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, 1996.

                                OR

(    )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934 For the transition
          period from _____________ to
                                             

                 Commission File Number 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)

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


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.  [  ]

     At March 1, 1997, there were 9,984,952 shares of Common
Stock outstanding, of which 5,288,208 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, 1997,
was $11,726,601.24.

     Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1996 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 30 N.W. Rome Circle, Mezzanine
Level, Kansas City International Airport, Kansas City, Missouri
64153, and its telephone number is (816) 243-2100.

     Vanguard is a low-fare airline offering convenient, non-stop
and connecting scheduled jet service to attractive destinations
in established markets for both leisure and business travelers. 
The Company currently operates six leased Boeing 737-200 jet
aircraft and two leased Boeing 737-300 jet aircraft, which
provide 63 daily weekday flights serving Kansas City, Atlanta,
Chicago/Midway, Dallas/Fort Worth, Denver, Des Moines, Fort
Meyers, Las Vegas, Los Angeles, Miami, Minneapolis/Saint Paul,
Orlando, San Francisco, Tampa/Saint Petersburg and Wichita.  In
addition, the Company provides limited charter services.  The
Company has experienced significant growth since the commencement
of operations in December 1994, achieving operating revenues of
approximately $36.2 million for the year ended December 31, 1995
and $68.6 million for the year ended December 31, 1996.  However,
despite this significant growth in revenue levels, the Company to
date has yet to operate profitably.

     THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION  THAT ARE 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.  THE ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE CURRENTLY ANTICIPATED.  FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
GENERAL ECONOMIC CONDITIONS, THE COST OF JET FUEL, THE OCCURRENCE
OF EVENTS INVOLVING OTHER LOW COST 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.  FOR ADDITIONAL DISCUSSION OF
SUCH RISKS, SEE "BUSINESS-- FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS."

COMPANY'S LOW-FARE SERVICE

     The Company's low-fare service is designed to meet the needs
of, and stimulate increased demand among, leisure travelers and
price-sensitive business travelers.  The Company believes that in
its markets opportunities exist for airlines such as the Company
that offer low fares with a level of service that meets or
exceeds consumer expectations of low-fare airlines.

     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 travelers, are
competitive with ground transportation alternatives.  The Company
typically offers its airline services at fares that are generally
substantially lower than fares offered prior to its entry into
its markets.  The Company believes its offering low fares will
continue in light of the Company's cost structure; however, the
Company has marginally increased fares in markets that it has
been operating for more than one year or where it has strong load
factors.  The following table sets forth a range of the Company's
fares for one-way, non-stop service in selected markets as of
February 2, 1997:

<PAGE>


     Between                       And            One Way Fares
                                                  From      To

Chicago-Midway ........  Minneapolis/Saint Paul   $69       $169
Denver ................  Kansas City              $79       $179
Des Moines ............  Kansas City              $29       $69 
Kansas City ...........  Atlanta                  $69       $159
Kansas City ...........  Chicago                  $99       $159
Kansas City ...........  San Francisco            $79       $179
Kansas City ...........  Los Angeles              $89       $149
Kansas City ...........  Orlando                  $99       $169
Kansas City ...........  Tampa                    $99       $169

     In the first quarter of 1996, the Company revised its
pricing system to complete more effectively against airlines that
offered a limited number of seats at fares at or below the
Company's then existing fares.  This change provided the Company
with flexible fare pricing options.  The Company transitioned
from a peak/off-peak single-price per flight fare system to a
revenue/yield management fare system utilizing a range of price
categories in all markets.  The primary price categories are: (i)
14-day advance, (ii) seven-day advance, (iii) three day advance
and (iv) walk-up.  Within each primary category, there are
smaller fare price increments that are triggered by time
remaining to the flight and existing number of reservations on
such flight and are tailored to competitive conditions in the
local market and historical operating data.  The purpose of the
yield management  system is to achieve and maintain acceptable
yield and load factor levels in each market, thereby maximizing
revenue per available seat mile.  

     None of the Company's fares require a round-trip purchase or
minimum stay.  All of the Company's published fares are sold on a
non-refundable basis. A customer who wishes to change, or who
fails to use a purchased flight reservation may apply the funds
toward the purchase of another Vanguard flight for use within 90
days (180 days as of March 24, 1997) of the scheduled flight date
subject to a $50 service charge. As a result of its
non-refundable fare structure, the Company's passengers typically
take their designated flights, and the Company believes its "no
-show" rate is approximately 4%.  Because of its non-refundable
fare structure and low "no-show" rate, it is unnecessary for the
Company to over book flights. 

     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 believes that
the basic air transportation needs of its targeted customers can
be satisfied by providing a limited number of flights per day on
each route (generally two or three), low-fares, a frequent flyer
program, in-flight beverages and the ability to make advance
reservations. The Company does not offer advance seat
assignments, airport clubs, city ticket offices or certain other
amenities offered by many of its competitors.  In addition, the
Company does not interline with other domestic jet airlines. 
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
leisure travelers and price-sensitive business travelers.

ROUTE SYSTEM AND SCHEDULING

     The Company currently serves primarily short- to medium-haul
markets (200 to 1,500 miles) with a limited number of flights
(generally two or three round trips per route per day).   In
addition, the Company currently offers "night hawk" flights on
its Las Vegas, Los Angeles and San Francisco routes.  By flying
these routes at night when the aircraft would otherwise be idle,
the Company has increased its capacity by approximately 20%. 
During the fourth quarter of 1996, the Company launched its new
route system by establishing a hub operation in Kansas City.  The
Company currently has twenty-three flights per day in Kansas City
and provides service to the most non-stop destinations from
Kansas City.  Prior to its current hub strategy, the Company's
utilized a point-to-point route strategy focusing primarily on
short-to medium-haul markets in the Midwest and Rocky Mountain
regions of the United States.  

<PAGE>

     The Company's hub system will allow the Company 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.  This hub system allows Vanguard to add service to a
new destination from a larger number of cities using only one or
a limited number of aircraft.  The Company's flights are timed to
promote good local service in each non-stop market and to provide
connecting opportunities to and from other destinations.  For
example, flights originating in Des Moines, Denver, Chicago-
Midway, Minneapolis/Saint  Paul, Las Vegas, San Francisco and Los
Angeles arrive in Kansas City in time to connect to non-stop
flights to either Tampa or Orlando.

     The Company's aircraft scheduling strategy is directly
related to the perceived needs of its target customers. The
Company believes that its target customers are more sensitive to
price than to schedule or flight frequency.   As a result, the
Company's schedule generally provides only two or three flights
per day in any given market. The Company may add or reduce
flights to existing markets to satisfy increased or decreased
demand.

RESERVATION AND INFORMATION SYSTEMS

     Automation is a key component of the Company's strategy. The
Company's software, which operates on a Hewlett-Packard 3000
computer system, has been specifically designed to implement 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, eliminating paper records when possible. The
Company's system provides immediate access to detailed market,
customer and financial information obtained through the
reservation process. The system also collects, organizes and
stores data on customers in support of the Company's frequent
flyer program and can be used for other direct marketing efforts. 
 The reservation system is operated under a perpetual license
from a subsidiary of Southwest Airlines.   Management believes
that the ease of immediate access to timely, detailed information
through its automation system in a cost-effective manner enhances
management functions.

     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 reservation system allows the Company to
sell directly to customers and travel agencies, eliminating the
charges imposed by the computerized reservation systems owned by
the major airlines.

     The Company currently does not allow reservations to be
booked directly through the airline industry's Computer
Reservation Systems (CRSs), which are used extensively by travel
agents. The Company currently displays its flight schedules in
the WORLDSPAN and GALILEO CRSs. The Company, however, does not
display its flight schedule in the larger SABRE CRS.  The Company
anticipates negotiating an agreement to have its schedules and
fares available for display and booking by travel agents through
all major CRS vendors during the second or third quarter of 1997.

     The Company currently does not participate in the Airline
Reporting Corporation ("ARC"), the airline industry collection
agent for travel agency sales.  Consequently, at the time a
reservation or sale is made with a travel agent, the Company
identifies the travel agency making the booking, either taking
credit card information or charging the travel agency's account
for future payment. Each travel agency then receives an invoice
summarizing these transactions.  In connection with the
anticipated CRS conversion, the Company is evaluating ARC
participation.  The Company anticipates converting to ARC
participation during 1997.

     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 regarding confirmed passengers
and flight schedules.

<PAGE>

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
newspapers, television, radio and billboards.  In November 1996,
with the launch of its new cities and hub in Kansas City and the
hiring of a new advertising agency, the Company has significantly
increased its advertising expenditures.  These advertisements
feature the Company's destinations, every-seat, every-flight low
fares and the Company's reservations toll free phone number, 
(1-800-VANGUARD).

     Approximately 40% of the Company's customers use travel
agents to make their reservations.  The Company's sales through
travel agents include payments of customary sales commissions,
however, sales are not made through a CRS and do not include fees
associated with such participation.  As described above, the
Company anticipates having its schedules and fares available for
display and booking by travel agents during the second or third
quarter of 1997.  See "--Reservation and Information Systems."

     The Company currently offers a  frequent-flyer program,
which awards free round-trip tickets on Vanguard to customers who
complete 16 Vanguard flights within 12 months.  In addition to
its standard frequent flyer program, the Company on occasion
accelerates rewards on its frequent flyer program.  For example,
in January 1997, the Company launched a Threequent Flyer Program
that entitles customers to a free round trip ticket, valid for
one year, for anyone who completes three round-trip flights on
Vanguard between January 26, 1997 and June 1, 1997.

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 sought to establish and develop 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 monthly question and
answer session with the Company's Chairman of the Board, Chief
Executive Officer and President, John P. Tague, and other
executive officers of 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 and develop professionally. 
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 has implemented  a  401(k) plan, employee
stock purchase plan and adopted a profit sharing plan, which the
Company expects will further align the interests of its
employees, the Company and its customers.  

     Training, both initial and recurring, is required for almost
all employees.  The average training period for all new
employees, other than pilots, is approximately two weeks.  Both
pilot training and mechanic training for the Boeing 737-200 and
737-300 jet aircraft are generally provided by independent
contractors, including other airlines.

     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 are subject to periodic continuation
requirements including recurrent training and recent flying
experience.  Mechanics, quality control inspectors and flight
dispatchers must be licensed and qualified for specific 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.

<PAGE>

     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.  If the employees eventually seek
representation, the impact on the Company may be material and
adverse, although the Company believes that its low-cost
structure derives from its simplified procedures and not simply
from its employee compensation structure.  The Company is unable
to predict whether any of its employees will elect to be
represented by a labor union.

AIRPORT OPERATIONS

     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 area 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 conducted
by the Company's full- and part-time employees.  Underwing ground
handling services are contracted to other air carriers or
independent contractors.  The Company currently is evaluating the
acquisition of certain ground handling equipment and hiring of
its own employees to provide underwing ground handling services
at selected airports.

     The Company currently serves 15 airports.  The Company has
leases with the appropriate airport authority at certain airports
and sublease or handling arrangements directly with other
airlines at various airports it serves.  Most of these sublease
or handling arrangements can be terminated by the other airlines
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.  The Company anticipates being able to gain
access to any airports but currently has no immediate plans to
serve any slot-controlled airports (Washington's National, New
York's LaGuardia and Kennedy and Chicago's O'Hare).  The Company
considers the cost of airport operations in determining whether
to commence service to a city.

AIRCRAFT

     The Company has leased three of its six Boeing 737-200 jet
aircraft for terms extendable by the Company through 2001; two of
its Boeing 737-200 jet aircraft have been leased for a term
extendable through 2002; and its remaining Boeing 737-200 has
been leased for a term expiring in 2002.  The Company has options
to purchase five of the Boeing 737-200 jet aircraft during the
terms of their respective leases.  The Company has leased its two
Boeing 737-300 jet aircraft for terms expiring in mid-1997.  The
first Boeing 737-300 jet aircraft will be returned in May 1997
and the second Boeing 737-300 jet aircraft will be returned in
July 1997.  The Company currently is evaluating lease terms with
respect to one to three Boeing 737-200 jet aircraft to replace
the Boeing 737-300 jet aircraft.  However, there can be no
assurance that additional aircraft will be available at all or at
reasonable costs or that the Company will have sufficient
resources to lease such aircraft.  The scheduled return of the
737-300 jet aircraft in May should not have a material adverse
effect on the Company's business, financial condition and results
of operations.  However, if the Company is unable to lease one to
two jet aircraft by July 1997, the scheduled return of its second
Boeing 737-300 jet aircraft, could 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--Limited Number of Aircraft." 

     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
("AD"s) and regulations for aging aircraft, the Company believes
that the total costs of operating the Boeing 737-200 jet aircraft
will be 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 compliance with
federal Stage 3 noise level requirements in phases:  25% by
December 31, 1994; 50% by December 31, 1996; 75% by December 31,
1998; and 100% by December 31, 1999.  Currently, the Company's
fleet meets the current Stage 3 noise compliance requirements. 
Any jet <PAGE> aircraft acquired to replace the two 737-300 jet aircraft,
which are scheduled to be returned in mid-1997, will need to meet the Stage
3 noise compliance requirements.  Alternatively, the Company
would be required to modify aircraft in its existing fleet to
meet the Stage 3 requirements if the acquired aircraft were non-
Stage 3 compliant. The Company believes that through the
modification of current lease terms, the acquisition of an FAA
certified hush kit would be available to allow the Company's
aircraft to meet Stage 3 requirements.  Although there can be no
assurance that the hush kit addition will not adversely affect
the cost and operating performance of the Company's Boeing
737-200 jet aircraft, the Company does not believe the hush kits
installed on two of the Company's aircraft have significantly
affected the economics or reliability of such aircraft.

