**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **Form
        10-KSB**
  (Mark
                  One)**[ X ]**
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **SECURITIES
                  EXCHANGE ACT OF 1934****For
                  the fiscal year ended June 30, 2007**[    ]**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **SECURITIES
                  EXCHANGE ACT OF
                  1934****
 
 For
        the
        transition period from ____________ to ____________
 
 Commission
        File No. 0-18958
 
 **Groen
        Brothers Aviation, Inc.**
 (Name
        of
        small business issuer in its charter)
 
 **Utah**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **87-0489865**
                (I.R.S.
                  Employer Identification No.)
 
 **2640
        W. California Avenue**
 **Salt
        Lake City, Utah  84104-4593**
 (Address
        of principal executive offices) (Zip Code)
 
 Issuer’s
        telephone number, including area code:**(801)
        973-0177**
 
 Securities
        registered pursuant to Section 12(b) of the
        Act:**None**
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 **Common
        Stock, No Par Value**
 
 Check
        whether the Issuer (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 Issuer was required to file such reports),
        and (2) has been subject to such filing requirements for the past 90
        days.  Yes [ X ]  No [   ]
 
 Check
        if
        no 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 Issuer’s knowledge,
        in definitive proxy or information statements incorporated by reference in
        Part
        III of this Form 10-KSB or any amendment to this Form 10-KSB.  [ X
        ]
 
 Indicated
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act    [   ]
        Yes  [ X ] No.
 
 The
        issuer’s revenues for its most recent fiscal year were $3,403,000.
 
 The
        aggregate market value of the voting stock, consisting solely of common stock,
        held by non-affiliates of the issuer computed by reference to the closing
        price
        of such stock was $20,952,000 as of September 18, 2007.
 
 The
        number of shares outstanding of the Issuer’s no par value Common Stock as of
        October 12, 2007 was 154,848,181.
 
 **Documents
        Incorporated by Reference**
 None
 
  
  **Groen
        Brothers Aviation, Inc.**
 **Annual
        Report on Form 10-KSB**
 **Table
        of Contents**
 
 
 
 **Part
                  I**
              Page
                  No.Item
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              17Item
                  3.
              Legal
                  Proceedings
              17Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              18**Part
                  II**Item
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities
              18Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              20Item
                  7.
              Financial
                  Statements
              36Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              36Item
                  8A
              Controls
                  and Procedures
              36Item
                  8B
              Other
                  Information
              37**Part
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act
              37Item
                  10.
              Executive
                  Compensation
              42Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management
              45Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              46**Part
                  IV**Item
                  13.
              Exhibits
              47Item
                  14.
              Principal
                  Accountant Fees and Services
              49**Signatures**
              50
 
 
 
 
 
 
 
 **PART
        I**
 
 **Item
                  1.**
              **Description
                  of Business**
 
 ***Background***
 
 Groen
        Brothers Aviation, Inc. (the
“Company") or (“GBA”) was originally incorporated in the State of Utah on July
        28, 1980 as New Wave Energy.  Separately, on March 21, 1986, Sego
        Tool, Inc. was incorporated by brothers Jay1 and David Groen in order to enter
        the
        gyroplane business.  On September 18, 1990, the Groen brothers
        exchanged 100% of the common stock of Sego Tool, Inc. for 80% of the stock
        of
        New Wave Energy, an action that was in effect a reverse acquisition of New
        Wave
        by the owners of Sego Tool.  On October 23, 1990, the name of New Wave
        Energy was changed to Groen Brothers Aviation, Inc., and under this name,
        the
        Company became a fully reporting public corporation (stock symbol “GNBA”) to
        facilitate the raising of capital and to give minority shareholders the
        flexibility of owning publicly traded stock.  Hereafter, the "Company"
        refers to the small business issuer, Groen Brothers Aviation, Inc. (“GBA”) and
        its wholly-owned subsidiaries, Groen Brothers Aviation USA, Inc. (“GBA USA”)
        and, from December 2002 through November 2004, American Autogyro, Inc.
        (“AAI”).  Effective November 1, 2004, the Company merged AAI into GBA
        USA.  Unless otherwise stated, the financial activities described
        herein are those of GBA USA, which is the sole operating entity of the
        Company.
 
 The
        initial objective of the Company,
        primarily through GBA USA, was to develop and market an easy-to-fly and
        cost-efficient gyroplane2 that could
        compete effectively in the general aviation market.  Initially,
        personal funds of the Groen brothers were used to build a proof-of-concept
        aircraft incorporating a design for the first collective pitch controlled
        semi-rigid teetering rotor system for a gyroplane.  This first
        prototype aircraft flew successfully in 1987, and as a result, the Company
        was
        able to obtain the support of private investors to begin the development
        of its
        second prototype gyroplane, the one-seat Hawk 1.
 
 Following
        the successful flight of the
        Hawk 1 in 1992, the Company proceeded with the design of its third prototype,
        the two-seat Hawk H2X, which first flew in February 1997, incorporating a
        unique
        airfoil design enabling a smooth vertical takeoff at a world record-breaking
        density altitude for gyroplanes.  At this point, management recognized
        that the opportunities for gyroplanes, and for the Company, extended well
        beyond
        the original general aviation market objective, and had broad potential for
        commercial, governmental and military applications.  The Company’s
        focus was thus reoriented to the design of a larger four-seat gyroplane,
        the
        Hawk 4, intended for Federal Aviation Administration (“FAA”) certification with
        a wide range of potential commercial and public use applications.
 
 Between
        1997 and 2003 the Company
        designed and manufactured two prototype Hawk 4 gyroplanes, the first with
        a
        piston engine first flight in 1999 and the second, powered by a Rolls-Royce
        gas
        turbine, had its first flight in 2000.  Based on the superior
        operating performance of the aircraft with the gas turbine engine, the Company
        proceeded with its FAA certification program based on that
        engine.  While substantial progress was made in the lengthy and
        expensive certification process in the following two years, the deterioration
        in
        the market for technical stocks, particularly aerospace, after 9/11, constrained
        the Company’s funding capabilities.  Although the Company had been
        able to demonstrate the unique capabilities of the Hawk 4 through its
        participation in the official security arrangements for the 2002 Winter
        Olympics,  the Company suspended its flight testing of the Hawk 4
        during the first quarter of fiscal 2003 due to lack of financial
        resources.  Further development toward commercial certification of the
        Hawk 4 has been deferred pending the obtaining of the funding necessary to
        complete it.
 
  
 1
          Jay Groen, founder
          and Chairman, died in October 2006.  David Groen, President and CEO,
          took on the additional title and duties of Chairman.
 2  Descriptions
          of the characteristics of a gyroplane and its derivative, the gyrodyne,
          and a
          history of the development of these two aircraft types are provided at
          the end
          of this Background section.
 
 1
 
 The
        Company continues to believe that there is a substantial and potentially
        profitable market for the Hawk 4 and its derivatives, both for commercial
        and
        for so-called “Public Use” applications that do not require commercial
        certification.  The latter includes federal, state and local agencies
        across the nation, particularly Homeland Defense, and also governments of
        foreign countries.  In this context, the Company has had conversations
        with representatives of several countries with respect to setting up one
        or more
        joint ventures (“JV”) to certificate, manufacture and sell the Hawk series of
        gyroplanes.  As described below under “Company Products,” considerable
        progress has been made with certain Spanish entities in this
        regard.
 
 While
        recognizing in fiscal year 2003 the infeasibility of continuing at that time
        with FAA certification of the Hawk 4, the Company also noted that the general
        aviation kit-plane market, which does not require the costly certification
        process of the Hawk 4, still lacked the safe, economical, easy-to-fly gyroplane
        that the Company originally intended to produce.  In the opinion of
        management, the kit-plane market could expand significantly as a result
        of new less restrictive FAA regulations.  Although thousands of
        kit-built small gyroplanes have been produced by a variety of manufacturers
        over
        many years, for the most part, the Company believed these gyroplanes did
        not
        incorporate a full understanding of gyroplane dynamics and that this contributed
        to the fact that fatality statistics of kit gyroplanes did not reflect the
        inherent safety of the gyroplane.  Because the Company has an
        important vested interest in the reputation for safety of gyroplanes in general,
        management believed that both to protect the reputation of the gyroplane
        and to
        take full advantage of an underserved market, the Company should enter this
        market.
 
 To
        take advantage of these
        opportunities through utilization of its very considerable knowledge of
        gyroplane dynamics and aerodynamics built up over the years, the Company
        established American Autogyro, Inc. (“AAI”) in December
        2002.   AAI started with the design and manufacture of a
        modification kit to enhance flight stability for another manufacturer’s
        home-built gyroplane and initiated delivery of such a kit in April
        2003.  The Company reported its first revenues in the fiscal year
        ended June 30, 2003, largely from AAI flight training and the sales of these
        modification kits.  AAI was then tasked with developing a new small
        gyroplane, designed to aerospace standards, that would set a new standard
        for
        safety in that class of aircraft. The Company’s activities with this aircraft,
        later called the ‘SparrowHawk,’ and its derivatives are described under “Company
        Products.” Effective November 1, 2004, the Company merged AAI into GBA
        USA.  GBA USA is continuing the manufacturing, sales and marketing,
        and customer support functions of the SparrowHawk.
 
 The
        Company also recognized that the
        knowledge and experience that it had gained from its work with the Hawk 4
        had
        made it the preeminent authority on gyroplane technology and that that in
        the
        post  9/11 defense environment this technology had substantial
        military potential.  It could serve in a wide variety of roles ranging
        from gyroplanes as unmanned air vehicles (“UAV”s) and to gyrodynes as heavy lift
        Vertical Take-off and Landing (“VTOL”) transports and as high speed
        helicopters.  Furthermore, the technology could be further developed
        to enable the design of runway independent commercial aircraft.
 
 
 2
 
 Starting
        in fiscal 2003, the Company made presentations to the U.S. Defense Advanced
        Research Projects Agency (“DARPA”) and to other military agencies and also to
        public aerospace companies.  Emerging from these efforts, on November
        7, 2005, the Company announced that DARPA had selected a Company-led team
        to
        design a proof of concept high-speed, long range, VTOL aircraft.  This
        modern rotorcraft, named the “Heliplane” by DARPA, is intended as a demonstrator
        aircraft for potential use in combat search and rescue roles and is designed
        to
        fly at a forward speed of 400 mph with a 1,150 mile range, a speed twice
        as fast
        as a helicopter, to offer the VTOL capability of a helicopter, the fast forward
        flight of an airplane, and the safety, simplicity and reliability of a GBA
        gyroplane, and is designed to exploit the Company’s gyrodyne
        technology.  On August 31, 2007, the DARPA contract was modified to
        extend the term of Phase One thereunder from a period of 15 to 23 months
        and to
        increase the total funding in Phase One from $6.4 to $10.4
        million.  The Company is nearing the end of Phase One of the four
        Phase program, and anticipates a Phase Two award by mid fiscal year
        2008.  There can be no guarantee, however, that Phase Two will be
        awarded.
 DARPA
          is
          the central research and development organization for the US Department
          of
          Defense (“DoD”).  It manages and directs select basic and applied
          research for DoD, emphasizing technology development projects where payoff
          is
          high and where success may provide dramatic advances in the capabilities
          of this
          country’s combat forces.  Under its DARPA contract, the Company
          retains the rights for both military and commercial use of the technology
          emerging from the Heliplane contract and continues to pursue potential
          opportunities for this and other of its technologies in the UAV and VTOL
          fields.  Under this contract, DARPA retains a “paid up for life”
license to the military use of this technology.
 ***Gyroplane
        and Gyrodyne Technology***
 
 Autorotative
        flight was developed in 1919 by Spanish aviator, Juan de la Cierva, with
        the
        objective of eliminating the risk of stalling inherent in all fixed wing
        aircraft when forward speed drops below a critical speed.  De la
        Cierva named and trademarked his invention as the “autogiro,” which means “self
        turning” or “autorotation.”  The rotary wing of a gyroplane3, however, powered in flight only
        by the
        onrushing air, much like a windmill, will not stall because a reduction in
        forward speed with the rotor blades in autorotation, will not result in any
        sudden loss of lift.  As speed decreases, a gyroplane will begin to
        descend, right side up and controllable, as its rotating wing continues to
        provide lift with the upward flow of air driving the rotor.  This
        provides the gyroplane with an important inherent safety advantage over a
        conventional airplane for activities requiring low altitude and low speed
        operations.
 
 For
        such
        low, slow flying missions, a gyroplane has a similar safety advantage over
        a
        helicopter.  The helicopter obtains its lift from its engine-powered
        rotor blades pulling the air downwards, creating an upward force on the rotor,
        enabling the helicopter to hover.  This, however, also makes the
        aircraft unstable, and difficult to fly, since a loss of power to a helicopter
        rotor will cause an immediate loss of lift.  Only with sufficient
        forward speed or altitude will a skilled pilot have sufficient time to put
        a
        helicopter into autorotation, and thus make a controlled landing while operating
        as a gyroplane, although without the benefit of rotor blades optimized for
        gyroplane flight.  A helicopter is also more mechanically complex than
        a gyroplane, requiring additional safety-critical systems, notably a
        transmission between engine and main rotor, and a tail rotor with its
        transmission needed to offset the torque in the system created by the powering
        of the rotor in flight.  For these reasons, a gyroplane, not requiring
        a tail rotor or complex transmission because its rotor is not driven by its
        engine, is inherently safer, simpler, quieter and  easier to operate
        while much less expensive to maintain than a helicopter.
 
 
 
 3  Gyroplane
          is an official term now designated by the FAA to describe an aircraft that
          gets
          its lift from rotor blades and its thrust from an engine-driven propeller
          either
          in front, the tractor configuration, or at the rear, the pusher
          configuration.
 
 3
 
 The
        one material advantage of a
        helicopter over a gyroplane is its ability to hover, which is necessary in
        some
        situations such as sea rescue, sling-load work, or landing in uneven
        terrain.  For air surveillance and point-to-point flying, the
        inability to hover is not a disadvantage.  Helicopters at low
        altitude, out of ground effect, whenever possible, will avoid hovering because
        of the danger inherent in doing so.  In a low level surveillance roll,
        such as law enforcement, border patrol, traffic control, etc., proper procedure
        for all rotorcraft is to circle in a slow orbit, something the Hawk 4 and
        SparrowHawk can do efficiently and safely.
 
 In
        summary, gyroplanes in flight, being
        in constant autorotation, are much safer in low and slow flight than either
        airplanes or helicopters.  Airplanes flying low and slow risk a
        stall/spin crash, which cannot happen in a gyroplane.  If power fails
        in a gyroplane, the autorotation continues and the aircraft can be guided
        softly
        to the ground from any altitude.  When power fails in a helicopter,
        the pilot must convert from powered flight to autorotative flight to keep
        the
        rotor blades turning.  This is an unforgiving process, requiring a
        skilled, practiced, accurate, and rapid reaction by the pilot, and it requires
        a
        minimum altitude and/or airspeed to be performed safely.  If a power
        failure occurs when a helicopter is operating with insufficient altitude
        or
        speed, specifically if operating within the “height-velocity” curve shown on
        graphs in the helicopter’s flight manual (informally known as the “dead man’s
        curve”), the pilot will not be able to avoid a crash landing.
 
 The
        gyrodyne is a derivative of the
        gyroplane that, as the name implies, has a powered rotor that enables the
        gyrodyne to hover and to takeoff and land vertically.  Gyrodynes
        differ from helicopters in that their rotors are powered, not by the main
        engine, but by tipjets normally used only for takeoff, landing and
        hovering.  In forward flight the tipjets are turned off and the
        aircraft operates as a gyroplane with the attendant advantages of safety,
        reliability and economy.  Since the rotor is not driven mechanically
        by torque from the main engine located in the aircraft fuselage, a gyrodyne,
        like a gyroplane does not require a tail rotor with its complexity and
        maintenance requirements.
 
 ***Interrupted
        History of the Gyroplane***
 
 In
        the 1920s and 1930s, following
        the successful flights of the Spaniard, Juan de la Cierva, the originator
        of the
        autogiro or gyroplane,  Harold Pitcairn and his colleague Walter
        Kellett, under license from Cierva, designed and built a series of gyroplanes
        in
        America, which eventually made vertical takeoffs and landings.  Their
        efforts resulted in the autogiro concept proving commercially successful
        in many
        applications during the 1930s and early 1940s.  An outstanding example
        was its use by the U.S. Postal Service for nearly ten years to deliver mail
        from
        the roofs of post offices.  Thousands of flights carrying mail were
        performed by Kellett and Pitcairn gyroplanes flying in Camden, Philadelphia,
        Chicago, New Orleans, Washington, D.C., and other cities.
 
 Funding
        for development of aircraft for
        the private market had collapsed in the years of the Great Depression and
        in the
        build up toward Word War II, the main source of investment in aviation came
        from
        the U.S. military.  At the time, Igor Sikorsky, who was an important
        designer of transport airplanes for the government, recognized the potential
        of
        a helicopter to the military.  After licensing rotor technology from
        Pitcairn, he convinced the U.S. military to invest in the helicopter as the
        next
        logical step in the evolution of rotorcraft, promising more versatility for
        military purposes than the gyroplane.  This commitment to the
        helicopter effectively ended government funding for technical development
        of the
        gyroplane.
 
 
 4
 
 After
        World War II, there was a brief and modest resurgence as investors enabled
        three
        private companies to develop two-seat commercial gyroplanes that were certified
        by the FAA:  the Umbaugh (later the Air & Space 18A), the Avian (a
        Canadian design of that same period that reached FAA certification, but was
        never produced), and the McCulloch J-2.  In each case, as an expedient
        to FAA certification, the designers adapted helicopter rotors and blades,
        and
        thus did not fully use the gyroplane technology created by their 1930s
        predecessors.  As a result, none of these civilian gyroplanes
        performed well and their companies failed.
 
 More
        significantly, during the 1950s, Igor Bensen, who had been a principal in
        General Electric’s rotary wing program after World War II, developed a
        home-built open-frame gyroplane kit for amateurs, which he called the
“gyrocopter.”  Stemming from this initiative, home-built kits, mostly
        seating one person, became popular with enthusiasts and more than a dozen
        small
        manufacturers have produced and sold several thousand kits.
 
 The
        technical development of the
        helicopter necessary to achieve the potential of helicopter flight was, however,
        much more difficult and took far longer than the military
        expected.  Real utility was not fully attained until the middle of the
        Vietnam War, and then only after billions of dollars had been spent developing
        turbine-powered helicopters with sufficient payload to move large numbers
        of
        troops and equipment into and out of the jungle.
 
 While
        the
        Vietnam War clearly demonstrated the versatility of vertical flight, it also
        demonstrated that the helicopter was too expensive, both to purchase and
        to
        operate, for widespread civilian use.  Large helicopter manufacturers
        have thus found that the civilian side of helicopter with current production
        technology has not been sufficiently profitable to encourage major investment.
        Nevertheless, companies such as Boeing and Bell, that have committed large
        capital outlays toward helicopter and tilt-rotor technology for military
        applications, recognize vertical takeoff and landing has substantial commercial
        potential.  These companies continue to look for civilian use of that
        technology as evidenced by their investment into the development of aircraft
        targeted for commercial use, including a civilian tilt-rotor.  This
        indicates to the Company the correctness of its opinion that with the right
        technology there is a substantial civilian market for a VTOL
        aircraft.
 
 
 ***Company
        Products***
 
 **GBA
        Hawk 4 Gyroplane**
 
 The
        first
        pre-production piston-engine version of the four-seat Hawk 4 flew in September
        1999, followed by the turbine-engine version in July 20004.  This latter aircraft, powered by
        a
        Rolls-Royce Model 250 420shp turboprop engine, was developed to become the
        Company’s first major production aircraft.  It incorporates rotor
        blades optimized for autorotative flight and the Company’s patented rotor head
        with infinitely variable collective pitch control.  This enables the
        pilot to optimize the rotor blade pitch to the existing conditions and attain
        a
        smoothly controlled ultra-short ground roll for both take-off and
        landing.  The turbine engine further contributes to the reliability,
        maintainability, payload and low operating cost characteristics of the
        aircraft.  The Company has flown the Hawk 4 in several hundred
        incident-free sorties and hundreds of hours of flight time in its
        pre-certification flight-test program.
  
 4
          The piston-powered
          Hawk 4, although with space for a pilot and four passengers, was limited
          by
          payload to four occupants.  The more powerful turbine version can
          carry a pilot and four passengers.
 
 5
 
 The
        Company believes that the safety,
        reliability, maneuverability and low operating cost of the Hawk 4 will permit
        it
        to perform competitively with helicopters (and airplanes) for many missions
        requiring low, slow flight, and the absence of a requirement for a runway
        for
        take-off or landing is a critical advantage.  Potential customers
        include the following:
  1.
              Law
                  enforcement (police, sheriff, border patrol, customs, and drug
                  interdiction).
 2.
              Public
                  service agencies (fire patrol, medical transport, wildlife and
                  land
                  management).
 3.
              Military
                  (courier, armed surveillance, VIP transport, forward artillery
                  control,
                  ground attack, unmanned aerial
                  vehicle).
 4.
              Commercial
                  (oil, gas, and power line patrol and inspection, land survey, aerial
                  photography, crop spraying, herd management, air taxi service,
                  corporate
                  transport, and flight training).
 5.
              Private
                  (commuting, sport flying,
                  training).
 
 Although
        certification of the Hawk 4 has not been completed, it has required significant
        capital and will continue to require significant capital to complete
        it.  In consequence of the adverse affects on the venture capital
        market of the spring 2000 decline of the stock market and the September 11,
        2001
        terrorist attacks, the Company cut back its operations very substantially
        in
        October 2001, and reoriented its immediate priorities toward offering the
        Hawk 4
        Gyroplane in its already well-tested form to the US government in roles similar
        to those outlined above that would not require commercial
        certification.
 
 As
        operation in the United States by Federal, State or Local Government agencies
        is
        exempted from commercial certification requirements under Public Use laws,
        each
        of these opportunities would give the Company the opportunity to begin receiving
        revenues ahead of FAA certification.  This would, as a result, reduce
        the need for funding to permit the start of production of the Hawk
        4.  Consistent with this objective, the Company has continued to
        present the case for the Hawk 4's utility in this role to members of Congress,
        appropriate Federal Agencies, and to State and local agencies across the
        nation,
        and, importantly, with similar agencies of friendly foreign governments.
        In this
        context, the Company has had conversations with representatives of several
        countries with respect to setting up a joint venture to certificate, manufacture
        and sell the Hawk series of gyroplanes.
 
 From
        an
        early stage of such discussions, it was recognized that the most serious
        interest in this project was coming from Spain and that that country presented
        an attractive combination of market potential, available skills and funding
        sources, and favorable legal and political environment.  As a result,
        the Company has been diligently seeking to set up a JV through which the
        Hawk 4
        could be certified under FAA and European regulations.  The objective,
        in broad terms, is for GBA to provide the JV with its Hawk 4 technology and
        oversee and participate in the certification program (on commercial terms),
        while the other partners, governmental and industrial, would provide funding,
        manufacturing, and other resources.  GBA would be a significant
        minority shareholder and the recipient of royalties on aircraft
        sales.
 
 As
        early
        as fiscal 2004, after favorable technical recommendations from a Spanish
        due
        diligence team, the Company believed that such an agreement with a mid-size
        Spanish aerospace company as the industrial partner was close at
        hand.  At a late stage, however, that company decided that in the very
        poor economic climate in the aerospace industry at that time, it would cease
        investing in aerospace in favor of its more profitable non-aerospace
        activities.
 
