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


                            FORM 10-Q



(Mark One)


( X )     QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
          PERIOD ENDED SEPTEMBER 30, 1996


                                OR


(    )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
          PERIOD FROM _______ TO _______.


Commission File Number 0-27034

                                 
                     VANGUARD AIRLINES, INC.
      (Exact name of Registrant as specified in its charter)


          Delaware                                48-1149290
(State or other jurisdiction                 (I.R.S. Employer
of incorporation or organization)                      Identification Number)



                       30 N.W. Rome Circle
                         Mezzanine Level
                Kansas City International Airport
                   Kansas City, Missouri 64153
                          (816) 243-2100
   (Address of principal executive offices, including zip code;
       Registrant's telephone number, including area code)


     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 ______

     At September 30, 1996, there were 9,955,773 shares of Common
Stock , par value $.001 per share issued and outstanding.


<PAGE>


PART I. - FINANCIAL INFORMATION
     ITEM 1. FINANCIAL STATEMENTS

<TABLE>
                           VANGUARD AIRLINES, INC.
                               BALANCE SHEETS
<CAPTION>

                                       SEPTEMBER 30, 1996    DECEMBER 31
                                           (UNAUDITED)           1995
ASSETS
<S>
Current assets:                              <C>             <C>
 Cash and cash equivalents                   $ 1,859,487     $  3,491,640
 Restricted cash                               2,540,068            ----   
 Accounts receivable, less 
   allowance                                   1,699,222        1,271,245
   of $197,000 at September 30, 
   1996 and December 31, 1995
 Inventory                                       721,334          338,119
 Prepaid expenses and other 
   current assets                              5,878,176        4,432,150
Total current assets                          12,698,287        9,533,154


Property and equipment, at cost:                                         
 Aircraft improvements and 
   leasehold costs                             3,559,192       3,409,633 
 Reservation system and 
   communication equipment                     1,482,484         884,939 
 Other property and equipment                  2,832,701        1,420,610
                                               7,874,377        5,715,182
 Less accumulated depreciation 
   and amortization                          (2,179,279)      (1,164,364)
                                               5,695,098        4,550,818


Other assets:
 Leased aircraft deposits                      1,506,000        1,506,000
 Fuel and security deposits                      977,238          820,213
 Other                                           562,726           15,513
                                               3,045,964        2,341,726

Total assets                                 $21,439,349      $16,425,698



</TABLE>


<PAGE>



<TABLE>
                     VANGUARD AIRLINES, INC.
                    BALANCE SHEETS (CONTINUED)

<CAPTION>
                                          SEPTEMBER 30, 1996    DECEMBER 31
                                            (UNAUDITED)             1995

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S>                                          <C>                <C>
Current liabilities:
 Notes payable                               $ 4,000,000         ----       
 Accounts payable                              5,847,919        3,400,288
 Accrued expenses                              3,218,329        2,303,377
 Accrued maintenance                           5,090,565        4,728,557
 Air traffic liability                         3,681,959        2,260,721
 Current portion of capital 
   lease obligations                              97,976          101,989
Total current liabilities                     21,936,748       12,794,932  
 
Capital lease obligations, 
 less current portion                            104,143           86,133

Commitments

Stockholders' equity (deficit):
  Common Stock, $.001 par value:
   Authorized shares - 15,000,000: 
   Issued and outstanding shares - 
   9,955,773 in 1996 and 8,524,376 
   in 1995                                         9,956            8,524
 Additional paid-in capital                   26,551,056       19,301,937
 Accumulated deficit                        (27,067,755)     (15,637,987)
                                               (506,743)        3,672,474
 Deferred stock compensation                    (94,560)        (127,841)
 Treasury stock                                    (239)           ---- 
Total stockholders' equity 
 (deficit)                                     (601,542)        3,544,633
Total liabilities and stockholders'  
   equity (deficit)                         $21,439,349       $16,425,698

</TABLE>

See accompanying Notes.


<PAGE>


<TABLE>

                     VANGUARD AIRLINES, INC.
                     STATEMENTS OF OPERATIONS
                           (UNAUDITED)
<CAPTION>

                                     THREE MONTHS ENDED                                            NINE MONTHS ENDED
                                        SEPTEMBER 30,                                                SEPTEMBER 30, 
                                  1995                 1996                                 1995                    1996
<S>                           <C>                   <C>                                 <C>                     <C>
Operating revenues:
 Passenger revenues           $10,524,122           $19,167,985                         $24,457,405             $ 52,140,355
 Other                            547,565               722,308                           1,106,186                2,534,986
Total operating revenues       11,071,687            19,890,293                          25,563,591               54,675,341

Operating expenses:
 Flying operations              1,982,180             4,419,541                           5,646,247              12,711,098 
 Aircraft fuel                  1,911,782             4,539,805                           4,908,812               11,730,787
 Maintenance                    1,221,075             3,804,766                           3,689,031               10,349,055
 Passenger service                795,542             1,603,014                           2,293,848                4,666,074
 Aircraft and traffic 
   servicing                    2,737,170             3,870,780                           6,882,510               11,481,168
 Promotion and sales            2,170,979             3,759,843                           6,290,237               11,119,769
 General and administrative       583,446             1,105,378                           1,872,972                2,922,121
 Depreciation and 
   amortization                   302,787               402,627                             726,360                1,111,923
Total operating expenses       11,704,961            23,505,754                          32,310,017               66,091,995

Operating loss                  (633,274)           (3,615,461)                         (6,746,426)             (11,416,654)

Other income (expense):
 Interest income                    7,011                46,270                              29,605                   79,291
 Interest expense                (40,539)              (62,446)                            (80,435)                 (92,405)
Total other income 
 (expense), net                  (33,528)              (16,176)                            (50,830)                 (13,114)
Net loss                    $   (666,802)          $(3,631,637)                        $(6,797,256)            $(11,429,768)

Net loss per share          $      (0.10)            $   (0.40) $                             (.98)               $   (1.32)

Weighted average common and 
 common equivalent shares 
 outstanding                    6,920,029             9,103,506                           6,903,995                8,626,709

</TABLE>                                                                        

See accompanying notes.