     Because the Company's aircraft fleet consists of only eight
aircraft, 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 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 profitability.

MAINTENANCE AND REPAIRS

     The Company's Boeing 737-200 jet aircraft were manufactured
between 1968 and 1970 and its Boeing 737-300 aircraft were
manufactured in 1986.  Older aircraft, in general, are likely to
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 of the FAA.  In
addition, the Company may be required to comply with future ADs
or regulations regarding maintenance and repairs, including aging
aircraft.  For example, the FAA has ordered a number of ADs for
rudder modifications on Boeing 737-200 jet aircraft.  Though
Boeing is willing to pay for the cost of the replacement parts,
the Company is responsible for the labor costs that are estimated
to be $50,000 to $75,000 per aircraft.  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 or daily
maintenance and major overhauls.  Routine or daily maintenance is
generally performed in Kansas City, Chicago-Midway or Minneapolis
by the Company's employees or in various other cities, as needed,
by independent contractors.  The Company has contracted with
Tramco (BF Goodrich) to  perform major scheduled maintenance. 
Through the end of 1997, the Company's aircraft will require
major scheduled maintenance in accordance with the Company's
maintenance program at an estimated aggregate cost of $4.3
million of which $2.1 million will be funded from existing
supplemental rent payments recoverable from aircraft lessors. 
The major scheduled maintenance costs exclude any costs
associated with the acquisition and installation of hush kits or
additional aircraft.

      The Company does not own a large inventory of spare parts,
but has contracted with an independent contractor to make spare
parts available and to manage the Company's stockroom in Kansas
City.  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.

FUEL

     The cost of jet fuel is one of the Company's largest
operating expenses (approximately 17.3% of operating expenses
when including taxes and the cost of delivering fuel into the
aircraft for the year ended December 31, 1996).  Significant
changes in jet fuel prices have materially affected the Company's
operating results.  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 has resulted 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 <PAGE> 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--Rising 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 types (jet or
propeller) and size of aircraft.  The Company competes with
numerous other airlines on its routes and expects to compete with
other airlines on any future routes.  Many of these airlines are
larger and have greater name recognition and greater financial
resources than the Company.  In response to the Company's
commencement of service to a particular market, competing
airlines have, at times, added flights and capacity in the market
and lowered their fares, making it more difficult for the Company
to achieve or maintain profitable operations 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 attempts
to prevent the Company from achieving  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--Competition and Competitive
Reaction."

GOVERNMENT REGULATION

     All interstate air carriers are subject to regulation by the
United States Department of Transportation ("DOT") and the FAA
under the 49 U.S.C., Subtitle VII (formerly the Federal Aviation
Act of 1958, as amended) (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.

     The Company's flight personnel, flight and emergency
procedures, 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 start-up 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 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."

     Recently, the FAA began a nationwide series of air carrier
inspections involving carriers of all sizes.  Several recent
inspections have resulted in the air carrier under inspection
suspending service or specific aircraft being grounded.  The
Company was the subject of an intensive inspection and was
notified that it had successfully completed this inspection with
no significant airworthiness findings.  The Company expects these
nationwide inspections to continue in 1997.  See "--Factors That
May Affect Future Results of Operations--Government Regulation."

<PAGE>


INSURANCE

     The Company carries the types and amounts of insurance
required by the DOT, and that 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 February 28, 1997, the Company employed approximately
484 full- and part-time employees consisting of 83 pilots, 109
flight attendants, 63 mechanics, 148 station agents and 81
management and staff personnel.  In addition, the Company's
reservation center, operated by a third party, employed
approximately 500 full- and part-time people as of February 28,
1997.

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 LOSSES; FUTURE
OPERATING RESULTS UNCERTAIN; WORKING CAPITAL DEFICIT.  The
Company has a limited history of operations, beginning flight
operations on December 4, 1994.  Since the Company's inception on
April 25, 1994, the Company has incurred significant losses and
as of December 31, 1996 had an accumulated deficit of
approximately $41.4 million, a stockholders' deficit of
approximately $13.2 and a working capital deficit of
approximately $21.3 million.  The Company's limited operating
history makes the prediction of future operating results
difficult.  The Company's future operating results will depend on
many factors, including general economic conditions, the cost of
jet fuel, the occurrence of events involving other low-cost
carriers, potential changes in government regulation of airlines
or aircraft and actions taken by other airlines particularly with
respect to scheduling and pricing in the Company's current or
future routes.  A negative change in any one or more of these
factors could have a material adverse effect on the Company's
business, financial condition and results of operations.  There
can be no assurance that the Company will achieve profitability
at any time in the future.  The Company has been dependent upon
equity and debt financings primarily with its principal
stockholders during 1996 and 1997.  See "Item 7 Management's
Discussion and Analysis of Finance Condition and Results of
Operations--Liquidity and Capital Resources."

     CONSUMER CONCERN ABOUT OPERATING SAFETY AT START-UP CARRIERS
OR TYPE OF AIRCRAFT.  Aircraft accidents or other safety related
issues involving any carrier, such as the recent plane crashes
involving ValuJet and Trans World Airlines, have had an adverse
effect on airline passengers' perceptions regarding the safety of
low cost carriers, particularly with respect to the use of aging
aircraft such as the Company's 737-200 jet aircraft.  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
aircraft that are of the same age as the Company's 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, an airline may experience
variations in passenger demand based on its particular routes and
passenger demographics.   Due to the Company's limited operating
history, the Company is unable to predict whether, and to what
extent, seasonal variations in its operations will differ from
those of the airline industry generally. If the Company's demand
patterns are similar to those of the airline industry generally,
the Company would experience reduced demand during the fall and
winter <PAGE> with adverse effects on revenues, operating results and cash
flow.  During 1995 and 1996, the Company did experience reduced
demand during the fall and winter with adverse effects on
revenues operating results and cash flows.  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, could have a material adverse effect of
the Company's business, financial condition or results of
operations.  

     COMPETITION AND COMPETITIVE REACTION.  Under the
Deregulation Act, domestic certificated airlines are free to
enter and exit domestic markets and to set fares without
regulatory approval, and all city-pair domestic airline markets
are generally open to any domestic certificated airline.  As a
consequence, the airline industry is intensely competitive. 
Airlines compete primarily with respect to fares, scheduling
(frequency and flight times), destinations, frequent flyer
programs and type (jet or propeller ) and size of aircraft.  The
Company competes with numerous other airlines on its routes and
expects to compete with other airlines on any future routes. 
Many of these airlines are larger and have greater name
recognition and greater financial resources than the Company.  In
response to the Company's commencement of service to a particular
market, competing airlines have, at times, added flights and
capacity in the market and lowered their fares, making it more
difficult for the Company to achieve or maintain profitable
operations in such markets.  In the future, other airlines may
set their prices at or below the Company's fares or introduce new
non-stop service between cities served by the Company in attempts
to prevent the Company from achieving or maintaining profitable
operations or even maintaining operations in that market.  The
Company may also face competition from existing airlines that may
begin serving markets the Company serves, from new low-cost
airlines that may be formed to compete in the low-fare market
(including any airlines that may be formed by traditional
airlines) and from ground transportation alternatives. 

     RISING 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
17.3% of the Company's operating expenses.  The Company's average
cost per gallon increased from $0.61 per gallon in the year ended
December 31, 1995, to $0.79 per gallon in the year ended December
31, 1996.  The Company's average cost per gallon during the
fourth quarter 1996 of $0.84 declined to $0.79 during the first
quarter 1997.  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 are relatively fuel
inefficient compared to newer aircraft (such as the Company's
Boeing 737-300 jet aircraft).  Accordingly, the significant
increases in the price of jet fuel has resulted 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, the increase in the cost of jet
fuel has immediately passed through to the Company by suppliers
and 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 has been 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 has also had 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 eight 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 profitability.  The leases relating to
the Company's Boeing 737-300 jet aircraft have terms expiring in
May and July, 1997.  The market for leased aircraft has become
more competitive than it was at the time of the Company's
inception, and there can be no assurance that the Company would
be able to lease additional aircraft on satisfactory terms or at
the time needed.  In addition, if the Company is unable to lease
737-200 jet aircraft with additional fuel tank capacity to
replace its existing 737-300 jet aircraft, it may have to
substantially curtail the frequency of its flight schedule to San
Francisco, Los Angeles, and Florida destinations, which flights
currently account for a substantial portion of the Company's
revenues.  Further, if the Company is unable to lease additional
aircraft that are in compliance with the Stage-3 noise compliance
requirements, it will have to make significant capital
expenditures to make its aircraft fleet meet such requirements. 
While the Company currently has plans to purchase or lease one to
three additional jet aircraft, two of which would replace the
737-300 jet aircraft, its ability to further expand its
operations could be limited by the availability of additional jet
aircraft on terms satisfactory to the Company.  See "--
Aircraft." 

<PAGE>

     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 start-up airlines, such as the Company. 
During 1996, after extensive FAA investigations, ValuJet
suspended operations and Kiwi Airlines substantially reduced its
operations before filing for bankruptcy protection, and Mesa
Airlines and Western Pacific Airlines were subject to extensive
investigations by the FAA.  Because of the Company's start-up
status, along with other start-up carriers, the Company's
operations recently have been subject to increased review by the
FAA. 

      Additional rules and regulations have been proposed from
time to time in the last several years and might be enacted that
could significantly increase the cost of airline operations by
imposing substantial additional requirements or restrictions on
airline operations.  For example, the National Transportation
Safety Board has proposed new regulations to require carriers to
upgrade the flight data recorders on their Boeing 737-200 jet
aircraft.  The estimated cost of such equipment would be
approximately $90,000 for each of the Company's six 737-200 jet
aircraft.  There can be no assurances that any of these rules or
regulations would not have material adverse effect on the
Company's business, financial condition and results of
operations.

     The DOT and FAA also enforce federal law with respect to
aircraft noise compliance requirements.  The Company's current
fleet exceeds the current Stage-3 noise compliance requirements
(50% of its fleet Stage-3 compliance), with two of its Boeing
737-200 jet aircraft being equipped with hush kits and its two
Boeing 737-300 jet aircraft satisfying the Stage-3 requirements. 
In the event the Company is unable to lease hush kitted 737-200
jet aircraft to replace the 737-300 jet aircraft or finance a
hush kit on one of its existing 737-200 jet aircraft, it could
have a material adverse effect on the Company's business,
financial condition and results of operations.  In the future,
the Company's aircraft fleet is required to meet the following
federal Stage-3 noise compliance deadlines:  75% of its fleet
must be Stage-3 compliant by December 31, 1998; and 100% of its
fleet must be Stage-3 compliant by December 31, 1999.

     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. 

     TICKET TAX.  Despite the recent reinstatement of the ten
percent ticket tax (the "ticket tax"), proposed FAA "funding
reform" continues to present uncertainty as to how or if any
changes would impact Vanguard in the future.  Congress reinstated
the ticket tax in August 1996, the ticket tax lapsed as of 
December 31, 1996;  Congress reinstated the ticket tax as of
March 7, 1997 with the tax scheduled to lapse on September 30,
1997.  The Company is unable to predict how the FAA funding issue
will be resolved, and what impact, if any resolution of this
uncertainty in the future will have on the Company's business,
financial condition and results of operations.

<PAGE>


ITEM 2.  PROPERTIES

     The Company leases approximately 6,000 square feet of office
space at Kansas City International Airport for its headquarters
at a current monthly rent of approximately $7,500 under a lease
that expires in 1998.  In addition, the Company leases
approximately 17,000 square feet of office space in Mission,
Kansas and approximately 7,250 square feet in Lawrence, Kansas,
which are used primarily for its reservations facilities.

     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 provided by other airlines
pursuant to subleases or other arrangements.  Such arrangements
may include baggage handling, station operations, cleaning and
other services.  If such facilities at any additional cities to
be 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

     In December 1996, the Company had a dispute regarding past
fees and termination fees associated with the Company's
termination of its contract with Valentine-Radford, Inc. ("VRI"),
the Company's former advertising agency.  On March 24, 1997, the
Company entered into a Settlement Agreement with VRI.  Under the
terms of Settlement Agreement, the Company has agreed to pay all
outstanding trade payables previously due for advertising
services performed and media placed by VRI.  In addition, the
Company agreed to pay an aggregate of $ 75,000 in late 1997 and
early 1998 in connection with the termination of its contract
with VRI.

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, 1996.  On March 3, 1997, the Company held a Special
Meeting of Stockholders where a majority of the holders of common
stock approved an amendment to the Company's  Restated
Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock, par value $.001 per share
from 15,000,000 to 50,000,000 shares.