 
 6
 
 In
        fiscal
        2007, however, the Company obtained renewed interest from the government
        of
        Aragon, an Autonomous Community within Spain, and in December 2006 entered
        into
        a Memorandum of Understanding with Aragon to set up such a JV.  Since
        that time, the investment advisors for Aragon have been undertaking due
        diligence on the project, presenting the project to potential industrial
        partners and undertaking preliminary discussions with regard to funding with
        the
        Spanish government authorities.  In early fiscal year 2008,
        representatives of GBA and Aragon met with representatives of CDTI5, the investment arm of the central
        Spanish
        government’s Ministry of Industry, Tourism and Commerce.  The Company
        has been advised that the results of this meeting were favorable and that
        CDTI
        has asked Aragon and other potential partners to enter into the formal process
        for funding requests.  While the Company can give no assurance that
        the JV will be established, or that if established it will be successful,
        the
        Company believes that the potential investors in the JV have the capability
        to
        fund such a project and, in the opinion of management, that they are likely
        to
        have access to a significant market for the Hawk 4.  The Company
        believes that the proposed JV offers a viable prospect for the Company to
        profit
        from its considerable investment in the Hawk 4 and gyroplane
        technology.
 
 **SparrowHawk
        Gyroplane and Derivatives**
 
 Starting
        in fiscal 2003, AAI undertook the task of designing its own two-seat piston
        engine powered gyroplane that it named the SparrowHawk.  This
        aircraft, incorporating safety features based on aerospace standards, offers
        performance, stability and comfort standards that AAI believes are superior
        to
        any competitive kit-built gyroplane in its class.  AAI finalized the
        design of the SparrowHawk in the fiscal year ended June 30, 2004, and began
        deliveries of kits for the home built market in the third quarter of that
        fiscal
        year. In addition, the Company developed and continues to sell, modification
        kits designed to improve in-flight stability and safety for another
        manufacturer’s kit gyroplane.
 
 In
        December 2005, the Company announced the introduction of its improved
        SparrowHawk model, the SparrowHawk II.  SparrowHawk II offered added
        comfort and robustness, and reduced the time and effort, needed by the customer
        to build the aircraft.  The Company has continued to design
        improvements for the SparrowHawk II during fiscal 2007 and in the first
        half of fiscal 2008 will be introducing new version called the SparrowHawk
        Quick Build.  As the name implies, the primary objective for the
‘Quick Build’ is a significant further reduction of time and effort on the part
        of the purchaser in building the aircraft, while maintaining conformity with
        FAA
        regulations.  Careful attention has been paid to existing customer
        input and to the needs of potential customers.  Many of the latter
        have the financial resources to purchase an aircraft, but have limited time
        to
        complete the build process.  Through a thorough assessment of the
        build process, changes in the design manufacture and product delivery, the
        time
        to assemble the kit by a typical purchaser is expected to be in the order
        of 300
        hours, cutting build time in half.  Deliveries of the Quick Build kit
        begin in October 2007.  All future aircraft will be manufactured to
        the SparrowHawk QB standard.
 
 The
        Company began deliveries of SparrowHawk kits during the third quarter of
        its
        fiscal year ended June 30, 2004, recording initial revenues from this aircraft
        in the fourth quarter of fiscal year 2004.  During the years ended
        June 30, 2007 and 2006, the Company reported revenues from the sale of
        SparrowHawk kits and parts of $562,000 and $667,000.  The Company has
        received advance payments from dealers and customers on SparrowHawk gyroplane
        kit orders during the past several quarters, which have been recorded as
        deferred revenue.  Additional revenues have also been received from
        the sale of modification kits, flight training and from contract manufacturing;
        however, these revenue sources have not been, and are not projected to be,
        significant to the Company.
  5
        Center for
        Development of Technology for Industry
 
 7
  During
          fiscal year 2005, the FAA announced the establishment of a new category
          of
          aircraft, called Light Sport Aircraft (LSA), which permits manufacturers
          to
          produce and sell small, non-complex, fully assembled aircraft without the
          necessity of fulfilling the requirements for an FAA
“Type-Certificate.”  While helicopters have been excluded from the LSA
          category as being too complex, gyroplanes are included, but in view of
          the
          limited experience of the FAA with gyroplanes, initially in a sub-category
          defined as Experimental Light Sport Aircraft (E-LSA).  The E-LSA
          category for gyroplanes will end in 2008.  The Company has petitioned
          the FAA for a “deviation” from the regulation that would permit it to produce
          and sell complete aircraft that meet the LSA standards, with the expectation
          that the experience gained and demonstrated will justify full LSA authorization
          for gyroplanes.  The Experimental Aircraft Association (EAA) filed
          with the FAA a “letter in support” of the Company’s petition for
          deviation.
 
 Management
          believes a large market is likely to arise within the United States as
          a result
          of this FAA action.  The Company believes that its technology will be
          well suited to this market and be capable of conforming to the new
          regulations.  The Company has therefore initiated the design of a new
          light gyroplane, called the SportHawk that would meet the LSA
          regulations.
 
 As
          previously noted, the Company
          identified an important untapped potential market for the Hawk 4 as a patrol
          and
          surveillance aircraft, both in the United States and
          overseas.   It has now become evident that as a derivative of its
          SportHawk design, a smaller, professionally designed aircraft with low
          purchase
          and operating costs that can operate “off airport” and is easy to maintain and
          fly, would also have important applications for patrol
          surveillance.  This is particularly the case in parts of the world
          where skilled helicopter pilots and maintenance personnel are not readily
          available.  For this reason, the Company believes the SparrowHawk or
          its derivatives sold as a fully assembled aircraft could be expected to
          be
          popular with law enforcement agencies around the world.
 
 The
          Company’s discussions with the Office of Domestic Preparedness (“ODP”) on
          gyroplane usage have emphasized the merits of the SparrowHawk as a readily
          available, ultra-low cost air surveillance vehicle.  Similarly,
          discussions have been held with the Department of Defense (“DOD”) for the use of
          gyroplanes for mine and bomb detection to counter those threats in Iraq
          and
          elsewhere, emphasizing again its low cost and early availability in relation
          to
          other solutions.  Sales representatives have also been appointed in
          Korea and India to present the capabilities of small gyroplanes to government
          agencies in those countries, and the Company has held meetings with several
          agencies in China in relation to the use of the SparrowHawk in
          China.
 
 Consistent
          with the design advances that are being incorporated into the SportHawk
          for the
          civilian market, and with the knowledge gained by these discussions with
          potential customers, as mentioned above, the Company has initiated design
          of a
          corresponding SportHawk derivative directed toward government markets,
          which it
          is naming the ShadowHawk Gyroplane.
 
 As
          a result of the new FAA regulations
          and the opportunities for government acquisition of fully assembled aircraft,
          the SportHawk and ShadowHawk can be sold as complete aircraft, rather than
          as
          kits like the SparrowHawk.  The Company believes that the production
          of complete aircraft will enable it to maintain quality control over the
          finished product, eliminate the delay between delivery and in-service dates,
          and
          overall enable the product and Company to be more effectively
          branded.
 
 
 8
 
 **Unmanned
        Gyroplane Contract**
 
 The
        relative mechanical simplicity and aerodynamic stability of the gyroplane
        and
        gyrodyne in comparison to a helicopter or other vertical lift aircraft allows
        both aircraft to be potential candidates for unmanned as well as manned
        applications.  GBA has been approached separately by two aerospace
        companies with proposals to assist them in the design of unmanned gyroplanes
        for
        two different US military applications.
 The
          Company has  been engaged as a subcontractor to one of these companies
          for a project called PAS (Precision Airdrop System) that is projected to produce
          an unmanned gyroplane rotorcraft for military supply missions, missions
          now
          served with much less accuracy by parachutes.  GBA has been engaged by
          this major aerospace company to design, and ultimately manufacture, the
          rotor
          system and fuselage using their guidance system.  A large-scale model
          designed and built by GBA was successfully flown on a military test range
          in
          July of 2007, demonstrating the effectiveness of this technology.  The
          project is expected to proceed to full-scale demonstrator development beginning
          in 2008.  If successful, it is possible that the Company could receive
          a significant order for full-scale production for these aircraft as early
          as
          2009.
 
 **The
        Company’s DARPA “Heliplane” Gyrodyne Contract**
 The
          Company’s technology is fully scalable and readily adaptable to the gyroplane’s
          derivative form, the gyrodyne.  As detailed earlier, the gyrodyne is a
          rotary wing aircraft that uses “tipjets” for short duration power permitting
          pure vertical takeoff and landing, providing the capability to
          hover.  During the en-route portion of the flight the tipjets are
          turned off and the gyrodyne flies as a gyroplane in
          autorotation.  Such an aircraft is capable of both lifting substantial
          payloads in gyrodyne mode and covering substantial range as a
          gyroplane.  The British Fairey Rotodyne aircraft demonstrated the
          technical validity of this concept in the 1960's.  With the
          application of modern technology developed by the Company, the concept
          is ready
          to be turned into a highly utilitarian aircraft platform, with many diverse
          applications.
 
 In
          recognition of these capabilities,
          over the past three years the Company has been assessing military applications
          of its gyrodyne technology to conceptual designs for a vertical takeoff
          aircraft
          with payload and range capabilities that no aerospace manufacturer has
          been able
          to offer and that would contribute to the military and security needs of
          the
          United States Government.  As a consequence, the Company has been able
          to respond to requests for proposals from government agencies and military
          commands.  These submissions have ranged from small UAV gyroplanes to
          large vertical takeoff and landing (“VTOL”) freighters.  Applications
          have also been made in partnership with either a major aerospace company
          or an
          academic institution with preeminent aerospace credentials.
 
 On
        November 7, 2005, the Company
        announced that the U.S. Defense Advanced Research Projects Agency (“DARPA”) had
        selected a Company-led team to design a proof of concept high-speed, long
        range
        VTOL aircraft.  This modern rotorcraft, named the “Heliplane” by
        DARPA, is intended for use in combat search and rescue roles.  It will
        offer the VTOL capability of a helicopter, the fast forward flight of an
        airplane, and the safety, simplicity and reliability of a GBA gyroplane and
        is
        designed to exploit the Company’s gyrodyne technology.  DARPA is the
        central research and development organization for the US Department of Defense
        (DoD).  It manages and directs select basic and applied research for
        DoD, emphasizing technology development projects where payoff is high and
        where
        success may provide dramatic advances in the capabilities of this country’s
        combat forces.
 
 
 9
 Phase
          One
          of this potential multi-year $55 million four-phase Heliplane program began
          with
          a 15-month $6.4 million award to develop the preliminary design and perform
          key
          technology demonstrations.  On September 19, 2007, the DARPA contract
          was modified, increasing the contract award from $6.4 million to $10.4
          million,
          and extending the term of Phase One from 15 to 23 months.  Substantial
          portions of Phase One payments are paid by the Company to subcontractors
          and
          consultants hired by the Company.  Payments under this contract are
          conditional upon the Company attaining several milestone objectives during
          the
          course of Phase One of the contract.
  The
          Company recognizes revenue on this contract as each defined milestone is
          completed and the requisite meetings are held and technical data submitted
          and
          accepted by DARPA.  At that time, DARPA will instruct the Company to
          submit an invoice for payment for the respective milestone at the amounts
          specified in the contract.  Through December 31, 2006,
          contract-related expenses incurred by the Company for each milestone of
          the
          contract, including its own labor, travel, supplies and other costs, and
          the
          costs of subcontractors and consultants, were deferred and expensed to
          cost of
          sales as the contract revenue for the milestone was recognized.  The
          Company is currently experiencing a negative profit margin on the DARPA
          contract; therefore, all contract-related costs and expenses incurred subsequent
          to December 31, 2006 have been expensed as incurred.  Through June 30,
          2007, the Company completed the first four milestones and substantially
          all of
          the fifth milestone of Phase One of the DARPA contract, and recognized
          revenues
          totaling $4,790,000, $2,350,000 recognized in the fiscal year ended June
          30,
          2006 and $2,440,000 recognized in the current fiscal year ended June 30,
          2007.
 The
          Heliplane gyrodyne represents the
          possible model for the next generation rotor wing aircraft, meeting economy
          and
          performance goals not considered achievable by any other type of VTOL
          aircraft.  As the Company’s gyrodyne technology is scalable to much
          larger aircraft, it has potential applications for both heavy lift, high
          speed
          VTOL military aircraft and for runway independent commercial
          airliners.  The Company has been actively engaged in discussions with
          government agencies and potential aerospace strategic partners in this
          country
          with respect to military and commercial gyrodyne and gyroplane applications,
          and
          in Europe, India, and China with respect to commercial gyroplane
          applications.
 
 **Future
        Company Gyrodyne Aircraft**
 
 The
        Heliplane gyrodyne represents the
        possible model for the next generation rotor wing aircraft, meeting economy
        and
        performance goals not considered achievable by any other type of VTOL
        aircraft.  As the Company’s gyrodyne technology is scalable to much
        larger aircraft, it has potential applications for both heavy lift, high
        speed
        VTOL military aircraft. The Company has been actively engaged in discussions
        with government agencies and potential aerospace strategic partners in this
        country with respect to military applications, both manned and
        unmanned.
 
 The
        gyrodyne technology developed for the Heliplane also has direct application
        to
        the design of short-range vertical take off and landing (“VTOL”) commercial
        airliners that are runway independent.  Growth in the economy can
        produce heavy demand for aircraft that do not require the use of increasingly
        congested runways and are not limited by air traffic control constraints,
        and
        the Company anticipates an opportunity to develop such an
        aircraft.  By using the airframe of an existing type-certificated
        production airplane and adding the Company’s rotor system, gyrodyne airliners
        can be delivered for substantially less investment and in less time than
        would
        normally be required to bring a new airliner to market.  The Company’s
        longer-range plans have identified opportunities for large (18-60 seat)
        gyrodynes to provide commercial passenger service in short and medium-range
        markets.
 
 
 10
 
 The
        proposals that the Company has
        presented, or participated in presenting, have been well received and helped
        generate credibility for the value of the Company’s technology among key
        segments of the aerospace industry.  The Company will continue to seek
        opportunities to obtain government research and development contracts for
        use of
        its technology in both military and civilian agency fields where it believes
        that it can offer meaningful advantages in performance or cost over competing
        technologies.
 
 
 ***Market***
 
 Management
        believes that it is in the national interest that the Company’s unique gyroplane
        technology is developed.  The terrorist actions of September 11, 2001
        and later, have triggered important new opportunities to use the Company’s
        technology in new counter-terrorism markets.  The new circumstance of
        our country, as well as other countries, is requiring sharply increased levels
        of vigilance by many branches of government to protect critical national
        assets
        against terrorist attack.  Public use regulations would permit the
        Hawk 4 to be utilized as a highly efficient, safe, and inexpensive means
        of
        providing needed surveillance by government agencies for such roles. These
        include border patrol as well as protection of pipelines, nuclear power plants
        and key transportation infrastructures for which the Hawk 4 is particularly
        well
        suited, performing such missions far more effectively, and often at far lower
        cost, than other air or ground vehicles.
 
 The
        attempted shooting down of an
        Israeli commercial aircraft approaching Mombassa airport in Kenya by Al Qaeda
        terrorists using surface-to-air “SAM” man-portable missiles has made the
        protection of commercial aircraft from such missile attacks an extremely
        important issue.  Several proposals have been made to fit military
        missile defense systems to commercial aircraft, but research undertaken under
        Homeland Defense contracts has indicated that these approaches are extremely
        expensive, and would take years to develop and
        install.  Significantly, however, the Kenya incident precisely fits
        the scenario presented by the Company as a serious risk to the Salt Lake
        City
        2002 Winter Olympics, which resulted in the Hawk 4 demonstrating its capacity
        to
        guard against such an attack.  The subsequent arrest in New York of
        individuals attempting to import Russian SAM missiles into the United States
        heightened concerns about this threat.
 
 The
        Company asserts that the most
        practical and effective deterrent to missile attacks remains intensive
        patrolling of airport approach and departure paths by safe Hawk 4 and/or
        SparrowHawk Gyroplanes, which could perform this role more economically and
        effectively than fixed-wing airplanes or helicopters.  The Company has
        therefore approached principal government agencies, including the Transportation
        Security Administration (TSA) of the Department of Homeland Security, the
        Office
        of Domestic Preparedness (ODP) of the Department of Justice (DOJ), as well
        as
        representatives of airport authorities, to present the case for both the
        Hawk 4
        and the SparrowHawk in this role.
 
 The
        Company is also seeking orders from foreign governments with intensive border
        patrol needs.  The small, ultra low cost SparrowHawk, mechanically
        very simple, although sophisticated in design, is well suited for areas where
        substantial coverage is needed, but resources and skills are very
        limited.  The easy maintainability of the Hawk 4 also enables it to
        excel in operating where infrastructure is relatively undeveloped and where
        the
        cost and complexity of acquiring and operating helicopters in adequate numbers
        is infeasible.  Given the potential for sales in foreign countries,
        the Company has evaluated the efficiency of assembling Hawk 4 and SparrowHawk
        Gyroplanes in strategic overseas locations, and has had discussions with
        different foreign entities on possible sites.
 
 
 11
 
 ***Government
        Regulation***
 
 The
        nature of aviation products has resulted in their manufacture being regulated
        by
        governments for public safety, national defense, and economic and/or political
        purposes.  Such regulations vary widely by country, by product type
        and by usage.  The Company’s products and intended products are
        principally impacted by United States laws and regulations, but also by
        requirements in its export markets.  As its products can be used for
        private, commercial, public agency or military purposes, their sale and
        operation are governed by regulations appropriate to each
        category.  Developmental flight testing of the Company’s aircraft is
        carried out under exemption rules covering experimental aircraft.  The
        following section reviews the principal regulations applicable to each category
        of the Company’s activities in the United States.
 
 **GBA
        Hawk 4 Series Gyroplanes**
 
 **Commercial
        or Private Use**:  FAA certification is the process by
        which the United States government ensures that aircraft sold into the US
        civil
        market meet appropriate standards for all civil users.  FAA
        certification is not required by military aircraft and by many aircraft in
        “Public Use,” roles operated by Federal, State or local
        agencies.  Civil aircraft operated outside the United States are
        regulated by the authorities of those countries and may be required to obtain
        additional certification.  The analysis and testing leading to a US
        certificate is, however, currently acceptable in most foreign countries as
        the
        basis for granting certification in those countries.
 
 FAA
        certification has two related components.  The first, Aircraft Type
        Certification assesses the integrity of the design and associated
        engineering through analysis and testing of components and complete aircraft
        to
        insure that the aircraft can achieve its performance standards
        safely.  The second, Aircraft Production Certification,
        assesses the manufacturing organization to insure that its processes and
        procedures will result in the production of aircraft that fully conform to
        the
        standards of the aircraft type certificate.
 
 The
        regulations pertaining to aircraft certification are contained in Title 14
        of
        the United States Code, the “Federal Aviation Regulations”
(FAR).  Aircraft in the category of the Company’s Hawk 4 aircraft, to
        be operated commercially or privately, must receive a Type Certificate under
        Part 27 (normal category rotorcraft weighing less than 6,000 lbs) of the
        FAR,
        while the Production Certificate must be obtained under Part 21 of the
        FAR.
 
 **Public
        Use**: The Company’s efforts to sell its Hawk 4 to government
        agencies in the United States is based on the specific exemption for operation
        of aircraft used by government agencies as authorized by Federal Public Law
        103-411, which defines what is a “public aircraft operation.”  This
        law permits training and flights in “public aircraft” for performance of the
        following governmental functions:
  Flights
        in response to fire fighting;
 Flights
        in response to search and rescue;
 Flights
        in response to law enforcement activities; and
 Flights
        in support of aeronautical research or biological or geological resource
        management.
 
 
 12
 
 In
        this
        context, ''public aircraft'' means an aircraft:
 
 (i)
        used
        only for the United States Government;
 (ii)
        owned by the United States Government and operated by any person for purposes
        related to crew training, equipment development, or demonstration;
        or
 (iii)
        owned and operated (except for commercial purposes), or exclusively leased
        for
        at least 90 continuous days, by a government (except the United States
        Government), including a State, the District of Columbia, or a territory
        or
        possession of the United States, or political subdivision of that
        government;
 
 It
        does
        not include a government-owned aircraft:
 
 (i)
        transporting property for commercial purposes; or
 (ii)
        transporting passengers other than –
 
 (I)
              transporting
                  (for other than commercial purposes) crewmembers or other persons
                  aboard
                  the aircraft whose presence is required to perform, or is associated
                  with
                  the performance of, a governmental function such as firefighting,
                  search
                  and rescue, law enforcement, aeronautical research, or biological
                  or
                  geological resource management; or
 (II)
              transporting
                  (for other than commercial purposes) persons aboard the aircraft
                  if the
                  aircraft is operated by the Armed Forces or an intelligence agency
                  of the
                  United States.
 
 An
        aircraft described in the preceding sentence shall, notwithstanding any
        limitation relating to use of the aircraft for commercial purposes, be
        considered to be a public aircraft for the purposes of this part without
        regard
        to whether the aircraft is operated by a unit of government on behalf of
        another
        unit of government, pursuant to a cost reimbursement agreement between such
        units of government, if the unit of government on whose behalf the operation
        is
        conducted certifies to the Administrator of the Federal Aviation Administration
        that the operation was necessary to respond to a significant and imminent
        threat
        to life or property (including natural resources) and that no service by
        a
        private operator was reasonably available to meet the threat.
 
 **Military
        Use**: Aircraft sold to the US military are not required to
        meet FAA regulations, but must conform to military specifications that serve
        a
        similar purpose.  The Company has not attempted to sell its Hawk 4 to
        the United States Armed Forces and is thus not familiar with the detailed
        requirements that would have to be met.  It believes, however, that
        should a military application for the Hawk 4 be needed by the US Armed Forces,
        a
        version of the Hawk 4 could be designed to meet military
        specifications.
 
 **GBA
        SparrowHawk Gyroplanes**
 
 **Homebuilt
        Kit Aircraft**:  While it might be possible to design and
        manufacture a gyroplane in the size and performance class of the SparrowHawk
        to
        meet the FAA FAR Parts 21 and 27 regulations that the Hawk 4 is designed
        to
        meet, the Company has not chosen to do this.  The Company’s entry to
        the SparrowHawk market has been through the alternative path of producing
        homebuilt aircraft kits for which there is an established
        market.  Homebuilt aircraft kits are permitted by the FAA under its
        FAR Part 21 regulations governing the certification and operation of
        amateur-built aircraft.  Such kits, however, require that the majority
        portion of the kit be built by an amateur (the “51% rule”), limiting the
        manufacturer’s portion to 49%.
 
 
 13
 
 **Light
        Sport Aircraft**:  The FAA issued new regulations in
        2004 defining a new classification of aircraft called Light Sport Aircraft
        (“LSA”) and regulated in two categories, namely Special Light Sport Aircraft
        (“SLSA”) and Experimental Light Sport Aircraft (“E-LSA”).  These
        regulations define an LSA by specific detailed limits upon size, weight,
        speed,
        and complexity.  The LSA regulations specifically exclude helicopters
        and other aircraft types considered to be overly complex for the LSA
        classification.  Such aircraft are not limited by the 51% rule, with
        the manufacturer permitted to fully build the aircraft.
  Aircraft
        conforming to the SLSA category, must in addition to the basic LSA limitations,
        be designed and manufactured to certain defined standards that include
        requirements such as, for example, the need for engines that are either
        FAA-certified or have parts traceability.
 Unlike
          helicopters, gyroplanes are not specifically excluded from the LSA
          classification, but in view of the FAA’s relative unfamiliarity with the type,
          are eligible for a subcategory defined as Experimental or
          E-LSA.  E-LSA aircraft must meet the LSA size, weight and other limits
          and can be sold as fully assembled aircraft, but are not required to meet
          the
          SLSA manufacturing standards.  Manufacture of E-LSA aircraft is,
          however, limited to the period ending January 31, 2008.
 
