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

	                   FORM 10-K

(MARK ONE)

( X )	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE 
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED 
DECEMBER 31, 1998.

	OR

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

         	Commission File Number 33-96884

	          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)

            533 Mexico City Avenue
	      Kansas City International Airport
	      Kansas City, Missouri 64153
	      (913) 789-1388
(Address of principal executive offices, including zip code;
	Registrant's telephone number, including area code)


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

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

	Common Stock, par value $0.001 per share
	(Title of Class)

Indicate by check mark whether the Registrant (1) has filed 
all reports required to be filed by Section 13 or 15(d) of the 
Securities Exchange Act of 1934 during the preceding 12 months (or 
for such shorter period that the Registrant was required to file 
such reports), and (2) has been subject to such filing requirements 
for the past 90 days.

Yes  X           No 
    ---             ---

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

At March 1, 1999, there were 85,382,389 shares of Common Stock 
outstanding, of which 76,436,807 shares were owned by affiliates.  
The aggregate market value of the outstanding Common Stock of the 
Registrant held by non-affiliates, based on the average of bid and 
asked prices of such stock on March 1, 1999 of $1.00, was 
$8,945,582.

Documents incorporated by reference: Portions of the 
Registrant's Proxy Statement for the 1998 Annual Meeting of 
Stockholders are incorporated by reference in Part III hereof.

<PAGE>

PART I

ITEM 1.  BUSINESS

GENERAL

Vanguard Airlines, Inc. ("Vanguard" or the "Company") was 
incorporated in Delaware on April 25, 1994.  The Company's 
principal offices are located at 533 Mexico City Avenue, Kansas 
City International Airport, Kansas City, Missouri 64153, and its 
telephone number is (913) 789-1388.

Vanguard is a low-fare airline offering convenient, non-stop 
and connecting scheduled jet service to destinations in established 
markets for both business and leisure travelers.  The Company 
currently operates ten leased Boeing 737-200 jet aircraft.  The 
Company accepted delivery of its eleventh aircraft on March 13, 
1999, which is anticipated to enter revenue service on April 15, 
1999.  The Company's schedule provides an average of 59 daily 
weekday flights serving Kansas City, Atlanta, Chicago-Midway, 
Dallas/Fort Worth, Denver, Minneapolis/St. Paul, Myrtle Beach and 
Pittsburgh.  The Company will commence service to Cincinnati from 
Chicago-Midway on April 15, 1999 when it will offer 69 daily 
weekday flights.  In January 1999, the Company signed a letter of 
intent to lease three Boeing 737-200 jet aircraft with deliveries 
anticipated throughout 1999.  These three additional Boeing 737-200 
aircraft will replace three older Stage II aircraft in the 
Company's fleet that are scheduled to be returned to its lessors in 
1999.  The Company also provides limited charter services.  The 
Company has experienced significant growth since the commencement 
of operations in December 1994, and has achieved operating revenues 
of approximately $36.2 million for the year ended December 31, 
1995, $68.6 million for the year ended December 31, 1996, $81.4 
million for the year ended December 31, 1997 and $104.3 million for 
the year ended December 31, 1998.

COMPANY'S LOW-FARE SERVICE

The Company's low-fare service is designed to meet the needs 
of, and stimulate demand among, price-sensitive business and 
leisure travelers.  To compete favorably, low-fare airlines must 
offer services that are price competitive with other airlines in 
its markets and, particularly with respect to short-haul markets, 
are competitive with ground transportation alternatives.  The 
Company typically offers its airline services at fares that are 
substantially lower than fares offered prior to its entry into its 
markets, especially with respect to reservations made within seven 
days of departure.  The Company's fares, however, are typically 
matched by the incumbent carriers, especially with respect to 
reservations made more than seven days prior to departure.  The 
Company believes its low-fare strategy will continue in light of 
the Company's cost structure; however, the Company has marginally 
increased fares in most of its markets.

The Company operates a revenue management system that monitors 
its fares and inventory in each of its markets.  The primary price 
categories are: (i) promotional; (ii) 14-day advance; (iii) seven-
day advance; (iv) one-day advance and (v) walk-up.  Within each 
primary category, there are smaller fare price increments that are 
tailored to specific conditions and historical operating data. The 
purpose of the revenue management system is to achieve and maintain 
acceptable load factor and yield levels in each market, thereby 
maximizing revenue per available seat mile.

Most of the Company's fares are sold on a nonrefundable basis 
and do not require a minimum or a Saturday night stay. Customers 
who change their itinerary on a nonrefundable ticket, or who fail 
to use a purchased flight reservation when scheduled and provide 
advance notice to the Company, may apply the funds toward the 
purchase of another Vanguard flight for use within 180 days of the 
scheduled flight date, subject to a $50 service charge.  As a 
result of its primarily non-refundable fare structure, the 
Company's passengers typically take their designated flights, and 
the Company believes its "no-show" rate is approximately 6%.  The 
Company also offers refundable fares.
<PAGE>

The Company's low-fare service is intended to satisfy most of 
the basic air transportation needs of the Company's targeted 
customers while establishing the Company's reputation as a small 
yet reliable airline where customers receive more than they expect 
from typical low-fare airlines. The Company offers advance seat 
assignments and more legroom than typical low-fare airlines.  The 
Company believes that the basic air transportation needs of its 
targeted customers can be satisfied by providing a limited number 
of flights per day on most routes, low-fares, a frequent flyer 
program, in-flight beverages and advance seat assignments. The 
Company, however, does not offer airport clubs, city ticket offices 
(except for the city ticket office in Mission, Kansas) or certain 
other amenities offered by many of its competitors.  In addition, 
the Company does not interline with other domestic jet airlines, 
which affects, but does not prevent, the Company's ability to 
reaccommodate its passengers in the event of flight cancellations 
or delays.  While many business travelers select traditional 
airlines based on the availability of these amenities, the Company 
believes that there is substantial demand for its low-fare service 
both from the cost-conscious business travelers and leisure 
travelers.

ROUTE SYSTEM AND SCHEDULING

The Company serves primarily short- to medium-haul, high-
volume markets with three to six round-trip flights per day.  On 
March 1, 1999, the average stage length of the Company's flights 
was approximately 464 miles.  Average stage length represents the 
scheduled service aircraft miles flown divided by the total number 
of departures. The Company has implemented various modifications to 
its route structure since beginning operations in 1994.  The 
Company's original 1994 route structure was based on a point to 
point strategy that focused on short- to medium-haul markets within 
the Midwestern and Rocky Mountain regions of the United States. 

In December 1996, the Company launched a hub and spoke 
strategy based in Kansas City.  During the first quarter of 1997, 
the Company operated approximately 60 flights per day primarily 
from its hub in Kansas City and during this period provided service 
to the most non-stop destinations from Kansas City.  This schedule 
included three "red-eye" flights from the West Coast (Las Vegas, 
Los Angeles and San Francisco) as part of its strategy to offer 
more destinations with the same number of aircraft, thereby 
increasing aircraft utilization and available seat miles ("ASMs"). 
 Due to poor reliability and financial performance of the hub and 
spoke schedule implemented in December 1996, the Company revised 
its schedule and reduced the number of destinations offered in 
September 1997.

The Company increased frequency on selected routes, eliminated 
its West Coast flying from Kansas City and increased times between 
arrivals and departures in order to increase its reliability and 
on-time performance. The revised schedule reduced ASMs and daily 
average aircraft utilization.  Unit cost increases as a result of 
reducing ASMs are expected to be offset by cost reduction 
strategies, improved reliability and higher fares and passenger 
loads in denser markets.  In December 1997, the Company initiated 
service between Chicago-Midway and Pittsburgh and Pittsburgh and 
New York City-JFK, with two flights per day.  In June 1998, the 
Company terminated service between Pittsburgh and New York City-
JFK.

The Company's strategy allows it to pursue measured growth by 
expanding in existing markets as well as entering new markets where 
its low cost structure, current operating efficiencies and quality 
of operations can be preserved.  As of March 1, 1999, the Company 
operated non-stop service in the following markets:  (i) Atlanta 
and Kansas City; (ii) Chicago-Midway and Kansas City; (iii) 
Chicago-Midway and Minneapolis/St. Paul; (iv) Chicago-Midway and 
Pittsburgh; (v) Dallas/Ft. Worth and Kansas City; (vi) Denver and 
Kansas City; (vii) Minneapolis/St. Paul and Kansas City; and (viii) 
Atlanta and Myrtle Beach.  The Company is scheduled to commence 
non-stop service between Chicago-Midway and Cincinnati on April 15, 
1999 and limited seasonal service between Pittsburgh and Myrtle 
Beach on April 4, 1999.  The Company's flights are also timed to 
provide connecting opportunities to and from other combinations of 
these city pairs primarily at its Kansas City and Chicago gateways. 
 In addition, the Company's schedule provides for convenient direct 
service between certain high passenger volume markets such as (i) 
Dallas/Ft. Worth and Chicago-Midway and (ii) Denver and Atlanta.
<PAGE>

RESERVATION AND INFORMATION SYSTEMS

The Company's new reservation system (purchased in the third 
quarter of 1997) continues the Company's simplified ticketless 
service and is an important component of the Company's attempt to 
maintain its low cost structure.  The Company's integrated 
reservation, marketing and revenue accounting system is designed to 
capture information at its source and eliminate paper records when 
possible.  The Company's system provides immediate access to 
detailed market by market data, as well as customer and financial 
information obtained throughout the reservation and boarding 
process.  This system also collects, organizes and stores data on 
customers in support of the Company's frequent flyer program and a 
number of other direct marketing efforts.  Management believes that 
the ease of immediate access to timely, detailed information 
through its reservation system enhances management functions.  In 
connection with its new reservation software, the Company 
anticipates the ability to sell tickets over the internet through 
its home page on the internet, www.flyvanguard.com, in 1999.

While a number of traditional airlines now offer ticketless 
service in certain circumstances, these airlines continue to 
maintain their ticketed service and the expenses associated with 
the supporting accounting functions.  The Company's reservation 
system and processes are entirely ticketless.  At the time a 
reservation or sale is made, the Company provides its customers 
with a confirmation number.  At the airport, this information is 
available to the gate agent facilitating customer check-in, 
effectively eliminating slow moving customer check-in lines.  The 
Company's ticketless service also eliminates traditional revenue 
accounting functions and the direct and indirect costs of handling 
tickets.

The Company's new reservation software permits the Company to 
participate in the SABRE and WORLDSPAN Computer Reservation Systems 
(CRSs).  The Company began participating in the SABRE CRS and 
WORLDSPAN CRS in August 1997 and April 1998, respectively.  Travel 
agents utilizing the SABRE and WORLDSPAN CRSs may book seats on the 
Company's flights, without the need to call the Company's 
reservation center. The Company's reservation software and level of 
CRS participation allows travel agents to send automated requests 
to the Company's reservation system to verify availability of seats 
and prices; upon verification from Vanguard's reservation system, 
the travel agent utilizes a credit card to complete the automated 
sale.  The Company intends to continue to be a totally ticketless 
operation.  The Company previously only displayed its flight 
schedule in the WORLDSPAN and GALILEO CRSs and the Company did not 
display its schedule in the much larger SABRE CRS.  The Company 
will continue to display its flights in the GALILEO CRS, but travel 
agents utilizing the GALILEO CRS currently must call the Company's 
reservation center to book a flight.

The Company currently does not intend to participate in the 
Airline Reporting Corporation ("ARC"), the airline industry 
collection agent for travel agency sales.  At the time a travel 
agency reservation or sale is made, the Company identifies the 
travel agency making the booking by taking credit card information. 
 As of April 1, 1998, the Company required most travel agencies to 
pay by credit card thereby reducing collection costs and bad debt 
expenses.  Although travel agencies are most accustomed to doing 
business through ARC, the Company believes that the cost savings 
realized by avoiding the fees, ticket handling and revenue 
accounting costs inherent in the ARC system justify the Company's 
decision not to participate in ARC.  The Company's participation in 
the SABRE and WORLDSPAN CRSs will require the travel agent to 
utilize a credit card to guarantee the completion of the sale.  The 
Company refers to this guaranteed credit card process as 
"guaranteed ticketing."  Under guaranteed ticketing, the Company 
collects cash from the travel agency bookings directly from the 
credit card processor.  Further, the importance of collecting 
outstanding travel agency bookings is eliminated because the 
Company does not participate in ARC or maintain its own internal 
billing and collection functions.

In the future, the Company may encounter problems with 
features added to its computer system, with new computer hardware 
provided by third parties or with a greater volume of reservations. 
If the Company experiences a system failure, revenues may be lost 
or significant expenses incurred in repairing, modifying or 
replacing the system. With its ticketless service, the Company is 
dependent on its computerized reservation system for information 
<PAGE>

regarding confirmed passengers and flight schedule.  The Company 
is considering outsourcing its computer reservation system to a 
large third party provider in the second quarter of 1999.

MARKETING AND PROMOTION

A majority of the Company's customers call its reservation 
center directly to make their reservations.  As a result, the 
Company advertises directly to potential customers using primarily 
newspapers, television and radio. The Company's advertisements 
feature the Company's destinations, lowest available fares and the 
Company's toll free phone number, 1-800-VANGUARD.  Currently, the 
marketing efforts of the Company are concentrated on price and 
destination advertisements.  The Company recently introduced 
numerous initiatives designed to capture a larger share of the 
cost-conscious business traveler market.  In November 1997, the 
Company launched its Road Warrior SM Program to attract more 
business travelers.  The Company's Road Warrior SM Program offers 
among other amenities, guaranteed timely arrivals, guaranteed seats 
on every flight, preferred seating, pre-assigned seating, 
refundable tickets, no change fees and a business class hotline, 1-
800-UFLY-EXEC.  In addition to its Road Warrior SM Program, the 
Company now aggressively pursues group and bulk ticket sales to 
price sensitive business travelers.  The Company intends to 
continue to build brand awareness around the Road Warrior SM 
Program.

Approximately 40% of the Company's customers use travel agents 
to make their reservations. The Company has implemented marketing 
strategies and programs to build on its relationships with travel 
agencies throughout its route system.  The Company pays an 8% 
commission to travel agents. The Company also communicates 
regularly with travel agents through personal visits, parties, 
direct mail and telemarketing.  The Company anticipates a moderate 
increase in travel agent bookings due to its participation in the 
SABRE CRS and WORLDSPAN CRS and guaranteed ticketing participation 
in the GALILEO CRS.  See "-Reservation and Information Systems."

The Company's frequent-flyer program awards free round-trip 
tickets on Vanguard to customers who complete 16 Vanguard flights, 
or eight round trips, within any 12 month period.  In addition to 
its standard frequent flyer program, the Company on occasion 
accelerates rewards on its frequent flyer program.  The Company is 
currently working on further enhancements and partnerships to its 
frequent flyer program in order to establish more active 
communication with frequent flyers and partners.

MOTIVATED AND TRAINED WORKFORCE

The Company believes that the success of an airline is 
dependent in large part on the attitudes of its people.  The 
Company has developed a corporate culture that provides an 
environment of relaxed, casual professionalism for its employees.  
The Company attempts to provide a working environment conducive to 
personal responsibility, creativity, accountability and commitment. 
The Company has created an informal atmosphere and employed a 
horizontal management structure to facilitate communication 
throughout the organization.  To keep all employees informed about 
the Company's status and developments, the Company hosts a 
quarterly question and answer session with the Company's Chairman 
of the Board, Chief Executive Officer and President, Robert J. 
Spane, and other executive officers of the Company.  In addition, 
the Company established various information lines and a daily 
Company newsletter to improve the flow of information and 
communications throughout the Company.

The Company seeks to select, train and maintain a highly 
productive workforce of skilled, enthusiastic and energetic 
employees and reward them for performance by allowing them to share 
in the Company's success.  Management believes that its base wage 
and benefit levels are generally at market rates of other similar 
airlines.  The Company expects to maintain a motivated workforce 
through its selection process and a casual and friendly working 
environment.  In addition, the Company as of January 1, 1999 has 
implemented a matching component to its 401(K) plan and also offers 
an employee stock purchase plan and a profit sharing plan.  In 
December 1998, due to the Company's improved financial performance, 
<PAGE>

the Company paid a bonus to all employees who had been with the 
Company for one year.  The Company expects that the aforementioned 
programs will further align the interests of its employees, the 
Company and its customers.

The airline business is highly regulated.  Regulations 
promulgated by the Federal Aviation Administration ("FAA") require 
pilots to be licensed as commercial pilots, with specific ratings 
for aircraft to be flown and to be medically certified as 
physically fit.  Licenses and medical certification requirements 
are subject to periodic continuation requirements including 
recurrent training and recent flying experience. Both pilot 
training and mechanic training for the Boeing 737-200 jet aircraft 
are generally provided by independent contractors, including other 
airlines.  Currently, the average age and flight time of the 
Company's pilots is 42 years and 4,300 hours, respectively. 
Mechanics, quality control inspectors and flight dispatchers must 
be licensed and qualified for the Company's aircraft.  Flight 
attendants must have initial and periodic training and 
certification.  All of these employees are subject to pre-
employment and subsequent random drug and alcohol testing.  
Training programs are subject to approval and monitoring by the 
FAA.  Management personnel directly involved in the supervision of 
flight operations, training, maintenance and aircraft inspection 
must meet experience standards prescribed by the FAA regulations.

Many airlines are unionized.  Management has attempted to 
create an environment that is informal and that facilitates the 
free flow of communication, which may reduce employees' desires to 
be represented by unions.  On March 9, 1999, the National Mediation 
Board recognized the Vanguard Airlines Pilots Association ("VAPA") 
as the bargaining unit for the Company's pilots.  The Company is in 
the very beginning stages of contract negotiations with VAPA.  The 
Company believes that its low-cost structure is derived from its 
simplified procedures and not simply from its employee compensation 
structure, however, the Company is unable to predict the affect the 
unionization of its pilots will have on the financial performance 
of the Company.

AIRPORT OPERATIONS

The Company currently serves eight airports.  The Company has 
leases with the airport authorities at certain airports and 
sublease or handling arrangements directly with signatory airlines 
at other airports. In May 1998 and February 1999, the Company 
entered into leases for gates with the appropriate airport 
authorities in Kansas City, Missouri and Minneapolis, Minnesota, 
respectively.  The Company began providing its own ground handling 
services in both of these cities shortly after signing the 
respective lease agreements.  Most of the sublease or handling 
arrangements, as discussed below, can be terminated by the other 
airlines or the Company upon 30 to 60 days notice.  If such a 
termination were to occur, the Company would have to make 
alternative arrangements or cease operations at the affected 
airport.  There can be no assurance that alternative arrangements 
would be available at all or at a reasonable cost.  See "-
Government Regulation."

Ground handling services typically involve (i) public contact 
services, such as meeting, greeting and serving the Company's 
customers at the check-in counter, gate and baggage claim areas and 
(ii) underwing ground handling services such as marshaling the 
aircraft into and out of the gate, baggage loading and unloading, 
as well as lavatory and water servicing, deicing and certain 
services provided to the aircraft overnight.  Public contact 
services at the Company's various airports are mainly conducted by 
the Company's full- and part-time employees.  Except as indicated 
above, underwing ground handling services are primarily provided by 
other airlines and/or fixed based operators. The Company performs 
its own underwing ground handling services at Chicago-Midway, 
Kansas City and Minneapolis/St. Paul Airports.

AIRCRAFT

The Company's aircraft fleet consists of eleven leased Boeing 
737-200 jet aircraft.  The Company has signed letters of intent to 
lease three additional Boeing 737-200 aircraft, which will replace 
the three Stage II aircraft in the Company's fleet.  The Company 
intends to return one aircraft in July 1999 and two aircraft in 
December 1999 to their lessors in connection with the expiration of 
their leases.  Eight of the Company's jet aircraft were 
<PAGE>

manufactured between 1968 and 1970. Three were manufactured between 
1979 and 1982.  The three replacement aircraft scheduled for 
delivery in 1999 were manufactured in 1981. The remaining eight 
aircraft have varying lease termination dates:  three of its Boeing 
737-200 jet aircraft has been leased for a term through 2000; two 
of its aircraft have been leased for a term through 2002; and three 
for a term through 2004.  See "Factors That May Affect Future 
Results of Operations - Limited Number of Aircraft; Aircraft 
Acquisitions."

All expenses relating to the maintenance and operation of the 
aircraft are the Company's responsibility.  While the Company 
anticipates a higher maintenance cost for older aircraft, including 
costs to comply with FAA Airworthiness Directives ("ADs") and 
regulations for aging aircraft, the Company believes that the total 
costs of operating the Boeing 737-200 jet aircraft is competitive 
with newer aircraft types because the Company's aircraft have 
significantly lower acquisition or lease costs.  Lower acquisition 
or lease costs result in lower fixed costs, which the Company 
believes will allow greater flexibility to adjust capacity to 
demand.