<PAGE>


                     VANGUARD AIRLINES, INC.
                     STATEMENTS OF CASH FLOWS
                           (UNAUDITED)
<TABLE>
                                    THREE MONTHS ENDED                                                  NINE MONTHS ENDED
                                       SEPTEMBER 30,                                                      SEPTEMBER 30,
                                  1995                1996                                      1995                       1996
<CAPTION>
<S>                           <C>                  <C>                                      <C>                        <C>
OPERATING ACTIVITIES:
Net loss                      $ (666,802)          $(3,631,637)                             $(6,797,256)               $(11,429,768)
Adjustments to reconcile
net loss to net cash
 provided by (used in)
 operating activities:
  Depreciation and 
   amortization                   326,770               402,627                                  726,360                1,111,923
  Compensation related to 
   stock options                    4,830                 8,588                                  117,330                   33,281
  Debt issuance cost 
   amortization                      ----                33,333                                     ----                   33,333
  Provision for 
   uncollectible accounts           8,893                15,703                                   55,893                   45,842
  Changes in operating assets 
  and liabilities:
   Restricted cash                   ----           (1,740,068)                                     ----              (2,540,068)
   Accounts receivable          (428,593)               930,221                              (1,225,048)                (473,819)
   Inventory                         ----             (186,114)                                 (36,349)                (383,215)
   Prepaid expenses and 
     other current assets       (922,563)           (1,298,194)                              (1,387,019)              (1,446,026)
   Deposits on leased 
     aircraft, fuel and 
     other                       (94,109)             (508,817)                                (273,004)                (637,571)
   Accounts payable             2,629,714               339,770                               4,826,279                3,443,889
   Accrued expenses and 
    accrued maintenance         (250,621)               862,741                                1,451,430                1,276,960
   Air traffic liability        (213,464)           (2,808,864)                                2,133,357                1,421,238
Net cash provided by 
(used in) operating 
activities                        394,055           (7,580,711)                                (408,027)              (9,544,001)

INVESTING ACTIVITIES:
Purchase of property and 
 equipment                      (347,127)             (899,129)                              (1,722,307)              (3,076,763)

FINANCING ACTIVITIES:
Proceeds from sale of common 
 stock and exercise of 
 options, net of offering 
 costs                             15,000             7,150,318                                  15,000                7,150,551
Purchase of treasury stock           ----                ----                                     ----                      (239)
Proceeds from notes payable          ----             8,650,000                               1,250,000                8,650,000
Principal payments on notes 
 payable                             ----           (4,650,000)                                     ----              (4,691,667)
Proceeds from issuance of 
  notes payable from 
 related parties                     ----               900,000                                     ----                  900,000
Principal payments on notes 
 payable from related parties        ----              (900,000)                                    ----                 (941,667)
Principal payments on capital  
 lease obligations               (27,142)              (43,259)                                  (67,412)                (120,034)
Net cash provided by 
(used in) financing 
activities                       (12,142)            11,107,059                                1,197,588               10,988,611

Net increase (decrease) in 
 cash and cash equivalents         34,786             2,627,219                                 (932,746)              (1,632,153)
Cash and cash equivalents, 
 beginning of period              159,277             (767,732)                                1,126,809                3,491,640
Cash and cash equivalents, 
 at end of period              $  194,063           $ 1,859,487                                $  194,063             $ 1,859,487
</TABLE>

<PAGE>

                                   VANGUARD AIRLINES, INC.
                           STATEMENTS OF CASH FLOWS (CONTINUED)
                                       (UNAUDITED)
<TABLE>

                                         THREE MONTHS ENDED                       NINE MONTHS ENDED
                                            SEPTEMBER 30,                           SEPTEMBER 30,
                                       1995                1996                1995               1996
<CAPTION>
<S>                                 <C>                  <C>               <C>                  <C>
Supplemental disclosures of 
 cash flow information:
Cash paid during the period 
 for interest                       $  40,540            $ 42,770          $  80,436            $ 72,729

Supplemental schedule of 
 noncash investing and 
 financing activities:
Aircraft leasehold costs 
 associated with accrued 
 maintenance                          $ ----               $ ----          $ 486,786              $ ----
Deferred compensation 
 costs associated with
 compensatory stock options           $ ----               $ ----         $  250,000              $ ----
Aircraft improvements financed 
 through the issuance of 
 notes payable                        $ ----              $  ----            $ ----           $1,000,000
Capital leases entered into 
 for property and equipment           $ ----              $  ----           $ 84,267           $ 134,031
Deferred debt issuance costs 
 recorded in in conjunction 
 with warrants issued                $  ----            $ 100,000           $ 50,000           $ 100,000
Retirement of notes payable 
 and reduction of accounts 
 payable through sale of
 property and equipment               $ ----          $ 1,954,591           $ ----           $ 1,954,591

</TABLE>


See accompanying notes.


<PAGE>


                     VANGUARD AIRLINES, INC.
    CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

     The financial statements of Vanguard Airlines, Inc. (the
"Company") presented herein, without audit except for balance
sheet information at December 31, 1995, have been properly
prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include
all of the information and note disclosures required by generally
accepted accounting principles.  These statements should be read
in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 1995, included in
the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 30, 1996. 

     The balance sheet as of September 30, 1996, the statements
of operations for the three months ended September  30, 1996 and
1995 and the nine months ended September 30, 1996 and 1995, and
the statements of cash flows for the three months ended September
30, 1996 and 1995 and the nine months ended September 30, 1996
and 1995 are unaudited but, in the opinion of management, include
all adjustments (consisting of normal, recurring adjustments)
necessary for a fair presentation of results for these interim
periods. 

     The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results
to be expected for the entire fiscal year ending December 31,
1996.

2.  ACCOUNTING POLICIES 

     The Company provides price protection discounts and refunds
to passengers as a result of schedule changes initiated by the
Company.  These amounts, which were previously netted against
service charge revenue and included as a component of other
revenues, have been reclassified against passenger revenue for
the periods ended September 30, 1996 on the accompanying
financial statements.  These amounts were not material, and
therefore not reclassified, for the periods ended September 30,
1995.

3.  NET LOSS PER SHARE

     For the periods ended September 30, 1996, the computation of
net loss per share was based on the weighted average number of
outstanding common shares.  Outstanding stock options and
warrants were not included in the calculation of net loss per
share as their effect was antidilutive.

     For the periods ended September 30, 1995, net loss per share
was based on the weighted average number of common and preferred
shares outstanding and dilutive common stock equivalents during
the periods.  Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common stock and preferred
stock issued for consideration below the initial offering price
of $6.00 per share ( the "Offering Price") and stock options and
preferred stock warrants issued with exercise prices below the
Offering Price during the 12-month period preceding the initial
filing of the Registration Statement have been included in the
calculation of common shares, using the treasury stock method, as
if they were outstanding for the 1995 periods presented.

4.  RESTRICTED CASH

     The Company has recorded cash of approximately $2.5 million,
which relates to restricted cash accounts securing the risk of
loss exposure estimated by the Company's credit card processor.

<PAGE>

5.  LINE OF CREDIT

     On July 30, 1996, the Company entered into a new bank line
of credit agreement (the "Agreement") that permitted borrowing up
to $4,000,000 with interest payable monthly at the prime rate
published in The Wall Street Journal.  On August 12, 1996 the
amount available under the Agreement was increased to $5,000,000. 
The Agreement matures on January 30, 1997.  As of September 30,
1996, the Company had borrowed $4,000,000 against amounts
available under the Agreement.  The Agreement is guaranteed by
certain stockholders of the Company (the "Guarantors").  In
connection with the execution of the Agreement and related
guarantee, the Company issued the Guarantors warrants to purchase
an aggregate of up to 656,250 shares of common stock at a
weighted average exercise price of $6.65 per share.  The warrants
vest immediately as of the date of grant and expire on July 30,
2006.  Accordingly, effective July 31, 1996, the estimated fair
value of the warrants issued under the Agreement of $100,000 was
recorded in other assets as deferred debt issuance costs and is
being charged to expense over the term of the Agreement.

