virginia on June 22, 1988) was merged with AGI.  Each share
    of CAC common stock was converted  into one share of AGI common  stock.  All
    outstanding  stock options of CAC were converted into AGI stock options on a
    one to one basis and all terms of the options remained unchanged.  On August
    6, 1998, SJS was incorporated  under the laws of the State of Delaware.  SJS
    provides consulting,  sales,  brokerage,  and refurbishment services for jet
    aircraft. The reorganization and merger had no effect on previously reported
    stockholders' equity or loss per share amounts.

    The Board of Directors of AGI is authorized to issue  preferred stock in one
    or more  series.  The Board of Directors  is further  authorized  to fix the
    number of shares constituting such series and to fix the relative rights and
    preferences of the shares of the series.

NOTE B - SUMMARY OF ACCOUNTING POLICIES

    A summary of the significant accounting policies consistently applied in the
    preparation of the accompanying consolidated financial statements follows.

    1.     Principles of Consolidation

    The Company consolidates the accounts of its subsidiaries,  CAC and SJS. All
    intercompany balances and transactions are eliminated in consolidation.

    2.     Cash and Cash Equivalents

    The Company  considers all highly liquid debt  instruments  purchased with a
    maturity  of  three  months  or  less  and  money  market  funds  to be cash
    equivalents.  The Company maintains its cash in bank deposit accounts which,
    at  times,  may  exceed  federally  insured  limits.  The  Company  has  not
    experienced  any losses in such  accounts  and believes it is not exposed to
    any significant  credit risks on cash and cash  equivalents.  As of December
    31, 1998 and 1997, the Company has  approximately  $600,000 and  $2,116,000,
    respectively, on deposit at one financial institution.

    3.     Investment in Debt Securities

    Debt securities that the Company has both the positive intent and ability to
    hold until maturity are classified as  held-to-maturity,  and are carried at
    amortized cost.


<PAGE>



                  Aviation General, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          December 31, 1998 and 1997


NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

    4.     Revenue Recognition

    Sales of aircraft are recognized  upon execution and funding of the purchase
    agreement  by  the  buyer  which  occurs  after  the  Company  receives  the
    airworthiness  certificate from the Federal Aviation  Administration ("FAA")
    and for financed aircraft sales when it has been determined that the buyer's
    initial  and  continuing   investments  in  the  aircraft  are  adequate  to
    demonstrate a commitment to pay. Sales of used aircraft are recognized  upon
    execution  and  funding  of  the  purchase  agreement.  Service  revenue  is
    recognized when the services are performed and billable.

    5.     Inventories

    Inventories  consist primarily of finished goods and parts for manufacturing
    and servicing of aircraft.  Inventory costs include all direct manufacturing
    costs and applied overhead. These inventories, other than used aircraft, are
    stated  at the  lower  of cost or  market,  and  cost is  determined  by the
    average-cost  method. Used aircraft are valued on a  specific-identification
    basis at the lower of cost or current estimated  realizable wholesale price.
    Inventory components at December 31 were as follows:

                                                1998                   1997 
                                           ---------------     -----------------

       Raw materials                          $3,112,257            $2,901,798
       Work in process                           602,457               819,442
       Demonstration aircraft                    987,325             1,132,713
       Used aircraft                           1,081,359               756,176
                                               ---------            ----------

                                              $5,783,398            $5,610,129
                                               =========             =========

    6.     Property and Equipment

    Depreciation  is  computed  using the  straight-line  method  for  financial
    reporting  purposes and accelerated  methods for tax purposes over estimated
    useful lives ranging from three to fifteen years.


<PAGE>


                  Aviation General, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          December 31, 1998 and 1997

NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED


7.       Income Taxes

    Deferred  income  taxes  are  provided  on  carryforwards  and on  temporary
    differences  between the tax basis of an asset or liability and its reported
    amount in the financial statements that will result in taxable or deductible
    amounts in future  years.  Deferred  income tax assets and  liabilities  are
    determined by applying the presently enacted tax rates and laws.

    The Company  provides  for a valuation  allowance on deferred tax assets if,
    based on the weight of available  evidence,  it is more likely than not that
    some portion or all of the deferred tax asset will not be realized.

    AGI  files  a   consolidated   income  tax  return  with  its   wholly-owned
    subsidiaries.

    8.     Refundable Deposits

    Refundable  deposits  consist of payments made by customers  prior to having
    repairs  performed on their  aircraft and deposits on aircraft  sold.  These
    deposits are  recognized as revenue in the period the services are completed
    or the aircraft sale is recognized.

    9.     Prepaid Advertising and Advertising Costs

    The Company expenses the cost of advertising as incurred, except for prepaid
    advertising.  Prepaid  advertising  consists  of costs for  future  magazine
    advertisement.   These  costs  are  expensed  when  the  advertisements  are
    published.  Advertising expense for the years ended December 31, 1998, 1997,
    and 1996 was approximately $590,000, $390,000, and $1,058,000, respectively.