The Company's aircraft must be brought into 100% compliance 
with Federal Stage III noise level requirements by December 31, 
1999.  Currently, the Company's fleet meets the Stage III noise 
compliance requirements of 75%.  The Company's plans to return its 
three remaining Stage II aircraft in 1999 and projects 100% Stage 
III Compliance by December 31, 1999.  The Company's aircraft to be 
delivered in 1999 will meet Stage III requirements.

Because the Company's aircraft fleet consists of eleven 
aircraft, if one or more of its aircraft was not in service, the 
Company would experience a proportionally greater loss of capacity 
than would be the case with a larger airline.  Any interruption of 
aircraft service as a result of scheduled or unscheduled 
maintenance, however, could materially and adversely affect the 
Company's service, reputation and financial performance.  In the 
event the Company seeks to lease additional aircraft in order to 
expand its service and/or route system, there can be no assurance 
that the Company will be able to lease additional aircraft on 
satisfactory terms or at the times needed.

MAINTENANCE AND REPAIRS

All maintenance and repairs are accomplished in accordance 
with the Company's maintenance program approved by the FAA.  Older 
aircraft, in general, incur greater maintenance expense than newer 
aircraft. The Company believes that its aircraft are mechanically 
reliable and that the ongoing cost of maintenance on such aircraft 
is, and will continue to be, within industry norms.  The Company 
must comply with existing ADs and regulations for aging aircraft 
issued by the FAA.  In addition, the Company may be required to 
comply with future ADs or regulations regarding maintenance and 
repairs.  There can be no assurance that the Company's costs of 
maintenance in the future (including costs to comply with ADs and 
regulations) will fall within industry norms or that the Company's 
aircraft will be reliable over time.

Aircraft maintenance consists of routine and daily maintenance 
and major overhauls.  Routine or daily maintenance is generally 
performed by the Company's mechanics in Kansas City, Chicago-
Midway, Pittsburgh and Minneapolis/St. Paul or in various other 
cities, as needed, by independent contractors.  The Company employs 
approximately 100 mechanics and related personnel.  The Company has 
contracted with various independent FAA certified maintenance 
operations to perform its major scheduled maintenance.

The Company continues to increase its inventory of spare 
parts.  In addition, the Company has contracted with an independent 
contractor to make spare parts available.  For this service, the 
Company pays a monthly lease fee based on the value of the parts in 
stock, in addition to the repair costs on "off" units when, and if, 
the inventoried parts are installed on the Company's aircraft.
<PAGE>

FUEL

The cost of jet fuel is one of the Company's largest operating 
expenses (approximately 13.4% of operating expenses when including 
taxes and the cost of delivering fuel into the aircraft for the 
year ended December 31, 1998).  Fuel costs have declined 
significantly over the past 12 months.  For the first two months of 
1999, the Company purchased fuel for approximately $0.49 per gallon 
(including taxes and the cost of delivering fuel into the 
aircraft), which is significantly less than the 1998, 1997 and 1996 
average cost of $0.58, $0.74 and $0.79 per gallon, respectively.  
Significant changes in jet fuel prices have materially affected the 
Company's operating results in the past.  Jet fuel prices are 
susceptible to international events.  The Company cannot predict 
the effect of events on the future availability and cost of jet 
fuel.  The Company's 737-200 jet aircraft are relatively fuel 
inefficient compared to newer aircraft.  Accordingly, a significant 
increase in the price of jet fuel will result in a 
disproportionately higher increase in the Company's fuel expenses 
as compared with many of its competitors, whose average aircraft is 
newer and thus more fuel-efficient.

The Company has not entered into any agreements that fix the 
price of jet fuel over any period of time.  Therefore, an increase 
in the cost of jet fuel is immediately passed through to the 
Company by suppliers.  As a result, the Company has experienced 
reduced margins due to its inability to increase fares sufficiently 
to compensate for higher fuel costs and taxes.  Even if it is able 
to raise selected 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 could also have a 
material adverse effect on the Company's business, financial 
condition and results of operations.  See "Factors That May Affect 
Future Results of Operations -- Fuel Costs."

COMPETITION

Under the Airline Deregulation Act of 1978 (the "Deregulation 
Act"), domestic certificated airlines are free to enter and exit 
domestic routes 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 and susceptible to price 
discounting. Airlines compete primarily with respect to fares, 
scheduling (frequency and flight time), 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.  Most 
of the Company's competitors are larger and have greater name 
recognition and greater financial resources than the Company.  In 
response to the Company's commencement of service in 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 or even maintain operations in that market.  In the 
future, other airlines may set their prices at or below the 
Company's fares, introduce new non-stop service between cities 
served by the Company or add additional capacity in markets served 
by the Company in an attempt to prevent the Company from achieving 
or continuing 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 major airlines) and from ground transportation 
alternatives.  See "Factors that may Affect Future Results of 
Operations-Intense Competition and Competitive Reaction."

GOVERNMENT REGULATION

All interstate air carriers are subject to regulation by the 
DOT and the FAA under the Federal Aviation Act (the "Aviation 
Act"). The DOT's jurisdiction extends primarily to the economic 
aspects of air transportation, while the FAA's regulatory authority 
relates primarily to air safety, including aircraft certification 
and operations, crew licensing and training and maintenance 
standards.  In general, the amount of economic regulation over 
interstate air carriers in terms of market entry, exit, pricing, 
and inter-carrier acquisitions and agreements has been greatly 
reduced subsequent to enactment of the Deregulation Act.
<PAGE>

Presently, four airports, Chicago-O'Hare, New York City-
LaGuardia, New York City-JFK and Washington, D.C.-National, are 
regulated by means of "slot" allocations, which represent 
governmental authorizations to take off or land at a particular 
airport within a specified time period. The DOT regulations 
currently permit the buying, selling, trading or leasing of slots. 
 Slot values depend on several factors, including the airport, time 
of day covered, the availability of slots and the class of the 
aircraft.  FAA regulations require the use of each slot at least 
80% of the time and provide for forfeiture of slots in certain 
circumstances without compensation.  The DOT may require forfeiture 
of slots without compensation if it determines slots are needed to 
meet operational needs of international or essential air 
transportation.  The Company currently does not serve any airports 
that require slot allocations.  The Company filed an application 
for slot exemption to allow the Company to offer non-stop service 
between Kansas City and New York City-JFK and between Pittsburgh 
and New York City-JFK.  The slot restrictions at New York City-JFK 
cover a five-hour period between 3:00 p.m. and 7:59 p.m.

Vanguard began flight operations in December 1994.  Since 
then, Vanguard has had no reportable incidents to the DOT that have 
involved serious bodily injury or significant damage to any of the 
Company's aircraft.

The Company's flight personnel, flight and emergency 
procedures and aircraft and maintenance facilities are subject to 
periodic inspections and tests by the FAA.  The Company believes 
that the FAA often applies strict scrutiny to the operations of 
small or new entrant airlines to ensure proper compliance with FAA 
regulations.  FAA examiners have flown on numerous Company flights 
and have subjected its flight and ground personnel to periodic 
announced and unannounced reviews and inspections.  The Company 
believes that its operations and compliance with FAA regulations 
are within industry standards.

The DOT and FAA also have authority under the Aviation Safety 
and Noise Abatement Act of 1979, as amended, under the Airport 
Noise and Capacity Act of 1990 ("ANCA") and, along with the 
Environmental Protection Agency, under the Clean Air Act, as 
amended, to monitor and regulate aircraft engine noise and exhaust 
emissions.  The Company believes its aircraft comply with all 
applicable FAA noise control regulations and with current emissions 
standards.  See "Aircraft and Maintenance and Repairs."

INSURANCE

The Company carries the types and amounts of insurance 
required by the DOT, which the Company believes are customary for 
airlines similar to the Company, including coverage for public 
liability, property damage, aircraft loss or damage, baggage and 
cargo liability and workers' compensation. While the Company 
believes such insurance will be adequate as to amounts and risks 
covered, there can be no assurance that such coverage will continue 
to be available or that it will fully protect the Company against 
all losses that it might sustain.

EMPLOYEES

As of March 1, 1999 the Company employed approximately 769 
full-time and 152 part-time employees consisting of 96 pilots, 122 
flight attendants, 34 line mechanics, 214 station agents, 216 
reservation agents and 239 management and staff personnel.

<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

Vanguard's business operations and financial results are 
subject to various uncertainties and future developments that 
cannot be predicted.  Certain of the principal risks and 
uncertainties that may affect Vanguard's operations and financial 
results are identified below.

LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES.  The 
Company has a limited history of operations, beginning flight 
operations on December 4, 1994.  Since the Company's inception on 
April 25, 1994 and until 1997, the Company incurred significant 
losses from operations.  In 1998, the Company recorded income from 
operations of $1.5 million and generated positive cash flow from 
operations of $6.0 million.  As of December 31, 1998 the Company 
had an accumulated deficit of $71.2 million and a working capital 
deficit of $7.9 million.  As of December 31, 1998, the Company had 
positive stockholders' equity of $5.8 million.  The Company's 
limited operating history makes the prediction of future operating 
results difficult.  There can be no assurance that the Company will 
be able to sustain profitable operations in the future.

AVAILABILITY OF WORKING CAPITAL AND FUTURE FINANCING 
RESOURCES.  The airline business is extremely capital intensive, 
including, but not limited to, lease payment obligations and 
related maintenance requirements for existing or additional 
aircraft.  Historically, the Company's continued operations have 
been dependent upon equity and debt financings from its principal 
stockholders. There can be no assurance that the Company's 
principal stockholders will provide working capital for the 
Company's operations if the Company is unable to continue to 
generate positive cash flow from its operations.  Any inability to 
obtain additional financing when needed could require the Company 
to cease or significantly curtail operations and would have a 
material adverse effect on the Company's business, financial 
condition and results of operations.  See "Management's Discussion 
and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources."

INTENSE COMPETITION AND COMPETITIVE REACTION.  The Company is 
subject to intense competition on all of its routes.  Under the 
Deregulation Act, domestic certificated airlines may enter and exit 
domestic markets and set fares without regulatory approval.  All 
city-pair domestic airline markets, except for those that are slot-
controlled, are generally open to any domestic certificated 
airline. Airlines compete primarily with respect to fares, 
schedules (frequency and flight times), destinations, frequent 
flyer programs and type (jet or propeller) and size of aircraft.  
The Company competes with various other airlines on its routes and 
expects to compete with other airlines on any future routes.  Most 
of the Company's competitors are larger and have greater name 
recognition and financial resources than the Company.  In response 
to the Company's commencement of service in a particular market, 
competing airlines have, at times, added flights and capacity and 
lowered their fares in the market, making it more difficult for the 
Company to achieve 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 in that market. 

CONSUMER CONCERN ABOUT OPERATING SAFETY AT NEW-ENTRANT 
CARRIERS OR TYPE OF AIRCRAFT.  Aircraft accidents or other safety-
related issues involving any carrier, may have an adverse effect on 
airline passengers' perceptions regarding the safety of new-
entrant, low-fare carriers.  As a result, any such future event 
could have a material adverse effect on the Company's business, 
financial condition and results of operations, even if such events 
do not include the Company's operations or personnel.  Similarly, 
publicized accounts of mechanical problems or accidents involving 
Boeing 737s or other aging aircraft could have a material adverse 
effect on the Company's business, financial condition and results 
of operations, even though the Company itself may not experience 
any such problems with its jet aircraft.

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, the Company experiences variations 
in passenger demand based on its particular routes and passenger 
<PAGE>

demographics.  The Company has experienced reduced demand during 
the fall and winter with adverse effects on revenues, operating 
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 served by the Company, would have a 
material adverse effect of the Company's business, financial 
condition and results of operations.

FUEL COSTS.  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, including taxes and the cost of delivering fuel into the 
aircraft, accounted for approximately 13.4% of the Company's 
operating expenses for the year ended December 31, 1998.  The 
Company's average cost per gallon for the past three years have 
been $0.79 per gallon in the year ended December 31, 1996, $0.74 
per gallon in the year ended December 31, 1997 and $0.58 per gallon 
in the year ended December 31, 1998.  Jet fuel costs are subject to 
wide fluctuations as a result of sudden disruptions in supply.  The 
Company cannot predict the effect on the future availability and 
cost of jet fuel.  The Boeing 737-200 jet aircraft is relatively 
fuel inefficient compared to newer aircraft.  Accordingly, a 
significant increase in the price of jet fuel will 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 that fix the price of jet fuel over any 
period of time.  Therefore, an increase in the cost of jet fuel 
will be immediately passed through to the Company by suppliers.  
The Company has experienced reduced margins at times when the 
Company has been unable to increase fares to compensate for such 
higher fuel costs.  Even at times when the Company is able to raise 
selected fares, the Company has experienced reduced margins on 
sales prior to such fare increases.  In addition to increases in 
fuel prices, a shortage of supply will also have a material adverse 
effect on the Company's business, financial condition and results 
of operations.

LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS.  The 
Company's fleet consists of eleven aircraft and if one or more of 
its aircraft were not in service, the Company would experience a 
proportionally greater loss of capacity than would be the case for 
an airline utilizing a larger fleet.  Any interruption of aircraft 
service as a result of scheduled or unscheduled maintenance could 
materially and adversely affect the Company's service, reputation 
and financial performance. The market for leased aircraft 
fluctuates based on certain worldwide macroeconomic factors. There 
can be no assurance that the Company will be able to lease 
additional aircraft on satisfactory terms or at the times needed.  
See "Business - Aircraft."

GOVERNMENT REGULATION.  The Company is subject to the Aviation 
Act, under which 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 new-
entrant airlines, such as the Company.  The Company's operations 
are subject to constant review by the FAA. 

Additional rules and regulations have been proposed from time 
to time in the last several years and that, if enacted, could 
significantly increase the cost of airline operations by imposing 
substantial additional requirements or restrictions on airline 
operations. There can be no assurances that any of these rules or 
<PAGE>

regulations would not have a material adverse effect on the 
Company's business, financial condition and results of operations.

The DOT and FAA also enforce federal law with respect to 
aircraft noise compliance requirements.  The Company's current 
fleet meets the current, Stage III noise compliance requirements 
(75% of its fleet Stage III compliance).  By the end of 1999, the 
Company's aircraft fleet is required be 100% Stage III compliant.  
The Company plans to return its three remaining Stage II aircraft 
this year upon the expiration of their leases.  See "Business - 
Aircraft."

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.

ITEM 2.  PROPERTIES

The Company leases approximately 20,500 square feet of office 
space near Kansas City International Airport ("KCI") for corporate, 
training, operation and maintenance functions pursuant to a month-
to-month lease.  The Company leases approximately 17,000 square 
feet of office space in Mission, Kansas for corporate offices and 
reservation's center, under a lease that expires in September 1999. 
 The Company is in discussions to renew a portion of the Mission, 
Kansas lease for its reservation center.  The Company also leases 
approximately 7,250 square feet in Lawrence, Kansas, which was used 
as one of its two reservations facilities.  The Company closed its 
Lawrence, Kansas reservation center in September 1997.  The Company 
has subleased this call center to a third party since September 
1997 and is in current discussions to sublease or assign the 
remaining two years of its lease to the current subtenant.

The check-in counters, gates and airport office facilities at 
each of the airports the Company serves are leased from the 
appropriate airport authority or other airlines pursuant to 
subleases or other arrangements.  Such arrangements may include 
baggage handling, station operations, cleaning and other services. 
If such facilities at current or new cities served by the Company 
are not available to the Company at acceptable rates, or if such 
facilities become no longer available to the Company at acceptable 
rates, the Company may choose not to service such markets.

ITEM 3.  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 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the stockholders of the 
Company during the fourth quarter of the fiscal year ended December 
31, 1998.
<PAGE>

ITEM 4A.  EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages and positions 
of the Company's executive officers and directors as of March 1, 
1999:

        NAME	  			 AGE	 POSITION	

Robert J. Spane 	 	58	  Chairman of the Board, Chief Executive 
                        Officer and President
James E. Eckart	  	55	  Vice President - Ground Operations
William A. Garrett	33	  Vice President - Finance and Chief 
                        Financial Officer
Brian S. Gillman		 29   Vice President, General Counsel and 
                        Secretary
Alan R. Gorthy, Jr.	53 	Vice President - Maintenance
James B. Miller		  60  	Vice President - Engineering and 
                        Quality Assurance
William F. McKinney	59	 Vice President - Operations
Russell Winter		    32 	Vice President - Marketing and 
                        Planning
Lee M. Gammill, Jr.	64	 Director
Denis T. Rice	     	66 	Director
Leighton W. Smith	  59  Director

Set forth below is a description of the business experience of 
each executive officer and director of the Company.

ROBERT J. SPANE was elected a director of the Company in May 1996 
and elected Chairman of the Board, Chief Executive Officer and 
President of the Company in June 1997.  Mr. Spane served in the 
U.S. Navy for 35 years where his last position was Commander, 
Naval Air Force Pacific, which he held from 
October 1993 to February 1996.  Mr. Spane, as Commander, 
Naval Air Force Pacific, was responsible for all finances, training, 
logistics and the material condition of all aircraft carriers, 
aircraft and naval air stations in the Pacific.  Mr. Spane 
retired from the U.S. Navy in February 1996 as a Vice Admiral.
Mr. Spane is a 1962 graduate of the U.S. Naval Academy.

JAMES E. ECKART joined the Company in July 1997 as a customer 
service consultant and was appointed Vice President of Ground 
Operations in August 1997.  For over 30 years Mr. Eckart was 
involved in aviation-related activities as a United States Naval 
Aviator, where he served most recently as a Captain. While in the 
Navy, Mr. Eckart commanded aviation squadrons and major aviation 
shore stations, was also involved in aviation training and served as 
liaison between the U.S. Navy and the FAA.  Mr. Eckart holds a 
commercial pilot license and a degree in Human Resources Management.

WILLIAM A. GARRETT joined the Company in June 1996 as Corporate 
Controller and was appointed Vice President - Finance and Chief 
Financial Officer in July 1996.  From December 1993 to June 1996, he 
served as a Senior Manager with Ernst & Young LLP.  From 1987 to 
1993, he served on the staff of and as manager for Coopers and 
Lybrand LLP.  Mr. Garrett is a certified public accountant and a 
member of the American Institute of Public Accountants.  Mr. Garrett 
obtained a B. S. Degree in Business Administration and Accounting 
from Washington & Lee University.

BRIAN S. GILLMAN joined the Company in July 1996 as Vice 
President, General Counsel and Secretary.  From September 1994 to 
July 1996, Mr. Gillman was an associate in the law firm of Stinson, 
Mag & Fizzell, P.C., Kansas City, Missouri, where he served as a 
corporate counsel for the Company.  Mr. Gillman received his Juris 
Doctorate and B. B. A. in Accounting from the University of Iowa in 
1994 and 1991, respectively.

ALAN R. GORTHY, JR. joined the Company in November 1997 as the 
Station Manager in Kansas City. He was promoted to Director of 
Stations in May 1998 and was appointed as Vice President - 
Maintenance in August 1998. Prior to joining the Company, Mr. 
<PAGE>

Gorthy was employed with United Sports of America, an international 
sports promotion and entertainment company from March 1995 to 
October 1997.  Mr. Gorthy retired in November 1994 as a Captain in 
the U. S. Navy.  During his twenty-five years of service, which 
began in February 1969, Mr. Gorthy commanded aviation squadrons and 
major aviation shore stations.

JAMES B. MILLER joined the Company in April 1996 as Manager of 
Maintenance Programs and Planning, was appointed to Director of 
Quality Assurance in July 1997, Vice President - Maintenance in 
March 1998 and Vice President - Engineering and Quality Assurance in 
August 1998.  Prior to joining the Company, Mr. Miller was employed 
with Trans World Airlines for 28 years. Mr. Miller served most 
recently as a Staff Vice-President, Engineering and Quality 
Assurance for Trans World Airlines.

WILLIAM F. MCKINNEY joined the Company in March 1996 as Chief 
Pilot and was appointed Vice President - Operations in April 1996.  
Prior to joining the Company, Captain McKinney served as a pilot for 
Trans World Airlines for 29 years, where he served most recently as 
General Manager of Flying (Chief Pilot) for the Western Region of 
the United States.