6.  NOTES PAYABLE

     In July 1996, the Company entered into promissory note
agreements totaling $900,000 with two stockholders.  Deferred
debt issuance costs recorded by the Company were immaterial.  In
August 1996, the Company repaid the principal balance of the
notes.

     In March 1996, the Company made cash down payments of
$260,000 and signed promissory notes totaling $1,000,000 to
finance the purchase of two aircraft engines.  In July 1996, the
Company restructured these note agreements whereby the two
aircraft engines were sold back the to the vendor and the vendor
subsequently leased the engines back to the Company.  This
transaction was entered into in conjunction with other aircraft
engine sale and leaseback agreements, all of which are described
in Note 7.

7.  LEASES

     In July 1996, the Company entered into several agreements
for the sale and leaseback of four aircraft engines under
operating leases with terms ranging from one month to three
years.  The Company has purchase and lease renewal options at
projected fair market values under such agreements.  As of the
date of these transactions in July, the book values and related
long-term debt of the aircraft engines totaling approximately
$1,525,000 and $958,999, respectively, were removed from the
balance sheet.  In addition, the Company reduced accounts payable
due to the Lessor, a vendor of the Company, by $567,000.  Gains
and losses recorded by the Company in conjunction with these
transactions were immaterial.  Fixed rental payments of
approximately $13,000 per engine are due monthly.  In addition,
the company is required to make supplemental payments to the
lessor based on the number of cycles/flight hours, as defined by
the agreements.

8.  STOCKHOLDERS EQUITY

     In September 1996, the Company completed a private sale of
units securities, each unit consisting of one share of common
stock and one redeemable common stock purchase warrant.  In
connection with the sale, the Company  issued 1,319,774 shares of
common stock for aggregate proceeds of approximately $7.1
million,  net of offering costs of approximately  $154,000 . 
Each redeemable warrant entitles the holder to purchase, at any
time over a five year period commencing after the sale closing,
one share of common stock at an exercise price of $6.64.  The
redeemable warrant exercise price is subject to adjustment under
certain circumstances as defined in warrant agreement between the
warrant holder and the Company.  Proceeds from the sale were
utilized for major scheduled maintenance costs, capital
expenditures, working capital requirements and the repayment of
notes payable to related parties.


ITEM 2.  - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS
REPORT OF FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY.  <PAGE> FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION TITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.



RESULTS OF OPERATIONS

Comparison of nine months ended September 30, 1996 and 1995

Operating revenues

     Total operating revenues increased approximately 113.9% from
approximately $25.6 million for the first nine months of 1995 to
approximately $54.7 million for the first nine months of 1996. 
This increase was primarily attributable to an increase in the
number of daily flights and the number of passengers on those
flights.  As of September 30, 1995, the Company operated 40 daily
weekday flights with five aircraft and during the period then
ended had added service to Dallas/Ft. Worth, Wichita, Des Moines,
Minneapolis/St. Paul and  Chicago-Midway.  As of  September 30,
1996, the Company operated 48 daily flights with eight aircraft,
having added service to  San Francisco and Los Angeles in the
last quarter of 1995 and early 1996.  The Company's capacity or
total available seat miles ("ASMs") increased approximately
104.2%, from approximately 403.9 million during the nine-month
period ended September 30, 1995 to approximately 824.8 million
during the nine-month period ended September 30, 1996.  Revenue
passenger miles ("RPMs") increased approximately 148.9% from
approximately 210.5 million during the nine-month period ended
September 30, 1995 to approximately 523.9 million during the
nine-month period ended September 30, 1996.  The increase in ASMs
was primarily attributable to an increase in the number of jet
aircraft in service, the number of daily flights and the addition
of destinations with greater flight lengths.  The increase in
RPMs was primarily attributable to an increase in the number of
daily flights, an increase in the number of passengers on those
flights and the addition of destinations with greater flight
lengths.  Load factor increased from approximately 52.12% for the
nine-month period ended September 30, 1995 to approximately
63.52% for the nine-month period ended September 30, 1996.  This
increase was primarily the result of adjustments in capacity to
meet market demand, an increase in the number of city pairs
served and increased market awareness of the Company's service.

     Passenger yield per RPM decreased approximately 14.3% from
approximately 11.6 cents for the first nine months of 1995 to
approximately 10.0 cents for the first nine months of 1996.  The
Company believes this decrease was primarily attributable to the
ValuJet and Trans World Airlines (TWA) accidents in May 1996 and
August 1996, respectively, and the introduction of service from
Kansas City to San Francisco in December 1995 and to Los Angeles
in March 1996.  The Company estimates that during the four-week
periods after the ValuJet and TWA accidents, call volume at its
reservation center declined substantially.  As a result, the
Company's revenue/yield management fare system offered customers
seats at reduced fares.  The Company's favorable load factors
remained unchanged, but at the cost of reduced passenger yields. 
The Company also offered promotional fares on its new city pairs
throughout the first nine months of 1996, and these new routes
accounted for approximately 40% of the system wide RPMs during
that period.  The Company is evaluating fares in all its markets
as well as its current route structure to improve passenger
yields.

     The Company also generates operating revenues as a result of
service charges from passengers who change or cancel flight
reservations.  For a period of ninety days after the flight date,
the customer may use the value of the unused reservation for
transportation, less a $25 service charge.  These operating
revenues were approximately $533,000 (approximately 2.1% of total
operating revenues) and approximately $1.5 million 
(approximately 2.7% of total operating revenues) in the first
nine months of 1995 and the first nine months of 1996,
respectively.  The increase in cancellation and change fee
revenue as a percent of total operating revenues  was primarily
attributable to the increase in the number of daily flights and
the number of passengers. The Company began carrying mail for the
United States Postal Service during the first quarter of 1995. 
Mail revenue increased approximately 133.6% from approximately
$295,000 in the first nine months of 1995 to approximately
$689,000 in the first nine months of 1996.

<PAGE>


Operating Expenses

     Expenses are generally categorized as related to flying
operations, aircraft fuel, maintenance, passenger service,
aircraft and traffic servicing, promotion and sales, general and
administrative, depreciation and amortization and other expense,
net.

     Flying operations expenses include aircraft lease expenses,
compensation of pilots, expenses related to flight dispatch and
flight operations administration, hull insurance and all other
expenses related directly to the operation of the aircraft other
than aircraft fuel and maintenance expenses.  Flying operations
expenses increased approximately 125.1% from approximately $5.6
million (approximately 22.1% of operating revenues) for the first
nine months of 1995 to $12.7 million (approximately 23.2% of
operating revenues) for the first nine months of 1996.  The
number of departures increased approximately 54.9% from 8,253 for
the first nine months of 1995 to 12,782 for the first nine months
of 1996.  The increase in flying operations expense as a
percentage of operating revenues was the result of the Company
leasing three additional jet aircraft in late 1995 and early
1996, two of which were newer, more advanced Boeing 737-300 jet
aircraft, which have substantially higher lease and aircraft
insurance costs.  In connection with the acquisition of the three
planes, the Company hired 30 additional pilots and incurred
additional pilot training costs for existing and new pilots.