    10.    Loss Per Common Share

    Loss per common share is calculated  based on the weighted average number of
    shares  outstanding  during the year  pursuant  to  Statement  of  Financial
    Accounting Standards ("SFAS") No. 128, Earnings per Share, which was adopted
    during the year ended December 31, 1997.  Because the conversion  prices for
    warrants  and  options are greater  than the  average  market  price for the
    periods   presented,   the  assumed   conversion  of  such   securities  are
    antidilutive  (see Note F). All loss per share  amounts have been  presented
    and, where appropriate, restated to conform to SFAS No. 128 requirements.



<PAGE>


               Aviation General, Inc. and Subsidiaries

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                         December 31, 1998 and 1997


NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

    11.    Use of Estimates

    In preparing the Company's  consolidated  financial  statements,  management
    makes estimates and  assumptions  that affect certain  reported  amounts and
    disclosures; accordingly, actual results could differ from those estimates.

NOTE C - NOTES RECEIVABLE

    From time to time, the Company  finances the sale of new aircraft with notes
    receivable  from customers  which are  collateralized  by the aircraft.  The
    notes range in length up to ten years with the average  being  approximately
    six years and bear interest at rates up to New York Prime plus 1.5%.

    A summary of such notes receivable as of December 31 is as follows:

                                                    1998            1997   
                                                ------------    -----------

       Amounts due within one year               $  21,286       $  55,269
       Amounts due after one year                  148,649         270,105
                                                   -------         -------

                  Total notes receivable          $169,935        $325,374
                                                   =======         =======

NOTE D - NOTES PAYABLE

    Notes payable consist of outstanding draws under revolving credit facilities
    of $600,000.  The revolving credit  facilities may be drawn down through May
    1, 1999, and are secured by aircraft. Interest is payable monthly at 9.25%.

NOTE E - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following  methods and assumptions  were used to estimate the fair value
    of each class of financial  instruments  as of December 31, 1998 and 1997 as
    required  by  SFAS  No.  107,  Disclosure  About  Fair  Value  of  Financial
    Instruments.  Such  information,  which pertains to the Company's  financial
    instruments,  is based  upon the  requirements  of SFAS No. 107 and does not
    purport to represent the aggregate net fair value of the Company:

       Cash and Cash Equivalents and Certificates of Deposit.  The balance sheet
       carrying amounts of cash and cash equivalents and certificates of deposit
       approximate fair values of such assets.


<PAGE>


                Aviation General, Inc. and Subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE E - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

       Investment  in Debt  Securities  - Related  Party  (see Note I). The fair
       values of investments in debt securities are estimated by discounting the
       future cash flows using the current rates at which similar loans would be
       made to borrowers  with similar credit ratings and for the same remaining
       maturities.

       Notes  Receivable  From Related Party (see Note I). At December 31, 1998,
       the carrying  amount  approximates  fair value because of the fluctuating
       interest  rate  associated  with  the  line of  credit  and  management's
       intention  to  collect  the  outstanding  balance  by June 30,  1999.  At
       December  31,  1997,  because  of  the  related  party  nature  of  these
       receivables, and the uncertainty of the timing of ultimate collection, it
       was not practicable to estimate the fair value.

       Notes Payable.  The fair value of notes payable is the discounted  amount
       of future cash flows using the  Company's  incremental  rate of borrowing
       for similar liabilities.

    All of the  Company's  financial  instruments  are for  purposes  other than
trading.

<TABLE>
<CAPTION>
                                                                           1998                     1997               
                                                             Carrying           Fair        Carrying           Fair
                                                              amount           value         amount            value    
<S>                                                         <C>           <C>             <C>             <C>
       Cash and cash equivalents                            $   645,706   $   645,706      $1,022,024      $1,022,024
       Certificates of deposit                                      -             -         1,224,845       1,224,845
       Notes receivable                                         169,935       169,935         325,374         324,064
       Investment in debt securities - related party          1,000,000     1,007,137             -               -
       Notes receivable from related party                    1,507,843     1,507,843       1,496,971             -
       Notes payable                                           (600,000)     (601,474)       (102,000)       (102,000)
</TABLE>



<PAGE>

                    Aviation General, Inc. and Subsidiaries

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE F - STOCK OPTION PLANS

    In December 1993,  the Company  approved a stock option plan for issuance of
    up to  300,000  shares  of  stock  to  employees  at the  discretion  of the
    committee  appointed  by the  Board  of  Directors.  The  number  of  shares
    authorized  for issuance under this plan was changed to 500,000 during 1995,
    800,000 during 1996,  and 1,300,000  during 1998. The stock option plan also
    provides for automatic grants of options to purchase 20,000 shares of common
    stock  to  each  director  on  an  annual  basis.   At  December  31,  1998,
    approximately  312,000 shares remain to be granted under the plan. The stock
    warrants and options generally vest ratably over a three-year period.

