SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------

                                    FORM 10-K

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

   For the fiscal year ended: DECEMBER 31, 1997 Commission File Number 0-26582

                               WORLD AIRWAYS, INC.
             (Exact name of registrant as specified in its charter)

                               DELAWARE 94-1358276
        (State of incorporation) (I.R.S. Employer Identification Number)

              13873 Park Center Road, Suite 490, Herndon, VA 20171
                    (Address of Principal Executive Offices)
                                 (703) 834-9200
                         (Registrant's telephone number)

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

          Title of Each Class Name of Each Exchange on Which Registered

           Common Stock par value $.001 per share Nasdaq Stock Market

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No State by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 13, 1998, was approximately $13,152,787. The number of
shares of the registrant's Common Stock outstanding on March 13, 1998 was
7,230,064.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of World Airways, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Report.


<PAGE>



                               WORLD AIRWAYS, INC.

                         1997 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS



                                                                           Page

PART I

Item 1.    Business...........................................................3

Item 2.    Properties........................................................10

Item 3.    Legal Proceedings.................................................10

Item 4.    Submission of Matters to a Vote of Security Holders...............10


PART II

Item 5.    Market for Registrant's Common Stock and Related Security
           Holder Matters....................................................11

Item 6.    Selected Financial Data...........................................12

Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.............................................13

Item 8.    Financial Statements and Supplementary Data.......................26

Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..........................................55


PART III

Item 10.   Directors and Executive Officers of the Registrant................55

Item 11.   Executive Compensation............................................56

Item 12.   Security Ownership of Certain Beneficial Owners and Management....56

Item 13.   Certain Relationships and Related Transactions....................56


PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K...57


<PAGE>


PART I ITEM 1. BUSINESS 

World  Airways  was  organized  in  March  1948 and  became a wholly  owned
subsidiary of WorldCorp,  Inc. ("WorldCorp") in a holding company reorganization
in 1987. In February 1994, pursuant to an October 1993 agreement, WorldCorp sold
24.9% of its  ownership to MHS Berhad  ("MHS"),  a Malaysian  aviation  company.
Effective December 31, 1994, WorldCorp increased its ownership in the Company to
80.1% through the purchase of 5% of World  Airways  common stock held by MHS. In
October  1995,  the Company  completed  an initial  public  offering.  Effective
January 23, 1998,  WorldCorp and MHS own 51.2% and 16.8%,  respectively,  of the
outstanding common stock of World Airways, with the balance publicly traded. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  ("MD&A") - Background" for transactions  effecting  ownership of the
Company.

The Company  desires to take  advantage of the "safe harbor"  provisions of
the Private  Securities  Litigation  Reform Act of 1995 (the "Act").  Therefore,
this report contains  forward  looking  statements that are subject to risks and
uncertainties,  including,  but not  limited to, the  reliance on key  strategic
alliances,  fluctuations in operating results and other risks detailed from time
to time in the Company's  filings with the Securities  and Exchange  Commission.
These  risks  could cause the  Company's  actual  results for 1998 and beyond to
differ  materially from those  expressed in any forward looking  statements made
by, or on behalf of, the Company.

The principal  executive offices of World Airways are located at Washington
Dulles International  Airport in The Hallmark Building,  13873 Park Center Road,
Herndon, Virginia 20171. World Airways' telephone number is (703) 834-9200.
Overview 

World Airways is a global  provider of  long-range  passenger and cargo air
transportation  outsourcing services to major international airlines under fixed
rate contracts.  Airline operations account for 100% of the Company's  operating
revenue and operating  income.  The Company's  passenger and freight  operations
employ 12 wide-body  aircraft which are operated under contracts,  a substantial
portion  of which are with  Pacific  Rim  airlines.  These  contracts  generally
require the Company to supply aircraft,  crew, maintenance and insurance ("ACMI"
or "wet lease"),  while the  Company's  customers  are  responsible  for a large
portion of the other operating  costs,  including fuel.  World Airways'  airline
customers  have  determined  that  outsourcing  a  portion  of  their  wide-body
passenger  and cargo  requirements  can be less  expensive,  and offers  greater
operational  and  financial  flexibility,   than  purchasing  new  aircraft  and
additional  spare parts required for such  aircraft.  World Airways also leads a
contractor  teaming  arrangement  that  is  one  of  the  largest  suppliers  of
commercial aircraft to the United States Air Force's Air Mobility Command ("U.S.
Air Force" or "USAF").

In July 1996,  World  Airways  restructured  its  business to focus on ACMI
contract  services.  As such,  the Company  ceased all  scheduled  passenger and
scheduled  charter services as of October 27, 1996, taking a one-time charge for
estimated loss on disposal of $21.0 million as of June 30, 1996.


     World  Airways'  operating  philosophy  is to  build on its  existing  ACMI
relationships  to achieve a strong  platform for future  growth.  World  Airways
concentrates on ACMI contracts which shift yield,  load factor and cost risks to
the  customer.  The  customer  bears  the  risk of  filling  the  aircraft  with
passengers  or cargo and  assumes a large  portion  of the  operating  expenses,
including fuel. World Airways has elected to emphasize its ACMI business because
the Company  perceives  a number of  opportunities  created by a growing  global
economy,  particularly  growth in second  and third  world  economies  where the
demand  for  airlift  exceeds  capacity.  World  Airways  attempts  to  maximize
profitability  by  combining  its  multi-year  ACMI  contracts  with short term,
higher-yielding ACMI agreements which meet the peak seasonal requirements of its
customers.  The Company  responds  opportunistically  to rapidly changing

 <PAGE>
market  conditions  by  maintaining  a flexible  fleet of  aircraft  that can be
deployed in a variety of configurations.

World  Airways  focuses  its  marketing  efforts on  countries  where rapid
economic  development  drives  demand for the  Company's  services.  The Company
believes that its modern fleet of long-range  medium-density wide-body MD-11 and
DC10-30  aircraft are well suited to these less dense  international  routes and
provide  superior  economics as compared to other  popular  aircraft such as the
Boeing 747 which has greater capacity.

World Airways substantially  increases its potential customer base by being
able to serve both passenger and cargo  customers.  The Company flies passenger,
cargo and passenger/cargo  convertible aircraft that the Company believes permit
the Company to target emerging  opportunities.  World Airways has been providing
safe,  reliable  services for over 50 years.  The Company has flown for the USAF
since 1956, for Malaysian  Airlines System Berhad  ("Malaysian  Airlines") since
1981 and for Garuda Indonesia ("Garuda") since 1973.

Customers 

Over the years,  the Company has had  relationships  with a number of major
international airlines and with the USAF (see "MD&A - Customers"). The Company's
growth strategy is based,  first and foremost,  upon providing the highest level
of service to these customers,  thereby  maintaining and expanding the amount of
business being done through long-term contracts.

The information  regarding major customers and foreign revenue is contained
in Note 15 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.

Information  concerning  the  classification  of  products  within  the air
transportation  industry  comprising  10% or  more  of the  Company's  operating
revenues from  continuing  operations  is presented in the  following  table (in
millions):

                                                 Year Ended December 31,
                                   -----------------------------------------
                                           1997           1996          1995
                                           ----           ----          ----

Flight Operations - Passenger      $      267.3   $       257.6 $      168.0
Flight Operations - Cargo                  39.5            39.3         64.6

COMPETITION AND SEASONALITY

See Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 18 "Unaudited Quarterly Results" of the Company's "Notes to
Financial Statement" in item 8.

AVIATION FUEL

The Company's source of aviation fuel is primarily from major oil companies,
under annual delivery contracts, at often frequented commercial locations, and
from United States military organizations at military bases. The Company's
current fuel purchasing policy consists of the purchase of fuel within seven
days in advance of all flights based on current prices set by individual
suppliers. More than one supplier is under contract at several locations. The
Company purchases no fuel under long-term contracts nor does the Company enter
into futures or fuel swap contracts.

The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant impact on the
Company's operations in recent years because, in general, the Company's ACMI
contracts with its customers limit the Company's exposure to increases in fuel
prices. However, a substantial increase in the price or the unavailability of
aviation fuel could have a material adverse effect on the air transportation
industry in general and the financial condition and results of operations of the
Company.

<PAGE>
REGULATORY MATTERS

Since it was founded in 1948, the Company has been authorized to engage in
commercial air transportation by the DOT or its predecessor agencies. The
Company is currently authorized to engage in the scheduled and charter air
transportation of combination (persons, property and mail) and all-cargo
services between all points in the U.S., its territories and possessions. It
also holds worldwide charter authority for both combination and all-cargo
operations. In addition, the Company is authorized to conduct scheduled
combination services to the foreign points listed in its DOT certificate. The
Company also holds certificates of authority to engage in scheduled all-cargo
services to a limited number of foreign destinations.

The Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including flight operations, equipment, aircraft
noise, ground facilities, dispatch, communications, training weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using specified
equipment. These certificates and specifications are subject to amendment,
suspension, revocation or termination by the FAA. In addition, all of the
Company's aircraft must have and maintain certificates of airworthiness issued
or approved by the FAA. The Company currently holds an FAA air carrier operating
certificate and operations specifications under Part 121 of the Federal Aviation
Regulations. The FAA has the authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed personnel for failure
to comply with regulations promulgated by the FAA and to assess civil penalties
for such failures.

Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft fleet must comply with certain Stage 3 noise restrictions
by certain specified deadlines. All of the Company's aircraft currently meet the
Stage 3 noise reduction requirement, which is currently the most stringent FAA
noise requirement. FAA regulations require compliance with the Traffic Alert and
Collision Avoidance System ("TCAS"), approved airborne windshear warning system
and aging aircraft regulations.

Additional laws and regulations have been proposed from time to time which could
significantly increase the cost of airline operations by imposing additional
requirements or restrictions on operations. Laws and regulations have been
considered from time to time that would prohibit or restrict the ownership and
transfer of airline routes or slots. There is no assurance that laws and
regulations currently enacted or enacted in the future will not adversely affect
the Company's ability to maintain its current level of operating results.

Several aspects of airline operations are subject to regulation or oversight by
Federal agencies other than the DOT or FAA. For instance, labor relations in the
air transportation industry are generally regulated under the Railway Labor Act,
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. In addition, the Company is subject to the jurisdiction
of other governmental entities, including (i) the FCC regarding its use of radio
facilities pursuant to the Federal Communications Act of 1934, as amended, (ii)
the Commerce Department, the Customs Service, the Immigration and Naturalization
Service, and the Animal and Plant Health Inspection Service of the Department of
Agriculture regarding the Company's international operations, (iii) the
Environmental Protection Agency (the "EPA") regarding compliance with standards
for aircraft exhaust emissions and (iv) the Department of Justice regarding
certain merger and acquisition transactions. The EPA regulates operations,
including air carrier operations, which affect the quality of air in the U.S.
The Company has made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke emissions standards issued by the EPA.

The Company's international operations are generally governed by the network of
bilateral civil air transport agreements providing for the exchange of traffic
rights between governments which then select and designate air carriers
authorized to exercise such rights. In the absence of a bilateral agreement,
such international air services are governed by principles of comity and
reciprocity. Bilateral provisions pertaining to the wet lease services in which
the Company is primarily engaged vary considerably depending on the particular
country. Most bilateral agreements into which the U.S. has entered permit either
country to terminate the agreement with one year's


<PAGE>

notification to the other. In the event a bilateral agreement is terminated,
international air service between the affected countries is governed by the
principles of comity and reciprocity.

Certain airports served by the Company are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, the Company has generally been successful
in obtaining the slots it needs in order to conduct planned operations. There
can be no assurance, however, that it will be able to do so in the future
because, among other factors, government policies regulating the distribution of
slots, both in the U.S., and in foreign countries, are subject to change.

Pursuant to federal law, no more than 25% of the voting interest in the Company
may be owned or controlled by foreign citizens. In addition, under existing
precedent and policy, actual control must reside in U.S. citizens. As a matter
of regulatory policy, the DOT has stated that it would not permit aggregate
equity ownership of a domestic air carrier by foreign citizens in an amount in
excess of 49%. The Company fully complies as of the date hereof with these U.S.
citizen ownership requirements.

Due to its participation in CRAF, the Company is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1996 and the next is anticipated to occur in 1998. As a result of
such inspections, the Company has been required to implement measures, such as
the establishment of a crew resource management course, beyond those required by
the DOT, FAA and other government agencies. The USAF may terminate its contract
with the Company if the Company fails to pass such inspection or otherwise fails
to maintain satisfactory performance levels, if the Company loses its
airworthiness certificate or if the aircraft pledged to the contracts lose their
U.S. registry or are leased to unapproved carriers.

The Company believes it is in compliance in all material respects with all
requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of the Company's DOT or FAA
authorizations or certificates could have a material adverse effect upon the
Company. The Company also is subject to state and local laws and regulations at
locations where it operates and the regulations of various local authorities
which operate the airports it serves. Certain airport operations have adopted
local regulations which, among other things, impose curfews and noise abatement
regulations. While the Company believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company.

EMPLOYEES

As of March 2, 1998, the Company had 801 full time employees classified as
follows:

                                                               Number of
Classification                                             Full-Time Employees
--------------                                             -------------------
Management.....................................................     8
Aministrative and Operations..................................    298
Cockpit Crew (including pilots)................................   298
Flight Attendants (active).....................................   197
                                                                  ---
    Total Employees............................................   801
                                                                  ===

The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 1998.
Approximately 37% of the Company's employees are covered under the collective
bargaining agreement. The Company expects to begin negotiations in April 1998
and cannot predict the outcome of the negotiations or their possible impact on
the Company's financial condition and results of operations.

<PAGE>

The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants argued the "scope clause" of the
collective bargaining agreement had been violated by the Company and challenged
the use of foreign flight attendant crews on the Company's flights for Malaysian
Airlines and Garuda Indonesia which has historically been the Company's
operating procedure. The Company is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter denied in 1997 the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. Subsequently, in 1997, the flight attendants challenged and filed
"scope clause" grievances with respect to four separate wet-lease contracts. The
Company and the Teamsters are presently in discussions regarding these
grievances. At this time, however, the Company can give no assurance that these
discussions will be successful and the grievances will not be submitted to
formal arbitration. The Company can provide no assurance as to how the
resolution of this matter will affect the Company's financial condition and
results of operations.

The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract was ratified in February 1996. Fewer than 12 Company employees are
covered by this collective bargaining agreement.

The Company is unable to predict whether any of its employees not currently
represented by a labor union, such as the Company's maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election by such employees of representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial results of the Company.

<PAGE>

ITEM 2.  PROPERTIES

FLIGHT EQUIPMENT

At December 31, 1997, the Company's aggregate operating fleet consisted of 12
leased aircraft as follows (see Note 11 "Long-Term Obligations" of the Company's
"Notes to Financial Statements" in Item 8):

                                   Capacity
Aircraft (a)                 Passenger (seats)(b)    Cargo (Tons)     Total (c)
------------                 --------------------    ------------     ---------

McDonnell Douglas MD-11             409                   --              3
McDonnell Douglas MD-11F             --                   95              1
McDonnell Douglas MD-11CF           410                   90              2
McDonnell Douglas MD-11ER           409                   --              2
McDonnell Douglas DC10-30           350                   --              3
McDonnell Douglas DC10-30CF         380                   65              1
                                                                         --
   Total                                                                 12
                                                                         ==

   Notes
   a)  "F" aircraft are freighters, "CF" are convertible freighters and
       may operate in either passenger or freight configurations. "ER"
       aircraft maintain extended-range capabilities. Aircraft with no
       letter designation are passenger-only aircraft.
   b)  Based on standard operating configurations. Other configurations are
       occasionally used.
  (c)  Lease terms expire between 1998 and 2020 (assuming exercise of all
       lease extensions).

GROUND FACILITIES

The Company leases office space located near Washington Dulles International
Airport which houses its corporate headquarters and substantially all of the
administrative employees of the Company. In addition, the Company leases
additional office and warehouse space in Wilmington, Delaware; Philadelphia,
Pennsylvania; New York, New York; Los Angeles, California; Kuala Lumpur,
Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small offices and
maintenance material storage space are leased at often frequented airports to
provide administrative and maintenance support for commercial and military
contracts.

ITEM 3.  LEGAL PROCEEDINGS

For a description of the Company's current legal proceedings, see Note 17,
"Commitments and Contingencies" of the Company's "Notes to Financial Statements"
in Item 8.

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 1997.

<PAGE>
                                     PART II



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

The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM under the symbol: WLDA. The high and low sales prices of
the Company's common stock, as reported on the Nasdaq National Market, for each
quarter in the last two fiscal years are as follows:

                                                     Common Stock
                                                 ----------------------
                                                 High               Low
                                                 ----               ---
                  1997
                  ----
                  Fourth Quarter                 9 1/2            6 3/8
                  Third Quarter                  9 1/2            5 1/4
                  Second Quarter                 9 3/4            6 1/4
                  First Quarter                 10 1/2            7

                  1996
                  ----
                  Fourth Quarter                11 1/8            6 5/8
                  Third Quarter                  7 3/4            4 3/4
                  Second Quarter                11 1/4            6 3/4
                  First Quarter                 11 1/8            6

The Company has not declared or paid any cash dividends or distributions on its
common stock since the payment of a distribution to WorldCorp in 1992. The
Company currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on its common stock will depend upon the
results of operations, financial condition, capital expenditure plans of the
Company, provisions of certain financing instruments as well as such other
factors as the Board of Directors, in its sole discretion, may consider
relevant.

Under the terms of the shareholders agreement among the Company, WorldCorp,
and MHS, the Company has agreed to declare and distribute all dividends properly
payable,  subject  to the  requirements  of law and  general  overall  financial
prudence.  The Credit  Agreement  with BNY  Financial  Corporation  (as  amended
subsequent to year end, the "Credit  Agreement")  contains  restrictions  on the
Company's  ability to pay dividends or make any distributions of common stock in
excess of 5% of the total aggregate outstanding amount of stock, except that the
Company may make  quarterly  dividends so long as in any six month period,  such
dividends  do not  exceed  50% of the  Company's  aggregate  net  income for the
previous six months.

WorldCorp is subject to the provisions of an indenture, expiring in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under the indenture. However, the indenture is not
applicable to World Airways if WorldCorp's ownership percentage is below 51% of
the issued and outstanding shares of common stock. As a result of the Company's
purchase of its common stock from MHS effective January 23, 1998, WorldCorp
owned approximately 51.2% of the outstanding common stock.

The approximate number of shareholders of record at March 13, 1998 is 71, and
does not include those shareholders who hold shares in street name accounts.

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

                               WORLD AIRWAYS, INC.
                             SELECTED FINANCIAL DATA
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                             --------------------------------------------------------------------
                                                 1997          1996          1995           1994          1993
                                             ------------  ------------  ------------   ------------   ----------
<S>                                          <C>            <C>          <C>             <C>           <C>  
RESULTS OF OPERATIONS:

Operating revenues                           $   309,412    $  309,587   $    242,386    $  180,715    $ 178,736
Operating expenses                               292,555(1)    287,942        226,488       185,916(2)   186,065(3)
Operating income (loss)                           16,857        21,645         15,898       (5,201)      (7,329)
Earnings (loss) from continuing
    operations before income taxes                12,230        19,032         14,748       (9,027)      (8,985)
Earnings (loss) from continuing
    operations                                    11,967        18,353         14,146       (9,001)      (9,048)
Discontinued operations                            (515)      (32,375)        (5,250)            --           --
Net earnings (loss)                               11,452      (14,022)          8,896       (9,001)      (9,048)
Cash dividends                                        --            --             --            --           --
Basic earnings (loss) per common share(5):
    Continuing operations                    $      1.16   $      1.55   $       1.35    $   (0.92)    $  (1.02)
    Discontinued operations                       (0.05)        (2.74)         (0.50)            --           --
    Net earnings (loss)                             1.11        (1.19)           0.85        (0.92)       (1.02)
    Weighted average common stock
       outstanding(4)                             10,302        11,806         10,477         9,812        8,874
Diluted earnings (loss) per common share(5):
    Continuing operations                    $      1.09   $      1.55   $       1.34    $        *    $       *
    Discontinued operations                       (0.05)        (2.74)         (0.50)             *            *
    Net earnings (loss)                             1.04        (1.19)           0.84             *            *
Weighted average common stock and
    common equivalent shares outstanding(4)       12,279        11,806         10,572         9,939        9,000

FINANCIAL POSITION:

Cash and restricted short-term
    investments                              $    25,887   $     8,075   $     26,180    $    4,722    $  11,746
Total assets                                     149,148       127,524        130,695        78,051       88,512
Notes payable and long-term obligations
    including current maturities                  88,966        50,538         37,112        33,826       42,256
Common stockholders' equity (deficit)            (4,771)         8,362         30,340       (1,367)      (7,756)
Dividends                                             --            --             --            --           --

</TABLE>

(1) Operating expenses in 1997 include a $0.9 million reversal of aircraft costs
    incurred in 1996 relating to reimbursements for disputed spare engine lease
    charges and a $1.0 million reversal of accrued maintenance expense in excess
    of the cost of an overhaul of a DC-10 aircraft.
(2) Operating expenses in 1994 include a $4.2 million reversal of excess accrued
    maintenance reserves associated with the expiration of three DC10-30
    aircraft leases during 1994.
(3) Operating expenses in 1993 include $2.3 million of termination fees related
    to the early return of three DC10-30 aircraft.
(4) All share and per share data for the periods presented have been restated 
    to reflect the 1-for-88, 737 reverse stock split which was effectuated in 
    February 1994.
(5) Earnings per share for the periods presented have been calculated in
    accordance with Financial Accounting Standards Board's Statement of
    Financial Accounting Standard No. 128, Earnings Per Share.

*  Diluted earnings per share are anti-dilutive.
<PAGE>

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

OVERVIEW

BACKGROUND

Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below relates to the operations of World Airways, Inc.
("World Airways" or "the Company") as reflected in its financial statements.

The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore, this
report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the reliance on key strategic
alliances, fluctuations in operating results and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
These risks could cause the Company's actual results for 1998 and beyond to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.