     Aircraft fuel expenses include the direct cost of the fuel,
taxes and the costs of delivering fuel into the aircraft. 
Aircraft fuel cost increased approximately 139.0% from
approximately $4.9 million (approximately 19.2% of operating
revenues) for the first nine months of 1995 to approximately
$11.7 million (approximately 21.5% of operating revenues) for the
first nine months of 1996.  These fuel expenses represent an
increase in the fuel cost per block hour from $466 in the first
nine months of 1995 to $623 in the first nine months of 1996
primarily due to an increase in price and average burn rate and
to the imposition of a federal tax.  Specifically, the average
price increased from $0.54 per gallon in the first nine months of
1995 to $0.64 per gallon in the first nine months of 1996, while
fuel consumption increased from 799 gallons per block hour in the
first nine months of 1995 to 816 gallons per block hour in the
first nine months of 1996.  In addition, effective October 1,
1995, the Company was required to pay a fuel tax of 4.3 cents per
gallon.  In the future, minor fuel cost increases will likely be
absorbed by the Company and would affect its operating results. 
The Company will continue to seek to pass on significant fuel
cost increases to the Company's customers through fare increases
as permitted by the then current market conditions.  However,
there can be no assurance that the Company will be successful in
passing on these increased costs.

     Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft.  Maintenance expenses increased approximately 180.5%
from approximately $3.7 million (approximately 14.4% of operating
revenues) for the first nine months of 1995 to approximately
$10.3 million (18.9% of operating revenues) for the first nine
months of 1996.  This increase was primarily due to the increase
in the fleet size and block hours.  For the first nine months of
1995, the average fleet size was approximately 4.9 aircraft
compared to an average fleet size for the first nine months of
1996 of approximately 7.9 aircraft.  In late 1995, the Company
leased two Boeing 737-300 jet aircraft, which generally are more
costly with respect to major scheduled maintenance.  The costs of
routine aircraft and engine maintenance are charged to
maintenance expense as incurred.  In addition, the Company
accrues the cost of future major scheduled maintenance on a
monthly basis.  The Company deposits funds with its aircraft
lessors to cover a portion of the cost of its future major
scheduled maintenance.

     Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses and passenger liability
insurance.  Passenger service expenses increased approximately
103.4% from approximately $2.3 million (approximately 9.0% of
operating revenues) for the first nine months of 1995 to $4.7
million (approximately 8.5% of operating revenues) for the first
nine months of 1996.  This increase was primarily due to the
approximately 54.9% increase in the number of departures and the
approximately 84.2% increase in number of passengers carried. 
Passenger service expenses per flight increased approximately
31.3% from approximately $278 for the first nine months of 1995
to $365 for the first nine months of 1996.  This increase per
flight is primarily due to the introduction of longer routes to
San Francisco and Los Angeles in late 1995 and early <PAGE> 1996 which
incur higher passenger service costs.  The decrease in passenger
service expenses as a percentage of operating revenues was
primarily attributable to lower training costs for flight
attendants and a higher load factor in the 1996 period.

     Aircraft and traffic servicing expenses include all expenses
incurred at the airports for handling aircraft, passengers and
mail, landing fees, facilities rental, station labor and ground
handling expenses.  Aircraft and traffic servicing expenses
increased approximately 66.8% from approximately $6.9 million
(approximately 26.9% of operating revenues) in the first nine
months of 1995 to approximately $11.5 million (approximately
21.0% of operating revenues) in the first nine months of 1996. 
This increase was primarily due to an increase in the number of
cities served and an increase in the number of departures. 
Departures increased approximately 54.9% from 8,253 during the
first nine months of 1995 to 12,782 during the first nine months
of 1996, and the average cost per departure increased
approximately 7.7% from approximately $834 to approximately $898
in the same periods.  The increase in cost per departure was
primarily attributable to the additional cost associated with
providing service to airports with higher operating costs.  The
decrease in aircraft and traffic servicing as a percentage of
operating revenues was primarily attributable to station
personnel cost, landing fees and other traffic servicing costs
not rising in proportion to the increases in the number of
passengers and RPMs between the nine month periods in 1995 and
1996.

     Promotion and sales expenses include the costs of the
reservations function, including all wages and benefits for
reservationists, rent, electricity, communication charges, credit
card fees, travel agency commissions, advertising expenses and
wages and benefits for the marketing department.  Promotion and
sales expenses increased approximately 76.8% from approximately
$6.3 million (approximately 24.6% of operating revenues) in the
first nine months of 1995 to approximately $11.1 million
(approximately 20.3% of operating revenues) in the first nine
months of 1996.  This increase was primarily the result of an
increase in cities served, reflecting the Company's plan to
increase advertising when new cities are introduced in order to
create brand awareness while maintaining stable advertising
programs in existing cities.  In addition, the Company's
reservation operations expanded in May 1996 with the opening of a
new reservation center in Lawrence, Kansas.  The average
promotion and sales cost per passenger decreased from $11.42 in
the first nine months of 1995 to $10.96 in the first nine months
of 1996.  The decrease in average sales and promotion expenses
per passenger was primarily the result of an increased number of
passengers flown and improved brand awareness offset by the
increased advertising incurred in March and September 1996
related to the introduction of scheduled service to four new
cities.

     General and administrative expenses include the wages and
benefits for the Company's executive and various other
administrative personnel, the cost for office supplies, office
rent, legal, accounting and other miscellaneous expenses. 
General and administrative expenses increased approximately 56.0%
from $1.9 million (approximately 7.3% of operating revenues) in
the first nine months of 1995 to $2.9 million (approximately 5.3%
of operating revenues) in the first nine months of 1996.  The
decrease in general and administrative expenses as a percentage
of operating revenues was primarily attributable to increased
productivity and economies of scale.

     Depreciation and amortization expenses include depreciation
and amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred.  Depreciation and amortization expense
increased approximately 53.1% from approximately $726,000
(approximately 2.8% of operating revenues) in the first nine
months of 1995 to approximately $1.1 million (approximately 2.0%
of operating revenues) in the first nine months of 1996.  This
increase was primarily the result of improvements to new and
existing aircraft and costs associated with modifications of the
Company's reservation system.

     Other income (expense), net consists primarily of interest
income and interest expense.  Interest income increased during
the first nine months of 1996, as a result of greater average
interest bearing cash balances compared to 1995.  Interest
expense increased during the nine months ended September 30,
1996, as a result of higher average borrowing during the period
as compared to 1995.

