<PAGE>

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

                                  FORM 10-QSB

                                  (Mark One)
      [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 2001

      [_]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934

                For the transition period from              to

                       Commission File Number 000-21749


                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
       (Exact name of small business issuer as specified in its charter)


            Delaware                              95-4257380
   (State or other jurisdiction of             (I.R.S. Employer
   incorporation or organization)               Identification)

                            3205 Lakewood Boulevard
                         Long Beach, California 90808
                   (Address of principal executive offices)

                                (562) 938-8618
                          (Issuer's telephone number)


     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [_]

  As of August 13, 2001, the issuer had outstanding 51,094 shares of Series A 5%
Cumulative Convertible Preferred Stock, 31,103,823 shares of Class A Common
Stock, 1,900,324 shares of Class B Common Stock, 4,000,000 shares of Class E-1
Common Stock and 4,000,000 shares of Class E-2 Common Stock.

                                       1
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                            Page
<S>                                                        <C>
PART I.    FINANCIAL INFORMATION

Item 1.  Financial Statements                                   3
Item 2.  Plan of Operations                                    12

PART II.  OTHER INFORMATION                                    16

Item 6.  Exhibits and Reports on Form 8-K                      16
</TABLE>

                                       2
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)
                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                                                June 30,
                                                                                                                  2001
                                                                                                                (unaudited)
                                                                                                             --------------
<S>                                                                                                           <C>
ASSETS
Current Assets:
  Cash and cash equivalents                                                                                    $    324,000
  Prepaid expenses                                                                                                   47,000
                                                                                                             --------------
   Total current assets                                                                                             371,000
Property, plant and equipment, net                                                                               12,303,000
Restricted cash                                                                                                     405,000
Other assets                                                                                                        315,000
                                                                                                             --------------
   Total assets                                                                                                $ 13,394,000
                                                                                                             ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                                                                             $  1,617,000
  Capital lease obligation current portion                                                                          361,000
  Other accrued liabilities                                                                                         637,000
                                                                                                             --------------
   Total current liabilities                                                                                      2,615,000
Capital lease obligation, long term                                                                               9,382,000
Convertible debenture, long term (net discount of $1,285,000)                                                     3,193,000
Deferred revenue                                                                                                  1,777,000
                                                                                                             --------------
   Total liabilities                                                                                             16,967,000
                                                                                                             --------------
Stockholders' Deficiency
  Preferred Stock, par value $.0001 per share; 5,000,000 shares authorized; no shares issued and                         --
   outstanding
  Series A 5% Cumulative Convertible Preferred Stock, par value $.0001 per share; 100,000 shares                  4,387,000
   authorized; 53,773 shares issued and outstanding
  Class A Common Stock, par value $.0001 per share; 200,000,000 shares authorized; 26,269,798 share                  18,000
   issued and outstanding
  Class B Common Stock, par value $.0001 per share; 10,000,000 shares authorized; 1,900,324 shares                       --
   issued and outstanding
  Class E-1 Common Stock; par value $.0001 per share; 4,000,000 shares authorized; 4,000,000 shares                      --
   issued and outstanding
  Class E-2 Common Stock; par value $.0001 per share; 4,000,000 shares authorized; 4,000,000 shares                      --
   issued and outstanding
Warrants to purchase common stock                                                                                        --
   Warrants                                                                                                       4,104,000
   Public Warrants                                                                                                  473,000
   Class A Warrants                                                                                              11,290,000
   Class B Warrants                                                                                               4,632,000
Additional paid-in capital                                                                                       46,044,000
Deficit accumulated during the development stage                                                                (74,521,000)
                                                                                                             --------------
Total stockholders' deficiency                                                                                   (3,573,000)
                                                                                                             --------------
Total liabilities and stockholder's deficiency                                                                 $ 13,394,000
                                                                                                             ==============
</TABLE>


                 See accompanying notes to financial statements

                                       3
<PAGE>

                    ADVANCED AERODYNAMICS & STRUCTRUES, INC
                       (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENT OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                                                    Period from
                                                               Three Months Ended          Six Months Ended       January 26, 1990
                                                                    June 30,                   June 30,             (inception)
                                                                  (Un-audited)               (Un-audited)           June 30, 2001
                                                                  ------------               ------------          --------------
                                                               2000          2001           2000         2001
                                                              -----         -----          -----        -----
<S>                                                        <C>           <C>           <C>            <C>            <C>
Interest Income                                             $    35,000   $     8,000   $    83,000    $     9,000    $   2,827,000
Other Income                                                      4,000         6,000         7,000          6,000        1,396,000
                                                            -----------   -----------   -----------    -----------    -------------
                                                                 39,000        14,000        90,000         15,000        4,223,000
Cost and Expenses:
Research and development costs                                1,094,000     2,259,000     1,478,000      4,034,000       41,141,000
General and administrative expenses                             642,000     1,027,000     1,421,000      1,964,000       23,385,000
Loss on disposal of assets                                           --            --            --             --          755,000
Realized loss on sale of investments                              5,000            --        48,000             --           66,000
Interest expense                                                704,000     1,392,000       982,000      3,355,000        7,638,000
In-process research and development acquired                         --            --            --             --          761,000
                                                            -----------   -----------   -----------    -----------    -------------
                                                              2,445,000     4,678,000     3,929,000      9,353,000       73,746,000
Loss before extraordinary item                               (2,406,000)   (4,664,000)   (3,839,000)    (9,338,000)     (69,523,000)
Extraordinary loss on retirement of Bridge Notes                     --            --            --             --         (942,000)
                                                            -----------   -----------   -----------    -----------    -------------
Net loss                                                    $(2,406,000)  $(4,664,000)  $(3,839,000)   $(9,338,000)   $ (70,465,000)
                                                                                                                      =============
Net loss per common share                                   $     (.28)   $      (.21)  $      (.44)   $      (.47)
                                                            -----------   -----------   -----------    -----------
Weighted average number of common shares outstanding          8,900,993    23,107,600     8,900,047     20,925,640
                                                            ===========   ===========   ===========    ===========
</TABLE>


                See accompanying notes to financial statements.