RUSSELL WINTER joined the Company in August 1997 as Vice 
President - Marketing and Planning.  From January 1995 to August 
1997, Mr. Winter was a Vice President at Hambrecht & Quist, a 
wholly-owned subsidiary of Hambrecht & Quist Group. Hambrecht & 
Quist is an investment banking firm based in San Francisco, 
California.  Mr. Winter serves as a member of Hambrecht & Quist TSP 
Investment Management Co., L.L.C. and Hambrecht & Quist TSP II 
Investment Management, L.L.C., one of the general partners of 
Hambrecht & Quist TSP Investors, L.P. and Hambrecht & Quist TSP II 
Investors, L.P., respectively.  From August 1992 to January 1995, 
Mr. Winter was a Business Analyst with the Airbus Division of 
British Aerospace.

LEE M. GAMMILL, JR. was elected a director of the Company in 
September 1997.  Mr. Gammill is the retired Vice Chairman of the 
Board of New York Life Insurance Company.  From 1989 until he retired 
in May 1997, Mr. Gammill served as the Executive Vice President - 
Individual Insurance Operations at New York Life.  Mr. Gammill joined 
New York Life in 1957 as a sales agent and held various management 
and executive positions throughout his 40-year career with New York 
Life.

DENIS T. RICE was elected a director of the Company in April 
1997.  Mr. Rice is a director in the law firm of Howard, Rice, 
Nemerovski, Canady, Falk & Rabkin, P.C., San Francisco, California, 
a firm he has been associated with since 1961.

ADMIRAL LEIGHTON W. SMITH, JR. USN (RET.) was elected a director 
of the Company in August 1998. Admiral Smith was appointed the honor 
of a four star rank in April 1994, became Commander in Chief of the 
Allied Forces Southern Europe and concurrently assumed the command of 
the NATO-led Implementation Force (IFOR) in Bosnia in December 1995. 
Admiral Smith retired from the U.S. Navy after 34 years of service 
in October 1996.  Currently, he serves as a Senior Fellow at the 
Center for Naval Analysis, is Chairman of the Board of Trustees of 
the U. S. Naval Academy Alumni Association.  Admiral Smith also 
serves on the Executive Boards of the Naval Aviation Museum and the 
Association of Naval Aviation and is on the National Advisory Council 
to the Navy League.

PART II

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

The Common Stock began trading publicly on the Nasdaq SmallCap 
Market under the symbol "VNGD" on November 3, 1995. Prior to that 
date, there was no public market for the Common Stock.  The 
<PAGE>

following table sets forth, for the periods indicated, the high and 
low sales prices of the Common Stock as reported on the Nasdaq 
SmallCap Market.  The Common Stock was delisted from the Nasdaq 
SmallCap Market on December 16, 1996.  The Common Stock currently 
trades on the OTC Bulletin Board.

                         High	       Low
1997
First Quarter          		$3 1/8     	$1 3/4
Second Quarter	         	$2 3/16    	$1 3/8
Third Quarter		          $2 	        $1 1/8
Fourth Quarter		         $1 1/8     	$ 4/10

1998
First Quarter          		$ 3/4	      $ 1/2
Second Quarter	         	$1 5/8	     $ 9/16
Third Quarter	          	$1 7/8	     $ 15/16
Fourth Quarter	         	$1 1/8	     $ 7/8

1999
January	               		$1 1/8     	$1
February		               $1 1/8	     $ 15/16

The above OTC Bulletin Board quotations reflect inter-dealer 
prices, without retail mark-up, mark-down or commission and may not 
necessarily represent actual transactions.  As of March 1, 1999, 
there were approximately 353 holders of record of Common Stock.

DIVIDEND POLICY

The Company has not declared or paid dividends on its Common 
Stock.  The Company currently intends to retain any future earnings 
to fund operations and to continue the development of its business 
and, thus, does not expect to pay any cash dividends on its common 
stock in the foreseeable future.

RECENT SALE OF UNREGISTERED SECURITIES

On January 17, 1999, two of the Company's principal 
stockholders agreed to establish a two-year $4.0 million letter of 
credit in favor of the Company's credit card processor on behalf of 
the Company.  In consideration for the establishment of this letter 
of credit, the Company issued up to 4,000,000 warrants to purchase 
shares of Common Stock with an exercise price of $1.00 per share.  
Upon execution of the letter of credit, 400,000 warrants immediately 
vested.  The remaining 3,600,000 vest quarterly according to the 
amount of exposure under such letter of credit.  Each warrant 
expires on January 17, 2004.  This transaction was made under an
exemption from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof.
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth selected financial data and 
other operating data of the Company for the years ended December 31, 
1995, 1996, 1997 and 1998 and for the period from inception
(April 25, 1994) to December 31, 1994.  The selected financial
data in the table have been derived from the audited
financial statements of the Company, which are included
elsewhere herein.  The data should be read in 
conjunction with the Financial Statements of the Company and the 
related Notes thereto, and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations included elsewhere 
herein.

<TABLE>
<CAPTION>
                   Period from Inception 
                   (April 25, 1994) to           Year Ended          Year Ended         Year Ended        Year Ended
                   December 31, 1994 (4)   December 31, 1995   December 31, 1996   December 31, 1997   December 31, 1998
                   ---------------------   -----------------   -----------------   -----------------   -----------------
<S>                 <C>                    <C>                 <C>                 <C>                 <C>              
STATEMENT OF
 OPERATIONS DATA:

Total operating
          revenues $             760,985   $      36,159,018   $      68,589,101   $      81,384,138   $     104,268,542
Total operating 
          expenses             4,274,275          48,225,313          92,503,417         106,758,900         102,814,267
                   ---------------------   -----------------   -----------------   -----------------   -----------------
Operating income
           (loss)  $          (3,513,290)        (12,066,295)        (23,914,316)        (25,374,762)          1,454,275
Total other
     expense, net                 70,833            (129,235)         (1,893,754)         (2,871,241)         (2,933,212)
                   ---------------------   -----------------   -----------------   -----------------   -----------------
Net loss           $          (3,442,457)  $     (12,195,530)  $     (25,808,070)  $     (28,246,003)  $      (1,478,937)
                   =====================   =================   =================   =================   =================
Net loss per
    share (1)      $               (0.70)  $           (1.65)  $           (2.85)  $           (1.85)  $           (0.02)
                   =====================   =================   =================   =================   =================

Weighted average
    common shares
    outstanding (1)            4,907,377           7,395,921           9,056,888          15,232,901          65,767,641
                   =====================   =================   =================   =================   =================

OPERATING DATA: (2)
Revenue passenger
    miles(RPMs)                6,515,183         290,030,187         667,845,140         767,239,664         702,003,589
Available seat
    miles (ASMs)              15,251,200         562,340,660       1,090,058,358       1,295,760,836       1,042,688,790
Load factor                        42.72%              51.58%              61.27%              59.21%              67.33%
Break-even load
     factor (3)                        -               69.95%              83.87%              79.62%              66.55%
Passenger yield
     per RPM                           -   $          0.1172   $          0.0973   $          0.0998   $          0.1393
Total revenue
     per ASM                           -   $          0.0643   $          0.0629   $          0.0628   $          0.1000
Operating cost
     per ASM                           -   $          0.0858   $          0.0849   $          0.0824   $          0.0986
Block hours flown                    441              14,781              24,721              29,859              28,122
Average flight 
     length (miles)                  464                 372                 530                 585                 466
Operating cost per
     block hour                        -   $           3,263   $           3,742   $           3,575   $           3,656
Aircraft in service
     (end of period)                   2                   7                   8                   9                   9
Airports served
     (end of period)                   3                   9                  15                   9                   8

BALANCE SHEET DATA:
Cash and cash
      equivalents  $           1,126,809   $       3,491,640   $         402,083   $       1,082,712    $       7,417,048
Working capital
      deficiency   $          (1,297,439)         (4,172,305)        (16,296,881)        (22,352,910)          (7,915,882)
Property and 
      equipment
      net          $           2,588,892           4,550,818           5,049,658           5,484,684            8,131,453
Total assets       $           6,191,439          16,425,698          20,318,247          24,763,884           33,646,583
Long-term debt                         -                   -           5,000,000           1,900,000                    -
Total stockholders'
     equity
     (deficit)     $           2,576,023           3,544,633         (13,238,017)        (11,944,434)           5,783,872
</TABLE>

(1)	See Note 1 of Notes to Financial Statements.
(2)	"REVENUE PASSENGER MILES" or "RPMs" represents the aggregate 
amount of miles flown by revenue passengers.  "AVAILABLE SEAT 
MILES" or "ASMs" represents the number of seats available for 
passengers multiplied by the number of miles those seats are 
flown.  "BREAK-EVEN LOAD FACTOR" represents the percentage of 
ASMs that must be flown for the airline to break-even after 
operating and interest expenses assuming non-passenger 
operations, primarily mail, operate at break-even.  Break-even 
load factor is calculated by taking total expenses (see 
footnote (3)), minus non-passenger revenue, divided by ASMs, 
divided by passenger yield per RPM.  "PASSENGER YIELD PER RPM" 
represents the total passenger revenue divided by RPMs.  "TOTAL 
REVENUE PER ASM" represents total revenues divided by total 
ASMs.  "OPERATING COST PER ASM" represents total operating 
expenses divided by total ASMs.  "BLOCK HOURS FLOWN" represents 
the time between aircraft gate departure and aircraft gate 
arrival.  "AVERAGE FLIGHT LENGTH" represents aircraft miles 
flown divided by the number of departures.
(3)	Excludes $2,629,785, $1,858,767, $1,850,000 and $71,000 of 
noncash deferred debt issuance cost amortization for the years 
ended December 31, 1998, 1997, 1996 and 1995, respectively.
(4)	The Company's flight operations commenced December 4, 1994.  
Prior to that time, the Company was in the development stage.  
As a result, statistical comparisons of the years 
1998,1997,1996 and 1995 with the 1994 period would not be 
meaningful.  Therefore, Operating Data for the Period from 
Inception (April 25, 1994) to December 31, 1994 has not been 
presented for the following statistics:  Break-even load 
factor, Passenger yield per RPM, Total revenue per ASM, 
Operating cost per ASM and Operating cost per block hour.
<PAGE>

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

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT 
OF FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS 
AND UNCERTAINTIES AND INFORMATION THAT IS BASED ON MANAGEMENT'S 
BELIEFS AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY 
AVAILABLE TO MANAGEMENT.  WHEN USED IN THIS DOCUMENT, THE WORDS 
"ESTIMATE," "ANTICIPATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE 
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE 
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  
THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE 
CURRENTLY ANTICIPATED.  FACTORS THAT COULD CAUSE OR CONTRIBUTE TO 
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY OF 
WORKING CAPITAL AND FUTURE FINANCING RESOURCES, GENERAL ECONOMIC 
CONDITIONS, THE COST OF JET FUEL, THE OCCURRENCE OF EVENTS 
INVOLVING OTHER LOW-FARE CARRIERS, THE CURRENT LIMITED SUPPLY OF 
BOEING 737 JET AIRCRAFT AND THE HIGHER LEASE COSTS ASSOCIATED WITH 
SUCH AIRCRAFT, POTENTIAL CHANGES IN GOVERNMENT REGULATION OF 
AIRLINES OR AIRCRAFT AND ACTIONS TAKEN BY OTHER AIRLINES 
PARTICULARLY WITH RESPECT TO SCHEDULING AND PRICE IN THE COMPANY'S 
CURRENT OR FUTURE ROUTES AND UNANTICIPATED YEAR 2000 COMPLIANCE 
COSTS AND EXPENSES.  FOR ADDITIONAL DISCUSSION OF SUCH RISKS, SEE 
"FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS."

COMPANY

The Company was incorporated on April 25, 1994 and operates as 
a low-fare, short- to medium-haul passenger airline that provides 
convenient scheduled jet service to destinations in established 
markets in the United States.  The Company's flight operations 
began on December 4, 1994 with two Boeing 737-200 jet aircraft 
operating two daily flights each way between Kansas City and Denver 
and two daily flights each way between Denver and Salt Lake City.  
The Company currently operates ten leased Boeing 737-200 jet 
aircraft.  The Company leased its eleventh aircraft in March 1999 
and will begin flying revenue service with this aircraft on April 
15, 1999.  In addition, in January 1999 the Company signed letters 
of intent to lease and delivery of three additional Boeing 737-200 
Stage III aircraft during 1999.  These three additional aircraft 
will replace three older Boeing 737-200 Stage II aircraft in the 
Company's fleet whose leases expire in July and December 1999.  The 
Company's current schedule provides an average of 59 daily weekday 
flights serving Kansas City, Atlanta, Chicago-Midway, Dallas/Fort 
Worth, Denver, Minneapolis/St. Paul, Pittsburgh and Myrtle Beach. 
Beginning April 15, 1999 the Company will commence flights between 
Chicago-Midway and Cincinnati four times daily.  The Company 
continues to review its financing alternatives in order to purchase 
or lease additional aircraft under suitable terms.  There can be no 
assurance that the Company will be able to secure adequate 
financing arrangements for the lease or purchase of additional 
aircraft.  The Company also provides limited charter services.

The Company has experienced significant growth since the 
commencement of operations in December 1994, and has achieved 
operating revenues of $36.2 million for the year ended December 31, 
1995, $68.6 million for the year ended December 31, 1996, $81.4 
million for the year ended December 31, 1997, and $104.3 for the 
year ended December 31, 1998.

The Company's operating revenues are derived principally from 
the sale of airline services to passengers and are recognized when 
transportation is provided.  Total operating revenues are primarily 
a function of fare levels and the number of seats sold per flight. 
The Company's business is characterized, as is true for the 
airline industry generally, by high fixed costs relative to 
operating revenues and low profit margins.  The Company's principal 
business strategy is to provide airline services in established, 
high passenger-volume markets that are not served by other low-fare 
airlines.
<PAGE>

The primary factors expected to affect the Company's future 
operating revenues are the Company's ability to offer and maintain 
competitive fares, the reaction of existing competitors to the 
continuation or commencement of operations by the Company in a 
particular market (including changes in their fare structure, 
aircraft type and schedule), the possible entry of other low-fare 
airlines into the Company's current and future markets, the 
effectiveness of the Company's marketing efforts, the occurrence of 
events involving other low-fare carriers, passengers' perceptions 
regarding the safety of low-fare carriers, general economic 
conditions and seasonality factors.  The Company's costs are 
affected by fluctuations in the price of jet fuel, scheduled and 
unscheduled aircraft maintenance expenses, labor costs, the level 
of government regulation, fees charged by independent contractors 
for services provided, rent for gates and other facilities, and 
marketing and advertising expenses.  The Company has a limited 
history of operations and, from its inception in 1994 through the 
first quarter of 1998, has experienced significant losses.  As of 
December 31, 1998, the Company had an accumulated deficit of $71.2 
million.  The Company had a net loss of $1.5 million, however, net 
cash flows provided by operating activities totaled $6.0 million 
for the year ended December 31, 1998.  At December 31, 1998, 
current liabilities exceeded current assets by $7.9 million.  As a 
result of its limited operating history, together with the 
uncertainty in the airline industry generally, management is unable 
to accurately predict the future operating results of the Company.

The Company has generated positive cash flow from operations from 
March 1998 through December 1998 and anticipates generating positive 
cash flows from operations for the year ending December 31, 1999.  
The Company received proceeds of approximately $5.2 million in August 
1998 from the exercise of warrants.  Management believes that cash to 
be generated from operations together with the cash received in 
August 1998 from the warrant exercise will provide the necessary 
working capital for operations through December 1999.  The Company is 
exploring options to raise additional capital to fund anticipated 
expansion of operations.  There can be no assurance the Company will 
be successful in expanding operations or raising additional capital 
that may be needed for this purpose.

OVERVIEW

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED 
DECEMBER 31, 1997

OPERATING REVENUES

Total operating revenues increased 28% from $81.4 million for 
the year ended December 31, 1997 to $104.3 million for the year 
ended December 31, 1998.  This increase was primarily attributable 
to increases in the number of passengers, passenger yield and load 
factor in the year ended December 31, 1998 as compared to 1997.  
The number of passengers increased 15% from 1.3 million in the year 
ended December 31, 1997 to 1.5 million in the year ended December 
31, 1998. Passenger yield increased 40% from 10.0 cents in the year 
ended December 31, 1997 to 13.9 cents in the year ended December 
31, 1998.  The increases were realized despite decreases in both 
ASMs and RPMs in the year ended December 31, 1998 compared to 
December 31, 1997. The Company began flying a new route structure 
on December 21, 1996, which included the initiation of services 
from Kansas City to Atlanta, Ft. Myers, Las Vegas, Miami, Orlando 
and Tampa/St. Petersburg as well as non-stop service between 
Chicago-Midway and Kansas City. This route restructuring refocused 
the Company's strategy by creating a hub in Kansas City.  The 
increases in ASMs for the year ended December 31, 1997 that 
resulted from the December 1996 schedule change were not present in 
the year ended December 31, 1998 as another schedule change in 
September 1997 reduced or eliminated service in a number of these 
cities.  The Company discontinued round trip service from Kansas 
City to Des Moines, Las Vegas, Los Angeles, Orlando and Tampa/St. 
Petersburg, while adding round trip service from Kansas City to New 
York-JFK in September 1997 and round trip service from Chicago-
Midway and New York City-JFK to Pittsburgh in December 1997.  As a 
result, ASMs decreased 20% from 1,296 million during the year ended 
December 31, 1997 to 1,043 million during the year ended December 
31, 1998; RPMs decreased 9% from 767 million during the year ended 
December 31, 1997 to 702 million during the year ended December 31, 
1998.  The decrease was primarily attributable to the elimination 
of destinations with greater flight lengths and the reduction of 
<PAGE>

available seats on flights from 128 to 122. In September 1997, the 
Company terminated service to a number of long-haul markets in 
conjunction with the Company's September 1997 schedule change and 
terminated service from Kansas City to San Francisco in January 
1998 and service from Kansas City to New York City-JFK in May 1998. 
As a result, the average stage length decreased from 585 miles 
during the year ended December 31, 1997 to 466 miles during the 
year ended December 31, 1998.  Conversely, load factor increased 
from 59% for the year ended December 31, 1997 to 67% for the year 
ended December 31, 1998.  This increase was primarily the result of 
a 20% decrease in capacity but only a 9% decrease in the RPMs in 
the year ended December 31, 1998 as compared to the year ended 
December 31, 1997.

Passenger yield per RPM increased 40% from 10.0 cents in the 
year ended December 31, 1997 to 13.9 cents in the year ended 
December 31, 1998.  In order to increase fares and passenger yield 
effectively, the Company initiated strategic product improvements 
beginning in September 1997.  The Company's strategic plan includes 
the delivery of a reliable product with a number of amenities found 
on larger, better-known airlines that specifically cater to price-
sensitive business travelers.  Those amenities include assigned 
seating, refundable tickets, greater legroom, fixed ticket pricing 
under the Road Warrior sm Class and greater frequencies between 
city pairs.  The Company believes it has improved its brand 
awareness in each of its markets through its direct advertising 
program that was modified in August 1997.  The Company's 
implementation of its strategic plan showed positive results in the 
year ended December 31,1998 with the increases in passenger yield 
and load factor.  In addition, in late August and early September, 
the Company benefited from the pilot strike at one of its 
competitors through increased ticket sales.  The Company's load 
factor, passenger revenue and related yield, operating costs and 
cost per ASM increased as a result of the strike.  The Company 
anticipates the passenger yield and load factor in 1999 will remain 
consistent with 1998.  The Company, however, cannot predict future 
fare and related yield levels, which depend to a substantial extent 
on actions of competitors, general economic conditions and the 
Company's ability to deliver a reliable product.  The Company's 
strategic niche as a low-fare provider makes its pricing strategy 
sensitive to competitor's fare reductions. In 1999, the Company 
will enter at least one new market and will discount fares to 
stimulate travel.  The Company believes that the negative impact of 
entering new markets will be minimized as the Company increases its 
overall revenue base and customer awareness and continues to 
improve its service and reliability.

Certain passengers who do not complete their travel as 
scheduled are entitled to a credit for the value of the unused 
reservation less a $50 service charge, as described below, subject 
to certain restrictions. This credit may be redeemed for a period 
of 180 days (90 days prior to March 24, 1997) for future travel.  
The value of unused reservations that are not entitled to a credit 
as well as the value of expired credits are recognized in passenger 
revenue.  These revenues totaled $3.5 million (approximately 4% of 
total operating revenues) and $8.6 million (approximately 8% of 
total operating revenues) for the years ended December 31, 1997 and 
1998, respectively.  This increase is attributable to a change in 
policy implemented in the first quarter of 1998 whereby passengers 
who purchase tickets in discounted fare classes and fail to 
complete their travel as scheduled are not entitled to a credit and 
the value of the unused reservation is immediately recognized in 
passenger revenue.  The increase is also attributable to an 
increase in the number of passengers booking reservations, an 
increase in the number of promotions offering discounted fares, and 
an increase in the average fare per passenger during the year ended 
December 31, 1998 as compared to the year ended December 31, 1997. 
As described previously, the Company's strategic plan implemented 
in September 1997 refocused the Company's effort to cater to the 
business traveler by offering greater frequencies of flights 
between city pairs and more amenities.  With increased flight 
frequencies between city pairs, an increase in the business 
traveler market segment, and an increase in the number of 
promotions, the Company experienced a significant increase in 
passengers who did not complete their originally scheduled travel 
as well as an increase in passengers who forfeited future travel 
credits.