    The Company uses the intrinsic  value method to account for its warrants and
    stock option plan in which  compensation  is  recognized  only when the fair
    value of each  option  exceeds  its  exercise  price  at the date of  grant.
    Accordingly,  no compensation  cost has been recognized for the warrants and
    options issued.  Had  compensation  cost been  determined  based on the fair
    value of the warrants and options at the grant dates, the Company's net loss
    and loss per share would have been  increased  to the pro forma  amounts for
    the years ended as indicated below.

<TABLE>
<CAPTION>

                                          1998               1997              1996     
                                    ----------------   ----------------  ---------------
<S>                                   <C>               <C>               <C>
       Net loss
           As reported                 $(1,849,400)      $(2,140,637)      $(3,408,200)
           Pro forma                   $(2,069,761)      $(2,362,514)      $(3,569,838)

       Loss per share
           As reported                 $      (.25)      $      (.31)      $      (.51)
           Pro forma                   $      (.28)      $      (.34)      $      (.53)
</TABLE>


    These pro forma  amounts  may not be  representative  of future  disclosures
    because they do not take into effect pro forma compensation  expense related
    to grants made before 1995. The fair value of each grant is estimated on the
    date of  grant  using  the  Black-Scholes  options-pricing  model  with  the
    following  weighted-average  assumptions  used for grants in 1998, 1997, and
    1996, respectively:  no expected dividends; expected volatility of 66%, 64%,
    and 60%; risk-free interest rate of 5.5%, 5.9%, and 6.2%; and expected lives
    of five years.  The exercise price of all options equaled or exceeded market
    price of the stock at the date of grant.

    The Black-Scholes option valuation model was developed for use in estimating
    the fair value of traded options which have no vesting  restrictions and are
    fully transferable.  In addition,  option valuation models require the input
    of  highly  subjective   assumptions  including  the  expected  stock  price
    volatility.    Because   the   Company's   employee   stock   options   have
    characteristics  significantly  different from those of traded options,  and
    because changes in the subjective  input  assumptions can materially  affect
    the fair value estimate, in management's opinion, the existing models do not
    necessarily  provide a  reliable  single  measure  of the fair  value of its
    employee stock options.


<PAGE>



                    Aviation General, Inc. and Subsidiaries

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          December 31, 1998 and 1997


NOTE F - STOCK OPTION PLANS - CONTINUED


    A summary of the status of the  Company's  warrants and stock option plan as
    of December 31, 1998,  1997, and 1996 and changes during the years ending on
    those dates is presented below.
<TABLE>
<CAPTION>

                                                           1998                  1997                1996       
                                                              Weighted                Weighted                Weighted
                                                              average                 average                 average
                                                              exercise                exercise                exercise
                                                   Shares       price      Shares       price     Shares        price  
<S>                                               <C>        <C>          <C>        <C>         <C>         <C>
       Outstanding at beginning of year            691,349    $3.65        510,500    $4.21       463,833     $4.40
       Granted                                     672,400    $2.67        206,850    $2.28       190,000     $3.78
       Exercised                                       -       -               -       -              -        -
       Forfeited                                  (382,869)   $3.68        (26,001)   $4.73      (143,333)    $4.09
                                                  --------                --------               --------

       Outstanding at end of year                  980,880    $2.97        691,349    $3.65       510,500     $4.21
                                                  ========                 =======               ========

       Options exercisable at year end             234,360    $3.89        304,327    $4.37       165,504     $4.56
       Weighted average fair value of options
           granted during the year                            $1.33                   $1.33                   $1.91
</TABLE>


    The following table summarizes  information about  fixed-price  warrants and
stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                                                                Options outstanding             Options exercisable  
                                                                   Weighted-
                                                                    average    Weighted-                    Weighted-
                                                      Number      remaining      average         Number       average
                                                   outstanding   contractual     exercise      exercisable    exercise
                                                   at 12/31/98         life        price       at 12/31/98    price     
<S>                                                <C>          <C>              <C>           <C>           <C>
       Range of exercise prices
           $1.94 to $2.75                            774,880      3.95 years      $2.59           61,693       $2.28
           $2.76 to $4.00                             43,000      1.96 years      $3.30           28,666       $3.30
           $4.01 to $5.25                            163,000      1.04 years      $4.67          144,001       $4.70
                                                     -------                                     -------

           $1.94 to $5.25                            980,880                                     234,360
                                                     =======                                     =======

</TABLE>


<PAGE>


                   Aviation General, Inc. and Subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                              December 31, 1998 and 1997