                                       4
<PAGE>

                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     Statement of Stockholders' Deficiency

<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------------------------------------------------------------------------------
                                    Preferred Stock       Class A            Class B            Class E-1          Class E-2
                                  -----------------------------------------------------------------------------------------------

                                    Shares   Amount   Shares    Amount    Shares    Amount   Shares    Amount   Shares    Amount
                                  -----------------------------------------------------------------------------------------------
<S>                                 <C>      <C>     <C>        <C>     <C>         <C>     <C>        <C>     <C>        <C>
Common stock issued                          $  -               $    -    418,094   $    -    836,189  $    -    836,189  $    -

Common stock issued in
  exchange for in-process
  research and development                                                201,494        -    402,988            402,988       -

Imputed interest on advances from
 stockholder

Conversion of stockholder
advances                                                                  598,011        -  1,196,021          1,196,021       -
Conversion of officer loans                                               187,118        -    374,236       -    374,236       -
Stock issued in consideration for                                                        -
 services in 1994, 1995, and 1996                                         595,283           1,190,566       -  1,190,566       -
Imputed interest on advances from
 stockholder
Net proceeds from initial public
 offering of Units                                   6,000,000   1,000

Net proceeds from exercise of
 over- allotment option                                900,000       -
Warrants issued in connection
 with issuance of Bridge Notes
Net loss from inception to
 December 31, 1996                --------------------------------------------------------------------------------------------------

Balance at December 31, 1996            -   -        6,900,000   1,000  2,000,000        -  4,000,000       -  4,000,000       -
Adjustment to proceeds from
 initial public offering and
 exercise of overallotment option
Net Loss                          --------------------------------------------------------------------------------------------------

Balance at December 31, 1997            -            6,900,000   1,000  2,000,000        -  4,000,000       -  4,000,000       -
Conversion of Class B to A
 Common Stock                                           99,676            (99,676)
Net Loss                          --------------------------------------------------------------------------------------------------

Balance at December 31, 1998            -   -        6,999,676   1,000  1,900,324        -  4,000,000       -  4,000,000       -
  Net Loss

Unrealized loss on investments
Comprehensive Loss                --------------------------------------------------------------------------------------------------

Balance at December 31, 1999            -   -        6,999,676   1,000  1,900,324        -  4,000,000       -  4,000,000       -

<CAPTION>
                                 ---------------------------------------------------------------------------------------------------
                                                                                       Accumulated
                                                                                           Other      Deficit Accumulated
                                              Public  Class A  Class B   Additional     Comprehensive    During the
                                   Warrants  Warrants Warrants Warrants Paid-In Capital   Losses      Development Stage     Total
                                 ---------------------------------------------------------------------------------------------------
<S>                                <C>       <C>      <C>      <C>      <C>                <C>            <C>          <C>
Common stock issued                $  -      $  -     $    -   $    -   $      7,500,000   $              $ -          $  7,500,000
Common stock issued in exchange
 for in-process research and
 development                                                                     361,000                                    361,000

Imputed interest on advances from
 stockholder                                                                     799,000                                    799,000
Conversion of stockholder
advances                                                                      10,728,000                                 10,728,000
Conversion of officer loans                                                      336,000                                    336,000
Stock issued in consideration for
 services in 1994, 1995, and 1996                                              1,507,000                                  1,507,000
Imputed interest on advances from
 stockholder                                                                      11,000                                     11,000
Net proceeds from initial public
 offering of Units                                     9,583,000   4,166,000  12,566,000                                 26,316,000

Net proceeds from exercise of
 over- allotment option                                1,707,000     466,000   1,922,000                                  4,095,000
Warrants issued in connection
 with issuance of Bridge Notes                473,000                                                                       473,000
Net loss from inception to
 December 31, 1996                                                                                       24,328,000      24,328,000
                                 ---------------------------------------------------------------------------------------------------
Balance at December 31, 1996                  473,000 11,290,000   4,632,000  35,730,000                (24,328,000)     27,798,000

Adjustment to proceeds from
 initial public offering and
 exercise of overallotment option                                                (78,000)                                   (78,000)
Net Loss                                                                                                 (6,625,000)     (6,625,000)
                                 ---------------------------------------------------------------------------------------------------
Balance at December 31, 1997                  473,000 11,290,000   4,632,000  35,652,000                (30,953,000)     21,095,000

Conversion of Class B to A Common                                                                       (10,118,000)    (10,118,000)
 Stock
Net Loss                         ---------------------------------------------------------------------------------------------------

Balance at December 31, 1998                  473,000 11,290,000   4,632,000  35,652,000               (41.071,000)      10,977,000
  Net Loss                                                                                              (9,341,000)      (9,341,000)

Unrealized loss on investments                                                              (32,000)                         32,000
                                                                                                                         ----------
Comprehensive Loss                                                                                                       (9,373,000)
                                 ---------------------------------------------------------------------------------------------------
Balance at December 31, 1999                  473,000 11,290,000   4,632,000  35,652,000    (32,000)   (50,412,000)       1,604,000
</TABLE>

                                       5
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

               Statement of Stockholders' Deficiency (continued)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                                                Common Stock
---------------------------------------------------------------------------------------------------------------------------
                                       Preferred Stock             Class A              Class B              Class E-1
                                  -----------------------------------------------------------------------------------------