 **Public
          Use Aircraft**: The Company is offering SparrowHawk aircraft fully
          built to US government agencies for Public Use, for which the regulations
          and
          limitations are covered by the same regulation, Public Law 103-411, that
          governs
          Public use for the Hawk 4, as described above.
 
 **Research
        and Development Aircraft Flown under Government Contract**
 
 Any
        aircraft developed and flown under
        government contracts that the Company may be granted, such as the DARPA
        Heliplane contract, will be tested and flown under FAA regulations governing
        experimental aircraft.
 
 
 ***Distribution
        and Marketing***
 
 It
        has
        been the Company’s plan to market the Hawk 4 through a dealer network, both in
        the United States and the rest of the world. A GBA Authorized Dealer network
        with 14 United States dealers, 3 International dealers and over 60 national
        sales representatives was established and these dealers placed firm orders
        with
        deposits for 145 Hawk 4 gyroplanes.  As of June 30, 2007, dealer
        deposits totaled $2,145,000, which amount has been reported as a long-term
        liability in the accompanying consolidated financial statements.  The
        deposit guarantees a delivery sequence number and represents a percentage
        of the
        total estimated purchase price.  The Company has also issued common
        stock to dealers as partial consideration for the delay in the certification
        of
        the Hawk 4 Gyroplane.  These costs have been charged to interest
        expense as incurred.  The dealers have been given the opportunity to
        convert a portion of their deposits into shares of the Company’s restricted
        common stock.  As stockholders of the Company, the dealers are
        considered related parties. In the event of a successful establishment of
        a
        joint venture for the Hawk 4 in Spain, the distribution rights of the dealers
        for commercial sales may be transferred from GBA to the JV.  Public
        use and military sales of the Hawk 4 will be made directly by the Company
        or by
        its prospective Spanish JV.
 
 
 14
 
 All
        the Company’s government marketing
        and therefore its responses to requests for proposals to participate in research
        and development programs suited to its technology have been directed exclusively
        to the United States Government.
 
 As
        discussed previously, the Company is
        building a dealer network for the sales of its SparrowHawk gyroplane kits,
        primarily throughout North America with some international
        locations.  This dealer network will be the principal means of
        marketing and selling it SparrowHawk kits, and the Company intends to sell
        its
        kits primarily through this network.  Through the date of this filing,
        36 dealerships have been established, 29 in the United States and 7
        internationally. Sales representatives have also been appointed in Korea
        and
        India to present the capabilities of the SparrowHawk for civil use to government
        agencies in those countries.
 
 The
        Company continues to place a
        particular focus on demonstrations of the SparrowHawk at regional and national
        air shows attended by kit-built aircraft enthusiasts.  Together with
        several of its dealers, it has given demonstrations to attendees at the Popular
        Rotorcraft Association Show at Mentone, Indiana, the Experimental Aircraft
        Association (EAA) Show at Oshkosh, Wisconsin, the EAA Sun ‘n Fun Show in
        Lakeland, Florida, and the Bensen Days Show in Wauchula,
        Florida.  Additional demonstrations have been given by dealers at
        shows in Arizona, Texas, Florida and Washington.  As the dealer
        network expands, it can be expected that the exposure of potential customers
        to
        the merits of the SparrowHawk will increase.
 
 In
        recognition that many of the
        opportunities for use of the Company’s gyroplane products lay in Asia, in fiscal
        2005 the Company hired Mr. Jason Chen, as Vice President of Business Development
        in Asia, who is now leading the Company’s efforts in that
        continent.  As a result of the hiring of Mr. Chen, executive officers
        and employees of the Company have met in China with government officials
        and
        aerospace executives on several occasions.  In these meetings, Company
        representatives made presentations covering the application of the Company’s
        gyroplane and gyrodyne technologies to China’s commercial needs.  The
        presentations were well received and resulted in the Company being invited
        back
        to China to discuss specific proposals for joint ventures or
        cooperation.
 
 The
        Company believes that Asia
        represents a potentially very large market for its products, from the
        SparrowHawk size gyroplanes, to the Hawk 4 gyroplane and its variants, to
        the
        varying sizes of tip-jet powered gyrodynes in commuter airline and transport
        category aircraft.  In addition, the Company believes that these types
        of safe, economical, high performance Ultra-Short and Vertical Takeoff and
        Landing (USTOL and VTOL) aircraft can be very important in helping solve
        the
        transportation needs of the burgeoning economies of China, India, Korea and
        other Asian nations.
 
 ***Competition***
 To
          the Company’s knowledge, no other
          gyroplane is being prepared for commercial FAA certification, nor are any
          certified commercial gyroplanes currently being manufactured.  The
          sole company known to be developing modern gyroplane technology, is
          CarterCopters, LLC (Carter).  Carter, like the Company, has identified the
          potential for a safe and efficient gyroplane that can operate without the
          need
          for a runway.  Carter has, however, approached the market from a very
          different perspective than the Company.  Carter has stated that its
          business strategy is to be a technology development company, not a manufacturer,
          and therefore, for these reasons the CarterCopter does not represent any
          direct
          competition to the Hawk 4.
 
 
 15
 
 Competition
        for the Hawk 4 lies largely in the helicopter segment, although the aircraft
        is
        competitive with airplanes for certain missions and is expected to obtain
        part
        of its market from fixed–wing markets.  Its principal competitors are
        therefore comparably-sized turbine-powered helicopters, with similar speed,
        payload and range capabilities, notably the Schweizer 333, the Enstrom 480,
        the
        Bell 206BIII and the MD 500E.  The Company believes that the much
        lower maintenance cost, greater daily utilization capability and inherent
        safety
        will enable the Hawk 4 to compete effectively against these aircraft as well
        as
        the lower cost, but lower-performing piston-powered Robinson R44.
 Competitive
          aircraft to the SparrowHawk in the two-seat closed cockpit kit class are
          principally the side-by-side two-seat RAF 2000, previously produced in
          Canada,
          but whose operations have been acquired by a South African party, and the
          tandem
          Sycamore produced in South Africa.  The Company believes that its
          SparrowHawk has important advantages in its flying characteristics and
          safety
          over the RAF 2000 and the Sycamore.  There are also several
          manufacturers of kits for amateur-built aircraft, including fixed wing,
          helicopter and other aircraft, that represent competition for the Company’s kit
          built SparrowHawk gyroplane.  Two new fully-built gyroplanes have
          entered the E-LSA market during fiscal 2007, the Xenon from France and
          the
          Sportcopter from Oregon and will be future competition for the Company’s
          SportHawk when it enters the market.
 
 As
        the
        Company’s gyrodyne technology is principally directed towards missions that
        require either VTOL or near VTOL capability, its most significant competition
        comes from helicopters or hybrid aircraft that combine both helicopter and
        airplane characteristics.  For high speed and heavy lift applications,
        both civil and military, these include tiltrotors in both two and four rotor
        configurations, proposed by Bell and Boeing, compound tandem helicopters
        with
        augmented lift from small wings and augmented thrust from external jet engines,
        proposed by Boeing and coaxial twin rotor helicopters proposed by
        Sikorsky.   The Company believes that inherent advantages in its
        technology allow it to compete effectively with these approaches.
 
 ***Patents***
 
 The
        Company presently owns several
        patents that relate to collective pitch and flight controls.  The
        important element of these patents is collective pitch control on a semi-rigid,
        teetering rotor head for gyroplanes.  This application is
        differentiated from similar sounding claims for helicopters, as this concept
        has
        never before been applied to gyroplanes.  The patent claims are
        written very broadly, which makes it difficult to design around
        them.  The Company’s patent opportunity existed because of a
        fifty-year hiatus in development in gyroplane technology.
 
 
 16
  ***Royalty
          Commitments***
 
 Royalty
          payments of 1% of the gross sales price of gyroplanes are to be paid in
          total to
          the Company’s founders, David Groen and the estate of the late Jay
          Groen.  Through June 30, 2007, royalties payable totaled $12,500 to
          each of these parties.
 The
        Company has royalty agreements with
        two holders of notes payable totaling $300,000 which entitle the note holders
        to
        receive royalties on the sales by the Company of certain gyroplanes other
        than
        the SparrowHawk gyroplane.  The royalties are calculated on each
        aircraft sold, and are limited to a combined maximum total of $1.3
        million.
 
 The
        Company has a royalty agreement
        with an investor entitling the investor to receive royalties equal to $2,500
        for
        each Hawk 4 Gyroplane sold, limited to a maximum total of $125,000.
 
 ***Research
        and Development Expenditures***
 
 Total
        research and development
        expenditures incurred by the Company for the years ended June 30, 2007 and
        June
        30, 2006 were $1,555,000 and $2,534,000, respectively.
 
 ***Employees***
 
 As
        of June 30, 2007, the Company had 90
        full time employees and 92 total employees.
 
 
 **Item
                  2.**
              **Description
                  of Property**
 
 The
        Company leases its
        development/manufacturing facility located at 2640 W. California Avenue,
        Salt
        Lake City, Utah from an unrelated party.  This property of
        approximately 25,000 square feet, houses the Company’s headquarters and its
        administrative offices, and within this facility the Company conducts research
        and development and government contract activities, and manufactures parts
        and
        assembles kits for the SparrowHawk.  The Company’s lease extends
        through September 2010.
 
 In
        addition, the Company leases a flight facility in Buckeye Airport, Arizona,
        of
        approximately 12,000 square feet, on a month-to-month basis, which it manages
        on
        behalf of the Airport Authority.  The principal flight testing of the
        Company’s aircraft and flight training, including gyroplane training of FAA
        pilots, takes place at Buckeye, as well as flight demonstrations to customers
        and other parties.
 
 The
        Company considers the condition of each of these facilities to be good and
        adequate for the current level of operations.
 
 
 **Item
                  3.**
              **Legal
                  Proceedings**
  The
        Company has been a plaintiff in connection with four million shares of the
        Company’s common stock issued for the purposes of obtaining a foreign loan in
        Luxembourg in 1993.  In that suit, the Company obtained injunctions in
        Germany and Luxembourg preventing those shares from being sold or
        liquidated.  The Company prevailed in the case at appellate
        levels.  The Company obtained a court order from Luxembourg to have
        the certificates returned to the Company.  The shares were returned to
        the Company and were cancelled in May 2007.
 
 The
        Company is subject to the potential
        of various claims and legal actions arising in the ordinary course of business,
        including certain matters relating to past due amounts to
        creditors.  The past due amounts are recorded as liabilities in the
        Company’s consolidated financial statements, and management believes that the
        amount, if any, that may result from other claims will not have a material
        adverse effect on the consolidated financial statements.
 
 
 17
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
  There
        were no matters submitted to a
        vote of security holders during the fourth quarter of fiscal year
        2007.
 
 
 **PART
        II**
 
 
 **Item
                  5:**
              **Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity
                  Securities**
 
 ***(a)
        Market Information.***
 
 The
        common stock of the Company, no par
        value, is currently traded over the counter and is listed on the OTC Bulletin
        Board under the symbol “GNBA.OB.”  The following table sets forth the
        approximate range of high and low closing prices for the common stock of
        the
        Company during the periods indicated.  The quotations presented
        reflect inter-dealer prices, without retail markup, markdown, or commissions,
        and may not necessarily represent actual transactions in the common
        stock.
 
 **Closing
                  Prices****Fiscal
                  Year Ended June 30:**
              
              **High**
              
              **Low****2007**First
                  Quarter
              
              $0.18
              
              $0.14Second
                  Quarter
              
              $0.24
              
              $0.14Third
                  Quarter
              
              $0.26
              
              $0.16Fourth
                  Quarter
              
              $0.18
              
              $0.14**2006**First
                  Quarter
              
              $0.21
              
              $0.16Second
                  Quarter
              
              $0.44
              
              $0.21Third
                  Quarter
              
              $0.26
              
              $0.18Fourth
                  Quarter
              
              $0.19
              
              $0.16
 
 
 On
        September 18, 2007, the closing
        quotation for the common stock was $0.15 per share.  As reflected by
        the high and low prices on the foregoing table, the trading price of the
        common
        stock of the Company can be volatile with dramatic changes over short
        periods.  The trading price may reflect imbalances in the supply and
        demand for shares of the Company, market reaction to perceived changes in
        the
        industry in which the Company sells products and services, general economic
        conditions, and other factors.  Investors are cautioned that the
        trading price of the common stock can change dramatically based on changing
        market perceptions that may be unrelated to the Company and its
        activities.
 
 
 18
 ***(b)
          Number of equity security holders.***
 The
        number of record holders of the Company’s common stock as of September 18, 2007
        was approximately 1,600, which does not include shareholders whose stock
        is held
        through securities position listings.
 
 ***(c)
        Dividends.***
 
 The
        Company did not declare or pay any
        cash dividends on its common stock during the past two fiscal
        years.
 
 ***(d)
        Securities authorized for issuance
        under equity compensation plans.***
 
 The
        Company’s Amended and Restated 2000
        Stock Option Plan (the “Plan”) has been approved by the shareholders of the
        Company.  Under the Plan, a maximum of 60,000,000 common shares are
        available for granting of options to purchase common stock.  The
        Company may issue both non-qualifying stock options and qualifying incentive
        stock options.  The Company has also issued stock options and warrants
        outside the Plan which have been approved by the Company’s Board of Directors
        and which have been issued under no specific plan approved by the
        shareholders.  The following table presents information concerning
        outstanding stock options and warrants issued by the Company as of June 30,
        2007.
 
 **Plan
                  Category**
              
              **Number
                  of Securities**
                **to
                  be Issued Upon Exercise**
                **of
                  Outstanding Options**
                **and
                  Warrants**
              
              **Weighted-Average**
                **Exercise
                  Price of**
                **Outstanding
                  Options**
                **and
                  Warrants**
              
              **Number
                  of Securities**
                **Remaining
                  Available for**
                **Future
                  Issuance Under**
                **Equity
                  Compensation Plans**
                **(Excluding
                  Securities Reflected**
                **in
                  Column (a))****(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              49,138,334
              
              $0.40
              
              10,861,666Equity
                  compensation plans not approved by security holders
              
              38,022,038
              
              $0.19
              
              n/aTotal
              
              87,160,372
              
              
              
              10,861,666
   See
        also the Notes to Consolidated
        Financial Statements for further information regarding the Plan and stock
        options and warrants issued by the Company.
 19
 ***(e)
        Recent sales of unregistered
        securities.***
 
 During
        the three months ended June 30,
        2007, the Company issued a total of 1,986,069 shares of its restricted common
        stock, at a prices ranging from $0.14 to $0.20 per share, through private
        placement offerings in reliance upon the exemption from registration contained
        in Rule 506 of Regulation D.  The prices per share recorded in these
        equity transactions approximated the quoted market price of the Company’s common
        stock.  The shares were issued for the following consideration:
        230,000 shares for cash of $46,000; 8,000 shares in payment of services of
        $1,000; 57,750 shares in payment of accrued expenses of $9,000; and 1,690,319
        shares in payment of interest expense of $166,000 (net of $86,000 of interest
        expense prepaid and netted against common stock).  The Company did not
        use underwriters in the sale or placement of these unregistered shares of
        common
        stock.
  During
        the three months ended June 30, 2007, the Company also issued a total of
        240,250
        stock options not covered by the Company’s Registration Statement on Form S-8,
        to investors in connection with the sale of common stock of the Company or
        lending activities with an exercise price of $0.20 per share exercisable
        for
        period of 1 year.
 
 ***(f)
        Purchases of equity securities by
        the small business issuer and affiliated purchasers.***
 
 During
        the fourth quarter of fiscal
        year 2007, neither the Company nor any of its affiliates purchased any equity
        securities of the Company.
 
 
 **Item
                  6.**
              **Management’s
                  Discussion and Analysis or Plan of
                  Operation**
 
 **Background**
 
 The
        Company has developed proprietary
        technology that promises significant advances for rotary-winged
        aircraft.  The initial objective of the Company was to develop and
        market an easy-to-fly and cost-efficient gyroplane that could compete
        effectively in the general aviation market.
 
 Effective
        July 1, 1993 and continuing
        through March 31, 2003, the Company was considered a development stage company
        as defined in SFAS No. 7.  The Company’s development stage activities
        consisted primarily of the development and preparation for FAA certification
        of
        the Hawk 4 gyroplane.  Sources of financing for these development
        stage activities were primarily debt and equity financing.
 
 During
        the first quarter of fiscal year
        2003, the Company suspended its flight testing of the Hawk 4 at its Buckeye
        facility in Arizona due to the lack of sufficient financial resources necessary
        to complete commercial certification.  Further development toward
        commercial certification of the Hawk 4 has been deferred pending the receipt
        of
        required funding.  The Company’s business plan for the Hawk 4 is now
        oriented toward offering this aircraft in its already well tested form to
        the US
        government, and to governments of friendly countries.  This would give
        the Company the opportunity to receive revenues ahead of FAA certification,
        and
        as a result, to reduce the need for funding to permit the start of production
        of
        the Hawk 4.  The Company is confident that the safety, reliability,
        maneuverability and low operating cost of the Hawk 4 will permit it to perform
        competitively with helicopters (and airplanes) for many missions requiring
        low,
        slow flight, but without the requirement for a runway for take-off or landing.
        The Company is
        currently in discussions with foreign investors relating to potential funding
        of
        Hawk 4 certification, although there is no assurance that the Company will
        be
        successful in obtaining such funding.
 
 The
        Company has received significant deposits on aircraft from the Company’s
        authorized dealers in anticipation of full-scale production of the Hawk
        4.  These dealer deposits are recorded as a long-term liability in the
        Company’s consolidated balance sheet.
 
 Subsequent
        to 2003, the Company’s
        operating focus was initially directed to the final development of the two-seat
        piston engine powered SparrowHawk, which it has designed and now manufactures
        and sells through its American Autogyro arm.  Through the date of this
        filing, 36 dealerships had been established, 29 in the United States and
        7internationally.  Sales representatives have also been appointed in
        Korea and India to present the capabilities of the SparrowHawk for civil
        use to
        government agencies in those countries.  In addition, the Company
        developed and continues to sell modification kits designed to improve in-flight
        stability and safety for another manufacturer’s kit gyroplane.
 
 
 20
 In
          December 2005, the Company announced the introduction of its improved
          SparrowHawk model, the SparrowHawk II.  SparrowHawk II offers improved
          performance, added comfort and robustness, and reduced the time and effort
          needed by the customer to build the aircraft.  The Company has
          continued to make improvements to the SparrowHawk II during fiscal 2007,
          and in the first half of fiscal 2008, will be introducing a new
          version called the SparrowHawk QB (for Quick Build).  As the name
          implies, the primary objective for the Quick Build is a significant further
          reduction of time and effort on the part of the purchaser in building the
          aircraft, while maintaining conformity with FAA regulations.  Careful
          attention has been paid to existing customer input and to the needs of
          potential
          customers.  Many of the latter have the financial resources to
          purchase an aircraft, but have limited time to complete the build
          process.  Through a thorough assessment of the build process, changes
          in the design manufacture and product delivery, the time to assemble the
          kit by
          a typical purchaser is expected to be cut in half.  Deliveries of the
          Quick Build kit are expected to begin in November 2007.  All future
          kit aircraft will be manufactured to the SparrowHawk QB
          standard.
 
 While
        the
        initial market for the SparrowHawk lay with builders of home-built aircraft
        from
        kits, management believes that there are larger, untapped markets for fully
        assembled small gyroplanes.  An emerging market for such aircraft is
        arising within the United States as a result of the Federal Aviation
        Administration (FAA) definition of a new category of aircraft, namely the
        Light
        Sport Aircraft (LSA).  The Company has therefore initiated the design
        of a new light gyroplane, called the SportHawk that would meet the LSA
        regulations and has applied for an exemption applicable to
        gyroplanes.  This would allow the Company to participate initially in
        the LSA category through a sub-classification called Experimental Light Sport
        Aircraft (E-LSA).
 
 A
        variation of the LSA design, called the ShadowHawk, benefiting from knowledge
        gained from discussions with potential customers, is also being developed
        that
        incorporates additional capabilities that are expected to enable this model
        to
        be a very attractive, low cost patrol aircraft for law enforcement agencies,
        both in the United States and overseas, and have other manned and unmanned
        applications.
 
 The
        Company began deliveries of SparrowHawk kits during the third quarter of
        its
        fiscal year ended June 30, 2004, recording initial revenues from this aircraft
        in the fourth quarter of fiscal year 2004.  During the years ended
        June 30, 2007 and 2006, the Company reported revenues from the sale of
        SparrowHawk kits and parts of $562,000 and $667,000.  The Company has
        received advance payments from dealers and customers on SparrowHawk gyroplane
        kit orders during the past several quarters, which have been recorded as
        deferred revenue.  Additional revenues have also been received from
        the sale of modification kits, flight training and from contract manufacturing;
        however, these revenue sources have not been, and are not projected to be,
        significant to the Company.
 
 On
        November 7, 2005, the Company
        announced that the U.S. Defense Advanced Research Projects Agency (“DARPA”) had
        selected a Company-led team to design a proof of concept high-speed, long
        range,
        vertical takeoff and landing (“VTOL”) aircraft.  This modern
        rotorcraft, named the “Heliplane” by DARPA, is intended demonstration vehicle
        for future gyrodynes to be used in combat search and rescue roles.  It
        will offer the VTOL capability of a helicopter, the fast forward flight of
        an
        airplane, and the safety, simplicity and reliability of a GBA gyroplane and
        is
        designed to exploit the Company’s gyrodyne technology.  DARPA is the
        central research and development organization for the US Department of Defense
        (DoD).  It manages and directs select basic and applied research for
        DoD, emphasizing technology development projects where payoff is high and
        where
        success may provide dramatic advances in the capabilities of this country’s
        combat forces.
 
 
 21
 In
          Phase
          One of this potential multi-year $55 million four-phase program, the Company
          was
          awarded a fifteen month $6.4 million contract to develop the preliminary
          design
          and perform key technology demonstrations.  On September 19, 2007, the
          DARPA contract was modified, increasing the contract award for Phase One
          from
          $6.4 million to $10.4 million, and extending the term of Phase One from
          fifteen
          to twenty-three months.  Substantial portions of Phase One payments
          are paid by the Company to subcontractors and consultants hired by the
          Company.  Payments under this contract are conditional upon the
          Company attaining several milestone objectives during the course of Phase
          One of
          the contract.  Contracts for subsequent phases are conditional on
          completion of Phase One and successor phases.
  The
          Company recognizes revenue on this contract as each defined milestone is
          completed and the requisite meetings are held and technical data submitted
          and
          accepted by DARPA.  At that time, DARPA will instruct the Company to
          submit an invoice for payment for the respective milestone at the amounts
          specified in the contract.  Through December 31, 2006,
          contract-related expenses incurred by the Company for each milestone of
          the
          contract, including its own labor, travel, supplies and other costs, and
          the
          costs of subcontractors and consultants, were deferred and expensed to
          cost of
          sales as the contract revenue for the milestone was recognized.  The
          Company is currently experiencing a negative profit margin on the DARPA
          contract; therefore, all contract-related costs and expenses incurred subsequent
          to December 31, 2007 have been expensed as incurred.  Through June 30,
          2007, the Company completed the first four milestones and substantially
          all of
          the fifth milestone of Phase One of the DARPA contract, and recognized
          revenues
          totaling $4,790,000, $2,350,000 recognized in the fiscal year ended June
          30,
          2006 and $2,440,000 recognized in the current fiscal year ended June 30,
          2007.
 