NOTE G - LEASES

    The Company leases office space, hangar space, its manufacturing and service
    facility,  and certain  office  equipment  under  agreements  classified  as
    operating  leases that expire at various dates through 2003.  Rental expense
    under these leases was approximately  $264,000,  $256,000,  and $243,000 for
    the years ended December 31, 1998, 1997, and 1996, respectively.  The future
    annual minimum lease payments under these leases at December 31, 1998 are as
    follows:

    Year ending December 31
                     1999                                         $   263,232
                     2000                                             252,774
                     2001                                             260,357
                     2002                                             268,168
                     2003                                             229,033
                                                                   ----------

    Total future minimum lease payments                            $1,273,564

NOTE H - SALES CONCENTRATIONS

    The geographic sales of the Company's new aircraft are as follows:

<TABLE>
<CAPTION>
                                                    1998                      1997                    1996              
                                          Number        Amount       Number        Amount      Number         Amount   
<S>                                      <C>          <C>            <C>          <C>             <C>       <C>
    United States                             10       $4,182,703       12        $4,583,063        9        $3,349,046
    Europe                                     2          828,750        -               -          3           991,683
    South America                              1          511,700        -               -          -               -
    Middle East                                -              -          -               -          3           901,000
</TABLE>

    The  Company's  1998 used  aircraft  sold in the United  States and Europe 
    were 21 and 2,  respectively,  totaling  $3,205,325  and $647,000,
    respectively.

    During 1997,  used aircraft sold in the United States and Europe were 13 and
    2,  respectively,  totaling  $1,876,350 and $401,000,  respectively.  During
    1996,  all used  aircraft  were  sold in the  United  States  for a total of
    $1,652,167.

    During 1996, 12% and 11% of the Company's revenues  represented sales to two
    international customers.


<PAGE>


                  Aviation General, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             December 31, 1998 and 1997


NOTE I - RELATED PARTY TRANSACTIONS

    The  Company  extends  financing  for  aircraft  and spare parts sold either
    directly to a director of the  corporate  general  partner of the  Company's
    majority  stockholder or to an Authorized  Sales and Service  Representative
    owned by the director under a line of credit of $5,000,000.  All outstanding
    advances under this line of credit and accrued  interest  thereon are due on
    June 30, 1999.  It is  management's  intention not to extend the due date at
    maturity, therefore, the entire outstanding balance under the line of credit
    is  reflected as a current  asset at December  31, 1998.  The line of credit
    bears interest at 1% over the Morgan  Guaranty of New York prime rate (8.75%
    at December 31, 1998), payable quarterly, in arrears. Following is a summary
    of transactions under this line of credit for 1998, 1997, and 1996:
<TABLE>
<CAPTION>

                                                           1998           1997           1996     
                                                      -------------- -------------- --------------
<S>                                                   <C>             <C>           <C>
       Balance at beginning of year                     $1,497,000     $2,648,000    $ 4,223,000

       Sale of spare parts                                  11,000         57,000         88,000
       Purchase of aircraft for inventory                      -         (485,000)           -
       Cash payments received                                  -         (723,000)    (1,663,000)
                                                       -----------     ----------     ----------

       Balance at end of year                           $1,508,000     $1,497,000    $ 2,648,000
                                                         =========      =========     ==========
</TABLE>

    Accrued  interest  receivable  under this line of credit  agreement  totaled
    $143,588  and  $22,205  as of  December  31,  1998 and  1997,  respectively.
    Interest  income  under  this line of  credit  was  approximately  $142,000,
    $207,000, and $309,000 for 1998, 1997, and 1996, respectively.

    During 1998, the Company  purchased debt securities  with  detachable  stock
    purchase  warrants for $1,000,000 from an entity under common  control.  The
    debt securities bear interest at 10%, payable semi annually,  with principal
    and accrued interest thereon due on December 31, 1999 and are collateralized
    by the entity's receivables. The debt securities are convertible into common
    stock of the  affiliate  at the rate of one share of  common  stock for each
    $8.50 of debt  converted.  The Company also received  100,000 stock purchase
    warrants at an exercise price of $2.50 a share expiring three years from the
    date of  issuance.  Management  believes  that the  warrants had no economic
    value when  granted,  and  accordingly,  no amount has been assigned to such
    warrants in the financial  statements.  Accrued interest receivable relating
    to these securities totaled $44,384 as of December 31, 1998. Interest income
    from these securities was  approximately  $54,000 for 1998. During 1998, the
    Company also purchased one used aircraft from this entity for $240,000.

    In January  1997,  the Board of Directors of the Company voted to accept the
    stockholders'  offer to exchange $2,000,000 of outstanding notes payable for
    common  stock at  approximately  $10 per  share.  The  repayment  of accrued
    interest of approximately  $87,000 was waived.  Effective  February 1, 1997,
    the  stockholder  and  its  affiliate  exchanged  $1,450,000  and  $550,000,
    respectively, of notes payable for a total of 200,000 shares of common stock
    at $10 per share.