<PAGE>

Comparison of three months ended September 30, 1996 and 1995

Operating revenues

     Total operating revenues increased approximately 79.7% from
approximately  $11.1 million for the third quarter 1995 to 
approximately $19.9 million for the third quarter of  1996.  This
increase in operating revenues is comparable to the increase
described for the nine months ended September 30, 1996 and 1995
which primarily resulted from increased daily flights and the
number of passengers on those flights. The Company's ASMs
increased approximately 113.7%, from approximately 144.7 million
during the three-month period ended September 30, 1995 to
approximately 309.1 million during the three-month period ended
September 30, 1996.  RPMs increased approximately 133.7% from
approximately 79.7 million during the three-month period ended
September 30, 1995 to approximately 186.2 million during the
three-month period ended September 30, 1996.  The increase in
ASMs and RPMs are comparable with nine month periods ended
September 30, 1996 and 1995.  Load factor increased from
approximately 55.07% for the three-month period ended September
30, 1995 to approximately 60.23% for the three-month period ended
September 30, 1996 for reasons consistent with those described
above.

     Passenger yield per RPM decreased approximately 22.1% from
approximately 13.2 cents for the third quarter of 1995 to
approximately 10.3 cents for the third quarter of 1996.  The
Company believes this decrease was generally for the same reasons
as noted in the nine month comparison.

     The Company generated other revenues as a result of service
charges from passengers who change or cancel flight reservations. 
For a period of ninety days after the flight date, the customer
may use the value of the unused reservation for transportation,
less a $25.00 service charge.  These operating revenues were
approximately $218,000 (approximately 2.0% of total operating
revenues) and approximately $398,000 (approximately 2.0% of total
operating revenues) in the third quarter of 1995 and the third
quarter of 1996, respectively.   Mail revenue increased
approximately 33.3% from approximately $163,000 in the third
quarter of 1995 to approximately $217,000 in the third quarter of
1996.
  
Operating Expenses

     Flying operations expenses increased approximately 123.0%
from approximately $2.0 million (approximately 17.9% of operating
revenues) for the third quarter of 1995 to approximately $4.4
million (approximately 22.2% of operating revenues) for the third
quarter of 1996.  The number of departures increased
approximately 37.4% from 3,359 for the third quarter of 1995 to
4,614 for the third quarter of 1996.  In addition, the additional
leased aircraft and related costs described above for the nine
months ended September 30, 1996 contributed to the increase in
flying operations expense.

     Aircraft fuel expenses increased approximately 137.5% from
approximately $1.9 million (approximately 17.3% of operating
revenues) for the third quarter of 1995 to approximately $4.5
million (approximately 22.8% of operating revenues) for the third
quarter of 1996.  These fuel expenses represent an increase in
the fuel cost per block hour from $493 in the third quarter of
1995 to $661 in the third quarter of 1996 primarily due to an
increase in price and average burn rate and to the imposition of
a federal tax.  Specifically, the average price increased from
$0.54 per gallon in the third quarter of 1995 to $0.66 per gallon
in the third quarter of 1996, while fuel consumption increased
consistent with the nine month periods described above.

     Maintenance expenses increased approximately 211.6% from
approximately $1.2 million (approximately 11.0% of operating
revenues) for the third quarter of 1995 to approximately $3.8
million (19.1% of operating revenues) for the third quarter of
1996.  This increase was primarily due to the increase in fleet
size, block hours flown and the mix of aircraft making up the
Company's fleet.

     Passenger service expenses increased approximately 101.5%
from approximately $795,000 (approximately 7.2% of operating
revenues) for the third quarter of 1995 to $1.6 million
(approximately 8.1% of operating revenues) for the third quarter
of 1996.  This increase was primarily due to the approximately
37.4% increase in the numbers of departures and the approximately
45.7% increase in number of passengers carried.  Passenger
service expenses per flight increased approximately 46.7% from
approximately  $237 for the third quarter of 1995 to $347 for the
third quarter of 1996.  The increase per flight costs as a
percentage of operating revenues was generally for the same
reasons <PAGE> as in the nine months comparison.  Passenger service
expenses for the third quarter of 1996 increased as a percentage
of operating revenues compared to the third quarter of 1995;
however, passenger service expenses for the nine months ended
September 30, 1996 decreased as a percentage operating revenues
compared to the nine months ended September 30, 1995.  The
increase in the third quarter 1996 is attributable to a lower
revenue increase for the third quarter 1996, 80.0%, as compared
to a 113.9% increase in revenues experienced in the nine month
period ended September 30, 1996.

     Aircraft and traffic servicing expenses increased
approximately 41.4% from approximately $2.7 million
(approximately 24.7% of operating revenues) in the third quarter
of 1995 to approximately $3.9 million (approximately 19.5% of
operating revenues) in the third quarter of 1996.  This increase
was primarily due do to an increase in the number of cities
served and an increase in the number of departures.  Departures
increased approximately 37.4% from 3,359 during the third quarter
of 1995 to 4,614 during the third quarter of 1996, and the
average cost per departure increased approximately 3% from
approximately $815 to approximately $839 in the same periods. 
The increase in cost per departure and the decrease in aircraft
and traffic servicing as a percentage of operating  revenues was
comparable with the same reasons described above for the nine
months ended September 30, 1996 and 1995. 

     Promotion and sales expenses increased approximately 73.2%
from approximately $2.2 million (approximately 19.6% of operating
revenues) in the third quarter of 1995 to approximately $3.8
million (approximately 18.9% of operating revenues) in the third
quarter of 1996.  The average promotion and sales cost per
passenger increased from $9.27 in the third quarter of 1995 to
$11.02 in the third quarter of 1996.  The increase in average
sales and promotion expenses per passenger for the third quarter
of 1996 as compared to the third quarter of 1995  is attributable
to an increase in advertising in September 1996 related to the
introduction of scheduled service to three new cities in October
1996.

     General and administrative expenses increased approximately
89.5% from $583,000 (approximately 5.3% of operating revenues) in
the third quarter of 1995 to $1.1 million (approximately 5.6% of
operating revenues) in the third quarter of 1996.  General and
administrative expenses as a percentage of operating revenues
remained constant during the three month period ended
September 30, 1995 and 1996 respectively.

     Depreciation and amortization expenses increased
approximately 33.0% from approximately $303,000 (approximately
2.7% of operating revenues) in the third quarter of 1995 to
approximately $403,000 (approximately 2.0% of operating revenues)
in the third quarter of 1996.  This increase was primarily the
result of improvements to new and existing aircraft and costs
associated with modifications of the Company's reservation
system.

     Interest income increased during the third quarter of 1996,
as a result of greater average interest bearing cash balances
compared to 1995.  Interest expense increased during the third
quarter of 1996 as a result of higher average borrowings during
the period as compared to 1995.


LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations and
met its capital expenditure requirements primarily with proceeds
from (i) the initial private sale of equity securities, which
raised an aggregate of approximately $6.0 million,  (ii) the
initial public offering of its Common Stock, which raised
approximately $13.0 million in November 1995 and (iii) the
private sale of units of securities, each unit consisting of
common stock and a redeemable common stock purchase warrant,
which raised aggregate net proceeds of approximately $7.1 million
in August and  September 1996.  In addition, the Company has utilized
current liabilities as an additional source of cash by delaying
payments to certain of its creditors. Most of the Company's
suppliers currently provide goods, services and operating
equipment on open credit terms.  If such terms were modified to
require immediate cash payments, the Company's cash position
would be materially and adversely affected.  
     