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,
1997:

      NAME                     AGE                 POSITION

John P. Tague                 34        Chairman of the Board,
                                        Chief Executive
                                        Officer and President 
William A. Garrett            31        Vice President - Finance and
                                        Chief Financial Officer
Brian S. Gillman              27        Vice President, General
                                        Counsel and Secretary
Ronald L. McClellan           47        Vice President - Maintenance
William F. McKinney           57        Vice President - Flight Operations
Robert J. McAdoo              51        Director
Richard D. Pearson            61        Director
Edmund H. Shea, Jr.           67        Director
Robert J. Spane               55        Director

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

     JOHN P. TAGUE joined the Company on November 1, 1996 as
Chairman of the Board, Chief Executive Officer and President. 
Mr. Tague has also served, since July 1996, as Chief Executive
Officer and President of Air South Airlines.  Since 1995, he was
and remains a principal of The Pointe Group, L.L.C ("TPG") and
its Co-Chairman and 

<PAGE>


Chief Executive Officer.  TPG is an aviation and transportation
consulting firm.  Prior to that, for more than five years, he was
with American Trans Air, Inc., the United States' 10th largest
airline, most recently as President and Chief Operating Officer.

     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.

     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.

     RONALD L. MCCLELLAN joined the Company in May 1994 as Vice
President - Maintenance. Prior to joining the Company, Mr.
McClellan served as Director of Aircraft Reliability Engineering
from 1987 to 1994.  From 1981 to 1986, he was employed by People
Express as Director of Quality Control and advanced to Managing
Officer of Technical Services.

     WILLIAM MCKINNEY joined the Company in March 1996 as Chief
Pilot and was appointed Vice President-Flight Operations in April
1996.  Prior to joining the Company, Captain McKinney retired
from Trans World Airlines after 29 years of service as a pilot,
where he served mostly as General Manager of Flying for the
western region.

     ROBERT J. MCADOO has been a director of the Company since
the Company's inception in April 1994.  From April 1994 to
November 1996, Mr. McAdoo was Chairman of Board, Chief Executive
Officer and President of the Company.  Mr. McAdoo was an airline
analyst with Prudential Securities from 1991 to 1994 and with
Oppenheimer and Company, Inc., from 1986 to 1991.  In 1980, he
was one of the original officers of People Express, where he
served from 1980 to 1986 as the Chief Financial Officer and from
1981 to 1983 as the Chief Marketing Officer. 

     RICHARD D. PEARSON was elected a director of the Company in
June 1995. From 1994 until his retirement in April 1995, he was
Chairman of the Board and Chief Executive Officer of Buffalo
Airways, Inc., a cargo airline. From 1992 to 1994, Mr. Pearson
was retired. From 1987 to 1992, Mr. Pearson was Senior Vice
President Field Services and Vice President of Operations
Administration for American Airlines, Inc. From 1984 to 1986, he
was President of TWA.

     EDMUND H. SHEA, JR. was elected a director of the Company in
May 1994. He has been Vice President of J.F. Shea & Co., Inc., a
privately held construction company since 1954. Mr. Shea is also
a director of Hambrecht & Quist Group.  

     VICE ADMIRAL ROBERT J. SPANE USN (RET.) was elected as a
director of the Company in May 1996.  Vice Admiral 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.  Vice Admiral 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.  Vice Admiral
Spane retired from the U.S. Navy in February 1996 and is a 1962
graduate of the U.S. Naval Academy.

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 following table sets forth, for the periods
indicated, the high and low sales prices of the Common Stock as
reported on the Nasdaq SmallCap <PAGE> 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

1995
     Fourth Quarter (from November 3, 1995). . . . . . $6 3/4   $5 15/16

1996
     First Quarter . . . . . . . . . . . . . . . . . .  9 5/8        6

     Second Quarter. . . . . . . . . . . . . . . . . . 12 1/4        8

     Third Quarter . . . . . . . . . . . . . . . . . .  9 1/2        3 7/16
          
     Fourth Quarter. . . . . . . . . . . . . . . . . .  5 1/4      1 3/4

1997
     January . . . . . . . . . . . . . . . . . . . . . 2 7/8       1 3/4

     February. . . . . . . . . . . . . . . . . . . . .   2        1  13/16


RECENT SALE OF UNREGISTERED SECURITIES

     On January 17, 1996, one 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, 1,600,000 warrants immediately vested.  The remaining
2,400,000 warrants vest quarterly according to the amount of
exposure under such letter of credit.  Each warrant expires 10
years from the date of issuance.    

     On January 30, 1997, the Company established a $2.275
million six-month line of credit, guaranteed by certain
stockholders of the Company.  In consideration for the guaranty,
the Company issued up to 2,275,000 warrants to purchase shares of
common stock with an exercise price of $1.00 per share.  Upon
execution of the line of credit, 910,000 warrants immediately
vested.  The remaining 1,365,000 warrants vest quarterly
according to the amount outstanding under the line of credit. 
Each warrant expires 10 years from the date of issuance.  

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data for the period ended
December 31, 1994, and the years ended  December 31, 1995 and
1996, 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.

                                       Period from Inception
                                 (April 25, 1994  Year Ended      Year Ended
                                 to December 31,   December 31,   December 31,
                                     1994/1/          1995          1996

STATEMENT OF OPERATIONS DATA:
Total operating revenues            $760,985    $  36,159,018     $68,589,101 
Total operating expenses           4,274,275       48,225,313      92,503,417 
Operating Loss                    (3,513,290)     (12,066,295)    (23,914,316)
Total other income (expense), net     70,833         (129,235)     (1,893,754)
Net loss                         $(3,442,457)   $ (12,195,530)  $ (25,808,070)
Net loss per share (2)           $     (0.70)   $       (1.65)   $      (2.85)
Weighted average common and
common equivalent shares 
outstanding (2)                    4,907,377        7,395,921       9,056,888 

OPERATING DATA: (3)
Revenue passenger miles (RPMs)     6,515,183      290,030,187     667,845,140 
Available seat miles (ASMs)       15,251,200      562,340,660   1,090,058,358 
Load factor                            42.75%           51.58%          61.27%
Break-even load factor (4) (5)        100.02%           69.90%          83.83%
Passenger yield per RPM              $0.1139          $0.1172         $0.0973 
Total revenue per ASM                $0.0499          $0.0643         $0.0629 
Operating cost per ASM (4)           $0.1139          $0.0855         $0.0848 
Block hours flown                        441           14,781          24,721 
Average flight length (miles)            464              372             530 
Operating cost per block hour (4)     $3,948           $3,260          $3,740 
Aircraft in service (end of period)        2                7               8 
Airports served (end of period)            3                9              15 

BALANCE SHEET DATA:
Cash and cash equivalents         $1,126,809       $3,491,640        $402,083 
Working capital (deficiency)     $(1,297,439)     $(4,172,305)   $(21,296,881)
Property and equipment, net       $2,588,892       $4,550,818      $5,049,658 
Total assets                      $6,191,439      $16,425,698     $20,318,247 
Total stockholders' equity
  (deficit)                       $2,576,023      $3,544,633     $(13,238,017)

_____________
/1/  The Company's flight operations commenced December 4, 1994. 
     Prior to that time, the Company was in the development
     stage.
/2/  See Note 1 of Notes to Financial Statements.
/3/  "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 RPMs 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, minus non-passenger revenue, divided by ASMs,
     divided by passenger yield per RPM.  "PASSENGER YIELD RPM"
     represents the total passenger revenue divided by RPMs. 
     "TOTAL REVENUE PER ASM" represents total revenues divided by
     total available seat miles.  "OPERATING COST PER ASM"
     represents operating expenses divided by total available
     seat miles.  "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.
/4/  Excludes $122,159 and $41,903 for the years ended December
     31, 1995 and 1996, respectively, of nonrecurring, noncash
     compensation expense relating to stock options granted to
     certain directors and key employees of the Company.
/5/  Excludes $1,833,335 of noncash deferred debt issuance cost
     amortization for the year ended December 31, 1996.

<PAGE>

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

OVERVIEW

     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 attractive
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. As of December 31, 1996, the
Company operates a total of six leased Boeing 737-200 jet
aircraft and two leased Boeing 737-300 jet aircraft, which
provide 63 daily weekday flights serving Kansas City, Atlanta,
Dallas/Fort Worth, Denver, Des Moines, Fort Meyers, Las Vegas,
Los Angeles, Miami, Minneapolis/Saint Paul, Orlando, San
Francisco, Tampa/Saint Petersburg and Wichita. The following
chart indicates the expansion of service from December 4, 1994
through February 28, 1997.

                                Number
                  Total Number  of Daily
                  of Aircraft   Weekday      As of Month End
                   in Service    Flights      New Cities Added

1994                                
 December. . . . .      2              8     Kansas City, Denver,
                                             Salt Lake City (2)
1995
 January . . . . . . . .4             28     Dallas/Fort Worth,
                                             Milwaukee /1/
 February. . . . . . . .4             24     --
 March . . . . . . . .  5             26     --
 April . . . . . . . . .5             32     Wichita
 May . . . . . . . . . .5             34     Des Moines, Minneapolis/Saint Paul
 June. . . . . . . . . .5             34     --
 July. . . . . . . . . .5             34     --
 August. . . . . . . . .5             40     Chicago-Midway
 September . . . . . . .5             40     --
 October . . . . . . . .5             40     --
 November. . . . . . . .5             40     --
 December. . . . . . . .7             44     San Francisco
1996
 January . . . . . . .  7             46     --
 February. . . . . . . .8             46     --
 March . . . . . . . . .8             48     Los Angeles
 April . . . . . . . . .8             50     --
 May . . . . . . . . .  8             50     --
 June. . . . . . . . . .8             58     --
 July. . . . . . . . . .8             58     --
 August. . . . . . . .  8             55     --
 September . . . . . . .8             49     --
 October . . . . . . . .8             44     Cincinnati /3/, Seattle /4/,
                                             Phoenix /5/
 November. . . . . . . .8             50     --
 December. . . . . . . .8             63     Atlanta, Fort Meyers,
                                             Las Vegas, Miami,
                                             Orlando, Tampa
1997 (6)
   January . . . . . . .8             63      --
   February. . . . . . .8             63     --

/1/  Milwaukee service terminated effective March 26, 1995.  /2/ 
Salt Lake City service terminated effective December 2, 1996. 
/3/  Cincinnati service terminated effective November 19, 1996. 
/4/  Seattle service terminated November 19, 1996.  /5/  Phoenix
service terminated effective December 20, 1996.  /6/ On March 11,
1997, the Company issued a press release announcing a schedule
change which among other things, involved the seasonal
termination of service to Miami and Fort Meyers, Florida.

<PAGE>

     The Company's operating revenues are derived principally
from the sale of airline transportation 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 where its low operating costs permit profitable
operations.

     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
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-cost carriers, passengers' perceptions
regarding the safety of low-cost carriers and general economic
conditions. 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 and rent for gates and other facilities.  The Company
has a limited history of operations and since its inception on
April 25, 1994 has experienced significant losses. As of December
31, 1996, the Company had an accumulated deficit of $41.4 million
and stockholders' deficit of $13.2 million.  As disclosed in the
audited financial statements, the Company had a net loss of
approximately $25.8 million and net cash flows used in operating
activities amounting to approximately $14.6 million for the year
ended December 31, 1996.  Additionally, at December 31, 1996,
current liabilities exceeded current assets by  $21.3 million. 
As a result of its limited operating history, together with the
uncertainty in the airline industry generally, management is
unable to predict the future operating results of the Company.

     The Company is dependent upon equity and debt financings
from third parties or from its principal stockholders. The
Company anticipates completing a $10.0 million private placement
in April 1997.  There can be no assurance as to the availability
of further financings.  Management's plans include raising
additional capital and securing additional bank financings to
fund ongoing operations and the possible expansion of operations,
there can be no assurance the Company will be successful in this
regard. 

     In January 1997, the Company entered into a $2.275 million
line of credit guaranteed by certain stockholders.  In addition,
one of the Company's principal stockholders established a $4.0
letter of credit facility in favor of the Company's credit card
processor.  In connection with these agreements, the Company
issued up to 2,275,000 warrants to the stockholders who
guaranteed the line of credit and up to 4,000,000 warrants to the
stockholder who established the letter of credit to purchase
shares of the Company's common stock at an exercise price of
$1.00.  Upon execution of the line of credit and letter of credit
agreements, the Company issued 910,000 and 1,600,000 warrants,
respectively, that vested immediately.  The fair value related to
each warrant issuance, totaling $1,100,000 related to the line of
credit and $1,900,000 related to the letter of credit, was
recorded in other assets and is being amortized over the term of
each agreement.  As a result of these agreements, the Company
will record deferred debt issuance cost amortization of
approximately $329,000 in the first quarter of 1997, $375,000 per
quarter through the fourth quarter of 1998, and $46,000 in the
first quarter of 1999.  The remaining warrants related to each
agreement vest quarterly and the number is determined based on
certain formulas, as defined in each agreement.  The estimated
fair value of the warrants that will vest each quarter will be
determined based on the then current stock prices.  The fair
value determined will be recorded in other assets and will be
amortized to expense over the remaining term of the agreements.  

     Typically, airlines experience reduced demand for service at
various times during the fall and winter. Within these periods,
an airline may experience variations in passenger demand based on
its particular routes and passenger demographics. Due to the
Company's limited history it is unable to predict if, and to what
extent, seasonal variations in its operations will differ from
those of the airline industry generally.  During its first two
full years of operations, however, the Company experienced
reduced demand during the fall and winter with adverse effects on
operating revenues, operating expenses, operating results and
cash flow.

     Certain amounts and percentages disclosed in management's
discussion and analysis of financial condition and results of
operations for the year ended December 31, 1995 have been changed
to conform to the 1996 presentation.