World Airways was organized in March 1948 and became a wholly owned subsidiary
of WorldCorp, Inc. ("WorldCorp") in a holding company reorganization in 1987. In
February 1994, pursuant to an October 1993 agreement, WorldCorp sold 24.9% of
its ownership to MHS Berhad ("MHS"), a Malaysian aviation company. Effective
December 31, 1994, WorldCorp increased its ownership in the Company to 80.1%
through the purchase of 5% of World Airways common stock held by MHS. In October
1995, the Company completed an initial public offering in which 2,000,000 shares
were issued and sold by the Company and 900,000 shares were sold by WorldCorp.
On September 18, 1997, the Company purchased 3,227,000 shares of its common
stock from WorldCorp. At December 31, 1997, WorldCorp and MHS owned 46.3% and
24.9%, respectively, of the outstanding common stock of World Airways. The
balance was publicly traded. Effective January 23, 1998, the Company purchased
773,000 shares of its common stock from MHS in accordance with the shareholders
agreement (see Note 1 of "Notes to Financial Statements" in Item 8). Therefore,
effective January 23, 1998, WorldCorp and MHS own 51.2% and 16.8%, respectively,
of the outstanding common stock of World Airways, with the balance publicly
traded.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures (the "Debentures") due
in 2004 (the "Offering"). The Debentures were subsequently registered with the
Securities and Exchange Commission. The Debentures are unsecured obligations,
convertible into shares of the Company's common stock at $8.90 per share,
subject to adjustment in certain events, and subordinated to all present and 
future senior indebtedness of the Company. In the event of a change in control
of the Company, as defined, the holders of the Debentures could require the 
Company to repurchase the outstanding Debentures.  The Debentures are not
redeemable by the Company prior to August 26, 2000. The Company's intended use
of net proceeds of the Offering was to repurchase approximately 4.0 million
shares of its common stock, repay certain indebtedness, increase working capital
and for general corporate purposes. After completion of the Offering, the
Company repaid approximately $3.8 million as full settlement of an outstanding
spare parts loan. In addition, failure by the Company to repurchase at least 
4.0 million shares of common stock within 150 days after the sale of the 
Debentures would constitute a repurchase event whereby each holder of the
Debentures would have the right, at the holder's option, to require the Company
to repurchase such holder's Debentures at 100% of their principal amount, plus
accrued interest. As discussed below, the Company fulfilled its 4.0 million
share repurchase requirement in accordance with the terms stipulated in the
Offering.

In 1996, World Airways instituted a program to purchase up to one million shares
of its publicly-traded Common Stock pursuant to open market transactions. As of
March 6, 1998, World Airways had purchased 770,000 shares of Common Stock at an
aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.

In connection with the above-mentioned Offering, the Company and WorldCorp, Inc.
("WorldCorp") entered into an agreement (the "Agreement") for the purchase by
World Airways of up to 4.0 million shares of common stock owned by WorldCorp at
a purchase price of $7.65 per share. On September 18, 1997, the Company
purchased 3,227,000 shares of its common stock from WorldCorp for approximately
$24.7 million. MHS has certain rights

<PAGE>
under a shareholders agreement, dated as of February 3, 1994, as amended, among
WorldCorp, MHS and the Company. This agreement includes a provision that
provides that if WorldCorp were to dispose of its holdings in the Company with
the result that WorldCorp's ownership interest in the Company falls below 51% of
the outstanding shares of common stock, then MHS may either sell its shares to a
third party or require WorldCorp to sell a pro rata number of shares held by MHS
to the party purchasing WorldCorp's Company shares. Therefore, as a result of
the purchase of 3,227,000 shares of common stock by World Airways from
WorldCorp, MHS had the right to sell, and accordingly sold, 773,000 shares of
common stock to World Airways for approximately $5.9 million, effective January
23, 1998.

GENERAL

World Airways is a global provider of long-range passenger and cargo air
transportation outsourcing services to major international airlines under fixed
rate contracts. The Company's passenger and freight operations employ 12
wide-body aircraft which are currently operated under contracts, a substantial
portion of which are with Pacific Rim airlines. These contracts generally
require the Company to supply aircraft, crew, maintenance and insurance ("ACMI"
or "wet lease"), while the Company's customers are responsible for a large
portion of the other operating expenses, including fuel. World Airways' airline
customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offers greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is one of the largest suppliers of
commercial airlift services to the United States Air Force's Air Mobility
Command ("U.S. Air Force" or "USAF").

In July 1996, World Airways restructured its business to focus on ACMI contract
services. As such, the Company ceased all scheduled passenger and scheduled
charter services as of October 27, 1996, taking a one-time charge of $21.0
million as of June 30, 1996 (see "Discontinuation of Scheduled Service
Operations").

The Company generally charges customers on a block hour basis rather than a per
seat or per pound basis. "Block hours" are defined as the elapsed time computed
from the moment the aircraft first moves under its own power at the point of
origin to the time it comes to rest at its final destination. The Company
provides most services under two types of contracts: wet lease contracts and
full service contracts. Under wet lease contracts, the Company provides the
aircraft, cockpit crew, maintenance and insurance and the customer provides all
other operating services and bears all other operating expenses, including fuel
and fuel servicing, marketing costs associated with obtaining passengers and/or
cargo, airport passenger and cargo handling fees, landing fees, cabin crews,
catering, ground handling and aircraft push-back and de-icing services. Under
full service contracts, the Company provides fuel, catering, ground handling,
cabin crew and all related support services as well. Accordingly, the Company
generally charges a lower rate per block hour for wet lease contracts than full
service contracts, although it does not necessarily earn a lower profit. Because
of shifts in the mix between full service contracts and wet lease contracts,
fluctuations in revenues are not necessarily indicative of volume trends or
profitability. It is important, therefore, to measure the Company's business
volume by block hours flown and to measure profitability by operating income per
block hour.

The Company's operating philosophy is to build on its existing ACMI
relationships to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts which shift yield, load factor and certain cost
risks to the customer. The customer bears the risk of filling the aircraft with
passengers or cargo and assumes a portion of the operating expenses, including
fuel. World Airways has elected to emphasize its ACMI business because the
Company perceives a number of opportunities created by a growing global economy,
particularly growth in second and third world economies where the demand for
airlift exceeds capacity. World Airways attempts to maximize profitability by
combining its multi-year ACMI contracts with short term, higher-yielding ACMI
agreements which meet the peak seasonal requirements of its customers. The
Company responds opportunistically to rapidly changing market conditions by
maintaining a flexible fleet of aircraft that can be deployed in a variety of
configurations.

<PAGE>
As noted  above,  the Company has  focused  its  business on ACMI  contract
services.  As is common in the air  transportation  industry,  the  Company  has
relatively  high fixed aircraft costs.  World Airways  operates a fleet of eight
MD-11 and four DC10-30 wide-body  aircraft,  and while the Company believes that
the lease rates on its MD-11  aircraft are favorable  relative to lease rates of
other MD-11  operators,  the  Company's  MD-11  aircraft have higher lease costs
(although lower operating costs) than its DC10-30 aircraft. Therefore, achieving
high average daily utilization of its aircraft (particularly its MD-11 aircraft)
at attractive yields are important factors to the Company's  financial  results.
In addition to fixed aircraft  costs, a portion of the Company's labor costs are
fixed due to  monthly  minimum  guarantees  to  cockpit  crewmembers  and flight
attendants.   Factors  that  affect  the  Company's   ability  to  achieve  high
utilization  in its ACMI  business  include the  compatibility  of the Company's
aircraft with customer needs and the Company's  ability to react on short notice
to customer  requirements  (which can be unpredictable due to changes in traffic
rights,  aircraft  delivery  schedules and aircraft  maintenance  requirements).
Other  factors that affect the ACMI  business  include  particular  domestic and
foreign regulatory requirements, as well as a trend toward aviation deregulation
which is  increasing  the number of alliances  and code share  arrangements. 

SIGNIFICANT CUSTOMER RELATIONSHIPS

In 1997, the Company's business relied heavily on its contracts with Malaysian
Airline System Berhad ("Malaysian Airlines"), Philippine Airlines, Inc.
("Philippine Airlines"), P.T. Garuda Indonesia ("Garuda") and the U.S. Air
Force. For the year ended December 31, 1997, these customers provided
approximately 21%, 31%, 10% and 25%, respectively, of the Company's revenues and
23%, 34%, 11% and 16%, respectively, of total block hours. In 1996, these
customers provided approximately 34%, 15%, 13%, and 25%, respectively, of the
Company's revenues and 42%, 17%, 14%, and 17%, respectively, of total block
hours flown from continuing operations.

Malaysian Airlines. World Airways has provided wet lease services to Malaysian
Airlines since 1981, providing wet lease services for Malaysian Airlines'
scheduled passenger and cargo operations as well as transporting passengers for
the annual Hadj pilgrimage. MHS, which owned 16.8% of the Company as of January
23, 1998, also owns 28% of Malaysian Airlines. The Company also entered into a
32-month agreement for year-round operations (including the Hadj) with Malaysian
Airlines whereby the Company is providing two passenger aircraft with cockpit
crews, maintenance and insurance to Malaysian Airlines' newly-formed charter
division through May 1999. However, the Company agreed to a five month reduction
in the utilization of one aircraft during 1997, although the aircraft was
redeployed in other activity. Malaysian Airlines has not informed the Company
of any reductions for 1998. The Company provided three aircraft for 1997 Hadj
operations. MAS  received  notice  from the  Malaysian  Hadj  Board  that MAS 
would not participate  in the 1998 Hadj  pilgrimage.  As a  result,  MAS
entered  into an agreement on behalf of the Company for the Company to provide
two DC-10 aircraft to fly in the 1998 Indian Hadj.

The Company has a long-term contract to operate three MD-11 cargo aircraft for
Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by
the parties, World Airways redeployed two cargo aircraft, which had been
operating under these contracts, into another contract which ended in February
1998. The Company and Malaysian Airlines are currently discussing the 
redeployment of these aircraft back into Malaysian Airlines' operations during 
1998 in order to meet the contracts' original obligations. The Company can 
provide no assurances, however, that the Company will, in fact, be able to do 
so.

Malaysian Airlines is subject to the financial difficulties associated with the
adverse economic conditions in Malaysia and the Asia Pacific Region, but it has
remained current with its payments for committed block hour minimums provided in
the contracts.  Failure by Malaysian Airlines to meet its aircraft lease 
obligations, if not offset by other business, would have a material adverse
effect on the financial condition, cash flows and results of operations of the
Company.

<PAGE>
Garuda. The Company has flown for Garuda periodically since 1973 and yearly
since 1988. Since 1988, the Company has been one of the largest providers of
passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj
pilgrimage is the world's largest due to the size of Indonesia's Islamic
population. In 1997, approximately 40,000 of the 200,000 Indonesians who
traveled to Jeddah for the Hadj pilgrimage flew on the Company's aircraft. The
Company has reached an agreement with Garuda to operate six aircraft during the
1998 pilgrimage.

Philippine Airlines. The Company had agreements with Philippine Airlines to
operate four passenger aircraft until November 1997. As a result of the economic
distress experienced in the Philippines, the Company negotiated to terminate the
agreements on two of the aircraft effective in August 1997, and received monthly
termination  payments  totaling  $3.0  million  through the  original end of the
agreements  in November  1997.  In addition,  the contracts on the remaining two
aircraft  were  extended  until  February  1998 and the per block hour rates for
those two aircraft were reduced  slightly.  The two aircraft  which were removed
from Philippine Airlines service were redeployed by the Company under agreements
with other customers.  The contract with Philippine Airlines expired in February
1998.

U.S. Air Force. The Company has provided international air transportation to the
U.S. Air Force since 1956. In exchange for requiring pledges of aircraft to the
Civil Reserve Air Fleet ("CRAF") for use in times of national emergency, the
U.S. Air Force grants awards to CRAF participants for peacetime transportation
of personnel and cargo. Although the Company's agreements with the USAF provide
for full service contracts with certain minimum performance requirements, the
Company has risks similar to an ACMI agreement because the USAF agreements are
cost-plus contracts at attractive rates. The overall downsizing of the U.S.
military places a premium on the mobility of the U.S. armed forces. This is
reflected in the stable size over the past several years of the USAF's
procurement of commercial airlift services. It is uncertain, however, what
impact, if any, the instability within the Middle East will have upon the
Company's future flight operations.

The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. The Company utilizes such teaming arrangements to maximize
the value of potential awards. The Company leads a contractor teaming
arrangement that enjoys a large market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, the Company's portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $73.4 million for the
government's 1997-98 fiscal year. The current annual contract commenced on
October 1, 1997 and expires on September 30, 1998. World Airways, however,
cannot determine how future cuts in military spending may affect future
operations with the U.S. Air Force.

VASP.  The Company leased a cargo plane to Viacao Aereo Sao Paulo ("VASP"),
a Brazilian airline, under an ACMI contract which began in June 1997 and
terminated prior to December 31, 1997.  World Airways also during 1997 entered
into a Memorandum of Agreement with VASP for the lease of two MD-11 passenger
aircraft for a six-month term with a six-month renewal option.  This contract
was not finalized in 1997 and the Company currently is not contracting with VASP
for any aircraft. The aircraft intended for VASP have been redeployed to other
customers of the Company.  

Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements. See Note 2 of the Company's "Notes to Financial Statement" in
Item 8.

As a result of these and other contracts, the Company had an overall contract
backlog at December 31, 1997 of $305.8 million, compared to $468.0 million at
December 31, 1996. Approximately $199.4 million of the backlog relates to
operations during 1998. The Company's backlog for each contract is determined by

<PAGE>

multiplying the minimum number of block hours guaranteed under the applicable
contract by the specified hourly rate under such contract. Approximately 57% of
the backlog relates to its contracts with Malaysian Airlines, included in which
are the revenues associated with the three cargo aircraft for Malaysian
Airlines (see "Significant Customer Relationships - Malaysian Airlines" for
further discussion of these contracts). Consistent with prior years, the Company
has substantial uncontracted capacity in the third and fourth quarters of
1998 and beyond. Although there can be no assurance that it will be able to 
secure additional business to reduce this excess capacity, the Company is
actively seeking customers for 1998 and beyond, and has historically been
successful in obtaining new customers.  The Company's financial results and
financial condition would be affected adversely if the Company is unable to
secure additional business to reduce this excess capacity.

The information regarding major customers and foreign revenue is contained in
Note 15 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.

COMPETITION

The market for  outsourcing air passenger and cargo ACMI services is highly
competitive.  Certain of the passenger and cargo air carriers  against which the
Company  competes possess  substantially  greater  financial  resources and more
extensive  facilities  and  equipment  than those  which are now, or will in the
foreseeable future become,  available to the Company.  The Company believes that
the most important  bases for competition in the ACMI  outsourcing  business are
the age of the aircraft fleet,  the passenger,  payload and cubic  capacities of
the aircraft,  and the price,  flexibility,  quality and  reliability of the air
transportation  service  provided.  Competitors in the ACMI  outsourcing  market
include  MartinAir  Holland,  Tower  Air and  American  TransAir  and  all-cargo
carriers,  such as Atlas Air, Gemini Air Cargo,  Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled  passenger carriers which have substantial belly
capacity.  The  ability of the  Company to  continue  to grow  depends  upon its
success in convincing major international airlines that outsourcing some portion
of their air  passenger  and cargo  business  remains more  cost-effective  than
undertaking  passenger or cargo  operations with their own incremental  capacity
and resources.

The allocation of military air transportation contracts by the USAF is based
upon the number and type of aircraft a carrier, alone or through a teaming
arrangement, makes available for use in times of national emergencies. The
formation of competing teaming arrangements comprised of larger partners than
those sponsored by the Company, an increase by other air carriers in their
commitment of aircraft to the emergency program, or the withdrawal of the
Company's current partners, could adversely affect the size of the USAF
contracts, if any, which are awarded to the Company in future years.

CYCLICAL NATURE OF AIR CARRIER BUSINESS

The Company operates in a challenging business environment. The air
transportation industry is highly sensitive to general economic conditions.
Since a substantial portion of passenger airline travel (both business and
personal) is discretionary, the industry tends to experience severe adverse
financial results during general economic downturns and can be adversely
affected by unexpected global political developments. The financial results of
air cargo carriers are also adversely affected by general economic downturns due
to the reduced demand for air cargo transportation. In 1993 and 1994, the
combination of a generally weak global economy and the depressed state of the
air transportation industry adversely affected the Company's operating
performance.

SEASONALITY

Historically, the Company's business has been significantly affected by seasonal
factors. During the first quarter, the Company typically experiences lower
levels of utilization and yields due to lower demand for passenger and cargo
services relative to other times of the year. The Company experiences higher
levels of utilization and yields in the second quarter, principally due to peak
demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1998, the Company's flight operations associated with the Hadj

<PAGE>

pilgrimage will occur from February 28 to May 12. Because the Islamic calendar
is a lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12
days earlier each year relative to the Western (Gregorian) calendar. As a
result, revenues resulting from future Hadj pilgrimage contracts will continue
to shift from the second quarter to the first quarter over the next several
years.

GEOGRAPHIC CONCENTRATION

The Company derives a significant percentage of its revenues and block hours
from its operations in the Pacific Rim region. Any further economic decline or
any military or political disturbance in this area may interfere with the
Company's ability to provide service in this area. In 1997, the affects of the
adverse economic conditions in Malaysia and Indonesia and other countries in the
Asia Pacific Region included a national liquidity crisis, significant
depreciation in the value of the ringgit and rupiah, higher domestic interest
rates, reduced opportunity for refinancing or refunding of maturing debts, and a
general reduction in spending throughout the region. These conditions and
similar conditions in other countries in the Asia Pacific Region could have a
material adverse effect on the operations of Malaysian Airlines and Garuda
Indonesia, and therefore on the operations of the Company. However, management
also believes these conditions could provide new opportunities to wet lease
aircraft to airlines customers, particularly those who have deferred or canceled
new aircraft orders but are still in need of providing additional airlift.

UTILIZATION OF AIRCRAFT

Due to the large capital costs of leasing and maintaining World Airways'
aircraft, each of World Airways' aircraft must have high utilization at
attractive rates in order for World Airways to operate profitably. Although
World Airways' strategy is to enter into long-term contracts with its customers,
the terms of World Airways' existing customer contracts are substantially
shorter than the terms of World Airways' lease obligations with respect to the
aircraft. As mentioned above, a significant portion of World Airways' contract
backlog at December 31, 1997, relates to its multi-year contracts with Malaysian
Airlines which is subject to the financial difficulties associated with the
adverse economic conditions in Malaysia and the Asia Pacific Region. In
addition, the Company has substantial uncontracted capacity in the third
and fourth quarters of 1998 and beyond. There can be no assurance that World
Airways will be able to enter into additional contracts with new or existing
customers or that it will be able to obtain enough additional business to fully
utilize each aircraft. World Airways' financial position and results of
operations could be materially adversely affected even by relatively brief
periods of low aircraft utilization and yields. In order to maximize aircraft
utilization, World Airways does not intend to acquire new aircraft unless such
aircraft would be necessary to service existing needs or World Airways has
obtained additional ACMI contracts for the aircraft to service. World Airways is
seeking to obtain additional ACMI contracts with new and existing customers, to
which such new aircraft would be dedicated when placed in service, but World
Airways can provide no assurance that it will obtain new ACMI contracts or that
existing ACMI contracts will be renewed or extended.

AIRCRAFT FLEET

World Airways' strategy is to attempt to ensure that each of the aircraft in its
fleet is to a large extent contractually dedicated by World Airways to the
service of one or more customers, with limited aircraft available to provide
back-up capability. Therefore, in the event the use of one or more of World
Airways' aircraft was lost, World Airways might have difficulty fulfilling its
obligations under one or more of these contracts, if it were unable to obtain
substitute aircraft. On October 24, 1997, one of the Company's MD-11 aircraft
was damaged upon landing. The aircraft was out of service for approximately two
and a half months while certain repairs were made. The Company expects insurance
to cover repair and certain related costs, but the Company's loss of revenues
that would have been generated by the aircraft's use had an adverse effect on
the Company's financial condition and results of operations for the fourth
quarter of 1997.

<PAGE>

MAINTENANCE

Engine maintenance accounts for most of the Company's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. The Company outsources major airframe maintenance and power plant
work to several suppliers. The Company has a 10-year contract expiring in August
2003 with United Technologies Corporation's Pratt & Whitney Group for all
off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under
this contract, the manufacturer agreed to provide such maintenance services at a
cost not to exceed specified rates per hour during the term of the contract. The
specified rates per hour are subject to annual escalation, increasing
substantially in 1998. Accordingly, while the Company believes the terms of this
agreement have resulted in lower engine maintenance costs than it otherwise
would incur, engine maintenance costs will increase substantially during the
last five years of the agreement. The Company began to accrue these increased
expenses in 1997 and such expenses will continue to increase during the
remainder of the term of the contract as the Company's aircraft fleet ages.

OPERATING LOSSES

While the Company generated operating income each year from 1987 through 1992
and in 1995, it sustained operating losses in 1993 and 1994 of $7.3 million and
$5.2 million, respectively, and net losses of $9.0 million in each of these two
years. For the year ended December 31, 1996, the Company incurred a net loss of
$14.0 million, which resulted from operating losses incurred in the Company's
scheduled service operations, which were discontinued in 1996, and the related
estimated loss on disposal. Earnings from continuing operations were $18.4
million for 1996. While the Company generated operating income for the year
ended December 31, 1997 of $16.9 million, there can be no assurance that the
Company will be able to continue generating operating income for 1998 or future
years.

CONTROL BY WORLDCORP; POTENTIAL CONFLICTS OF INTEREST

As of  January  23,  1998,  WorldCorp  owned  approximately  51.2%  of  the
outstanding World Airways common stock. WorldCorp is a holding company that owns
positions in two companies:  InteliData  and World Airways.  WorldCorp is highly
leveraged and therefore  requires  substantial  funds to cover debt service each
year. As a holding company,  all of WorldCorp's  funds are generated through its
subsidiaries,  neither of which is expected to pay dividends in the  foreseeable
future. As a result of WorldCorp's cash requirements, it may be required to sell
additional  shares of common stock, and such sales, or the threat of such sales,
could have a material  adverse  effect on the market price of the common  stock.
Except as limited by contractual  arrangements with MHS,  WorldCorp also is in a
position  to control  the outcome of many  issues  submitted  to World  Airways'
stockholders,  including  the  election  of  all  of  World  Airways'  Board  of
Directors,   adoption  of   amendments   to  World   Airways'   Certificate   of
Incorporation, and approval of mergers.

In connection with a $15.0 million loan from a commercial bank (the "Bank
Loan"), WorldCorp had pledged all of the shares of common stock beneficially
owned by WorldCorp (the "WorldCorp Shares"). The Bank Loan was scheduled to
mature on September 29, 1997. On September 18, 1997, the Company purchased
3,227,000 of its common stock from WorldCorp for approximately $24.7 million in
cash. WorldCorp used a portion of these proceeds to retire the Bank Loan prior
to its maturity.

Subsequent to year-end,  the Company loaned WorldCorp $1.75 million,  which
was used by WorldCorp to pay debt obligations. The loan is collateralized by one
million  shares of the Company's  stock owned by WorldCorp and bears interest at
prime plus 2.5%.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Total block hours decreased 6,745 hours, or 13%, to 43,780 hours in 1997 from
50,525 hours in 1996, with an average of 12.9 available aircraft per day in 1997
compared to 14.1 in 1996. Average daily utilization (block hours flown per day
per aircraft) decreased to 9.3 hours in 1997 from 9.8 hours in 1996. In 1997,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1997, wet lease
contracts accounted for 81% of total block hours, an increase from 68% in 1996.
<PAGE>

Continuing Operations

Block hours from continuing operations decreased slightly to 43,780 hours in
1997 from 43,897 hours in 1996.