 The
        Heliplane gyrodyne represents the
        possible model for a range of next generation rotor wing aircraft, meeting
        economy and performance goals not considered achievable by any other type
        of
        VTOL aircraft.  As the Company’s gyrodyne technology is scalable to
        much larger aircraft, it has potential applications for both heavy lift,
        high
        speed VTOL military aircraft and for runway independent commercial
        airliners.  The Company has been actively engaged in discussions with
        government agencies and potential aerospace strategic partners in this country
        with respect to military and commercial gyrodyne and gyroplane applications,
        and
        in Europe, India and China with respect to commercial gyroplane
        applications.
 
 The
        relative mechanical simplicity and aerodynamic stability of the gyroplane
        and
        gyrodyne in comparison to a helicopter or other vertical lift aircraft allows
        both aircraft to be potential candidates for unmanned as well as manned
        applications.  The Company has been approached separately by two
        aerospace companies with proposals to assist them in the design of unmanned
        gyroplanes for two different US military applications.
 The
          Company has  been engaged as a subcontractor to one of these companies
          for a project called PAS (Precision Airdrop System) that is projected to
          produce
          an unmanned gyroplane rotorcraft for military supply missions, missions
          now
          served with much less accuracy by parachutes.  GBA has been engaged by
          this major aerospace company to design, and ultimately manufacture, the
          rotor
          system and fuselage using their guidance system.  A large-scale model
          designed and built by GBA was successfully flown on a military test range
          in
          July of 2007, demonstrating the effectiveness of this technology.  The
          Company recognized revenues of $110,000 from this subcontract during the
          year
          ended June 30, 2007.  The project is expected to proceed to full-scale
          demonstrator development beginning in 2008.  If successful, the
          Company could receive a significant order for full-scale production for
          these
          aircraft as early as 2009.
 
 22
 
 **Going
        Concern Uncertainty**
 
 The
        accompanying consolidated financial
        statements have been prepared assuming that the Company will continue as
        a going
        concern.  Because of recurring operating losses, the excess of current
        liabilities over current assets, the stockholders’ deficit, and negative cash
        flows from operations, there is substantial doubt about the Company’s ability to
        continue as a going concern.
 At
          June
          30, 2007, the Company had total current liabilities of $83,429,000 and
          current
          assets of $629,000, resulting in a working capital deficiency of
          $82,800,000.  Included in current liabilities and the working capital
          deficiency at June 30, 2007 is a $58,771,000 Series B Preferred Stock
          obligation.  On May 10, 2007, the Company received the approval of the
          Series B Holders to extend the redemption date of the Series B Preferred
          Stock
          from May 1, 2007 to June 16, 2007, or such later date as agreed to in writing
          by
          at least 80% of the Series B Holders.  Subsequently, the Series B
          Holders agreed in writing to an extension of the redemption date to November
          30,
          2007.  In order to repay this obligation in full or in part when due,
          the Company will be required to raise significant capital from other
          sources.  Alternatively, the Company will be required to negotiate
          further extension of the Series B Preferred Stock maturity date, as it
          has
          accomplished in the past.  There is no assurance, however that the
          Company will be successful in raising the capital required to repay the
          Series B
          Preferred Stock obligation or in obtaining a further extension of the Series
          B
          Preferred Stock redemption date beyond November 30, 2007.
  The
          Company’s continuation as a going concern is dependent on attaining profitable
          operations, obtaining additional outside financing and/or restructuring
          its debt
          obligations, including its Series B Preferred Stock.  The Company has
          funded losses from operations in primarily from the issuance of debt to
          related
          parties (current shareholders and lenders of the Company), the increase
          in
          accounts payable and accrued expenses, and the sale of the Company’s restricted
          common stock in private placement transactions, and will require additional
          funding from these sources to sustain its future operations.  The
          Company anticipates that the issuance of debt and the sale of the Company’s
          restricted common stock will continue to fund operating losses in the
          short-term, or until revenues grow to the point where they are sufficient
          to
          cover operating costs and expenses.
 
 The
        DARPA
        contract has been a significant source of revenues and operating cash flow,
        with
        $4,790,000 of revenues recognized and received through June 30,
        2007.  The Company believes that the remaining revenues from Phase One
        of the contract, as recently modified, currently estimated at approximately
        $5,660,000, will continue to be the largest source of revenues in the short
        term, and will have a positive impact on cash flows from
        operations.  However, the Company has been required to add personnel,
        engage subcontractors, and make other significant purchases to meet its
        obligations under this contract, which has resulted in a negative profit
        margin
        realized on the DARPA contract and reduced cash flows from
        operations.
 
 
 23
 
 Operating
        revenues from the DARPA
        contract, the new PAS sub-contract commenced during the year ended June 30,
        2007, and from the sale of SparrowHawk kit gyroplanes, the Company’s primary
        source of operating revenues prior to the award of the DARPA contract and
        the
        sub-contract, are not currently sufficient, nor are they projected to be
        sufficient in the near future, to cover operating
        expenses.  SparrowHawk kit sales will not be sufficient to cover
        related operating expenses for the following reasons:
 
 ·
              To
                  date, the Company has experienced a negative gross profit on sales
                  because
                  of the start-up and “learning curve” costs that are normally experienced
                  in the introduction of a new product and due to lower than expected
                  sales
                  volume.
 
 ·
              The
                  Company projects that as the Company improves it manufacturing
                  capabilities and increases its sales efforts the negative gross
                  profit on
                  sales will narrow in fiscal year 2008, although there is no assurance
                  that
                  the Company will be successful in reducing the negative gross
                  margin.
 
 ·
              The
                  Company continues to incur research and development expenditures
                  related
                  to fully assembled SparrowHawk gyroplane derivatives and to potential
                  applications of the Company’s technology to vertical take-off and landing
                  military aircraft, runway independent short-haul airliners and
                  other
                  aircraft.
 
 ·
              Marketing
                  and sales efforts continue, but the number of SparrowHawk kits
                  sold is
                  below expectations, due in part to lack of funding to finalize
                  product
                  development and to pay for increased sales and marketing
                  efforts.
 
 The
        Company will continue to explore
        what it expects to be larger, untapped markets for fully assembled small
        gyroplane aircraft, including law enforcement agencies both in the United
        States
        and overseas for use as a surveillance aircraft.  The Company believes
        the margins on these completed aircraft will be substantially higher than
        on kit
        gyroplanes, although there is no assurance that higher margins will be
        realized.  However, through the date of this filing, no sales of fully
        assembled SparrowHawk gyroplane aircraft to law enforcement agencies have
        occurred.
 
 The
        Company does not expect revenues from the sale of Hawk 4 or Hawk 5 gyroplanes
        will be realized until the Company completes the Federal Aviation Administration
        (“FAA”) or equivalent international certification of the
        aircraft.  Currently, the Company estimates that approximately $40
        million and a two to three year period will be required to complete the
        certification.  The Company is in discussions with parties that have
        expressed interest in funding the completion of the certification and commencing
        the production of the Hawk 4 or Hawk 5 gyroplanes.  On December 14,
        2006, the Company announced the government of Aragón, Spain signed a Memorandum
        of Understanding with the Company to form a joint venture to complete FAA
        certification, production and delivery of the Company’s Hawk 5
        gyroplane.  Due diligence procedures and discussions relating to the
        potential joint venture, and discussions with other parties are ongoing,
        but the
        Company is not in a position to conclude how likely a favorable outcome to
        these
        opportunities is.  In addition, with the announcement of such a
        funding source, the Company believes prospects will improve to raise equity
        capital from other sources to fund operations and meet debt
        obligations.  Because of ongoing research and development efforts and
        the projected costs of certification, the Company does not project that it
        will
        have net income or positive cash flows from Hawk 4 or Hawk 5 operations until
        FAA certification is obtained and sales of these gyroplanes reach planned
        levels.
 
 
 24
 
 As
        a result, the Company anticipates
        that operating costs of personnel, facilities, research and development and
        sales and marketing will increase from levels reported for fiscal year
        2007.
 
 There
        can be no guarantee or assurance
        that the Company will be successful in its ability to generate income from
        operations or from the DARPA contract, or to raise capital at favorable rates
        or
        at all.  The consolidated financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
  **Results
        of Operations**
 
 **Revenues**
 
 The
        Company’s consolidated revenues are
        comprised of the following:
 
 **Year
                  Ended June 30,****2007**
              
              
              **2006**Government
                  contract
              
              $
              2,440,000
              
              
              $
              2,350,000Commercial
                  subcontract
              
              
              110,000
              
              
              
              -SparrowHawk
                  kits and parts
              
              
              562,000
              
              
              
              667,000Flight
                  training
              
              
              36,000
              
              
              
              62,000Other
                  operating
              
              
              255,000
              
              
              
              36,000Total
              
              $
              3,403,000
              
              
              $
              3,115,000
 
 Total
        revenues increased $288,000 to
        $3,403,000 in the year ended June 30, 2007 from $3,115,000 in the year ended
        June 30, 2006.  The increase in revenues in the current fiscal year
        was primarily attributed to additional revenues from Phase One of the DARPA
        contract, a new commercial subcontract in the current fiscal year and an
        increase in other operating revenues, partially offset by decreases in flight
        training and SparrowHawk kits and parts.
 
 The
        Company recognizes revenue on the DARPA contract as each defined milestone
        is
        completed and the requisite meetings are held and technical data submitted
        and
        accepted by DARPA.  At that time, DARPA instructs the Company to
        submit an invoice for payment for the respective milestone at the amount
        specified in the contract.
 
 During
        the year ended June 30, 2007, government contract revenues included the $1.4
        million fourth milestone of Phase One of the DARPA contract completed in
        November 2006 and substantial completion of the $1.3 million fifth milestone
        of
        Phase One of the DARPA contract, for which the Company was permitted by DARPA
        to
        submit a partial invoice of $1,040,000 in March 2007.  This invoice
        was paid in April 2007.  By comparison, the Company completed the
        first three milestones of Phase One of the DARPA contract in the year ended
        June
        30, 2006 and recognized revenues totaling $2,350,000.
 25
 Revenues
            from the sale of SparrowHawk kits and parts decreased to $562,000 in
            the year
            ended June 30, 2007 from $667,000 in the year ended June 30,
            2006.  The decrease in these revenues resulted from the Company
            selling less SparrowHawk kits during the current fiscal year compared
            to the
            year ended June 30, 2006.  The Company also experienced a decrease in
            the sales of SparrowHawk parts in the current fiscal year.  In
            December 2005, the Company announced the introduction of its improved
            SparrowHawk model, the SparrowHawk II.  SparrowHawk II offered added
            comfort and robustness, and  made some reduction in the time and
            effort, needed by the customer to build the aircraft.  The Company has
            continued to design improvements for the SparrowHawk II during fiscal 2007
            and in the first half of fiscal 2008 will be introducing  a new
            version called the SparrowHawk Quick Build.  As the name implies,
            the primary objective for the ‘Quick Build’ is a significant further reduction
            of time and effort on the part of the purchaser in building the aircraft,
            while
            maintaining conformity with FAA regulations.  Careful attention has
            been paid to existing customer input and to the needs of potential
            customers.  Many of the latter have the financial resources to
            purchase an aircraft, but have limited time to complete the build
            process.  Through a thorough assessment of the build process, changes
            in the design manufacture and product delivery, the time to assemble
            the kit by
            a typical purchaser is expected to be in the order of 300 hours, cutting
            build
            time in half.  Deliveries of the Quick Build kit begin in October
            2007.  All future SparrowHawk aircraft will be manufactured to the
            Quick Build standard.  The priority of effort on the development of the
            much improved Quick Build version resulted in some delay in delivery
            of kits
            manufactured to the SparrowHawk II standard.  The decrease in revenues
            from the sale of SparrowHawk kits and parts resulting from a lower volume
            of
            kits sold was partially offset in the current year by an overall increase
            in the
            sales price per kit.
  While
        significantly less in dollar amount, the Company anticipates that flight
        training and other operating revenue, consisting of dealer fees, sales of
        research and development parts and miscellaneous, will continue to contribute
        to
        Company cash flow.
 
 **Costs
        and Expenses**
 
 The
        Company’s consolidated cost of sales is comprised of the following:
 
 **Year
                  Ended June 30,****2007**
              
              
              **2006**Government
                  contract
              
              $
              7,030,000
              
              
              $
              2,052,000Commercial
                  subcontract
              
              
              307,000
              
              
              
              -SparrowHawk
                  kits and parts
              
              
              2,006,000
              
              
              
              1,285,000Flight
                  training
              
              
              17,000
              
              
              
              21,000Total
              
              $
              9,360,000
              
              
              $
              3,358,000
   26
 Comparing
        the year ended June 30, 2007 to the year ended June 30, 2006, cost of sales
        increased to $9,360,000 from $3,358,000.  The increase is due
        primarily to the higher level of cost and expenses related to the fourth,
        fifth
        and subsequent milestones of Phase One of the DARPA contract recorded in
        the
        year ended June 30, 2007, including costs and expenses significantly in excess
        of amounts projected, as compared to the costs and expenses for the first,
        second and third milestones of Phase One of the DARPA contract which were
        recorded in the year ended June 30, 2006.  Because of the negative
        profit margin on Phase One of the DARPA contract; all contract-related costs
        and
        expense were expensed as incurred during the year ended June 30, 2007, resulting
        in the reporting of cost of sales in advance of the revenue billed.
 
 On
        August
        31, 2007, the DARPA contract was modified, increasing the contract award
        for
        Phase One from $6.4 million to $10.4 million, and extending the term of Phase
        One from fifteen to twenty-three months.  The Company will invoice and
        recognize the additional revenues for Phase One as the requisite meetings
        are
        held and technical data submitted and accepted by DARPA.  The increase
        in contract revenue of $4.0 million will partially offset the cost overruns
        incurred by the Company on Phase One of the DARPA contract.
 
 The
        Company incurred cost of sales on
        its commercial subcontract of $307,000 in the year ended June 30,
        2007.  No costs of sales were incurred for the commercial subcontract
        in the prior fiscal year.  The Company is also experiencing a negative
        profit margin on the initial phases of its commercial subcontract and,
        therefore, all contract-related costs and expenses were expensed as incurred
        during the year ended June 30, 2007.
  In
        spite
        of decreased revenues from the sales of SparrowHawk kits and parts, related
        cost
        of sales increased to $2,006,000 in the year ended June 30, 2007 from $1,285,000
        in the prior fiscal year.  The Company continues to experience a
        negative gross profit on the SparrowHawk kits because of the nonrecurring
        and
“learning curve” costs that are normally experienced in the introductory
        production of a new product and due to lower than expected sales
        volume.  Ongoing improvements to the design and packaging of the kits,
        including the development of the Quick Build kit, also contributed to negative
        margins on the sale of SparrowHawk kits.  The Company anticipates that
        as the Company finalizes the kit configuration, improves its manufacturing
        capabilities and increases its sales efforts and volume, the negative gross
        profit on sales will narrow in fiscal year 2008, but may not turn
        positive.  In addition, only nominal gross margin is realized on the
        sale of modification kits and on flight training.  All costs of
        incomplete SparrowHawk kits delivered as of June 30, 2007 have been deferred
        and
        included in work-in-process inventories.
 
 Cost
        of
        sales for the year ended June 30, 2007 also included $119,000 of stock-based
        compensation due to the adoption of SFAS No. 123(R) on July 1,
        2006.
 
 Comparing
        the year ended June 30, 2007
        to the year ended June 30, 2006, research and development expenses decreased
        to
        $1,555,000 from $2,534,000 as more engineering and other resources were
        committed to the DARPA contract and the commercial sub-contract.  This
        decrease in research and development expenses in the current fiscal year
        was
        partially offset by a charge of $453,000 in stock-based
        compensation.  Ongoing research and development activities include the
        development of opportunities for subcontract opportunities with industry
        partners, variations to the SparrowHawk, fully assembled SparrowHawk gyroplane
        derivatives, potential applications of the Company’s technology to heavy lift
        vertical take-off military aircraft, runway independent short-haul airliners
        and
        other aircraft, including government contract opportunities.
 
 Comparing
        the year ended June 30, 2007
        to the year ended June 30, 2006, general and administrative expenses increased
        to $2,659,000 from $1,837,000 in the prior fiscal year.  The increase
        in general and administrative expenses in the current fiscal year is due
        to the
        addition of personnel to support the increased level of operations related
        to
        the DARPA contract and the new commercial sub-contract,  increases in
        the level of compensation for existing employees, and a charge of $211,000
        in
        stock-based compensation.
 27
 **Other
        Income and
        Expenses**
 
 Comparing
        the year ended June 30, 2007
        to the year ended June 30, 2006, related party interest income remained somewhat
        constant.
 
 Comparing
        the year ended June 30, 2007
        to the year ended June 30, 2006, interest and other income increased to $13,000
        from $6,000.  The increase in the current fiscal year resulted
        primarily from income from miscellaneous sources not received in the prior
        fiscal year.  Interest income earned on the Company’s bank deposits in
        the current fiscal year remained somewhat constant with that earned in the
        prior
        fiscal year.
  The
        Company has realized gains on the extinguishment of certain debt.  The
        Company realized a gain on extinguishment of debt of $26,000 in the year
        ended
        June 30, 2007 and $166,000 in the year ended June 30, 2006.
 
 Interest
        expense for the year ended
        June 30, 2007 compared to the year ended June 30, 2006 increased to $2,740,000
        from $1,509,000.  The Company incurred net additional debt of
        $5,188,000 during the current fiscal year.  In addition, additional
        interest expense was incurred in the current fiscal year for the value of
        stock
        and stock options issued to lenders in connection with new debt or debt
        extensions.
 
 Comparing
        the year ended June 30, 2007
        to the year ended June 30, 2006, Series B Preferred Stock interest expense
        decreased to $12,550,000 from $14,136,000.  Through December 31, 2006,
        the Company recorded the accretion of the $10,700,000 redemption value of
        the
        10,700 additional shares of Series B Preferred Stock issued in January 2007,
        resulting in a significant increase in Series B Preferred Stock interest
        expense
        during the first six months of the current fiscal year and in the prior fiscal
        year.  From January 1, 2007 through June 30, 2007, no accretion was
        recorded, resulting in an overall reduction in the interest
        expense.  This reduction in the Series B Preferred Stock interest
        expense during the last six months of the current fiscal year was partially
        offset by increased interest expense due to the increased number of shares
        of
        Series B Preferred Stock outstanding, on which the interest expense is
        computed.  Dividends on the Series B Preferred Stock, which are
        recorded as interest expense, have been “paid in kind” with additional shares of
        Series B Preferred Stock.
 
 **Net
        Loss**
 
 During
        the year ended June 30, 2007,
        the Company continued to record losses as it continued work on the DARPA
        contract, commenced a new commercial sub-contract, progressed toward full
        marketing and manufacturing of the SparrowHawk gyroplane kit, and continued
        research and development activities on SparrowHawk gyroplane derivatives
        and
        other applications of the Company’s gyroplane technology.  For the
        year ended June 30, 2007, the loss from operations was $10,171,000 compared
        to
        the loss from operations of $4,614,000 for the year ended June 30,
        2006.  As discussed above, the increase in the loss from operations in
        the current fiscal year resulted from negative gross margins on the DARPA
        contract, on a new commercial sub-contract and on lower SparrowHawk revenues,
        increases in general and administrative expenses, and stock compensation
        expense, offset by the decrease in research and development
        expenses.
 
 The
        net loss for the year ended June
        30, 2007 was $25,417,000 compared to $20,081,000 for the year ended June
        30,
        2006.  The increase in the net loss in the current fiscal year
        resulted primarily from the negative gross margins, and increases in general
        and
        administrative expenses, as described above.
 28
 **Liquidity
        and Capital Resources**
 
 **Series
        B Preferred Stock
        Obligation**
 As
          previously discussed, at June 30, 2007, the Company had total current
          liabilities of $83,429,000 and current assets of $629,000, resulting in
          a
          working capital deficiency of $82,800,000.  Included in current
          liabilities and the working capital deficiency at June 30, 2007 is a $58,771,000
          Series B Preferred Stock obligation that currently is due November 30,
          2007.  In order to repay this obligation in full or in part when due,
          the Company will be required to raise significant capital from other
          sources.  Alternatively, the Company will be required to negotiate
          further extension of the Series B Preferred Stock maturity date, as it
          has
          accomplished in the past.  There is no assurance, however, that the
          Company will be successful in raising the capital required to repay the
          Series B
          Preferred Stock obligation or in obtaining a further extension of the Series
          B
          Preferred Stock redemption date beyond November 30, 2007.
 
 On
          October 11, 2005, the Series B Holders extended the redemption date of
          the
          Series B Preferred Stock from October 31, 2005 to January 1, 2007.  On
          February 13, 2007, the Series B Holders further extended the redemption
          date to
          May 1, 2007.  On May 10, 2007, the Series B Holders agreed to an
          extension of the redemption date of the Series B Preferred Stock to June
          16,
          2007, or such later date as agreed to in writing by at least 80% of the
          Series B
          Holders.  Subsequently, the Series B Holders agreed in writing to an
          extension of the redemption date to November 30, 2007.
 The
        Company has amended its Articles of Incorporation to reflect the modifications
        to the redemption date of the Series B Preferred Stock.
 
 The
        October 11, 2005 extension required
        the following consideration to be paid to the Series B Holders:
 
 ·
              The
                  cancellation on October 11, 2005 of existing warrants issued to
                  the Series
                  B Holders to purchase 2.5 million shares of the Company’s common stock at
                  an exercise price of $0.30 per
                  share.
 
 ·
              The
                  issuance on October 11, 2005 of warrants to purchase 6.85 million
                  shares
                  of the Company’s common stock exercisable through January 1, 2009 at an
                  exercise price of $0.30 per share.
 
 ·
              The
                  issuance of additional shares of Series B Preferred Stock with
                  a
                  redemption value of $10.7 million face value (10,700 shares) on
                  January 1,
                  2007, with reductions in the number of shares to be issued allowed
                  for
                  repayments during the extension period of amounts due to the Series
                  B
                  Holders in accordance with an agreed-upon
                  formula.
 
 The
        10,700 additional shares of Series
        B Preferred Stock were issued in January 2007.
 
 In
        connection with the extension of the
        redemption date of the original issuance of the Company’s Series B Preferred
        Stock and the sale of 8,000 shares of the Series B Preferred Stock during
        the
        second quarter of fiscal year 2004, the Company’s Articles of Incorporation were
        amended to require that all redemptions of the Series B Preferred Stock be
        paid
        in cash.
 29
 The
        Articles of Incorporation have been further amended to define the maturity
        date
        as the first to occur of (a) June 16, 2007, or such later date as agreed
        to in
        writing by the holders of at least 80% of the outstanding shares of the Series
        B
        Preferred Stock after June 16, 2007, (b) the occurrence of a defined
“liquidation event”, or (c) the date that is six months following the receipt by
        the Company or its affiliates of proceeds from one or more financing
        transactions in excess of $50 million.  In addition, the amended
        Articles of Incorporation require pro rata redemptions of the Series B Preferred
        Stock with the proceeds of certain financing transactions that exceed $20
        million in the aggregate.  As a result, if the Company is successful
        in raising the levels of funding that it requires to bring its obligations
        current and to fund its planned operations, significant portions of this
        funding
        will be required to make redemption payments on the Series B Preferred
        Stock.
  **Other
        Debt Obligations**
 
 Following
        the economic downturn of 9/11
        and its impact on the aerospace industry, the Company’s fund-raising activities
        in the venture capital market were seriously impaired, resulting in active
        development of its Hawk 4 gyroplane for commercial certification being
        deferred.  The Company, however, continues to actively seek sales and
        funding for government and public use applications of the Hawk 4 as well
        as for
        the SparrowHawk.
 