The Company also generates operating revenues as a result of 
service charges from passengers who change flight reservations.  
The Company charges a $50 service charge for these passengers. 
These service charges were $3.6 million (approximately 4% of total 
operating revenues) and $5.0 million (approximately 5% of operating 
revenues) in the years ended December 31, 1997 and 1998, 
<PAGE>

respectively. The increase is attributable to the increase in 
passengers subject to the service charge and the enforcement of the 
Company's policy to charge a service fee, when applicable. 

OPERATING EXPENSES

The following table sets forth the percentage of total 
operating revenues represented by these expense categories:

                             YEAR ENDED DECEMBER 31,
                             1997                1998

                   PERCENT OF    CENTS   PERCENT OF    CENTS
                    REVENUES    PER ASM   REVENUES   PER ASM

Total operating
       revenues     100.0%    6.28 cents    100.0%   10.00 cents
                    =======    ========    =======   ========
Operating expenses:
Flying operations    21.0%    1.32 cents    17.3%      1.73 cents
Aircraft fuel        22.8     1.43          13.2       1.32
Maintenance          23.8     1.49          21.0       2.10
Passenger service     9.0     0.57           6.4       0.64
Aircraft and
  traffic servicing  20.6     1.29          16.2       1.62
Promotion and sales  25.5     1.60          17.9       1.79
General and
  administrative      6.0     0.38           3.9       0.39
Depreciation and
  amortization        2.5     0.16           2.7       0.27
                    -------   --------    -------   --------
Total operating
    expenses        131.2     8.24          98.6       9.86
Total other
    expense, net     (3.5)   (0.22)         (2.8)     (0.28)
                    -------   --------    -------   --------
Net loss            (34.7)%  (2.18) cents   (1.4)%    (0.14) cents
                    =======   ========    =======   ========

Flying operations expenses increased 5% from $17.1 million 
(approximately 21% of operating revenues) for the year ended 
December 31, 1997 to $18.0 million (approximately 17% of operating 
revenues) for the year ended December 31, 1998.  The increase in 
flying operations expenses was primarily the result of the increase 
in the average number of aircraft in the fleet from 7.7 to 9.0 and 
the associated gross aircraft rent.  Additional increases were 
noted in pilot training and overnight hotel and food costs.  These 
increases were offset by a decrease in the Company's hull insurance 
premium rates.  Finally, despite a 6% decrease in block hours 
flown, pilot pay increased as a result of wage per hour increases 
in 1998.   As a result of the September 1997 schedule change, block 
hours decreased from 29,859 hours in the year ended December 31, 
1997 to 28,122 in the year ended December 31, 1998.  Flying 
operations expense increased on a cents per ASM basis from 1.32 
cents for the year ended December 31, 1997 to 1.73 cents for the 
year ended December 31, 1998.  The Company's base rent increased 
due to additional aircraft and this coupled with 20% fewer ASMs 
resulted in an increased cost per ASM. 

Aircraft fuel expenses decreased 26% from $18.6 million 
(approximately 23% of operating revenues) for the year ended 
December 31, 1997 to $13.7 million (approximately 13% of operating 
revenues) for the year ended December 31, 1998.  Lower fuel expense 
is directly related to the decrease in block hours flown by the 
Company as well as a decrease in cost per gallon in the year ended 
December 31, 1998 versus 1997.  Fuel cost per block hour decreased 
$134 or 22% from $622 in the year ended December 31, 1997 to $488 
in the year ended December 31, 1998 primarily due to a decrease in 
average fuel price per gallon.  Specifically, the average price 
decreased from $0.74 per gallon (including taxes and into-plane 
costs) in the year ended December 31, 1997 to $0.58 per gallon 
(including taxes and into-plane costs) in the year ended December 
31, 1998, a 22% decrease.  The Company will seek to pass on any 
significant fuel cost increases to the Company's customers through 
fare increases as permitted by then current market conditions; 
however, there can be no assurance that the Company will be 
successful in passing on increased fuel costs.
<PAGE>

Maintenance expenses include all maintenance-related labor, 
parts, supplies and other expenses related to the upkeep of 
aircraft.  Maintenance expenses increased 13% from $19.3 million 
(approximately 24% of operating revenues) for the year ended 
December 31, 1997 to $21.9 million (approximately 21% of operating 
revenues) for the year ended December 31, 1998.  This increase was 
primarily the result of an increase in the average number of 
aircraft in the Company's fleet from 7.7 to 9.0, accelerating 
aircraft input dates for certain scheduled required major 
maintenance and providing for the under accrual of actual engine 
maintenance costs.  During the third and fourth quarters of 1998, 
the Company expensed approximately $800,000 to provide for actual 
engine maintenance costs incurred in excess of accrued amounts.  
The Company attributed the underaccrual to the continued increase 
in engine overhaul costs.  In addition, the Company expensed 
approximately $400,000 to provide for the expected increase in 
engine overhaul costs in 1999, 2000 and 2001.  The Company also 
expensed approximately $433,000 in the fourth quarter of 1998 to 
provide an obsolescence reserve for rotable and expendable 
inventory.  The increase in maintenance expense is further 
attributable to the Company having three aircraft in scheduled 
major airframe maintenance during the year ended December 31, 1998 
for which certain airworthiness directives were performed and 
expensed as incurred in accordance with Company policy.  The 
Company did not have an aircraft in scheduled major airframe 
maintenance during the year ended December 31, 1997 involving 
airworthiness directives.  The increase in the average aircraft 
fleet combined with the three aircraft incurring major scheduled 
airframe maintenance during 1998 also resulted in significant 
increases in repair and overhaul expenses and parts purchases 
during the year ended December 31, 1998.  Lastly, the Company has 
also made a concerted effort to improve its line maintenance 
capabilities in Pittsburgh, Chicago and Minneapolis, in addition to 
its warehousing capabilities in Kansas City.  As a result, the 
Company has added approximately thirty additional maintenance 
employees to support these efforts. These increases were offset by 
decreases in the major maintenance accruals for landing gear and 
auxiliary power units ("APUs") correlating to the 6% decrease in 
block hours flown.  The Company deposits supplemental rents with 
its aircraft lessors to cover a portion of or all of the cost of 
its future major scheduled maintenance for airframes, engines, 
landing gears and APUs.  These supplemental rents are variable 
based on flight hours flown.  The costs of routine aircraft and 
engine maintenance are charged to maintenance expense as incurred. 
Maintenance expenses increased on a cents per ASM basis from 1.49 
cents for the year ended December 31, 1997 to 2.10 cents for the 
year ended December 31, 1998.  This increase in cents per ASM 
mainly resulted because of the increases in maintenance expense as 
described above as well as the fixed costs of the Company's 
maintenance efforts being spread over 20% fewer ASMs.

Passenger service expenses decreased 9% from $7.3 million 
(approximately 9% of operating revenues) for the year ended 
December 31, 1997 to $6.7 million (approximately 6% of operating 
revenues) for the year ended December 31, 1998.  The Company 
significantly reduced its inconvenienced passenger costs as a 
result of the Company's strategy to increase frequencies between 
city pairs and to deliver a more reliable product to its customers. 
In addition, this decrease was attributable to cost savings from 
the reduction in the Company's passenger liability insurance rates. 
This decrease was offset by increases in flight attendant overnight 
hotel and food costs.  It was also offset by increases in in-flight 
food and beverage costs resulting from the 15% increase in the 
number of passengers for the year ended December 31, 1998 compared 
to 1997.  Finally, despite a 6% decrease in block hours flown, 
flight attendant pay increased as a result of wage per hour 
increases in 1998.

Aircraft and traffic servicing expenses increased 1% from 
$16.7 million (approximately 21% of operating revenues) for the 
year ended December 31, 1997 to $16.9 million (approximately 16% of 
operating revenues) for the year ended December 31, 1998. The 
Company experienced increases in station rent, employee salaries 
and benefits related to the Company's dispatch, scheduling, station 
management and system control departments in the year ended 
December 31, 1998 as compared to the year ended December 31, 1997. 
 These increases were offset, however, by decreases in station 
ground handling expenses and station salaries that correspond to 
the decrease in the number of cities served.   Furthermore, in July 
1998, the Company took its station ground handling operations in 
house at its Kansas City station.  This resulted in an additional 
cost saving of approximately $600,000.  The Company decreased its 
average cost per departure from $920 for the year ended December 
31, 1997 to $897 for the year ended December 31, 1998 as a result 
of these decreases.  Aircraft and traffic servicing expenses 
<PAGE>

increased on a cents per ASM basis from 1.29 cents for the year 
ended December 31, 1997 to 1.62 cents for the year ended December 
31, 1998 as a result of the fixed costs of the Company's aircraft 
and traffic servicing functions being spread over 20% fewer ASMs.

Promotion and sales expenses decreased 10% from $20.7 million 
(approximately 25% of operating revenues) in the year ended 
December 31, 1997 to $18.7 million (approximately 18% of operating 
revenues) in the year ended December 31, 1998.  This decrease was 
primarily the result of the decrease in the number of cities 
served, the dollars spent on direct advertising, and the reduction 
in costs associated with its reservation center in the year ended 
December 31, 1998 as compared to the year ended December 31, 1997. 
During the year ended December 31, 1998, the Company incurred 
direct advertising costs of $5.4 million versus $7.7 million in the 
year ended December 31, 1997.  Furthermore, the Company took the 
reservation center in-house in April 1998 versus contracting out to 
a third party, which effectively reduced reservation center costs 
by approximately $1.6 million.  Increases in travel agency 
commissions, CRS fees, and credit card processing fees in the year 
ended December 31, 1998 as compared to 1997 offset this decrease.  
These increases can be attributed to the 28% increase in operating 
revenues in the year ended December 31, 1998 as compared to the 
year ended December 31, 1997.  The average promotion and sales cost 
per passenger decreased $3.39 or 22% from $15.79 in the year ended 
December 31, 1997 to $12.40 in the year ended December 31, 1998.  
Promotion and sales expenses increased on a cents per ASM basis 
from 1.60 cents for the year ended December 31, 1997 to 1.79 cents 
for the year ended December 31, 1998.  This increase in cents per 
ASM resulted because the fixed costs of the Company's promotion and 
sales functions were spread over 20% fewer ASMs.

General and administrative decreased 17% from $4.9 million 
(approximately 6% of operating revenues) in the year ended December 
31, 1997 to $4.1 million (approximately 4% of operating revenues) 
in the year ended December 31, 1998.  The decrease in general and 
administrative expenses in the year ended December 31, 1998 as 
compared to 1997 is the result of decreases in general liability 
insurance, property tax, accounting staff salaries and office rent.

Depreciation and amortization expenses increased 35% from $2.1 
million (approximately 3% of operating revenues) in the year ended 
December 31, 1997 to $2.8 million (approximately 3% of operating 
revenues) in the year ended December 31, 1998.  This increase was 
primarily due to an increase in rotable aircraft parts inventory of 
approximately $3.3 million, the acquisition of two spare aircraft 
engines and various capitalized aircraft improvements in the year 
ended December 31, 1998.

Other expense, net consists primarily of debt issuance cost 
amortization, interest income and interest expense.  In connection 
with the guarantees and the letters of credit issued on behalf of 
its credit card processor and the bank line of credit agreements, 
each executed in 1997, the Company issued certain stockholders 
warrants to purchase shares of Common Stock at exercise prices of 
$l.00 and $1.94 per share. Warrants vest quarterly in amounts 
dependent on the Company's exposure under the letter and line of 
credit, as defined in the respective agreements.  Accordingly, the 
estimated fair value of the warrants issued related to 
the agreements totaling $490,000 during the year ended December 31,
1998 was recorded as deferred debt issuance costs and is 
being amortized to expense over the terms of the related 
guarantees.  Interest expense decreased during the year ended 
December 31, 1998 as a result of the payoff of the line of credit 
in August 1998 as well as the conversion of demand notes payable to 
related parties to preferred stock and common stock in March 1998 
and May 1998, respectively.

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

OPERATING REVENUES

Total operating revenues increased approximately 19% from 
approximately $68.6 million for the year ended December 31, 1996 to 
approximately $81.4 million for the year ended December 31, 1997.  
This increase was primarily attributable to an increase in the 
number of daily flights and the number of passengers on those 
flights.  During the year ended December 31, 1996, the Company 
<PAGE>

averaged 45 flights per day that increased to 50 flights per day 
during the year ended December 31, 1997.  The Company began flying a 
new route structure on December 21, 1996, which included the 
initiation of services from Kansas City to Atlanta, Ft. Myers, Las 
Vegas, Miami, Orlando and Tampa/St. Petersburg as well as non-stop 
service between Chicago-Midway and Kansas City.  This route 
restructuring refocused the Company's strategy by creating a hub in 
Kansas City.  ASMs increased approximately 19%, from approximately 
1,090 million during the year ended December 31, 1996 to 
approximately 1,296 million during the year ended December 31, 1997. 
RPMs increased approximately 15%, from approximately 668 million 
during the year ended December 31, 1996 to approximately 767 million 
during the year ended December 31, 1997.  The increase in ASMs was 
primarily attributable to an increase in 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, the number of passengers on those 
additional flights and the addition of destinations with greater 
flight lengths.  These increases in ASMs and RPMs that resulted from 
the December 1996 schedule change were offset by a schedule change 
in September 1997 that reduced or eliminated service in a number of 
these cities.  The Company discontinued round trip service from 
Kansas City to Des Moines, Las Vegas, Los Angeles, Orlando and 
Tampa/St. Petersburg while adding round trip service from Kansas 
City to New York-JFK in September 1997 and round trip service from 
Chicago-Midway and New York City-JFK to Pittsburgh in December 1997. 
Load factor decreased from approximately 61% for the year ended 
December 31, 1996 to approximately 59% for the year ended December 
31, 1997.  This decrease was primarily the result of a 19% increase 
in capacity and the addition of destinations with greater flight 
lengths while experiencing only a 15% increase in RPMs.

Passenger yield per RPM increased approximately 3% from 
approximately 9.7 cents for the year ended December 31, 1996 to 
approximately 10.0 cents for the year ended December 31, 1997.  The 
Company initially discounted fares to stimulate travel in a number 
of the new markets that were introduced in conjunction with the 
Company's major route restructuring in December 1996.  The Company 
attempted on a number of occasions to increase fares in most of its 
markets in the second and third quarters of 1997.  This strategy 
reduced passenger demand and, often, was not followed by the 
Company's competitors in the respective markets and, thus, limited 
the Company's ability to increase fares.  In addition, with the 
initiation of the December 1996 route structure, the Company's 
average stage length increased to 587 miles from 530 miles during 
the nine months ended September 30, 1997 as compared to the year 
ended December 31, 1996.  In September, the Company terminated 
service to a number of long-haul markets in conjunction with the 
Company's September 1997 schedule change, its average stage length 
then decreased to 554 miles in the fourth quarter of 1997.  As a 
result of the Company's inability to increase fares in its markets, 
the Company was required to stimulate travel by continuing to offer 
discounted fares on the majority of the city pairs it served 
throughout the year ended December 31, 1997.  In order to increase 
fares and passenger yield effectively, the Company focused on 
improving its product beginning in September 1997.  The Company's 
implementation of its strategic plan showed positive results in the 
fourth quarter of 1997 with passenger yield increasing to 11.1 
cents.

The Company also generated operating revenues as a result of 
service charges from passengers who changed flight reservations.  
For a period of 180 days (90 days prior to March 24, 1997) after the 
flight date, the customer may use the value of the unused 
reservation, subject to certain restrictions, for transportation, 
less a $50 ($25 through October 1996) service charge.  These 
operating revenues were approximately $2.1 million (approximately 3% 
of total operating revenues) and approximately $3.6 million 
(approximately 4% of operating revenues) in the years ended December 
31, 1996 and 1997, respectively. 

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, including interest 
expense and amortization of deferred debt 
<PAGE>

issuance costs.  The following table sets forth the percentage of 
total operating revenues represented by these expense categories as 
well as certain other selected financial data.

                         YEAR ENDED DECEMBER 31,
                        1996                 1997 

                  PERCENT OF  CENTS     PERCENT OF  CENTS
                   REVENUES  PER ASM     REVENUES  PER ASM

Total operating
 revenues           100.0%   6.29 cents   100.0%   6.28 cents
                    =====    ====         =====    ====
Operating expenses:
Flying operations   25.2%    1.59 cents    21.0%   1.32 cents
Aircraft fuel       23.3     1.47          22.8    1.43
Maintenance         23.4     1.48          23.8    1.49
Passenger service    9.1     0.57           9.0    0.57
Aircraft and 
 traffic servicing  22.2     1.39          20.6    1.29
Promotion and sales 22.9     1.44          25.5    1.60
General and 
 administration      6.4     0.40           6.0    0.38
Depreciation and
 amortization        2.3     0.15           2.5    0.16
                  ======    =====         =====    ====
Total operating
 expenses          134.8     8.49         131.2    8.24
Total other income
 (expense), net     (2.8)   (0.17)         (3.5)  (0.22)
                  ------    -----         -----    ----
Net loss	       (37.6%)  (2.37 cents)  (34.7%) (2.18 cents)
                  ======    ======         ======  ======

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 decreased approximately 1% from approximately $17.3 million 
(approximately 25% of operating revenues) for the year ended 
December 31, 1996 to approximately $17.1 million (approximately 21% 
of operating revenues) for the year ended December 31, 1997.  In 
late 1995 and early 1996, the Company leased two Boeing 737-300 jet 
aircraft that were newer, more advanced aircraft and have a larger 
capacity and substantially higher lease and insurance costs.  The 
decrease in flying operation expenses in 1997 was primarily the 
result of the return of these two Boeing 737-300 jet aircraft to the 
lessor in May and July 1997.  In addition, the Company was 
successful in negotiating more favorable hull insurance rates on its 
fleet in 1997 as compared to 1996.  These decreases were offset by 
increases in pilot compensation directly related to the increase in 
block hours.  Block hours increased to 29,859 in 1997 from 24,721 in 
1996.  Flying operations expenses decreased as a percentage of 
operating revenue as a result of the increase in flying and revenue 
generated from the Company's fleet, especially the 737-300 and long-
range 737-200 jet aircraft, during the first eight months of 1997 
versus the same period in 1996.

Aircraft fuel expenses include the direct cost of fuel, taxes 
and the costs of delivering fuel into the aircraft.  Aircraft fuel 
expenses increased approximately 16% from approximately 
$16.0 million (approximately 23% of operating revenues) for the year 
ended December 31, 1996 to approximately $18.6 million 
(approximately 23% of operating revenues) for the year ended 
December 31, 1997.  Higher fuel expense is directly related to the 
increase in ASMs flown by the Company offset by a decrease in cost 
per gallon in the year ended December 31, 1997 versus 1996.  Fuel 
cost per ASM decreased 0.04 cents or 3% from 1.47 cents in the year 
ended December 31, 1996 to 1.43 cents in the year ended December 31, 
1997 primarily due to a decrease in average fuel price per gallon.  
Specifically, the average price decreased from $0.79 per gallon 
(including taxes and into-plane costs) in the year ended December 
31, 1996 to $0.74 per gallon in the year ended December 31, 1997, a 
6% decrease.

Maintenance expenses include all maintenance-related labor, 
parts, supplies and other expenses related to the upkeep of 
<PAGE>

aircraft.  Maintenance expenses increased approximately 20% from 
approximately $16.1 million (approximately 23% of operating 
revenues) for the year ended December 31, 1996 to approximately 
$19.3 million (approximately 24% of operating revenues) for the year 
ended December 31, 1997.  This increase was primarily due to the 
increase in block hours and cycles flown.  In addition, during the 
later part of 1996 and 1997, the Company incurred charges related to 
certain Boeing 737-200 jet aircraft that were in excess of what 
traditionally had been accrued by the Company for major scheduled 
airframe, engine and landing gear maintenance checks.  The Company 
attributed the increase in costs associated with major scheduled 
airframe, engine and landing gear maintenance checks to the 
following: a change in the vendors providing the major scheduled 
overhaul services; the lack of available overhauled/used engine and 
landing gear replacement parts; and the funding of nonroutine 
airframe repairs not normally experienced during major scheduled 
airframe overhauls.  As a result, in the fourth quarter of 1996 and 
again in the second quarter of 1997, the Company increased the 
monthly maintenance provisions for major scheduled maintenance 
checks.  In the second quarter of 1997, the Company also provided 
for the underaccrual of completed major air frame maintenance 
checks.  The Company deposits funds with its aircraft lessors to 
cover a portion of or all of the cost of its future major scheduled 
maintenance for airframes, engines, landing gears and APUs.  The 
costs of routine aircraft and engine maintenance are charged to 
maintenance expense as incurred.  Additionally, the Company 
significantly increased the capacity of its in-house maintenance 
department subsequent to January 1, 1997.  The Company's maintenance 
administration function expanded by eight employees to insure 
compliance with all FAA and DOT regulations and requirements.  The 
Company also increased line maintenance personnel by twelve 
employees including the introduction of maintenance operations at 
the Chicago-Midway and Minneapolis/St. Paul airports.