Operating Revenues. Revenues from flight operations increased $9.9 million, or
3%, in 1997 to $306.8 million from $296.9 million in 1996. Revenues in 1997
included approximately $11.2 million related to minimum guarantee payments
received from Malaysian Airlines for flying levels which did not meet the
minimum monthly levels specified in the contracts, and $3.0 million related to
contract modification payments received from Philippine Airlines, for which the
Company incurred no related variable costs.

Operating Expenses. Total operating expenses increased $4.7 million, or 2%,
in 1997 to $292.6 million from $287.9 million in 1996.

Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft costs, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $2.7 million, or 4%, in
1997 to $71.8 million from $69.1 million in 1996. This increase resulted
primarily from higher crew costs relating to an accrual for the profit sharing
bonus plan, an increase in wage rates including an increase in the guarantee
payment, and an increase in training costs relating to crewmember attrition,
partially offset by the shift in the mix of business from full service to wet
lease operations. Flight attendant costs remained consistent despite the shift
to wet lease operations as a result of flight attendants receiving minimum
guarantee payments.

Maintenance expenses increased $5.5 million, or 9%, in 1997 to $66.0 million
from $60.5 million in 1996. This increase resulted primarily from the increase
in the number of aircraft dedicated to the Company's continuing
operations and the integration of additional aircraft into the fleet during
1996. In addition, the Company experienced an increase in costs associated with
the MD-11 aircraft and related engines as a result of certain manufacturer
guarantees and warranties which began to expire in 1995 and will fully expire by
1998. The Company expects its maintenance expense to increase further in 1998
due to escalations in the specified rates per hour under the Company's
maintenance agreement. The increase was partially offset by a reversal in 1997
of $1.0 million of accrued maintenance expense in excess of the cost of an
overhaul of a DC-10 aircraft.

Aircraft costs increased $6.2 million, or 7%, in 1997 to $91.4 million from
$85.2 million in 1996. This increase resulted from the increase in the number of
aircraft dedicated to the Company's continuing operations, primarily due to the
lease of two MD-11ER aircraft in March 1996, and the lease of additional spare
engines necessary to maintain the expanded fleet. This increase was partially
offset by the reversal of approximately $0.9 million in lease costs, which had
been recorded in 1996, as a result of a settlement with the engine manufacturer
for reimbursements related to disputed spare engine lease charges.

Fuel expenses decreased $1.7 million, or 9%, in 1997 to $17.6 million from $19.3
million in 1996. This decrease is due primarily to the shift from full service
to wet lease operations where the Company is not responsible for fuel costs.
This decrease was partially offset by an increase in price per gallon.

Promotions, sales and commissions increased $1.4 million, or 17%, in 1997 to
$9.6 million from $8.2 million in 1996. This increase resulted primarily from an
increase in commissions related to increased flying during 1997 under the
Philippine Airlines contract.

<PAGE>

Depreciation and amortization increased $0.7 million, or 9%, in 1997 to $8.7
million from $8.0 million in 1996. This increase resulted primarily from
depreciation on the increased levels of spare parts required to support the
additional MD-11 aircraft described above, partially offset by a decrease in the
amortization of certain intangible assets.

General and administrative expenses increased $0.2 million, or 1%, in 1997 to
$24.9 million from $24.7 million in 1996. This increase was primarily due to the
hiring of additional administrative personnel, beginning in the second quarter
of 1996, necessary to support the growth in the Company's core business and
related marketing efforts and an increase in property tax accruals. This
increase was partially offset by a reduction in certain legal and professional
fees.

Interest expense increased $1.9 million, or 54%, in 1997 to $5.4 million from
$3.5 million in 1996. This increase resulted primarily from the issuance of
$50.0 million of 8% senior subordinated debentures on August 26, 1997.

Discontinued Operations

The Company commenced service between Tel Aviv and New York in July 1995. In the
first quarter of 1996, the Company generated $4.2 million in losses related to
these operations. In the second quarter of 1996, the Company expanded its
scheduled service operations with service between the United States and South
Africa and introduced scheduled charter operations between the United States and
various destinations within Europe. As the Company was unable to operate these
scheduled service operations profitably, in July 1996, the Company announced its
decision to exit its scheduled service operations by October 1996 and focus its
operations on its core wet lease operations. Consistent with this decision,
World Airways ceased all scheduled operations as of October 27, 1996. As a
result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results were
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) was recorded as of June 30,
1996. The Company recognized an additional $0.5 million of expense in the fourth
quarter of 1997 and believes that substantially all the costs relating to the
disposal have been recorded as of December 31, 1997. The Company is subject to
claims arising as a result of the discontinuance of its scheduled service
operations, but the Company believes it has substantial defenses to these
actions.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996 from
37,342 hours in 1995, with an average of 14.1 available aircraft per day in 1996
compared to 10.3 in 1995. Average daily utilization (block hours flown per day
per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In 1996,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1996, wet lease
contracts accounted for 68% of total block hours, consistent with 70% in 1995.
Total operating revenues increased $67.2 million, or 28%, to $309.6 million in
1996 from $242.4 million in 1995.

Continuing Operations

Block hours from continuing operations increased 8,269 hours, or 23%, to 43,897
hours in 1996 from 35,628 hours in 1995.

Operating Revenues. Revenues from flight operations increased $64.3 million, or
28%, to $296.9 million in 1996 from $232.6 million in 1995. This increase was
primarily attributable to an increase in military flying and an increase in
revenues generated from its 1996 Hadj operations and services to certain
international carriers, partially offset by a decrease in cargo operations
resulting from a shift in the mix of business during 1996.
<PAGE>

Operating Expenses.  Total operating expenses increased $61.4 million, or 27%,
in 1996 to $287.9 million from $226.5 million in 1995.

Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $5.5 million, or 9%, in
1996 to $69.1 million from $63.6 million in 1995. This increase resulted
primarily from an increase in block hours flown and higher crew costs and
up-front training expenses in connection with the integration of additional
aircraft into the fleet. These increases were partially offset by a decrease in
accrued profit sharing expenses. In 1995, the Company accrued profit sharing
expenses as a result of earnings experienced during that period. No such accrual
was necessary in 1996 as a result of losses from the discontinuation of
scheduled service operations.

Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5 million
from $41.8 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown. In addition, the Company experienced an increase in costs
associated with the MD-11 aircraft and related engines as a result of certain
manufacturer guarantees and warranties which began to expire in 1995 and will
fully expire by 1998.

Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million from
$67.3 million in 1995. This increase was primarily due to the lease of two
MD-11ER aircraft in the first quarter of 1996 and the lease of incremental
DC10-30 aircraft which began in the second and fourth quarters of 1995 and the
first quarter of 1996, partially offset by the return of two DC10-30 aircraft to
the lessor in the third quarter of 1995.

Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million from
$16.7 million in 1995. This increase is due primarily to an increase in fuel
utilized in connection with its military operations and a slight increase in
price per gallon.

Promotions, sales and commissions increased $4.6 million in 1996 to $8.2 million
from $3.6 million in 1995. This increase resulted primarily from commissions
paid in connection with the new Philippine Airlines contract and an increase in
teaming arrangement commissions associated with the larger fixed-award contract
received from the U.S. Air Force beginning October 1995.

Depreciation and amortization increased $1.9 million, or 31%, in 1996 to $8.0
million from $6.1 million in 1995. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above.

General and administrative expenses increased $6.5 million, or 36%, in 1996 to
$24.7 million from $18.2 million in 1995. This increase was primarily due to the
hiring of additional administrative personnel necessary to support the growth in
the Company's core business and an increase in certain legal and professional
fees.

Discontinued Operations

The Company  commenced  service between Tel Aviv and New York in July 1995. In
the first  quarter of 1996,  the  Company  generated  $4.2  million in losses
related to these operations. In the second quarter of 1996, the Company expanded
its  scheduled  service  operations  with service  between the United States and
South Africa and  introduced  scheduled  charter  operations  between the United
States and  various  destinations  within  Europe.  As the Company was unable to
operate these scheduled service operations profitably, in July 1996, the Company
announced its decision to exit its scheduled service  operations by October 1996
and focus its operations on its core wet lease operations.  Consistent with this
decision,  World Airways ceased all scheduled operations as of October 27, 1996.
As a result,  the  Company's  scheduled  service  operations  were  reflected as
discontinued  operations  as of June 30,  1996,  and prior  period  results were
restated to reflect  scheduled  service  operations as discontinued  operations.
Loss from discontinued  operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition,  an estimated loss on
disposal of $21.0 million (net of income tax effect) was recorded as of June 30,
1996.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company is highly leveraged. The Company incurred substantial debt and lease
commitments during the past four years in connection with its acquisition of
MD-11 aircraft and related spare parts. In addition, the Company issued $50.0
million of convertible debentures in August 1997, as discussed below. As of
December 31, 1997, the Company had outstanding long-term debt and capital leases
of $75.1 million, and notes payable and current maturities of long-term
obligations, including debt service costs, of $20.6 million. In addition, the
Company has significant future long-term obligations under aircraft lease
obligations relating to its aircraft.

The Company has historically financed its working capital and capital
expenditure requirements out of cash flow from operating activities, public and
private sales of its common stock, secured borrowings, and other financings from
banks and other lenders. The degree to which the Company is leveraged could have
important consequences to holders of common stock, including the following: (i)
World Airways' ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be limited;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness; (iii)
World Airways' degree of leverage and related debt service obligations, as well
as its obligations under operating leases for aircraft, may make it more
vulnerable than some of its competitors in a prolonged economic downturn; (iv)
World Airways' ability to meet its payment obligations under existing and future
indebtedness, capital leases and operating leases may be limited; and (v) World
Airways' financial position may restrict its ability to pursue new business
opportunities and limit its flexibility in responding to changing business
conditions.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures due in 2004, which were
subsequently  registered  with  the  Securities  and  Exchange  Commission.  The
Debentures are unsecured  obligations,  convertible into shares of the Company's
common stock at $8.90 per share,  subject to adjustment in certain  events,  and
subordinated to all present and future senior  indebtedness  of the Company.  In
the event of a change in control of the Company, as defined,  the holders of the
Debentures  could require the Company to repurchase the outstanding  Debentures.
The  Debentures  are not redeemable by the Company prior to August 26, 2000. The
Company's  intended use of the net proceeds was to repurchase  approximately 4.0
million shares of its common stock, repay certain indebtedness, increase working
capital and for general  corporate  purposes.  After completion of the Offering,
the  Company  repaid  approximately  $3.8  million  as  full  settlement  of  an
outstanding spare parts loan. In addition,  failure by the Company to repurchase
at least 4.0 million  shares of common  stock  within 150 days after the sale of
the Debentures  would  constitute a repurchase  event whereby each holder of the
Debentures would have the right, at the holder's option,  to require the Company
to repurchase such holder's Debentures at 100% of their principal amount, plus
accrued interest.

In connection with the above-mentioned  Offering, the Company and WorldCorp
entered into an  agreement on August 20, 1997 for the purchase by World  Airways
of up to 4.0 million  shares of common  stock owned by  WorldCorp  at a purchase
price of $7.65 per share. On September 18, 1997, the Company purchased 3,227,000
shares of its common stock from WorldCorp for approximately  $24.7 million.  MHS
has certain rights under a shareholders agreement, dated as of February 3, 1994,
as amended,  among  WorldCorp,  MHS and the Company.  This agreement  includes a
provision that provides that if WorldCorp were to dispose of its holdings in the
Company with the result that WorldCorp's ownership interest in the Company falls
below 51% of the  outstanding  shares of common stock,  then MHS may either sell
its shares to a third  party or require  WorldCorp  to sell a pro rata number of
shares held by MHS to the party purchasing WorldCorp's shares.  Therefore,  as a
result of the  repurchase  of 3,227,000  shares of common stock by World Airways
from WorldCorp,  MHS had the right to sell, and accordingly sold, 773,000 shares
of common  stock to World  Airways for  approximately  $5.9  million,  effective
January 23, 1998.

<PAGE>

World Airways' cash and cash equivalents at December 31, 1997 and December 31,
1996 were $25.9 million and $7.0 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit. At
December 31, 1997, World Airways' current assets were $54.1 million and current
liabilities were $55.9 million. World Airways has substantial long-term aircraft
lease obligations with respect to its current aircraft fleet. In addition,
subsequent to year-end, the Company used approximately $5.9 million of its cash
balance to purchase the aforementioned 773,000 shares of common stock, and
loaned WorldCorp $1.75 million, which was used by WorldCorp to pay debt
obligations.

In 1996, World Airways instituted a program to purchase up to one million shares
of its publicly-traded common stock pursuant to open market transactions. As of
March 6, 1998, World Airways had purchased 770,000 shares of common stock at an
aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.

In the event that World Airways enters into leases for additional aircraft,
World Airways will need to make capital expenditures for additional spare
engines and parts. No assurances can be given, however, that World Airways will
obtain all of the financing required for such capital expenditures.

Although there can be no assurances, World Airways believes that the combination
of its existing contracts and additional business which it expects to obtain for
1998, along with its existing cash and financing arrangements, will be
sufficient to allow World Airways to meet its cash requirements related to the
operating and capital requirements for 1998.

CASH FLOWS FROM OPERATING ACTIVITIES

Operating activities provided $22.1 million in cash for the year ended December
31, 1997 compared to using $1.5 million of cash in the comparable period in
1996. This increase in cash in 1997 resulted primarily from the increase in net
earnings and a decrease in accounts receivable, partially offset by a decrease
in accounts payable.

CASH FLOWS FROM INVESTING ACTIVITIES

Investing activities used $4.3 million in cash for the year ended December 31,
1997, compared to $9.1 million in the comparable period in 1996. In 1997, cash
was used primarily for the purchase of rotable spare parts required to maintain
the current fleet as well as leasehold improvements on the aircraft. In 1996,
cash was used primarily for the purchase of rotable spare parts required for the
integration of two MD-11 aircraft and incremental aircraft and leasehold
improvements required on one of the DC-10 aircraft obtained in late 1995.

CASH FLOWS FROM FINANCING ACTIVITIES

Financing activities provided $1.1 million in cash for the year ended December
31, 1997 compared to using $7.6 million in the comparable period in 1996. This
increase in cash resulted primarily from the $50.0 million proceeds of the
Offering in 1997 offset by the purchase of shares of the Company's common stock
from WorldCorp for an aggregate cost of $24.7 million and the repayment of debt.

CAPITAL COMMITMENTS/FINANCING DEVELOPMENTS

In October 1992 and January 1993, the Company signed a series of agreements to
lease seven new MD-11 aircraft for initial lease terms of two to five years,
renewable for up to 10 years (and in the case of one aircraft, for 13 years) by
the Company with increasing rent costs. As of March 1995, the Company had taken
delivery of all seven aircraft, consisting of four passenger MD-11 aircraft, one
freighter MD-11, and two passenger/cargo convertible MD-11s. The Company
returned one aircraft in August 1997. As part of the lease agreements, the
Company was assigned purchase options for four additional MD-11 aircraft. In
1992, the Company made non-refundable deposits of $1.2 million toward the option
aircraft and the purchase options were terminated. In March 1996, the Company
signed an agreement with the manufacturer to lease two MD-11ER aircraft. Under
the agreement, the Company leased each aircraft for a term of 24 years with an
option to return the aircraft after a seven-year period with certain fixed
termination fees. As part of the agreement, the above-mentioned deposits were
applied towards the deposits required on these two aircraft. In addition, the
Company agreed to assume an existing lease of two additional MD-11 freighter
aircraft for 20 years, beginning in 1999, in the event that the existing lessee
terminates its lease with the manufacturer at that time.

<PAGE>

As of December 31, 1997, World Airways maintains leases for four DC10-30
aircraft. Three of the leases expire in 1998 and one expires in 2003. Subsequent
to December 31, 1997, the Company extended one of the leases expiring in 1998
for an additional 12 months.

Subsequent to year-end, the Company renewed and amended a revolving line of 
credit facility of up to $25.0 million, collateralized by certain receivables,
inventory and equipment. The proceeds from this facility will be used to
increase working capital and for general corporate purposes.

In September 1995, the Company agreed to purchase a spare engine which was
delivered in March 1996. The engine cost approximately $8.0 million. The Company
entered into an agreement with the engine's manufacturer to finance 80% of the
purchase price over a seven-year term. The Company made payments of $0.7
million, $0.4 million and $1.2 million towards this purchase in 1997, 1996, and
1995, respectively.

In January 1996, the Company agreed to purchase an additional engine and
received a commitment from the engine manufacturer to finance 85% of its
purchase price over a seven-year term with an interest rate to be fixed at the
time of delivery. In June 1997, the Company took delivery of the engine and
signed a note for $6.3 million. The note bears interest at a rate of 8.18% and
is payable over an 84-month period at approximately $48,000 per month with the
balance of $2.2 million due on June 18, 2004.

As discussed above, the Company signed an agreement for the lease of two MD-11ER
aircraft beginning in the first quarter of 1996 to provide additional capacity
for growth opportunities. As part of the agreement for the MD-11 aircraft, the
Company received spare parts financing from the lessor of $9.0 million of which
$3.0 million was made available with the delivery of each aircraft, and the
remaining $3.0 million was made available in December 1996.
As of December 31, 1997, approximately $7.9 million had been received.

As of December 31, 1997, annual minimum payments required under the Company's
aircraft and lease obligations totaled $79.5 million for 1998. The Company
anticipates that its total capital expenditures in 1998 will approximate $4.1
million, which the Company expects to fund from its working capital. As of
December 31, 1997, the Company held approximately $3.2 million (at book value)
of aircraft spare parts currently available for sale.

OTHER MATTERS

LEGAL AND ADMINISTRATIVE PROCEEDINGS

World Airways has periodically received correspondence from the FAA with respect
to minor noncompliance matters. In November 1996, as the FAA has increased its
scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of
$810,000 in connection with certain security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. Under 49
U.S.C., Section 46301, any violation of pertinent provisions of 49 U.S.C.
Subsection 40101 or related rules is subject to a civil penalty for each
violation. Upon review of the evidence or facts and circumstances relating to
the violation, the statute allows for the compromise of proposed
civil penalties. The penalties were proposed by the FAA in connection with
recent inspections at foreign airport facilities and relate primarily to ground
handling services provided by World Airways' customers in connection with their
operations; specifically, the inspection procedures of its aircraft, passengers
and associated cargo. In each of these instances, World Airways was in
compliance with international regulations, but not the more stringent U.S.
requirements, despite the fact that the flights in question did not originate or
terminate in the United States. World Airways has taken steps to comply with the
U.S. requirements. In September 1997, the Company entered into a consent order
and settlement agreement with the FAA in connection with the above-mentioned
alleged violations. Pursuant to this agreement, the Company is liable for the
sum of $610,000, of which $405,000 was paid in September. The remaining $205,000
was suspended and will be forgiven if the Company complies with the provisions
of the settlement agreement, including not incurring any security violations
during the one year period following the execution of the settlement agreement.
While World Airways believes it is currently in compliance in all material
respects with all appropriate standards and has all required licenses and
authorities, any material non-compliance by World Airways therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the financial condition or results of operations of World
Airways.

<PAGE>

World Airways and WorldCorp  (the "World  Defendants")  were  defendants in
litigation  brought  by the  Committee  of  Unsecured  Creditors  of  Washington
Bancorporation in August 1992, captioned Washington Bancorporation v. Boster et.
al., Adv.  Proc.  92-0133  (Bankr.  D.D.C.) (the "Boster  Litigation").  Under a
settlement agreement,  the plaintiff agreed to dismiss with prejudice the Boster
Litigation  against all defendants,  including the World  Defendants,  with each
party  to bear  its  own  costs.  Under  the  settlement  agreement,  the  World
Defendants do not have any further liability in the Boster Litigation.

In connection with the discontinuance of World Airways' scheduled service
operations, World Airways is subject to claims by various third parties and may
be subject to further claims in the future. One claim which had been filed in
connection with World Airways' discontinuance of scheduled service to South
Africa, and which sought approximately $37.8 million in compensatory and
punitive damages, has been settled by the parties for approximately $0.7
million. Also, a claim has been filed in Germany against the Company by a tour
operator seeking approximately $3.5 million in compensation related to the 
cancellation of a summer program in 1996.  The Company believes it has
substantial defenses to this action, although no assurance can be given of the 
eventual outcome of this litigation.

In addition, World Airways is party to routine litigation and administrative
proceedings incidental to its business, none of which is believed by World
Airways to be likely to have a material adverse effect on the financial
condition and results of operations of World Airways.

EMPLOYEES

The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 1998.
Approximately 37% of the Company's employees are covered under the collective
bargaining agreement. The Company expects to begin negotiations in April 1998
and cannot predict the outcome of the negotiations or their possible impact on
the Company's financial condition and results of operations.

The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants argued the "scope clause" of the
collective bargaining agreement had been violated by the Company and challenged
the use of foreign flight attendant crews on the Company's flights for Malaysian
Airlines and Garuda Indonesia which has historically been the Company's
operating procedure. The Company is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter denied in 1997 the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. Subsequently, in 1997, the flight attendants challenged and filed
"scope clause" grievances with respect to four separate wet-lease contracts. The
Company and the Teamsters are presently in discussions regarding these
grievances. At this time, however, the Company can give no assurance
that these discussions will be successful and the grievances will not be
submitted to formal arbitration. The Company can provide no assurances as to how
the resolution of this matter will affect the Company's financial condition and
results of operations.

The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract was ratified in February 1996. Fewer than 12 Company employees are
covered by this collective bargaining agreement.

<PAGE>

The Company is unable to predict whether any of its employees not currently
represented by a labor union will elect to be represented by a labor union or
collective bargaining unit. The election by such employees of representation in
such an organization could result in employee compensation and working condition
demands that could have a material adverse effect on the financial results of
the Company.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends or distributions on its
common stock since the payment of a distribution to WorldCorp in 1992. The
Company currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on its common stock will depend upon the
results of operations, financial condition, capital expenditure plans of the
Company, provisions of certain financing instruments as well as such other
factors as the Board of Directors, in its sole discretion, may consider
relevant.

Under the terms of the shareholders agreement among the Company, WorldCorp, and
MHS, the Company has agreed to declare and distribute all dividends properly
payable, subject to the requirements of law and general overall financial
prudence. The Credit Agreement with BNY Financial Corporation (as amended in
March 1998, the "Credit Agreement") contains restrictions on the Company's
ability to pay dividends or make any distributions of common stock in excess of
5% of the total aggregate outstanding amount of stock, except that the Company
may make quarterly dividends so long as in any six month period, such dividends
do not exceed 50% of the Company's aggregate net income for the previous six
months.