                                     Shares      Amount       Shares      Amount    Shares    Amount     Shares    Amount
                                  -----------------------------------------------------------------------------------------
<S>                                 <C>       <C>           <C>          <C>       <C>       <C>     <C>          <C>
Net proceeds from issuance of
 Preferred Stock                     79,800   $ 5,034,000            -   $     -          -  $                    $     -
Conversion of Preferred Stock to
 Class A                            (10,891)     (687,000)     712,663         -          -
Net proceeds from Equity Line                                1,252,160
Amortization of discount on
 Preferred Stock                                  278,000
Amortization of warrant attached
 to Common Stock
Unrealized gain on investments
Net Loss

                                  -----------------------------------------------------------------------------------------

                                  -----------------------------------------------------------------------------------------
Comprehensive loss
Balance at December 31, 2000         68,909   $ 4,625,000    8,964,499   $ 1,000  1,900,324  $     -   4,000,000  $     -
                                  -----------------------------------------------------------------------------------------
Conversion of Preferred Stock to
 Class A                            (26,421)   (1,353,000)  11,549,635    11,000          -
Amortization of discount on
 Preferred Stock                                  101,000
Amortization of warrant attached
 to Common Stock
Net proceeds from Equity Line                                3,118,377     3,000
Issuance of warrants attached to
 debentures
Conversion of Convertible
 Debentures to Class A                                      2,637,287      3,000
Issuance of Preferred Stock          11,285     1,014,000
Net loss and comprehensive loss
                                  -----------------------------------------------------------------------------------------
Balance at June 30, 2001             53,773   $ 4,387,000   26,269,798   $18,000  1,900,324  $     -   4,000,000  $     -
                                  =========================================================================================

<CAPTION>
                                  -----------------------------------------------------------------------------------------

                                  -----------------------------------------------------------------------------------------
                                        Class E-2
                                  -----------------------------------------------------------------------------------------


                                                                      Public      Class A      Class B      Additional
                                    Shares    Amount     Warrants    Warrants    Warrants      Warrants   Paid-In Capital
                                  -----------------------------------------------------------------------------------------
<S>                               <C>        <C>        <C>          <C>        <C>          <C>          <C>
Net proceeds from issuance of
 Preferred Stock                             $          $2,217,000                            $             $ 3,302,000
Conversion of Preferred Stock to
 Class A                                                                                                        687,000
Net proceeds from Equity Line                              358,000                                              863,000
Amortization of discount on
 Preferred Stock
Amortization of warrant attached                                                                                 45,000
 to Common Stock
Unrealized gain on investments
Net Loss

                                  -----------------------------------------------------------------------------------------
Comprehensive loss
                                  -----------------------------------------------------------------------------------------
Balance at December 31, 2000      4,000,000  $     -    $2,575,000   $473,000   $11,290,000   $4,632,000    $40,549,000
                                  -----------------------------------------------------------------------------------------
Conversion of Preferred Stock to
 Class A                                                                                                      1,480,000
Amortization of discount on
 Preferred Stock
Amortization of warrant attached                                                                                 59,000
 to Common Stock
Net proceeds from Equity Line                                                                                   894,000
Issuance of warrants attached to                         1,529,000                                            2,606,000
 debentures
Conversion of Convertible
 Debentures to Class A                                                                                          324,000
Issuance of Preferred Stock                                                                                     132,000
Net loss and comprehensive loss
                                  -----------------------------------------------------------------------------------------
Balance at June 30, 2001          4,000,000  $     -    $4,104,000   $473,000   $11,290,000   $4,632,000    $46,044,000
                                  =========================================================================================

<CAPTION>
                                  ----------------------------------------------------------

                                  ----------------------------------------------------------

                                  ----------------------------------------------------------
                                    Accumulated
                                      Other           Deficit Accumulated
                                   Comprehensive           During the
                                     Losses            Development Stage          Total
                                  ----------------------------------------------------------
<S>                               <C>                 <C>                      <C>
Net proceeds from issuance of
 Preferred Stock                    $          -         $  (3,302,000)        $  7,251,000
Conversion of Preferred Stock to
 Class A                                                                                  -
Net proceeds from Equity Line                                                     1,221,000
Amortization of discount on
 Preferred Stock                                              (278,000)                   -
Amortization of warrant attached                               (45,000)                   -
 to Common Stock
Unrealized gain on investments            32,000                                     32,000
Net Loss                                                   (10,715,000)         (10,715,000)
                                  ----------------------------------------------------------
Comprehensive loss                                                              (10,683,000)
                                  ----------------------------------------------------------
Balance at December 31, 2000        $          -         $ (64,752,000)        $   (607,000)
                                  ----------------------------------------------------------
Conversion of Preferred Stock to
 Class A                                                      (139,000)        $     (1,000)
Amortization of discount on
 Preferred Stock                                              (101,000)                   -
Amortization of warrant attached                               (59,000)                   -
 to Common Stock
Net proceeds from Equity Line                                                  $    897,000
Issuance of warrants attached to                                               $  4,135,000
 debentures
Conversion of Convertible
 Debentures to Class A                                                         $    327,000
Issuance of Preferred Stock                                   (132,000)        $  1,014,000
Net loss and comprehensive loss                             (9,338,000)        $ (9,338,000)
                                  ----------------------------------------------------------
Balance at June 30, 2001            $          -         $ (74,521,000)        $ (3,573,000)
                                  ==========================================================
</TABLE>