Passenger service expenses include flight attendant wages and 
benefits, in-flight service, flight attendant training, uniforms and 
overnight expenses, inconvenienced passenger charges and passenger 
liability insurance.  Passenger service expenses increased 
approximately 18% from approximately $6.2 million (approximately 9% 
of operating revenues) for the year ended December 31, 1996 to 
approximately $7.3 million (approximately 9% of operating revenues) 
for the year ended December 31, 1997.  This increase was primarily 
due to the 19% increase in ASMs and the 15% increase in RPMs that 
directly resulted in an increase in flight attendant wages and 
inconvenienced passenger charges.  These increases were offset by 
cost savings from the reduction in the Company's passenger liability 
insurance rates. Passenger service expenses per ASM remained 
consistent at approximately 0.57 cents for the year ended December 
31, 1996 and 1997.

Aircraft and traffic servicing expenses include all expenses 
incurred at the airports for handling aircraft, passengers and mail, 
landing fees, facilities rent, station labor and ground handling 
expenses.  Aircraft and traffic servicing expenses increased 
approximately 10% from approximately $15.2 million (approximately 
22% of operating revenues) in the year ended December 31, 1996 to 
approximately $16.7 million (approximately 21% of operating 
revenues) in the year ended December 31, 1997.  This increase was 
primarily due to an increase in the number of cities served during 
the first nine months of 1997 and an increase in the number of 
departures.  Departures increased approximately 11% from 16,383 
during the year ended December 31, 1996 to 18,195 during the year 
ended December 31, 1997.  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 year ended December 
31, 1997 and the year ended December 31, 1996.  The decrease of .10 
cents per ASM was primarily due to the 10% increase in average stage 
length from 530 miles in 1996 to 585 miles in 1997.

Promotion and sales expenses include the costs of the reservations 
functions, including all wages and benefits for reservations, rent, 
electricity, telecommunication charges, credit card fees, travel 
agency commissions, advertising expenses and wages and benefits for 
the marketing department.  Promotion and sales expenses increased 
approximately 32% from approximately $15.7 million (approximately 
23% of operating revenues) in the year ended December 31, 1996 to 
approximately $20.7 million (approximately 26% of operating 
revenues) in the year ended December 31, 1997.  This increase was 
primarily the result of an increase in cities served, reflecting 
the Company's practice to increase advertising when new cities are 
introduced in order to create brand awareness in addition to the 
Company's strategy to increase spending 
<PAGE>

on advertising programs in existing cities.  The Company incurred 
significant increases in late 1996 and early 1997 promoting its 
major route restructuring, which created a hub in Kansas City.  The 
Company continues relied on its direct advertising methods to 
attract its passengers and therefore continued to incur significant 
advertising expenses in each month and with each of its schedule 
changes. The average promotion and sales cost per passenger 
increased $3.31 or 27% from $12.47 in the year ended December 31, 
1996 to $15.79 in the year ended December 31, 1997.

General and administrative expenses include the wages and 
benefits for the Company's corporate employees and various other 
administrative personnel, the costs for office supplies, office 
rent, legal, accounting, insurance, and other miscellaneous 
expenses.  General and administrative expenses increased 
approximately 12% from approximately $4.4 million (approximately 6% 
of operating revenues) in the year ended December 31, 1996 to 
approximately $4.9 million (approximately 6% of operating revenues) 
in the year ended December 31, 1997.  The increase in general and 
administrative expenses in 1997 was primarily attributable to the 
increase in administrative personnel in the Company's accounting, 
MIS and legal departments as well as initiation of directors' and 
officers' insurance coverage in February 1997.

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 31% from approximately $1.6 million 
(approximately 2% of operating revenues) in the year ended December 
31, 1996 to approximately $2.1 million (approximately 3% of 
operating revenues) in the year ended December 31, 1997.  This 
increase was primarily the result of improvements to new and 
existing aircraft and gate space at the Kansas City Airport and 
those costs associated with modifications to the Company's 
reservation system.  In addition, the Company incurred a full year 
of depreciation and amortization charged in the year ended December 
31, 1997 on property and equipment added in the year ended December 
31, 1996.

Other income (expense), net consists primarily of debt issuance 
cost amortization, interest income and interest expense.  In 
connection with the guarantees of the letter of credit issued on 
behalf of its credit card processor and the bank line of credit 
agreements, each executed in 1997, the Company issued certain 
stockholders warrants to purchase shares of common stock at an 
exercise price of $1.00 and $1.94 per share.  Accordingly, the 
estimated fair value of the warrants issued related to the 
agreements totaling $4,082,000 during the year ended December 
31,1997 was recorded as deferred debt issuance costs and is being 
amortized to expense over the terms of the related guarantees.  
Interest expense increased during the year ended December 31, 1997, 
as a result of borrowings against the line of credit and the 
addition of demand notes payable to related parties during the year 
ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations and 
met its capital expenditure requirements primarily with proceeds 
from private sales of equity securities, proceeds from its initial 
public offering of Common Stock, proceeds from its public rights 
offering and the issuance of debt primarily to its principal 
stockholders.  As of March 12, 1999, the Company has received net 
proceeds from the sale of its equity securities aggregating 
approximately $70.2 million.

In January 1998, the Company established a $1.9 million line 
of credit with INTRUST Bank, NA (Wichita, Kansas).  In August 1998, 
the Company repaid its $1.9 million line of credit with a portion 
of the $5.2 million proceeds received from the exercise of warrants 
by principal stockholders.  The line of credit was guaranteed by 
certain stockholders and expired on January 30, 1999.  The Company 
is currently evaluating its options with financial institutions to 
secure a line of credit for working capital.  There can be no 
assurance that the Company will be able to obtain a line of credit 
on acceptable terms or at all.
<PAGE>

On March 20, 1998, the Company entered into a Note Exchange 
Agreement whereby the principal stockholders holding demand notes 
of $9.5 million agreed to exchange the demand notes and all unpaid 
interest for Convertible Notes.  On May 20, 1998, the Company 
converted the Convertible Notes plus accrued interest totaling 
approximately $10.6 million to Common Stock at a rate of $0.50 per 
share.

In the quarter ended March 31, 1998, the Company issued $3.0 
million of unsecured 9% convertible promissory notes to certain 
principal stockholders of the Company.  The Company converted the 
unsecured promissory notes, plus accrued interest, in aggregate 
amount of approximately $3.0 million to units of Series A Preferred 
Stock and Common Stock purchase warrants.  Each unit cost $10 and 
consisted of one share of Series A Preferred Stock and a Common 
Stock purchase warrant.  Each share of Series A Preferred Stock is 
convertible into 20 shares of Common Stock.  Each warrant in the 
unit entitles the holder to purchase 40 shares of Common Stock at 
an exercise price of $0.55 per share of Common Stock.  On August 6, 
1998 and August 12, 1998, the warrant holders net exercised 
warrants representing rights to purchase 6,000,000 and 6,094,480, 
respectively, shares of Common Stock that were sold in the Series A 
Preferred Stock unit offering.  Because the warrant holders elected 
to exercise the warrants on a net basis, as defined by the 
agreement, the Company issued an aggregate 8,110,936 shares of 
Common Stock in connection with the aforementioned exercises.  The 
Company received no cash due to the warrant holder's election to 
exercise on a net basis.

On July 2, 1998, the Company notified certain principal 
stockholders of its intention to redeem 10,300,000 outstanding 
warrants that were issued in conjunction with the Company's April 
1997 private unit offering.  Each warrant issued in connection with 
the private offering entitled the holder to purchase one share of the 
Company's Common Stock for $0.50 per share.  All of the holders 
elected to exercise these warrants and the Company issued 10,300,000 
shares of Common Stock and received proceeds of $5,150,000 in August 
1998.

In January and February 1998, the Company did not generate 
sufficient passenger ticket sales to provide for its operational 
cash needs.  The Company funded its cash flow deficit through the 
issuance of demand notes to its principal stockholders, as 
discussed above.  During the second through fourth quarters of 
1998, the Company generated approximately $8.6 million of positive 
cash flows from operations.  As of December 31, 1998, the Company 
had a working capital deficit of $7.9 million.

During the year ended December 31, 1998, the Company has 
experienced a significant increase in advanced ticket sales that 
has resulted in an increase to its air traffic liability.  In 
January 1999, the principal stockholders of the Company agreed to 
renew the two-year $4.0 million letter of credit facility and in 
May 1999, the Company anticipates the principal stockholders to 
renew a $2.0 million stockholder guarantee in order to secure the 
Company's credit card processor.  The letters of credit and 
stockholder guarantee expire in January 2001 and May 1999, 
respectively.  If the Company is not able to extend the term of the 
guarantee, the Company would be obligated to fund its credit card 
processor with $2.0 million in May 1999.  There can be no assurance 
that the principal stockholders will agree to such extension on 
acceptable terms, if at all, or that the Company's credit card 
processor would agree to a reduction in collateral.  The Company 
does believe that cash on hand will be adequate to fund the 
collateral requirements requested by its credit card processor, if 
needed.

In addition, in May 1998, the Company began depositing cash 
into a restricted cash account to provide for the Company's credit 
card exposure in excess of $6.0 million.  At December 31, 1998, the 
credit card exposure was less than $6.0 million and, consequently, 
the Company did not have any additional cash placed in this 
restricted cash account.  To the extent that exposure exceeds $6.0 
million, the Company must deposit cash from ticket sales as 
collateral to secure the Company credit card processor.  As of 
March 12, 1999 due to increased ticket sales, the Company's credit 
card exposure was approximately $8.9 million.  The Company funded 
the credit card exposure in excess of $6.0 million with $2.9 
million in available cash on hand.  The Company estimates that its 
credit card exposure will range between $8.0 to $10.0 million 
through the end of the third quarter when the balance should reduce 
due to expected seasonality.  The Company plans to renegotiate its 
collateral requirements during the later part of 1999.  There can 
<PAGE>

be no assurance that the Company will be successful with these 
negotiations or that the Company will be able to reduce its 
collateral requirements.  Any cash utilized as collateral is 
refunded by the credit card processor, on a daily basis, when the 
Company's exposure falls below the previously calculated exposure 
or $6.0 million, whichever is greater.

The Company estimates that scheduled heavy maintenance of its 
existing aircraft fleet through December 1999 will cost $6.2 
million, of which $2.7 million will be funded from existing 
supplemental rent payments recoverable from aircraft lessors.  In 
addition, the Company expects to expend $4.6 million on various 
capital expenditures in the next year, which are primarily related 
to improvements for existing aircraft, increased aircraft parts 
inventory levels and improvements to its in-house computer systems.

The Company continues to review its financing alternatives in 
order to purchase or lease additional aircraft under suitable 
terms.  In January 1999, the Company signed leases for two 
additional Boeing 737-200 jet aircraft and accepted delivery of 
these aircraft in February and March, respectively.  The Company 
began flying revenue service in March with one of these aircraft 
and anticipates flying revenue service in April 1999 with the 
second.  In connection with these leases, the Company has 
established letters of credit in favor of the lessor to secure said 
aircraft.  The Company has also signed letters of intent for three 
additional aircraft to replace its three remaining Stage II 
compliant aircraft.  The Company must deposit with the lessor or 
establish a letter of credit in the aggregate amount of $690,000 
for these three aircraft.  As of March 12, 1999, the Company had 
placed deposits totaling $345,000 with the lessor.  In addition, 
the Company is currently in discussion with various aircraft 
lessors regarding the addition of two more aircraft in the second 
quarter of 1999.  The Company's cash balance as of March 12, 1999 
is sufficient to provide for the necessary estimated lease deposit 
requirements for up to two additional aircraft.  Historically, the 
Company has been required to deposit between $140,000 and $400,000 
per aircraft depending on the specific terms negotiated in the 
lease.

The Company has been generating positive cash flows from 
operations since March 1998 and expects to continue to generate 
sufficient cash to support its operations through the year ending 
December 31, 1999.  The Company plans to continue to implement 
certain actions designed to achieve long-term profitability and 
improve its capital resources.  Management's plans to achieve long-
term profitability include increased focus on the price-sensitive 
business traveler and pricing strategies designed to maximize 
passenger revenue and continued focus on cost savings programs.  
There can be no assurance that its efforts will be successful.

Whether or not the Company's strategic plans to achieve long-
term profitability are successful, any expansion beyond that 
discussed above would be dependent upon the Company raising 
additional capital.  The Company is evaluating options on raising 
additional capital or issuing debt during 1999.  The Company's 
success in implementing actions designed to achieve long-term 
profitability and its ability to operate at profitable levels will 
determine if the Company will be able to raise additional capital. 
There can be no assurance that the Company's necessary working 
capital requirements to expand operations will be available on 
acceptable terms, or at all.

OTHER MATTERS

YEAR 2000 COMPLIANCE

Older computers were programmed to use a two-digit code for the 
date entry rather than a four-digit code.  For example, the date 
November 17, 1970 would be entered as "11/17/70" rather than 
"11/17/1970."  The decision to use two digits instead of four was 
based largely on cost-reduction considerations and the belief that 
the code would no longer be used at the millennium.  Nevertheless, 
coding conventions have not changed, and on January 1, 2000, 
computers may read the digits "00" as denoting the year 1900 rather 
than 2000.  At the least, this could result in massive quantities of 
incorrect data.  At worst, it could result in the total or partial 
failure of time sensitive computer systems and software.
<PAGE>

THE COMPANY'S YEAR 2000 ISSUES.  The Company began operations 
in December 1994, and its operations depend predominantly on third 
party computer systems.  Because of the Company's limited resources 
during its start-up, the most cost effective way to establish its 
computer systems was to outsource or to use manual systems.  
Internal systems developed and any software acquired are limited and 
were designed or purchased with the Year 2000 taken into 
consideration.

Management has neared the completion of the modification of the 
Company's information technology to recognize the Year 2000 and the 
conversion or purchase of critical data process systems.  The 
Company's new reservations software was installed in the third 
quarter of 1997 is Year 2000 compliant.  In addition, the Company 
purchased a new revenue management system in February 1998 that is 
Year 2000 compliant.  The Company's financial reporting software is 
currently not Year 2000 compliant.  The Company can upgrade its 
financial reporting software for less than $10,000 if it elects not 
to purchase and install a new financial reporting system.  The 
Company is currently reviewing proposals from various financial 
software vendors and expects to begin the financial software 
conversion process prior to June 30, 1999.  The cost of a new 
financial software system is estimated to be between $200,000 and 
$400,000.  The Company believes these three systems are critical 
data processing systems.

Secondary systems that the Company has completed its Year 2000 
assessment on include, but are not limited to, the Company's 
telephone switch software and equipment at its Reservations Center, 
intranet network systems, flight operations and tracking software 
and maintenance inventory tracking system.  Management has completed 
the modification on these systems and all are Year 2000 compliant 
except for the Company's Reservation Center telephone switch 
software and equipment.  The Company plans to enter into a lease for 
a new Year 2000 compliant telephone switch software and equipment 
during the second quarter of 1999.  The lease for the telephone 
switch software and equipment is expected to cost less than $10,000 
per month.

The Company relies on third parties that provide goods and 
services that are imperative to the Company's operations including, 
but not limited to, the FAA, the DOT, local airport authorities, 
utilities, communication providers, credit card processor and fuel 
suppliers. The Company continues to monitor each of these entities, 
and has initiated formal communications with these third party 
service providers to determine their Year 2000 readiness.  There can 
be no assurance that the systems of such third parties on which the 
Company's business relies (including those of the FAA) will be 
modified on a timely basis.  The Company's business, financial 
condition and results of operations could be materially affected by 
the failure of its equipment or systems or those operated by other 
parties to operate properly beyond 1999.

While the Company believes it is taking all appropriate steps 
to assure Year 2000 compliance, it is dependent on key third party 
business and governmental partners' compliance to some extent.  The 
Year 2000 problem is pervasive and complex as virtually every 
computer operation will be affected in some way.  Consequently, no 
assurance can be given that Year 2000 compliance can be achieved 
without a material cost by these outside parties.  The Company has 
utilized existing resources and has not incurred any significant 
costs to implement its Year 2000 project to date and the total 
remaining cost of the Year 2000 project is expected to be immaterial 
and will be funded through cash from operations.  The costs and the 
dates on which the Company anticipates it will complete the Year 
2000 project are based on management's best estimates and estimates 
received in writing from applicable third parties.  There can be no 
guarantee that these estimates will be achieved and actual results 
could differ materially from those anticipated.
<PAGE>

ITEM 7(A).	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 
            RISK

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

The risk inherent in the Company's market risk sensitive 
position is the potential loss arising from an adverse change in the 
price of fuel as described below.  The sensitivity analysis 
presented does not consider either the effects that such an adverse 
change may have on overall economic activity or additional actions 
management may take to mitigate its exposure to such a change.  
At the present time, management does not utilize fuel price hedging
instruments to reduce the Company's exposure to fluctuations in
fuel prices.  Actual results may differ.

The Company's earnings are affected by changes in the price and 
availability of aircraft fuel.  Market risk is estimated as a 
hypothetical 10 percent increase in the average 1998 cost per gallon 
of fuel.  Based on 1998 actual fuel usage, such an increase would 
have resulted in an increase to aircraft fuel expense of 
approximately $1.4 million in 1998.  Comparatively, based on 
projected 1999 fuel usage, such an increase would result in an 
increase to aircraft fuel expense of approximately $1.7 million in 
1999.  The increase in exposure to fuel price fluctuations in 1999 
is due to the Company's plan to increase its average aircraft fleet 
size and related gallons purchased.

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Reference is made to the financial statements and schedule and 
Report of Independent Auditors included later in this report under 
Item 14.

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

None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Registrant's Proxy Statement to be used in connection with 
the Annual Meeting of Stockholders to be held on May 18, 1999 
contains under the caption "Election of Directors" certain 
information required by Item 10 of Form 10-K and such information is 
incorporated herein by this reference.  The information required by 
Item 10 of Form 10-K as to executive officers is set forth in Item 
4A of Part I hereof.

The Registrant's Proxy Statement to be used in connection with 
the Annual Meeting of Stockholders to be held on May 18, 1999 
contains under the caption "Compliance with Section 16(a) of the 
Securities Exchange Act of 1934" certain information required by 
Item 10 of Form 10-K and such information is incorporated herein by 
this reference.

ITEM 11.  EXECUTIVE COMPENSATION

The Registrant's Proxy Statement to be used in connection with 
the Annual Meeting of Stockholders to be held on May 18, 1999 
contains under the caption "Executive Compensation" the information 
required by Item 11 of Form 10-K and such information is 
incorporated herein by this reference (except that the information 
set forth under the following subcaptions is expressly excluded from 
such incorporation:  "Executive Compensation and Stock Option 
Committee Report" and "Company Performance").

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
MANAGEMENT

The Registrant's Proxy Statement to be used in connection with 
the Annual Meeting of Stockholders to be held on May 18, 1999 
contains under the caption "Voting Securities and Principal Holders 
Thereof" the information required by Item 12 of Form 10-K and such 
information is incorporated herein by this reference.
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Registrant's Proxy Statement to be used in connection with 
the Annual Meeting of Stockholders to be held on May 18, 1999 
contains under the caption "Certain Transactions" the information 
required by Item 13 of Form 10-K and such information is 
incorporated herein by this reference.

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS 
ON FORM 8-K

     (a)	Financial Statements.

           (1)	Audited Financial Statements:

                  Report of Independent Auditors	      32

                  Balance Sheets -
                  December 31, 1998 and December 31, 1997	33

                  Statements of Operations for the
                  years ended December 31, 1998,
                  1997 and 1996	                        35

                  Statements of Stockholders' Equity 
                  (Deficit) for the years ended 
                  December 31, 1998, 1997 and 1996	      36

                  Statements of Cash Flows for the years 
                  ended December 31, 1998, 1997 and 1996	37

                  Notes to Financial Statements          39

           (2)	The following financial statement schedule
                  is included herein:

                  Schedule II - Valuation and 
                  Qualifying Accounts	                  53

           All other schedule are omitted, as the required 
           information is inapplicable or the information is 
           presented in the financial statements or related notes.