<PAGE>


              Aviation General, Inc. and Subsidiaries

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                      December 31, 1998 and 1997


NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED

    The Chairman of the Board of Directors of the Company is also a stockholder,
    director,  and the Managing Director of the corporate general partner of the
    Company's majority stockholder.

NOTE J - INCOME TAXES

    No  current  tax  provisions  have  been  recognized  in  the   accompanying
statements of operations given the operating losses incurred.

    Components of the net deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>

                                                                                              1998              1997      
                                                                                       ------------------ ----------------
<S>                                                                                   <C>                <C>
    deferred tax assets (liabilities)
       Inventories                                                                     $      280,000    $      212,000
       Depreciation and amortization                                                         (167,000)         (181,000)
       Accrued liabilities                                                                    149,000            78,000
       Net operating loss carryforwards                                                    11,066,000        10,481,000
                                                                                          -----------       -----------
                                                                                           11,328,000        10,590,000
    Valuation allowance                                                                   (11,328,000)      (10,590,000)
                                                                                          -----------       -----------
           Total deferred tax assets                                                   $           -     $           -  
                                                                                       =============     ==============
</TABLE>

    The Company's net operating loss carryforwards will expire as follows:

    December 31
                     2004                                    $       220,657
                     2005                                          3,196,640
                     2006                                             17,434
                     2007                                          6,466,819
                     2008                                          3,982,473
                     2009                                          4,523,401
                     2010                                          2,279,486
                     2011                                          3,445,366
                     2012                                          1,869,674
                     2013                                          1,662,921
                                                                 -----------

    Total net operating loss carryforwards                     $  27,664,871
                                                                  ==========



<PAGE>


                  Aviation General, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                         December 31, 1998 and 1997


NOTE K - COMMITMENTS AND CONTINGENCIES

    The Company is subject to  regulation  by the FAA. The Company is subject to
    inspections  by the FAA and may be  subjected  to fines and other  penalties
    (including  orders  to  cease   production)  for   noncompliance   with  FAA
    regulations.  The Company has a  Production  Certificate  from the FAA which
    delegates to the Company the  inspection of each  aircraft.  The sale of the
    Company's  product  internationally  is subject to  regulation by comparable
    agencies in foreign countries.

    The  Company  faces  the  inherent  business  risk of  exposure  to  product
    liability  claims.  In  1988,  the  Company  agreed  to  indemnify  a former
    manufacturer of the Commander single engine aircraft against claims asserted
    against the  manufacturer  with respect to aircraft built from 1972 to 1979.
    In 1994,  Congress  enacted the General Aviation  Revitalization  Act, which
    established an eighteen-year statute of repose for general aviation aircraft
    manufacturers.  This legislation  prohibits  product liability suits against
    manufacturers  when  the  aircraft  involved  in an  accident  is more  than
    eighteen  years  old.  This  action  effectively  eliminated  all  potential
    liability for the Company with respect to aircraft  produced in the 1970s as
    of December 31, 1998. The Company's product liability  insurance policy with
    coverage  of $10  million per  occurrence  and $10  million  annually in the
    aggregate  with a deductible of $200,000 per  occurrence and annually in the
    aggregate expired March 1, 1995. Subsequent to March 1, 1995, the Company is
    not insured for product liability claims.

    The Company is routinely  involved in various legal  matters  arising in the
    normal course of business.  Management believes that losses, if any, arising
    from such actions will not have a material  adverse  effect on the financial
    position or operations of the Company.

NOTE L - EMPLOYEE BENEFIT PLANS

    The Company has a profit  sharing  401(k) plan  covering  substantially  all
    employees.   Eligible   employees   may   contribute  up  to  15%  of  their
    compensation.  The Company  contributes  an amount  equal to at least 25% of
    each employee's contributions not in excess of 10% of compensation. However,
    additional  contributions may be made at the Company's  discretion.  Expense
    under the plan was  approximately  $53,000,  $44,000,  and $45,000 for 1998,
    1997, and 1996, respectively.

    The  Company  has  a   contributory   health  care  benefit  plan   covering
    substantially all employees and eligible  dependents.  The plan provides for
    covered  major  medical  expense  benefits  subject to certain  deductibles,
    coinsurance  provisions,   and  lifetime  maximums.   Employee  and  Company
    contributions  are  determined by the Company from time to time based on the
    amounts  of  claims  and  other  expenses  incurred.  The plan  has  certain
    stop-loss  coverage under an insurance  policy that provides for payments of
    covered  benefits  in excess of $25,000  per year per  covered  person.  The
    policy also  provides an aggregate  monthly  stop-loss for the plan based on
    number  of  covered  persons.  Expense  under  the  plan  was  approximately
    $160,000, $142,000, and $125,000 for 1998, 1997, and 1996, respectively.