WorldCorp is subject to the provisions of an indenture, expiring in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under the indenture. However, the indenture is not
applicable to World Airways if WorldCorp's ownership percentage is below 50% of
the issued and outstanding shares of common stock. As of January 23, 1998,
WorldCorp owned approximately 51.2% of the outstanding common stock.

INCOME AND OTHER TAXES

As of December 31, 1997, World Airways had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $92.2 million ($27.8
million of which is subject to a $6.9 million annual limitation as a result of
an ownership change of World Airways for tax purposes in 1991). These NOLs, if
not utilized to offset taxable income in future periods, would expire between
1998 and 2011. Use of World Airways' NOLs in future years could be further
limited if an Ownership Change were to occur in the future. While World Airways
believes that as of December 31, 1997, no Ownership Change has occurred since
the 1991 Ownership Change, the application of the Internal Revenue Code (the
"Code") in this area is subject to interpretation by the Internal Revenue
Service. The NOLs are subject to examination by the IRS and, thus, are subject
to adjustment or disallowance resulting from any such IRS examination. In
addition, conversion of the Debentures or future transactions in the Company's
common stock or the common stock of the Company's stockholders, including
conversions of a portion of the outstanding WorldCorp debentures into common
stock, may cause an Ownership Change, which could result in a substantial
reduction in the annual limitation in the use of the NOLs and the loss of a
substantial portion of the NOLs available to the Company.

<PAGE>

YEAR 2000

The Company has begun a comprehensive review of its computer system to identify
the systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversion are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company. The Company
has not yet estimated the cost of modifying its computer systems.

EFFECTS OF NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income". FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
is required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted, however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company believes that the disclosure of
comprehensive income in accordance with the provisions of FAS No. 130 will not
materially impact the manner of presentation of its financial statements as
currently and previously reported.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information". FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted, however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.

INFLATION

The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                               WORLD AIRWAYS, INC.
                                 BALANCE SHEETS
                                     ASSETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                             December 31,
                                                                                    ----------------------------
                                                                                        1997             1996
                                                                                    -----------       ----------
<S>                                                                                 <C>              <C> 
CURRENT ASSETS
     Cash and cash equivalents, including restricted
         cash of $498 at December 31, 1997 and
         $338 at December 31, 1996 (Note 17)                                        $    25,887      $     7,028

     Restricted short-term investments (Notes 7 and 17)                                      --            1,047

     Trade accounts receivable, less allowance for
         doubtful accounts of $498 at December 31, 1997
         and $413 at December 31, 1996 (Notes 10 and 15)                                  7,747           14,093

     Other receivables (Note 11)                                                          9,485            4,464

     Due from affiliate, less allowance for doubtful accounts
         of $475 at December 31, 1997 (Note 5)                                            2,471            5,548

     Prepaid expenses and other current assets (Note 8)                                   7,995            7,778

     Assets held for sale (Notes 9 and 11)                                                  500              500
                                                                                        -------           ------

         Total current assets                                                            54,085           40,458
                                                                                        -------          -------

ASSETS HELD FOR SALE (Notes 9 and 11)                                                     2,734            3,426

EQUIPMENT AND PROPERTY (Notes 9 and 11)
     Flight and other equipment                                                          86,774           72,089
     Equipment under capital leases                                                      12,266           11,466
                                                                                        -------          -------
                                                                                         99,040           83,555
     Less: accumulated depreciation and amortization                                     25,603           18,553
                                                                                        -------          -------

         Net equipment and property                                                      73,437           65,002
                                                                                        -------          -------

LONG-TERM OPERATING DEPOSITS (Note 11)                                                   16,059           15,951

OTHER ASSETS AND DEFERRED CHARGES,
     NET (Notes 5 and 8)                                                                  2,833            2,687
                                                                                        -------         --------

TOTAL ASSETS                                                                        $   149,148      $   127,524
                                                                                        =======          =======

                                                                                                     (Continued)
</TABLE>
<PAGE>



                               WORLD AIRWAYS, INC.
                                 BALANCE SHEETS
                                   (CONTINUED)
              LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                             December 31,
                                                                                     ---------------------------
                                                                                        1997             1996
                                                                                     -----------     -----------
<S>                                                                                 <C>              <C> 
CURRENT LIABILITIES
     Notes payable (Note 10)                                                        $     4,039      $    11,386
     Current maturities of long-term obligations (Note 11)                                9,856            9,046
     Accounts payable                                                                    19,824           22,349
     Net liabilities of discontinued operations (Note 3)                                     --            1,834
     Unearned revenue                                                                     2,486            3,046
     Accrued maintenance in excess of reserves paid                                       2,481            9,770
     Accrued salaries and wages                                                          10,976            9,351
     Accrued taxes                                                                        1,386            1,225
     Due to affiliate (Note 5)                                                            3,304            1,850
     Other accrued liabilities                                                            1,553              157
                                                                                       --------         --------
         Total current liabilities                                                       55,905           70,014
                                                                                       --------         --------

LONG-TERM OBLIGATIONS, NET (Note 11)                                                     75,071           30,106

OTHER LIABILITIES
     Deferred gain from sale-leaseback transactions, net of
         accumulated amortization of $20,156 at December
         31, 1997 and $19,099 at December 31, 1996                                        5,195            6,252
     Accrued maintenance in excess of reserves paid                                      10,575            6,867
     Accrued postretirement benefits (Note 12)                                            2,752            2,545
     Other liabilities                                                                    4,421            3,378
                                                                                       --------         --------
         Total other liabilities                                                         22,943           19,042
                                                                                       --------         --------

TOTAL LIABILITIES                                                                       153,919          119,162
                                                                                       --------         --------

COMMON STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1, 4, 5, 11, 12 and 16)
     Common stock, $.001 par value (40,000,000 shares authorized;
         12,000,064 shares issued and 8,003,064 outstanding at December 31, 1997
         and 12,000,064 shares issued and
         11,282,064 outstanding at December 31, 1996)                                        12               12
     Preferred stock, $.001 par value (5,000,000 shares authorized and
         no shares issued or outstanding at December 31, 1997 and 1996)                      --               --
     Additional paid-in capital                                                          42,522           42,522
     Contributed capital                                                                  3,000            3,000
     Accumulated deficit                                                               (17,554)         (29,006)
     ESSOP guaranteed bank loan (Note 12)                                                 (227)            (805)
     Treasury stock, at cost (3,997,000 shares at December 31, 1997 and
         718,000 shares at December 31, 1996) (Notes 1, 4 and 5)                       (32,524)          (7,361)
                                                                                       --------        ---------
         Total common stockholders' equity (deficit)                                    (4,771)            8,362
                                                                                       --------        ---------

COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 5, 10, 11, 12, 14, 15 and 17)

TOTAL LIABILITIES AND COMMON STOCKHOLDERS'
     EQUITY (DEFICIT)                                                               $   149,148      $   127,524
                                                                                        =======          =======
                 See accompanying Notes to Financial Statements
</TABLE>
<PAGE>



                               WORLD AIRWAYS, INC.
                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                    ----------------------------------------------
                                                                         1997              1996             1995
                                                                         ----              ----             ----
<S>                                                                 <C>               <C>              <C> 
OPERATING REVENUES (Note 15)
     Flight operations                                              $    306,800      $   296,930      $   232,623
     Flight operations subcontracted
         to other carriers                                                 2,058           11,726            8,598
     Other                                                                   554              931            1,165
                                                                        --------         --------         --------
         Total operating revenues                                        309,412          309,587          242,386
                                                                         -------          -------          -------

OPERATING EXPENSES
     Flight                                                               71,845           69,128           63,584
     Maintenance (Notes 5, 11 and 17)                                     65,972           60,462           41,843
     Aircraft costs (Notes 5 and 11)                                      91,422           85,227           67,331
     Fuel                                                                 17,615           19,255           16,704
     Flight operations subcontracted
         to other carriers                                                 2,603           12,932            9,096
     Promotions, sales and commissions                                     9,569            8,229            3,634
     Depreciation and amortization                                         8,651            8,032            6,056
     General and administrative                                           24,878           24,677           18,240
                                                                         -------          -------          -------
         Total operating expenses                                        292,555          287,942          226,488
                                                                         -------          -------          -------

OPERATING INCOME                                                          16,857           21,645           15,898
                                                                         -------          -------          -------

OTHER INCOME (EXPENSE)
     Interest expense (Notes 10 and 11)                                  (5,379)          (3,529)          (3,486)
     Interest income                                                       1,506            1,230              933
     Other, net (Notes 9 and 11)                                           (754)            (314)            1,403
                                                                        --------         --------         --------
         Total other expense                                             (4,627)          (2,613)          (1,150)
                                                                        --------         --------         --------

EARNINGS FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES                                                  12,230           19,032           14,748

INCOME TAX EXPENSE (Note 14)                                                 263              679              602
                                                                        --------         --------         --------

EARNINGS FROM CONTINUING OPERATIONS                                       11,967           18,353           14,146

DISCONTINUED OPERATIONS (Note 3)
     Loss from discontinued operations (less applicable
         income tax benefit of $83 and $306 in 1996 and
         1995, respectively)                                                  --         (11,720)          (5,250)
     Loss on disposal (less applicable income tax
         benefit of $562 in 1996)                                          (515)         (20,655)               --
                                                                        --------         --------        ---------

NET EARNINGS (LOSS)                                                 $     11,452      $  (14,022)      $     8,896
                                                                        ========         ========         ========

                                                                                                       (continued)
</TABLE>
<PAGE>



                               WORLD AIRWAYS, INC.
                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)
                                   (CONTINUED)

<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                     ---------------------------------------------
                                                                        1997              1996             1995
                                                                        ----              ----             ----
<S>                                                                 <C>               <C>              <C>  
BASIC EARNINGS (LOSS) PER COMMON
     EQUIVALENT SHARE (Note 13):
     Continuing operations                                          $       1.16      $      1.55      $      1.35
     Discontinued operations                                              (0.05)           (2.74)           (0.50)
                                                                       ---------        ---------        ---------
     Net earnings                                                   $       1.11      $    (1.19)      $      0.85
                                                                       =========        =========        =========

WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING                                                          10,302           11,806           10,477
                                                                        ========         ========         ========

DILUTED EARNINGS (LOSS) PER COMMON
     EQUIVALENT SHARE (Note 13):
     Continuing operations                                          $       1.09      $      1.55      $      1.34
     Discontinued operations                                              (0.05)           (2.74)           (0.50)
                                                                       ---------        ---------        ---------
     Net earnings                                                   $       1.04      $    (1.19)      $      0.84
                                                                       =========        =========        =========

WEIGHTED AVERAGE COMMON AND COMMON
     EQUIVALENT SHARES OUTSTANDING                                        12,279           11,806           10,572
                                                                        ========         ========         ========


                 See accompanying Notes to Financial Statements
</TABLE>
<PAGE>

                               WORLD AIRWAYS, INC.
                              STATEMENTS OF CHANGES
                    IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                                    Total
                                                                                                                   Common
                                                Additional                                  ESSOP     Treasury  Stockholders'
                                       Common     Paid-in     Contributed  Accumulated   Guaranteed    Stock,      Equity
                                        Stock     Capital       Capital      Deficit      Bank Loan    at Cost    (Deficit)
                                        -----     -------       -------      -------      ---------    -------    ---------
<S>                                   <C>         <C>         <C>          <C>           <C>          <C>          <C>
BALANCE AT
     DECEMBER 31, 1994                $    10     $19,503     $   3,000    $ (23,880)    $      --    $     --     $(1,367)

Sale of common stock in public
     offering, net (Note 1)                 2      22,809            --            --           --          --       22,811

Net earnings                               --           --           --         8,896           --          --        8,896
                                      -------     --------     --------      --------      -------     -------      -------

BALANCE AT
     DECEMBER 31, 1995                $     12    $42,312     $   3,000    $ (14,984)    $      --    $     --     $ 30,340

Common stock purchases (718,000
     shares)(Notes 1 and 4)                 --         --            --            --           --     (7,361)      (7,361)

Employee Savings and Stock
     Ownership Plan guaranteed
     bank loan (Note 12)                   --          --            --            --        (805)          --        (805)

Issuance of warrants (Note 11)             --         210            --            --           --          --          210

Net loss                                   --           --           --      (14,022)           --          --     (14,022)
                                      -------     --------     --------      --------      -------    ---------    --------

BALANCE AT
     DECEMBER 31, 1996                $    12     $42,522     $   3,000    $ (29,006)    $   (805)    $(7,361)     $  8,362

Common stock purchases (3,279,000
     shares) (Notes 1 and 4)               --          --            --            --           --    (25,163)     (25,163)

Employee Savings and Stock
     Ownership Plan guaranteed
     bank loan payments (Note 12)          --          --            --            --          578          --          578

Net earnings                               --           --           --        11,452           --          --       11,452
                                      -------     --------     --------      --------      -------     -------      -------

BALANCE AT
     DECEMBER 31, 1997                $     12    $42,522     $   3,000    $ (17,554)    $   (227)    $(32,524)    $(4,771)
                                       =======     ======        ======      ========       ======     ========     =======

                 See accompanying Notes to Financial Statements
</TABLE>
<PAGE>

                               WORLD AIRWAYS, INC.
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                 Years Ended December 31,
                                                                    ----------------------------------------------
                                                                        1997              1996             1995
                                                                        ----              ----             ----
<S>                                                                 <C>               <C>              <C>  
CASH AND CASH EQUIVALENTS AT
     BEGINNING OF YEAR (Note 6)                                     $      7,028      $    25,271      $     4,054

CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)                                                       11,452         (14,022)            8,896
Adjustments to reconcile net earnings (loss) to cash
     provided (used) by operating activities:
     Depreciation and amortization                                         8,651            8,032            6,056
     Deferred gain recognition                                           (1,057)          (1,058)          (1,063)
     Deferred aircraft rent payments, net                                     --               --              153
     (Gain) loss on sale of property and equipment                           108             (32)             (55)
     Writedown of assets held for sale                                       500              400               --
     Loss on disposal of discontinued operations                              --            1,734               --
     Other                                                                    18               14              277
     Changes in certain assets and liabilities net of effects of non-cash
         transactions:
         (Increase) decrease in accounts receivable                        5,615          (9,286)         (10,370)
         (Increase) decrease in restricted short-term investments          1,047            (138)            (241)
         (Increase) decrease in deposits, prepaid expenses
             and other assets                                              (298)            1,186          (4,601)
         (Decrease) increase in accounts payable,
             accrued expenses and other liabilities                      (3,385)           21,071           12,172
         (Decrease) increase in unearned revenue                           (560)          (7,371)            5,117
         (Decrease) increase in air traffic liability                         --          (2,073)            2,332
                                                                      ----------         --------         --------
     Net cash provided (used) by operating activities                     22,091          (1,543)           18,673
                                                                        --------         --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property                                      (5,467)          (9,615)         (23,210)
Proceeds from disposals of equipment and property                          1,183              471              717
                                                                        --------        ---------        ---------
     Net cash used by investing activities                               (4,284)          (9,144)         (22,493)
                                                                        --------          -------         --------

CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in line of credit borrowing
     arrangement, net                                                    (9,354)            5,031          (1,051)
Issuance of debt                                                          54,495           10,851           25,240
Repayment of debt                                                       (17,333)         (15,977)         (21,963)
Proceeds from sale of common stock, net                                       --               --           22,811
Purchase of World Airways common stock, at cost                         (25,163)          (7,361)               --
Debt issuance costs                                                      (1,593)            (100)               --
                                                                        --------         --------       ----------
     Net cash provided (used) by financing activities                      1,052          (7,556)           25,037
                                                                        --------         --------         --------

NET INCREASE (DECREASE) IN CASH
     AND CASH EQUIVALENTS                                                 18,859         (18,243)           21,217
                                                                        --------         --------         --------

CASH AND CASH EQUIVALENTS AT END OF
     YEAR (Note 6)                                                  $     25,887      $     7,028      $    25,271
                                                                        ========        =========         ========

                 See accompanying Notes to Financial Statements
</TABLE>
<PAGE>
                               WORLD AIRWAYS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

World  Airways,   Inc.  ("World  Airways"  or  "the  Company")  is  a  U.S.
certificated  air carrier,  which operates in the air  transportation  industry.
Airline  operations  account  for 100% of the  Company's  operating  revenue and
operating  income.  World Airways is a leading provider of long-range  passenger
and cargo air transportation, serving customers in three distinct markets: major
international  air  carriers;  the  U.S.  Government;   and  international  tour
operators in leisure passenger markets. The Company's business relies heavily on
its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"),  P.T.
Garuda Indonesia ("Garuda") and the U.S. Air Force (see Note 15).

Effective June 23, 1987, World Airways became a wholly-owned subsidiary of
WorldCorp, Inc. ("WorldCorp") pursuant to a Merger Agreement and Plan of
Reorganization (the "Plan"). Under the Plan, the shareholders of World Airways
exchanged their outstanding common shares, warrants and/or options for common
shares, warrants and/or options of WorldCorp in a one-for-one exchange. This
transaction was accounted for in a manner similar to a pooling of interests.

On October 30, 1993, WorldCorp, World Airways, and MHS Berhad ("MHS") entered
into a stock purchase agreement pursuant to which MHS, subject to satisfactory
completion of its due diligence investigations, agreed to purchase 24.9% of
World Airways' common stock. On February 28, 1994, WorldCorp, World Airways, and
MHS concluded the transaction. Effective December 31, 1994, WorldCorp purchased
5% of World Airways' common stock held by MHS, increasing its ownership to
80.1%. Therefore, at December 31, 1994, MHS owned 19.9% of World Airways' common
stock (see Note 5).

On August 8, 1995, World Airways filed a registration statement on Form S-1 with
the Securities and Exchange Commission to register 2,900,000 shares of World
Airways' common stock. The offering was completed on October 12, 1995. Of the
2,900,000 shares registered, 2,000,000 shares were issued and sold by World
Airways and 900,000 shares were sold by WorldCorp, Inc., the majority
shareholder. At December 31, 1995, WorldCorp and MHS owned approximately 59.3%
and 16.6%, respectively, of the outstanding common stock of World Airways. The
remaining shares were publicly traded.

In the third quarter of 1996, the Company announced its intention to purchase up
to one million shares of its publicly-traded common stock pursuant to open
market transactions. During the fourth quarter of 1996, the Company purchased
718,000 shares of its common stock for an aggregate cost of $7.4 million. As a
result of these purchases, WorldCorp and MHS owned approximately 61.3% and
17.6%, respectively, of the outstanding common stock of World Airways at
December 31, 1996. The remaining shares were publicly traded. In the first
quarter of 1997, the Company purchased an additional 52,000 shares of its common
stock for an aggregate cost of $0.5 million.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures (the "Debentures") due
in 2004 (the "Offering")(see Note 11). In connection with the Offering, and
pursuant to an agreement entered into on August 20, 1997, the Company purchased
3,227,000 shares of its common stock from WorldCorp on September 18, 1997 for
approximately $24.7 million. Therefore, at December 31, 1997, WorldCorp and MHS
owned approximately 46.3% and 24.9% of World Airways, respectively. The
remaining shares were publicly traded. In accordance with a shareholders
agreement, dated as of February 3, 1994, as amended, among WorldCorp, MHS and
the Company, if WorldCorp were to dispose of its holdings in the Company with
the result that WorldCorp's ownership interest in the Company falls below 51% of
the outstanding shares of common stock, then MHS may either sell its shares to a
third party or require WorldCorp to sell a pro rata number of shares held by MHS
to the party purchasing WorldCorp's shares. Therefore, as a result of the
purchase

<PAGE>

of 3,227,000 shares of common stock by World Airways from WorldCorp, MHS had the
right to sell, and accordingly sold, 773,000 shares of its World Airways common
stock to the Company for approximately $5.9 million, effective January 23, 1998.
Therefore, effective January 23, 1998, WorldCorp and MHS own approximately 51.2%
and 16.8%, respectively, of World Airways.

FINANCIAL STATEMENT RECLASSIFICATIONS

Certain items in prior year financial statements included herein have been
reclassified to conform to the 1997 financial statement presentation.

USE OF ESTIMATES

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

CASH EQUIVALENTS

For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments purchased with an original maturity of ninety days or less to
be cash equivalents.

REVENUE RECOGNITION

Contract flight operations revenues are recognized as the services are provided.

ADMINISTRATIVE AND INTEREST EXPENSES

Administrative expenses incurred by WorldCorp are allocated as described in Note
4. This allocation is intended to reflect the costs that would have been
incurred had World Airways been operated on a stand-alone basis. Interest
expense is charged based upon the outstanding balance of long-term payables to
WorldCorp, if any. In the opinion of WorldCorp management, such allocations are
made on a reasonable basis; however, the allocations are not necessarily
indicative of the costs which may be incurred in subsequent periods. The amounts
due to/from affiliates resulting from allocations of expenses are short-term in
nature and are non-interest bearing.

INCOME TAXES

The Company computes income taxes in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, ("FAS #109"). Under the asset and liability method of FAS
#109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FAS #109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company is not
included in WorldCorp's consolidated income tax returns.

EARNINGS (LOSS) PER COMMON SHARE

Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("FAS
#128") became effective for the year ended December 31, 1997, and required
restatement of previously reported earnings per share data. FAS #128 provides
for the calculation of basic and diluted earnings per share.

<PAGE>

Basic earnings (loss) per common shares is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per common share also includes common equivalent
shares outstanding during the period. The Company's common equivalent shares
consist of stock options, convertible securities and warrants.

EQUIPMENT AND PROPERTY

Equipment and property are stated at cost or, if acquired under capital leases,
at the present value of the minimum lease payments.

Provisions for depreciation and amortization of equipment and property are
computed over estimated useful lives or the term of the lease, if shorter, for
capital leases, by the straight-line method, with estimated salvage values of 0
- 15%. Estimated useful lives of equipment and property are as follows:

   DC10  and MD-11 flight equipment                            15-16 years
   Other equipment and property                                5-10 years

Deferred gains realized in connection with sale-leasebacks of aircraft and
equipment are amortized over the periods of the respective leases.

AIRCRAFT MAINTENANCE

Major airframe maintenance and engine overhauls are expensed using the accrual
method of accounting. The accrual method provides for estimating the cost of the
initial overhaul and accruing the cost, based on an hourly rate, to the
overhaul. At that time, the actual cost of overhaul is charged to the accrual,
with any deficiency or excess charged or credited to expense. The cost of the
next overhaul is then estimated, based on the new rate, and accrued to that
overhaul, at which time the process is repeated. Certain of the Company's leases
require the Company to make monthly payments to the lessor for estimated
maintenance costs to be incurred. Modifications performed in response to
Airworthiness Directives issued by the Federal Aviation Administration are
capitalized at cost. Routine maintenance and general repairs are expensed as
incurred.