          (3)	The exhibits required to be filed by this item are 
                  set forth in paragraph (c) below:

     (b)	Reports on Form 8-K.

	  	None.

     (c)	Exhibits.

            3.1	Restated Certificate of Incorporation, as amended 
                  of Registrant (filed as Exhibit 3.1 to the 
                  Registrant's Form 10-K for the year ended 
                  December 31, 1996 and incorporated herein by 
                  reference).

            3.2	Certificate of Designation of Series A Preferred 
                  Stock of Registrant, as filed with Delaware 
                  Secretary of State on March 18, 1998 (filed as 
                  Exhibit 3.2 to the Registrant's Form 10-K for the 
                  year ended December 31, 1997 and incorporated 
                  herein by reference).
<PAGE>

            3.3	By laws of Registrant, as amended to date 
                  (filed as Exhibit 3.2 to Amendment No. 2 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.1	Registrant's 1994 Stock Option Plan, as amended 
                  to date (filed as Exhibit 10.1 to the 
                  Registrant's Registration Statement No. 33- 
                  96884 and incorporated herein by reference).

           10.2	Form of Incentive Stock Option Agreement (filed 
                  as Exhibit 10.2 to the Registrant's 
                  Registration Statement No. 33-96884 and 
                  incorporated herein by reference).

           10.3	Form of Nonstatutory Stock Option Agreement 
                  (filed as Exhibit 10.3 to the Registrant's 
                  Registration Statement No. 33-96884 and 
                  incorporated herein by reference).

           10.4	Form of Employee Stock Purchase Plan (filed as 
                  Exhibit 10.4 to the Registrant's Registration 
                  Statement No. 33-96884 and incorporated herein 
                  by reference).

           10.5	Registrant's 401(k) Plan (filed as Exhibit 10.4 
                  to the Registrant's Registration Statement No. 
                  33-96884 and incorporated herein by reference).

           10.6	Form of Registrant's Profit Sharing Plan (filed 
                  as Exhibit 10.6 to the Registrant's 
                  Registration Statement No. 33-96884 and 
                  incorporated herein by reference).

           10.7	Aircraft Lease Agreement, dated as of December 
                  8, 1994, between US Air, Inc. and Registrant, 
                  along with Lease Supplements Nos. 1, 2, 3 and 4 
                  (filed as Exhibit 10.7 to the Registrant's 
                  Registration Statement No. 33-96884 and 
                  incorporated herein by reference).

           10.8	Supplementary Lease Agreement, dated as of 
                  October 28, 1997, between US Air,	Inc.
                  and Registrant (filed as Exhibit 10.8 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.9	Modification to Aircraft Lease Agreement, dated 
                  September 1, 1995, between U.S. Air, Inc. and 
                  Registrant (filed as Exhibit 10.9 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.10	Acknowledgment and Consent of the Registrant 
                  regarding assignment of Aircraft Lease 
                  Agreement between US Air, Inc. and Registrant 
                  (filed as Exhibit 10.10 to the Registrant's 
                  Form 10-K for the year ended December 31, 1996 
                  and incorporated herein by reference).

           10.11	Amendment No. 1 to Lease Agreement, by and 
                  between Registrant and First Security Bank as 
                  owner, trustee and successor-in-interest to 
                  U.S. Airways, Inc. (f/k/a U.S. Air, Inc.) 
                  (filed as Exhibit 10. 1 to Registrants Form
                  10-Q for the Quarterly Period Ended June 30, 
                  1997).

           10.12	Amendment No. 2 to Lease Agreement, by and 
                  between Registrant and First Security Bank as 
                  owner, trustee and successor-in-interest to 
                  U.S. Airways, Inc. (f/k/a U.S. Air, Inc.).
<PAGE>

           10.13	Aircraft Lease Agreement, dated as of December 
                  6, 1994, between EA 727, Inc. and Registrant 
                  (filed as Exhibit 10.10 to the Registrant's 
                  Registration Statement No. 33-96884 and 
                  incorporated herein by reference).

           10.14	Aircraft Lease Agreement, dated December 11, 
                  1995, between the Registrant and Mimi Leasing 
                  Corporation (filed as Exhibit 10.30 to the 
                  Registrant's Form 10-K for the year ended 
                  December 31, 1995).

           10.15	Aircraft Lease Agreement, dated as of May 30, 
                  1997, between Interlease Aviation Investors III 
                  (TACA), L.L.C. and the Registrant (filed as 
                  Exhibit 10.14 to the Registrant's Form 10-Q for 
                  the Quarterly Period Ended June 30, 1997 and 
                  incorporated herein by reference).

           10.16	Aircraft Lease Agreement, dated September 18, 
                  1997, between Interlease Aviation Investors II 
                  (Aloha), L.L.C. and the Registrant (filed as 
                  Exhibit 10.1 to the Registrant's Form 10-Q for 
                  the quarterly period ended September 30, 1997 
                  and incorporated herein by reference).

           10.17	Aircraft Lease Agreement, dated November 18, 
                  1997 between Mimi Leasing Corporation and the 
                  Registrant (filed as Exhibit 10.16 to the 
                  Registrant's Form 10-K for the year ended 
                  December 31, 1997 and incorporated herein by 
                  reference).

           10.18	Aircraft Lease Agreement (MSN 22979), dated
                  as of January 5, 1999 between AeroUSA, Inc.
                  and the Registrant.

           10.19	Aircraft Lease Agreement (MSN 21735), dated 
                  as of January 5, 1999 between AeroUSA, Inc.
                  and the Registrant.

           10.20	Employment Agreement, dated November 3, 1997 
                  between the Registrant and Robert J. Spane 
                  (filed as Exhibit 10.17 to the Registrant's 
                  Form 10-K for the year ended December 31, 1997 
                  and incorporated herein by reference).

           10.21	Registration Rights Agreement, dated as of 
                  March 20, 1998 (filed as Exhibit 10.18 to the 
                  Registrant's Form 10-K for the year ended 
                  December 31, 1997 and incorporated herein by 
                  reference).

           10.22	Unit Purchase Agreement, dated as of March 20, 
                  1998, between the Registrant and J. F. Shea 
                  Co., Inc. and The Hambrecht 1980 Revocable 
                  Trust (filed as Exhibit 10.19 to the 
                  Registrant's Form 10-K for the year ended 
                  December 31, 1997 and incorporated herein by 
                  reference).

           10.23	Note Exchange Agreement, dated as of March 20, 
                  1998, between the Registrant and the Holders 
                  (filed as Exhibit 10.20 to the Registrant's 
                  Form 10-K for the year ended December 31, 1997 
                  and incorporated herein by reference).

           10.24	Computer Software Nonexclusive License 
                  Agreement, dated as of September 14, 1994, 
                  between Morris Air Corporation and the 
                  Registrant (filed as Exhibit 10.11 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.25	Lease, dated September 27, 1994, between the 
                  Gerson Company and Registrant, as amended to 
                  date (Mission, KS Corporate / Reservations 
<PAGE>
                  Office) (filed as Exhibit 10.13 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.26	Shopping Center Lease, dated February 28, 1996, 
                  between the Registrant and Southern Hills 
                  Center, L.L.C. (Lawrence, KS Office) (filed as 
                  Exhibit 10.31 to the Registrant's Form 10-K for 
                  the year ended December 31, 1995).

           10.27	Second Amendment and Restated Warrant Purchase 
                  Agreement among Registrant and certain of its 
                  stockholders (filed as Exhibit 10.18 to the 
                  Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.28	Form of Amended and Restated Warrant for the 
                  Purchase of Shares of Series B Preferred Stock 
                  (Amended Warrant) (filed as Exhibit 10.19 to 
                  the Registrant's Registration Statement No. 33-
                  96884 and incorporated herein by reference).

           10.29	Reimbursement Agreement, dated as of December 
                  31, 1996, by and among Registrant and Hambrecht 
                  & Quist California, a wholly owned subsidiary 
                  of Hambrecht & Quist Group (filed as Exhibit 
                  10.21 to the Registrants Form 10-K for the year 
                  ended December 31, 1996 and incorporated herein 
                  by reference).

           10.30	Security Agreement, dated as of December 31, 
                  1996, by Registrant in favor of Hambrecht & 
                  Quist California (filed as Exhibit 10.22 to the 
                  Registrants Form 10-K for the year ended 
                  December 31, 1996 and incorporated herein by  
                  reference).

           10.31	Merchant Agreement, dated as of February 27, 
                  1997, by and between Registrant and Michigan 
                  National Bank (filed as Exhibit 10.25 to the 
                  Registrants Form 10-K for the year ended 
                  December 31, 1996 and incorporated herein by 
                  reference).

           10.32	Amendment to Merchant Agreement, dated as of 
                  February 6, 1997, by and between Registrant 
                  (filed as Exhibit 10.26 to the Registrants Form 
                  10-K for the year ended December 31, 1996 and 
                  incorporated herein by reference).

           10.33	Service Contract for Aeronautical Maintenance, 
                  dated as of February 26, 1999, between The 
                  Self-Managed Cooperative of Aero Industrial 
                  Services R.L. ("COOPESA") and the Registrant.

            21.1	List of Subsidiaries of Registrant (filed as 
                  Exhibit 21.1 to the Registrant's Registration 
                  Statement No. 33-96884 and incorporated herein 
                  by reference).

            23.1	Consent of Ernst & Young LLP.

            24.1	Power of Attorney (included on the signature 
                  page of this Form 10-K).

            27	Financial Data Schedule. 

     (d)	Financial Statement Schedule.

      The response to this portion of Item 14 is submitted as a 
separate section of this report.
<PAGE>


                     Report of Independent Auditors

The Board of Directors and Stockholders
Vanguard Airlines, Inc.

We have audited the accompanying balance sheets of Vanguard Airlines, 
Inc. (the Company) as of December 31, 1998 and 1997, and the related 
statements of operations, stockholders' equity (deficit) and cash 
flows for each of the three years in the period ended December 31, 
1998. Our audits also included the financial statement schedule 
listed on the Index at 14(a). These financial statements and schedule 
are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements 
and 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 Vanguard 
Airlines, Inc. as of December 31, 1998 and 1997, and the results of 
its operations and its cash flows for each of the three years in the 
period ended December 31, 1998, 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.



/s/ Ernst & Young LLP
Ernst & Young LLP

Kansas City, Missouri
February 22, 1999
<PAGE>

                                   Vanguard Airlines, Inc.

                                        Balance Sheets


                                          DECEMBER 31
                                     1998             1997
                                  ---------------------------
ASSETS
Current assets:
Cash and cash equivalents        $  7,417,048   $  1,082,712
Accounts receivable, less
 allowance for doubtful
 accounts of $303,000
 in 1998  ($354,000 in 1997)        2,030,309      2,312,439
Inventories                         1,168,054        842,620
Prepaid expenses and
 other current assets               1,022,953      1,011,417
Current portion of
  supplemental maintenance
  deposits                          4,490,281      4,546,824
                                  ----------------------------
Total current assets               16,128,645      9,796,012


Property and equipment, at cost:
Aircraft improvements and
 leasehold costs                    4,854,683      4,611,528
Aircraft engines and
 rotable inventory                  6,243,693      1,638,389
Reservation system and
 communication equipment            1,867,954      1,844,981
Other property and equipment        2,624,579      2,057,554
                                  ---------------------------
                                   15,590,909     10,152,452
Less accumulated depreciation
 and amortization                  (7,459,456)    (4,667,768)
                                  ---------------------------
                                    8,131,453      5,484,684

Other assets:
Supplemental maintenance
 deposits, less current portion     5,121,050      3,221,875
Deferred debt issuance costs           83,448      2,223,233
Leased aircraft deposits            2,299,000      2,258,500
Fuel and security deposits            883,610      1,240,284
Other                                 999,377        539,296
                                  ---------------------------
                                    9,386,485      9,483,188
                                  ---------------------------
Total assets                      $33,646,583    $24,763,884
                                  ===========================

<PAGE>



                                         DECEMBER 31
                                     1998            1997
                                  ---------------------------
LIABILITIES AND STOCKHOLDERS'
 EQUITY (DEFICIT)  
Current liabilities:  
Notes payable to related
 parties                       $           -    $ 9,467,741
 Accounts payable                   5,848,635     6,095,903
 Accrued expenses                   3,062,823     4,007,363
 Accrued maintenance                6,902,847     6,588,830
 Air traffic liability              8,230,222     5,989,085
                                  ---------------------------
Total current liabilities          24,044,527    32,148,922

Line of credit                              -     1,900,000
Accrued maintenance,
  less current portion              3,818,184     2,659,396

Commitments and contingencies

Stockholders' equity (deficit):
 Preferred stock, $.001 par value:
  Authorized shares - 2,000,000
   in 1998 (1,000,000 in 1997)
  Issued and outstanding shares -
   302,362 in 1998 (-0- in 1997)           302             -
  Liquidation preference - 
   $3,023,620 in 1998 
 Common stock, $.001 par value:
  Authorized shares - 200,000,000
   in 1998 (50,000,000 in 1997)
  Issued and outstanding shares - 
   85,372,309 in 1998
   (45,695,908 in 1997)                 85,372        45,696
 Additional paid-in capital         76,886,373    57,753,488
 Accumulated deficit               (71,170,997)  (69,692,060)
                                   ---------------------------
                                     5,801,050   (11,892,876)
Deferred stock compensation            (17,178)      (51,558)
                                   ---------------------------
Total stockholders'
 equity (deficit)                    5,783,872   (11,944,434)
                                   ---------------------------
Total liabilities and
 stockholders' equity (deficit)    $33,646,583   $24,763,884
                                   ===========================

SEE ACCOMPANYING NOTES.
<PAGE>
                                 Vanguard Airlines, Inc.

                                Statements of Operations


                                  YEAR ENDED DECEMBER 31
                         1998              1997           1996
Operating revenues:
Passenger revenue    $  97,810,522   $  76,560,373   $ 64,977,645
Other                    6,458,020       4,823,765      3,611,456
                     -------------    ------------   ------------
Total operating 
     revenues          104,268,542      81,384,138     68,589,101

Operating expenses:
Flying operations       17,997,741      17,080,316     17,306,500
Aircraft fuel           13,725,011      18,571,472     16,005,041
Maintenance             21,928,784      19,334,251     16,074,921
Passenger service        6,677,818       7,342,237      6,245,678
Aircraft and traffic
     servicing          16,941,063      16,746,727     15,193,426
Promotion and sales     18,680,369      20,701,511     15,722,822
General and
     administrative      4,065,266       4,914,469      4,371,150
Depreciation and
     amortization        2,798,215       2,067,917      1,583,879
                       -----------     -----------    -----------
Total operating
     expenses          102,814,267     106,758,900     92,503,417
                       -----------     -----------    -----------

Operating income (loss)  1,454,275     (25,374,762)   (23,914,316)

Other income (expense):   
Deferred debt issuance
  cost amortization    (2,629,785)     (1,858,767)    (1,833,335)
 Interest expense        (516,626)     (1,110,465)      (195,728)
 Interest income          213,199          97,991        135,309
                       -----------     -----------    -----------
Total other expense,
   net                 (2,933,212)     (2,871,241)    (1,893,754)
                       -----------     -----------    -----------
Net loss              $(1,478,937)   $(28,246,003)  $(25,808,070)
                       ===========     ===========    ===========
Net loss per share    $     (0.02)   $      (1.85)  $      (2.85)
                       ===========     ===========    ===========
Weighted-average
   common shares
   outstanding         65,767,641      15,232,901      9,056,888
                       ===========     ===========    ===========

SEE ACCOMPANYING NOTES.
<PAGE>

<TABLE>
                                              Vanguard Airlines, Inc.

                                    Statements of Stockholders' Equity (Deficit)
<CAPTION>
                     CONVERTIBLE                                                                          TOTAL
                   PREFERRED STOCK                        ADDITIONAL                     DEFERRED      STOCKHOLDERS'
                      SERIES A       COMMON STOCK          PAID-IN       ACCUMULATED      STOCK         EQUITY
                  ----------------  ---------------
                   SHARES   AMOUNT  SHARES       AMOUNT     CAPITAL        DEFICIT     COMPENSATION     (DEFICIT)
                  ----------------  --------------------  -----------    -----------    ---------       ---------
<S>               <C>       <C>   <C>          <C>        <C>           <C>             <C>          <C>         
Balance at
 December 31, 1995      -   $  -   8,524,376   $  8,524   $19,301,937   $(15,637,987)   $(127,841)   $  3,544,633
  Issuance of warrants  -      -           -          -     1,850,000              -            -       1,850,000
  Amortization of 
   deferred stock
   compensation         -      -           -          -             -              -       41,903          41,903
  Issuance of common
   stock in a private
   placement            -      -   1,319,774      1,320     7,114,188              -           -        7,115,508
  Exercise of stock
   options              -      -     138,302        138        17,871              -           -           18,009
  Net loss              -      -           -          -             -    (25,808,070)          -      (25,808,070)
                  ----------------  --------------------  -----------    -----------    ---------       ---------
Balance at
 December 31, 1996      -      -   9,982,452      9,982    28,283,996    (41,446,057)     (85,938)    (13,238,017)
  Issuance of warrants  -      -           -          -     4,082,000              -            -       4,082,000
  Amortization of
   deferred stock
   compensation         -      -           -          -             -              -       34,380          34,380
  Issuance of 
   common stock in
   a private placement  -      -   5,150,000      5,150    10,229,850              -            -      10,235,000
  Issuance of common
   stock in a rights
   offering             -      -  30,455,714     30,456    15,144,544              -            -      15,175,000
  Exercise of
   stock options        -      -     107,742        108        13,098              -            -          13,206
  Net loss              -      -           -          -             -    (28,246,003)           -     (28,246,003)
                  ----------------  --------------------  -----------    -----------    ---------       ---------
Balance at 
 December 31, 1997      -      -  45,695,908     45,696    57,753,488    (69,692,060)     (51,558)    (11,944,434)
  Issuance of warrants  -      -           -          -       490,000              -            -         490,000
  Amortization of
   deferred stock
   compensation         -      -           -          -             -              -       34,380          34,380
  Issuance of
   preferred stock
   and warrants to
   purchase common
   stock through
   conversion of
   related-party
   notes payable  302,362    302           -          -     2,921,445              -            -       2,921,747
  Issuance of
   common stock
   through
   conversion of
   related-party
   notes payable        -      -  21,129,770     21,130    10,543,757              -            -     10,564,887
  Issuance of common
   stock through
   exercise of warrants -      -  10,300,000     10,300     5,139,700              -            -       5,150,000
  Issuance of common
   stock through
   cashless exercise
   of warrants          -      -   8,110,936      8,111        (8,111)             -            -               -
  Exercise of
   stock options        -      -     135,695        135        46,094              -            -          46,229
  Net loss              -      -           -          -             -     (1,478,937)           -      (1,478,937)
                  --------------  ---------------------   -----------    -----------    ---------       ---------
Balance at
 December 31,1998 302,362   $302  85,372,309    $85,372   $76,886,373   $(71,170,997)   $ (17,178)    $ 5,783,872
                  ==============  =====================   ===========    ===========    =========       =========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>

                                     Vanguard Airlines, Inc.