 In
        the face of continuing fund-raising
        difficulties, in fiscal years 2002 and 2003, the Company successfully approached
        many of its principal vendors requesting that they accept extensions of payments
        beyond their normal terms.  As a result, the Company is servicing much
        of its pre-November 2001 obligations to vendors utilizing a combination of
        repayment plans, which include monthly payments for smaller vendor liabilities
        and promissory notes for larger vendor liabilities.  The Company has
        also paid in full several of these obligations.  As of June 30, 2007,
        the Company was delinquent in making payments on substantially all remaining
        promissory notes to vendors and to other unrelated party lenders, which totaled
        $541,000.  In addition, the Company is delinquent in making payments
        of accrued interest payable of $487,000 on this debt at June 30,
        2007.  The Company continues to make some payments on this
        indebtedness and continues discussions with many of these vendors and lenders,
        and has, in most instances, been granted grace periods and extensions without
        receipt of formal notices of default or threat of legal action.  There
        is no assurance that these vendors and lenders will continue to forebear
        from
        collection or legal action.
 
 Current
        liabilities at June 30, 2007 also included $13,443,000 notes payable to related
        parties, including $2,270,000 that is in default.  In addition, the
        Company is delinquent in making payments of accrued interest payable of $434,000
        on this related party debt at June 30, 2007.  Most of these related
        party notes payable are held by long-time shareholders and lenders of the
        Company and are payable on demand or are short-term in nature.  There
        is no assurance that these related party lenders will not demand payment
        of this
        short-term indebtedness in the near future.
 
 As
        indicated above, the Company’s current plan is to repay or covert to common
        shares of the Company all short-term debt, including accrued interest where
        applicable, in its proposed fund raising and recapitalization.  There
        is no assurance that the Company will be successful in this fund raising
        and
        recapitalization effort.
 30
 **Operating,
        Investing and Financing Activities**
 
 Net
        cash used in operating activities
        was $5,538,000 for the year ended June 30, 2007 compared to $3,651,000 for
        the
        year ended June 30, 2006.  The Company continues to use cash in
        operations primarily due to negative gross margins on revenues, particularly
        on
        the DARPA contract, and increases in general and administrative
        expenses.  As discussed above, the Company is required to incur and
        pay significant costs and expenses on the DARPA contract in advance of receiving
        approval and payment of DARPA contract invoices.  The Company
        anticipates that operating costs of personnel and facilities will continue
        to
        increase from levels reported for the year ended June 30, 2007.
 
 Net
        cash used in investing activities
        for the year ended June 30, 2007 was $153,000, comprised of the purchase
        of
        property and equipment of $197,000, partially offset by proceeds from incidental
        sales of property and equipment of $22,000, and related party notes receivable
        repayments received of $22,000.  Net cash used in investing activities
        for the year ended June 30, 2006 was $211,000 comprised of the purchase of
        property and equipment of $187,000, the increase in related party notes
        receivable of $29,000, partially offset by related party notes receivable
        repayments received of $5,000.
 
 The
        Company has funded losses from
        operations and net cash used in investing activities in the current fiscal
        year
        primarily from the issuance of debt to related parties (current shareholders
        and
        lenders of the Company), the increase in accounts payable and accrued expenses,
        and to a lesser extent, the sale of the Company’s restricted common stock in
        private placement transactions, and will require additional funding from
        these
        sources to sustain its future operations.
 
 Net
        cash provided by financing
        activities was $5,747,000 for the year ended June 30, 2007, comprised of
        a net
        increase in debt of $5,188,000 and net proceeds from the issuance of common
        stock of $559,000.  Net cash provided by financing activities for the
        year ended June 30, 2006 was $3,796,000, comprised of a net increase in debt
        of
        $1,542,000 and net proceeds from the issuance of common stock of
        $2,254,000.  The Company anticipates that the issuance of debt and the
        sale of the Company’s restricted common stock will continue to fund operating
        losses in the short-term, or until revenues grow to the point where they
        are
        sufficient to cover operating costs and expenses.  The Company
        believes that its share of revenues from the DARPA contract, which are payable
        only upon the Company attaining several milestone objectives, will have a
        positive impact on cash flows from operations; however, the Company will
        also be
        required to add personnel, expand facilities and make other significant
        purchases to meet its obligations under this contract.  There is no
        assurance that the Company will be successful in either raising sufficient
        capital or improving operations.
 
 Management
        does not anticipate that
        revenues or expenses will be materially affected by inflation during the
        next
        twelve months of operations.
 
 The
        operations of the Company are not
        subject to material seasonal fluctuations.
 31
  **Off
          Balance Sheet Commitments**
 
 The
        Company leases facilities under
        non-cancelable operating leases.  Future minimum rental payments
        required under these leases are as follows:
 
 **Years
                  Ending June 30,**
              
              **Amount**2008
              
              $
              228,0002009
              
              
              235,0002010
              
              
              242,0002011
              
              
              61,000$
              766,000
 
 
 **Critical
        Accounting Policies**
 
 The
        Company’s critical accounting
        policies include the following:
 
 **Research
        and Development Costs**- Research and development costs are expensed as incurred in accordance
        with SFAS No. 2, “Accounting for Research and Development Costs.”  The
        costs of materials and other costs acquired for research and development
        activities are charged to expense as incurred.  Salaries, wages, and
        other related costs of personnel, as well as other facility operating costs
        are
        allocated to research and development expense through management’s estimate of
        the percentage of time spent by personnel in research and development
        activities.
 
 **Revenue
        Recognition** -  The Company recognizes revenues from goods and
        services when there is a binding agreement, the product has been completely
        shipped or service has been delivered, collection is reasonably assured,
        and the
        Company has no significant obligations remaining.  Portions of the
        purchase price of the Company’s products collected from customers in advance of
        product delivery are recorded as deferred revenue.  Therefore,
        revenues from the sale of SparrowHawk gyroplane kits are not recorded until
        all
        kit components and parts are delivered to the customer and collection of
        any
        remaining amounts due is reasonably assured.
 
 The
        Company recognizes revenue on its
        current government contract as each defined milestone is completed and the
        requisite meetings are held and technical data submitted and accepted by
        DARPA.  At that time, DARPA instructs the Company to submit an invoice
        for payment for the respective milestone at the amount specified in the
        contract.  Contract-related expenses incurred by the Company for each
        milestone of the contract, including its own labor, travel, supplies and
        other
        costs, and the costs of subcontractors and consultants, are deferred as
        work-in-process inventory and expensed to cost of sales as the contract revenue
        for the milestone is recognized.  When a loss on a contract is
        projected, however, all contract-related costs and expenses are expensed
        as
        incurred.
 
 The
        Company recognizes revenue on
        commercial and sub-contractor contracts as each scheduled phase of the contract
        is completed and invoices are submitted.  Contract-related expenses
        incurred by the Company for each phase of the contract, including its own
        labor,
        travel, supplies and other costs, and the costs of subcontractors and
        consultants, are deferred as work-in-process inventory and expensed to cost
        of
        sales as the contract revenue for the milestone is recognized.  When a
        loss on a contract is projected, however, all contract-related costs and
        expenses are expensed as incurred.
 32
 **Stock-Based
        Compensation -**Effective July 1, 2006, the Company adopted the fair
        value recognition provisions of SFAS No. 123(R), *Share Based
        Payments,* using the modified prospective application
        method.  Under this transition method, the Company recorded
        compensation expense on a straight-line basis of $783,000 for the year ended
        June 30, 2007 for: (a) the vesting of options granted prior to July 1, 2006
        (based on the grant-date fair value estimated using the Black-Scholes
        option-pricing model and previously presented in the pro-forma footnote
        disclosures), and (b) stock-based awards granted subsequent to June 30, 2006
        (based on the grant-date fair value estimated using the Black-Scholes option
        pricing model).  The stock-based compensation expense for the year
        ended June 30, 2007 has been allocated to the various categories of costs
        and
        expenses in a manner similar to the allocation of payroll expense.  In
        accordance with the modified prospective application method, results for
        the
        year ended June 30, 2006 have not been restated.  Changes in the
        assumptions used in the option-pricing model, including the market price
        of the
        Company’s common stock, risk-free interest rates, estimated forfeitures and life
        of the options, may result in fluctuations in the estimated fair value and
        carrying value of the consideration recorded for employee stock
        options.
 
 **Non-Employee
        Stock Options and
        Warrants –**In accordance with SFAS No. 123, “Accounting for Stock-Based
        Compensation”, the Company estimates the fair value of the consideration
        recorded for stock options and warrants issued to non-employees using the
        Black-Scholes option-pricing model.  For those stock options and
        warrants that have variable characteristics, the Company will continue to
        use
        this methodology to periodically reassess the fair value of the consideration
        to
        determine if the value of the consideration recorded in the consolidated
        financial statements requires adjustment.  Changes in the assumptions
        used in the option-pricing model, including the market price of the Company’s
        common stock and risk-free interest rates, may result in fluctuations in
        the
        estimated fair value and carrying value of the consideration recorded for
        variable non-employee stock options and warrants.
 
 **Financial
        Instruments with
        Characteristics of Both Liabilities and Equity -**In May 2003, the FASB
        issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of
        Both Liabilities and Equity.”  This statement establishes standards
        for how an issuer classifies and measures certain financial instruments with
        characteristics of both liabilities and equity.  It requires that an
        issuer classify a financial instrument that is within its scope as a liability
        (or an asset in some circumstances).  Many of those instruments were
        previously classified as equity.  The statement was effective on July
        1, 2003 for financial instruments entered into or modified after May 31,
        2003,
        and otherwise effective for existing financial instruments entered into before
        May 31, 2003.  The adoption of SFAS No. 150 resulted in the reporting
        of the Company’s Series B Preferred Stock and a put option obligation as
        liabilities.  The carrying value of the Series B Preferred Stock was
        the same before and after adoption of SFAS No. 150, and therefore no cumulative
        effect adjustment was required.
 
 **Put
        Option Liability –**To comply with SFAS No. 150, the Company estimated the fair value
        of
        the put option liability using the Black-Scholes option-pricing
        model.  Until the obligation was satisfied in November 2005, the
        Company used this methodology to periodically reassess the fair value of
        the put
        option liability to determine if the carrying value of the liability in the
        consolidated financial statements required adjustment, with changes in the
        fair
        value recognized as interest cost.  The fair value of the put option
        liability was inversely related to the fair value of the Company’s common
        stock.  Any material changes in the fair value of the Company’s common
        stock could have resulted in material changes in the fair value of the put
        option liability.
  33
 **Recently
        Issued Accounting Pronouncements**
 
 The
        FASB
        has issued Financial Interpretation No. 48, *Accounting for Uncertainty in
        Income Taxes – An Interpretation of FASB Statement No. 109*(FIN
        48).  FIN 48 clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109, *Accounting for Income Taxes.*FIN 48 also
        prescribes a recognition threshold and measurement standard for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return.  In addition, FIN 48 provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition.  The provisions of FIN 48 are to
        be applied to all tax positions upon initial adoption of this
        standard.  Only tax positions that meet the more-likely-than-not
        recognition threshold at the effective date may be recognized or continue
        to be
        recognized upon adoption of FIN 48.  The cumulative effect of applying
        the provisions of FIN 48 should be reported as an adjustment to the opening
        balance of retained earnings (or other appropriate components of equity)
        for the
        fiscal year of adoption.  The provisions of FIN 48 will be effective
        for the Company on July 1, 2007, and the Company has not yet determined the
        potential financial statement impact of adopting FIN 48.
 
 In
        February 2007, the FASB issued SFAS
        No. 159, *The Fair Value Option for Financial Assets and Financial
        Liabilities – Including an Amendment of FASB Statement No. 115*. This
        statement permits entities to choose to measure many financial instruments
        and
        certain other items at fair value.  Most of the provisions of SFAS No.
        159 apply only to entities that elect the fair value option.  However,
        the amendment to SFAS No. 115 *Accounting for Certain Investments in Debt and
        Equity Securities* applies to all entities with available-for-sale and
        trading securities. SFAS No. 159 is effective as of the beginning
        of an entity’s first fiscal year that begins after November 15,
        2007.  Early adoption is permitted as of the beginning of a fiscal
        year that begins on or before November 15, 2007, provided the entity also
        elects
        to apply the provision of SFAS No. 157, *Fair Value
        Measurements*.  The adoption of this statement is not expected to
        have a material effect on the Company's financial statements.
  The
        FASB
        has issued SFAS Statement No. 158, *Employers’ Accounting for Defined Benefit
        Pension and Other Postretirement Plans*.  This new standard will
        require employers to fully recognize the obligations associated with
        single-employer defined benefit pension, retiree healthcare and other
        postretirement plans in their financial statements.  The Company
        anticipates adopting SFAS No. 158 on June 30, 2007, and does not believe
        the
        adoption of the new accounting standard will result in a material impact
        on the
        consolidated financial statements of the Company since the Company currently
        does not sponsor the defined benefit pension or postretirement plans within
        the
        scope of the standard.
 
 In
        September 2006, the FASB issued SFAS
        No. 157, *Fair Value Measurements*.  SFAS No. 157 defines fair
        value, establishes a framework for measuring fair value, and requires enhanced
        disclosures about fair value measurements.  SFAS No. 157 requires
        companies to disclose the fair value of their financial instruments according
        to
        a fair value hierarchy as defined in the standard.  Additionally,
        companies are required to provide enhanced disclosure regarding financial
        instruments in one of the categories, including a reconciliation of the
        beginning and ending balances separately for each major category of assets
        and
        liabilities.  SFAS No. 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. The Company believes that the adoption of SFAS
        No.
        157 will not have a material impact on its consolidated financial
        statements.
 34
  In
        March 2006, the FASB issued SFAS No.
        156, *Accounting for Servicing of Financial Assets,* to simplify
        accounting for separately recognized servicing assets and servicing
        liabilities.  SFAS No. 156 amends SFAS No. 140, *Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities*.  Additionally, SFAS No. 156 applies to all
        separately recognized servicing assets and liabilities acquired or issued
        after
        the beginning of an entity’s fiscal year that begins after September 15, 2006,
        although early adoption is permitted.  The Company does not expect the
        adoption of this new standard will have a material impact on its consolidated
        financial statements.
 
 In
        February 2006, the FASB issued SFAS
        No. 155, *Accounting for Certain Hybrid Instruments*, which amends SFAS
        No. 133, *Accounting for Derivative Instruments and Hedging Activities*,
        and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets
        and Extinguishments of Liabilities*.  SFAS No. 155 allows
        financial instruments that have embedded derivatives to be accounted for
        as a
        whole (eliminating the need to bifurcate the derivative from its host) if
        the
        holder elects to account for the whole instrument on a fair value
        basis.  SFAS No. 155 also clarifies and amends certain other
        provisions of SFAS No. 133 and SFAS No. 140.  This statement is
        effective for all financial instruments acquired or issued in financial years
        beginning after September 15, 2006.  The Company does not expect the
        adoption of this new standard will have a material impact on its consolidated
        financial statements.
 
 The
        FASB has issued Statement No. 154,
*Accounting Changes and Error Corrections*. This new standard replaces
        Accounting Principles Board (APB) Opinion No. 20, *Accounting Changes*,
        and FASB Statement No. 3, *Reporting Accounting Changes in the Interim
        Financial Statements*.  Among other changes, SFAS No. 154 requires
        that a voluntary change in accounting principle be applied retrospectively
        with
        all prior period financial statement presented on the new accounting principle,
        unless it is impracticable to do so.  SFAS No. 154 also provides that
        (1)  a change in method of depreciating or amortizing a long-lived
        non-financial asset be accounted for as a change in estimate (prospectively)
        that was effected by a change in accounting principle, and (2) correction
        of
        errors in previously issued financial statement should be termed a
“restatement.”  The new standard is effective for accounting changes
        and correction of errors made in fiscal years beginning after December 15,
        2005.  Early adoption of this standard is permitted for accounting
        changes and correction of errors made in fiscal years beginning after June
        1,
        2005.  The adoption of this new accounting pronouncement had no
        material impact on the Company’s consolidated financial statements.
  **Forward
        Looking Statements**
 
 *The
        Company, from time to time, may
        publish forward-looking statements relating to such matters as anticipated
        financial performance, business prospects, technological development, new
        products, research and development activities and similar
        matters.  The Private Securities Litigation Reform Act of 1995
        provides a safe harbor for forward-looking statements.  In order to
        comply with the terms of the safe harbor, the Company notes that a variety
        of
        factors could cause the Company’s actual results and experience to differ
        materially from the anticipated results or other expectations expressed in
        any
        of the Company’s forward-looking statements.  The risks and
        uncertainties that may affect the operations, performance, development and
        results of the Company’s business include, but are not limited to, the
        following: (a) the failure to obtain additional borrowed and/or equity capital
        on favorable terms for acquisitions and expansion; (b) adverse changes in
        federal and state laws, or other matters affecting the Company’s business; (c)
        the demand for the Company’s products and services; and (d) other risks detailed
        in the Company’s Securities and Exchange Commission filings.*
 35
 *This
        Form 10-KSB contains and
        incorporates by reference certain “forward-looking statements” within the
        meaning of Section 27A of the Securities Act and Section 21E of the Exchange
        Act
        with respect to results of operations and businesses of the
        Company.  All statements, other than statements of historical facts,
        included in this Form 10-KSB, including those regarding market trends, the
        Company’s financial position, business strategy, projected costs, and plans and
        objectives of management for future operations, are forward-looking
        statements.  In general, such statements are identified by the use of
        forward-looking words or phrases including, but not limited to, “intended, will,
        should, may, expect, anticipate, estimates, projects” or the negative thereof or
        variations thereon or similar terminology.*
 
 *Forward-looking
        statements are based on
        the Company’s current expectations.  Although the Company believes
        that the expectations reflected in such forward-looking statements are
        reasonable, there can be no assurance that such expectations will prove to
        be
        correct.  Because forward-looking statements involve risk and
        uncertainty, the Company’s actual results could differ
        materially.  Important factors that could cause actual results to
        differ materially from the Company’s expectations are disclosed hereunder and
        elsewhere in this Form 10-KSB**.**These forward-looking
        statements represent the Company’s judgment as of the date of this Form
        10-KSB.  All subsequent written and oral forward-looking statements
        attributable to the Company are expressly qualified in their entirety by
        the
        Cautionary Statements.  The Company disclaims, however, any intent or
        obligation to update its forward-looking statements.*
 
 
 **Item
                  7**.
              **Financial
                  Statements**
 
 The
        consolidated financial statements
        of the Company required by this Item are contained in a separate section
        of this
        report.  See “Index to Consolidated Financial Statements” on Page F-1
        for the consolidated financial statements of the Company included in this
        report.
   **Item
                  8.**
              **Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure**
 
 None.
 
 
 **Item
                  8A.**
              **Controls
                  and Procedures**
 
 **(A)
        Evaluation of disclosure controls and procedures**
 
 The
        Company's Chief Executive Officer and Chief Financial Officer have conducted
        an
        evaluation of the Company's disclosure controls and procedures as of June
        30,
        2007.  Based on their evaluation, the Company's Chief Executive
        Officer and Chief Financial Officer have concluded, for the reasons described
        below, that the Company's disclosure controls and procedures to ensure that
        information required to be disclosed by the Company in reports that it files
        or
        submits under the Securities Exchange Act of 1934 is recorded, processed,
        summarized and reported within the time periods specified in the applicable
        Securities and Exchange Commission rules and forms were not effective, as
        of the
        end of such period.
  
 36
 During
          the audit of the Company’s consolidated financial statements for the year ended
          June 30, 2005, management and the Company’s independent auditors identified a
          material weakness in the Company’s internal control over the financial reporting
          process relating to the identification, recording and reporting of cost
          of sales
          of the Company’s products, the cost of raw materials and parts inventories, and
          the cost of work-in-process inventories through the Company’s manufacturing and
          cost accounting software.  In addition, the Company has not completely
          implemented the accounting module of this ERP software to enable the costs
          of
          the Company’s purchasing, manufacturing and sales activities to integrate with
          the financial statements of the Company.
 
 During
          fiscal year 2007, the Company has been implementing the following actions
          to
          address the cost accounting weakness described above.  The Company
          purchased an upgrade to the ERP system and has committed to fully implement
          the
          accounting module of the software.  Training has been conducted for
          finance and other personnel of the Company in the use of the ERP software,
          and
          such training will continue during fiscal year 2008.  Consultants from
          the vendor of the software have visited the Company and provided a report
          recommending improvements and providing instructions for fully integrating
          all
          modules of the software which the Company is using in its plans to strengthen
          controls.  The Company has also hired a cost accountant experienced in
          a manufacturing environment similar to that of the Company.  The
          Company believes that it will require an additional six to nine months
          to
          implement the changes necessary to fully address the cost accounting weakness,
          and currently estimates the accounting module of the ERP software will
          be fully
          implemented by the end of fiscal year 2008.
 
 Management
          has also determined that a weakness in internal controls over financial
          reporting exists due to an overall lack of segregation of duties resulting
          from
          the limited number of personnel in the Company’s accounting
          department.  The Company’s independent auditors have classified this
          weakness as a reportable condition.  Management believes that as the
          Company expands with increased sales activities and government contract
          opportunities, additional accounting personnel will be added, resulting
          in
          improved ability to segregate key accounting and financial reporting
          duties.
 **(B)
        Changes in internal controls**
 
 Other
        than as described above, during the period covered by this report, there
        was no
        change in the Company's internal controls over financial reporting that has
        materially affected, or is reasonably likely to materially affect, the Company’s
        controls over financial reporting.
 
 
 **Item
                  8B**
              **Other
                  Information**
 
 None.
 