<PAGE>

RESULTS OF OPERATIONS
     
     YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995

     OPERATING REVENUES

     Total operating revenues increased approximately 89.7% from
approximately $36.2 million for the year ended December 31, 1995
to approximately $68.6 million for the year ended December 31,
1996.  This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights off-set by the drop in passenger yield per revenue
passenger mile.  At December 31, 1995, the Company operated 44
daily weekday flights with seven aircraft and during the year
then ended added service to Dallas/Fort Worth, Milwaukee,
Wichita, Des Moines, Minneapolis/Saint Paul, Chicago-Midway and
San Francisco.  Service to Milwaukee terminated in March 1995. 
At December 31, 1996, the Company operated 63 daily flights with
eight aircraft, having added service to Los Angeles, Cincinnati,
Seattle, Phoenix, Atlanta, Fort Meyers, Las Vegas, Miami, Orlando
and Tampa during the year.  Service to Salt Lake City,
Cincinnati, Seattle and Phoenix terminated in November and
December of 1996.   Total available seat miles ("ASMs") increased
approximately 93.8%, from approximately 562.3 million during the
year ended December 31, 1995 to approximately 1,090.1 million
during the year ended December 31, 1996.  Revenue passenger miles
("RPMs") increased approximately 130.3% from approximately 290.0
million during the year ended December 31, 1995 to approximately
667.8 million during the year ended December 31, 1996.  The
increase in ASMs was primarily attributable to an increase in the
number of jet aircraft in service throughout the year, the number
of daily flights and the addition of destinations with greater
flight lengths.  The increase in RPMs was primarily attributable
to an increase in the number of daily flights, an increase in the
number of passengers on those flights and the addition of
destinations with greater flight lengths.  Load factor increased
from approximately 51.6% for the year ended December 31, 1995 to
approximately 61.3% for the year ended December 31, 1996.  This
increase was primarily the result of adjustments in capacity to
meet market demand, increases and changes in the number of city
pairs served, reduced fares, and an increase in market awareness
of the Company's service.

     Passenger yield per RPM decreased approximately 17.0% from
approximately 11.7 cents for the year ended December 31, 1995 to
approximately 9.7 cents for the year ended December 31, 1996.  The
Company believes this decrease was partially attributable to the
Valujet and Trans World Airlines accidents in May 1996 and July
1996, respectively.  During the four week period after each
accident, call volume at the Company's reservation center
declined substantially.  As a result, the Company's revenue/yield
management fare system offered customers seats at reduced fares. 
In other words, the Company had to discount fares to stimulate
travel in existing markets during a seasonally strong sales
period.  The Company's favorable load factors remained unchanged,
but at the cost of reduced passenger yields.  The expansion of
service to new markets also contributed to the decrease in yield
experienced by the Company in 1996.  The Company also offered
promotional fares on its new city pairs throughout the year ended
December 31, 1996, and these new routes accounted for
approximately 48% of the system-wide RPMs during 1996.  The
Company terminated service in late 1996 to three cities in which
the Company had offered promotional fares.  During 1996, the
Company attempted to increase fares in mature markets in order to
improve passenger yield.  The Company can not predict future fare
levels, which depend to a substantial extent on actions of
competitors.  When the sale prices or other price changes have
been made by competitors in the Company's markets, the Company
believes that it must, in most cases, match these competitive
fares in order to maintain its market share.  The Company
believes that the negative impact of entering new markets and the
use of discounted fares should decrease as the Company increases
its overall revenue base and customer awareness.  The factors
which decreased yield were offset by the increase yield in the
first half of 1996 as a result of the absence of the ticket tax. 
The benefit received by the Company from the expiration of the
ticket tax cannot precisely be determined.  The ticket tax was
reinstated in August 1996, the tax lapsed as of December 31,
1996, and Congress reinstated the ticket tax as of March 7, 1997
with the tax scheduled to lapse again on September 30, 1997.

     The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations. 
For a period of 90 days (180 days as of March 24, 1997) after the
flight date, the customer may use the value of the unused
reservation for transportation, less a $50 ($25 through October
1996) service charge.  These operating revenues were
approximately $697,000 (approximately 1.9% of total operating
revenue) and approximately $2.1 million (approximately 3.1% of
total operating revenues) in the year ended December 31, 1995 and
the year ended <PAGE> December 31, 1996, respectively.  The increase in
cancellation and change fee revenue as a percent of passenger
revenue was primarily attributable to the increase in the number
of daily flights and the number of passengers.  The Company began
carrying mail for the United States Postal Service during the
first quarter of 1995.  Mail revenue increased approximately
93.0% from approximately $484,000 in the year ended December 31,
1995 to approximately $933,000 in the year ended December 31,
1996.

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


<TABLE>
                                                        Year Ended December 31,

                                                1995                              1996


                                       Percent               Cents          Percent  Cents
                                           of                 Per            of      Per
                                       Revenues               ASM          Revenues  ASM

<CAPTION>

<S>                                       <C>                 <C>            <C>     <C>
Total operating revenues                  100.0%              6.43           100.0%  6.29
Operating Expenses:
     Flying operations                     23.8%              1.53            25.2%  1.59
     Aircraft fuel                         20.0               1.29            23.3   1.47
     Maintenance                           17.8               1.15            23.5   1.48
     Passenger service                      8.0                .52             9.1   .57
     Aircraft and traffic
          servicing                        27.5               1.77            22.2   1.39
     Promotion and sales                   25.6                .49             6.4   .40
     Depreciation and
          amortization                      3.0                .20             2.3   .15
Total operating expenses                  133.3               8.60           134.9   8.49
Total other income 
          (expense), net                    (.4)               .00            (2.7)  (.17)
Net loss                                  (33.7%)            (2.17)          (37.6%) (2.37)

</TABLE>


     Flying operations expenses include aircraft lease and
subservice expense, compensation of pilots, expenses related to
flight dispatch and flight operations administration, hull
insurance and all other expenses related directly to the
operation of the aircraft other than aircraft fuel and
maintenance expenses.  Flying operations expenses increased
approximately 100.9% from approximately $8.6 million
(approximately 23.8% of operating revenues) for the year ended
December 31, 1995 to approximately $17.3 million (approximately
25.2% of operating revenues) for the year ended December 31,
1996.  The number of departures increased approximately 38.7%
from 11,809 for the year ended December 31, 1995 to 16,383 for
the year ended December 31, 1996.  In addition, the Company
leased three additional jet aircraft in late 1995 and early 1996,
two of which were newer, more advanced Boeing 737-300 jet
aircraft which have a larger capacity and substantially higher
lease and insurance costs.  In connection with the acquisition of
the three planes, the Company hired 30 additional pilots and
incurred additional pilot training costs for existing and new
pilots.

     Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft. 
Aircraft fuel cost increased approximately 121.6% from
approximately $7.2 million (approximately 20.0% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.0 million (approximately 23.3% of operating revenues) for the
year ended December 31, 1996.  These fuel expenses represent an
increase in the fuel cost per ASM of 0.18 cents or 14.0% from 1.29 cents in
the year ended December 31, 1995 to 1.47 cents in the year ended
December 31, 1996 primarily due to an increase in fuel price. 
Specifically, the average price increased from $0.61 per gallon
in the year ended December 31, 1995 to $0.79 per gallon in the
year ended December 31, 1996.  The Company's average cost per
gallon during the fourth quarter 1996 of $0.84 declined to $0.79
during the first quarter 1997.  Approximately one fourth of the
fuel price increase was due to a 4.30 cents federal excise tax on
domestic fuel consumption that began October <PAGE> 1, 1995.
The Company will continue to seek to pass on
significant fuel cost increases to the Company's customers
through fare increases as permitted by the then current market
conditions, however, there can be no assurance that the Company
will be successful in passing on these increased costs.

     Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft.  Maintenance expenses increased approximately 149.6%
from approximately $6.4 million (approximately 17.8% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.1 million (23.5% of operating revenues) for the year ended
December 31, 1996.  This increase was primarily due to the
increase in the fleet size and block hours and cycles flown.  For
the year ended December 31, 1995, the average fleet size was
approximately 5.0 aircraft compared to an average fleet size for
the year ended December 31, 1996 of approximately 7.9 aircraft. 
In late 1995 and early 1996, the Company leased two Boeing 737-
300 jet aircraft, which generally are more costly with respect to
major scheduled maintenance.  In addition, the Company incurred
greater lease pool charges for the significant amount of Boeing
737-300 jet aircraft parts held in stock. During 1996, 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 three scheduled maintenance checks. 
The Company also charged approximately $300,000 to maintenance
expense in the fourth quarter for the early induction of three
aircraft for scheduled maintenance checks in November and
December 1996.  These scheduled maintenance checks were
originally scheduled during the first and second quarters of
1997.  This change in the Company's major maintenance schedule
corresponded to the major route restructuring completed by the
Company in December 1996.  The costs of routine aircraft and
engine maintenance are charged to maintenance expense as
incurred.  In addition, the Company accrues the cost of future
major scheduled maintenance on a monthly basis.  The Company
deposits funds with its aircraft lessors to cover a portion of
the cost of its future major scheduled maintenance.  Finally, the
Company significantly increased the capacity of its in-house
maintenance department during 1996.  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
Chicago-Midway and Minneapolis/Saint Paul airports. 

     Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses and passenger liability
insurance.  Passenger service expenses increased approximately
115.8% from approximately $2.9 million (approximately 8.0% of
operating revenues) for the year ended December 31, 1995 to
approximately $6.2 million (approximately 9.1% of operating
revenues) for the year ended December 31, 1996.  This increase
was primarily due to the 38.7% increase in the number of
departures and the 61.9% increase in number of passengers
carried.  Passenger service expenses per ASM increased
approximately 11.3% from approximately 0.51 cents for the year ended
December 31, 1995 to 0.57 cents for the year ended December 31, 1996. 
This increase per ASM is primarily due to passenger
reaccomodation charges necessitated by frequent schedule changes
and restructurings in 1996 and operational inefficiencies.

     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 52.7% from approximately $10.0 million
(approximately 27.5% of operating revenues) in the year ended
December 31, 1995 to approximately $15.2 million (approximately
22.2% of operating revenues) in the year ended December 31, 1996. 
This increase was primarily due to an increase in the number of
cities served and an increase in the number of departures. 
Departures increased approximately 38.7% from 11,809 during the
year ended December 31, 1995 to 16,383 during the year ended
December 31, 1996, and the average cost per departure increased
approximately 10.1% from approximately $843 to approximately $927
in the same periods.  The increase in cost per departure was
primarily attributable to the additional cost associated with
providing service to airports with higher operating costs. The
decrease in aircraft and traffic servicing as a percentage of
operating revenues was primarily attributable to station
personnel cost, landing fees and other traffic servicing costs
not rising in proportion to the increases in the number of
passengers and RPMs between 1995 and 1996.  The decrease of 0.38 cents
per ASM was primarily due to a 42% increase in average stage
length from 372 miles to 530 miles in 1995 and 1996,
respectively. 

     Promotion and sales expenses include the costs of the
reservations function, including all wages and benefits for
reservationists, rent, electricity, communication charges, credit
card fees, travel agency commissions, advertising 

<PAGE>

expenses and wages and benefits for the marketing department. 
Promotion and sales expenses increased approximately 69.9% from
approximately $9.3 million (approximately 25.6% of operating
revenues) in the year ended December 31, 1995 to approximately
$15.7 million (approximately 22.9% of operating revenues) in the
year ended December 31, 1996.  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 while maintaining stable
advertising programs in existing cities.  In addition, the
Company's reservation operations expanded in May 1996 with the
opening of a new reservation center in Lawrence, Kansas.  The
average promotion and sales cost per passenger increased from
$11.88 in the year ended December 31, 1995 to $12.47 in the year
ended December 31, 1996.  The Company anticipates increased
advertising expenses to establish and reinforce its hub operation
in Kansas City and to improve brand awareness in its key
destination cities in 1997.    
     
     General and administrative expenses include the wages and
benefits for the Company's executive and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting and other miscellaneous expenses. 
General and administrative expenses increased approximately 58.1%
from $2.8 million (approximately 7.6% of operating revenues) in
the year ended December 31, 1995 to $4.4 million (approximately
6.4% of operating revenues) in the year ended December 31, 1996. 
The decrease in general and administrative expenses as a
percentage of operating revenues and on a per ASM basis was
primarily attributable to increased productivity and economies of
scale.

     Depreciation and amortization expenses include depreciation
and amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred.  Depreciation and amortization expense
increased approximately 46.1% from approximately $1.1 million
(approximately 3.0% of operating revenues) in the year ended
December 31, 1995 to approximately $1.6 million (approximately
2.3% of operating revenues) in the year ended December 31, 1996. 
This increase was primarily a result of improvements to new and
existing aircraft and costs associated with modifications of the
Company's reservation system as well a full year of depreciation
and amortization charged in 1996 on 1995 additions.

     Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense. 
In connection with a guarantee of a bank line of credit executed
in July 1996, the Company issued certain stockholders (the
guarantors) warrants to purchase an aggregate of up to 656,250
shares of common stock at a weighted-average exercise price of
$6.65 per share.  Accordingly, the estimated fair value of the
warrants issued of $1,850,000 was recorded in other current
assets as deferred debt issuance costs and was amortized to
expense over the term of the line which expired January 1997. 
Interest income increased during the year ended December 31,
1996, as a result of greater average interest bearing cash
balances compared to 1995.  Interest expense decreased during the
year ended December 31, 1996, as a result of lower average
borrowings during the year as compared to 1995.  