<PAGE>

     In July 1996, the Company established a $4.0 million line of
credit.  On August 12, 1996 the Company amended its line of
credit to increase it to $5.0 million.   The line of credit is
guaranteed by certain of the Company's stockholders.  As of
September 30, 1996, $4.0 million is outstanding on the Company's
line of credit.  The Company has used the proceeds of the line of
credit primarily to reduce past accounts payable balances,  repay
$900,000 of outstanding notes held by certain of the Company's
stockholders, provide for scheduled engine maintenance repairs and
increase its restricted cash account balance held by its credit
card processor.  Borrowings accrue interest at the prime rate as
published in The Wall Street Journal.  The line of credit expires
January 30, 1997 at which time all funds are due and payable. 
The Company has begun discussions with certain financial
institutions to replace the line of credit and, if possible, to
increase the Company's borrowing capacity to $7 or $8 million. 
There can be no assurance that a replacement line of credit will
be available on acceptable terms if, at all.  In the event that
the Company is unable to replace the line of credit prior to
January 30, 1997, the Company would be required to utilize
available cash balances and borrow additional funds.  There can
be no assurance that the Company will be successful in this
regard.

     As of  September 30, 1996 the Company has recorded cash of
approximately $2.5 million, which relates to restricted cash
accounts securing the potential risk of loss exposure estimated
by the Company's credit card processor.  The Company has begun
discussions with certain credit card processors in order to reduce
required restricted cash balances  through a letter of credit
arrangement between the Company's credit card processor and one
of the Company's stockholders. The Company intends to use any
proceeds that become available pursuant to a letter of credit
arrangement for working capital purposes. There can be no
assurance such arrangement can be available on acceptable terms,
if at all.

     The Company estimates that major scheduled maintenance of
its existing aircraft fleet through September 1997 will cost
approximately $2 million.  The Company expects to expend
approximately $1.8 million on various capital expenditures, the
majority of which relate to improvements to existing aircraft. 
While the Company does not intend to lease additional aircraft
for the foreseeable future, the Company's capital expenditures
during this period would increase if it leases additional
aircraft to expand its service in existing or new markets. 

          During the nine months ended September 30, 1996, the
Company's operating activities resulted in a cash flow deficit of
approximately $9.5 million.  Accordingly, the Company relies on
cash balances, available credit arrangements and continued sales
of its equity securities to fund operations until profitability
is attained.  Management does not expect to achieve profitability
or positive cash flows from operations during the fourth quarter
of 1996, but is continuing to take steps to improve the Company's
operating performance and reduce the negative cash flow from
operations.  There can be no assurance that the Company will be
successful in this regard.  Effective November 1996 the Company
is eliminating certain unprofitable routes in order to improve
operating performance.  The aircraft used to serve these
destinations will be redeployed to routes between cities that
supports the Company's current operating strategy.  Additional
financing will be required to continue its operating strategy. 
There can be no assurance that additional financing will be
available on acceptable terms, if at all.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

     Limited Operating History; History of Losses; Future
Operating Results Uncertain; Working Capital Deficit.  The
Company has a limited history of operations, beginning flight
operations on December 4, 1994.  Since the Company's inception on
April 25, 1994, the Company has incurred significant losses and
as of September 30, 1996 had an accumulated deficit of
approximately $27.1 million and a stockholders' deficit of
approximately $602,000.  The Company's limited operating history
makes the prediction of future operating results difficult. 
Effective November 1996 the Company is in the process of
eliminating certain unprofitable routes in order to improve
operating performance and  introducing new routes that supports
the Company's current operating strategy. The Company's future
operating results will depend on many factors, including general
economic conditions, the cost of jet fuel, the occurrence of
events involving other low-cost carriers, potential changes in
government regulation of airlines or aircraft and actions taken
by other airlines particularly with respect to scheduling and
pricing in the Company's current and new routes.  A negative
change in any one or more of these factors could have a material
adverse effect on the Company's business, financial condition and
results of operations.  There can be no assurance that the
Company will achieve profitability at any time in the future.  


<PAGE>

     Impact of Continued Nasdaq Listing on Marketability of
Common Stock.  The Common Stock currently is quoted on the Nasdaq
SmallCap Market.  The National Association of Securities Dealers,
Inc. ("NASD") has rules that establish criteria for the continued
listing of the Common Stock on the Nasdaq SmallCap Market.  Under
these rules, companies must maintain at least $1,000,000 in
capital and surplus for continued inclusion on the Nasdaq
SmallCap Market.  In August 1996, the NASD informed the Company
that it must demonstrate capital and surplus of $3,000,000.  As
of the date of the report, the Company does not meet Nasdaq
SmallCap listing requirements. There can be no assurance that the
Company will continue to be listed on the Nasdaq SmallCap Market
or that the Nasdaq Stock Market will not take actions in the
future with respect to the listing of the Company's Common Stock. 
If the Common Stock does not continue to be listed on the Nasdaq
SmallCap Market, trading in the Common Stock will be conducted on
the OTC Bulletin Board or in the over-the-counter market in what
is commonly referred to as the "pink sheets."  Consequently, an
investor will find it more difficult to dispose of such
securities or to obtain accurate quotations as to the price of
such securities.  

In addition, if the Common Stock is delisted from trading on the
Nasdaq SmallCap Market and the trading price of the such security
is less than $5.00 per share, trading in such securities would
also be subject to the requirements of Rule 15g-9 promulgated
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").  Under such rule, broker/dealers who recommend
such low-priced securities to persons other than established
customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an
individualized written suitability determination for the
purchaser and receive the purchaser's written consent prior to
the transaction.  The Securities Enforcement Remedies and Penny
Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the
Securities and Exchange Commission, any equity security not
traded on an exchange or quoted on Nasdaq that has a market price
of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of
a disclosure schedule explaining the penny stock market and the
risks associated therewith.  Such requirements could severely
limit the market liquidity of the Common Stock and the ability of
purchasers in the offering to sell their securities in the
secondary market.  There can be no assurance that the Common
Stock will not be delisted or treated as a penny stock.

     Seasonality and Cyclicality.  The Company's operations are
dependent upon passenger travel demand.  Airlines typically
experience reduced demand at various times during the fall and
winter and increased demand for service during the spring and
summer.  Within these periods, an airline may experience
variations in passenger demand based on its particular routes and
passenger demographics.   Due to the Company's limited operating
history, the Company is unable to predict, and to what extent,
seasonal variations in its operations will differ from those of
the airline industry generally. If the Company's demand patterns
are similar to those of the airlines industry generally, the
Company would experience reduced demand during the fall and
winter with adverse effects on revenues, operation results and
cash flow.  In addition, passenger travel in the airline
industry, particularly leisure travel, is highly sensitive to
adverse changes in general economic conditions.  A worsening of
current economic conditions, or an extended period of recession
nationally or in the regions services by the Company, could have
a material adverse effect of the Company's business, financial
condition or results of operations.  