                                       6
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                      PERIOD FROM
                                                                                                                       JANUARY 26
                                                                                                                          1990
                                                                                                                      (INCEPTION)
                                                                                         QUARTER ENDING JUNE 30,      TO JUNE 30,
                                                                                     ---------------------------------------------
                                                                                            2000           2001            2001
                                                                                     ---------------------------------------------
<S>                                                                                  <C>               <C>            <C>
OPERATING ACTIVITIES:
 Net loss                                                                               $(3,839,000)   $(9,338,000)   $(70,465,000)
 Adjustments to reconcile net loss to net cash used in operating activities:                      -              -
  Noncash stock compensation expense                                                              -              -       1,207,000
  Noncash interest expense                                                                  341,000              -         336,000
  Beneficial conversion feature on debentures issued                                              -      2,606,000       2,606,000
  Amortization of Discount on Convertible Debentures                                              -        110,000         110,000
  Cost of in-process research and development acquired                                            -              -         761,000
  Imputed interest on advances from stockholder                                                                  -         810,000
  Interest income from restricted cash invested                                                   -              -        (474,000)
  Extraordinary loss on retirement of Bridge Notes                                                -              -         942,000
  Depreciation and amortization                                                             633,000        685,000       5,458,000
  Loss on disposal of assets                                                                      -              -         755,000
  Realized Loss on sale of investments                                                       48,000              -          66,000
  Beneficial conversion feature                                                             342,000              -               -
  Changes in operating assets and liabilities:
   Change in prepaid expenses and other current assets                                   (2,492,000)        22,000         126,000
   Change in other assets                                                                                 (109,000)       (315,000)
   Change in accounts payable                                                              (135,000)       224,000         229,000
   Change in accrued liabilities                                                            169,000        (47,000)      1,744,000
   Change in deferred revenue                                                                70,000              -       1,560,000
                                                                                     ---------------------------------------------
Net cash used in operating activities                                                    (5,205,000)    (5,847,000)    (54,544,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
 Increase in construction in progress                                                             -              -        (446,000)
 Proceeds from insurance claims upon loss of aircraft                                             -              -          30,000
 Proceeds from sales of assets                                                                    -              -       9,803,000
 Capital expenditures                                                                    (2,161,000)      (274,000)     (8,393,000)
 Purchase of certificate of deposit                                                               -              -      (1,061,000)
 Proceeds from redemption of certificate of deposit                                               -              -       1,061,000
 Purchase of investments                                                                 (2,595,000)             -     (36,346,000)
 Proceeds from maturities of investments in bonds                                                 -              -         828,000
 Proceeds from sale of investments                                                        3,054,000              -      35,452,000
 Restricted cash from long term debt                                                              -              -      (8,095,000)
 Increase in restricted cash                                                                      -              -        (405,000)
                                                                                     ---------------------------------------------
Net cash used in investing activities                                                    (1,702,000)      (274,000)     (7,572,000)
                                                                                     ---------------------------------------------
FINANCING ACTIVITIES:
 Adjustment to net proceeds from initial public offering and exercise of
  over allotment option                                                                           -              -         (78,000)
 Proceeds from the issuance of convertible debentures                                             -      4,938,000       4,938,000
 Proceeds from long term debt                                                                     -              -       8,500,000
 Restricted cash collateral for long term debt                                                    -              -      (8,500,000)
 Proceeds from issuance of convertible preferred stock                                    6,820,000      1,014,000       8,265,000
 Advances from stockholder                                                                        -              -      10,728,000
 Proceeds from issuance of common stock                                                           -        897,000       9,618,000
 Net proceeds from initial public offering and exercise of over-allotment option                  -              -      30,411,000
 Net proceeds from bridge financing                                                               -              -       6,195,000
 Net proceeds from loans from officers                                                            -              -         336,000
 Payments on capital lease obligations                                                     (101,000)      (417,000)       (973,000)
 Repayment of bridge financing                                                                    -              -      (7,000,000)
                                                                                     ---------------------------------------------
Net cash provided by financing activities                                                 6,719,000      6,432,000      62,440,000
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                       (188,000)       311,000         311,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                            498,000         13,000               -
                                                                                     ---------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                              $   310,000    $   324,000    $    311,000
                                                                                     =============================================
</TABLE>

                                       7
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                      STATEMENT OF CASH FLOWS (continued)


<TABLE>
<CAPTION>
                                                                                                                PERIOD FROM
                                                                                                                JANUARY 26
                                                                                                                  1990
                                                                                                                (INCEPTION)
                                                                               QUARTER ENDING JUNE 30,          TO JUNE 30,
                                                                             ----------------------------------------------
                                                                             2000              2001             2001
                                                                             ----------------------------------------------
<S>                                                                          <C>               <C>              <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest                                                        $553,000         $539,000         $ 3,434,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 Stockholder advances converted to common stock                                                                 $10,728,000
 Loans from officer converted to common stock                                                                   $    36,000
 Common stock issued for noncash consideration and compensation                                                 $ 1,507,000
 Liabilities assumed from ASI                                                                                   $   400,000
 Common stock issued for in-process research and development acquired                                           $   361,000
 Equipment acquired under capital leases                                                                        $10,327,000
 Deposit surrendered as payment for rents due                                                                   $    80,000
 Construction in progress acquired with restricted cash                                                         $ 8,578,000
</TABLE>

                                       8
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A Development Stage Enterprise)

                         Notes to Financial Statements
                                  (unaudited)

1.  GENERAL

       In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the financial
position of the Company at June 30, 2001 and the results of operations and cash
flows for the six months ended June 30, 2001 and June 30, 2000 respectively and
for the period from January 26, 1990 (inception) to June 30, 2001.  Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for interim periods are not necessarily
indicative of results of operations to be expected for any other interim period
or the full year.

       The financial information in this quarterly report should be read in
conjunction with the audited December 31, 2000 financial statements and notes
thereto included in the Company's annual report filed on Form 10-KSB.

       The Company is a development stage enterprise. On December 3, 1996, the
Company successfully completed an initial public offering to finance the
continued development, manufacture and marketing of its product to achieve
commercial viability. The net proceeds of $30,411,000 from the offering,
including the exercise of the over allotment option, were and will be used to
amend its Federal Aviation Administration ("FAA") Type Certificate for technical
revisions to its product, to obtain a FAA Production Certificate for its
product, to repay borrowings under a bridge loan, to expand the Company's sales
and marketing efforts, to establish a new manufacturing facility, and to acquire
production materials and additional tooling and equipment.