ASSETS HELD FOR SALE

Assets held for sale are recorded at the lower of cost or estimated net
realizable value. Net realizable value is based on the estimated fair value
(measured by using a current selling price for similar assets) less estimated
selling costs.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. To the extent that the future undiscounted net cash flows expected
to be generated from an asset are less than the carrying amount of the asset, an
impairment loss will be recognized based on the difference between the asset's
carrying amount and its estimated fair market value.

OTHER ASSETS AND DEFERRED CHARGES

Contract enhancements, pre-operating costs and debt issuance costs are amortized
on a straight line basis over certain estimated periods (see Notes 5 and 8).

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

World Airways' cockpit crewmembers and eligible dependents are covered under
postretirement health care benefits to age 65. The Company accounts for the
benefit costs in accordance with Statement of Financial Accounting

<PAGE>

Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than  Pensions"  ("FAS  #106").  The  Company  funds  the  benefit  costs  on  a
pay-as-you-go (cash) basis.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123
(see Note 12). In addition, in accordance with SFAS 123, the Company applies
fair value as the measurement basis for transactions in which equity instruments
are issued to nonemployees (as defined) (see Note 11).

2.    OPERATING ENVIRONMENT

Cash and cash equivalents at December 31, 1997 and 1996 were $25.9 million and
$7.0 million, respectively, and the Company's working capital deficit was $1.8
million and $28.2 million at December 31, 1997 and December 31, 1996,
respectively. Subsequent to year-end, the Company purchased 773,000 shares of
its common stock from MHS in accordance with the shareholders agreement for
approximately $5.9 milion (see Note 1), and loaned WorldCorp $1.75 million (see
Note 4).

At December  31,  1997,  the Company had total  long-term  indebtedness  of
approximately  $75.1  million  and  notes  payable  and  current  maturities  of
long-term  obligations of $13.9 million. The Company also has significant future
long-term  obligations under aircraft lease obligations relating to its aircraft
(see Note 11 - "Long Term Obligations").  The Company anticipates that its total
capital expenditures in 1998 will approximate $4.1 million. The Company's flight
attendants  filed four  grievances  against the Company  challenging  the use of
foreign flight  attendant crews on the Company's  flights,  the outcome of which
may increase the Company's costs during 1998.

The Company has historically financed its working capital and capital
expenditure requirements out of cash flow from operating activities, public and
private sales of its common stock, secured borrowings, and other financings from
banks and other lenders. The degree to which the Company is leveraged could have
important consequences, including the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or other purposes may be limited; (ii) the Company's
degree of leverage and related debt service obligations, as well as its
obligations under operating leases for aircraft, may make it more vulnerable
than some of its competitors in a prolonged economic downturn; and (iii) the
Company's financial position may restrict its ability to pursue new business
opportunities and limit its flexibility in responding to changing business
conditions.

Subsequent to year-end, the Company renewed and amended a credit facility of up
to $25 million, to be collateralized by certain receivables and spare parts. The
proceeds from this facility will be used to increase working capital and for
general corporate purposes.

While the Company believes that the lease rates on its MD-11 aircraft are
favorable relative to lease rates of other MD-11

<PAGE>

operators, the Company's MD-11 aircraft have higher lease costs (although lower
operating costs) than its DC10-30 aircraft. Therefore, achieving high average
daily utilization of its aircraft (particularly its MD-11 aircraft) at
attractive yields are important factors to the Company's financial results. In
addition to fixed aircraft costs, a portion of the Company's labor costs are
fixed due to monthly minimum guarantees to cockpit crewmembers and flight
attendants.   Factors  that  affect  the  Company's   ability  to  achieve  high
utilization  in its ACMI  business  include the  compatibility  of the Company's
aircraft with customer needs and the Company's  ability to react on short notice
to customer  requirements  (which can be unpredictable due to changes in traffic
rights,  aircraft  delivery  schedules and aircraft  maintenance  requirements).
Other  factors that affect the ACMI  business  include  particular  domestic and
foreign regulatory requirements, as well as a trend toward aviation deregulation
which is  increasing  the number of alliances  and code share  arrangements. 

Although the Company's strategy is to enter into long-term contracts with its
customers, the terms of the Company's existing customer contracts are
substantially shorter than the terms of the Company's lease obligations with
respect to its aircraft. The Company's financial results could be materially
adversely affected even by relatively brief periods of low aircraft utilization
and yields. Consistent with prior years, the Company has substantial
uncontracted capacity in the third and fourth quarters of 1998 and beyond. In
addition, as further described below, the Company's major customer, Malaysian
Airlines, is subject to the financial difficulties associated with the adverse
economic conditions in Malaysia and the Asia Pacific Region (see Notes 5 and
15). Although there can be no assurance that it will be able to secure
additional business to reduce this excess capacity, the Company is actively
seeking customers for 1998 and beyond, and has historically been successful in
obtaining new customers.

As described in Note 15, a substantial portion of the Company's business in 1997
was with two customers: Malaysian Airlines and Philippine Airlines. The contract
with Philippine Airlines expired in February, 1998. In 1997, the Company
received approximately $11.2 million in revenue associated with minimum
guarantee payments from Malaysian Airlines and $3.0 million in contract
modification payments from Philippine Airlines, not associated with aircraft
flying and related costs. As of December 31, 1997, Malaysian Airlines and
Philippine Airlines owed the Company $2.6 million and $1.0 million,
respectively, primarily related to reimbursable costs incurred by the Company,
which is included in due from affiliate and trade receivables, respectively, in
the accompanying balance sheet. A substantial portion of the Company's
contracted business in 1998 is with Malaysian Airlines and Garuda Indonesia.
Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements.

In 1997, the affects of the adverse economic conditions in Malaysia and
Indonesia and other countries in the Asia Pacific Region included a national
liquidity crisis, significant depreciation in the value of the ringgit and
rupiah, higher domestic interest rates, reduced opportunity for refinancing or
refunding of maturing debts, and a general reduction in spending throughout the
region. These conditions and similar conditions in other countries in the Asia
Pacific Region could have a material adverse effect on the operations of
Malaysian Airlines and Garuda Indonesia, and therefore on the operations of the
Company. However, management also believes these conditions could provide new
opportunities to wet lease aircraft to airlines customers, particularly those
who have deferred or canceled new aircraft orders but are still in need of
providing additional airlift.

The Company believes that the combination of its existing contracts and
additional business which it expects to obtain for 1998, along with its existing
cash and financing arrangements, will be sufficient to allow the Company to meet
its cash requirements related to the operating and capital requirements for
1998.

<PAGE>

3.    DISCONTINUED OPERATIONS

The Company commenced its scheduled service operations between Tel Aviv and New
York in July 1995 and commenced its scheduled service operations between the
U.S. and South Africa in June 1996. In addition, in May 1996 the Company
commenced its scheduled charter operations between the United States and
Germany, Switzerland, Ireland, and the United Kingdom. However, the Company was
unable to operate these scheduled service operations profitably.

Therefore, in July 1996, the Company announced its decision to exit its
scheduled service operations by October 1996 and focus its operations on its
core business: operating aircraft under contracts with international carriers,
the U.S. Government, and international tour operators. Consistent with this
decision, World Airways ceased all scheduled operations as of

October 27, 1996. As a result, the Company's scheduled service operations were
reflected as discontinued operations as of June 30, 1996, and prior period
results were restated to reflect scheduled service operations as discontinued
operations. Loss from discontinued operations (net of income tax effect)
approximated $11.7 million for the year ended December 31, 1996. In addition, an
estimated loss on disposal of $21.0 million (net of income tax effect), which
was recorded as of June 30, 1996, included the following: $13.6 million for
estimated operating losses during the phase-out period; a $2.6 million estimated
loss to be incurred in connection with sub-leasing DC-10 aircraft which will not
be utilized in the Company's operations subsequent to the phase-out of scheduled
service operations; a $2.3 million writeoff of related leasehold improvements;
and $2.0 million for passenger reprotection expenses. The Company recognized an
additional $0.5 million of expense in the fourth quarter of 1997 and believes
that substantially all of the costs relating to the disposal have been incurred
as of December 31, 1997. The Company is subject to certain claims arising as a
result of the discontinuance of its scheduled service operations (see Note 17),
but the Company believes it has substantial defenses to these actions.

4.    TRANSACTIONS WITH PARENT COMPANY

ADMINISTRATIVE COST ALLOCATION

Prior to December 31, 1994, WorldCorp and its operating subsidiaries utilized a
single corporate staff for administrative support services thus permitting the
Company to draw upon the expertise of WorldCorp management personnel as needed.
Effective January 1, 1995, a majority of the WorldCorp employees providing
services to World Airways became employees of the Company. As a result, the net
allocation of corporate administrative costs to the Company was minimal
beginning in 1995.

CONTROL BY WORLDCORP

Pursuant to the Agreement between World Airways and WorldCorp (see Note 1),
the Company purchased  3,227,000 shares of its common stock held by WorldCorp on
September  18,  1997.  As a result,  as of December 31,  1997,  WorldCorp  owned
approximately  46.3% of World Airways.  Effective  January 23, 1998, the Company
purchased  773,000  shares of its common stock from MHS in  accordance  with the
amended  shareholders  agreement  (see Note 1), thereby  increasing  WorldCorp's
ownership percentage in the Company to 51.2%. WorldCorp's  operations  consist
primarily of its  equity  method  investments in the  Company  and  InteliData
Technologies  Corporation  ("InteliData").  WorldCorp is highly  leveraged,  and
therefore requires substantial funds to cover debt service each year. Subsequent
to year-end, the Company loaned WorldCorp $1.75 million, which was used by
WorldCorp to pay debt obligations. The loan is collateralized by 1.0 million of
World Airways shares owned by WorldCorp and bears interest at prime plus 2.5%.
As a holding company, all of WorldCorp's funds are  generated  through  its
subsidiaries,  neither of which is expected to pay dividends in the  foreseeable
future. As a result of WorldCorp's cash requirements, it may be required to sell
additional  shares of common stock, and such sales, or the threat of such sales,
could have a material  adverse  effect on the market price of the common  stock.
Except as limited by contractual  arrangements with MHS,  WorldCorp also is in a
position  to control  the outcome of many  issues  submitted  to World  Airways'
stockholders,  including  the  election  of  all  of  World  Airways'  Board  of
Directors,   adoption  of   amendments   to  World   Airways'   Certificate   of
Incorporation, and approval of mergers.

<PAGE>

In 1996, World Airways announced its intention to purchase up to one million
shares of its publicly-traded common stock pursuant to open market transactions.
As of December 31, 1996, World Airways had purchased 718,000 shares of its
common stock for an aggregate cost of $7.4 million. In January 1997, the Company
purchased an additional 52,000 shares of its common stock for an aggregate cost
of $0.5 million. The Company does not intend to purchase any additional shares
at this time.

5.    TRANSACTIONS WITH MHS AND MALAYSIAN AIRLINES

On October 30, 1993, WorldCorp, World Airways, and MHS entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") pursuant to which MHS,
subject to satisfactory completion of its due diligence investigations, agreed
to purchase 24.9% of World Airways' common stock for $27.4 million in cash.
Under this Agreement, World Airways would receive upon closing $12.4 million to
fund its working capital requirements. The remaining $15.0 million would be 
paid to WorldCorp to add to

its cash reserves. WorldCorp received $2.7 million prior to December 31, 1993 as
an advance on the sales price. At the time of the signing of the Stock Purchase
Agreement, World Airways was a wholly-owned subsidiary of WorldCorp. On February
28, 1994, WorldCorp, World Airways, and MHS concluded the transaction according
to the terms described above. Under the agreement, if at any time after October
30, 1996 World Airways registers additional common stock under the Securities
Act of 1933, MHS has the right to demand the registration of its shares of the
Company's common stock. Under a shareholders agreement, MHS has the right to
nominate two members to the Company's board of directors and WorldCorp has
agreed to vote its shares of common stock to elect such nominees. Also, if
without the prior written consent of MHS: (1) World Airways sells all or
substantially all of its business; or (2) World Airways fundamentally changes
its line of business, then MHS has the option to require WorldCorp to purchase
all or part of MHS's shares at fair market value. Fair market value is defined
to be not less than the aggregate of the costs borne by MHS in acquiring and
holding its World Airways shares. Management has indicated that it does not have
any current intent to take any such actions without the prior consent of MHS or
the directors nominated by MHS. The shareholders agreement also provides that if
WorldCorp's ownership interest in the Company falls below 51% of the outstanding
shares of common stock, then MHS may either sell its shares to a third party or
require WorldCorp to sell a pro rata number of shares held by MHS to the party
purchasing WorldCorp's shares. MHS also has a right of first refusal to purchase
shares of common stock issued by the Company or sold by WorldCorp and to
purchase additional shares of common stock to maintain its ownership percentage
in the Company.

In connection with the Company's Offering on August 26, 1997 (see Note 11),
the Company  purchased  3,227,000  shares of its common stock from  WorldCorp on
September 18, 1997 for approximately $24.7 million.  Therefore,  at December 31,
1997, MHS owned approximately 24.9% of the Company's common stock. In accordance
with the shareholders agreement, when the Company purchased the 3,227,000 shares
of common stock from WorldCorp in September 1997 (see Note 1), MHS had the right
to sell, and accordingly sold,  773,000 shares of its World Airways common stock
to the Company for  approximately  $5.9  million,  effective  January 23,  1998,
thereby reducing MHS's ownership interest in the Company to 16.8%.

During 1994, MHS acquired 32% of Malaysian Airlines, the flag carrier of
Malaysia. Due mainly to the issuance of additional shares of common stock by
Malaysian Airlines during 1996, MHS owns 28% of Malaysian Airlines at December
31, 1997. World Airways has provided service to Malaysian Airlines since 1981,
providing aircraft for integration into Malaysian Airlines' scheduled passenger,
cargo and charter operations as well as transporting passengers for the annual
Hadj pilgrimage. Malaysian Airlines is one of the Company's largest customers
(see Note 15).

Effective  December 31, 1994,  WorldCorp  entered into a 6% note payable to
MHS in the amount of $8.5 million,  due December 31, 1995, in exchange for 5% of
World Airways' common stock held by MHS and the execution of certain  multi-year
contracts between World Airways and Malaysian Airlines.  The shares were pledged
as security for the note  payable.  The note was repaid in  accordance  with the
agreement. Of the $8.5 million  consideration  paid by  WorldCorp to MHS,  $3.0
million was attributable to the contract  enhancements  discussed  above.  This
amount is included in other assets and deferred  charges  and in  contributed
capital in the  accompanying  balance  sheets,  and is being  amortized over the
terms of the related Malaysian Airlines contracts, approximately two to five
years. As of December 31, 1997, the unamortized balance of the deferred contract
cost is $1.1 million, net of $1.9 million of accumulated  amortization (see 
Note 8).
<PAGE>

In late 1994, the Company entered into a series of multi-year contracts, with
expiration dates ranging from 1997 to 2000, to provide aircraft to Malaysian
Airlines. The Company also entered into a 32-month agreement for year-round
operations (including the Hadj) with Malaysian Airlines whereby the Company is
providing two passenger aircraft with cockpit crews, maintenance and insurance
to Malaysian Airlines' newly-formed charter division through May 1999. However,
in 1997, the Company agreed to a five month reduction in the utilization of one
aircraft during 1997 although that aircraft was redeployed. Malaysian Airlines
has not informed the Company of any reductions for 1998. The Company provided
three aircraft for the 1997, 1996 and 1995 Hadj operations. MAS received notice
from the Malaysian Hadj Board that MAS would not participate in the 1998 Hadj
pilgrimage. As a result, MAS entered into an agreement on behalf of the Company
for the Company to provide two DC-10 aircraft to fly in the 1998 Indian Hadj.

The Company has a long-term  contract to operate three MD-11 cargo aircraft
for Malaysian Airlines.  However, beginning in July 1996, and as mutually agreed
by the parties,  World Airways  redeployed  two cargo  aircraft,  which had been
operating under these  contracts,  into another contract which ended in February
1998.  The  Company  and  Malaysian   Airlines  are  currently   discussing  the
redeployment of these aircraft back into Malaysian  Airlines'  operations during
1998 in order to meet the  contracts'  original  obligations.  The  Company  can
provide no assurances, however, that the Company will, in fact, be able to do so
(see Note 15).

As of December 31, 1997 and 1996, the Company had $2.2 million and $5.5 million,
respectively, included in due from affiliate, net of allowances, in the
accompanying balance sheets.  Included in these balances are certain
reimbursable operating costs of $1.9 million and $0.6 million due from Malaysian
Airlines at December 31, 1997 and 1996, respectively, incurred by the Company
pursuant to the currently operated contracts.  In addition, included in
the amount shown as due to affiliate in the accompanying balance sheets, are 
$2.2 million and $1.4 million of aircraft rent owed to Malaysian Airlines at
December 31, 1997 and 1996, respectively.

During 1995, the Company entered into agreements with Malaysian Airlines to
lease two DC10-30  aircraft.  The aircraft  were  delivered in June and December
1995 and had original lease terms of 26 and 36 months, respectively.  The leases
on the two aircraft expire in August 1999 and December 1998. In March 1996, the
Company leased two additional DC-10-30 aircraft from Malaysian  Airlines.  These
additional aircraft were not expected to be utilized after the discontinuance of
the  Company's  scheduled  service  operations in October 1996 (see Note 3).
Therefore, effective December 31, 1996, the parties mutually agreed to terminate
the lease agreement for the additional two aircraft. In March 1997, the Company
entered  into an  agreement  with  Malaysian  Airlines  to lease an  incremental
DC10-30 aircraft on a short-term basis to support its peak flying season.  The
aircraft  was  returned  at the  end of  the  Hadj  program.  Rent  expense  and
maintenance  reserve  payments  related to these aircraft  leased from Malaysian
Airlines amounted to $6.6 million,  $12.6 million and $1.6 million in 1997, 1996
and 1995, respectively.

6.    SUPPLEMENTAL INFORMATION -- STATEMENTS OF CASH FLOWS

Additional information pertaining to certain cash payments and noncash investing
and financing activities is as follows (in thousands):


                                          For the years ended December 31,
                                     -----------------------------------------
                                        1997            1996           1995
                                     ----------      ----------     ----------
         Cash paid for:
              Interest               $    3,641      $    3,556     $    3,377
              Income taxes                  462             412            336

In 1997, the Company entered into a capital lease, valued at $0.8 million, with
a lessor to lease an auxiliary power unit over a 32 month term beginning in July
1997. The Company made principal payments of $0.1 million in 1997.

In January 1996, the Company agreed to purchase an additional engine and
received a commitment from the engine manufacturer to finance 85% of its
purchase price over a seven-year term (see Note 11). In June 1997, the Company
took delivery of the engine and signed a note for $6.3 million, of which $0.3
million was repaid in 1997.
<PAGE>
The Company purchased a spare engine which was delivered in March 1996. The
engine cost approximately $8.0 million. The Company entered into an agreement
with the engine's manufacturer to finance 80% of the purchase price over a
seven-year term (see Note 11). The Company made payments of $0.7 million, $0.4
million and $1.2 million towards this purchase during 1997, 1996 and 1995,
respectively.

In March 1996, the Company entered into an agreement with McDonnell Douglas to
lease two MD-11ER aircraft (see Note 11). The Company entered into a
simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. The
Company can borrow a total of $9.0 million of which $3.0 million became
available with the delivery of each aircraft and an additional $3.0 million
became available in December 1996. Borrowings under the agreement were $1.5
million and $6.4 million during 1997 and 1996, respectively, and payments of
$1.1 million and $0.5 million were made in these years.

7.   SHORT-TERM INVESTMENTS

At December 31, 1996, short-term investments consist of cash pledged as
collateral for letters of credit with original maturities in excess of ninety
days, and expiration dates within one year. There were no outstanding letters of
credit at December 31, 1997.

8.   OTHER ASSETS

Prepaid expenses and other current assets consist of the following (in
thousands):

                                                     December 31,
                                               --------------------------
                                                   1997            1996
                                               ----------      ----------

    Prepaid rent                               $    3,331      $    2,463
    Prepaid insurance                               4,491           4,866
    Other                                             173             449
                                                    -----           -----
         Total                                 $    7,995      $    7,778
                                                    =====           =====

Other assets and deferred charges include net deferred contract costs of $1.1
million and $1.5 million as of December 31, 1997 and 1996, respectively (see
Note 5), net MD-11 aircraft integration costs of $0.2 million and $1.1
million as of December 31, 1997 and 1996, respectively, and as of December 31,
1997, debt issuance costs of $1.5 million related to the issuance of the $50.0
million of 8% convertible senior subordinated debentures on August 26, 1997.
Aircraft integration costs consist of pre-operating costs incurred in connection
with integrating the MD-11 aircraft into the Company's fleet as of December 31,
1997 (see Note 11). These costs are being amortized on a straight-line basis
over a five-year period.

9.   ASSETS HELD FOR SALE

Assets held for sale consist primarily of DC10 rotables with a net book value of
$3.2 million and $3.9 million as of December 31, 1997 and 1996, respectively.
The Company has consigned these parts with a third party to be sold over a
reasonable period of time with the objective of maximizing the proceeds from the
sales. As a result of the discontinuance of the Company's scheduled service
operations in 1996 (see Note 3), and the termination of two DC10 lease
agreements in December 1996 (see Note 5), the Company consigned additional DC10
rotables with the third party during 1997. Accordingly, the net book values of
these parts of $0.6 million and $1.7 million were reclassified from flight and
other equipment to assets held for sale in the accompanying balance sheets at
December 31, 1997 and 1996, respectively. The Company wrote-down assets held for
sale by $0.5 million and $0.4 million during the fourth quarters of 1997 and
1996, respectively, to reflect the estimated fair value of the parts less
estimated selling costs, which is included in other expense in the accompanying
statements of operations.

10.  NOTES PAYABLE

In 1993, the Company entered into an $8.0 million revolving line of credit
borrowing arrangement which is collateralized by certain receivables which were
sold to the bank with recourse. Borrowing availability under the line is based
on the amount of eligible receivables. This borrowing arrangement was amended

<PAGE>

effective June 30, 1996 (see Note 11). At December 31, 1996, World Airways had
minimal unused borrowing capacity and borrowings under the line of credit were
$6.8 million. Upon completion of the Offering (see Notes 1 and 11), the Company
repaid the outstanding balance on the line. Therefore, at December 31, 1997,
there was no outstanding balance or borrowing capacity on the revolving line of
credit.