YEARS ENDED DECEMBER 31, 1996 AND 1995 COMPARED TO PERIOD ENDED
DECEMBER 31, 1994

     The Company began flight operations on December 4, 1994,
operating a total of 28 days during the fourth quarter of 1994.
As a result, any comparison of the years 1996 and 1995 with the
1994 period would not be meaningful.  

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations and
met its capital expenditure requirements primarily with proceeds
from (i) the initial private sale of equity securities, which
raised an aggregate of approximately $6.0 million, (ii) the
initial public offering of its Common Stock, which raised
approximately $13.0 million in November 1995, and (iii) the
private sale of units of securities, each unit consisting of one
share of common stock and one redeemable common stock purchase
warrant, which raised aggregate net proceeds of approximately
$7.1 million in August and September 1996.  During December 1996
and the first quarter of 1997, the Company received interim
borrowings of $10.0 million from its principal stockholders.  The
Company utilized $3.375 million of these borrowings to repay an
outstanding line of credit as described below.  In April 1997,
the Company expects to complete a $10.0 million private placement
of units of securities, each unit consisting of one share of
common stock and two redeemable <PAGE> common stock purchase warrants.
The Company anticipates the net proceeds from this private placement
will be utilized to pay down all outstanding interim borrowings with
the principal stockholders of the Company.  In addition, the Company has
utilized and continues to utilize current liabilities as an
additional source of cash by delaying payments to certain of its
creditors.  Most of the Company's suppliers currently provide
goods, services and operating equipment on open credit terms.  If
such terms were modified to require immediate cash payments, the
Company's cash position and possibly its ability to continue to
operate would be materially and adversely affected.

     In August 1996, the Company established a $5.0 million six-
month line of credit.  The line of credit was guaranteed by
certain principal stockholders of the Company.  The Company used
the proceeds of the line of credit primarily to reduce past due
accounts payable balances, provide for scheduled engine
maintenance repairs and increase its restricted cash account
balance held by its credit card processor.  Borrowings accrued
interest at the prime rate as published in The Wall Street
Journal.  On January 30, 1997, the Company repaid the remaining
$3.375 million of the $5.0 million credit facility with interim
borrowings as described above from principal stockholders of the
Company who guaranteed the credit facility.  On January 30, 1997,
the Company replaced $1.625 million of the $5.0 million credit
facility with a $2.275 million six-month line of credit,
guaranteed by certain of the Company's stockholders.  Upon
execution of the line of credit, the Company issued 910,000
warrants at an exercise price of $1.00 per share that vested
immediately.  The remaining 1,365,000 warrants vest quarterly
according to the amount of borrowings against the line, as
defined in the agreement. Each warrant expires 10 years from the
date of issuance. There can be no assurance that a replacement
line of credit will be available on acceptable terms, if at all
prior to its maturity.  In the event that the Company is unable
to replace the line of credit prior to July 30, 1997, the Company
would be required to utilize available cash balances which would
materially adversely affect the Company's then current cash
position.

     On January 17, 1997, one of the Company's principal
stockholders agreed to established a two year $4.0 million letter
of credit on behalf of the Company in favor of the Company's
credit card processor in order to reduce required restricted cash
balances with the Company's credit card processor.  Upon
execution of the letter of credit, the Company issued 1,600,000
warrants at an exercise price of $1.00 per share that vest
immediately.   The remaining 2,400,000 warrants vest quarterly
according to the amount of exposure under such letter of credit,
as defined in the agreement.  Each warrant expires 10 years from
the date of issuance.  The Company anticipates it will need to
place additional restricted cash deposits of approximately $2.5
million during the next six months with the Company's credit card
processor to secure its increased exposure due to increased
advance ticket sales.  The Company is in discussions with its
principal stockholder with respect to increasing the letter of
credit in order to secure its increased exposure.  In the event
the letter of credit in not increased the Company will need to
utilize cash from operations to secure its credit card processor. 
There can be no assurance that the Company's principal
stockholders will increase the letter of credit or that the
Company's use of cash from operations to secure the credit card
processor will not have a material adverse effect on the
Company's liquidity.
 
     During 1996, and through March 10, 1997, the Company has not
generated sufficient passenger revenue to provide for its
operational cash needs.  As a result, in December 1996, the
Company completed a significant route restructuring including the
introduction of non-stop service to six new cities as well as
one-stop service to two additional cities.  This route
restructuring refocused the Company's strategy by creating a
Kansas City hub.  The Company anticipates generating sufficient
cash flow from operations through the third quarter of 1997.  The
Company's ability to raise additional capital through equity or
debt financings that may be required for operations or expansion
during 1997 will likely be dependent upon the Company's ability
to operate at profitable levels during the second and third
quarters of 1997.  There can be no assurance that management's
restructuring efforts or its ability to provide for the necessary
cash requirements of the Company will be successful.  Even if the
Company is successful in restructuring operations and completing
the anticipated $10.0 million private placement, there can be no
assurance that management can provide for the Company's capital
requirements that may be necessary during the remainder of 1997.  

     The Company estimates that  major scheduled maintenance of
its existing aircraft fleet through December 1997 will cost
approximately $4.3 million of which $2.1 million will be funded
from existing supplemental rent payments recoverable from
aircraft lessors.  The Company expects to expend approximately
$2.8 million on various capital expenditures, the majority of
which relate to improvements to existing aircraft, consolidating
the Company's Kansas City <PAGE> operations in a new terminal and
leasing 737-200 jet aircraft to replace the 737-300 jet aircraft
scheduled to be returned in May and July 1997. 

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Reference is made to the financial statements and schedules
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 29,
1997, 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 29,
1997, 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 29,
1997, 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 29,
1997, 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.

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 29,
1997, 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 SCHEDULES, AND
REPORTS ON FORM 8-K

     (a)  Financial Statements.

          (1)  Audited Financial Statements:

<PAGE>

          Independent Auditors' Report . . . . . . . . . . .             27

          Balance Sheets -
          December 31, 1996 and December 31, 1995. . . . . .             28

          Statements of Operations for the years 
          ended December 31, 1996 and 1995, and 
          for the period from April 25, 1994 (date 
          of inception) to December 31,1994. . . . . . . . .             30

          Statements of Stockholders' Equity (Deficit) 
          for the years ended December 31, 1996 and 1995, 
          and for the period from April 25, 1994 (date of 
          inception) to December 31, 1994. . . . . . . . . .             31

          Statements of Cash Flows for the years ended 
          December 31, 1996  and 1995, and for the period 
          from April 25, 1994 (date of inception) to 
          December 31, 1994. . . . . . . . . . . . . . . . .             32

          Notes to Financial Statements  . . . . . . . . . .             34

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

          Schedule II - Valuation and Qualifying Accounts . .            50

          All other schedules 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.
          
          On October 22, 1996, the Company filed a report on Form
          8-K under Item 5 - Other Events regarding a press
          release issued by the Company on October 14, 1996
          announcing the resignation of Russell W. Meyer, Jr.
          from the Company's Board of Directors.  This item was
          reported under Item 5 of Form 8-K rather than Item 6
          because Mr. Meyer's resignation was not the result of a
          disagreement with the Registrant on any matter relating
          to the Registrant's operations, policies or practices.

          On November 4, 1996, the Company filed a report on Form
          8-K under Item 5-Other Events regarding a press release
          issued by the Company on November 1, 1996 announcing
          that Robert         J. McAdoo, Chief Executive Officer
          and President of the Company and Chairman of the Board
          resigned effective November 1, 1996.  Mr. McAdoo will
          continue as a director of the Company.  The Board of
          Directors has named John P. Tague as Chief Executive
          Officer and President and Chairman of the Board of
          Directors.  Mr. Tague currently is Chief Executive
          Officer and President and Chairman of the Board of Air
          South Airlines, Inc.  Mr. Tague will continue in his
          positions as Chief Executive Officer and President and
          Chairman of the Board of Directors of  Air South.

          On December 11, 1996, the Company filed a report on
          Form 8-K under Item 5-Other Events  regarding a press
          release issued by the Company on December 9, 1996
          announcing that the Company was informed by the Nasdaq
          Stock Market that it did not meet the minimum net worth
          requirements for continued listing on the Nasdaq
          SmallCap Market, and that effective with the close of
          business on Friday December 13, 1996 the Company's
          common stock will no longer be eligible for continued
          listing on the Nasdaq SmallCap Market.  When the
          Company's common stock is delisted, trading of 

<PAGE>

          the Company's common stock will be conducted on the OTC
          Bulletin Board or in the over-the-counter market in
          what is commonly referred to as the "pink sheets."
          
          On February 6, 1997, the Company filed a report on Form
          8-K under Item 5- Other Events regarding a press
          release issued by the Company on February 5, 1997
          announcing the resignation of Kenneth J. Wagnon and
          Sharol Raspberry from the Company's Board of Directors. 
          This item was reported under Item 5 of Form 8-K rather
          than Item 6 because Mr. Wagnon and Ms. Raspberry's
          resignations were not the result of a disagreement with
          the Registrant on any matter relating to the
          Registrant's operations, policies or practices.

          On March 6, 1997, the Company filed a report on Form 8-K
          under Item 5 - Other Events regarding the Special
          Meeting of Stockholders of the Company held on March 3,
          1997, where a majority of the holders of common stock
          approved an amendment to the Company's Restated
          Certificate of Incorporation to increase the number of
          authorized shares of the Company's capital stock from
          16,000,000 to 51,000,000 shares and to increase the
          number of  authorized shares of the Company's common
          stock, par value $.001 per share, from 15,000,000 to
          50,000,000 shares.

     (c)  Exhibits.

          3.1    Restated Certificate of Incorporation, as
                 amended of Registrant.

          3.2    By laws of Registrant, as amended to date
                 (filed as Exhibit 3.2 with 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).

<PAGE>

          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 US 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.

          10.11  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).

          10.12  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).

          10.13  Lease, dated September 27, 1994, between the
                 Gerson Company and Registrant, as amended to
                 date (filed as Exhibit 10.13 to the
                 Registrant's Registration Statement No.
                 33-96884 and incorporated herein by reference).

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

          10.15  Form of Second Amended and Restated Investors'
                 Rights Amendment (filed as Exhibit 10.16 to the
                 Registrant's Registration Statement No. 33-96884
                 and incorporated herein by reference).

          10.16  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).
                 
          10.17  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).

          10.18  Aircraft Sublease Agreement B, dated December
                 31, 1995, between the Registrant and Aloha
                 Airlines, Inc. (filed as Exhibit 10.28 to the
                 Registrant's Form 10-K for the year ended
                 December 31, 1995).

          10.19  Aircraft Sublease Agreement D, dated January
                 18, 1996, between the Registrant and Aloha
                 Airlines, Inc. (filed as Exhibit 10.29 to the
                 Registrant's Form 10-K for the year ended
                 December 31, 1995).

          10.20  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).

<PAGE>
     
          10.21  Reimbursement Agreement, dated as of December
                 31, 1996, by and among Registrant and Hambrecht
                 & Quist California, a wholly owned subsidiary
                 of Hambrecht & Quist Group.

          10.22  Security Agreement, dated as of December 31,
                 1996, by Registrant in favor of Hambrecht &
                 Quist California.  

          10.23  Amended and Restated Reimbursement Loan Note in
                 the amount of $4,000,000.

          10.24  Warrant for the purchase of shares of Common
                 Stock issued to Hambrecht & Quist California.

          10.25  Merchant Agreement, dated as of February 27,
                 1997, by and between Registrant and Michigan
                 National Bank. 

          10.26  Amendment to Merchant Agreement, dated as of
                 February 6, 1997, by and between Registrant.
          
          10.27  Agreement, dated as of January 30, 1997, by and
                 between Registrant and Commerce Bank, N.A.
                 (Wichita, KS) and certain stockholders of the
                 Registrant.

          10.28  Line of Credit Note in the amount of
                 $2,275,000.

          10.29  Warrant Purchase Agreement, dated as of January
                 30, 1997.

          10.30  Form of Warrant to purchase shares of Common
                 Stock in connection with the Commerce Bank Line
                 of Credit.

          11.1   Statement regarding computation of net income
                 (loss) per common share.

          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 Schedules.

     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, 1996 and 1995,
and the related statements of operations, stockholders' equity
(deficit), and cash flows for the years ended December 31, 1996
and 1995 and for the period from April 25, 1994 (date of
inception) to December 31, 1994.  Our audits also included the
financial statement schedule listed on the Index at Item 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, 1996 and 1995, and
the results of its operations and its cash flows for the years
ended December 31, 1996 and 1995 and for the period from April
25, 1994 (date of inception) to December 31, 1994, 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.

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed
in Note 2 to the financial statements, the Company had a net loss
of $25,808,070 and net cash flows used in operating activities
amounted to $14,559,507 for the year ended December 31, 1996 and,
at December 31, 1996, current liabilities exceed current assets
by $21,296,881.  As a result, the Company has been dependent upon
financing from its principal stockholders, which during the
period from January 1, 1996 through March 10, 1997, included
$7,115,508 in equity and $11,400,000 in short-term loans.  There
is no assurance as to the availability of further financing. 
These factors raise substantial doubt about the Company's ability
to continue as a going concern.  Management's plans in regard to
this matter are described in Note 2.  The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.