 
 **PART
        III**
 
 **Item
                  9.**
              **Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(A) of the Exchange Act**
 
 The
        following table contains the names and ages of all Directors and Executive
        Officers of the Company and offices held by each such person.
  37
 **Name**
                
                **Age**
                
                **Positions**David
                    L. Groen
                
                56
                
                Chairman
                    of the Board of Directors,
                    President and Chief Executive OfficerRobert
                    (Robin) H. H. Wilson
                
                71
                
                Director,
                    Executive Vice President, and Chief Operating OfficerDennis
                    P. Gauger
                
                55
                
                Director,
                    Senior Vice President, Chief Financial Officer, Secretary and
                    Treasurer
 
 **Term
          of Office**
 
 The
          appointment of David Groen as a
          member of the Board of Directors was ratified and approved by the stockholders
          at a meeting for that purpose on May 20, 2000.  Mr. Wilson was
          appointed a member of the Board of Directors on October 3, 2006.  Mr.
          Gauger was appointed a member of the Board of Directors on January 22,
          2004.  The term of service of each director continues until the next
          annual meeting of the stockholders.  With the exception of compliance
          with the duties of a director as set forth in the Articles of Incorporation
          or
          By-laws of the Company or in the provisions of the Utah Business Corporation
          Act, there are no arrangements or understandings pursuant to which any
          of the
          foregoing persons were selected to serve on the Board of Directors of the
          Company.  Each of the foregoing persons consented to serve as a
          director of the Registrant prior to their designation or subsequent election
          as
          such.
 **Background
        on Directors and Executive Officers**
 
 **David
        L.
        Groen**  As a founder of Groen Brothers Aviation, David
        Groen has performed in an executive management role for twenty-one years,
        nearly
        a decade and a half of which as its President and Chief Executive
        Officer.  David and his late brother Jay grew the Company from just
        the two of them in 1986 to more than 130 people by 2001, all the while
        developing and re-discovering the science of autorotative
        flight.  They have weathered the severe economic down turn cause by
        the “Tech Sector” crash, made even worse by the events of 9/11, and yet
        continued moving the science forward.  Following 9/11, the Company
        experienced a reduction in its work force of more than 100 people through
        layoffs, but has now grown the Company back to nearly 100 full time and part
        time employees divided between its Salt Lake City, Utah and Buckeye, Arizona
        facilities.  They have brought the Company to where it is now poised
        for expansion while fully exploiting the technology of autorotative
        flight.
 
 Immediately
        prior to forming Groen
        Brothers Aviation, David Groen was a founding partner and Chief Financial
        Officer for Seagull Recycling Company.  Previously, he has held
        numerous executive positions in the helicopter industry with Sales and
        Marketing, Safety Officer, Branch Manager, and Chief Pilot
        responsibilities.
 
 Having
        extensive military and
        commercial experience in helicopters, Mr. Groen has logged over 7,000 hours
        in
        rotor-wing and fixed-wing aircraft.  Mr. Groen received his
        Certificate of Graduation in 1970 from the U.S. Army Warrant Officer Flight
        Training School, was awarded Army Aviator Wings and promoted to the rank
        of
        Warrant Officer.  As a combat helicopter pilot and Aircraft Commander
        in Vietnam, he flew hundreds of combat sorties.  He is qualified as a
        pilot in most American and French helicopters, and has attended Aerospatiale
        factory schools.
 
 
 38
  Over
          the years, Mr. Groen’s numerous
          commercial helicopter missions have involved such work as EMS (emergency
          medical
          service hospital air ambulance), power line construction and patrol,
          topographical survey, USGS map making, wildlife management, predator control,
          herd management, back country tour guides, heli-skiing, forest fire fighting,
          long line seismic oil exploration, and wildcat on shore and off shore oil
          drilling operations.
 
 These
          years of commercial flying, added
          to his tenure serving in management positions within the rotor-wing industry,
          gave Mr. Groen a wealth of management and leadership experience in a variety
          of
          related fields.  David Groen is co-author, along with his brother Jay,
          of a best selling novel entitled Huey.
 
 **Robert
          (Robin) H.H. Wilson** has had a long and prominent career in
          aviation.  A U.S. citizen, he is a native of Ireland, but began his
          career with Rolls-Royce Aero-Engines in England, where he worked as an
          engineer
          for eight years, obtaining his Engineering degree from Cambridge
          University.  During this period he was a section leader on the
          development of the Tyne engine intended among other applications as the
          powerplant for the Fairey Rotodyne, a large commercial gyrodyne.
 
 Mr.
          Wilson left Rolls-Royce to attend graduate school, obtaining an MBA with
          High
          Distinction from Harvard University.  From Harvard he joined TWA as a
          Financial Analyst, where over the following seventeen years he held several
          Vice
          President positions across many functional areas, including Planning, Marketing,
          Maintenance and Engineering and finally Senior Vice President,
          Operations.  He left TWA to become President of the Long Island
          RailRoad, the nation’s oldest and largest passenger carrying
          railroad.  His 31⁄2 years in this position were marked by significant
          improvement in the railroad with a commendation by the U.S. Senate and
          New York
          State legislature for outstanding performance.
 Mr.
        Wilson returned to aviation as
        President of Western Airlines, where he participated in the build up of its
        Salt
        Lake City hub as part of the team that managed the major turnaround of that
        carrier and merger with Delta.  Later, he was appointed President of
        Burlington Air Express, before returning to Ireland, as Chief Technical Officer
        of Guinness Peat Aviation, then the world’s largest aircraft leasing
        company.
 
 Following
        TWA’s Chapter 11 filing in
        1992, Mr. Wilson was asked to return to TWA as Co-Chief Executive to take
        the
        company out of bankruptcy.  When this was accomplished, he remained as
        Vice Chairman until new management was recruited.  He then became a
        partner in the international aviation consultancy, SH&E, advising
        Governments, Banks, Airlines and other parties on aviation matters over a
        five-year period.
 
 In
        August
        2001 he joined Groen Brothers Aviation as Chief Financial Officer and Head
        of
        Business Development.  Late in 2003, he took on added responsibility
        for GBA and AAI Marketing and Sales, while relinquishing his CFO role to
        Mr.
        Gauger when he joined the Company.  Subsequently, he was appointed
        Executive Vice President and Chief Operating Officer and joined the Board
        following the death of Jay Groen..
 
 **Dennis
        P. Gauger,
        CPA**  Dennis P. Gauger, Certified Public Accountant, has
        over 30 years of experience as a financial executive, consultant, and accounting
        and auditing professional.  His professional background includes 21
        years of service in three offices of Deloitte & Touche, a "Big Four"
        international accounting firm, including 9 years as an accounting and auditing
        partner, and nine years operating his own Certified Public Accounting firm
        specializing in contract financial and executive management.
 
 39
 As
          a
          Deloitte partner, Mr. Gauger directed domestic and international firm
          interactions with senior executive management, audit committees and boards
          of
          directors relating to audited financial statements, SEC accounting and
          reporting, initial public offerings, mergers and acquisitions, technical
          accounting issues, cost accounting, internal controls, employee benefit
          plans,
          corporate governance, financing, cash management, and
          operations.  Since leaving Deloitte, Mr. Gauger has completed both
          short and long-term engagements as a corporate troubleshooter, "turn around"
          specialist, financial consultant and analyst, compliance officer, and chief
          financial officer for a variety of public and privately-owned
          companies.  He has experience in a wide variety of industries,
          including manufacturing, high technology, software, Internet, retail and
          distribution, financial services, hospitality, mining, telecommunications
          and
          real estate.
 
 Mr.
          Gauger serves as part-time, contract Chief Financial Officer or consultant
          for
          three other public companies.  He is a licensed Certified Public
          Accountant in the states of Utah and Nevada, and a member of the American
          Institute of Certified Public Accountants and the Utah Association of Certified
          Public Accountants. He graduated with honors from Brigham Young University
          with
          a BS degree in accounting.
 
 **Communications
          Between Shareholders and the Board of Directors**
 
 The
          Board of Directors of the Company
          has not adopted a formal procedure that shareholders must follow to send
          communications directly to it.  The Board of Directors does receive
          communication from shareholders, from time to time, and addresses those
          communications as appropriate.  Shareholders can send communication to
          the Board of Directors in one of the following ways:
 ·
              In
                  writing, to Groen Brothers Aviation, Inc., 2640 West California
                  Avenue,
                  Suite A, Salt Lake City, Utah 84104, Attention of Board of
                  Directors
 
 ·
              By
                  Email, at directors@groenbros.com.
 
 The
        Company did not hold an annual meeting of shareholders during the fiscal
        year
        ended June 30, 2007.
 
 
 **Section
        16(a) Beneficial Ownership Reporting Compliance**
 
 Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires the directors
        and executive officers of the Company, and persons who own more than 10%
        of a
        registered class of the Company’s equity securities, to file initial reports of
        ownership and reports of changes in ownership with the SEC.  Such
        persons are required by SEC regulations to furnish the Company with copies
        of
        all Section 16(a) forms they file.
  Based
        solely on the review of the copies of such forms received by the Company
        or
        written representations from certain reporting persons, that no other reports
        were required, management of the Company believes that all filing requirements
        applicable to its officers, directors, and greater than 10% beneficial owners
        were complied with during the year ended June 30, 2007.
 40
 **Committees
        of the Board of Directors**
 
 The
        three members of the Company’s
        Board of Directors, none of whom is deemed independent pursuant to Rule 4200
        of
        the National Association of Securities Dealers' listing standards, currently
        serve as the Audit Committee and Compensation Committee of the
        Board.
 
 **Audit
        Committee**
 
 The
        Audit Committee of the Board of
        Directors makes recommendations regarding the retention of the independent
        registered public accounting firm, reviews the scope of the annual audit
        undertaken by the Company’s independent registered public accounting firm and
        the progress and results of their work, reviews the financial statements
        of the
        Company, and oversees the internal controls over financial reporting and
        corporate programs to ensure compliance with applicable laws. The Audit
        Committee reviews the services performed by the independent registered public
        accounting firm and determines whether they are compatible with maintaining
        the
        registered public accounting firm’s independence. The Audit Committee currently
        does not have a charter.  The Company’s Board of Directors has
        determined that Dennis P. Gauger is an “audit committee financial expert,” as
        that term I defined by the rules and regulations of the Securities and Exchange
        Commission.
 
 In
        fulfilling its oversight
        responsibilities, the Audit Committee has reviewed and discussed the audited
        financial statements and discussed with the independent auditors the matters
        required to be discussed by SAS 61.  Management is responsible for the
        financial statements and the reporting process, including the system of internal
        controls.  The independent auditors are responsible for expressing an
        opinion on the conformity of those audited financial statements with generally
        accepted accounting principles.
  The
        Audit Committee discussed with the
        independent auditors, the auditors' independence from the management of the
        Company and received written disclosures and the letter from the independent
        accountants required by Independence Standards Board Standard No.
        1.
  After
        review and discussions, the Audit
        Committee approved the audited financial statements be included in the Company's
        Annual Report on Form 10-KSB for the year ended June 30, 2007.  The
        Audit Committee also selected HJ & Associates, LLC as the Company’s
        independent registered public accounting firm for the fiscal year ending
        June
        30, 2007.
 
 **Compensation
        Committee**
 
 The
        Compensation Committee of the Board
        of Directors reviews and approves executive compensation policies and practices,
        reviews salaries and bonuses for the Company’s officers, administers the
        Company’s stock option plans and other benefit plans, and considers other
        matters as required.
 
 **Code
        of Ethics**
 
 The
        Company has adopted Standards of
        Conduct applicable to all employees and a Statement of Corporate Values,
        also
        applicable to all employees.  Copies of the Standards and the
        Statement were filed as Exhibit 14.2 and 14.1, respectively, to the Company’s
        Annual Report on Form 10-KSB for fiscal year 2004 and are also available
        on the
        Company’s web site.
 41
 
 **Item
                  10.**
              **Executive
                  Compensation**
 
 The
        following table summarizes all compensation earned by or paid to the Company’s
        President and Chief Executive Officer, Executive Vice President and Chief
        Operating Officer, and Senior Vice President and Chief Financial Officer
        (the
“Named Executive Officers”) for services rendered in all capacities for the year
        ended June 30, 2007.
 
 **Summary
        Compensation Table**
  **Name
                  and**
                **Principal
                  Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Stock**
                **Awards**
              
              **Option**
                **Awards
                  (1)**
              
              **Non-Equity**
                **Incentive
                  Plan**
                **Compensation**
              
              **Change
                  in**
                **Pension
                  Value and Non-Qualified Deferred
                  Compensation  Earnings**
                **(2)**
              
              **All**
                **Other**
                **Compensation**
              
              **Total****(a)**
              
              **(b)**
              
              **(c)**
              
              **(d)**
              
              **(e)**
              
              **(f)**
              
              **(g)**
              
              **(h)**
              
              **(i)**
              
              **(j)**David
                  Groen (3)
                President
                  and Chief Executive Officer
              
              2007
              
              $133,827
              
              $
                  -
              
              $
                  -
              
              $  44,729
              
              $
                  -
              
              $
                  160,000
              
              $   1,186
              
              $
                  179,742Robin
                  Wilson (4)
                Executive
                  Vice President and Chief Operating Officer
              
              2007
              
              $124,038
              
              $
                  -
              
              $
                  -
              
              $102,600
              
              $
                  -
              
              $
                  145,000
              
              $ 11,154
              
              $
                  237,792Dennis
                  Gauger (5)
                Senior
                  Vice President and Chief Financial Officer
              
              2007
              
              $119,038
              
              $
                  -
              
              $
                  -
              
              $  72,667
              
              $
                  -
              
              $
                  110,000
              
              $   6,427
              
              $
                  198,132
 ____________
  (1)
              The
                  amounts in column (f) reflect the dollar amount of stock-based
                  compensation expense recognized for financial statement reporting
                  purposes
                  for the year ended June 30, 2007 in accordance with SFAS
                  123(R).
 (2)
              The
                  amounts in column (h) reflect the additions to deferred compensation
                  payable during the year ended June 30, 2007.  The deferred
                  compensation is payable in part or in whole only by resolution
                  of the
                  Company’s Board of Directors and when not precluded by the Company’s
                  financing agreements.
 (3)
              The
                  other compensation paid to Mr. Groen in fiscal year 2007 consists
                  of
                  matching contributions made by the Company pursuant to the Company’s
                  Profit Sharing 401(k) Plan.
 (4)
              The
                  other compensation paid to Mr. Wilson in fiscal year 2007 consists
                  of
                  matching contributions made by the Company pursuant to the Company’s
                  Profit Sharing 401(k) Plan.
 (5)
              The
                  other compensation paid to Mr. Gauger in fiscal year 2007 consists
                  of
                  matching contributions made by the Company pursuant to the Company’s
                  Profit Sharing 401(k) Plan of $5,327 and $1,100 contributed by
                  the Company
                  to Mr. Gauger’s health savings account pursuant to a Company benefit
                  plan.
 42
  **Employment
          Agreements**
 
 Effective
        August 12, 2007 annual
        salaries for David Groen, Robin Wilson and Dennis Gauger were established
        at
        $150,000, $140,000, and $125,000, respectively, with no additional compensation
        for service on the Company’s Board of Directors.  The Company does not
        have written employment agreements with its executive officers.
 
 **Deferred
        Compensation**
 
 In
        addition to cash compensation, the
        Company has a deferred compensation arrangement for executive officers and
        certain of its senior management that accrues additional salary, with amounts
        originating from fiscal year 1998 through the current fiscal
        year.  The terms of the Company’s Series B Preferred Stock preclude
        the Company from making any deferred compensation payments until all outstanding
        amounts due relating to the Series B Preferred Stock have been paid in
        full.  Absent payment restrictions related to outstanding Series B
        Preferred Stock or other restrictions, the deferred compensation is payable
        in
        part or in whole only by resolution of the Company’s Board of
        Directors.  Through June 30, 2007, the Board of Directors has not
        authorized payment of any of the deferred compensation, and will not authorize
        payments until the Board determines such payments are allowed under the
        Company’s outstanding financing agreements and would be prudent in light of the
        Company’s financial condition and availability of cash.  Deferred
        compensation totaling $4,664,000, related accrued payroll taxes of $160,000
        and
        related accrued interest payable of $309,000 are classified as long-term
        liabilities at June 30, 2007.    In fiscal year 2001, the
        Company began accruing interest expense on the deferred compensation at the
        rate
        of 8% per annum.  The accrual of interest was permanently discontinued
        on July 1, 2004.  At June 30, 2007, deferred compensation and related
        interest accrued to the Named Executive Officers were as follows:
 
 **Deferred
                  Compensation**
              
              
              **Accrued**
                **Interest**
              
              
              **Total**David
                  Groen
              
              $
              1,559,354
              
              
              $
              179,711
              
              
              $
              1,739,065Robin
                  Wilson
              
              
              792,139
              
              
              
              41,158
              
              
              
              833,297Dennis
                  Gauger
              
              
              210,833
              
              
              
              -
              
              
              
              210,833
 43
 **Stock
        Option Plan**
 
 The
        following table summarizes the
        outstanding stock options held by the Named Executive Officers at June 30,
        2007.
 
 **Outstanding
        Equity Awards at Fiscal Year-End**
 
 **Option
                  Awards****Name**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Unexercisable**
              
              **Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)**
              
              **Option**
                **Exercise**
                **Price
                  ($)**
              
              **Option**
                **Expiration**
                **Date****(a)**
              
              **(b)**
              
              **(c)**
              
              **(d)**
              
              **(e)**
              
              **(f)**David
                  Groen
              
              2,500,000
              
              -
              
              -
              
              0.15
              
              3/31/2008David
                  Groen
              
              50,000
              
              -
              
              -
              
              0.25
              
              12/30/2008David
                  Groen
              
              1,925,000
              
              -
              
              -
              
              0.25
              
              10/19/2009David
                  Groen
              
              3,000,000
              
              -
              
              -
              
              1.00
              
              10/19/2009David
                  Groen
              
              375,000
              
              375,000
              
              -
              
              0.25
              
              6/20/2011David
                  Groen
              
              568,750
              
              1,706,250
              
              -
              
              0.25
              
              8/13/2011David
                  Groen
              
              -
              
              185,000
              
              -
              
              0.15
              
              10/31/2011David
                  Groen
              
              -
              
              1,500,000
              
              -
              
              0.18
              
              11/16/2011Robin
                  Wilson
              
              1,000,000
              
              -
              
              -
              
              0.15
              
              3/31/2008Robin
                  Wilson
              
              50,000
              
              -
              
              -
              
              0.25
              
              12/30/2008Robin
                  Wilson
              
              1,000,000
              
              -
              
              -
              
              0.25
              
              4/30/2009Robin
                  Wilson
              
              1,950,000
              
              -
              
              -
              
              0.25
              
              9/22/2009Robin
                  Wilson
              
              666,666
              
              333,334
              
              -
              
              0.25
              
              6/23/2010Robin
                  Wilson
              
              666,666
              
              333,334
              
              -
              
              1.00
              
              6/23/2010Robin
                  Wilson
              
              375,000
              
              375,000
              
              -
              
              0.25
              
              6/20/2011Robin
                  Wilson
              
              250,000
              
              750,000
              
              -
              
              0.25
              
              8/13/2011Robin
                  Wilson
              
              -
              
              110,000
              
              -
              
              0.15
              
              10/31/2011Dennis
                  Gauger
              
              50,000
              
              -
              
              -
              
              0.25
              
              12/30/2008Dennis
                  Gauger
              
              250,000
              
              -
              
              -
              
              0.63
              
              12/30/2008Dennis
                  Gauger
              
              200,000
              
              -
              
              -
              
              1.10
              
              12/30/2008Dennis
                  Gauger
              
              1,500,000
              
              -
              
              -
              
              0.25
              
              9/22/2009Dennis
                  Gauger
              
              666,666
              
              333,334
              
              -
              
              0.25
              
              6/23/2010Dennis
                  Gauger
              
              666,666
              
              333,334
              
              -
              
              1.00
              
              6/23/2010Dennis
                  Gauger
              
              375,000
              
              375,000
              
              -
              
              0.25
              
              6/20/2011Dennis
                  Gauger
              
              -
              
              95,000
              
              -
              
              0.15
              
              10/31/2011
 
 Columns
        (g) through (j) have been omitted since the Company has not granted any stock
        awards.
 
 Under
        the
        Company’s 2000 amended and restated stock option plan (Plan), there are 60
        million shares that are authorized for stock options.  The Company may
        issue both non-qualifying stock options and qualifying incentive stock
        options.  All stock options have an exercise price that is not less
        than 100 percent of the fair market value on the date of the
        grant.  While expiration dates vary on particular grants, no stock
        options may be exercised more than ten years after the date of
        grant.  Qualifying incentive stock options are granted only to
        employees, while non-qualifying options may be granted to employees, directors,
        and non-employees.
 
 On
        May 17, 2002 and June 10, 2005,
        the Company filed Form S-8 Registration Statements (“Registration”) for the Plan
        under the Securities Act of 1933.  Options granted under the Plan
        prior to the filing of the 2002 Registration can only be exercised for
        restricted common stock as defined under the Securities and Exchange Commission
        Rule 144.  Options granted under the Plan after the 2002 Registration
        can be exercised for unrestricted and free trading common stock.
 44
 The
        Company’s Board of Directors may
        also authorize the issuance of other stock options and warrants outside of
        the
        Plan.
 
 
 **Item
                  11.**
              **Security
                  Ownership of Certain Beneficial Owners and
                  Management.**
 
 The
        following tabulation shows, as of September 18, 2007, the number of shares
        of
        common stock, no par value, and the number of shares of Series A preferred
        stock
        owned beneficially by: (a) all persons known to be the holders of more than
        five
        percent (5%) of voting securities, (b) Directors, (c) the Named Executive
        Officers and (d) all other Senior Officers and Directors as a
        group:
 
 **Amount
                  and Nature of**
                **Beneficial
                  Ownership (1)****Name
                  and Address of Beneficial Owner**
              
              **Common
                  Shares**
              
              
              **Series
                  A**
                **Preferred
                  Shares**
              
              
              **Total
                  Voting**
                **Shares(6)****Shares**
              
              
              
              **%**
              
              
              **Shares**
              
              
              **%**
              
              
              **Shares**
              
              
              **%**David
                  Groen
                2640
                  W. California Ave.
                Salt
                  Lake City, Utah 84104
              
              
              19,131,300
              
              **(2)**
              
              
              10.6
              
              
              
              1,025,000
              
              
              
              73.2
              
              
              
              121,631,300
              
              
              
              38.0Robin
                  Wilson
                2640
                  W. California Ave.
                Salt
                  Lake City, Utah 84104
              
              
              6,644,998
              
              **(3)**
              
              
              3.7
              
              
              
              125,000
              
              
              
              8.9
              
              
              
              19,144,998
              
              
              
              6.0Dennis
                  Gauger
                2640
                  W. California Ave.
                Salt
                  Lake City, Utah 84104
              
              
              3,789,998
              
              **(4)**
              
              
              2.1
              
              
              
              125,000
              
              
              
              8.9
              
              
              
              16,289,998
              
              
              
              5.1Margaret
                  Groen
                2640
                  W. California Ave.
                Salt
                  Lake City, Utah 84104
              
              
              10,774,684
              
              **(5)**
              
              
              6.0
              
              
              
              125,000
              
              
              
              8.9
              
              
              
              23,274,684
              
              
              
              7.3All
                  officers and directors as a group  (3 persons)
              
              
              29,566,296
              
              
              
              
              16.4
              
              
              
              1,275,000
              
              
              
              91.1
              
              
              
              157,066,296
              
              
              
              49.1
  (1)
              Unless
                  otherwise indicated, each person identified in the table has sole
                  voting
                  and investment power with respect to the common stock beneficially
                  owned
                  by such person.  The total number of outstanding shares included
                  in the computation of percentages is 154,714,931 plus 25,304,996
                  options
                  which are exercisable by executives and directors within 60
                  days.
 (2)
              Includes
                  7,747,884 shares owned by David Groen, 2,403,000 shares beneficially
                  owned
                  held by family trusts and 8,980,416 options exercisable by David
                  Groen.
 (3)
              Includes
                  300,000 shares owned by Robin Wilson, 100,000 shares beneficially
                  owned
                  held by family trusts and 6,244,998 options exercisable by Robin
                  Wilson.
 (4)
              Includes
                  50,000 shares owned by Dennis Gauger and 3,739,998 options exercisable
                  by
                  Dennis Gauger.
 (5)
              Includes
                  4,435,100 shares beneficially owned by Margaret Groen held by a
                  trust and
                  by the estate of Jay Groen, 1,500,000 options exercisable by Margaret
                  Groen, and 4,839,584 options beneficially owned and exercisable
                  by a trust
                  and by the estate of Jay Groen.
 (6)
              Each
                  share of Series A preferred stock entitles the holder to cast one
                  hundred
                  (100) votes on all matters submitted to the stockholders for a
                  vote,
                  voting together with the holders of the common stock as a single
                  class.
  45
 
 David
        Groen, President and Chief Executive Officer, owns 1,025,000 shares of the
        Company’s Series A Convertible Preferred Stock, and Robin Wilson, Executive Vice
        President and Chief Operating Officer, Dennis Gauger, Senior Vice President
        and
        Chief Financial Officer, and Margaret Groen, the surviving spouse of the
        late
        Jay Groen, each owns 125,000 shares of the Company’s Series A Convertible
        Preferred Stock, combined representing 100% of the outstanding shares of
        that
        series of preferred stock.  Each share of the Series A Convertible
        Preferred Stock entitles the holder to cast one hundred (100) votes, or a
        total
        of 140,000,000 votes on all matters submitted to the stockholders for a vote,
        voting together with the holders of the common stock of the Company as a
        single
        class.
 