       The Company is currently in the process of developing their product and
obtaining appropriate certification from the Federal Aviation Administration. To
date, the Company has generated no sales revenue, and none is projected until
the Company can begin commercial production of its product and the certification
process is complete. Prior to commencing deliveries, the Company will need to,
among other things, complete the development of the JETCRUZER 500 and obtain the
requisite regulatory approvals. The Company's management believes that its
current cash balance with the additional funding obtained subsequent to June 30,
2001 will only be sufficient to finance its plan of operations through the end
of the third quarter, at which time additional funding will be required.

       Certain reclassifications have been made to December 31, 2000 financial
statement balances in order to conform to the June 30, 2001 presentation.

2.  NET LOSS PER COMMON SHARE

       The Company's net loss per common share was computed based on the
weighted average number of shares of common stock outstanding during the six
month periods ended June 30, 2001 and 2000 and excludes all outstanding shares
of Class E-1 and Class E-2 Common Stock because the conditions for the lapse of
restrictions on such shares have not been satisfied. There is no difference
between the loss per common share amounts computed for basic and dilutive
purposes because the impact of convertible preferred stock, options and warrants
outstanding are anti-dilutive.

3.  CONVERTIBLE DEBENTURES

       On March 27, 2001 the Company obtained new financing of up to $5,000,000,
with an availability of up to an additional $3,000,000. The additional amount
becomes available after certain criteria have been met, as defined in the
agreement.  The Company issued $4,100,000 in Secured Convertible Notes with an
interest rate of 5% to

                                       9
<PAGE>

accredited investors, as defined by Regulation D rules issued by the Securities
and Exchange Commission under the Securities Act of 1933. Attached to the Notes
are warrants to purchase 2 shares of Common stock for every one dollar in Notes,
at an exercise price of approximately $.45. The Company has filed a proxy
statement and Form S-3 Registation Statement as required by the terms of the
agreement. There is a mandatory redemption requirement at 125% of the unpaid
principal balance and unpaid interest upon the occurrence of default or if the
Company is prohibited from issuing shares of Common stock. Additionally, the
Company may put the additional notes to the note holders upon meeting certain
covenants related to the availability of trading of the stock, trading volume
and market price and other milestones.

       At June 30, 2001 the Company was in default on one of the covenants of
the agreement for failure to pay accrued interest on the notes within 10 days of
June 30, 2001. Due to the default the Company is required to accrue the interest
due at 10%. In accordance with the agreement, the Company has accrued
approximately $100,000 in interest due the note holders at June 30, 2001. As of
August 14, 2001, the Company is in the process of obtaining waivers from the
note holders waiving only their right to call the notes due, but not the
payment of interest.

       The debentures were issued with various stated conversion prices, which
resulted in a beneficial conversion feature since the effective conversion price
was below market at the time of the issuance. The discount of $2,231,000, which
resulted from this transaction, was immediately expensed as interest, as the
holders of the debentures are able to convert to common stock immediately upon
issuance.

       On June 27, 2001 the Company obtained new financing of $1,000,000. This
financing is separate and in addition to that of March 27, 2001, described
above. The Company issued $1,000,000 in a Convertible Note with an interest rate
of 5% to an accredited investor, as defined by Regulation D rules issued by the
Securities and Exchange Commission under the Securities Act of 1933. Attached to
the Note are warrants to purchase 2 shares of Common stock for every one dollar
of the Note, at a purchase price of $.22275 per share. There is a mandatory
redemption requirement at 125% of the unpaid principal balance and unpaid
interest upon the occurrence of default or if the Company is prohibited from
issuing shares of Common stock. The Company did not file a Form SB-2
Registration Statement within 30 days of the Closing date which is a non-
registration event pursuant to the Subscription Agreement. The Company has
obtained a waiver from the note holder dated August 9, 2001, waiving the non-
registration event and permitting the filing of the SB-2 by August 17, 2001.

       The debentures were issued with various stated conversion prices, which
resulted in a beneficial conversion feature since the effective conversion price
was below market at the time of the issuance. As of June 30, 2001 the discount
of $375,000, which resulted from this transaction, was immediately expensed as
interest, as the holder of the debentures are able to convert to common stock
immediately upon issuance.

       As of June 30, 2001, various note holders converted a total of $476,000
of convertible debentures into 2,637,287 shares of Class A Common Stock.
Subsequent to June 30, 2001, an additional $421,000 of convertible debentures
was converted into 2,859,000 shares of Class A Common Stock.

4. STOCKHOLDERS' EQUITY

Preferred Stock

       As of June 30, 2001, the Company received $8,265,500 in net cash proceeds
related to a preferred stock agreement to issue up to 100,000 shares of 5%
Cumulative Convertible Series A Preferred Stock ("Preferred Stock") with a
stated value of $100 per share and Common Stock Purchase Warrants to purchase
Class A Common Stock, for the aggregated purchase price of $10 million. As of
June 30, 2001, the Company issued 91,085 shares of Preferred stock with a stated
value of $9,108,500 and 1,082,000 detachable warrants and incurred $840,000 in

                                       10
<PAGE>

commissions and legal fees. Of the total shares issued to date 7,935 shares were
issued in the quarter ended June 30, 2001.  The remaining $891,500 in Preferred
Stock funding will not occur until certain criteria have been met.

       Additionally, as consideration for the transaction, placement warrants to
purchase up to 873,000 shares of Class A Common Stock were issued. Fair values
of $1,231,000 and $987,000 for the detachable warrants and the placement
warrants, respectively, have been included in stockholders' equity and are
netted as a discount to the Preferred Stock.  The warrants are exercisable in
installments and the terms for the placement warrants are similar to the terms
of the detachable warrants issued with the Preferred Stock.  The fair value for
these warrants was estimated at the dates of grant using a Black-Scholes pricing
model with the following weighted-average assumptions: risk-free interest rates
of 4.68% to 6.43%; dividend yields of 0%; a volatility factor of .566 to .915
and an expected life of the warrants of 3 years.