     Adverse Industry Conditions.  The airline industry is
characterized generally by high fixed costs relative to revenues,
and low profit margins.  As a result, profit levels are highly
sensitive to changes in fuel costs (which comprise a substantial
portion of operating expenses), fare levels and passenger demand. 
Fare levels and passenger demand in the airline industry have
been, at times, adversely affected by, among other things, the
general state of the economy, the economic conditions in markets
in which an airline operates and actions taken by other carriers
with respect to fare levels.  The enactment of the Airline
Deregulation Act of 1978 (the "Deregulation Act") substantially
eliminated government authority to regulate domestic routes and
fares.  Since the enactment of the Deregulation Act, the airline
industry has been subject to intense competition, both from
traditional carriers and new low-cost carriers, which generally
has reduced fare levels and earnings.  These factors, combined
with the general economic conditions, resulted in unprecedented
losses in the airline industry in the late 1980s and early 1990s,
and, as a consequence, many restructurings, bankruptcies and
liquidations in the industry.  In recent years, Continental
Airlines, America West Airlines, and Trans World Airlines, among
others, have filed for bankruptcy and Eastern Airlines, Pan
American <PAGE> World Airways, Mark Air and Braniff Airlines, among
others, have either ceased operations or were liquidated.  There
can be no assurance that these industry conditions, including
intense price competition, will not adversely affect the
Company's business, financial condition and results of
operations.  

     Competition and Competitive Reaction.  Under the
Deregulation Act, domestic certificated airlines are free to
enter and exit domestic markets and to set fares without
regulatory approval, and all city-pair domestic airline markets
are generally open to any domestic certificated airline.  As a
consequence, the airline industry is intensely competitive. 
Airlines compete primarily with respect to fares, scheduling
(frequency and flight times), destinations, frequent flyer
programs and type (jet or propeller ) and size of aircraft.  The
Company competes with numerous other airlines on its routes and
expects to compete with other airlines on any future routes. 
Many of these airlines are larger and have greater name
recognition and greater financial resources than the Company.  In
response to the Company's commencement of service to a particular
market, competing airlines have, at times, added flights and
capacity in the market and lowered their fares, making it more
difficult for the Company to achieve or maintain profitable
operations in such markets.  In the future, other airlines may
set their prices at or below the Company's fares or introduce new
non-stop service between cities served by the Company in attempts
to prevent the Company from achieving or maintaining profitable
operations.  The Company may also face competition from existing
airlines that may begin serving markets the Company serves, from
new low-cost airlines that may be formed to compete in the low-fare
market (including any airlines that may be formed by traditional
airlines) and from ground transportation alternatives.  Any airline
operating under bankruptcy protection could have a competitive
advantage over the Company and there can be no assurance that
this advantage will not adversely affect the Company's business,
financial condition and results of operations.  

     Fuel.  The cost of jet fuel is one of the largest operating
expenses for an airline and particularly for the Company due to
the relative fuel inefficiency of its aircraft.  Jet fuel costs
are subject to wide fluctuations as a result of sudden
disruptions in supply.  The Company cannot predict the effect of
events on the future availability and cost of jet fuel.  The
Boeing 737-200 jet aircraft are relatively fuel inefficient
compared to newer aircraft (such as its Boeing 737-300 jet
aircraft).  Accordingly, a significant increase in the price of
jet fuel would result in a disproportionately higher increase in
the Company's fuel expenses as compared with many of its
competitors who have, on average, newer and thus more fuel
efficient aircraft.  The Company has not entered into any
agreements which fix the price of jet fuel over any period of
time because such agreements generally are not available. 
Therefore, an increase in the cost of jet fuel will be
immediately passed through to the Company by suppliers and the
Company will experience reduced margins if it is unable to
increase fares to compensate for such higher fuel costs.  Even if
it is able to raise fares, the Company will experience reduced
margins on sales prior to such fare increases.  In addition to
increases in fuel prices, a shortage of supply would also have a
material adverse effect on the Company's business, financial
condition and results of operations.  Effective October 1, 1993,
Congress enacted a law imposing a 4.3 cents per gallon fuel tax, and
at the same time exempted commercial airlines from this tax until
September 30, 1995.  Since October 1, 1995, all commercial
airlines, including the Company, have been required to pay a tax
of 4.3 cents per gallon of fuel purchased.  Congress currently is
considering proposed legislation to reinstate the airline fuel
tax exemption through December 31, 1996, but there can be no
assurances that the fuel tax exemption will be reinstated.  

     Government Regulation.  The Company is subject to 49 U.S.C.,
Subtitle VII (formerly the Federal Aviation Act of 1958, as
amended) (the "Aviation Act"), under which the United States
Department of Transportation (the "DOT") and the FAA exercise
regulatory authority over airlines.  This regulatory authority
includes, but is not limited to: (I) the initial determination
and continuing review of the fitness of air carriers (including
financial, managerial, compliance-disposition and citizenship
fitness); (ii) the certification and regulation of aircraft and
other flight equipment; (iii) the certification and approval of
personnel who engage in flight, maintenance and operations
activities; and (iv) the establishment and enforcement of safety
standards and requirements with respect to the operation and
maintenance of aircraft, all as set forth in the Aviation Act and
the Federal Aviation Regulations.  The FAA has promulgated a
number of maintenance regulations and directives relating to,
among other things, retirement of aging aircraft, increased
inspections and maintenance procedures to be conducted on aging
aircraft, collision avoidance systems, aircraft corrosion,
airborne windshear avoidance systems and noise abatement.  As a
result of recent incidents involving airlines, the FAA has
increased its review of commercial airlines generally and
particularly with respect to small and start-up airlines, such as
the Company.  In recent months, after extensive FAA
investigations, ValuJet <PAGE> suspended operations and Kiwi Airlines
substantially reduced operations, and Mesa Airlines and Western
Pacific Airlines have been subject to extensive investigations by
the FAA.  The Company's operations recently have been subject to
increased review by the FAA.  There can be no assurance that
safety issues will not arise or that the Company will not be
required to pay fines in an amount which could have a material
adverse effect on the Company's  business, financial condition
and results of operations.  Additional rules and regulations have
been proposed from time to time and might be enacted which could
significantly increase the cost of airline operations by imposing
substantial additional requirements or restrictions on airline
operations.  For example, the National Transportation Safety
Board has proposed new regulations to require carriers to upgrade
would be approximately $90,000 for each of the Company's nine
737-200 jet aircraft.  There can be no assurances that any of
these rules or regulations would not have material adverse effect
on the Company's business, financial condition and results of
operations.

In accordance with the Deregulation Act, domestic certificated
airlines are permitted to enter and exit domestic markets and to
set fares without regulatory approval, and all city-pair domestic
airline markets are generally open to any domestic certificated
airline.  The DOT  maintains and exercises authority over
consumer protection issues, computer reservations system issues
and unfair trade practices.  The DOT also maintains regulatory
authority over international routes, subject to review by the
President of the United States.