 
 **Item
                  12.**
              **Certain
                  Relationships and Related Transactions, and Director
                  Independence**
 
 **Related
        Party Transactions**
 
 At
        June 30, 2007, the Company had a
        note payable, originating in 1990, of $180,000, plus accrued interest of
        $165,000, due to a company owned by David and the late Jay Groen.  The
        note bears interest at 12% and is due on demand.
 
 At
        June 30, 2007, the Company had two
        notes payable to David Groen totaling $101,000, plus accrued interest totaling
        $12,000.  The notes bear interest at 8% and 18% and are due on
        demand.
 
 At
        June 30, 2007, the Company had two
        notes payable to Robin Wilson totaling $234,000, plus accrued interest totaling
        $61,000.  The notes bear interest at 8% and are due on
        demand.
 
 At
        June 30, 2007, current liabilities
        of the Company included short-term notes payable to related parties (including
        the notes payable to executive officers discussed in the three preceding
        paragraphs), primarily stockholders of the Company (including the related
        party
        notes payable described above), totaling $13,443,000, with accrued interest
        payable of $4,633,000.  Most of these notes are unsecured, due on
        demand, and bear interest at annual rates ranging from 8% to 25%, with four
        notes at 36% and two notes at 50% where interest was paid in advance in common
        shares of the Company.  Included in these notes payable at June 30,
        2007 are notes payable totaling $2,270,000 that are technically in
        default.  In addition, the Company is delinquent in making payments of
        accrued interest payable of $434,000 on this related party debt at June 30,
        2007.
 
 At
        June 30, 2007, the Company had
        unsecured long-term notes payable to two stockholders totaling $931,000,
        with
        interest rates of 12% and 18%.  Accrued interest payable on this
        related party long-term debt was $210,000 at June 30, 2006.
 
 At
        June 30, 2007, the Company had
        related party accounts and notes receivable from employees and a former officer
        of the Company, resulting primarily from cash advances, totaling $57,000,
        bearing interest at 7% to 12%.  The Company has implemented a
        procedure to reduce the note receivable from a former officer each quarter
        by
        offsetting amounts due to the former officer by the Company for accrued
        compensation and interest expense.
 
 Royalty
        payments of 1% of the gross
        sales price of gyroplanes are to be paid to the Company’s founders, David Groen
        and the estate of the late Jay Groen.  Through June 30, 2007,
        royalties payable totaled $12,500 to each of these parties, which amounts
        are
        included in cost of sales in the accompanying consolidated statement of
        operations.
 
 
 46
 
 Included
        in long-term accrued expenses
        in the consolidated balance sheet at June 30, 2007 is deferred compensation
        payable to twelve management employees or former employees, including officers
        and directors of the Company, with amounts originating from fiscal year 1998
        through fiscal year 2007.  In addition to cash compensation, the
        Company has a deferred compensation arrangement for executive officers and
        certain of its senior management that accrues additional salary.  The
        terms of the Company’s Series B Preferred Stock preclude the Company from making
        any deferred compensation payments until all outstanding amounts due relating
        to
        the Series B Preferred Stock have been paid in full.  Absent payment
        restrictions related to outstanding Series B Preferred Stock or other
        restrictions, the deferred compensation is payable in part or in whole only
        by
        resolution of the Company’s Board of Directors.  Deferred compensation
        totaling $4,195,000, related accrued payroll taxes of $160,000 and related
        accrued interest payable of $309,000 are classified as long-term liabilities
        at
        June 30, 2007.  Through June 30, 2007, the Board of Directors has not
        authorized payment of any of the deferred compensation, and will not authorize
        payments until the Board determines such payments are allowed under the
        Company’s outstanding financing agreements and would be prudent in light of the
        Company’s financial condition and availability of cash.  In fiscal
        year 2001, the Company began accruing interest expense on the deferred
        compensation at the rate of 8% per annum.  The accrual of interest was
        permanently discontinued on July 1, 2004.
 
 **Director
        Independence**
 
 The
        Company currently does not have any
        directors considered to be independent pursuant to Rule 4200 of the National
        Association of Securities Dealers' listing standards.
 
 
 **PART
        IV**
 
 **Item
                  13.**
              **Exhibits**
  (a)
              Exhibits
                  (filed with this report unless indicated
                  below)
 
 3.1
              Amendment
                  to Second Restated Articles of Incorporation of Groen Brothers
                  Aviation,
                  Inc. {1}
 
 3.2
              Second
                  Amendment to Second
                  Restated Articles of Incorporation of Groen Brothers Aviation,
                  Inc.(1)
 
 3.3
              Third
                  Restated Articles of Incorporation of Groen Brothers Aviation,
                  Inc. (2)
 
 3.4
              Amendment
                  to Third Restated Articles of Incorporation of Groen Brothers Aviation,
                  Inc. (3)
 
 3.5
              Second
                  Amendment to Third Restated Articles of Incorporation of Groen
                  Brothers
                  Aviation, Inc. (4)
 
 3.6
              Amendment
                  to Fourth Restated Articles of Incorporation of Groen Brothers
                  Aviation,
                  Inc. (5)
 
 
 47
 
 3.7
              Second
                  Amendment to Fourth Restated Articles of Incorporation of Groen
                  Brothers
                  Aviation, Inc. (6)
 
 3.8
              By-laws
                  (4)
 
 4.1
              Amended
                  and Restated 2000 Option Plan (7)
 
 10.1
              Amendment
                  to the Common Stock
                  Purchase Agreement Dated November 7, 2000(2)
 
 10.2
              Form
                  of SparrowHawk Dealer Agreement (4)
 
 10.3
              Form
                  of Amendment No. 2 to Securities Exchange Agreement (4)
 
 10.4
              Form
                  of Stock Option (4)
 
 11
              Statement
                  re: computation of per share earnings. (8)
 
 14.1
              Groen
                  Brothers Aviation Corporate Values (2)
 
 14.2
              Standards
                  of Conduct(2)
 
 21
              Subsidiaries
                  of the small business issuer. (8)
 
 23.1
              Consent
                  of Independent Registered Accounting
                  Firm
 
 31.1
              Certification
                  of Principal Executive Officer required by Rule
                  13a-14(a)
 
 31.2
              Certification
                  of Principal Financial Officer required by Rule
                  13a-14(a)
 
 32.1
              Certification
                  of Principal Executive Officer required by Rule 13a-14(b) and 18
                  U.S.C.
                  1350
 
 32.2
              Certification
                  of Principal Financial Officer required by Rule 13a-14(b) and 18
                  U.S.C.
                  1350
 
 (1)   Filed
        as an exhibit to the Company’s report on Form 10-QSB for the quarter ended
        December 31, 2003 and incorporated herein by reference.
 (2)   Filed
        as an exhibit to the Company’s report on Form 10-KSB for the year ended June 30,
        2004 and incorporated herein by reference.
 (3)   Filed
        as an exhibit to the Company’s report on Form 10-QSB for the quarter ended
        December 31. 2004 and incorporated herein by reference.
 (4)   Filed
        as an exhibit to the Company’s report on Form 10-KSB for the year ended June 30,
        2005 and incorporated herein by reference.
 (5)   Filed
        as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31,
        2006 and incorporated herein by reference.
 (6)   Filed
        as an exhibit to the Company’s Report on Form 8-K filed May 11, 2007 and
        incorporated herein by reference.
 (7)   Filed
        as an exhibit to the Company’s registration statement on Form S-8 filed June 10,
        2005 and incorporated herein by reference.
 (8)   Information
        included in Notes to Consolidated Financial statements filed with this
        report.
 
 
 48
 
 
 **Item
                  14.**
              **Principal
                  Accountant Fees and
                  Services**
 
 The
        following schedule presents the professional fees incurred to HJ &
Associates, LLC, the Company’s independent registered accountants engaged March
        1, 2006, for the fiscal years ended June 30, 2007 and 2006.
 
 **2007**
              
              
              **2006**Audit
                  fees
              
              $
              56,800
              
              
              $
              42,250Audit
                  related fees
              
              
              -
              
              
              
              -Tax
                  fees
              
              
              4,996
              
              
              
              2,838Other
                  fees
              
              
              -
              
              
              
              -Total
              
              $
              61,796
              
              
              $
              45,088
 
 
 Tax
        fees were for preparation of
        federal and state income tax returns and related tax consultation.
 
 All
        professional fees paid to the
        Company’s independent registered accountants are pre-approved by the Board of
        Directors of the Company, acting in its capacity as the Audit
        Committee.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 49
 
 
 SIGNATURES
 
 
 Pursuant
        to the requirements of Section
        13 or 15 (d) of the Securities Exchange Act of 1934, the small business issuer
        has duly caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
 
 
 GROEN
                  BROTHERS AVIATION, INC./s/
                  David GroenDavid
                  Groen, President and Chief Executive Officer(Principal
                  Executive Officer)Date:  October
                  15, 2007
 
 
 Pursuant
        to the requirements of the
        Securities Exchange Act of 1934, this report has been signed below by the
        following persons on behalf of the small business issuer and in the capacities
        and on the dates indicated.
 
 Signatures
              
              Capacity
                  in Which Signed
              
              Date/s/
                  David
                  Groen
              
              President
                  and Chief Executive Officer
              
              October
                  15, 2007David
                  Groen
              
              (Principal
                  Executive
                  Officer)/s/
                  Dennis P.
                  Gauger
              
              Chief
                  Financial Officer and Secretary
              
              October
                    15, 2007Dennis
                  P.
                  Gauger
              
              (Principal
                  Financial
                  Officer)/s/
                  Robert
                  Wilson
              
              Director
              
              October
                    15, 2007Robert
                  Wilson
 
 
 
 
 
 
 
 50
 
  
 **GROEN
        BROTHERS AVIATION, INC.**
 **Index
        to Consolidated Financial Statements**
 
 
 Report
                  of Independent Registered Public Accounting Firm – HJ & Associates,
                  LLC
              F-2Consolidated
                  Balance Sheet
              F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Statements of Stockholders’ Deficit
              F-5Consolidated
                  Statements of Cash Flows
              F-7Notes
                  to Consolidated Financial Statements
              F-8
 
 
 
 
 
 
 
 
 
 F-1
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 Board
        of
        Directors and Shareholders of
 Groen
        Brothers Aviation, Inc.
 Salt
        Lake
        City, Utah
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Groen Brothers Aviation,
        Inc. as of June 30, 2007, and the related consolidated statements of operations,
        stockholders' deficit and cash flows for the years ended June 30, 2007 and
        2006.
        These consolidated financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        consolidated financial statements are free of material
        misstatement.  An audit includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the consolidated financial
        statements.  An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall consolidated financial statement
        presentation.  We believe that our audits provide a reasonable basis
        for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Groen Brothers
        Aviation, Inc. as of June 30, 2007, and the results of their operations and
        their cash flows for the years ended June 30, 2007 and 2006 in conformity
        with
        US generally accounting principles.
 
 The
        accompanying consolidated financial
        statements have been prepared assuming that the Company will continue as a
        going
        concern.  As discussed in Note 2 to the consolidated financial
        statements, the Company’s operating losses and lack of working capital raise
        substantial doubt about its ability to continue as a going
        concern.  Management’s plans concerning these matters are also
        described in Note 2.  The consolidated financial statements do not
        include any adjustments that might result from the outcome of this
        uncertainty.
 
 
 
 
 HJ
&
        Associates, LLC
 Salt
        Lake
        City, Utah
 October
        10, 2007
 
 
 
 F-2
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Consolidated
        Balance Sheet**
 
 **Assets**
              
              **June
                  30, 2007**Current
                  assets:Cash
              
              $
              60,000Accounts
                  receivable
              
              
              15,000Related
                  party accounts and notes receivable
              
              
              57,000Prepaid
                  expenses
              
              
              31,000Inventories
              
              
              466,000Total
                  current assets
              
              
              629,000Property
                  and equipment, net
              
              
              681,000Total
                  assets
              
              $
              1,310,000**Liabilities
                  and Stockholders’ Deficit**Current
                  liabilities:Accounts
                  payable
              
              $
              3,534,000Accrued
                  expenses
              
              
              6,489,000Deferred
                  revenue
              
              
              634,000Notes
                  payable
              
              
              558,000Related
                  party notes payable
              
              
              13,443,000Series
                  B 15% cumulative redeemable non-voting preferred stock, no par
                  value,
                  50,000,000 shares authorized, 58,771 shares issued and
                  outstanding
              
              
              58,771,000Total
                  current liabilities
              
              
              83,429,000Long-term
                  liabilities:Accrued
                  expenses
              
              
              4,664,000Deferred
                  revenue
              
              
              25,000Long-term
                  debt
              
              
              109,000Related
                  party long-term debt
              
              
              931,000Dealer
                  deposits
              
              
              2,145,000Total
                  liabilities
              
              
              91,303,000Stockholders’
                  deficit:Series
                  A convertible preferred stock, no par value, 50,000,000 shares
                  authorized,
                  1,400,000 shares issue and outstanding
              
              
              70,000Common
                  stock, no par value, 500,000,000 shares authorized, 154,522,431
                  shares
                  issued and outstanding
              
              
              31,861,000Accumulated
                  deficit
              
              
              (121,924,000
              )Total
                  stockholders’ deficit
              
              
              (89,993,000
              )Total
                  liabilities and stockholders’ deficit
              
              $
              1,310,000
 
 See
        accompanying notes to consolidated financial statements.
 
 
 F-3
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Consolidated
        Statements of Operations**
 
 **Years
                  Ended June 30,****2007**
              
              
              **2006**Revenues
              
              $
              3,403,000
              
              
              $
              3,115,000Costs
                  and expenses:Cost
                  of sales
              
              
              9,360,000
              
              
              
              3,358,000Research
                  and development
              
              
              1,555,000
              
              
              
              2,534,000General
                  and administrative expenses
              
              
              2,659,000
              
              
              
              1,837,000Total
                  costs and expenses
              
              
              13,574,000
              
              
              
              7,729,000Loss
                  from operations
              
              
              (10,171,000
              )
              
              
              (4,614,000
              )Other
                  income (expense):Related
                  party interest income
              
              
              5,000
              
              
              
              6,000Interest
                  and other income
              
              
              13,000
              
              
              
              6,000Gain
                  on extinguishment of debt
              
              
              26,000
              
              
              
              166,000Interest
                  expense
              
              
              (2,740,000
              )
              
              
              (1,509,000
              )Series
                  B preferred stock interest expense
              
              
              (12,550,000
              )
              
              
              (14,136,000
              )Total
                  other income (expense)
              
              
              (15,246,000
              )
              
              
              (15,467,000
              )Loss
                  before income taxes
              
              
              (25,417,000
              )
              
              
              (20,081,000
              )Income
                  tax benefit
              
              
              -
              
              
              
              -Net
                  loss
              
              $
              (25,417,000
              )
              
              $
              (20,081,000
              )Net
                  loss per share – basic and diluted
              
              $
              (0.17
              )
              
              $
              (0.15
              )Weighted
                  average number of common shares outstanding – basic and
                  diluted
              
              
              147,446,000
              
              
              
              136,904,000
 
 See
        accompanying notes to consolidated financial statements.
 
  F-4
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Consolidated
        Statements of Stockholders' Deficit**
 **Years
        Ended June 30, 2007 and 2006**
 
 
 **Series
                  A Convertible****Preferred
                  Stock**
              
              
              **Common
                  Stock**
              
              
              **Accumulated****Shares**
              
              
              **Amount**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **Deficit**
              
              
              **Total****Balance
                  forward, June 30, 2005**
              
              ****
              **1,400,000**
              
              
              **$**
              **70,000**
              
              
              ****
              **130,424,172**
              
              
              **$**
              **23,590,000**
              
              
              **$**
              **(76,426,000**
              **)**
              
              **$**
              **(52,766,000**
              **)**Issuance
                  of common stock for:Cash
              
              
              -
              
              
              
              -
              
              
              
              10,449,417
              
              
              
              2,236,000
              
              
              
              -
              
              
              
              2,236,000Accrued
                  expenses
              
              
              -
              
              
              
              -
              
              
              
              861,171
              
              
              
              179,000
              
              
              
              -
              
              
              
              179,000Interest
                  expense
              
              
              -
              
              
              
              -
              
              
              
              1,059,533
              
              
              
              190,000
              
              
              
              -
              
              
              
              190,000Reduction
                  of deferred revenue
              
              
              -
              
              
              
              -
              
              
              
              184,907
              
              
              
              37,000
              
              
              
              -
              
              
              
              37,000Payment
                  of debt
              
              
              -
              
              
              
              -
              
              
              
              1,146,213
              
              
              
              234,000
              
              
              
              -
              
              
              
              234,000Purchase
                  of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              530,093
              
              
              
              106,000
              
              
              
              -
              
              
              
              106,000Customer
                  refund
              
              
              -
              
              
              
              -
              
              
              
              5,000
              
              
              
              1,000
              
              
              
              -
              
              
              
              1,000Settlement
                  of put option liability
              
              
              -
              
              
              
              -
              
              
              
              5,004,009
              
              
              
              1,560,000
              
              
              
              
              
              
              
              1,560,000Employer
                  401(k) expense
              
              
              -
              
              
              
              -
              
              
              
              505,980
              
              
              
              99,000
              
              
              
              -
              
              
              
              99,000Services
              
              
              -
              
              
              
              -
              
              
              
              338,214
              
              
              
              71,000
              
              
              
              -
              
              
              
              71,000Finders’
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (129,000
              )
              
              
              -
              
              
              
              (129,000
              )Return
                  of collateral shares
              
              
              -
              
              
              
              -
              
              
              
              (400,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -Cancellation
                  of shares put to to the Company
              
              
              -
              
              
              
              -
              
              
              
              (750,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
                  of stock options for:Cash
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              44,000
              
              
              
              -
              
              
              
              44,000Interest
                  expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              56,000
              
              
              
              
              
              
              
              56,000Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              38,000
              
              
              
              -
              
              
              
              38,000Issuance
                  of warrants for Series B preferred stock interest expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              924,000
              
              
              
              
              
              
              
              924,000Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (20,081,000
              )
              
              
              (20,081,000
              )**Balance,
                  June 30, 2006**
              
              ****
              **1,400,000**
              
              
              **$**
              **70,000**
              
              
              ****
              **149,358,709**
              
              
              **$**
              **29,236,000**
              
              
              **$**
              **(96,507,000**
              **)**
              
              **$**
              **(67,201,000**
              **)**
 
 See
        accompanying notes to consolidated financial statements.
 
 
 F-5
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Consolidated
        Statements of Stockholders' Deficit *Continued***
 **Years
        Ended June 30, 2007 and 2006**
 
 **Series
                  A Convertible****Preferred
                  Stock**
              
              
              **Common
                  Stock**
              
              
              **Accumulated****Shares**
              
              
              **Amount**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **Deficit**
              
              
              **Total****Balance
                  forward, June 30, 2006**
              
              ****
              **1,400,000**
              
              
              **$**
              **70,000**
              
              
              ****
              **149,358,709**
              
              
              **$**
              **29,236,000**
              
              
              **$**
              **(96,507,000**
              **)**
              
              **$**
              **(67,201,000**
              **)**Issuance
                  of common stock for:Cash
              
              
              -
              
              
              
              -
              
              
              
              2,891,135
              
              
              
              578,000
              
              
              
              -
              
              
              
              578,000Accrued
                  expenses
              
              
              -
              
              
              
              -
              
              
              
              427,495
              
              
              
              82,000
              
              
              
              -
              
              
              
              82,000Interest
                  expense
              
              
              -
              
              
              
              -
              
              
              
              2,844,072
              
              
              
              457,000
              
              
              
              -
              
              
              
              457,000Prepaid
                  interest to related parties - net of unamortized prepaid interest
                  of
                  $86,000
              
              
              -
              
              
              
              -
              
              
              
              801,728
              
              
              
              36,000
              
              
              
              -
              
              
              
              36,000Reduction
                  of deferred revenue
              
              
              -
              
              
              
              -
              
              
              
              175,000
              
              
              
              35,000
              
              
              
              -
              
              
              
              35,000Purchase
                  of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              300,000
              
              
              
              45,000
              
              
              
              -
              
              
              
              45,000Reduction
                  in stock deposit
              
              
              -
              
              
              
              -
              
              
              
              150,000
              
              
              
              30,000
              
              
              
              -
              
              
              
              30,000Employer
                  401(k) expense
              
              
              -
              
              
              
              -
              
              
              
              983,142
              
              
              
              187,000
              
              
              
              -
              
              
              
              187,000Services
              
              
              -
              
              
              
              -
              
              
              
              591,150
              
              
              
              114,000
              
              
              
              -
              
              
              
              114,000Finders’
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (35,000
              )
              
              
              -
              
              
              
              (35,000
              )Cancellation
                  of shares
              
              
              -
              
              
              
              -
              
              
              
              (4,000,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
                  of stock options for:Interest
                  expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              185,000
              
              
              
              -
              
              
              
              185,000Services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              128,000
              
              
              
              
              
              
              
              128,000Stock-based
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              783,000
              
              
              
              
              
              
              
              783,000Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (25,417,000
              )
              
              
              (25,417,000
              )**Balance,
                  June 30, 2007**
              
              ****
              **1,400,000**
              
              
              **$**
              **70,000**
              
              
              ****
              **154,522,431**
              
              
              **$**
              **31,861,000**
              
              
              **$**
              **(121,924,000**
              **)**
              
              **$**
              **(89,993,000**
              **)**
 
 See
        accompanying notes to consolidated financial statements.
 