<PAGE>


                   Aviation General, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                            December 31, 1998 and 1997


NOTE M - MANAGEMENT PLANS

    Since  commencement  of production in 1992,  annual  revenues have increased
    significantly and annual losses have substantially declined, concurrent with
    ongoing  investment in the Company's  future.  Cash needs have been financed
    with  debt,  private  investor  capital,  proceeds  from an  initial  public
    offering,  and  proceeds  from  subsequent  stock  issuances.   The  Company
    continues to broaden its general  aviation  capabilities  by increasing  its
    business in the  pre-owned  piston and jet markets.  These  markets are much
    larger than the market for new high  performance,  single  engine  aircraft.
    Furthermore, this diversifies the Company's business and revenue base and is
    synergistic with the manufacturing,  marketing,  and support services of our
    high performance, single engine Commander aircraft.

    Management  believes  the  reduction  in net loss is  attributable  to plans
    implemented  in late 1996 and 1997 to provide new  revenues for the Company.
    During 1998, the Company  continued to expand the Aviation Services Division
    ("ASD"), which sells pre-owned aircraft and markets refurbishment  services.
    Also in 1998,  the  Company  expanded  its  efforts  to  purchase  pre-owned
    aircraft, accept aircraft on trade for new units, and refurbish and sell the
    aircraft at a reasonable  profit.  Revenue from sales of pre-owned  aircraft
    increased  by 69% in  1998  and  revenues  from  refurbishment  and  service
    increased over 11%.  Management  expects growth to continue in 1999 for both
    refurbishment  services and pre-owned  aircraft sales. The Company continues
    to take advantage of its factory  facilities to market  upgrades to existing
    aircraft owners for new paint, interior, and equipment.

    In October 1998, the Company  announced the formation of SJS, a wholly-owned
    subsidiary  established  to  provide  brokerage,   sale,   consulting,   and
    refurbishment  work for jet  aircraft.  Income from this line of business is
    expected to begin improving the Company's profitability in 1999.

    The Company introduced a new de-icing option and received certification from
    the FAA in 1998,  allowing  equipped  aircraft  to  operate  in known  icing
    conditions  similar  to  larger,  more  expensive  aircraft.  Sales  of this
    optional  equipment not only provide additional  revenues and earnings,  but
    also increase the value of the aircraft relative to its competition.

    In  addition  to the above  actions  by the  Company  to  increase  revenue,
    management  has made  efforts  to  reduce  costs  and cash  requirements  by
    optimizing its production  schedule using just-in-time  scheduling,  thereby
    systematically   decreasing   inventories  and  payables  since   production
    commenced in 1992.  Management  has reduced the costs  incurred to advertise
    new  aircraft  by  focusing  its  marketing  efforts at a specific  customer
    profile.

    The Company  continues to advertise in industry and trade  publications at a
    significantly  reduced level, while directly contacting  potential customers
    whose  demographic  characteristics  closely  match  the  typical  customer,
    especially in the areas of income, pilot experience, and types of businesses
    with  demonstrated  regional travel  requirements.  Further reducing selling
    expenses,  the Company  completed a  reorganization  of its service  center,
    paint,  and interior shops into a completion  center to focus on the growing
    after-market refurbishment business.


<PAGE>


                  Aviation General, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                          December 31, 1998 and 1997


NOTE M - MANAGEMENT PLANS - CONTINUED

    The Company has expanded its operations to include the ASD and SJS, improved
    its  products,  dramatically  decreased  sales and marketing  expenses,  and
    reduced  debt and interest  expense.  Management  believes  that is has made
    significant  progress in 1998 and it is  reasonable to expect the Company to
    improve revenues,  reduce costs,  improve operating  results,  and stabilize
    cash  flow in 1999.  Due to  numerous  factors  beyond  the  control  of the
    Company, there can be no assurances that these results will be achieved.





<PAGE>




                      AVIATION GENERAL, INCORPORATED
                     SELECTED QUARTERLY FINANCIAL DATA
                               (unaudited)

<TABLE>
<CAPTION>

                                                                    Three Months Ended
                                      --------------------------------------------------------------------------------
                                          MARCH 31,            JUNE 30,          SEPTEMBER 30,        DECEMBER 31,
                                             1998                1998                1998                 1998
                                      -------------------  ------------------  ------------------  -------------------
<S>                                   <C>                  <C>                 <C>                  <C>
Net Sales                                 $2,923,229          $2,633,898          $3,675,194           $1,479,506

Net loss                                  ($241,496)          ($435,352)           ($95,189)          ($1,077,363)

Loss per share                             ($0.03)              ($0.06)             ($0.01)             ($0.15)

Weighted average shares outstanding       7,280,548            7,280,548           7,280,548           7,280,548
</TABLE>