                                    Statements of Cash Flows



                                    YEAR ENDED DECEMBER 31 
                             1998            1997           1996
                           ---------       ---------      ---------

OPERATING ACTIVITIES
Net loss                 $(1,478,937)  $ (28,246,003)  $(25,808,070)
Adjustments to reconcile
 net loss to net cash
 provided by (used in)
 operating activities:
  Depreciation             1,519,808         848,948        681,982
  Amortization             1,278,407       1,218,969        901,897
  Loss on sale and
   disposal of property
   and equipment                   -          11,400        117,954
  Deferred debt issuance
   cost amortization       2,629,785       1,858,767      1,850,000
  Compensation related
   to stock options           34,380          34,380         41,903
  Provision for
   uncollectible accounts     10,895         253,276         32,719
  Provision for expendable
   and rotable inventory
   obsolescence              433,000               -              -
  Changes in operating
   assets and liabilities:
   Restricted cash                 -       1,822,998     (1,822,998)
   Accounts receivable       271,235         888,703     (2,215,892)
   Inventories              (358,434)       (169,282)      (335,219)
   Prepaid expenses
    and other current
    assets                   (11,536)       (144,313)       635,008
   Supplemental maintenance
    deposits              (1,842,632)     (3,045,441)    (1,793,220)
   Accounts payable         (247,268)     (2,308,293)     5,937,339
   Accrued expenses          176,226         355,201      1,348,785
   Accrued maintenance     1,472,805       1,563,588      2,503,081
   Air traffic liability   2,241,137        (620,524)     4,348,888
   Deposits and other       (143,907)       (712,690)      (983,664)
                           ---------       ---------      ---------
Net cash provided by
 (used in) operating
 activities                5,984,964     (26,390,316)   (14,559,507)

INVESTING ACTIVITIES
Purchases of property
 and equipment            (5,844,984)     (2,061,343)    (2,958,406)

FINANCING ACTIVITIES
Proceeds from issuance
 of notes payable to
 related parties           3,000,000      29,148,816      3,900,000
Proceeds from line
 of credit borrowings      1,900,000       2,275,000      9,700,000
Principal payments
 on line of credit        (3,800,000)     (5,375,000)    (4,700,000)
Proceeds from issuance
 of notes payable            275,000               -              -
Principal payments on
 notes payable to
 related parties                   -               -     (1,400,000)
Proceeds from sale of
 common stock and the
 exercise of stock
 options and warrants,
 net of offering costs     5,196,229       3,242,131      7,133,517
Offering costs incurred
 on issuance of preferred
 stock through conversion
 of related-party
 notes payable              (101,873)             -               -
Principal payments on
 notes payable and
 capital lease
 obligations                (275,000)       (158,659)      (205,161)
                           ---------       ---------      ---------
Net cash provided
 by financing activities   6,194,356      29,132,288     14,428,356
                           ---------       ---------      ---------

<PAGE>
                                     Vanguard Airlines, Inc.

                               Statements of Cash Flows (continued)


                                      YEAR ENDED DECEMBER 31
                             1998           1997           1996
                          ---------       ---------      ---------

Net increase (decrease)
 in cash and cash
 equivalents             $6,334,336     $   680,629     $(3,089,557)
Cash and cash equivalents
 at beginning of year     1,082,712         402,083       3,491,640
                          ---------       ---------      ----------
Cash and cash equivalents
 at end of year          $7,417,048     $ 1,082,712     $   402,083
                          =========       =========      ==========

SUPPLEMENTAL DISCLOSURE
 OF CASH FLOW INFORMATION
Cash paid during the year
 for interest            $  190,935     $   377,122     $   159,541
                          =========       =========      ==========

SUPPLEMENTAL SCHEDULE OF
 NONCASH INVESTING AND
 FINANCING ACTIVITIES   
Conversion of related-
 party notes payable
 and accrued interest
 to preferred stock      $3,023,620     $         -      $        -
                          =========       =========      ==========

Conversion of related-
 party notes payable
 and accrued interest
 to common stock        $10,564,887     $22,181,075     $         -
                         ==========      ==========      ==========

Deferred debt issuance
 costs recorded in
 conjunction with
 warrants issued        $   490,000     $ 4,082,000     $ 1,850,000
                          =========       =========      ==========

Aircraft leasehold costs
 associated with accrued
 maintenance at inception
 of lease               $         -     $   453,000     $         -
                          =========       =========      ==========

Property and equipment
 accrued through issuance
 of capital lease
 obligations            $         -     $         -      $  134,031
                          =========       =========      ==========

Aircraft improvements
 financed through the
 issuance of notes
 payable                $         -     $         -      $1,000,000
                          =========       =========      ==========

Retirement of notes
 payable through sale of
 property and equipment $         -     $         -      $  958,333
                          =========       =========      ==========

Reduction of accounts
 payable through sale of
 property and equipment $         -     $         -      $  933,431
                          =========       =========      ==========

SEE ACCOMPANYING NOTES.
<PAGE>

1. SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Vanguard Airlines, Inc. (the Company) was incorporated in Delaware 
in April 1994. The Company offers low-fare, convenient, short- to 
medium-haul passenger air transportation service primarily in the 
midwestern, Rocky Mountain, northeastern and southeastern regions 
of the United States and commenced flight operations on December 4, 
1994.

The airline industry is highly competitive primarily due to the 
effects of the Airline Deregulation Act of 1978, which has 
substantially eliminated government authority to regulate domestic 
routes and fares and has increased the ability of airlines to 
compete with respect to flight frequencies and fares.

The airline industry is significantly affected by general economic 
conditions. Because a substantial portion of business and personal 
airline travel is discretionary, the industry has experienced 
adverse financial results during general economic downturns and 
positive financial results during economic upturns. The Company's 
business is also seasonal, which can affect the Company's results 
of operations from quarter to quarter. A prolonged economic 
downturn could have a material adverse effect on the Company's 
operations and profitability. 

Fuel is a major component of operating expenses for all airlines. 
Both the cost and availability of fuel are subject to many economic 
and political factors and events occurring throughout the world. 
The future cost and availability of fuel to the Company cannot be 
predicted, and substantial sustained price increases or the 
inability to obtain adequate fuel supplies could have a material 
adverse effect on the Company's operations and profitability.

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 amounts reported in 
the financial statements and accompanying notes. Actual results 
could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity 
of three months or less when purchased to be cash equivalents. 

RESTRICTED CASH

Restricted cash includes cash equivalents that secure the risk of 
loss exposure estimated by the Company's credit card processors.  
During the year, the risk of loss exposure for the Company's 
largest credit card processor is calculated daily. If the risk of 
loss exposure exceeds $6,000,000 (the amount secured by letters of 
credit and a guarantee discussed in NOTE 7), the Company is 
required to maintain a restricted cash balance in an amount equal 
to the additional exposure. At December 31, 1998 and 1997, no 
restricted cash balance related to this credit card processor was 
required as the risk of loss exposure calculated on those dates did 
not exceed $6,000,000. Another credit card processor requires the 
Company to maintain a deposit as security for its risk of loss 
exposure. The risk of loss exposure for this credit card processor 
is reviewed annually. At December 31, 1998 and 1997, the restricted 
cash balance related to this credit card processor totaling 
$227,183 and $217,396, respectively, is considered noncurrent and 
is included as a component of other assets on the accompanying 
balance sheets.

ACCOUNTS RECEIVABLE

Accounts receivable are primarily due from major credit card 
processors and travel agents. These receivables are unsecured. The 
Company provides an allowance for doubtful accounts equal to the 
estimated losses expected to be incurred in the collection of 
accounts receivable.

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK

Although the Company does not expect losses associated with 
supplemental payments recoverable from aircraft lessors, which are 
described in NOTE 9, recoverability of these payments is dependent 
on the continued financial stability of its three lessors and on 
the Company's ability to initially fund aircraft maintenance 
required for a return of such supplemental payments.

INVENTORIES

Inventories of flight equipment, expendable parts, materials, 
tools, food, beverages and promotional items are carried at cost 
less an estimated obsolescence reserve. These items are charged to 
expense when issued for use under the first-in, first-out method.

In 1996, the Company entered into an agreement with a supplier for 
consigned parts and supplies for its Boeing 737-200 aircraft. The 
Company is required to pay a monthly consignment fee, based on the 
value of the consigned parts, and to replenish any such parts when 
used with a like part. At December 31, 1998 and 1997, the Company 
held consigned parts and supplies of approximately $1,628,000 and 
$2,088,000, respectively, which are not included in the 
accompanying balance sheets.

PROPERTY AND EQUIPMENT

Depreciation and amortization of aircraft improvements and 
leasehold costs are recorded using the straight-line method over 
their estimated useful lives or remaining lease terms of the 
related aircraft, whichever is shorter, ranging from five to seven 
years. Reservation system and communication equipment and other 
property and equipment are depreciated on a straight-line basis 
over the shorter of their estimated useful lives or remaining lease 
terms ranging from five to seven years. Aircraft rotable inventory 
items are depreciated over their estimated useful lives or 
remaining aircraft lease terms, whichever is shorter, ranging from 
five to seven years. At December 31, 1998, aircraft rotable 
inventory is recorded net of a $400,000 obsolescence reserve. 
Aircraft engines are depreciated on a straight-line basis over 10 
years.

AIRCRAFT AND ENGINE MAINTENANCE

The Company accounts for aircraft overhaul and major engine 
maintenance costs using the accrual method. The Company accrues the 
estimated cost of the next aircraft overhaul based on aircraft 
utilization. The actual cost of an aircraft overhaul is charged to 
the accrual, with any deficiency or excess charged or credited to 
expense. The Company accrues major engine maintenance based on the 
greater of engine cycles or flight hours multiplied by the 
estimated long-term cost per flight hour or cycle. The actual cost 
of engine maintenance is charged to the accrual. The estimated 
long-term cost per flight hour or cycle is adjusted to provide for 
the Company's estimated cost of the next overhaul. The cost of 
routine maintenance is charged to expense as incurred.

ADVERTISING COSTS

Advertising costs are charged to expense in the period the costs 
are incurred. Advertising expense was approximately $5,458,000, 
$7,792,000 and $4,316,000 for the years ended December 31, 1998, 
1997 and 1996, respectively.

<PAGE>

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PASSENGER REVENUE RECOGNITION

Passenger ticket sales are initially recorded as a component of air 
traffic liability. Revenue derived from ticket sales is recognized 
at the time transportation is provided. However, due to various 
factors, including a multitier ticket pricing structure, certain 
amounts are recognized in revenue using estimates regarding both 
the timing of the revenue recognition and the amount of revenue to 
be recognized. Actual results could differ from those estimates.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principals Board (APB) 
Opinion No. 25, "Accounting for Stock Issued to Employees," and 
related Interpretations in accounting for its employee stock 
options, because, as discussed in NOTE 4, the alternative fair 
value accounting provided for under the Financial Accounting 
Standards Board's Statement of Financial Accounting Standards 
(SFAS) No. 123, "Accounting for Stock-Based Compensation," requires 
the use of option valuation models that were not developed for use 
in valuing employee stock options.

Pro forma information regarding net loss and loss per share is 
required by SFAS No. 123 and has been determined as if the Company 
had accounted for its stock options under the fair value method of 
that statement. This pro forma information is included in NOTE 3. 

LOSS PER SHARE

In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." 
Under SFAS No. 128, the Company is required to calculate basic 
earnings per share based on the weighted-average common shares 
outstanding by excluding the effect of dilutive stock options. In 
all years presented herein, the computation of net loss per share 
is based on the weighted-average number of common shares 
outstanding, as outstanding convertible preferred stock, stock 
options and warrants were antidilutive.

INCOME TAXES

The Company utilizes the liability method in accounting for income 
taxes, whereby deferred tax assets and liabilities are determined 
based on differences between financial reporting and tax bases of 
assets and liabilities utilizing enacted rates and laws that will 
be in effect when the differences are expected to reverse.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, restricted cash 
and supplemental maintenance deposits reported in the balance sheet 
approximate fair value. Based on the guarantee of the line of 
credit by certain stockholders of the Company, management believes 
the carrying amount of such borrowings reported in the balance 
sheet at December 31, 1997 approximates fair value. The carrying 
amount of the notes payable to related parties at December 31, 1997 
approximates fair value. These notes payable were converted to 
common stock in 1998 at $0.50 per share as discussed in NOTE 2. The 
fair values of warrants issued in 1998, 1997 and 1996, as described 
in NOTES 5 AND 7, were estimated using the discounted Black-Scholes 
pricing model. 

RECLASSIFICATION

Certain amounts in the 1997 and 1996 financial statements have been 
reclassified to conform to the 1998 presentation.

<PAGE>

2. STOCKHOLDERS' EQUITY

On March 20, 1998, the Company completed a private sale of 302,362 
units of securities at $10 per unit, each unit consisting of one 
share of Series A Convertible Preferred Stock, par value $0.001 per 
share (the Series A Preferred Stock), and a common stock purchase 
warrant. In conjunction therewith, the Company converted $3,023,620 
of outstanding principal and interest on the demand notes payable, 
described in NOTE 6, to Series A Preferred Stock under the terms of 
the agreement. Offering costs of $101,873 were incurred in 
connection with the issuance of the Series A Preferred Stock. Each 
warrant in the unit entitled the holder to purchase 40 shares of 
common stock at an exercise price of $0.55 per share and expired on 
March 20, 2005. On August 6, 1998 and August 12, 1998, the warrant 
holders exercised, in accordance with the cashless exercise 
provision of the warrant agreement, warrants representing rights to 
purchase 6,000,000 and 6,094,480, respectively, shares of common 
stock that were sold in the Series A Preferred Stock unit offering. 
Because the warrant holders elected to exercise the warrants on a 
net basis, as defined by the related warrant agreement, the Company 
issued an aggregate 8,110,936 shares of common stock in connection 
with such exercises. 

The Series A Preferred Stock is not redeemable and pays dividends 
at an annual rate of $0.80 per share only when, and if, declared by 
the Company's Board of Directors. The Board of Directors, as of 
December 31, 1998, has declared no dividends. The liquidation 
preference of each share of Series A Preferred Stock is $10 plus 
any accrued and unpaid dividends. Each share of Series A Preferred 
Stock is convertible into 20 shares of common stock (subject to 
certain antidilution adjustments) at any time commencing on 
September 20, 1998, and holders of the Series A Preferred Stock are 
entitled to voting rights determined on an as-converted basis.

On May 15, 1998, the Company held its annual meeting of 
stockholders whereby the stockholders approved an amendment to the 
Company's Restated Certificate of Incorporation to increase the 
number of authorized shares of the Company's common stock from 
50,000,000 to 200,000,000 shares and preferred stock from 1,000,000 
to 2,000,000 shares. Effective with the increase in the authorized 
capital stock, the Convertible Notes, described in NOTE 6, were 
converted, at $0.50 per share, to an equivalent number of shares of 
common stock. The Company issued 21,129,770 shares of common stock 
on May 20, 1998 in connection with this transaction.

On July 2, 1998, the Company notified certain principal 
stockholders of its intention to redeem 10,300,000 outstanding 
warrants that were issued in conjunction with the Company's April 
1997 private unit offering. Each warrant issued in connection with 
the private unit offering entitled the holder to purchase one share 
of the Company's common stock for $0.50 per share. In lieu of 
redemption, the warrant holders exercised the warrants and the 
Company received proceeds of $5,150,000 in August 1998 upon 
issuance of 10,300,000 shares of common stock.

The Company also issued redeemable stock purchase warrants in 
conjunction with certain other debt and equity agreements entered 
into during the year. During 1998, the Company issued 107,261 
redeemable stock purchase warrants related to such agreements. The 
warrants entitle the holders to purchase, at any time over a 10-
year period from the date of issuance, one share of common stock at 
an exercise price of $0.50.

In December 1997, the Company completed a sale of 30,455,714 shares 
of common stock through a Rights Offering. Under the Rights 
Offering, the Company distributed nontransferable rights, at no 
cost, to stockholders of record. Each record holder received two 
rights, with each right entitling the holder to purchase one share 
of common stock for a price of $0.50 per share. Certain principal 
stockholders exercised all of their rights pursuant to the basic 
subscription and the over subscription privileges of the Rights 
Offering. In lieu of paying the subscription price in cash, they 
relieved and discharged the Company of $12,181,075 in notes payable 
to related parties. The cash proceeds to the Company from the sale 
of the common stock upon the exercise of the rights offered totaled 
approximately $2,994,000, after deducting approximately $53,000 in 
offering expenses.

<PAGE>

2. STOCKHOLDERS' EQUITY (CONTINUED)

In April 1997, the Company completed a private sale of units of 
securities, each unit consisting of one share of common stock and 
two redeemable common stock purchase warrants. In connection with 
the sale, the Company issued 5,150,000 shares of common stock for 
aggregate proceeds of approximately $10,235,000, net of offering 
costs of approximately $65,000. Included in this private sale were 
5,000,000 shares of common stock issued to certain principal 
stockholders in lieu of repayment of $10,000,000 in notes payable 
to related parties. Each redeemable warrant originally entitled the 
holder to purchase, at any time over a five-year period commencing 
with the closing of this private offering, one share of common 
stock at an exercise price of $2.50. The redeemable warrant 
exercise price was subject to adjustment in the event the Company 
issued equity securities raising net proceeds in an aggregate 
amount of $1,000,000 at a price below $2.00 per share. In 
conjunction with the Company's Rights Offering discussed above, the 
redeemable warrants were repriced to $0.50, the offering price of 
the common stock in the Rights Offering. The Company had the right 
to redeem the warrants at a redemption price of $0.05 per warrant 
on 45 days' prior notice if the average closing bid price of the 
Company's common stock equals or exceeds $1.00 for any 20 days 
within a period of 30 consecutive trading days, as defined by the 
warrant agreement. The Company notified the stockholders of its 
intention to redeem the warrants on July 2, 1998 as discussed 
above. 

In September 1996, the Company completed a private sale of units of 
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 $7,116,000, net of offering 
costs of approximately $184,000. Each redeemable warrant entitles 
the holder to purchase, at any time over a five-year period 
commencing with the closing of this private offering, 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 the warrant agreement. The Company has the right to 
redeem the warrants at a redemption price of $0.05 per warrant on 
45 days' prior notice if the average closing bid price of the 
Company's common stock equals or exceeds $13.28 for any 20 days 
within a period of 30 consecutive trading days, as defined by the 
warrant agreement. 

On November 3, 1995, the Company completed the issuance of 
2,400,000 shares of common stock at a price of $6.00 per share 
through an initial public offering, resulting in net proceeds, 
after underwriting commissions and offering expenses, of 
approximately $12,956,000. In connection with the Rights Offering, 
the Company issued the underwriter warrants to purchase 240,000 
shares of common stock at an exercise price of $7.20. The warrants 
are exercisable at any time from November 1, 1996 to November 1, 
2000.

The Company has reserved 33,404,138 shares of common stock for 
issuances related to the conversion of preferred stock, the 
exercise of outstanding or available stock options and outstanding 
stock purchase warrants (including the warrants granted in January 
1999) and for shares available under the employee stock purchase 
plan as follows:


                                         NUMBER
                                        OF SHARES
                                        RESERVED
                                         --------
Stock options (NOTE 3)                  12,855,241
Stock purchase warrants
 (NOTES 2, 5 AND 7)                     13,501,657
Series A Preferred Stock (NOTE 2)        6,047,240
Employee stock purchase plan (NOTE 4)    1,000,000
                                        ----------
                                        33,404,138
                                        ==========

<PAGE>

3. STOCK OPTIONS

The Company established the Vanguard Airlines, Inc. 1994 Stock 
Option Plan (the 1994 Plan) whereby options for up to 1,700,000 
(increased to 10,000,000 in 1998) shares may be granted to 
officers, directors, key employees and consultants to purchase 
shares of common stock. Vesting and term of these options are 
determined by the Board of Directors and may vary by optionee; 
however, the term may be no longer than 10 years from the date of 
issuance. 

During 1997, the Company repriced certain options under the 1994 
Plan due to a significant decline in the market price of the stock 
from the grant date. The first option repricing occurred on 
February 6, 1997 whereby options to purchase up to 76,000 shares of 
common stock were repriced to the then current market price of 
$1.81. The repricing resulted in an adjusted vesting start date for 
all repriced options equal to a three-month extension. A second 
option repricing occurred on November 3, 1997 whereby options 
repriced on February 6, 1997 and options granted in 1997 to 
purchase up to 1,037,500 shares of common stock were repriced to 
the then current market price of $0.50. This repricing also 
resulted in an adjusted vesting start date for all repriced options 
equal to another three-month extension. 

A summary of stock option activity related to the 1994 Plan is as 
follows:

	                  1998	          1997	        1996
                ----------------- ---------------- ---------------
                         WEIGHTED-         WEIGHTED-         WEIGHTED-
                         AVERAGE           AVERAGE           AVERAGE
                         EXERCISE          EXERCISE          EXERCISE
                OPTIONS  PRICE    OPTIONS  PRICE    OPTIONS  PRICE
                ----------------- ----------------- --------------
Outstanding at
 beginning of
 year          1,265,265  $0.64   473,227  $2.40    587,000  $0.17
Granted        4,436,933   0.97 2,252,500   1.16    133,500   8.66
Transferred
 from 1997
 Program       3,586,982   0.53         -      -          -      -
Repriced               -     - (1,113,500)  2.28          -      -
Exercised       (135,695)  0.34  (107,742)  0.12   (138,302)  0.13
Forfeited     (1,232,934)  0.69  (239,220)  1.68   (108,971)  0.93
              ----------  -----  --------   ----   --------   ----
Outstanding at
 end of year   7,920,551   0.77 1,265,265   0.64    473,227   2.40
              ==========  ===== =========   ====   ========   ====
Exercisable at
 end of year   2,223,077   0.76   235,033   1.35    202,821   2.55
Weighted-average
 fair value of
 options granted
 during the year           0.48             0.56              4.08

Exercise prices for options outstanding under the 1994 Plan as of 
December 31, 1998 for incentive stock options granted to employees 
range from $0.11 to $1.16. The exercise prices for certain 
nonstatutory options granted range from $0.69 to $2.13 for 875,000 
options and equals $9.25 for an additional 25,000 options 
outstanding under the Plan. The weighted-average remaining 
contractual life at December 31, 1998 of all outstanding options 
under the 1994 Plan is 9.05 years.