Subsequent to year end, the Company amended its Credit Agreement with BNY
Financial Corporation ("BNY"). The amended line has a borrowing capacity of up
to $25.0 million, subject to borrowing base amounts related to receivables and
spare parts inventory, as defined.  The amended arrangement contains certain
dividend restrictions and certain covenants related to the Company's financial
condition and operating results, including quarterly net worth and net income
(loss) requirements and debt coverage requirements. Borrowings under this
amended Credit Agreement are collateralized by certain receivables, inventory,
and equipment.

A $4.0 million note bearing interest at 4.0% and a $4.6 million note bearing
interest at 3.8% are included in notes payable at December 31, 1997 and 1996,
respectively. The $4.6 million note was fully paid during 1997. The $4.0 million
note requires monthly principal and interest payments, and is required to be
paid in full in 1998.

11.  LONG-TERM OBLIGATIONS

LONG-TERM DEBT

The Company's long-term obligations at December 31 are as follows (in
thousands):
<TABLE><CAPTION>
                                                                                            1997           1996
                                                                                         ----------     ----------
<S>                                                                                      <C>            <C> 
     Note payable due 1999 -- with principal and interest at 7.25% payable
         monthly, collateralized by one Pratt & Whitney PW4462 engine.                   $    3,866     $    4,393

     Note payable due 2003 -- with principal and interest at 9.98% payable
         monthly, collateralized by one Pratt and Whitney PW4462 engine.                      5,361          6,018

     Note payable due 2004 -- with interest at 8.18% payable monthly,
         collateralized by one Pratt & Whitney PW4462 engine                                  5,920             --

     Spare parts loan due 1998 -- with principal and interest at 8.5%
         payable monthly, collateralized by certain MD-11 spare parts.                        2,842          3,229

     Spare parts loan due 2003 -- with principal and interest at 8.5%
         payable monthly, collateralized by certain MD-11 spare parts.                        2,248          2,581

     Spare parts loan due 2003 -- with principal and interest at 10%
         payable monthly, collateralized by certain MD-11 spare parts.                        6,276          5,929

     Aircraft spare parts security agreement payable to bank due 1999, 
         net of discount of $0.2 million -- with interest at the greater
         of the federal funds rate plus 2.5% or the prime rate plus 2% (10.25%
         at December 31, 1996), collateralized by certain rotables.                              --          7,595

     Employee Saving and Stock Ownership Plan guaranteed bank loan (Note 12)                    227            805

     Convertible senior subordinated debentures, due 2004 -- with interest
         at 8% payable semi-annually                                                         50,000             --

     Capital lease obligations                                                                7,409          7,683

     Deferred aircraft rent                                                                     915          1,142

     Less: debt discount                                                                      (137)          (223)
                                                                                            -------        -------
         Total                                                                               84,927         39,152

     Less: current maturities                                                                 9,856          9,046
                                                                                             ------         ------
         Total long-term obligations, net                                                $   75,071     $   30,106
                                                                                             ======         ======
</TABLE>
<PAGE>

The Company believes that the carrying values of the amounts outstanding under
the above debt agreements approximate fair value.

Subsequent to December 31, 1997, the Company  amended its Credit  Agreement
with BNY,  which included the aircraft  security agreement and the $8.0 million
revolving line of credit borrowing (see Note 10), to provide for up to a $25.0
million  revolving  line of credit  borrowing  (see Note 10). In 1996, in 
connection with a previous amendment,  the Company granted warrants to BNY to 
purchase  up to 50,000  shares of  authorized  but  unissued common stock.  The
warrants were granted at an exercise price of $8.00 per share which was equal
to the market price of the Company's stock at the date of grant. All warrants
were vested and became fully  exercisable  at the date of grant and expire on
December  31,  1999.  The per share  weighted-average  fair  value of warrants
granted  was  $3.615  on the date of grant  using  the  Black  Scholes option-
pricing model with the following weighted-average  assumptions:  expected
dividend  yield of 0.0%,  risk free  interest  rate of 6.0%,  expected life of 
3 years and  expected  volatility  of 61.0%.  The Company  recorded  $0.2 
million related to the warrants which will be amortized  into interest  expense
over the terms of the related debt.

On August 26, 1997, the Company completed a private offering, issuing $50.0
million of 8% convertible senior subordinated debentures (the "Debentures") due
in 2004 (the "Offering").  The Debentures were subsequently  registered with the
Securities and Exchange  Commission.  The Debentures are unsecured  obligations,
convertible into shares of the Company's common stock at $8.90  per  share,
subject to adjustment in certain  events, and subordinated  to all present and
future senior  indebtedness of the Company.  In the event of a change in control
of the Company, as defined, the holders of the Debentures could require the
Company  to  repurchase  the  outstanding  Debentures.  The Debentures  are not
redeemable  by the Company  prior to August 26,  2000. The Company used the net
proceeds of the Offering to purchase approximately 4.0 million  shares of its
common  stock  (see  Notes 1, 4 and 5),  repay certain  indebtedness,  increase
working capital and for general corporate purposes.  After  completion of the
Offering,  the Company repaid approximately $3.8 million,  which was outstanding
on the aircraft spare parts security agreement.

In September 1995, the Company entered into an agreement with a lessor to
purchase a spare engine, previously under lease, for $5.5 million. The Company
paid $0.5 million upon closing and signed a note for the $5.0 million balance.
The note bears interest at a rate of 7.25% and is payable over a 40-month period
at $69,000 a month, with the balance of $3.3 million due on January 29, 1999.
The Company purchased an additional spare engine, which was delivered in March
1996, at a cost of approximately $8.0 million. The Company entered into an
agreement with the engine's manufacturer to finance 80% of the purchase price
over a seven-year term at an interest rate of 9.98%. The Company made payments
of $1.2 million, $0.4 million and $0.7 million towards this purchase in
September 1995, January 1996 and during 1997, respectively.

In January 1996, the Company agreed to purchase an additional engine for
approximately $7.2 million and received a commitment from the engine
manufacturer to finance 85% of its purchase price over a seven-year term with an
interest rate to be fixed at the time of delivery. In June 1997, the Company
took delivery of the engine and signed a note for $6.3 million. The note bears
interest at a rate of 8.18% and is payable over an 84-month period at
approximately $48,000 per month, with the balance of $2.2 million due on June
18, 2004.

During 1993, the Company negotiated with several of its lessors to defer
approximately $14.7 million of lease payments on eight aircraft. In addition,
during 1995 and 1994 the Company deferred approximately $0.7 million of rent,
pursuant to the 1993 agreement. Of these amounts, the Company repaid
approximately $14.5 million through 1997.

The following table shows the aggregate annual amount of scheduled principal
maturities (in thousands) of debt outstanding at December 31, 1997, excluding
capital lease obligations.

         1998                                 $    6,625
         1999                                      6,339
         2000                                      3,161
         2001                                      3,049
         2002                                      2,960
         Thereafter                               55,384
                                                  ------
              Total                           $   77,518
                                                  ======
<PAGE>

CAPITAL LEASES

The present value of the obligations under capital leases at December 31, 1997
is calculated using rates ranging from 10.0% to 10.5%. The following are
scheduled minimum capital lease payments (in thousands) due in the succeeding
five years and thereafter, together with the present value of such obligations:

         1998                                    $    3,692
         1999                                         1,656
         2000                                         2,998
         2001                                            --
         2002                                            --
         Thereafter                                      --
                                                     ------

         Total minimum lease payments                 8,346
         Less: imputed interest                         937
                                                     ------
        Present value of obligations under 
        capital lease                            $    7,409
                                                     ======

Property under capital leases consists of equipment leases and is amortized over
the lease terms or expected useful lives of the assets. Accumulated amortization
under capital leases was $4.8 million and $4.2 million at December 31, 1997 and
1996, respectively. Amortization expense of property under capital leases
totaled approximately $0.6 million for each of the years ended December 31, 1997
and 1996, and $0.8 million for the year ended December 31, 1995.

OPERATING LEASES

In October 1992 and January 1993, World Airways signed a series of agreements
with International Lease Finance Corporation ("ILFC"), McDonnell Douglas
Corporation, GATX Capital Corporation, and United Technologies Corporation's
Pratt & Whitney Group ("Pratt and Whitney") to lease seven new McDonnell Douglas
MD-11 aircraft and associated engines under initial lease terms of two to five
years. The Company returned one aircraft in August 1997. The remaining six
aircraft leases contain annual renewal options in years six through fifteen of
the lease term. If these renewal options are not exercised, the Company is
required to pay a substantial penalty to the lessor. Under the terms of the
lease agreements, World Airways may be required to pay additional rent in excess
of the fixed monthly amounts depending on block hours flown.

In February 1992, World Airways signed 12-year operating leases for two
McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways
returned these aircraft to their lessor. Certain matters related to the
termination of these leases were resolved in 1995 and resulted in a gain to the
Company of approximately $0.8 million. This gain is included in other income in
1995.

The Company's MD-11 leases contain options to purchase the aircraft at various
times throughout the lease terms. Long-term deposits consist primarily of
deposits on the MD-11 leases. As part of the lease agreements, World Airways was
assigned purchase options for four additional MD-11 aircraft. In 1992, World
Airways made non-refundable deposits to McDonnell Douglas toward the option
aircraft. In March 1996, the Company entered into an agreement with McDonnell
Douglas to lease two MD-11ER aircraft. Under this agreement, the Company is
leasing each aircraft for a term of 24 years with an option to return the
aircraft after a seven year period, subject to fixed termination fees of $2.8
million per aircraft. The non-refundable deposits of $1.2 million previously
paid to McDonnell Douglas towards options on four MD-11 aircraft were applied to
the deposits required on the MD-11ER aircraft. The Company entered into a
simultaneous agreement with McDonnell Douglas to finance MD-11 spare parts. The
Company can borrow a total of $9.0 million of which $3.0 million became
available with the delivery of each aircraft and an additional $3.0 million
became available in December 1996. Net borrowings under the agreement were $6.3
million and $5.9 million at December 31, 1997 and 1996, respectively. McDonnell
Douglas retains a purchase money lien in the purchased parts. In connection with
this lease agreement, the Company agreed to assume an existing lease of two
additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the
event the existing lessee terminates its lease with McDonnell Douglas at that
time.

<PAGE>

Effective August 1997, the Company entered into an agreement with one of its
lessors to return a passenger MD-11 aircraft. The aircraft was returned in
September 1997. In conjunction with the aircraft return, the Company forfeited
security deposits of $0.2 million and paid an additional $0.2 million to the
lessor in 1998.

In October 1997, one of the Company's MD-11 aircraft was damaged upon its
landing at Montevideo, Uruguay. The aircraft was out of service until January
1998 while certain repairs were made. The Company expects insurance to cover the
majority of repair and certain related costs. Expected insurance proceeds of
$3.7 million are included in other receivables in the accompanying balance sheet
at December 31, 1997.

In 1995, World Airways entered into three DC10-30 aircraft leases with lease
terms, as amended, expiring in September 1998, December 1998 and August 1999. In
addition, another DC-10 aircraft lease expires in January 2003.

As of December 31, 1997, the Company's fleet consisted of three passenger MD-11
aircraft, one freighter MD-11 aircraft, two convertible MD-11 aircraft, two
MD-11ER aircraft, three passenger DC10-30 aircraft, and one DC10-30 convertible
aircraft.

The Company extended the lease terms on two spare engines during 1996. One
lease, originally expiring on December 31, 1995, was extended until February
1998. This lease was classified as a capital lease at December 31, 1995, but
became an operating lease under the new agreement. The other engine was extended
three years from its original April 20, 1996 termination date. During 1997, the
Company reached a settlement with its engine manufacturer for reimbursements
related to disputed spare engine lease charges. As a result of this settlement,
during 1997, the Company reversed aircraft costs of $0.9 million originally
recorded during 1996. In addition, the Company received the use, at no charge,
of one spare engine through September 30, 1998.

During 1997, the Company's lease for its headquarters space expired, and the
Company entered into a new agreement with the lessor to lease the space until
2003. As part of the lease agreement, the lessor agreed to finance certain
leasehold improvements provided that the Company meets specific net worth
requirements. As a result of the Company's purchase of 3,227,000 shares on
September 18, 1997 (see Note 1), the Company was not in compliance with this
covenant. The Company and the lessor are currently discussing possible
amendments to the agreement.

Rental expense for continuing operations, primarily relating to aircraft leases,
totaled approximately $87.7 million, $84.0 million, and $66.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively.

The following is a schedule of future annual minimum rental payments,
principally aircraft rentals (excluding variable portions), required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1997 (in thousands):

         1998                                     $      79,500
         1999                                            72,772
         2000                                            72,831
         2001                                            72,989
         2002                                            73,148
         Thereafter                                     612,817
                                                        -------
         Total                                    $     984,057
                                                        =======

These future annual minimum rental payments include all option years. Under the
terms of certain of the MD-11 leases, if the options are not exercised, the
Company must pay a substantial penalty to the lessor, consisting of either a
fixed penalty or a penalty based on the number of block hours flown since
delivery of the aircraft. The Company intends to exercise the options under
these leases.

<PAGE>

12. EMPLOYEE BENEFIT PLANS

The World Airways' Crewmembers Target Benefit Plan is a defined contribution
plan covering flight engineers and pilots with contributions based upon defined
wages. It is a tax-qualified retirement plan under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Pension expense for the
Target Benefit plan totaled $1.9 million, $2.5 million, and $1.9 million for the
years ended December 31, 1997, 1996, and 1995, respectively.

Until September 1996, the Company's flight attendants participated in the World
Airways' Flight Attendant Target Benefit Plan, which was a tax-qualified
retirement plan under Section 401(a) of the Code. Under the collective
bargaining agreement between the Company and the flight attendants, represented
by the International Brotherhood of Teamsters ("Teamsters"), that was signed in
June 1996 and ratified by the flight attendants in August 1996, the World
Airways' Flight Attendant Target Benefit Plan was terminated in September 1996.
The Company is required under the agreement to make certain monthly payments on
behalf of the flight attendants to the Teamsters subsequent to the termination
of the previous plan. Pension contributions made to the Teamsters on behalf of
the flight attendants totaled $0.3 million and $0.1 million in 1997 and the
fourth quarter of 1996, respectively. Pension expense relating to the Flight
Attendant Target Benefit Plan totaled $0.5 million and $0.2 million for the
first three quarters of 1996 and the year ended 1995, respectively.

Effective January 1, 1994, World Airways adopted the World Airways, Inc.
Retroactivity and Profit Sharing Bonus Plan ("the 1994 Profit Sharing Plan").
The 1994 Profit Sharing Plan provides for the payment of retroactive pay to
certain DC10 crewmembers for the period July 1, 1992 to August 15, 1994, as well
as for certain profit sharing payments. Distributions under the 1994 Profit
Sharing Plan are equal to 20% of World Airways defined earnings, subject to an
annual limitation of 10% of the total annual aggregate compensation of World
Airways employees participating in the 1994 Profit Sharing Plan in that year.
This is not a tax-qualified retirement plan under Section 401(a) of the Code.
The Company distributed approximately $1.7 million in 1996 pertaining to 1995
results, which included the retroactive payment required under the plan. The
Company did not make any 1997 distributions pertaining to 1996 results. The
Company expects to distribute approximately $2.6 million in 1998 pertaining to
1997 results, which is included in accrued salaries and wages in the
accompanying balance sheet.

World Airways' cockpit crewmembers and eligible dependents are covered under
postretirement health care benefits to age 65. The Company accounts for the cost
of health benefits in accordance with FAS #106 which requires accrual accounting
for all postretirement benefits other than pensions. World Airways funds the
benefit costs on a pay-as-you-go (cash) basis.

A summary of the net periodic postretirement benefit costs for the years ended
December 31, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
                                                                      1997              1996              1995
                                                                  ------------      ------------      -----------
<S>                                                               <C>               <C>               <C>    
         Service cost                                             $    157,000      $    176,000      $   118,000
         Interest cost on accumulated
           postretirement benefit obligation                           103,000           100,000          134,000
         Net amortized gain                                           (53,000)          (38,000)         (40,000)
                                                                      --------          --------         --------
              Net periodic postretirement benefit cost            $    207,000      $    238,000      $   212,000
                                                                      ========          ========         ========
</TABLE>

<PAGE>
The components of the Accumulated Postretirement Benefit Obligation for the
years ended December 31, 1997 and 1996 are as follows:
<TABLE><CAPTION>
                                                                      1997              1996
                                                                  -----------      ------------
<S>                                                               <C>              <C>  
         Retirees and dependents                                  $   863,000      $    789,000
         Fully eligible, active participants                          183,000           229,000
         Not fully eligible participants                            1,706,000         1,527,000
                                                                    ---------         ---------
                                                                  $ 2,752,000      $  2,545,000
         Less: plan assets                                                 --                --
                                                                  -----------        ----------
              Accrued postretirement benefit obligation           $ 2,752,000      $  2,545,000
                                                                    =========         =========
</TABLE>
The assumed discount rate used to measure the accumulated postretirement benefit
obligation for 1997 and 1996 was 6.75%. The medical cost trend rate in 1998 was
7.5% trending down to an ultimate rate in 2021 of 4.0%. A one percentage point
increase in the assumed health care cost trend rates for each future year would
have increased the aggregate of the service and interest cost components of 1997
net periodic postretirement benefit cost by $28,000 and would have increased the
accumulated postretirement benefit obligation as of December 31, 1997 by
$121,000.

The Board of Directors of World Airways adopted an Employee Savings and Stock
Ownership Plan (the "Plan") effective October 1, 1996. The Plan is intended to
allow employees not covered by collective bargaining agreements, as well as
certain WorldCorp and WorldCorp Investments, Inc. employees, to share in the
growth and prosperity of the Company, to encourage participants to save on a
tax-favored basis, and to provide participants an opportunity to accumulate
capital for their future economic security. The Plan is an amendment and
continuation of the WorldCorp Employee Savings and Stock Ownership Plan (the
"WorldCorp KSOP"). As a result of various business developments, the vast
majority of the participants in the WorldCorp KSOP were Company employees. For
that reason, the Company and WorldCorp agreed that the Company should assume
WorldCorp's obligation under the WorldCorp KSOP. In connection with that action,
the Trustees exchanged the unallocated shares of WorldCorp common stock held by
the WorldCorp KSOP for a like-value of shares in Company common stock. World
Airways also made a special contribution of $50,000 to the Plan.

The WorldCorp KSOP originally assumed bank financing from its predecessor plan,
the WorldCorp Employee Stock Ownership Plan. This obligation was paid off by
WorldCorp in 1994 and the WorldCorp KSOP agreed to repay WorldCorp the amount of
the bank loan. The WorldCorp KSOP refinanced its debt to WorldCorp through a
margin loan obtained in January 1995 and amended in May 1996 in the amount of
$1.5 million. Principal payments of $90,000 are due quarterly and a final
principal payment of $0.1 million is due May 1998. Interest is payable quarterly
at the call loan rate plus 1.5%. The margin loan is collateralized by
approximately 59,677 of the unallocated shares of common stock owned by the Plan
at December 31, 1997. The Company is required to make minimum annual
discretionary contributions to the Plan in an amount necessary to pay principal
and interest due on the margin loan to the extent that other contributions to
the Plan are insufficient to make such payments. Contributions were sufficient
to make the required principal and interest payments during 1997. World Airways
guarantees payment on the margin loan. The outstanding balance is therefore
included in current maturities of long-term obligations and stockholders' equity
in the accompanying balance sheet at December 31, 1997.

The Plan will continue to hold the shares of WorldCorp common stock that were
allocated to the participants' accounts before October 1, 1996. No additional
shares of WorldCorp common stock will be allocated under the Plan on or after 
that date. Instead, participants will have the opportunity to receive future
allocations of Company common stock.

Under the Plan, employees may elect to invest salary deferral contributions in
either the World Airways Stock Fund or in other investment funds. The Plan
provides employer matching contributions in the World Airways Stock Fund at a
rate determined by the Board of Directors, but at no less than 50% of the salary
deferral contribution. The employer matching contribution rate in the other
investment funds is 33 1/3% of the salary deferral contribution. The Company
expensed approximately $0.2 million for its contributions to the Plan during
1997.
<PAGE>

On May 24, 1995, the Company's stockholders approved the 1995 Stock Option Plan
(the "1995 Plan") that took effect May 31, 1995. Members of the Company's Board
of Directors, employees, and consultants to the Company or its affiliates are
eligible to participate in the 1995 Plan. The Company has reserved 1,100,000
shares of common stock for issuance upon the exercise of options granted to
participants under the 1995 Plan. These options expire at the earlier of the
stated expiration, which shall not exceed ten years from the date of grant, or
one year after the termination of the participant's employment with the Company.
Stock options are granted with an exercise price which shall not be less than
85% of the fair market value of the common stock on the date of grant. The stock
options have terms ranging from seven years and seven months to ten years and
become vested and fully exercisable at various times through December 2007. At
December 31, 1997, 1,469,670 shares have been granted under the 1995 Plan. The
Company will seek shareholder approval for the additional options granted during
the Annual Meeting in 1998.

On July 27, 1995, the Company  adopted the  Non-Employee  Directors'  Stock
Option  Plan (the  "Directors'  Plan"),  pursuant  to which  each  non-affiliate
director will be offered  options to purchase 10,000 shares of common stock upon
election or appointment  to the Board of Directors of the Company.  On the third
anniversary of the initial  award,  each such director will be offered an option
to purchase 5,000 shares of common stock.  Options  granted under the Directors'
Plan  become  exercisable  in equal  monthly  installments  during the 36 months
following  the award,  as long as the person  remains a director of the Company.
The exercise price of all such options will be the average  closing price of the
common stock during the 30 trading days immediately preceding the date of grant.
Up to 250,000  shares of common stock may be issued under the  Directors'  Plan,
subject to certain adjustments.  There were no shares granted under this Plan at
December 31, 1997.