Kansas City, Missouri                             ERNST & YOUNG
LLP
March 10, 1997


<PAGE>


                     Vanguard Airlines, Inc.
Balance Sheets

                                                                           
                                                             December 31
                                                        1996            1995
ASSETS
Current assets:
 Cash and cash equivalents                             $402,083     $3,491,640
 Restricted cash                                      1,822,998      -
 Accounts receivable, less allowance 
   for doubtful accounts of $230,000 
   in 1996 ($197,000 in 1995)                         3,454,418      1,271,245
 Inventory                                              673,338        338,119
 Prepaid expenses and other 
   current assets                                     3,356,374      2,215,579
                                                               
Total current assets                                  9,709,211      7,316,583


Property and equipment, at cost:                                     
 Aircraft improvements and 
   leasehold costs                                    3,731,046      3,409,633
 Reservation system and 
   communication equipment                            1,516,440        884,939
 Other property and equipment                         2,404,121      1,420,610
                                                               
                                                      7,651,607      5,715,182
 Less accumulated depreciation 
   and amortization                                 (2,601,949)      (1,164,364)
                                                               
                                                      5,049,658      4,550,818


Other assets:                                                        
 Supplemental maintenance deposits                    2,233,988      2,216,571
 Leased aircraft deposits                             1,506,000      1,506,000
 Fuel and security deposits                           1,093,185        820,213
 Other                                                  726,205         15,513
                                                               
                                                      5,559,378      4,558,297
                                                               
Total assets                                        $20,318,247    $16,425,698



<PAGE>



                                                          December 31
                                                  1996             1995
Liabilities and stockholders' 
 equity (deficit)                                                        
Current liabilities:                                                     
 Line of credit                                $5,000,000              $-
 Notes payable to related parties               2,500,000               -
 Accounts payable                               8,404,196       3,400,288
 Accrued expenses                               3,652,162       2,303,377
 Accrued maintenance                            4,684,550       3,422,513
 Air traffic liability                          6,609,609       2,260,721
 Current portion of capital 
   lease obligations                              155,575         101,989

Total current liabilities                      31,006,092      11,488,888
                                                         
Accrued maintenance, less 
  current portion                               2,547,088       1,306,044
                                                         
Capital lease obligations, 
  less current portion                              3,084          86,133
                                                         
Commitments and contingencies                            

Stockholders' equity (deficit):
 Preferred stock, $.001 par value:
  Authorized shares - 1,000,000 in 
  1996 and 1995 None issued and 
  outstanding                                           -               -
 Common stock, $.001 par value:
  Authorized shares - 15,000,000 
  in 1996 and 1995 Issued and 
  outstanding shares - 9,982,452 
  in 1996 (8,524,376 in 1995)                       9,982           8,524
 Additional paid-in capital                    28,283,996      19,301,937
 Accumulated deficit                         (41,446,057)    (15,637,987)

                                             (13,152,079)       3,672,474
  Deferred stock compensation                       (85,938)   (127,841)

Total stockholders' equity 
  (deficit)                                     (13,238,017)  3,544,633

Total liabilities and 
  stockholders' equity (deficit)                 $20,318,247 $16,425,698


See accompanying notes.


<PAGE> 



                     Vanguard Airlines, Inc.
                     Statements of Operations


<TABLE>

                                                                         Period from
                                                                         April 25, 
                                        Year Ended December 31,            1994 to  
                                                                         December 31,
                                           1996          1995             1994  

<CAPTION>
<S>                                    <C>          <C>                     <C>
Operating revenues:
 Passenger revenue                     $64,977,645  $33,980,209             $741,898
 Other                                   3,611,456    2,178,809               19,087

Total operating revenues                68,589,101   36,159,018              760,985

Operating expenses:                                                                 
 Flying operations                      17,306,500    8,615,286            1,215,454
 Aircraft fuel                          16,005,041    7,223,040              287,455
 Maintenance                            16,074,921    6,440,702              383,965
 Passenger service                       6,245,678    2,894,113              275,656
 Aircraft and traffic 
   servicing                            15,193,426    9,950,014              332,469
 Promotion and sales                    15,722,822    9,253,974              545,404
 General and administrative              4,371,150    2,764,313            1,153,379
 Depreciation and amortization           1,583,879    1,083,871               80,493

Total operating expenses                92,503,417   48,225,313            4,274,275
                                                               
Operating loss                        (23,914,316) (12,066,295)          (3,513,290)

Other income (expense):
 Deferred debt issuance cost
  amortization                           (1,833,335)            -                    -
 Interest income                           135,309       88,368               73,189
 Interest expense                        (195,728)    (217,603)              (2,356)

Total other income 
  (expense), net                       (1,893,754)    (129,235)               70,833

Net loss                             $(25,808,070)$(12,195,530)         $(3,442,457)

                                                               
Net loss per share                         $(2.85)      $(1.65)               $(.70)

Weighted average common and
 common equivalent shares 
 outstanding                             9,056,888    7,395,921            4,907,377

</TABLE>


See accompanying notes.


<PAGE> 

<TABLE>


                            Statements of Stockholders' Equity
                                  Vanguard Airlines, Inc.
                       Statements of Stockholders' Equity (Deficit)


                                                        Convertible Preferred Stock                 Common Stock
                                                 Series A                       Series B
                                        Shares             Amount         Shares    Amount       Shares             Amount
<CAPTION>
<S>                                     <C>               <C>             <C>       <C>          <C>                <C>
Balance at April 25, 1994 
 (date of inception)                      --              $     --          --  $     --             --             $    --
 Issuance of common 
     stock for cash                       --                    --          --        --        433,333                 433
 Issuance of preferred 
     stock for cash                2,000,000                 2,000          --        --             --                  --
 Issuance of preferred 
     stock for cash                       --                    --   3,641,043     3,641             --                  --
 Net loss                                 --                    --          --        --             --                  --
Balance at 
 December 31, 1994                 2,000,000                  2,000  3,641,043      3,641       433,333                 433
 Issuance of warrants                     --                    --          --        --             --                  --
 Issuance of compensatory 
     options                              --                    --          --        --             --                  --
 Amortization of 
     deferred stock 
     compensation                         --                    --          --        --             --                  --
 Conversion of preferred 
     stock to common 
     stock                        (2,000,000)               (2,000)  (3,641,043)    (3,641)     5,641,043               5,641
 Issuance of common 
     stock in 
     public offering                      --                    --          --        --      2,400,000               2,400
 Exercise of stock 
     options                              --                    --          --        --         50,000                  50
 Net loss                                 --                    --          --        --            --                   --
Balance at 
 December 31, 1995                        --                    --          --        --      8,524,376               8,524
 Issuance of warrants                     --                    --          --        --             --                  --
 Amortization of 
     deferred stock 
     compensation                         --                    --          --        --             --                  --
 Issuance of common stock 
     and warrants in  
     private placement                    --                    --          --        --      1,319,774               1,320
 Exercise of stock 
     option                               --                    --          --        --        138,302                 138
 Net loss                                 --                    --          --        --             --                  --
Balance at 
 December 31, 1996                        --                  $ --          --       $--      9,982,452              $9,982

</TABLE>


<TABLE>
                                                                                                                              Total
                                     Additional                         Deferred       Stockholder's
                                       Paid            Accumulated       Stock            Equity
                                      Capital             Deficit     Compensation      (Deficit)


<CAPTION>
<S>                                   <C>             <C>            <C>               <C>
Balance at April 25, 1994
 (date of inception)                     $     --            $    --        $ --           $ ---
 Issuance of common
   stock for cash                          12,900                 --          --          13,333
 Issuance of preferred
   stock for cash                       1,998,000                 --          --       2,000,000
 Issuance of preferred
   stock for cash                       4,001,506                 --          --       4,005,147
 Net loss                                      --        (3,442,457)          --     (3,442,457)
Balance at
 December 31, 1994                      6,012,406        (3,442,457)          --       2,576,023
 Issuance of warants                       71,000                 --          --          71,000
 Issuance of compensatory
   options                                250,000                 --   (250,000)              --
 Amortization of
   deferred stock
   compensation                                --                 --     122,159         122,159
 Conversion of preferred
   stock to common stock                       --                 --          --      
 Issuance of common
   stock in public offering            12,953,581                 --          --      12,955,981
 Exercise of stock options                 14,950                 --          --          15,000
 Net loss                                      --       (12,195,530)          --
 Balance at 
   December 31, 1995                   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
   and warrants in a 
   private placement                    7,114,188                 --          --       7,115,508
 Exercise of stock
   options                                 17,871                 --          --          18,009
 Net loss                                      --       (25,808,070)          --    (25,808,070)
 Balance at
   December 31, 1996                  $28,283,996      $(41,446,057)   $(85,938)   $(13,238,017)
</TABLE>

See accompanying notes.


<PAGE> 

                      Vanguard Airlines, Inc.
                     Statements of Cash Flows

                                                             Period from
                                                               April 25,
                                   Year Ended December 31,     1994 to  
                                                             December 31,
                                    1996            1995         1994

Operating activities
Net loss                       $(25,808,070)  $(12,195,530)  $(3,442,457)
Adjustments to 
 reconcile net loss 
 to net cash used in 
 operating activities:                                                   
  Depreciation and 
  amortization                     1,583,879      1,083,871        80,493
  Loss on sale and 
  disposal of property
     and equipment                         117,954          -          -
   Deferred debt issuance 
     cost amortization                   1,833,335     71,000          -
   Compensation related to 
     stock options                          41,903    122,159          -
   Provision for 
     uncollectible accounts                 32,719    197,000          -
   Changes in operating 
    assets and liabilities:                                             
     Restricted cash                   (1,822,998)          -          -
     Accounts receivable               (2,215,892)(1,128,214)  (340,031)
     Inventory                           (335,219)  (331,110)    (7,009)
     Prepaid expenses and 
      other current assets             (1,124,130)(1,493,600)  (721,979)
     Accounts payable                    5,937,339  3,395,860      4,428
     Accrued expenses and 
      accrued maintenance                3,851,866  3,777,801  1,601,739
     Air traffic liability               4,348,888  1,482,684    607,192
     Deposits and other                (1,001,081)(3,151,578)(1,406,719)

Net cash used in operating 
  activities                          (14,559,507)(8,169,657)(3,624,343)

Investing activities                                                    
Purchase of property and 
  equipment                            (2,958,406)(2,341,478)(1,248,359)
Net cash used in investing 
  activities                           (2,958,406)(2,341,478)(1,248,359)

Financing activities                                                    
Proceeds from line of 
  credit                                 9,700,000  2,000,000          -
Payments on line of 
  credit                               (4,700,000)(2,000,000)          -
Proceeds from issuance 
  of notes payable
  to related parties                     3,900,000          -          -
Principal payments on 
  notes payable
  to related parties                   (1,400,000)          -          -
Proceeds from sale of 
  common stock and
  exercise of options, 
  net of offering costs                  7,133,517 12,970,981     13,333
Proceeds from sale of 
  preferred stock                                -          -  6,005,147
Principal payments on 
  notes payable and
  capital lease obligations              (205,161)   (95,015)   (18,969)

Net cash provided by 
  financing activities                  14,428,356 12,875,966  5,999,511


<PAGE> 


                     Vanguard Airlines, Inc.
               Statements of Cash Flows (continued)


                                                              Period from
                                                               April 25,
                                   Year Ended December 31,      1994 to 
                                                             December 31,
                                    1996            1995         1994

Net increase (decrease) 
 in cash and cash 
 equivalents                     $(3,089,557)     $2,364,831   $1,126,809
Cash and cash 
 equivalents, beginning
 of period                          3,491,640      1,126,809            -

Cash and cash 
 equivalents, 
 end of period                       $402,083     $3,491,640   $1,126,809

SUPPLEMENTAL DISCLOSURE 
 OF CASH FLOW INFORMATION
Cash paid during the 
 period for interest                 $159,541       $146,603       $2,356

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital leases entered 
 into for property
 and equipment                       $134,031        $84,267     $223,887

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             $-           $-

Deferred debt issuance 
 costs recorded in
 conjunction with 
 warrants issued                   $1,850,000        $71,000           $-

Conversion of preferred 
 stock to common stock                     $-     $6,005,147           $-

Aircraft leasehold costs 
 associated with
 accrued maintenance                       $-       $620,052   $1,203,187

Deferred compensation 
 costs associated with
 compensatory stock options                $-       $250,000           $-

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, western and
southeastern regions of the United States, and commenced flight
operations on December 4, 1994.  During the period from April 25,
1994 (date of inception) to December 3, 1994, the Company was in
the development stage and was engaged in raising capital and
establishing its business and planned principal operations.

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.  The Company's business is also seasonal, which can
affect the Company's results of operations from quarter to
quarter.

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.

1.  SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)

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 processor.  

<PAGE> 


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.

CONCENTRATION OF CREDIT RISK

Although the Company does not expect losses associated with
supplemental payments recoverable from aircraft lessors, which
are described in Notes 3 and 10, recoverability of these payments
is dependent upon the continued financial stability of its four
lessors.

INVENTORIES

Inventories of flight equipment, expendable parts, materials,
tools, food, beverages and promotional items are carried at cost. 
These items are charged to expense when issued for use.

The Company has entered into an agreement with a supplier for
consigned parts and supplies for its six Boeing 737-200 and two
Boeing 737-300  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, 1996, the Company held consigned parts and
supplies of approximately $3,943,000, which are not included in
the Company's balance sheet.