Under a separate stock option program (the 1997 Program), the 
Company granted options to purchase 6,973,962 shares of common 
stock to certain directors and officers of the Company. Options 
totaling 3,586,982 issued to certain directors and officers under 
the 1997 Program were transferred to the 1994 Plan in 1998 when the 
shares reserved for issuance under the 1994 Plan were increased to 
10,000,000. The remaining 3,386,980 options under the 1997 Program 
have an exercise price of $0.50, vest over a period of two years 
and have a contractual term of five 

<PAGE>
3. STOCK OPTIONS (CONTINUED)

years from the date of issuance. None of these options were 
exercised or forfeited during the years ended December 31, 1998 or 
1997. At December 31, 1998, there are 2,540,235 options exercisable 
under the 1997 Program, and the weighted-average remaining 
contractual life of all outstanding options is 3.45 years. The 
weighted-average fair value of all options originally granted under 
the 1997 Program is $0.21.

The fair values of options granted in 1998, 1997 and 1996 were 
estimated at the date of grant using a Black-Scholes option pricing 
model with the following weighted-average assumptions for 1998, 
1997 and 1996, respectively: risk free interest rates of 5.37%, 
5.78% and 6.32%; volatility factors of the expected market price of 
the Company's common stock of .57, .55 and .61; and a weighted-
average expected life of the option of 3.90, 2.96 and 3.21 years. 
The Company assumed a 0% dividend yield over the expected life of 
the options.

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

For purposes of pro forma disclosures, the estimated fair value of 
the options is amortized to expense over the options' vesting 
period. The effects of applying SFAS No. 123 for pro forma 
disclosures are not likely to be representative of the effects on 
reported net income or losses for future years. The Company's pro 
forma information follows:

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

Pro forma net loss      $(2,192,258)  $(28,701,314)  $(25,948,409)
Pro forma net loss
    per share                 (0.03)         (1.88)         (2.87)

4. EMPLOYEE STOCK PURCHASE PLAN

Effective January 1, 1996, the Company adopted the Vanguard 
Airlines, Inc. Employee Stock Purchase Plan (the Purchase Plan). 
Under the Purchase Plan, the Company registered 1,000,000 shares of 
common stock for issuance to participating eligible employees. The 
Company withholds a specified amount (at least $20.00 per month and 
not to exceed 15% of compensation for that particular month) from 
the paychecks of participating eligible employees. The custodian of 
the Purchase Plan purchases common stock within five business days 
of the allocation of the participating employee's contribution. Any 
employee who has completed ninety (90) days of employment with the 
Company is eligible to participate in the Purchase Plan. Common 
stock is purchased by the employees from the Company at 85% of the 
fair market value of the common stock as determined on the last 
market trading day prior to the purchase date. Common stock 
purchased on the open market is paid 85% by the participating 
employee and 15% by the Company. 

5. LINES OF CREDIT

On January 30, 1997, the Company entered into a bank line of credit 
(the Agreement) that permitted borrowings up to $2,275,000 with 
interest payable monthly at the prime rate published in THE WALL 
STREET JOURNAL. As of December 31, 1997, the Company had borrowed 
$1,900,000 under the Agreement. The prime rate was 8.50% at 
December 31, 1997. The Agreement matured on January 30, 1998 and 
was subsequently paid off. The Agreement was guaranteed by certain 
stockholders of the Company (the Guarantors) for a period of up to 
two years.

<PAGE>

5. LINES OF CREDIT (CONTINUED)

On January 30, 1998, the Company entered into another bank line of 
credit agreement (the New Agreement) that permitted borrowings up 
to $1,900,000 with interest payable monthly at the prime rate 
published in THE WALL STREET JOURNAL. On January 30, 1998, the 
Company borrowed $1,900,000 under the terms of the New Agreement to 
repay amounts outstanding under the Agreement. The New Agreement 
was paid off in August 1998 with proceeds from the exercise of 
warrants discussed in NOTE 2. The New Agreement matured on January 
30, 1999 and was not renewed.  The New Agreement was also 
guaranteed by certain stockholders of the Company. 

In connection with the execution of the Agreement and a related 
two-year guarantee, the Company agreed to issue the Guarantors 
warrants to purchase an aggregate of up to 2,275,000 shares of 
common stock at an exercise price of $1.00. Upon execution of the 
Agreement, the Company issued 910,000 warrants that vested 
immediately. Accordingly, effective January 30, 1997, the estimated 
fair value of the warrants issued of $1,100,000 was recorded as 
deferred debt issuance costs in the accompanying balance sheet and 
is being charged to expense over the term of the guarantee. The 
remaining warrants vested quarterly through July 1998 with the 
number dependent on the amount of borrowings against the line, as 
defined in the warrant agreement.  In 1997 and 1998, the Company 
issued an additional 682,500 and 570,000 warrants, respectively. 
Accordingly, the estimated fair value of the additional warrants 
issued in 1997 and 1998, totaling $323,000 and $138,000, 
respectively, was recorded as deferred debt issuance costs and is 
being charged to expense over the remaining term of the guarantee. 
Accumulated amortization related to the warrants totaled $1,477,552 
and $613,348 at December 31, 1998 and 1997, respectively. Each 
warrant expires 10 years from the date of issuance. Warrants for 
purchase of 262,500 shares were terminated and warrants for 
purchase of 112,500 shares were forfeited in December 1997 as a 
result of the release of one of the stockholder's guarantee. 

At December 31, 1998, in connection with guarantees of lines of 
credit that expired in 1995 and 1996, the Company had issued 
warrants to purchase an aggregate of up to 1,190,341 shares of 
common stock at a weighted-average exercise price of $4.46 per 
share. These warrants are fully vested and expire in varying 
amounts in 2005 and 2006. 

6. NOTES PAYABLE TO RELATED PARTIES

During January and March 1998, the Company issued a total of 
$3,000,000 of unsecured 9.0% convertible demand notes payable to 
certain principal stockholders of the Company. The Company 
converted the unsecured demand notes plus accrued interest totaling 
$3,023,620 to Series A Convertible Preferred Stock, as described in 
NOTE 2. In addition, on March 20, 1998, the Company entered into a 
note exchange agreement whereby the principal stockholders holding 
notes payable totaling $9,467,741 exchanged their existing 
unsecured demand notes payable, and all accrued unpaid interest, 
for new unsecured convertible demand notes payable (the Convertible 
Notes). The remaining terms of the Convertible Notes were 
unchanged. In May 1998, the Company converted the Convertible Notes 
plus accrued interest totaling $10,564,887 to common stock at a 
rate of $0.50 per share, as described in NOTE 2.

In 1997 and 1996, the Company entered into unsecured demand notes 
payable with certain major stockholders of the Company with 
interest payable on demand at a rate of 8.0%. As of December 31, 
1997, unsecured demand notes payable of $9,467,741 were 
outstanding. 

The Company had no short-term borrowings outstanding as of 
December 31, 1998. The weighted-average stated interest rate on 
short-term borrowings outstanding (excluding deferred debt issuance 
costs amortization) as of December 31, 1997 equaled 8.0%. The 
Company recorded related-party interest expense (excluding deferred 
debt issuance costs amortization) during 1998, 1997 and 1996 of 
approximately $332,000, $762,000 and $11,000, respectively. There 
were no interest payments made to related parties in 1998, 1997 and 
1996.

<PAGE>

7. FINANCIAL INSTRUMENTS

In January 1999, major stockholders of the Company agreed to renew 
the two-year $4,000,000 letter of credit facility in favor of the 
Company's credit card processor. As consideration for renewing the 
letter of credit, the Company agreed to issue up to 4,000,000 
warrants to the major stockholder to purchase shares of the 
Company's common stock at an exercise price of $1.00. Upon 
execution of the letter of credit, the Company issued 800,000 
warrants that vested immediately. Accordingly, in January 1999, the 
estimates fair value of the warrants issued of $238,000 was 
recorded in other assets and is being charged to expense over the 
term of the facility. The remaining warrants vest quarterly 
according to the amount of exposure under such letter of credit, as 
defined in the agreement.

In January 1997, a major stockholder of the Company agreed to 
establish a two-year $4,000,000 letter of credit facility in favor 
of the Company's credit card processor. As consideration for 
establishing the letter of credit, the Company agreed to issue up 
to 4,000,000 warrants to the major stockholder to purchase shares 
of the Company's common stock at an exercise price of $1.00. Upon 
execution of the letter of credit, the Company issued 1,600,000 
warrants that vested immediately. Accordingly, in January 1997, the 
estimated fair value of the warrants issued of $1,900,000 was 
recorded in other assets and is being charged to expense over the 
term of the facility. The remaining warrants vested quarterly 
through October 1998 according to the amount of exposure under such 
letter of credit, as defined in the agreement. In 1997 and 1998, 
the Company issued an additional 814,457 and 1,298,896 warrants, 
respectively. Accordingly, the estimated fair value of the 
additional warrants issued in 1997 and 1998, totaling $592,000 and 
$332,000, respectively, was recorded as deferred debt issuance 
costs and is being charged to expense over the remaining term of 
the guarantee. The warrants were fully amortized at December 31, 
1998. Accumulated amortization related to the warrants totaled 
$1,180,419 at December 31, 1997. Each warrant expires 10  years 
from the date of issuance. In addition, the Company granted the 
major stockholder a security interest in all credit card 
receivables processed by the Company's credit card processor. 
Warrants for purchase of 286,647 shares were forfeited in 1998 as a 
result of the credit card exposure being less than the amount of 
the letter of credit during certain vesting periods. 

In May 1997, the Company completed an additional $2,000,000 
guarantee facility in favor of the Company's credit card processor. 
This guarantee facility expires in May 1999 and was established by 
the same major stockholder of the Company. As consideration for 
establishing the guarantee, the Company agreed to issue up to 
1,030,928 warrants to the major stockholder to purchase shares of 
the Company's common stock at an exercise price of $1.94. Upon 
execution of the guarantee, the Company issued 412,371 warrants 
that vested immediately. Accordingly, in May 1997, the estimated 
fair value of the warrants issued of $150,000 was recorded in other 
assets and is being charged to expense over the term of the 
facility. The remaining warrants vested quarterly through November 
1998 according to the amount of exposure under such letter of 
credit, as defined in the agreement. In 1997 and 1998, the Company 
issued an additional 206,186 and 412,371 warrants, respectively. 
Accordingly, the estimated fair value of the additional warrants 
issued in 1997 and the warrants issued in 1998 totaling $17,000 and 
$20,000, respectively, was recorded as deferred debt issuance 
costs. The warrants were fully amortized at December 31, 1998. 
Accumulated amortization related to the warrants totaled $65,000 at 
December 31, 1997. Each warrant expires 10 years from the date of 
issuance.

<PAGE>

8. INCOME TAXES

A reconciliation of the income tax benefit at the federal statutory 
rate to the provision (benefit) for income taxes is as follows:


                                    YEAR ENDED DECEMBER 31
                              1998           1997           1996
                           ----------   -----------   -----------

Benefit at statutory rate $  (502,839)  $(9,603,640)  $(8,774,744)
State benefit, net of
 federal benefit              (68,327)   (1,304,965)   (1,192,333)
Amortization of deferred
 debt issuance costs        1,025,616       724,919       715,001
Meals and entertainment       103,329        72,944        72,884
Other                          (5,620)     (112,530)      (60,440)
Change in valuation
 allowance                   (552,159)   10,223,272     9,239,632
                           ----------    ----------    ----------
                           $        -    $        -    $        -
                           ==========    ==========    ==========


The tax effects of temporary differences that give rise to 
significant portions of the deferred tax assets and deferred tax 
liabilities as of December 31 are as follows:


                                         1998             1997
                                     ------------     -----------
Deferred tax assets:  
  Net operating loss carryforwards    $23,433,318     $24,264,808
  Accrued overhaul maintenance          4,181,202       3,606,808
  Amortization of aircraft
   leasehold costs                        616,186         451,306
  Accrued vacation                        189,778         172,076
  Inventory reserve                       168,870               -
  Other                                   243,320         262,757
                                     ------------      ----------
Total deferred tax assets              28,832,674      28,757,755

Valuation allowance                   (24,984,110)    (25,536,269)
                                     ------------      ----------
                                        3,848,564       3,221,486

                                          1998           1997
                                     ------------      ----------
Deferred tax liabilities:
Prepaid overhaul maintenance         $  3,748,419     $ 3,029,793
Prepaid insurance                          25,478         109,687
Other                                      74,667          82,006
                                     ------------     -----------
Total deferred tax liabilities          3,848,564       3,221,486
                                     ------------     -----------
                                     $          -     $         -
                                     ============     ===========

The Company has provided a valuation reserve of $24,984,110 and 
$25,536,269 as of December 31, 1998 and 1997, respectively, to 
fully reserve for net deferred tax assets in the same amounts due 
to the uncertainty of their future realization.

As of December 31, 1998, net operating loss carryforwards of 
approximately $60,085,432 are available to reduce income taxes of 
future years and will begin to expire in 2009, if unused. The 
Company made no income tax payments during the years ended 
December 31, 1998, 1997 and 1996.
<PAGE>

9. LEASES

AIRCRAFT

From the date of inception through December 31, 1998, the Company 
has entered into operating lease agreements (collectively, the 
Lease Agreements) for nine Boeing 737-200 and two Boeing 737-300 
Series aircraft requiring fixed monthly rental payments. The two 
Boeing 737-300 Series aircraft were returned upon expiration of 
their respective lease terms in 1997. The Company recorded rent 
expense for aircraft of approximately $10,236,000, $9,261,000 and 
$10,404,000 for the years ended December 31, 1998, 1997 and 1996, 
respectively.

In addition, the Company is required to make supplemental payments 
to the aircraft lessors based on the number of cycles/flight hours, 
as defined by the Lease Agreements. Certain supplemental payments 
are recoverable from the lessor upon the performance of required 
engine, airframe, landing gear and auxiliary power unit overhauls. 
At December 31, 1998 and 1997, the Company has recorded 
approximately $9,611,000 and $7,769,000, respectively, in 
supplemental maintenance deposits recoverable from aircraft 
lessors. 

The Lease Agreements require the Company to pay the entire cost of 
the initial overhauls, even though a portion of the cycles or 
flight hours were incurred prior to initiation of the Lease 
Agreements. Accordingly, at the inception of the lease, the Company 
accrued (as accrued maintenance) the portion of the estimated cost 
of the initial overhaul pertaining to cycles or flight hours 
incurred prior to inception of the lease. The amounts capitalized 
as aircraft leasehold costs totaled approximately $453,000 for the 
year ended December 31, 1997. There was no overhaul component 
capitalized for the years ended December 31, 1998 and 1996. The 
capitalized component is being amortized on the straight-line 
method over five to seven years, the estimated lease terms. 
Amortization totaled approximately $423,000, $405,000 and $422,000 
for the years ended December 31, 1998, 1997 and 1996, respectively.

The Lease Agreements have lease terms ranging from three to seven 
years with the option to extend the lease term for certain aircraft 
for two to four additional years. The Company exercised its option 
to extend the lease term on four Boeing 737-200 aircraft for two 
additional years effective December 1997. In December 1998, a lease 
extension agreement was modified to extend the lease term on one 
Boeing 737-200 aircraft through December 2000. Three other Boeing 
737-200 aircraft will be returned to the lessor in 1999 upon the 
expiration of their respective lease terms. Certain Boeing 737-200 
Lease Agreements each have an option to purchase the aircraft at a 
value defined by the respective agreement. 

During 1998, the Company entered into additional lease agreements 
for the delivery of two additional aircraft in February and March 
1999. The lease terms are five years from the date of delivery and, 
like the other aircraft leases, require the Company to make 
supplemental payments to the aircraft lessor based on the number of 
cycles/flight hours, as defined by the agreements. The supplemental 
payments are recoverable from the lessor upon the performance of 
required engine, airframe, landing gear and auxiliary power unit 
overhauls. At December 31, 1998, the Company had deposits on these 
aircraft totaling $263,000 and is required to make additional 
deposits totaling $526,000 prior to aircraft delivery. In addition, 
in 1999 the Company has signed letters of intent for the lease and 
delivery of three additional aircraft during 1999.

OTHER

The Company leases facilities as well as office space for its 
corporate headquarters from local airport authorities. These 
operating leases have terms ranging from one month to five years. 
In addition, the Company leases aircraft engines, auxiliary power 
units, certain equipment and other office space. These operating 
leases have terms ranging from one to three years. Total rental 
expense for operating leases other than aircraft charged to 
operations for the years ended December 31, 1998, 1997 and 1996 was 
approximately $3,306,000, $2,982,000 and $2,764,000, respectively.

<PAGE>

9. LEASES (CONTINUED)

Future minimum lease payments under noncancelable operating leases 
(excluding supplemental payments but including the lease agreements 
related to aircraft deliveries in February and March 1999) at 
December 31, 1998 were as follows:

               1999                                $14,300,599
               2000                                 11,773,867
               2001                                  8,739,734
               2002                                  7,254,398
               2003                                  3,490,223
               Thereafter                              394,500
                                                   -----------
               Total minimum lease payments        $45,953,321
                                                   ===========

10. CONTINGENCIES

The Company is party to various legal proceedings and claims which 
arise during the ordinary course of business. In the opinion of 
management, the ultimate outcome of these matters will not have a 
material adverse effect on the Company's financial position or 
results of operations.

<PAGE>

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
               VANGUARD AIRLINES, INC.


              Balance at           Charged to
              Beginning  Charged to  Other   Deductions  Balance at
                   of   Costs and  Accounts--    --        End of
    DESCRIPTION  PERIOD  EXPENSES   DESCRIBE  DESCRIBE     PERIOD
---------------  ------  --------  ---------  --------     ------

YEAR ENDED DECEMBER 31, 1998:

Reserves and
 allowances
 deducted from
 asset accounts:

Valuation
 reserve for
 deferred tax
 assets:     $25,536,269  $     -  $      -  $552,159(1)  $24,984,110

YEAR ENDED DECEMBER 31, 1997:

Reserves and
 allowances
 deducted from
asset accounts:

Valuation
 reserve for
 deferred tax
 assets:     $15,312,997  $10,223,272  $  -  $      -   $25,536,269

YEAR ENDED DECEMBER 31, 1996:

Reserves and
 allowances
 deducted from
asset accounts:

Valuation
 reserve for
 deferred tax
 assets:     $ 6,073,365  $ 9,239,632  $  -  $      -   $15,312,997

(1)	reduction in valuation allowance due to utilization of net 
operating loss carryforward.

<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.



VANGUARD AIRLINES, INC.



Dated:  March 27, 1999        By:  /S/ ROBERT J. SPANE 
                                   Robert J. Spane
                                   Chairman of the Board, Chief 
                                   Executive Officer
                                   and President 

We, the undersigned, directors and officers of Vanguard 
Airlines, Inc. (the "Company"), do hereby severally constitute and 
appoint Robert J. Spane and William A. Garrett and each or any of 
them, our true and lawful attorneys and agents, with full power of 
substitution and resubstitution, for him or her and in his or her 
name, place and stead, in any and all capacities, to sign any and 
all amendments to the Company's Annual Report on Form 10-K for the 
fiscal year ended December 31, 1998, and to file the same with all 
exhibits thereto, and all other documents in connection therewith, 
with the Securities and Exchange Commission, granting unto said 
attorneys and agents, and each or any of them, full power and 
authority to do and perform each and every act and thing requisite 
and necessary to be done, as fully to all intents and purposes as he 
or she might or could do in person, hereby ratifying and confirming 
all that said attorneys and agents, and each of them, or his 
substitute or substitutes, may lawfully do or cause to be done by 
virtue hereof.

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

SIGNATURE AND TITLE						DATE


/S/ ROBERT J. SPANE					March 27, 1999
Robert J. Spane, Chairman of the Board,
	Chief Executive Officer and President 
	 (Principal Executive Officer)

/S/ WILLIAM A. GARRETT					March 27, 1999
William A. Garrett, Vice President-Finance 
	and Chief Financial Officer 
	(Principal Financial and Accounting Officer)

/S/ LEE M. GAMMILL, JR.					March 27, 1999
Lee M. Gammill, Jr. Director

/S/ DENIS T. RICE						March 27, 1999
Denis T. Rice, Director

/S/ LEIGHTON W. SMITH					March 27, 1999
Leighton W. Smith, Director