The DOT and FAA also enforce federal law with respect to aircraft
noise compliance requirements.  The Company's current fleet
exceeds the current Stage-3 noise compliance requirements (25% of
its fleet Stage-3 compliance), with two of its Boeing 737-200 jet
aircraft being equipped with hush kits and its two Boeing 737-300
jet aircraft satisfying the Stage-3 requirements.  In the future,
the Company's aircraft fleet is required to meet the following
federal Stage-3 noise compliance deadlines:  50% of its fleet
must be Stage-3 compliant by January 1, 1997; 75% of its fleet
must be Stage-3 compliant by January 1, 1999; and 100% of its
fleet must be Stage-3 compliant by January 1, 2000.

The Company has obtained the necessary authority to perform
airline operations, including a Certificate of Public Convenience
and Necessity issued by the DOT pursuant to 49 U.S.C. Section 41102
and an air carrier operating certificate issued by the FAA under
Part 121 of the Federal Aviation Regulations.  The continuation
of such authority is subject to continued compliance with
applicable rules, regulations and laws pertaining to or affecting
the airline industry, including any rules and regulations that
may be adopted by the DOT and FAA in the future.  No assurance
can be given that the Company will be able to continue to comply
with all present or future rules, regulations and laws or that
such rules, regulations and laws would not materially and
adversely affect the Company's business, financial condition and
results of operations. 

PART II.  -  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     The Company is not involved in any material litigation or
legal proceedings at this time and is not aware of any material
litigation or legal proceedings threatened against it.

ITEM 2.   CHANGES IN SECURITIES

          a.    None.

          b.    None.

          c.   Furnish the information required by Item 701 of
               Regulation S-K as to all equity securities of the
               registrant sold by the registrant during the
               period covered by the report that were not
               registered under the Securities  Act other than
               unregistered sales made in reliance on Regulation
               S.

               In August and September 1996, the Company
               completed a private sale of units of securities,
               each unit consisting of one share of the Company's
               common stock, $.001 par value, and a redeemable
               common stock <PAGE> purchase warrant  (the "units").  In
               connection with the sale of units of securities,
               the Company issued 1,319,774 shares of common
               stock for aggregate proceeds of approximately 7.1
               million, net of offering costs of approximately
               $154,000.  Each redeemable common stock purchase
               warrant entitles the registered holder to purchase
               one share of common stock, at any time over a five
               year period, at an exercise price of $6.64.  The
               units were sold to a limited number of "accredited
               investors," as defined in the Securities Act of
               1933, pursuant to an exemption from registration
               provided by Regulation D promulgated under the
               Securities Act. 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
               None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
               None.

ITEM 5.    OTHER INFORMATION
               None.




ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

               (a) Exhibits

               Exhibit 10.38-- Revolving Promissory Note, dated
               as of August 7, 1996, between the Company and Bank
               IV, N.A.

               Exhibit 10.39-- Guaranty Agreement, dated as of
               July 30, 1996, among Bank IV, N.A., Hambrecht &
               Quist Group, Kenneth J. Wagnon, Daniel M. Carney
               and Starwood Investments, L.P.

               Exhibit 10.40-- Amendment to Guaranty Agreement,
               dated as of August 7, 1996, among Hambrecht &
               Quist Group, Kenneth J. Wagnon, Daniel M. Carney
               and Starwood Investments, L.P.

               Exhibit 10.41-- Form of Warrant Purchase Agreement
               among the Company and certain of its stockholders 

               Exhibit 10.42-- Form of Warrant for the purchase
               of shares of Common Stock

               Exhibit 10.43-- Form of Warrant Agreement among
               the Company and certain of its stockholders

               Exhibit 10.44-- Form of Warrant for the purchase
               of shares of Common Stock

               Exhibit 10.45-- Form of Registration Rights
               Agreement
               
               Exhibit 11- Statement of Computation of Earnings
               per Share for the Nine-month Periods Ended
               September 30, 1995 and 1996

               Exhibit 27 - Financial Data Schedule

          (b)  Reports on Form 8-K.

               On August 5, 1996, the Company filed a report on
               Form 8-K under Item 5 - Other Events regarding (i)
               a press release issued by the Company on August 5,
               1996, announcing the appointment of William A.
               Garrett <PAGE> as Vice President - Finance and Chief
               Financial Officer and Brian S. Gillman as Vice
               President and General Counsel of the Company.  The
               Company also announced its termination of the
               employment relationship with Fred L deLeeuw, Vice
               President - Finance and Chief Financial Officer. 
               In addition, the Company announced second- quarter
               earnings and its revision to its previously
               reported financial results for the first quarter
               of 1996, and (ii) a press release issued by the
               Company on August 5, 1996, announcing its
               intention to seek additional time for meeting
               Nasdaq's continue listing requirements.  

               On August 5, 1996, the Company filed a report on
               Form 8-K under Item 5 - Other Events regarding a
               press release issued by the Company announcing its
               intention to make an public offering of
               convertible preferred stock.

               On August 30, 1996, the Company filed a report on
               Form 8-K under Item 5 - Other Events regarding a
               press release issued by the Company on August 29,
               1996, announcing that the Nasdaq SmallCap Market
               has granted the Company conditional listing on the
               Nasdaq SmallCap Market and an extension of time
               until September 11, 1996 to satisfy net worth
               requirements for continued listing on the Nasdaq
               SmallCap Market and that effective August 30, 1996
               the symbol for the Company's securities will be
               changed from VNGD to VNGDC.  The Company also
               announced the completion of a $5.2 million private
               placement of units of securities, each unit
               consisting of the Company's common stock, par
               value $.001, and a redeemable common stock
               purchase warrant and that the Company estimates
               that it has raised 70% of the equity financing
               required to satisfy the Nasdaq net worth
               requirement.

               On September 10, 1996, the Company filed a report
               on Form 8-K under Item 5 - Other Events regarding
               a press release issued by the Company on September
               10, 1996 announcing the completion of its private
               placement of units of securities, each unit
               consisting of the Company's common stock, par
               value $.001, and a redeemable common stock
               purchase warrant and that the Company has
               satisfied the requirements outlined by the Nasdaq
               Stock Market and that it believes Nasdaq will
               grant the Company continued listing on the Nasdaq
               SmallCap Market.

               On November 1, 1996, the Company filed a report on
               Form 8-K under Item 5- Other Events regarding a
               press release issued by the Company on November 1,
               1996 announcing that Robert J. McAdoo, Chief
               Executive Officer and President of the Company and
               Chairman of the Board resigned effective November
               1, 1996.  Mr. McAdoo will continue as a director
               of the Company.  The Board of Directors has named
               John P. Tague as Chief Executive Officer and
               President and Chairman of the Board of Directors. 
               Mr. Tague currently is Chief Executive Officer and
               President and Chairman of the Board  of Air South
               Airlines, Inc.  Mr. Tague will continue in his
               positions as Chief Executive Officer and President
               and Chairman of the Board of Directors of Air
               South.

<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.

     Signature and Title                     Date

/s/John P. Tague                        November 14, 1996
John P. Tague, President and
  and Chief Executive Officer


/s/ William A Garrett                   November 14, 1996
William A. Garrett, Vice 
  President-Finance and Chief 
  Financial Officer (Principal 
  Financial and Accounting Officer)