PROPERTY AND EQUIPMENT

Depreciation and amortization of aircraft improvements and
leasehold costs are provided by the straight-line method over
their estimated useful lives or anticipated lease terms of the
related aircraft, whichever is shorter, ranging from 17 months to
five years.  Reservation system and communication equipment and
other property and equipment are depreciated on a straight-line 


1.  SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)

basis over the shorter of their estimated useful lives or
remaining lease terms ranging from five to seven years. 
Amortization of capital leases is included in depreciation and
amortization expense.

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 times the
estimated long-term cost per flight hour or cycle.  The actual
cost of engine maintenance is charged to the accrual. 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 $4,316,000,
$2,372,000 and $167,000 for the years ended December 31, 1996 and
1995 and for the period ended December 31, 1994, respectively.

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 multi-tier 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.

<PAGE> 


PREOPERATING COSTS

All preoperating costs incurred during the development stage were
charged to expense as incurred.

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 5, 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

1.  SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)

options.  Under APB No. 25, compensation expense is recorded over
the related vesting period when the exercise price is less than
the estimated fair value of the stock at the date of grant.  For
the years ended December 31, 1996 and 1995, the Company recorded
compensation expense of approximately $42,000 and $122,000,
respectively, in general and administrative expenses.  The
Company recorded no compensation expense related to options in
1994.

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 5. 

LOSS PER SHARE

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

In 1995 and 1994, net loss per share is based on the weighted
average number of common and preferred shares outstanding and
dilutive common stock equivalents during the periods.  Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock and preferred stock issued for consideration
below the offering price of $6.00 per share (the Offering Price)
and stock options and preferred stock warrants issued with
exercise prices below the Offering Price during the 12-month
period preceding the initial filing of the Registration Statement
have been included in the calculation of common shares, using the
Treasury stock method, as if they were outstanding for all
periods presented.

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 reported in the balance
sheet approximates fair value. As a result of the uncertainties
described in Note 2, management is unable to estimate the fair
value of the notes payable to related parties at 


1.  SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)

December 31, 1996.  The fair values of warrants issued in 1996
and 1997, as described in Notes 7 and 12, were estimated using a
discounted Black-Scholes pricing model.

<PAGE> 


FOURTH QUARTER ADJUSTMENT

During the quarter ended December 31, 1996, the Company adjusted
its estimate of the fair value of warrants issued in conjunction
with obtaining a bank line of credit in July 1996 (see Note 7). 
The effect was to increase net loss for the fourth quarter of the
year ended December 31, 1996 by approximately $583,000, which
relates to the third quarter period.

RECLASSIFICATIONS

Certain amounts in the 1994 and 1995 financial statements have
been reclassified to conform to the 1996 presentation.

2.  BASIS OF PRESENTATION

The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern.  The Company
had a net loss of $25,808,070 and net cash flows used in
operations amount to $14,559,507 for the year ended December 31,
1996 and, at December 31, 1996, current liabilities exceed
current assets by $21,296,881.  As a result, the Company has been
dependent upon financing from its principal stockholders, which
during the period from January 1, 1996 through March 10, 1997,
included $7,115,508 in equity and $11,400,000 in short-term
loans.  There is no assurance as to the availability of further
financing.  These factors raise substantial doubt about the
Company's ability to continue as a going concern.  The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

Management's plans include raising additional capital and
securing additional bank financing to fund ongoing operations and
the possible expansion of operations.  Management's plans also
include actions designed to achieve long-term profitability,
including the reassessment of existing markets, possible
expansion into new markets, pricing strategies to maximize
operating income and cost controls.  During 1996 and through
March 10, 1997, the Company did not generate sufficient passenger
revenue to provide for its operational cash needs.  As a result,
in December 1996, the Company completed a significant route
restructuring, including the introduction of service to six new
cities as well as nonstop service to two additional cities.  This
route restructuring refocused the Company's strategy by creating
a Kansas City hub.   As discussed in  Notes 7 and 8, the Company
has received interim cash advances from its majority stockholder
in the form of demand notes payable in connection with the
Company's anticipated placement of a $10.0 million private
offering of equity securities in April 1997.  In  January 1997,
the Company 

2.  BASIS OF PRESENTATION (...CONTINUED)

also completed a $2,275,000, six-month credit facility with a
bank.  Management believes these sources of cash will provide for
its cash requirements through the first quarter of 1997.  The
Company anticipates generating sufficient cash flow from
operations through the third quarter of 1997.   The Company's
ability to raise additional cash through equity or debt
financings that may be required for expansion during 1997 or
operations in the fourth quarter, or earlier, if sufficient cash
flows are not generated in the second and third quarters, will be
greatly dependent on the Company's ability to operate at
profitable levels during the second and third quarters of 1997,
as to which there can be no assurance.

There can be no assurance that management's restructuring efforts
or its efforts to provide for the necessary cash requirements of
the Company will be successful.  Even if the Company is
successful in restructuring operations and completing the
anticipated $10 million private placement, there can be no
assurance that management can provide for the Company's cash
requirements which may be necessary during the remainder of 1997.

Inability to obtain necessary financing would have a material
adverse effect on the Company, including possibly requiring the
Company to cease operations.

3.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are as follows as of
December 31:

<PAGE> 

                                                       1996         1995

     Supplemental payments recoverable
       from aircraft lessors (Note 10)             $2,489,270    $713,467
     Prepaid insurance                                255,560     811,005
     Other prepaid expenses                           611,544     691,107

                                                   $3,356,374  $2,215,579


4.  STOCKHOLDERS' EQUITY

In September 1996, the Company completed a private sale of units
of securities, each 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 after the sale closing, one share of common
stock at an exercise price of $6.64.  The redeemable warrant
exercise price is subject to adjustment under certain
circumstances as defined in the warrant agreement. The Company
has the right to redeem the warrants at a redemption 

4.  STOCKHOLDERS' EQUITY (...CONTINUED)

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. Proceeds from
the sale were utilized for major scheduled maintenance costs,
capital expenditures, working capital requirements and the
repayment of notes payable to related parties.

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 expenses, of approximately
$12,956,000.  The net proceeds of this offering were used
principally for working capital needs, including reduction of
indebtedness, reduction of accounts payable, and expenditures
related to the maintenance and expansion of the Company's
aircraft fleet.  In connection with the 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.

In May 1994, the Company authorized 5,000,000 shares of preferred
stock and subsequently issued and sold 2,000,000 shares of
convertible Series A preferred stock (Series A preferred stock). 
In August 1994, the Company amended and restated its Certificate
of Incorporation to increase the number of authorized shares of
preferred stock from 5,000,000 to 6,000,000, of which 4,000,000
were designated convertible Series B preferred stock (Series B
preferred stock).  The Company then sold 3,641,043 shares of
Series B preferred stock.  In March 1995, the Company filed a
Certificate of Amendment to increase the number of authorized
shares of preferred stock from 6,000,000 to 7,000,000, of which
5,000,000 were designated as Series B preferred stock.  The
Series A preferred stock and Series B preferred stock were
entitled to the same privileges, the only difference being the
issuance price of $1.00 and $1.10, respectively.  Upon the
closing of the Company's initial public offering described above,
the Series A preferred stock and Series B preferred stock were
automatically converted into an equal number of shares of common
stock. At the time of the conversion, there were no declared but
unpaid dividends. In addition, pursuant to the Company's Restated
Certificate of Incorporation, the number of shares of the
Company's authorized preferred stock were reduced from 7,000,000
to 1,000,000 shares. 

In March 1997, the Company held a special meeting of stockholders
and 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 15,000,000 to 50,000,000 shares.

As of March 10, 1997, the Company has reserved shares of common
stock for issuances related to the exercise of outstanding or
available stock options and outstanding stock purchase warrants
and for shares available under the employee stock purchase plan
as follows:

<PAGE> 

4.  STOCKHOLDERS' EQUITY (...CONTINUED)

                                                                Number
                                                             of Shares
                                                              Reserved

      Stock options (Note 5)                                 3,759,198
      Stock purchase warrants (Notes 4, 7 and 12)            9,025,115
      Employee stock purchase plan (Note 6)                  1,000,000

5.  STOCK OPTIONS

The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the Stock Plan) whereby options for up to 1,700,000
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.  A summary of stock option
activity related to the Stock Plan is as follows:

<TABLE>


                                              1996                               1995                          1994
                                         Weighted-                          Weighted-                      Weighted
                                           Average                            Average                       Average
                                          Exercise                           Exercise                      Exercise
                           Options           Price         Options              Price        Options          Price

<CAPTION>
<S>                     <C>              <C>             <C>              <C>             <C>              <C>
Outstanding at 
 beginning
 of year                   587,000           $0.17         489,500              $0.11              -             $-
Granted                    133,500            8.66         147,500               0.35        589,500           0.11
Exercised                (138,302)            0.13        (50,000)               0.30      (100,000)           0.10
Forfeited                (108,971)            0.93               -                  -              -              -

Outstanding at 
 end of year               473,227            2.40         587,000               0.17        489,500           0.11

Exercisable at 
 end of year               202,821            2.55         152,719               0.12         17,219           0.11
Weighted-average 
 fair value of 
 options granted
 during the year                              4.08                               0.84                             -

</TABLE>


Exercise prices for options outstanding under the Stock Plan as
of December 31, 1996 for options granted prior to November 3,
1995, the date the Company completed an initial public offering,
range from $.11 to $.30.  Exercise prices for options granted
subsequent to November 3, 1995, range from $7.00 to $9.25.  The
weighted-average remaining contractual life at December 31, 1996
of all outstanding options under the Stock Plan is 8.23 years.

The fair values of options granted after November 3, 1995, were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 

5.  STOCK OPTIONS (...CONTINUED)

1996, including a risk free interest rate of 6.32%, a volatility
factor of the expected market price of the Company's common stock
of .61, and a weighted-average expected life of the option of
3.21 years.

The fair values of options granted prior to November 3, 1995,
were estimated using the Minimum Value option pricing model with
the following weighted-average assumptions for 1995, including a
risk free interest rate of 6.19% and a weighted-average expected
life of four <PAGE> years.  Under the Minimum Value model, the
volatility factor is excluded. There were no options granted
during the period from November 3, 1995 to December 31, 1995.
Under both the Black-Scholes and the Minimum Value models, the
Company assumed a 0% dividend yield over the expected life of the
options.

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

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:

                                                 1996            1995    

  Pro forma net loss                        $(25,948,409)   $(12,089,631)
  
  Pro forma net loss per share                    $(2.87)         $(1.63)

Subsequent to December 31, 1996, in connection with an employment
agreement entered into with the president of the Company on
November 1, 1996, the president will receive options to purchase
up to 200,000 shares of common stock.  Each option will have an exercise
price of $1.81 and an estimated fair value of $.67.  The options
will vest over a two-year period from the date employment commenced
and have a contractual term of 10 years.




6.  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 issuances to participating eligible
employees, and 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 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.  During
1996, the Company expensed approximately $19,000 for purchases of
common stock under the Purchase Plan.

7.  LINES OF CREDIT

On July 30, 1996, the Company entered into a new bank line of
credit (the Agreement) that permitted borrowings up to $4,000,000
with interest payable monthly at the prime rate published in The
Wall Street Journal.  On August 12, 1996, the amount available
under the Agreement was increased to $5,000,000.  As of December
31, 1996, the Company had borrowed $5,000,000 under the
Agreement. The Agreement matured on January 30, 1997 and was
subsequently paid off.  The Agreement was guaranteed by certain
stockholders of the Company (the Guarantors).  In connection with
the execution of the Agreement and related guarantee, the Company
issued the Guarantors warrants to purchase an aggregate of up to
656,250 shares of common stock at a weighted-average exercise
price of $6.65 per share.  The warrants vested immediately and
expire on July 30, 2006.  Accordingly, effective July 31, 1996,
the estimated fair value of the warrants issued <PAGE> under the
Agreement of $1,850,000 was recorded in other current assets as
deferred debt issuance costs and is being charged to expense over
the term of the Agreement.

In January 1997,  the Company entered into another  bank line of
credit agreement (the New Agreement) that permits borrowings up
to $2,275,000 with interest payable monthly at the prime rate
published in The Wall Street Journal.  The New Agreement matures
on June 30, 1997.  On January 31, 1997, the Company borrowed
$2,275,000 under the terms of the New Agreement, of which
$1,625,000 was used to repay amounts outstanding under the
Agreement. The New Agreement is guaranteed by certain
stockholders of the Company (the New Guarantors).  In connection
with the execution of the New Agreement and related guarantee,
the Company agreed to issue the New Guarantors warrants to
purchase an aggregate of up to 2,275,000 shares of common stock. 
Upon execution of the New Agreement, the Company issued 910,000
warrants at an exercise price of $1.00 per share that vested
immediately.  Accordingly, effective January 31, 1997, the
estimated fair value of the warrants issued of $1,100,000 was
recorded in other assets 

7.  LINES OF CREDIT (...CONTINUED)

and is being charged to expense over the term of the New
Agreement.  The remaining warrants vest quarterly and the number
is dependent on the amount of borrowings against the line, as
defined in the agreement.  Each warrant expires 10 years from the
date of issuance.

On March 24, 1995, the Company entered into a bank line-of-credit
agreement (the Original Credit Agreement) that permitted
borrowings up to $1,500,000 with interest payable monthly at the
prime rate as published in The Wall Street Journal plus 1%. In
September 1995, the Company amended the Original Credit Agreement
to increase the amount available thereunder to $3,000,000 and to
extend the maturity to September 30, 1996.  In November 1995, the
Company elected to terminate the Original Credit Agreement with
the bank.