       Holders of the Preferred Stock are entitled to receive cash dividends
payable quarterly and have preferential liquidation rights above all other
issuance of Common Stock for an amount equal to the stated value.  The Preferred
Stock and unpaid dividends convertible into shares of Common Stock equal to an
amount determined by the market value at the date of close of the common stock,
adjusted for changes in the market price prior to the conversion.  The preferred
stockholders do not have voting rights.  The warrants are callable in
installments.  The Company has reserved 4,000,000 shares of its Class A Common
Stock for the conversion of the Preferred Stock. As of June 30, 2001, the
Company had dividends in arrears for the Preferred Stock totaling $248,000 or
$4.62 per share.

       For the period ended June 30, 2001, various Preferred Stockholders
converted a total of 26,421 shares plus dividends in arrears into 11,549,635
shares of Class A Common Stock.  Subsequent to the end of the period, certain
Preferred Stockholder's additionally converted a total of 3,000 shares plus
dividends in arrears into 1,838,765 shares of Class A Common Stock.  As of June
30, 2001, no warrants have been exercised.

Equity Line of Credit

       On August 11, 2000, the Company closed a Private Equity Line of Credit
Agreement with private investors.  These investors have committed to purchase up
to $20,000,000 of Common Stock over the course of two years.  This private
placement agreement provides that the Company to request, at its sole discretion
and subject to limitation based on volume and market price, may require that the
investors purchase certain amounts of shares every 30 days at a price equal to
92% or 93% of the market price.  Each request will be for a minimum of $200,000
and subject to a maximum of $1,500,000.  In connection with the Equity Line
Agreement, warrants to purchase 250,000 shares of Class A Common Stock were
issued with a strike price of $3.15 per share.  Additional drawings on this
Equity Line are dependent upon stock market conditions, which at the latter part
of 2000 and beginning at 2001 seriously limited such drawings.  During the
six months ended June 30, 2001, the Company received cash proceeds of $897,000
and issued 3,118,377 shares of common stock under this equity line.

5. SUBSEQUENT EVENTS

       Subsequent to June 30, 2001, the Company received authorization to issue
new Secured Convertible Notes under the March 27, 2001 agreement. Based on that
agreement, $3,000,000 is available to the Company for additional financings. On
July 25, 2001, the Company issued $1,000,000 in Secured Convertible Notes with
the remaining $2,000,000 to be provided during the late third quarter. Attached
to the Notes are warrants to purchase 2 shares of Common stock for every one
dollar of the Notes, at a purchase price of $.22275 per share. The Company has
registered the shares underlying the conversion of the Notes and the exercise of
the warrants as required by the agreement. There is a mandatory redemption
requirement at 125% of the unpaid principal balance and unpaid interest upon the
occurrence of default or if the Company is prohibited from issuing Common stock.

                                       11
<PAGE>

ITEM 2.  PLAN OF OPERATIONS

       Certain statements contained in this report, including statements
concerning the Company's future cash and financing requirements, the Company's
ability to raise additional capital, the Company's ability to obtain market
acceptance of its aircraft, the Company's ability to obtain regulatory approval
for its aircraft, and the competitive market for sales of small business
aircraft and other statements contained herein regarding matters that are not
historical facts, are forward looking statements; actual results may differ
materially from those set forth in this report, our Annual Report on Form 10-KSB
and other reports and documents that we file with the Securities and Exchange
Commission, all of which may be retrieved at www.sec.gov.
                                             -----------
       The Company is a development stage enterprise organized to design,
develop manufacture and market propjet and jet aircraft intended primarily for
business use. Since its inception, the Company has been engaged principally in
research and development of its proposed aircraft. In March 1990, the Company
made application to the FAA for a Type Certificate for the JETCRUZER 450, which
Certificate was ultimately granted in June 1994. The Company has not generated
any operating revenues to date and has incurred losses from such activities. The
Company believes it will continue to experience losses until such time as it
commences the sale of aircraft on a commercial scale.

       Prior to commencing commercial sales of the JETCRUZER 500, the Company
will need to, among other things, complete the development of the aircraft,
obtain the requisite regulatory approvals, hire additional engineering and
manufacturing personnel and expand its sales and marketing efforts. The Company
estimates that the cost to complete development of the JETCRUZER 500 and obtain
an amendment of its FAA Type Certificate will be approximately $15,000,000. This
amount includes the cost of equipment and tooling, static and flight-testing of
the aircraft and the employment of the necessary personnel to build and test the
aircraft.

       The Company expects to receive progress payments during the construction
of aircraft and final payments upon the delivery of aircraft. However, the
Company believes it will continue to experience losses until such time as it
commences the sale of aircraft on a commercial scale.

       In late 2000, certain of the Company's investors invited three aviation
industry expert executives to visit the Company for due diligence and issue a
report (investors' report) regarding the status of the JETCRUZER 500 project.
The report, issued in the first quarter of 2001, was most enthusiastic about the
Company and its JETCRUZER 500 project.

       Based on the investors' report, and as the result of the delays caused by
the shortfall in funding due to market conditions, the Company believes that it
will require approximately $15,000,000 and approximately 12-15 months of effort
to complete development of the JETCRUZER 500 and obtain an amendment of its FAA
Type Certificate. This amount of money includes the cost of equipment and
tooling, static and flight-testing of the aircraft, and the employment of the
necessary personnel to build and test the aircraft. There can be no assurances,
however, that the Company's cost to complete development of the JETCRUZER 500
will not exceed $15,000,000.