<TABLE>
<CAPTION>


                                          MARCH 31,            JUNE 30,          SEPTEMBER 30,        DECEMBER 31,
                                             1997                1997                1997                 1997
                                      -------------------  ------------------  ------------------  -------------------
<S>                                   <C>                   <C>                <C>                 <C>
Net Sales                                 $1,074,409          $1,984,776          $2,970,196           $2,032,988

Net loss                                  ($789,952)          ($559,867)          ($393,107)           ($397,711)

Loss per share                             ($0.12)              ($0.08)             ($0.06)             ($0.06)

Weighted average shares outstanding        6,851,659           6,920,548           6,920,548            7,221,852
</TABLE>


Quarterly  and  year  to  date   computation  of  per  share  amounts  are  made
   independently.  Therefore,  the sum of  quarterly  per share  amounts may not
   agree with per share amounts for the year.
















<PAGE>







Item 9.  Changes in and Disagreements with Accountants on Accounting and 
Financial Disclosure

There were no Form 8-K filings in fiscal year ended  December 31, 1998 and there
were no changes in or disagreements with accountants on accounting and financial
disclosure in 1998.

                             PART III

Certain  information  required  by Part III is omitted  from this report in that
registrant will file a definitive proxy statement pursuant to Regulation 14A for
its 1999 Annual Meeting of Shareholders, and the information included therein is
incorporated by reference.

Item 10.  Directors and Executive Officers of the Registrant


Information  regarding  directors  of the  Registrant  required  by this item is
incorporated  herein by reference form the company's 1999 Proxy  Statement under
the caption "Election of Directors - Nominees".

The information  regarding  executive  officers of the company  required by this
item appearing in the company's 1999 Proxy Statement under the caption "Election
of Directors - Other Officers" is hereby incorporated by reference.

Item 11.  Executive Compensation

The  information  required by this item  appearing in the  company's  1999 Proxy
Statement under the captions "Election of Directors  Director  Compensation" and
"Executive Compensation" is hereby incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The  information  required by this item  appearing in the  company's  1999 Proxy
Statement under the caption  "Information  Concerning  Solicitation and Voting -
Security  Ownership  of  Certain  Beneficial  Owners and  Management"  is hereby
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

Note E -  Disclosures  About Fair Value of  Financial  Instruments  and Note I -
Related Party  Transactions,  of the Notes to Financial  Statements for 1998 are
hereby incorporated by reference.







                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports of Form 8-K:

                                                                            Page
(a) (1) The following financial statements are included in Part II Item 8:

           Report of Independent Public Accountant                          15

           Financial Statements:
              Balance Sheets December 31, 1998 and 1997                     16

              Statements of Operations for the years ended December 31,
                  1998, 1997 and 1996                                       18

              Statement of Stockholders' Equity for the years ended
                  1998, 1997 and 1996                                       19

              Statements of Cash Flows for the years ended
                  December 31, 1998, 1997 and 1996                          20

              Notes to Financial Statements                                 21


         (2)   The following financial schedule for the years 1998, 1997 and 
               1996 is submitted herewith:

               Selected Quarterly Financial Data for the years ended
                December 31, 1998 and 1997 (unaudited)                      34

                 All other schedules are omitted because they are not 
                 applicable or the required information has been 
                 presented in the financial statements or
                 notes thereto.

         (3)      Exhibits included are hereby  incorporated by reference to the
                  Exhibit Index, page 37 of this report.




<PAGE>



                             INDEX OF EXHIBITS

Exhibit No                                   Description

3.1  Certificate  of  Incorporation  of  Aviation  General,  Incorporated.  This
     exhibit is  incorporated  by reference  to Exhibit 3.1 of the  Registrant's
     Form S-4 filed June 12, 1998 (Reg. No. 333-56731).

3.2  Bylaws of Aviation General,  Incorporated.  This exhibit is incorporated by
     reference to Exhibit 3.2 of the  Registrant's  Form S-4 filed June 12, 1998
     (Reg. No. 333-56731).

4.1(a) Certificate of  Incorporation,  describing the Common Stock  (included in
     Exhibit 3.1).  This exhibit is  incorporated by reference to Exhibit 4.1(a)
     of the Registrant's Form S-4 filed June 12, 1998 (Reg. No. 333-56731).

10.1 Federal  Aviation   Administration  ("FAA")  Type  Certificates  issued  to
     Commander  Aircraft  Company (the  "Company")  for models 112, 114,  112TC,
     112B,  112TCA 114A, and 114B.  This exhibit is incorporated by reference to
     Exhibit  10.1 of the  Registrant's  Form S-1 filed March 4, 1993 (Reg.  No.
     33-59128).

10.2 FAA Repair  Station  Air Agency  Certificate  issued to the  Company.  This
     exhibit is  incorporated  by reference to Exhibit 10.2 of the  Registrant's
     Form S-1 filed March 4, 1993 (Reg. No. 33-59128).