The Original Credit Agreement was secured by the Guarantors.  In
connection with the execution of the Original Credit Agreement
and related guarantee, the Company issued to the Guarantors
warrants to purchase an aggregate of up to 545,454 shares of
Series B preferred stock at an exercise price of $1.10 per share,
which warrants expire on March 19, 2005. In connection with the
amendment of the Original Credit Agreement, the Company issued to
the Guarantors warrants to purchase an additional 784,086 shares
of Series B preferred stock at an exercise price of $3.50 per
share, which warrants expire on September 12, 2005.  A portion of
the warrants were immediately vested as of the date of grant, and
the remaining warrants vest proportionately each month based on
the amount of borrowings outstanding under the Original Credit
Agreement. Upon the closing of the Company's initial public
offering, the holders of the warrants agreed to amend and restate
the warrants so that each warrant will be exercisable for shares
of common stock.  At December 31, 1995, warrants for 534,091
shares of the common stock were exercisable and warrants for
795,449 shares of common stock expired unvested upon termination
of the Credit Agreement.  In connection with the warrant
issuances, $71,000 was recorded in other assets as deferred debt
issuance costs and was charged to expense upon the termination of
the Original Credit Agreement in 1995.

8.  NOTES PAYABLE TO RELATED PARTIES

In December 1996,  the Company entered into unsecured demand
notes payable totaling $3,000,000 with the majority stockholder
of the Company with interest payable on demand at a rate of 8.0%.
As of December 31, 1996, unsecured demand notes payable of
$2,500,000 were outstanding.  Subsequent to December 31, 1996,
the Company entered into additional unsecured demand notes
payable totaling $7,500,000 with the majority stockholder of the
Company with interest payable on demand at a rate of 8.0%.  
Proceeds totaling $3,375,000 were used by the Company to repay
amounts outstanding under the Agreement described in Note 7. 
Proceeds received from the Company's anticipated placement of a
$10.0 million private offering of equity securities in April 1997
is expected to be utilized to repay these outstanding demand
notes payable.

8.  NOTES PAYABLE TO RELATED PARTIES (...CONTINUED)

In July 1996, the Company entered into promissory note agreements
totaling $900,000 with two stockholders at an interest rate of
8.25%.  In August 1996, the Company repaid the principal and
interest balance of the notes.


<PAGE> 


The weighted average stated interest rate on short-term
borrowings outstanding, including the notes payable to related
parties and the line of credit discussed in Note 7 (excluding
deferred debt issuance cost amortization), as of December 31,
1996 equaled 8.17%.  The Company recorded related-party interest
expense during 1996 of approximately $11,000 (excluding deferred
debt issuance cost amortization).

9.  INCOME TAXES

A reconciliation of the provision (benefit) for income taxes to
the federal statutory rate of 34% is as follows:

                                                              Period from
                                                                April 25,
                                                                 1994 to
                                 Year ended December 31,      December 31,
                                   1996           1995            1994

Tax at statutory 
  rate                        $(8,774,744)   $(4,146,480)    $(1,170,435)
State taxes, 
  net of federal 
  benefit                      (1,192,333)      (563,433)       (113,601)
Amortization of 
  deferred debt
  issuance costs                   715,001             --              --
Other                               12,444       (80,137)             721
Change in 
  valuation allowance            9,239,632      4,790,050       1,283,315

                                        $-             $-              $-


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:

                                                1996          1995  

 Deferred tax assets:                                               
    Net operating loss 
    carryforwards                           $13,928,498   $5,507,568
    Accrued overhaul maintenance              2,820,339    1,710,032
    Accrued vacation                            142,308       90,725

9.  INCOME TAXES (...CONTINUED)

 Amortization of aircraft 
 leasehold costs                                293,243      155,634
    Other                                       132,963      125,779

 Total deferred tax assets                   17,317,351    7,589,738
    
 Valuation allowance                       (15,312,997)  (6,073,365)

                                              2,004,354    1,516,373
 Deferred tax liabilities:                                          
    Prepaid overhaul maintenance              1,842,071    1,142,715
    Prepaid insurance                            99,668      316,292

<PAGE> 


    Other                                        62,615       57,366

 Total deferred tax liabilities               2,004,354    1,516,373

                                                     $-           $-


The Company has provided a valuation reserve of $15,312,997 and
$6,073,365 as of December 31, 1996 and 1995, 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, 1996, net operating loss carryforwards of
approximately $35,714,000 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, 1996 and 1995, or the period from April 25, 1994
(date of inception) to December 31, 1994.

10.  LEASES

AIRCRAFT

In January 1996 and during 1995 and 1994, the Company entered
into operating lease agreements (collectively, the Lease
Agreements) for six Boeing 737-200 and two Boeing 737-300 Series
aircraft requiring fixed monthly rental payments.  The Company
recorded rent expense of approximately $10,404,000, $4,613,000
and $312,000 for the years ended December 31, 1996 and 1995, and
for the period ended December 31, 1994, 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, 1996 and 1995,
the Company 

10.  LEASES (...CONTINUED)

has recorded approximately $4,723,000 and $2,930,000,
respectively, in current assets as supplemental payments
recoverable from aircraft lessors, reflecting amounts paid to
lessors (Note 3).

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.  There was
no overhaul component capitalized for the year ended December 31,
1996.  The amounts capitalized as aircraft leasehold costs
totaled approximately $620,000 and $1,203,000 for the year ended
December 31, 1995 and the period ended December 31, 1994,
respectively.  The capitalized component is being amortized on
the straight-line method over 17 months to five years, the
estimated lease terms.  Amortization totaled approximately
$422,000 and $399,000 for the years ended December 31, 1996 and
1995, respectively.

The Lease Agreements have lease terms ranging from 17 months to
five years with the option to extend the lease term for certain
aircraft from two to four additional years.  The Boeing 737-200
Lease Agreements each have an option to purchase the aircraft at
a value defined by the respective agreement.

SALE AND LEASEBACK OF AIRCRAFT ENGINES

In March 1996, the Company made cash down payments of $260,000
and signed promissory notes totaling $1,000,000 to finance the
purchase of two aircraft engines.  In July 1996, the Company
restructured these note agreements, whereby the two aircraft
engines were sold back to the vendor and the vendor subsequently
leased the aircraft engines back to the Company.  This
transaction was completed in conjunction with the sale and
leaseback of two additional engines.  In total, the Company
completed the sale and leaseback of four aircraft <PAGE> engines under
operating leases with terms ranging from one month to four years. 
The Company has purchase and lease renewal options at the
projected fair market values under such agreements.  As of the
date of these transactions in July 1996, the book values and
related long-term debt of the aircraft engines totaling
approximately $1,525,000 and $959,000, respectively, were removed
from the Company's balance sheet.  In addition, the Company
reduced accounts payable due to the lessor, a vendor of the
Company, by approximately $567,000.  Gains and losses recorded by
the Company in conjunction with these transactions were
immaterial.  Fixed rental payments of approximately $13,000 per
engine are due monthly.  In addition, the Company is required to
make supplemental payments to the lessor based on the number of
cycles/flight hours the engines are utilized, as defined by the
Lease Agreements. 

10.  LEASES (...CONTINUED)

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 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, 1996 and 1995, and for the period ended December 31,
1994 were approximately $1,574,000, $634,000 and $67,000,
respectively.

The Company has capital leases in connection with various
property and equipment.  Property and equipment at December 31
included the following amounts for the capital leases:

             1996                                  1995

  Other property and equipment                 $442,185    $308,154
  Less accumulated depreciation                 184,913     119,301

         $257,272                              $188,853


Future minimum lease payments under capital leases and
noncancelable operating leases (excluding supplemental payments)
at December 31, 1996 were as follows:

                                CAPITAL                  OPERATING
                                 LEASES                    LEASES

  1997                          $165,453               $10,339,076
  1998                             2,699                 7,444,409
  1999                               674                 6,514,620
  2000                                 -                 2,040,253
  2001                                 -                   220,303

  Total minimum lease payments    168,826              $26,558,661
  Less amounts representing 
   interest                        10,166            

  Present value of minimum 
    lease payments                158,660            
  Less current portion            155,576            
  
                                   $3,084

<PAGE> 


11.  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.

12.  SUBSEQUENT EVENTS

In January 1997, the Company completed a $4,000,000 letter of
credit facility in favor of the Company's credit card processor. 
The letter of credit facility expires in January 1998 and was
established by the Company's majority stockholder.  As
consideration for establishing the letter of credit, the Company
agreed to issue up to 4,000,000 warrants to the majority
stockholder to purchase shares of the Company's common stock. 
Upon execution of the letter of credit, the Company issued
1,600,000 warrants at an exercise price of $1.00.  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
2,400,000 warrants vest quarterly according to the amount of
exposure under such letter of credit, as defined in the
agreement. Each warrant expires 10 years from the date of
issuance.  In addition, the Company granted the majority
stockholder a security interest in all credit card receivables
processed by the Company's credit card processor.



<PAGE> 




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


                  Balance at             Charged to
                  Beginning  Charged to   Other    Deductions   Balance at End
                       of     Costs and   Accounts--   --             of
Description          Period   Expenses    Describe   Describe       Period

YEAR ENDED DECEMBER 31, 1996:

Reserves and allowances deducted from
asset accounts:

Allowance for 
uncollectible 
accounts:             $197,000   $89,336     $32,719   $56,617 /1/    $229,719

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

PERIOD ENDED DECEMBER 31, 1995: 

Reserves and allowances deducted from 
asset accounts:

Allowance for 
uncollectible 
accounts:                    $ --            $197,000                $197,000

Valuation reserve 
for deferred tax 
assets:                $1,283,315          $4,790,050               $6,073,365


YEAR ENDED DECEMBER 31, 1994:

Reserves and allowances deducted from
asset accounts:

Valuation for deferred 
tax assets:                  $ --          $1,283,315               $1,283,315

/1/  amounts charged against the allowance for accounts
determined uncollectible during the year.


<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 30, 1997             By:/s/ John P. Tague 
                                   John P. Tague
                                   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 John P. Tague 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, 1996, 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/ John P. Tague                            March 30, 1997
     John P. Tague, Chairman of the Board,
     Chief Executive Officer and President 
     (Principal Executive Officer)


     /s/ William A. Garrett                       March 30, 1997
     William A. Garrett, Vice President-Finance 
     and Chief Financial Officer 
     (Principal Financial and Accounting Officer)


     /s/ Robert J. McAdoo                         March 30, 1997
     Robert J. McAdoo, Director


     /s/ Robert J. Spane                          March 30, 1997
     Robert J. Spane, Director

     /s/ Richard D. Pearson                       March 30, 1997
     Richard D. Pearson, Director


     /s/ Edmund H. Shea, Jr.                      March 30, 1997
     Edmund H. Shea, Jr., Director

<PAGE> 


     3.1    Restated Certificate of Incorporation, 
            as amended of Registrant                            *

     3.2    By laws of Registrant, as amended to date 
            (filed as Exhibit 3.2  with 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 US 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


     10.11  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).     *
<PAGE> 


     10.12  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).     *

     10.13  Lease, dated September 27, 1994, between the 
            Gerson Company and Registrant, as amended to 
            date (filed as Exhibit 10.13 to the Registrant's
            Registration Statement No. 33-96884 and 
            incorporated herein by reference).                  *

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

     10.15  Form of Second Amended and Restated Investors'
            Rights Amendment (filed as Exhibit 10.16 to the
            Registrant's Registration Statement No. 33-96884
            and incorporated herein by reference).              *

     10.16  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).              *
               
     10.17  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).              *

     10.18  Aircraft Sublease Agreement B, dated December 31,
            1995, between the Registrant and Aloha Airlines,
            Inc. (filed as Exhibit 10.28 to the Registrant's 
            Form 10-K for the year ended December 31, 1995).    *

     10.19  Aircraft Sublease Agreement D, dated January 18,
            1996, between the Registrant and Aloha Airlines,
            Inc. (filed as Exhibit 10.29 to the Registrant's 
            Form 10-K for the year ended December 31, 1995).    *

     10.20  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).                                 *
     
     10.21  Reimbursement Agreement, dated as of 
            December 31, 1996, by and among Registrant and
            Hambrecht & Quist California, a wholly owned
            subsidiary of Hambrecht & Quist Group                

     10.22  Security Agreement, dated as of December 31, 
            1996, by Registrant in favor of Hambrecht & 
            Quist California                                     

     10.23  Amended and Restated Reimbursement Loan Note 
            in the amount of $4,000,000                          

     10.24  Warrant for the purchase of shares of Common 
            Stock issued to Hambrecht & Quist California         

     10.25  Merchant Agreement, dated as of February 27, 
            1997, by and between Registrant and Michigan
            National Bank

<PAGE> 



     10.26  Amendment to Merchant Agreement, dated as of
            February 6, 1997, by and between Registrant          
            
     10.27  Agreement, dated as of January 30, 1997, by 
            and between Registrant and Commerce Bank, N.A.
            (Wichita, KS) and certain stockholders of the
            Registrant                                           

     10.28  Line of Credit Note in the amount of $2,275,000      


     10.29  Warrant Purchase Agreement, dated as of January 
            30, 1997                                             

     10.30  Form of Warrant to purchase shares of Common 
            Stock in connection with the Commerce Bank 
            Line of Credit                                       

     11.1   Statement regarding computation of net income 
            (loss) per common share                              

     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                              

     * Incorporated by reference