       On March 27, 2001, the Company consummated an agreement with certain
investors to provide the Company $4,100,000 through a convertible debenture.
Under the same agreement, an additional $3,000,000 will likely be provided in
September 2001. The debentures are convertible into Class A Common Stock at
various prices. On June 27, 2001 the Company obtained new financing of
$1,000,000. This financing is separate and in addition to that of March 27,
2001, described above. The Company issued $1,000,000 in a Convertible Note with
an interest rate of 5% to an accredited investor, as defined by Regulation D
rules issued by the Securities and Exchange Commission under the Securities Act
of 1933. Until such time that the debentures are converted, the Company's
interest in its assets is security for the debentures. The Company's management
believes that its current cash balance with the additional funding obtained
subsequent to June 30, 2001 and the remaining availability to issue $2,000,000
of Secured Convertible Notes will only be sufficient to finance its plan of
operations through the end of the third quarter, at which time additional
funding will be required and is expected, either through the use of the equity
line or additional debt financing. If the Company's estimates prove to be

                                       12
<PAGE>

incorrect, or additional sources of financing are unavailable, the Company
will have to curtail its development plans.

       During the quarter ended June 30, 2001 and immediately following that
date, the Company accomplished the following important steps that lead towards
achieving the goals listed above:

   .   JETCRUZER was prepared for retraction testing of landing gear doors in
       preparation for company gear door installation and ground tests on S/N
       0002.

   .   AASI Aircraft appointed Michael C. Y. Niu as Senior Specialist. Mr. Niu
       is regarded as one of the world's leading experts in metallic and
       composite aircraft structures design.

   .   The JETCRUZER 500 wing tip sail vertical wing tip sail (VTS) passed the
       first of two important FAA-witnessed tests.

   .   Employees from AASI's electrical division commenced preparation of the
       Pratt & Whitney (P&W) 1,572 ESHP propjet engine wiring and harnesses that
       were produced in-house. After completion, the engine wiring will be
       checked numerous times prior to installation in JETCRUZER S/N 0003. A
       number of components are required in the wiring, such as the
       starter/generator, ignition system, prop rpm, turbine rpm, torque, oil
       temperature & pressure, prop reverse contacts, internal turbine temps,
       etc. The P&W engine in the JETCRUZER 500 is actually a jet engine that is
       geared to a propeller and is considered one of the most reliable in the
       world.

   .   The JETCRUZER 500 vertical tip sail (VTS), manufactured on mass
       production tooling, passed the critical 100% limit load test, witnessed
       by the FAA. Just over two weeks prior, this wing tip sail also passed
       testing on the reverse side. The sail was then turned over and forces
       were applied in the opposite direction. This critical and final test in
       the limit load series on the wing tip sails was passed the first time,
       and the test will not have to be repeated. The Company must still go
       through ultimate load tests on the VTS. However, the company is in very
       familiar territory with all the testing that is needed to finish the
       amended certification, as it was all previously conducted for the model
       450 FAA certification that was received in June 1994.

       During the balance of 2001 and in 2002, the Company intends to focus its
       efforts on the following events:

   .   The completion of two flight test aircraft for participation in high-
       speed cruise and other flight-testing

   .   The completion of ERP (enterprises resources planning) system phase II
       implementation, including a bar code system and Internet interface
       capability with customers and vendors.

   .   The completion of all major structural and system tests.

   .   Completing Company high-speed cruise flight-testing to assure customers
       of the JETCRUZER 500's speed.

   .   The commencement of limited JETCRUZER 500 production. Upon the
       successful completion of the Company speed tests, the Company immediately
       will commence production of the first JETCRUZER 500 planes. The Company
       anticipates that production will start with a lot of 4 planes.

   .   The start of progress payment collections. As the Company starts the
       production process, each customer whose plane is being built will be
       requested to make an initial progress payment, as specified in the
       customer's purchase contract. The Company believes that this event assist
       the start of positive cash flow.

   .   Obtaining Type Inspection Authorization (TIA). This event marks the end
       of Company flight tests and means that the FAA will test the plane, using
       its pilots. The Company believes that this event will occur in the year
       2002. Obtaining an amended Type Certificate (TC) for the Jetcruzer 500
       from the FAA. This means that the Company may deliver planes to its
       customers. The Company believes that this event will occur in the year
       2002.

   .   Delivering the first JETCRUZER 500. With the delivery of its first plane,
       the Company will record its first sales revenue and cost of goods sold.

                                       13
<PAGE>

   .   Obtaining a production certificate from the FAA. This will allow use of
       the Company's specified inspectors during the production and delivery
       processes of the JETCRUZER 500. This certification should quickly follow
       the receipt of the TC.



LIQUIDITY AND CAPITAL RESOURCES

       At June 30, 2001, the Company had a negative working capital of
$(2,244,000) and stockholders' deficiency of $(3,573,000).  Since its inception
in January 1990, the Company has experienced continuing negative cash flow from
operations, which, prior to the December 1996 IPO, resulted in the Company's
inability to pay certain existing liabilities in a timely manner. The Company
has financed its operations through private funding of equity and debt and
through the proceeds generated from its December 1996 initial public offering.

       The Company expects to continue to incur losses until such time, if ever,
as it obtains regulatory approval for the JETCRUZER 500 and related production
processes and market acceptance for its proposed aircraft at selling prices and
volumes which provide adequate gross profit to cover operating costs and
generate positive cash flow. The Company's working capital requirements will
depend upon numerous factors, including the level of resources devoted by the
Company to the scale-up of manufacturing and the establishment of sales and
marketing capabilities and the progress of the Company's research and
development program for the JETCRUZER 500 and other proposed aircraft.

       The Company's management team has developed a financial plan to address
its working capital requirements. On March 6, 2000, the Company entered into a
series of subscription agreements for the sale of up to $10,000,000 of 5%
Cumulative Convertible Series A Preferred Stock, from which the Company has
received net proceeds of $8,265,000, to date.