There were no stock options granted during 1996. The per share weighted-average
fair value of stock options granted during 1997 and 1995 was $4.67 and $6.29,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:

                                              1997                     1995
                                           -----------             -----------
      Expected dividend yield                   0%                      0%
      Risk-free interest rate              5.7% - 5.8%             5.1% - 5.6%
      Expected life (in years)                3 - 10                   4 - 8
      Expected volatility                   53% - 61%               59% - 62%

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been changed to the pro forma amounts
indicated below (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
                                                                             1997           1996           1995
                                                                         -----------    -----------    ----------
<S>                                                                      <C>            <C>            <C> 
      Net earnings (loss)                                 As reported    $   11,452     $  (14,022)    $     8,896
                                                          Pro forma      $   10,502     $  (14,579)    $     7,778
      Basic earnings (loss) per
         common equivalent share                          As reported    $     1.11     $    (1.19)    $      0.85
                                                          Pro forma      $     1.02     $    (1.23)    $      0.74
      Diluted earnings (loss) per
         common equivalent share                          As reported    $     1.04     $    (1.19)    $      0.84
                                                          Pro forma      $     0.97     $    (1.23)    $      0.74

</TABLE>
<PAGE>

Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
                                                                              Number of
                                                                               Options           Weighted-Average
                                                                             Outstanding          Exercise Prices
                                                                             -----------          ---------------
<S>                                                                          <C>                    <C>   
      Balance at December 31, 1994                                                  --              $        --
         Granted                                                             1,095,843                    11.00
         Exercised                                                                  --                       --
         Forfeited                                                                  --                       --
         Expired                                                                    --                       --
                                                                             ---------

      Balance at December 31, 1995                                           1,095,843              $     11.00
         Granted                                                                    --                       --
         Exercised                                                                  --                       --
         Forfeited                                                           (284,670)                    11.00
         Expired                                                                    --                       --
                                                                             ---------

      Balance at December 31, 1996                                             811,173              $     11.00
         Granted                                                               773,000                     7.61
         Exercised                                                                  --                       --
         Forfeited                                                           (114,503)                    11.00
         Expired                                                                    --                       --
                                                                             ---------

      Balance at December 31, 1997                                           1,469,670                     9.20
                                                                             =========
</TABLE>
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $6.75 - $12.50 and 5.5
years, respectively. The following table summarizes the stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
                                               Stock Options Outstanding                 Stock Options Exercisable
                                        -----------------------------------------        -------------------------
                                                         Weighted        Weighted                       Weighted
                                         Number of        Average         Average          Number of     Average
                                          Options        Remaining       Exercise           Options    Exercisable
Range of Excercise Price                Outstanding     Life (Years)       Price          Exercisable     Price
------------------------                -----------     ------------       -----          -----------     -----
<S>                                       <C>              <C>               <C>             <C>          <C>
     6.75 -  7.00                          48,000          6.92             6.75              12,000       6.75
     7.01 -  8.00                         550,000          7.58             7.38             180,000       7.32
     8.01 -  9.00                         175,000          8.25             8.38              35,000       8.38
    10.01 - 11.00                          10,000          5.42            10.25              10,000      10.25
    11.01 - 12.00                         680,910          3.08            11.00             418,434      11.00
    12.01 - 13.00                           5,760          5.42            12.50               5,760      12.50
                                         ---------                                           -------
                                         1,469,670                                           661,194
                                         =========                                           =======
</TABLE>
At December 31, 1997, 1996 and 1995, the number of options exercisable was
661,194, 315,448 and 304,448, respectively, and the weighted-average exercise
price of those options was $9.79, $11.00 and $11.00, respectively.
<PAGE>
13.   EARNINGS PER SHARE

Earnings per common equivalent share for the years ended December 31, 1997, 1996
and 1995 are computed as follows (amounts in thousands except per share data):
<TABLE><CAPTION>
                                                                     For the Year Ended December 31, 1997
                                                           -------------------------------------------------------
                                                               Earnings             Shares             Per-Share
                                                              (Numerator)        (Denominator)           Amount
                                                              -----------        -------------           ------
<S>                                                        <C>                          <C>         <C>
Basic EPS
    Earnings from continuing operations                    $        11,967              10,302      $         1.16
                                                                                                         =========
Effect of Dilutive Securities
    Options                                                             --                   7
    8% convertible debentures                                        1,375               1,970
                                                                    ------              ------
Diluted EPS
    Earnings available to common stockholders              $        13,342              12,279      $         1.09
                                                                    ======              ======           =========
</TABLE>
<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31, 1996
                                                           --------------------------------------------------------
                                                               Earnings             Shares             Per-Share
                                                              (Numerator)        (Denominator)           Amount
                                                              -----------        -------------           ------
<S>                                                        <C>                          <C>         <C> 
Basic EPS
    Earning from continuing operations                     $        18,353              11,806      $         1.55
                                                                                                         =========

Effect of Dilutive Securities
    Options                                                             --                  --
                                                                    ------              ------
Diluted EPS
    Earnings available to common stockholders              $        18,353              11,806      $         1.55
                                                                    ======              ======           =========
</TABLE>
<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31, 1995
                                                           -------------------------------------------------------
                                                               Earnings             Shares             Per-Share
                                                              (Numerator)        (Denominator)           Amount
                                                              -----------        -------------           ------
<S>                                                        <C>                          <C>         <C>
Basic EPS
    Earnings from continuing operations                    $        14,146              10,477      $         1.35
                                                                                                         =========
Effect of Dilutive Securities
    Options                                                             --                  95
                                                                    ------              ------
Diluted EPS
    Earnings available to common stockholders              $        14,146              10,572      $         1.34
                                                                    ======              ======           =========
</TABLE>
Effective January 23, 1998, the Company purchased 773,000 shares of its common
stock from MHS (see Note 5).

<PAGE>
14. FEDERAL AND STATE INCOME TAXES

Income tax expense attributable to earnings from continuing operations consists
of (in thousands):
                                          For the years ended December 31,
                                    ------------------------------------------
                                         1997          1996           1995
                                         ----          ----           ----

     U.S. Federal                  $        203   $        724    $       514
     State                                   60           (45)             88
                                          -----          -----           ----
       Income tax expense          $        263   $        679    $       602
                                          =====          =====           ====

There is no deferred tax expense or benefit for the years ended December 31,
1997, 1996, and 1995.

The provision for income taxes for fiscal years 1997, 1996, and 1995 has been
presented in the statements of operations as continuing operations and
discontinued operations as follows (in thousands):
<TABLE><CAPTION>
                                                                               For the years ended December 31,
                                                                        -------------------------------------------
                                                                            1997           1996            1995
                                                                            ----           ----            ----
<S>                                                                     <C>            <C>             <C>
     Tax provision (benefit) allocated to:
       Continuing operations                                            $        263   $        679    $       602
       Discontinued operations                                                    --          (645)          (306)
                                                                              ------          -----          -----
     Total provision for income tax expense                             $        263   $         34    $       296
                                                                               =====         ======          =====
</TABLE>
Income tax expense attributable to earnings from continuing operations for the
years ended December 31, 1997, 1996, and 1995 differed from the amounts computed
by applying the U.S. Federal income tax rate of 35 percent for the year ended
December 31, 1997 and 34 percent for the years ended December 31, 1996 and 1995
as a result of the following (in thousands):
<TABLE>
<CAPTION>
                                                                               For the years ended December 31,
                                                                        ------------------------------------------
                                                                               1997           1996            1995
                                                                                ----           ----            ----
<S>                                                                     <C>            <C>             <C>
     Expected Federal income tax expense at the statutory rate          $      4,188   $      6,471    $     5,014
     Utilization of net operating loss carryforward                          (5,304)        (7,607)        (4,932)
     Alternative minimum and environmental taxes                                 203            724            285
     State income tax expense, net of Federal benefit                             39           (30)             58
     Other:
       Meals and entertainment                                                   911          1,057            663
       Other                                                                     226             64          (486)
                                                                             -------       --------        -------
     Income tax expense                                                 $        263   $        679    $       602
                                                                             =======        =======        =======
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, are as follows (in
thousands):
<TABLE><CAPTION>
                                                                                        1997                1996
                                                                                    ------------        ----------
<S>                                                                                <C>                 <C> 
      Deferred tax assets:
         Net operating loss carryforwards                                          $     32,258        $    35,819
         Recognition of sales/leaseback gains                                             1,818              2,126
         Accrued maintenance in excess of reserves paid, primarily
           due to accrual for financial statement purposes                                7,744              6,335
         Accrued postretirement benefit obligation, due to accrual
           for financial statement purposes                                                 963                865
         Discontinued operations accruals                                                    --                272
         Compensated absences, primarily due to accrual for
           financial statement purposes                                                   1,135                805
         Accrued rent                                                                     1,547              1,112
         Alternative minimum tax credit carryforward                                      2,790              2,503
         Investment tax credit carryforward                                                 667                821
         Other                                                                              171                457
                                                                                         ------             ------
           Gross deferred tax assets                                                     49,093             51,115
           Less:  valuation allowance                                                    38,256             43,258
                                                                                         ------             ------
           Net deferred tax assets                                                       10,837              7,857
                                                                                         ------             ------
      Deferred tax liabilities:
         Property and equipment                                                          10,797              7,650
         Other                                                                               40                207
                                                                                        -------             ------
         Gross deferred tax liabilities                                                  10,837              7,857
                                                                                         ------             ------
      Net deferred income taxes                                                    $         --        $        --
                                                                                       ========           ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was $39.5
million. The net changes in the total valuation allowance for the years ended
December 31, 1997 and 1996 were a decrease of $5.0 million and an increase of
$3.8 million, respectively. The Company's estimate of the required valuation
allowance is based on a number of factors, including historical operating
results. The Company generated net earnings in 1997 and 1995, as compared to net
losses in both 1996 and 1994. If the Company generates net earnings in 1998 and
favorably resolves certain of the uncertainties facing the Company (see Note 2),
it is possible that a change in the estimate of the required valuation allowance
will occur in the near term, and could differ materially from the amount
recorded at December 31, 1997.

The availability of net operating loss carryforwards to reduce the Company's
future federal income tax liability is subject to limitations under section 382
of the Internal Revenue Code of 1986, as amended (the "Code"). Generally, these
limitations restrict the availability of net operating loss and investment tax
credit carryforwards upon certain changes in stock ownership by five percent
shareholders which, in aggregate, exceed 50 percentage points in value in a
three-year period ("Ownership Change").

In August 1991, 5.7 million shares of WorldCorp common stock were sold by a
group of existing shareholders. This transaction constituted an Ownership Change
as defined under  Section 382 of the Internal  Revenue Code of 1986, as amended.
This Ownership  Change subjects the Company to an annual  limitation in 1991 and
future years in the use of net operating loss,  alternative  minimum tax credit,
and investment tax credit  carryforwards  which were available to WorldCorp (and
thus  allocable  to the  Company)  on the date on  which  the  Ownership  Change
occurred. As of December 31, 1997, the Company had net operating loss
<PAGE>

carryforwards for federal income tax purposes of $92.2 million. Of this amount,
$27.8 million is subject to a $6.9 million annual limitation resulting from the
1991 Ownership Change. The Company's net operating loss carryforwards expire as
follows (in millions):

            1998              $   3.2
            1999                 12.0
            2000                 15.8
            2001                 10.2
            2005                  4.0
            2008                 26.3
            2009                 17.9
            2011                  2.8
                                -----
                              $  92.2

Use of the Company's net operating loss carryforwards in future years could be
further limited if an Ownership Change were to occur in the future. While the
Company believes that as of December 31, 1997, no Ownership Change has occurred
since the 1991 Ownership Change, the application of the Code in this area is
subject to interpretation by the Internal Revenue Service. The NOLs are subject
to examination by the IRS and, thus, are subject to adjustment or disallowance
resulting from any such IRS examination. In addition, conversion of the
Debentures or future transactions in the Company's common stock or the common
stock of the Company's stockholders, including conversions of a portion of the
outstanding WorldCorp debentures into common stock, may cause an Ownership
Change, which could result in a substantial reduction in the annual limitation
in the use of the NOLs and the loss of a substantial portion of the NOLs
available to the Company.

15.  MAJOR CUSTOMERS

The Company operates in one business segment, the non-scheduled air
transportation industry. Information concerning customers for years in which
their revenues comprised 10% or more of the Company's operating revenues is
presented in the following table (in thousands):

                                              Year ended December 31,
                                     --------------------------------------
                                        1997          1996           1995
                                     ---------     ---------     ----------

Malaysian Airlines                   $  64,995     $ 105,410     $  100,934
U.S. Department of Defense 
   (including U.S. Air Force)           78,896        79,029         52,889
Philippine Airlines                     95,427        46,516             --
P. T. Garuda Indonesia                  30,627        39,849         26,263
Look Charters                               --         3,749          3,677

World Airways has provided wet lease  services to Malaysian  Airlines since
1981,  providing wet lease services for Malaysian  Airlines' scheduled passenger
and cargo  operations  as well as  transporting  passengers  for the annual Hadj
pilgrimage.  MHS, which owned 16.8% of the Company as of January 23, 1998,  also
owns 28% of  Malaysian  Airlines. The Company also entered into a  32-month
agreement for year-round operations (including the Hadj) with Malaysian Airlines
whereby the Company is providing  two  passenger  aircraft  with cockpit  crews,
maintenance and insurance to Malaysian Airlines' newly-formed charter division
through May 1999.  However,  the Company agreed to a five month reduction in the
utilization of one aircraft during 1997, although the aircraft was redeployed in
other  activity.  Malaysian  Airlines  has  not informed the Company  of  any
reductions  for  1998. The Company provided  three  aircraft  for  1997  Hadj
operations.

MAS  received  notice  from the  Malaysian  Hadj  Board  that MAS would not
participate  in the 1998 Hadj  pilgrimage.  As a  result,  MAS  entered  into an
agreement on behalf of the Company for the Company to provide two DC-10 aircraft
to fly in the 1998 Indian Hadj.

<PAGE>

The Company has a long-term contract to operate three MD-11 cargo aircraft for
Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by
the parties, World Airways redeployed two cargo aircraft, which had been
operating under these contracts, into another contract which ended in February
1998. The Company and Malaysian Airlines are currently discussing the 
redeployment of these aircraft back into Malaysian Airlines' operations during 
1998 in order to meet the contracts' original obligations. The Company can 
provide no assurances, however, that the Company will, in fact, be able to do 
so.

Malaysian Airlines is subject to the financial difficulties associated with the
adverse economic conditions in Malaysia and the Asia Pacific Region, but it has
remained current with its payments for committed block hour minimums provided in
the contracts.  Failure by Malaysian Airlines to meet its aircraft lease
obligations, if not offset by other business, would have a material adverse
effect on the financial condition, cash flows and results of operations of the
Company.

The Company's contract with the U.S. Air Force expires in September 1998. The
Company anticipates that future renewals of the U.S. Air Force contract will be
on an annual basis.

The Company has provided service to PT Garuda Indonesia ("Garuda") since 1973
and has operated under an annual Hadj contract since 1988. World Airways
operated six aircraft in the 1997 Garuda Hadj and seven aircraft in the 1996
Garuda Hadj. The Company will operate six aircraft for the 1998 Garuda Hadj.

The Company had agreements with Philippine Airlines to operate four passenger
aircraft until November 1997. As a result of the economic distress experienced
in the Philippines, the Company negotiated to terminate the agreements on two of
the aircraft effective in August 1997, and received monthly termination payments
totaling $3.0 million through the original end of the agreements in November
1997. In addition, the contracts on the remaining two aircraft were extended
until February 1998 and the per block hour rates for those two aircraft were
reduced slightly. The two aircraft which were removed from Philippine Airlines
service were redeployed by the Company under agreements with other customers.
The contract with Philippine Airlines expired in February 1998.

World Airways provided service to Look Charters under an annual contract from
1992 through 1996. In 1996 and 1995, World Airways performed operations for a
summer charter program transporting passengers between Paris, France and various
locations in the United States and Mexico.

Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements. See Note 2 for further discussion.

The Company derives a significant percentage of its revenues and block hours
from its operations in the Pacific Rim region. Any further economic decline or
any military or political disturbance in this area may interfere with the
Company's ability to provide service in this area and could have a material
adverse effect on the financial condition or results of operations of the
Company. See Note 2 for further discussion.

<PAGE>
All export contracts are denominated in U.S. dollars as are substantially all of
the related expenses. The classification between domestic and export revenues is
based on entity definitions prescribed in the economic regulations of the
Department of Transportation. Information concerning the Company's export
revenues from continuing operations is presented in the following table (in
thousands):
                                          For the Years Ended December 31,
                                  ---------------------------------------------
                                        1997            1996           1995
                                        ----            ----           ----
Operating Revenues:
  Domestic                        $    97,469      $    91,516      $    59,278
  Export -  Malaysia                   64,995          105,410          100,934
         -  Philippines                95,427           46,516               --
         -  Indonesia                  30,627           39,849           26,263
         -  Belgium                    15,407               --               --
         -  France                         --            3,749            6,897
         -  Other                       5,487           22,547           49,014
                                      -------          -------          -------
    Total                         $   309,412      $   309,587      $   242,386
                                      =======          =======          =======

16.  RELATED PARTY TRANSACTIONS

Effective January 23, 1998 and December 31, 1997, WorldCorp owned approximately
51.2% and 46.3%, respectively, of the outstanding common stock of World Airways.
Transactions between World Airways and WorldCorp are described in Note 4.

Effective January 23, 1998 and December 31, 1997, MHS owned approximately 16.8%
and 24.9%, respectively, of the outstanding common stock of World Airways.
Effective December 31, 1997, MHS owned approximately 28% of the outstanding
common stock of Malaysian Airlines. Malaysian Airlines is one of World Airways'
largest customers (see Notes 5 and 15).

In 1997, the Company paid T. Coleman Andrews, the Chairman of WorldCorp and
World Airways, $175,000 in salary for his services as Chairman of the Board of
Directors of World Airways.

Bain & Company, Inc. provided consulting services of approximately $150,000 to
the Company during 1995.  A principle of Bain & Company is also a member of the 
Board of Directors of WorldCorp.

17.  COMMITMENTS AND CONTINGENCIES

LITIGATION AND CLAIMS

World Airways and WorldCorp  (the "World  Defendants")  were  defendants in
litigation  brought  by the  Committee  of  Unsecured  Creditors  of  Washington
Bancorporation in August 1992, captioned Washington Bancorporation v. Boster et.
al., Adv.  Proc.  92-0133  (Bankr.  D.D.C.) (the "Boster  Litigation").  Under a
settlement agreement,  the plaintiff agreed to dismiss with prejudice the Boster
Litigation  against all defendants,  including the World  Defendants,  with each
party  to bear  its  own  costs.  Under  the  settlement  agreement,  the  World
Defendants do not have any further liability in the Boster Litigation.

The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 1998.
Approximately 37% of the Company's employees are covered under this collective
bargaining agreement. The Company expects to begin negotiations in April 1998
and cannot predict the outcome of the negotiations or their possible impact on
the Company's financial condition and results of operations. 

The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants argued the "scope clause" of the
collective bargaining agreement had been violated by the Company and challenged
the use of foreign flight attendant crews on the

<PAGE>

Company's flights for Malaysian Airlines and Garuda Indonesia which has
historically been the Company's operating procedure. The Company is
contractually obligated to permit its Southeast Asian customers to deploy their
own flight attendants. While the arbitrator in this matter denied in 1997 the
Union's request for back pay to affected flight attendants for flying relating
to the 1994 Hadj, the arbitrator concluded that the Company's contract with its
flight attendants requires the Company to first actively seek profitable
business opportunities that require using the Company's flight attendants,
before the Company may accept wet lease business opportunities that use the
flight attendants of the Company's customers. Subsequently, in 1997, the flight
attendants challenged and filed "scope clause" grievances with respect to four
separate wet-lease contracts. The Company and the Teamsters are presently in
discussions regarding these grievances. At this time, however, the Company can
give no assurance that these discussions will be successful and the grievances
will not be submitted to formal arbitration. The Company can provide no
assurance as to how the resolution of this matter will affect the Company's
financial condition and results of operations.

World Airways has periodically received correspondence from the FAA with respect
to minor noncompliance matters. In November 1996, as the FAA has increased its
scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of
$810,000 in connection with certain security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. Under 49
U.S.C., Section 46301, any violation of pertinent provisions of 49 U.S.C.
Subsection 40101 or related rules is subject to a civil penalty for each
violation. Upon review of the evidence or facts and circumstances relating to
the violation, the statute allows for the compromise of proposed civil
penalties. The penalties were proposed by the FAA in connection with inspections
at foreign airport facilities and relate primarily to ground handling services
provided by World Airways' customers in connection with their operations;
specifically, the inspection procedures of its aircraft, passengers and
associated cargo. In each of these instances, World Airways' customer was in
compliance with international regulations, but not the more stringent U.S.
requirements, despite the fact that the flights in question did not originate or
terminate in the United States. World Airways has taken steps to comply with the
U.S. requirements. In September 1997, the Company entered into a consent order
and settlement agreement with the FAA in connection with the above-mentioned
alleged violations. Pursuant to this agreement, the Company is liable for the
sum of $610,000, of which $405,000 was paid in September. The remaining $205,000
was suspended and will be forgiven if the Company complies with the provisions
of the settlement agreement, including not incurring any security violations
during the one year period following the execution of the settlement agreement.
While World Airways believes it is currently in compliance in all material
respects with all appropriate standards and has all required licenses and
authorities, any material non-compliance by World Airways therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the financial condition or results of operations of World
Airways.

In connection with the discontinuance of World Airways' scheduled service
operations, World Airways is subject to claims by various third parties and may
be subject to further claims in the future. One claim which had been filed in
connection with World Airways' discontinuance of scheduled service to South
Africa, and which sought approximately $37.8 million in compensatory and
punitive damages, has been settled by the parties for approximately $0.7
million. Also, a claim has been filed in Germany against the Company by a tour
operator seeking approximately $3.5 million in compensation related to the 
cancellation of a summer program in 1996.  The Company believes it has 
substantial defenses to this action, although no assurance can be given of the
eventual outcome of this litigation. 

The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.

<PAGE>

CONTINGENT RENTAL PAYMENTS

In July 1993, the Company returned certain DC10-30 aircraft to the lessor (see
Note 11). As a result of this early lease termination, the Company is
responsible, until 2004 for one aircraft and 2005 for the second aircraft, for
one-third of any deficit in rent incurred in future leases of the aircraft, up
to $100,000 monthly per plane, with an overall combined cap of $1,850,000. The
Company incurred $984,000 for rent shortfalls through December 1996. The 
Company's remaining contingent liability related to this matter approximates
$866,000.

LETTERS OF CREDIT

At December 31, 1996, restricted cash and short-term investments included
customer deposits held in escrow and cash pledged as collateral for various
letters of credit facilities issued by a bank on the Company's behalf totaling
$1.0 million, with expiration dates occurring in 1997. At December 31, 1997,
there were no outstanding letters of credit.

MD-11 ENGINE MAINTENANCE AGREEMENT

Engine maintenance accounts for most of the Company's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. The Company outsources major airframe maintenance and power plant
work to several suppliers. The Company has a 10-year contract expiring in August
2003 with United Technologies Corporation's Pratt & Whitney Group for all
off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under
this contract, the manufacturer agreed to provide such maintenance services at a
cost not to exceed specified rates per hour during the term of the contract. The
specified rates per hour are subject to annual escalation, increasing
substantially in 1998. Accordingly, while the Company believes the terms of this
agreement have resulted in lower engine maintenance costs than it otherwise
would incur, engine maintenance costs will increase substantially during the
last five years of the agreement. The Company began to accrue these increased
expenses in 1997 and such expenses will continue to increase during the
remainder of the term of the contract as the Company's aircraft fleet ages.