10.3 Lease and operations  Agreement between the Company and the Trustees of the
     Oklahoma  City  Airport  Trust  dated  August 9,  1988,  as  amended by the
     Supplemental  Agreement No. 1 dated December 18, 1991, and the Supplemental
     Agreement  No. 2 dated  April 2,  1992.  This  exhibit is  incorporated  by
     reference to Exhibit 10.19 of the Registrant's Form S-1 filed March 4, 1993
     (Reg. No. 33-59128).

10.4 Textron Lycoming Finance Plan No. 1 between Textron  Financial  Corporation
     and the Company  dated June 26, 1991,  as amended to the Finance Plan No. 1
     dated as of May 28, 1992,  the Second  Amendment  dated as of September 29,
     1992, and the Third  Amendment  dated as of December 10, 1992. This exhibit
     is incorporated by reference to Exhibit 10.29 of the Registrant's  Form S-1
     filed March 4, 1993 (Reg.No. 33-59128).







<PAGE>



                                INDEX OF EXHIBITS

Exhibit No                                   Description

10.5 International  Distributorship  Agreement  between  the Company and Com-Air
     Flugzeughandel  Gmbh.  This exhibit is incorporated by reference to Exhibit
     10.31 of the Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).

10.6 International  Distributorship  Agreement  between  the  Company  and  Aero
     Service b.v. This exhibit is  incorporated by reference to Exhibit 10.32 of
     the Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).

10.7 International  Dealership  Agreement  between  the  Company  and  Commander
     Khaleej Trading Establishment. This exhibit is incorporated by reference to
     Exhibit10.28 of the Registrant's Form 10-K filed March 30, 1994.

10.8 Form of the Company's  Authorized Sales and Service  Representative  Policy
     and Procedures Manual. This exhibit is incorporated by reference to Exhibit
     10.37 of the Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).

10.9 Form  of  the  Company's   Authorized  Sales  and  Service   Representative
     Agreement.  This exhibit is  incorporated  by reference to Exhibit 10.38 of
     the Registrant's Form S-1 filed March 4, 1993 (Reg. No. 33-59128).

10.10Form  of  the  Company's   Service  Center   Agreement.   This  exhibit  is
     incorporated  by reference to Exhibit  10.39 of the  Registrant's  Form S-1
     filed March 4, 1993 (Reg. No. 33-59128).

10.11The  Commander  Aircraft  Company  Profit  Sharing  Plan.  This  exhibit is
     incorporated  by reference to Exhibit  10.40 of the  Registrant's  Form S-1
     filed March 4, 1993 (Reg. No. 33-59128).

10.12Nonstatutory  Stock  Option  Agreement  between  the  Company  and  Wirt D.
     Walker,  III dated  January  31,  1994.  This  exhibit is  incorporated  by
     reference to Exhibit  10.48 of the  Registrant's  Form 10-K filed March 30,
     1994.

10.13Nonstatutory  Stock Option Agreement between the Company and Mishal Y.S. Al
     Sabah dated January 31, 1994.  This exhibit is incorporated by reference to
     Exhibit 10.49 of the Registrant's Form 10-K filed March 30, 1994.

10.14Form of Company's Aircraft Delivery and Acceptance Agreement.  This exhibit
     is incorporated by reference to Exhibit 10.63 of the Registrant's  Form S-1
     filed March 4, 1993 (Reg. No. 33-59128).






<PAGE>



                                INDEX OF EXHIBITS

Exhibit No                                   Description

10.15Form  of  the  Company's   Aircraft  Retail   Warranty.   This  exhibit  is
     incorporated  by reference to Exhibit  10.64 of the  Registrant's  Form S-1
     filed March 4, 1993 (RNo. 33-59128).

10.16Commander  Aircraft  Company  1993  Stock  Option  Plan.  This  exhibit  is
     incorporated  by reference to Exhibit 10.53 of the  Registrant's  Form 10-K
     filed March 28, 1996.

21   List of subsidiaries

27   Financial Data Schedule


<PAGE>




                             SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto authorized on the 19th day of March, 1999.


                          AVIATION GENERAL INCORPORATED



                              /s/ WIRT D. WALKER, III
                           By:  Wirt D. Walker, III
                              Chairman of the Board


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


Principal Executive Officer:


Wirt D. Walker,III             President and
                           Chief Executive Officer            March 19, 1999

Principal Financial Officer and Accounting Officer:


Stephen R. Buren            Chief Financial Officer           March 19, 1999
----------------


Directors:


Wirt D. Walker, III              Director                     March 19, 1999
-------------------

Mishal Y.S. Al Sabah             Director                     March 19, 1999
--------------------

N. Gene Criss                    Director                     March 19, 1999