       On August 11, 2000, the Company finalized an "equity line" which permits
the Company to sell up to $20,000,000 of its common stock through a Regulation D
offering to a private investor. In connection with the sale, the Company will
issue 250,000 warrants with a three-year life. The first equity draw from the
"equity line" was executed on October 3, 2000, in which the Company has received
net proceeds in the amount of $1,760,000.

       On March 27, 2001, the Company consummated an agreement with certain
investors to provide the Company $4,100,000 through a convertible debenture.
Under the same agreement, an additional $3,000,000 will likely be provided
during the third quarter.  The debentures are convertible into Class A Common
Stock as various prices.

       On June 27, 2001, the Company obtained new financing of $1,000,000. This
financing is separate and in addition to that of March 27, 2001, described
above. The Company issued $1,000,000 in a Convertible Note with an interest rate
of 5% to an accredited investor, as defined by Regulation D rules issued by the
Securities and Exchange Commission under the Securities Act of 1933

       The Company's management believes that its current cash balance with
the additional funding obtained subsequent to June 30, 2001 and the remaining
availability to issue $2,000,000 of Secured Convertible Notes will only be
sufficient to finance its plan of operations through the end of the third
quarter, at which time additional funding will be required and is expected,
either through the use of the equity line or additional debt financing.

       While there is no assurance that additional financing will be available,
the Company's management believes that it has developed a financial plan that,
if executed successfully, will substantially improve the Company's ability to
meet its working capital requirements.  This financial plan includes the
commencement of production and the collection of progress payments to assist
with the working capital requirements.  However, there can be no assurances that
the current timetable for the commencement of production and development and
certification of the aircraft will not be delayed beyond the current fiscal
year.  If the Company's estimates prove to be incorrect, or additional sources
of financing prove to be unavailable, if needed, the Company may have to curtail
its development plans.

                                       14
<PAGE>

       In November 1998, the Company moved into its manufacturing and
headquarters facility. The primary financing for this project was the Company's
obligation under a loan agreement related to proceeds received from $8,500,000
in the issuance of Industrial Development Bonds (IDB) by the California Economic
Development Financing Authority (the "Authority"). The Company was required to
provide cash collateral to The Sumitomo Bank, Limited (the "Bank") in the amount
of $8,500,000 for a stand-by letter of credit in favor of the holders of the
IDBs which was to expire on August 5, 2002, if not terminated earlier by the
Company or the Bank. The IDBs were retired in 1999 and the stand-by letter of
credit in favor of the holders of the IDBs was terminated by the Company.

       The Company has leased approximately l0 acres of land located on the Long
Beach Airport in Long Beach, California ("Ground Lease"). The Ground Lease term
commenced on January l4, l998, and continues for 30 years.  The rental under the
Ground Lease incrementally increases for the first five years of the Ground
Lease term from $7,400 per month to $l5,900 per month.

       The Company retained Commercial Developments International West to design
and build their approximately 200,000 square foot manufacturing and headquarters
facility (the "New Facility") on the property subject to the Ground Lease.  The
Company moved into the New Facility on November l8, l998.  The total cost for
the New Facility was approximately $9,700,000.  The Company believes the New
Facility will provide adequate capacity for its operations for the foreseeable
future.

       In June l999, the Company, in a sale/sublease-back transaction, sold the
New Facility to AP-Long Beach Airport LLC.  The purchase price of the building
was $9,800,000.  The initial term of the sublease is eighteen years, and the
Company has an option to extend the term for an additional l0 years. The
approximate monthly rental payments under the terms of the Sublease are
currently $l09,000.  The monthly rental payments will be adjusted incrementally
on an annual basis until January l, 2008, when the monthly Sublease rental will
be $206,000.  After June l, 2008, the Sublease rentals will be adjusted annually
according to changes in the Consumer Price Index, not to exceed 3% per annum.
During the option term the sublease rental will be at fair market value.  Under
the terms of the Sublease, the Company is also required to pay the Ground Lease
rentals as additional rent.

       The Company had no material capital commitments at June 30, 2001, other
than discussed elsewhere in this report. The Company intends to hire a number of
additional employees, which will require substantial capital resources. The
Company anticipates that it will hire up to 200 additional employees over the
next twelve months, including engineers and manufacturing technicians necessary
to produce its aircraft.

CHARGE TO INCOME IN THE EVENT OF CONVERSION OF PERFORMANCE SHARES

       In the event the Company attains certain earnings thresholds or the
Company's Class A Common Stock meets certain minimum bid price levels, the Class
E Common Stock will be converted into Class B Common Stock. In the event any
such converted Class E Common Stock is held by officers, directors, employees or
consultants, the maximum compensation expense recorded for financial reporting
purposes will be an amount equal to the fair value of the shares converted at
the time of such conversion which value cannot be predicted at this time.
Therefore, in the event the Company attains such earnings thresholds or stock
price levels, the Company will recognize a substantial charge to earnings during
the period in which such conversion occurs, which would have the effect of
increasing the Company's loss or reducing or eliminating its earnings, if any,
at that time. In the event the Company does not attain these earnings thresholds
or minimum bid price levels, and no conversion occurs, no compensation expense
will be recorded for financial reporting purposes.

                                       15
<PAGE>

                          PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports pm Form 8-K

         (a)       Exhibits

                   None


         (b)       Reports on Form 8-K

                   None

                                       16
<PAGE>

                                  SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                  ADVANCED AERODYNAMICS & STRUCTURES, INC.


                                  By: /s/ Carl L. Chen
                                      ---------------------------
                                      Carl L. Chen, President


                                  By: /s/ Dave Turner
                                      ----------------------------
                                      Dave Turner, Chief Financial Officer


Dated:  August 14, 2001

                                       17