<PAGE>

18.  UNAUDITED QUARTERLY RESULTS

The results of the Company's quarterly operations (unaudited) for 1997 and 1996
are as follows (in thousands except share data):
<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                            ---------------------------------------------------------
                                             March 31       June 30      September 30     December 31  Total Year
                                             --------       -------      ------------     -----------  ----------
<S>                                         <C>            <C>           <C>            <C>            <C> 
    1997
    ----

    Operating revenues                      $   78,748     $  81,928     $   79,924     $   68,812     $  309,412

    Operating income (loss)                      6,336         6,498 (1)      4,523 (2)      (500)         16,857

    Earnings (loss) from
        continuing operations                    5,020         5,646          3,726        (2,425)         11,967

    Discontinued operations (less
        applicable tax benefit)                     --            --             --          (515)          (515)

    Net earnings (loss)                     $    5,020     $   5,646     $    3,726     $  (2,940)     $   11,452

    Basic earnings (loss) per common 
      share(4):
        Continuing operations               $     0.45     $    0.50     $     0.35     $   (0.30)     $     1.16
        Discontinued operations                     --            --             --         (0.07)         (0.05)
                                                 -----         -----          -----         ------         ------
        Net earnings (loss)                 $     0.45     $    0.50     $     0.35     $   (0.37)     $     1.11
                                                  ====          ====           ====         ======         ======

    Diluted earnings (loss) per common 
      equivalent share(4):
        Continuing operations               $     0.45     $    0.50     $     0.25     $        *     $     1.09
        Discontinued operations                     --            --             --              *         (0.05)
                                                 -----         -----          -----        -------         ------
        Net earnings                        $     0.45     $    0.50     $     0.25     $        *     $     1.04
                                                  ====          ====           ====        =======         ======

    1996
    ----
    Operating revenues                      $   65,365     $  86,508     $   75,397     $   82,317     $  309,587

    Operating income (loss)                    (3,325)        15,271          3,716          5,983         21,645

    Earnings (loss) from
        continuing operations                  (3,687)        14,459          2,909          4,672 (3)     18,353

    Discontinued operations (less
        applicable tax benefit)                (4,187)      (28,518)            180            150       (32,375)

    Net earnings (loss)                     $  (7,874)     $(14,059)     $    3,089     $    4,822     $ (14,022)

    Basic earnings (loss) per common share(4):
        Continuing operations               $   (0.31)     $    1.20     $     0.24     $     0.42     $     1.55
        Discontinued operations                 (0.35)        (2.37)           0.02           0.01         (2.74)
                                                ------        ------           ----           ----         ------
        Net earnings (loss)                 $   (0.66)     $  (1.17)     $     0.26     $     0.43     $   (1.19)
                                                ======        ======           ====           ====         ======
    Diluted earnings (loss) per common 
      equivalent share (4):
        Continuing operations               $   (0.31)     $    1.20     $     0.24     $     0.42     $     1.55
        Discontinued operations                 (0.35)        (2.37)           0.02           0.01         (2.74)
                                                ------        ------           ----           ----         ------
        Net earnings (loss)                 $   (0.66)     $  (1.17)     $     0.26     $     0.43     $   (1.19)
                                                ======        ======           ====           ====         ======
</TABLE>
<PAGE>
(1) Operating expenses include a $1.0 million reversal of accrued maintenance
    expense in excess of the cost of an overhaul of a DC-10 aircraft. 
(2) Operating expenses include a $2.3 million reversal of aircraft costs
    incurred in 1996 and the first six months of 1997, relating to
    reimbursements for disputed spare engine lease charges (see Note 11).
(3) Earnings from continuing operations in the quarter ended December 31, 1996
    includes the reversal of maintenance costs, which had been accrued
    throughout 1996, of $1.5 million relating to the termination of two DC10-30
    aircraft in December 1996 (see Note 5).
(4) Earnings per share for the periods presented have been calculated in
    accordance with Financial Accounting Standard Board's Statement of Financial
    Accounting Standard No. 128, Earnings Per Share.

*   Diluted earnings per share are anti-dilutive.

<PAGE>




                          INDEPENDENT AUDITORS' REPORT



THE BOARD OF DIRECTORS AND STOCKHOLDERS
WORLD AIRWAYS, INC.:

We have audited the accompanying balance sheets of World Airways, Inc. ("World
Airways") as of December 31, 1997 and 1996, and the related statements of
operations, changes in common stockholders' equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the financial statements, we also have audited the
related financial statement schedule as listed in Item 14(a)(2) herein. These
financial statements and financial statement schedule are the responsibility of
World Airways' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of World Airways as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.



                                                         KPMG PEAT MARWICK LLP



WASHINGTON, D.C.
FEBRUARY 9, 1998




<PAGE>

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

Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The Company incorporates herein by reference the information concerning
directors contained in its Notice of Annual Stockholder's Meeting and Proxy
Statement to be filed within 120 days after the end of the Company's fiscal year
(the "1998 Proxy Statement").

EXECUTIVE OFFICERS

The following table sets forth the names and ages of all executive officers of
the Company and all positions and offices within the Company presently held by
such executive officers:

Name                       Age      Position Held

T. Coleman Andrews,III     43       Chairman of the Board, and Director

Russell L. Ray             62       President and Chief Executive Officer, 
                                    and Director

James D. Douglas           48       Executive Vice President and Chief 
                                    Financial Officer

Ahmad M. Khatib            49       Executive Vice President - Sales and 
                                    Marketing, and Director

Vance Fort                 54       Executive Vice President and General Counsel

William R. Lange           53       Executive Vice President - Operations

T. COLEMAN ANDREWS, III has served as Chairman of the Board of the Company since
September 1986. On March 14, 1997, World Airways announced that Charles W.
Pollard departed as President and Chief Executive Officer. Pursuant to the
Company's bylaws, Mr. Andrews acted as President and Chief Executive Officer on
an interim basis pending the hiring of a Russell L. Ray, Jr. as CEO in April
1997. He is a Director and Chairman of the Board of WorldCorp and has served as
a Director of InteliData Technologies Corporation (and its predecessor US Order,
Inc.) since 1990. From 1978 through 1986, he was affiliated with Bain & Company,
Inc., an international strategy consulting firm. At Bain, he was elected partner
in 1982 and was a founding general partner in 1984 of The Bain Capital Fund, a
private venture capital partnership. Prior to his experience with Bain, Mr.
Andrews served in several appointed positions in the White House for the Ford
Administration. He is the brother of A. Scott Andrews.

RUSSELL L. RAY,  JR. has served as a  Director  of the  Company  since July
1993. Mr. Ray was appointed President and CEO of World Airways on April 4, 1997.
Prior to that  appointment,  Mr. Ray was senior advisor to Winston  Partners,  a
private  investment  firm.  From 1992 to 1993,  Mr. Ray served as Executive Vice
President  of  British  Aerospace,  Inc.  from 1991 to 1992,  Mr.  Ray served as
President and CEO of Pan American World Airways. From 1988 to 1991, he served as
Vice President and General Manager of Commercial  Marketing of McDonnell Douglas
Corporation,  from 1985 to 1988,  he served as  President  of Pacific  Southwest
Airlines, and from 1971 to 1985, he served as Senior Vice President at Eastern
Airlines.  Mr. Ray has also served on the boards of directors of a number of
public and private companies.

<PAGE>

JAMES D. DOUGLAS currently serves as Executive Vice President and Chief
Financial Officer. He joined the Company in December 1997 after twenty six years
in the transportation industry, all within the Union Pacific Corporation
companies. During his tenure with Union Pacific, he held various positions,
primarily financial assignments, including Senior Vice President - Finance and
Administration for Overnite Transportation Company, Union Pacific's trucking
entity, and was President and Chief Operating Officer of that company prior to
joining World Airways.

VANCE FORT currently serves as Executive Vice President and General Counsel, and
manages the Human Resources department of the Company. He joined the Company as
Senior Vice President, Government and International Affairs, in September 1989.
He served as Vice President, International and Government Affairs for the Flying
Tiger Line, an air cargo service provider, from September 1987 to September
1989. From 1978 to 1987 he served in various positions at the U.S. Department of
Transportation, including service as Deputy Assistant Secretary for Policy and
International Affairs.

AHMAD M. KHATIB has served as a Director and Executive Vice President - Sales
and Marketing of the Company since February 1994. Mr. Khatib has served as
Senior Vice President, in different capacities, since June 1988. He joined the
Company in May 1972 as a passenger service agent. During his more than 25 years
with the Company, he has held numerous management positions in the areas of
sales, planning and services as well as in aircraft leasing and related
agreements, becoming Vice President of Marketing and Customer Services in 1987.

WILLIAM R. LANGE has served as Executive Vice President - Operations  since
June 19, 1997.  Prior to this date,  Mr. Lange was the founder and  principal of
Aero  Initiatives,  an aviation  consulting  firm.  Mr. Lange was Executive Vice
President  and Chief  Operating  Officer of Jetstream  Aircraft,  Inc. from 1993
until  founding Aero  Initiatives  in 1996,  and was Vice  President - Jetstream
Programs for British  Aerospace  Holdings,  Inc. from 1992.  Prior to that,  Mr.
Lange was President  and Chief  Operating  Officer of Pan Am Express,  Inc. from
1989 until 1993 and served in various  positions of Pan American  World Airways,
Inc. from 1973 until 1989.

BENEFICIAL OWNERSHIP REPORTING

The Company incorporates herein by reference the information required by Item
405 of Regulation S-K contained in its 1998 Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

The Company incorporates herein by reference the information concerning
executive compensation contained in the 1998 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 1998
Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 1998 Proxy Statement.

<PAGE>
                                     PART IV

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

(a) The following documents are filed as part of this report:

     (1)  Financial Statements

          The following financial statements of World Airways, Inc. are filed
          herewith:

          Balance Sheets, December 31, 1997 and 1996

          Statements of Operations, Years Ended December 31, 1997, 1996 and 1995

          Statements of Changes in Common Stockholders' Equity (Deficit),
             Years Ended December 31, 1997, 1996 and 1995

          Statements of Cash Flows, Years Ended December 31, 1997, 1996 and 1995

          Notes to Financial Statements

          Independent Auditors' Report

     (2)  Financial Statement Schedule

          Schedule
           Number

             II.   Valuation and Qualifying Accounts

           NOTE:  All other schedules are omitted because the requisite
                  information is either presented in the financial statements or
                  notes thereto or is not present in amounts sufficient to
                  require submission of the schedules.

      (3)  Index to Exhibits


 No.    Description

 1.1    Form of Underwriting Agreement to be entered into among the Company,
        WorldCorp, Inc. and the Underwriters. Incorporated herein by reference.

 3.1    Amended and Restated Certificate of Incorporation. Incorporated herein 
        by reference.

 3.2    Amended and Restated Bylaws. Incorporated herein by reference.

 4.1    Article IV of the Company's Amended and Restated Certificate of
        Incorporation, incorporated by reference to Exhibit 3.1 filed herewith,
        and Section 6 of the Company's Bylaws, incorporated by reference to
        Exhibit 3.2 filed herewith.

 5.1    Opinion of Hunton & Williams. Incorporated herein by reference.

<PAGE>

10.1    The Company's 1995 Stock Option Plan. Incorporated herein by reference.

10.2    Form of Directors' Indemnification Agreement.

10.3    Employment Agreement between the Company and Charles W. Pollard, dated
        as of January 1, 1995. Incorporated herein by reference.

10.4    Amendment No. 1 to the Employment Agreement between the Company and 
        Charles W. Pollard, dated as of May 31, 1995. Incorporated herein by 
        reference.

10.5    Stock Option Agreement between the Company and Charles W. Pollard, 
        dated as of January 1, 1995. Incorporated herein by reference.

10.6    Amendment No. 1 to the Stock Option Agreement between the Company and
        Charles W. Pollard, dated as of May 31, 1995. Incorporated herein by
        reference.

10.7    Agreement between the Company and Flight Attendants represented by
        International Brotherhood of Teamsters. (Filed as Exhibit 10.67 to
        WorldCorp, Inc.'s Form S-3 Registration Statement (Commission File No.
        91998) filed on December 10, 1987 and incorporated herein by reference.)

10.8    Office Lease--The Hallmark Building dated as of September 20, 1989
        between the Company and GT Renaissance Centre Limited Partnership.
        (Filed as Exhibit 10.38 to WorldCorp, Inc.'s Annual Report on Form 10-K
        for the fiscal year ended December 31, 1989 and incorporated herein by
        reference.)

10.9    Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.38 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.10   Amendment No. 1 to Aircraft Lease Agreement for Aircraft Serial Number
        48518 dated as of November 1992 between the Company and International
        Lease Finance Corporation. (Filed as Exhibit 10.68 to WorldCorp, Inc.'s
        Annual Report on Form 10-K for the fiscal year ended December 31, 1993
        and incorporated herein by reference.)

10.11   Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number
        48518 dated as of March 8, 1993 between the Company and International
        Lease Financial Corporation. (Filed as Exhibit 10.69 to WorldCorp,
        Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31,
        1993 and incorporated herein by reference.)

10.12   Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.39 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.13   Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number
        48519 dated as of April 23, 1993 between the Company and International
        Lease Finance Corporation. Incorporated herein by reference.

10.14   Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number
        48519 dated as of April 1993 between the Company and International Lease
        Finance. Incorporated herein by reference.

10.15   Aircraft Lease Agreement for Aircraft Serial Number 48437 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.40 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.16   Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number 
        48437 dated as of March 31, 1993 between the Company and International 
        Lease Finance Corporation. (Filed as Exhibit 10.73 to WorldCorp, Inc.'s
        Annual Report on Form 10-K for the fiscal year ended December 31, 1993
        and incorporated herein by reference.)


<PAGE>

10.17   Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number
        48437 dated as of April 15, 1993 between the Company and International
        Lease Finance Corporation. (Filed as Exhibit 10.74 to WorldCorp, Inc.'s
        Annual Report on Form 10-K for the fiscal year ended December 31, 1993
        and incorporated herein by reference.)

10.18   Aircraft Lease Agreement for Aircraft Serial Number 48633 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.41 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.19   Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.42 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.20   Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number
        48631 dated as of April 28, 1995 between the Company and International
        Lease Finance Corporation. Incorporated herein by reference.

10.21   Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as of
        September 30, 1992 between the Company and International Lease Finance
        Corporation. (Filed as Exhibit 10.43 to WorldCorp, Inc.'s Annual Report
        on Form 10-K for the fiscal year ended December 31, 1992 and
        incorporated herein by reference.)

10.22   Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number
        48632 dated as of April 28, 1995 between the Company and International
        Lease Finance Corporation. Incorporated herein by reference.

10.23   Accounts Receivable Management and Security Agreement dated as of
        December 7, 1993 between the Company and BNY Financial Corporation.
        (Filed as Exhibit 10.46 to WorldCorp, Inc.'s Annual Report on Form 10-K
        for the fiscal year ended December 31, 1993 and incorporated herein by
        reference.)

10.24   Amendment (No. 1) to the Accounts Receivable Management and Security
        Agreement between the Company and BNY Financial Corporation dated March
        15, 1995 and effective as of January 1, 1995. Incorporated herein by
        reference.

10.25   Amendment No. 2 to the Accounts Receivable Management and Security
        Agreement between the Company and BNY Financial Corporation dated August
        1995. Incorporated herein by reference.

10.26   Long Term Aircraft Charter Agreement dated August 20, 1986 between the
        Company and Malaysian Airline System Berhad (Filed as Exhibit 10.79 to
        WorldCorp's Annual Report on Form 10-K for the year ended December 31,
        1986). Incorporated herein by reference.

10.27   Amendment dated April 10, 1991 to the Long Term Aircraft Charter
        Agreement dated August 20, 1986 between the Company and Malaysian
        Airline System Berhad. Incorporated herein by reference.

10.28   Stock Purchase Agreement by and among the Company, WorldCorp, Inc., and
        Malaysian Helicopter Services Berhad dated as of October 30, 1993.
        (Filed as Exhibit 10.87 to WorldCorp, Inc.'s Annual Report on Form 10-K
        for the fiscal year ended December 31, 1994 and incorporated herein by
        reference.)

10.29   Stock Registration Rights Agreement between the Company and Malaysian
        Helicopter Services Berhad dated as of October 30, 1993. (Filed as
        Exhibit 10.88 to WorldCorp, Inc.'s Annual Report on Form 10-K for the
        fiscal year ended December 31, 1994 and incorporated herein by
        reference.)

10.30   Shareholders Agreement between Malaysian Helicopter Services Berhad, 
        WorldCorp, Inc. and the Company, dated as of February 3, 1994. (Filed 
        as Exhibit 10.89 to WorldCorp, Inc.'s Annual Report on Form 10-K for
        the fiscal year ended December 31, 1994 and incorporated herein by 
        reference.)

<PAGE>

10.31   Amendment No. 1 to Shareholders Agreement dated as of February 28, 1994,
        among WorldCorp, the Company and Malaysian Helicopter Services Berhad.
        (Filed as Exhibit 10.90 to WorldCorp Inc.'s Annual Report on Form 10-K
        for the fiscal year ended December 31, 1994 and incorporated herein by
        reference.)

10.32   Agreement between the Company and the International Brotherhood of
        Teamsters representing the Cockpit Crewmembers employed by the Company
        dated August 15, 1994-June 30, 1998. (Filed as Exhibit 10.98 to
        WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended
        December 31, 1994 and incorporated herein by reference.)

10.33   Aircraft Services Agreement dated September 26, 1994 by and between the
        Company and Malaysian Airline System Berhad. (Filed as Exhibit 10.101 to
        WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended
        December 31, 1994 and incorporated herein by reference.)

10.34   Freighter Services Agreement dated October 6, 1994 by and between the
        Company and Malaysian Airline System Berhad. (Filed as Exhibit 10.102 to
        WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended
        December 31, 1994 and incorporated herein by reference.)

10.35   Amendment No. 1 to Passenger Aircraft Services and Freighter Services
        Agreement dated December 31, 1994 by and between the Company and
        Malaysian Airline System Berhad. (Filed as Exhibit 10.107 to WorldCorp,
        Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31,
        1994 and incorporated herein by reference.)

10.36   Amendment No. 2 to the Aircraft Services and Freighter Services
        Agreements by and between the Company and Malaysian Airline System
        Berhad, dated February 9, 1995. Incorporated herein by reference.

10.37   Amendment No. 3 to the Freighter Services Agreement by and between the
        Company and Malaysian Airline System Berhad dated May, 1995.
        Incorporated herein by reference.

10.38   1995 U.S. Air Force Contract F11626-94-D0027 dated October 1, 1994
        between the Company and Air Mobility Command. (Filed as Exhibit 10.103
        to WorldCorp, Inc.'s Annual Report on Form 10-K/A for the fiscal year
        ended December 31, 1994 and incorporated herein by reference.)

10.39   FY1996 Contractor Team Agreement among the Company, Continental
        Airlines, Inc., Emery Worldwide Airlines, Inc., Evergreen International
        Airlines, Inc., Miami Air International, Inc., Northwest Airlines, Inc.
        and Rich International Airways, Inc. dated April 3, 1995. Incorporated
        herein by reference.

10.40   Lease agreement for Aircraft Serial Number 48485 dated as of January 15,
        1991 between the Company and First Security National Bank of Utah, N.A.
        (Filed as Exhibit 10.65 to WorldCorp, Inc.'s Annual Report on Form 10-K
        for the fiscal year ended December 31, 1991 and incorporated herein by
        reference).

10.41   Maintenance Agreement between Malaysian Airline System Berhad and the
        Company dated March 1, 1995. Incorporated herein by reference.

10.42   Form of Master Services Agreement between the Company and WorldCorp, 
        Inc. Incorporated herein by reference.

10.43   1996 U.S. Air Force Contract dated October 1, 1995 between the Company 
        and Air Mobility Command. Incorporated herein by reference.

10.44   Amendment No. 3 to the Accounts Receivable Management and Security
        Agreement between the Company and BNY Financial Corporation dated as of
        September 28, 1995. Incorporated herein by reference.

<PAGE>

10.45   Amendment No. 4 to the Accounts Receivable Management and Security
        Agreement between the Company and BNY Financial Corporation dated as of
        September 28, 1995. Incorporated herein by reference.

10.46   Form of Non-Employee Directors' Stock Option Plan. Incorporated herein 
        by reference.

11.1   Computation of earnings (loss) per share.                 Filed Herewith

23.1   Consent of Independent Auditors                           Filed Herewith

27     Financial data schedule for the year ended
       December 31, 1997                                         Filed Herewith

(b)    Reports on Form 8-K

       Form 8-K dated September 18, 1997, was filed with the Securities and
       Exchange Commission on October 2, 1997.


 
<PAGE>



                            STATUS OF PRIOR DOCUMENTS

World Airways' Annual Report on Form 10-K for the year ended December 31, 1997,
at the time of filing with the Securities and Exchange Commission, shall modify
and supersede all prior documents filed pursuant to Sections 13, 14, and 15(d)
of the Securities Exchange Act of 1934 for purposes of any offers or sales of
any securities after the date of such filing pursuant to any Registration
Statement or Prospectus filed pursuant to the Securities Act of 1933, as
amended, which incorporates by reference such Annual Report on Form 10-K.


*     *     *     *     *     *     *     *     *     *     *     *     *     *


<PAGE>



                                   SIGNATURES

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

                               WORLD AIRWAYS, INC.



                                                    By
                                                    James D. Douglas
                                                    Chief Financial Officer

Pursuant to the requirements of the Securities 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.

Signature                       Title                            Date
---------                       -----                            ----


/s/ Russell L. Ray, Jr.         Chief Executive Officer and       March 31, 1998
(Russell L. Ray, Jr.)           President


/s/ T. Coleman Andrews, III     Chairman of the Board             March 31, 1998
(T. Coleman Andrews, III)


/s/ James D. Douglas            Chief Financial Officer           March 31, 1998
(James D. Douglas)


/s/ Daniel J. Altobello         Director                          March 31, 1998
(Daniel J. Altobello)


/s/ A. Scott Andrews            Director                          March 31, 1998
(A. Scott Andrews)


/s/ John C. Backus              Director                          March 31, 1998
(John C. Backus)


/s/ Ronald R. Fogleman          Director                          March 31, 1998
(Ronald R. Fogleman)


/s/ Wan Malek Ibrahim           Director                          March 31, 1998
(Wan Malek Ibrahim)


/s/ Ahmad M. Khatib             Director                          March 31, 1998
(Ahmad M. Khatib)


/s/ Peter M. Sontag             Director                          March 31, 1998
(Peter M. Sontag)

 
/s/ Lim Kheng Yew               Director                          March 31, 1998
(Lim Kheng Yew)