 
 F-6
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Consolidated
        Statements of Cash Flows**
 
 **Years
                  Ended June 30,****2007**
              
              
              **2006****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (25,417,000
              )
              
              $
              (20,081,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization expense
              
              
              195,000
              
              
              
              160,000Stock-based
                  compensation
              
              
              783,000
              
              
              
              -Common
                  stock issued for interest expense and prepaid interest
              
              
              493,000
              
              
              
              190,000Common
                  stock issued for services
              
              
              114,000
              
              
              
              71,000Common
                  stock issued for 401(k) expense
              
              
              187,000
              
              
              
              99,000Stock
                  options and warrants issued for interest expense
              
              
              185,000
              
              
              
              56,000Stock
                  options and warrants issued for services
              
              
              128,000
              
              
              
              38,000Interest
                  expense accrued on Series B preferred stock
              
              
              12,550,000
              
              
              
              14,136,000Interest
                  expense on put option liability
              
              
              -
              
              
              
              45,000Interest
                  expense added to debt principal
              
              
              24,000
              
              
              
              23,000Other
                  expenses added to debt principal
              
              
              -
              
              
              
              4,000Interest
                  income added to related party notes receivable
              
              
              (5,000
              )
              
              
              (6,000
              )Gain
                  on extinguishment of debt
              
              
              (26,000
              )
              
              
              (166,000
              )Loss
                  on disposal of property and equipment
              
              
              1,000
              
              
              
              -(Increase)
                  decrease in:Accounts
                  and notes receivable
              
              
              1,201,000
              
              
              
              (1,187,000
              )Prepaid
                  expenses
              
              
              (29,000
              )
              
              
              2,000Inventories
              
              
              (23,000
              )
              
              
              (54,000
              )Increase
                  (decrease) in:Accounts
                  payable
              
              
              1,511,000
              
              
              
              1,202,000Accrued
                  expenses
              
              
              2,551,000
              
              
              
              1,737,000Deferred
                  revenue
              
              
              39,000
              
              
              
              80,000Net
                  cash used in operating activities
              
              
              (5,538,000
              )
              
              
              (3,651,000
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (197,000
              )
              
              
              (187,000
              )Proceeds
                  from the sale of property and equipment
              
              
              22,000
              
              
              
              -Issuance
                  of related party notes receivable
              
              
              -
              
              
              
              (29,000
              )Payments
                  of related party notes receivable
              
              
              22,000
              
              
              
              5,000Net
                  cash used in investing activities
              
              
              (153,000
              )
              
              
              (211,000
              )**Cash
                  flows from financing activities:**Proceeds
                  from the issuance of debt
              
              
              6,778,000
              
              
              
              2,012,000Repayment
                  of debt
              
              
              (1,590,000
              )
              
              
              (470,000
              )Proceeds
                  from the issuance of common stock and stock options
              
              
              578,000
              
              
              
              2,280,000Deposits
                  received for the purchase of common stock
              
              
              -
              
              
              
              30,000Payment
                  of finders’ compensation on issuance of common stock
              
              
              (19,000
              )
              
              
              (56,000
              )Net
                  cash provided by financing activities
              
              
              5,747,000
              
              
              
              3,796,000Net
                  increase (decrease) in cash
              
              
              56,000
              
              
              
              (66,000
              )Cash,
                  beginning of year
              
              
              4,000
              
              
              
              70,000Cash,
                  end of year
              
              $
              60,000
              
              
              $
              4,000
 
 See
        accompanying notes to consolidated financial statements.
 
 F-7
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 
 
 **Note
        1:  Organization and Summary of Significant Accounting
        Policies**
 
 **Organization
        and Principles of
        Consolidation**– The consolidated financial statements include the
        accounts of Groen Brothers Aviation, Inc. and its wholly-owned subsidiary,
        Groen
        Brothers Aviation USA, Inc. (“GBA-USA”), (collectively, the
“Company”).  All significant inter-company balances and transactions
        have been eliminated.  The primary business purpose of the Company is
        to develop, manufacture and market the gyroplane, which activities are
        considered one business segment.
 
 **Concentration
        of Credit
        Risk** - The Company maintains its cash in bank deposit accounts which,
        at times, may exceed federally insured limits.  The Company has not
        experienced any losses in such accounts.  The Company believes it is
        not exposed to any significant credit risk on cash and cash
        equivalents.
 
 **Cash
        and Cash
        Equivalents**– For purposes of the consolidated statements of cash flows,
        the Company considers all cash and investments with original maturities to
        the
        Company of three months or less to be cash equivalents.  The Company
        had no cash equivalents at June 30, 2007.
 
 **Accounts
        Receivable**–
Trade accounts receivable are carried at original invoice amount
        less an
        estimate made for doubtful accounts.  Management of the Company
        determines the allowance for doubtful accounts by identifying potential troubled
        accounts and by using historical experience and future expectations applied
        to
        an aging of accounts.  Trade accounts receivable are written off when
        deemed uncollectible.  Recoveries of trade accounts receivable
        previously written off are recorded as income when
        received.  Management determined that no allowance for doubtful
        accounts was required at June 30, 2007.
 
 **Inventories**–
Raw
        materials and parts inventories are stated at the lower of cost or market,
        with
        cost determined using primarily the first-in-first-out (FIFO)
        method.  Work-in-process inventories at June 30, 2007 consist of
        SparrowHawk kits which have not been delivered in a completed status to
        customers.  The SparrowHawk kits work-in-process inventories are
        stated at the lower of cost or market, with cost determined on estimated
        average
        unit costs of the kits.  The cost of parts inventories manufactured by
        the Company and work-in-process inventories include an allocation of overhead
        costs comprised of labor, operating supplies, utilities, depreciation, rent
        and
        other facility costs.
 
 Contract-related
        expenses incurred on
        by the Company on its long-term government and commercial contracts, including
        its own labor, travel, supplies and other costs, and the costs of subcontractors
        and consultants, are generally deferred as work-in-process inventories and
        expensed to cost of sales as the contract revenue for each milestone of a
        particular contract is recognized.  When a loss on a contract is
        projected, however, all contract-related costs and expenses are expensed
        as
        incurred.  At June 30, 2007, the Company had no work-in-process
        inventories related to long-term contracts.
 
 
 
 F-8
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Property
        and
        Equipment**– Property and equipment are carried at cost, less accumulated
        depreciation and amortization.  Depreciation and amortization are
        computed using accelerated and straight-line methods based on the estimated
        useful lives of the assets or term of the lease.  Depreciation and
        amortization expense was $195,000 and $160,000 for the years ended June 30,
        2007
        and 2006, respectively.  When assets are retired or otherwise disposed
        of, the cost and related accumulated depreciation are removed and any resulting
        gain or loss is recognized in operations for the period.  The cost of
        maintenance and repairs is charged to operations as
        incurred.  Significant renewals and betterments are
        capitalized.
 
 **Dealer
        Deposits**–  Dealer deposits consist of amounts received from
        the Company’s authorized dealers on aircraft in anticipation of full-scale
        production of the Company’s Hawk 4 gyroplane.  The deposit guarantees
        a delivery sequence number and represents a percentage of the total estimated
        purchase price.  The Company has also issued common stock to dealers
        as partial consideration for the delay in the certification of the Hawk 4
        gyroplane.  These costs have been charged to interest expense as
        incurred.  The dealers have been given the opportunity to convert a
        portion of their deposits into shares of the Company’s restricted common
        stock.  Those dealers that have converted deposits into shares and are
        now stockholders of the Company are considered related parties.  The
        Company continues its efforts to obtain the funding to complete the
        certification of the Hawk 4.  Once such funding is obtained, the
        Company estimates the certification process will require two to three years
        to
        complete.  Because of the long-term prospects of obtaining the funding
        and completing the certification, dealer deposits have been recorded as
        long-term liabilities.
 
 **Impairment
        of Long-Lived
        Assets** -  The Company periodically reviews its long-lived
        assets for impairment when events or changes in circumstances indicate that
        the
        carrying value of an asset may not be recoverable.  The Company
        evaluates, at each balance sheet date, whether events and circumstances have
        occurred which indicate possible impairment. The carrying value of a long-lived
        asset is considered impaired when the anticipated cumulative undiscounted
        cash
        flows of the related asset or group of assets is less than the carrying
        value.  In that event, a loss is recognized based on the amount by
        which the carrying value exceeds the estimated fair market value of the
        long-lived asset.
 
 **Research
        and Development Costs**- Research and development costs are expensed as
        incurred in accordance with SFAS No. 2, “Accounting for Research and Development
        Costs.”  The costs of materials and other costs acquired for research
        and development activities are charged to expense as
        incurred.  Salaries, wages, and other related costs of personnel, as
        well as other facility operating costs are allocated to research and development
        expense through management’s estimate of the percentage of time spent by
        personnel in research and development activities.
 
 **Revenue
        Recognition** -  The Company recognizes revenues from goods and
        services when there is a binding agreement, the product has been completely
        shipped or service has been delivered, collection is reasonably assured,
        and the
        Company has no significant obligations remaining.  Portions of the
        purchase price of the Company’s products collected from customers in advance of
        product delivery are recorded as deferred revenue.  Therefore,
        revenues from the sale of SparrowHawk gyroplane kits are not recorded until
        all
        kit components and parts are delivered to the customer and collection of
        any
        remaining amounts due is reasonably assured.
 
 
 
 F-9
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 The
        Company recognizes revenue on its
        current government contract as each defined milestone is completed and the
        requisite meetings are held and technical data submitted and accepted by
        DARPA.  At that time, DARPA instructs the Company to submit an invoice
        for payment for the respective milestone at the amount specified in the
        contract.  Contract-related expenses incurred by the Company for each
        milestone of the contract, including its own labor, travel, supplies and
        other
        costs, and the costs of subcontractors and consultants, are deferred as
        work-in-process inventory and expensed to cost of sales as the contract revenue
        for the milestone is recognized.  When a loss on a contract is
        projected, however, all contract-related costs and expenses are expensed
        as
        incurred.
 
 The
        Company recognizes revenue on
        commercial and sub-contractor contracts as each scheduled phase of the contract
        is completed and invoices are submitted.  Contract-related expenses
        incurred by the Company for each phase of the contract, including its own
        labor,
        travel, supplies and other costs, and the costs of subcontractors and
        consultants, are deferred as work-in-process inventory and expensed to cost
        of
        sales as the contract revenue for the milestone is recognized.  When a
        loss on a contract is projected, however, all contract-related costs and
        expenses are expensed as incurred.
 
 **Accounting
        Estimates** -
        The preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period.  Actual results could differ from those
        estimates.
 
 **Stock-Based
        Compensation -**Effective July 1, 2006, the Company adopted the fair value recognition
        provisions of SFAS No. 123(R), *Share Based Payments,* using the
        modified prospective application method.  Under this transition
        method, the Company recorded compensation expense on a straight-line basis
        of
        $783,000 for the year ended June 30, 2007 for: (a) the vesting of options
        granted prior to July 1, 2006 (based on the grant-date fair value estimated
        using the Black-Scholes option-pricing model and previously presented in
        the
        pro-forma footnote disclosures), and (b) stock-based awards granted subsequent
        to June 30, 2006 (based on the grant-date fair value estimated using the
        Black-Scholes option pricing model).  The stock-based compensation
        expense for the year ended June 30, 2007 has been allocated to the various
        categories of costs and expenses in a manner similar to the allocation of
        payroll expense.  In accordance with the modified prospective
        application method, results for the year ended June 30, 2006 have not been
        restated.
 
 **Non-Employee
        Stock Options and
        Warrants –**In accordance with SFAS No. 123, “Accounting for Stock-Based
        Compensation”, the Company estimates the fair value of the consideration
        recorded for stock options and warrants issued to non-employees using the
        Black-Scholes option-pricing model.  For those stock options and
        warrants that have variable characteristics, the Company will continue to
        use
        this methodology to periodically reassess the fair value of the consideration
        to
        determine if the value of the consideration recorded in the consolidated
        financial statements requires adjustment.  Changes in the assumptions
        used in the option-pricing model, including the market price of the Company’s
        common stock and risk-free interest rates, may result in fluctuations in
        the
        estimated fair value and carrying value of the consideration recorded for
        variable non-employee stock options and warrants.
 
 
 F-10
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Financial
        Instruments with
        Characteristics of Both Liabilities and Equity -**In May 2003, the FASB
        issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of
        Both Liabilities and Equity.”  This statement establishes standards
        for how an issuer classifies and measures certain financial instruments with
        characteristics of both liabilities and equity.  It requires that an
        issuer classify a financial instrument that is within its scope as a liability
        (or an asset in some circumstances).  The adoption of SFAS No. 150
        resulted in the reporting of the Company’s Series B Preferred Stock and a put
        option obligation as liabilities.  The carrying value of the Series B
        Preferred Stock was the same before and after adoption of SFAS No. 150, and
        therefore no cumulative effect adjustment was required.
 
 **Advertising**
        -
        Advertising costs are non-direct in nature, and are expensed over the periods
        in
        which the advertising takes place.  Advertising expense totaled $3,000
        and $5,000 for the years ended June 30, 2007 and 2006,
        respectively.
 
 **Income
        Taxes** - The
        Company accounts for income taxes according to the asset and liability
        method.  The asset and liability method requires the recognition of
        deferred tax liabilities and assets for the expected future tax consequences
        of
        temporary differences between tax bases and financial reporting bases of
        existing assets and liabilities.  Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the
        years in which those temporary differences are expected to be recovered or
        settled.  The effect on deferred tax assets and liabilities of a
        change in tax rates is recognized in income in the period that includes the
        enactment date.
 
 **Loss
        per Common and Common
        Equivalent Share** - The computation of basic loss per common share is
        computed using the weighted average number of common shares outstanding during
        each year.
 
 The
        computation of diluted loss per
        common share is based on the weighted average number of shares outstanding
        during the period plus common stock equivalents which would arise primarily
        from
        the exercise of stock options and warrants outstanding using the treasury
        stock
        method and the average market price per share during the
        year.  Options and warrants to purchase 87,160,372 shares of common
        stock at exercise prices ranging from $0.15 to $1.10 and 99,011,502 shares
        of
        common stock at exercise prices ranging from $0.15 to $1.10 were outstanding
        at
        June 30, 2007 and 2006, respectively.  Certain notes payable,
        long-term debt and related accrued interest payable were convertible into
        a
        total of 56,270,363 and 34,659,722 shares of common stock at June 30, 2007
        and
        2006, respectively, with conversion prices ranging from $0.20 to
        $1.25.  Common stock equivalents were not included in the diluted loss
        per share calculation because the effect would have been
        antidilutive.
 
 Restricted
        shares of common stock
        issued as collateral for notes payable are excluded from the calculation
        of loss
        per common share.
 
 **Reclassifications**
        -
        Certain amounts in the consolidated financial statements for fiscal year
        2006
        have been reclassified to conform to the current year presentation.
 
 
 F-11
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Recently
        Issued Accounting Pronouncements** -The FASB
        has issued
        Financial Interpretation No. 48, *Accounting for Uncertainty in Income Taxes
– An Interpretation of FASB Statement No. 109*(FIN 48).  FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with FASB Statement No. 109,
*Accounting for Income Taxes.*FIN 48 also prescribes a
        recognition threshold and measurement standard for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return.  In addition, FIN 48 provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition.  The provisions of FIN 48 are to be applied
        to all tax positions upon initial adoption of this standard.  Only tax
        positions that meet the more-likely-than-not recognition threshold at the
        effective date may be recognized or continue to be recognized upon adoption
        of
        FIN 48.  The cumulative effect of applying the provisions of FIN 48
        should be reported as an adjustment to the opening balance of retained earnings
        (or other appropriate components of equity) for the fiscal year of
        adoption.  The provisions of FIN 48 will be effective for the Company
        on July 1, 2007, and the Company has not yet determined the potential financial
        statement impact of adopting FIN 48.
 
 In
        February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
        Financial Assets and Financial Liabilities – Including an Amendment of FASB
        Statement No. 115*. This statement permits entities to choose to measure
        many financial instruments and certain other items at fair
        value.  Most of the provisions of SFAS No. 159 apply only to entities
        that elect the fair value option.  However, the amendment to SFAS No.
        115 *Accounting for Certain Investments in Debt and Equity Securities*
        applies to all entities with available-for-sale and trading
        securities.  SFAS No. 159 is effective as of the beginning of an
        entity’s first fiscal year that begins after November 15, 2007.  Early
        adoption is permitted as of the beginning of a fiscal year that begins on
        or
        before November 15, 2007, provided the entity also elects to apply the provision
        of SFAS No. 157, *Fair Value Measurements*.  The adoption of
        this statement is not expected to have a material effect on the Company's
        financial statements.
  The
        FASB
        has issued SFAS Statement No. 158, *Employers’ Accounting for Defined Benefit
        Pension and Other Postretirement Plans*.  This new standard will
        require employers to fully recognize the obligations associated with
        single-employer defined benefit pension, retiree healthcare and other
        postretirement plans in their financial statements.  The Company
        anticipates adopting SFAS No. 158 on June 30, 2007, and does not believe
        the
        adoption of the new accounting standard will result in a material impact
        on the
        consolidated financial statements of the Company since the Company currently
        does not sponsor the defined benefit pension or postretirement plans within
        the
        scope of the standard.
  In
        September 2006, the FASB issued SFAS No. 157, *Fair Value
        Measurements*.  SFAS No. 157 defines fair value, establishes a
        framework for measuring fair value, and requires enhanced disclosures about
        fair
        value measurements.  SFAS No. 157 requires companies to disclose the
        fair value of their financial instruments according to a fair value hierarchy
        as
        defined in the standard.  Additionally, companies are required to
        provide enhanced disclosure regarding financial instruments in one of the
        categories, including a reconciliation of the beginning and ending balances
        separately for each major category of assets and liabilities.  SFAS
        No. 157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. The
        Company believes that the adoption of SFAS No. 157 will not have a material
        impact on its consolidated financial statements.
 
 
 F-12
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 In
        March
        2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial
        Assets,* to simplify accounting for separately recognized servicing assets
        and servicing liabilities.  SFAS No. 156 amends SFAS No. 140,
*Accounting for Transfers and Servicing of Financial Assets and
        Extinguishments of Liabilities*.  Additionally, SFAS No. 156
        applies to all separately recognized servicing assets and liabilities acquired
        or issued after the beginning of an entity’s fiscal year that begins after
        September 15, 2006, although early adoption is permitted.  The Company
        does not expect the adoption of this new standard will have a material impact
        on
        its consolidated financial statements.
  In
        February 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid
        Instruments*, which amends SFAS No. 133, *Accounting for Derivative
        Instruments and Hedging Activities*, and SFAS No. 140, *Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities*.  SFAS No. 155 allows financial instruments that have
        embedded derivatives to be accounted for as a whole (eliminating the need
        to
        bifurcate the derivative from its host) if the holder elects to account for
        the
        whole instrument on a fair value basis.  SFAS No. 155 also clarifies
        and amends certain other provisions of SFAS No. 133 and SFAS No.
        140.  This statement is effective for all financial instruments
        acquired or issued in financial years beginning after September 15,
        2006.  The Company does not expect the adoption of this new standard
        will have a material impact on its consolidated financial
        statements.
  The
        FASB
        has issued Statement No. 154, *Accounting Changes and Error Corrections*.
        This new standard replaces Accounting Principles Board (APB) Opinion No.
        20,
*Accounting Changes*, and FASB Statement No. 3, *Reporting Accounting
        Changes in the Interim Financial Statements*.  Among other
        changes, SFAS No. 154 requires that a voluntary change in accounting principle
        be applied retrospectively with all prior period financial statement presented
        on the new accounting principle, unless it is impracticable to do
        so.  SFAS No. 154 also provides that (1)  a change in method
        of depreciating or amortizing a long-lived non-financial asset be accounted
        for
        as a change in estimate (prospectively) that was effected by a change in
        accounting principle, and (2) correction of errors in previously issued
        financial statement should be termed a “restatement.”  The new
        standard is effective for accounting changes and correction of errors made
        in
        fiscal years beginning after December 15, 2005.  Early adoption of
        this standard is permitted for accounting changes and correction of errors
        made
        in fiscal years beginning after June 1, 2005.  The adoption of this
        new accounting pronouncement had no material impact on the Company’s
        consolidated financial statements.
 
 **Note
        2:  Going Concern Uncertainty**
 
 The
        accompanying consolidated financial
        statements have been prepared assuming that the Company will continue as
        a going
        concern.  Because of recurring operating losses, the excess of current
        liabilities over current assets, the stockholders’ deficit, and negative cash
        flows from operations, there is substantial doubt about the Company’s ability to
        continue as a going concern.
 At
          June
          30, 2007, the Company had total current liabilities of $83,429,000 and
          current
          assets of $629,000, resulting in a working capital deficiency of
          $82,800,000.  Included in current liabilities and the working capital
          deficiency at June 30, 2007 is a $58,771,000 Series B Preferred Stock
          obligation.  On May 10, 2007, the Company received the approval of the
          Series B Holders to extend the redemption date of the Series B Preferred
          Stock
          from May 1, 2007 to June 16, 2007, or such later date as agreed to in writing
          by
          at least 80% of the Series B Holders.  Subsequently, the Series B
          Holders agreed in writing to an extension of the redemption date to November
          30,
          2007.  In order to repay this obligation in full or in part when due,
          the Company will be required to raise significant capital from other
          sources.  Alternatively, the Company will be required to negotiate
          another extension of the Series B Preferred Stock maturity date, as it
          has
          accomplished in the past.  There is no assurance, however, that the
          Company will be successful in raising the capital required to repay the
          Series B
          Preferred Stock obligation or in obtaining a further extension of the Series
          B
          Preferred Stock redemption date beyond November 30, 2007.
 
 F-13
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 The
        Company’s continuation as a going concern is dependent on attaining profitable
        operations, obtaining additional outside financing and/or restructuring its
        debt
        obligations, including its Series B Preferred Stock.  The Company has
        funded losses from operations in primarily from the issuance of debt to related
        parties (current shareholders and lenders of the Company), the increase in
        accounts payable and accrued expenses, and the sale of the Company’s restricted
        common stock in private placement transactions, and will require additional
        funding from these sources to sustain its future operations.  The
        Company anticipates that the issuance of debt and the sale of the Company’s
        restricted common stock will continue to fund operating losses in the
        short-term, or until revenues grow to the point where they are sufficient
        to
        cover operating costs and expenses.
 
 The
        DARPA
        contract (see Note 3) has been a significant source of revenues and operating
        cash flow, with $4,790,000 of revenues recognized and received through June
        30,
        2007.  The Company believes that the remaining revenues from Phase One
        of the contract, as recently modified (Note 22), currently estimated at
        approximately $5,660,000, will continue to be the largest source of revenues
        in
        the short term, and will have a positive impact on cash flows from
        operations.  However, the Company has been required to add personnel,
        engage subcontractors, and make other significant purchases to meet its
        obligations under this contract, which has resulted in a negative profit
        margin
        realized on the DARPA contract and reduced cash flows from
        operations.
 
 Operating
        revenues from the DARPA
        contract, a new sub-contract commenced during the year ended June 30, 2007,
        and
        from the sale of SparrowHawk kit gyroplanes, the Company’s primary source of
        operating revenues prior to the award of the DARPA contract and the
        sub-contract, are not currently sufficient, nor are they projected to be
        sufficient in the near future, to cover operating
        expenses.  SparrowHawk kit sales will not be sufficient to cover
        related operating expenses for the following reasons:
 
 ·
              To
                  date, the Company has experienced a negative gross profit on sales
                  because
                  of the start-up and “learning curve” costs that are normally experienced
                  in the introduction of a new product and due to lower than expected
                  sales
                  volume.
 
 ·
              The
                  Company projects that as the Company improves it manufacturing
                  capabilities and increases its sales efforts the negative gross
                  profit on
                  sales will narrow in fiscal year 2008, although there is no assurance
                  that
                  the Company will be successful in reducing the negative gross
                  margin.
 
 ·
              The
                  Company continues to incur research and development expenditures
                  related
                  to fully assembled SparrowHawk gyroplane derivatives and to potential
                  applications of the Company’s technology to vertical take-off and landing
                  military aircraft, runway independent short-haul airliners and
                  other
                  aircraft.
 
 
 F-14
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 ·
              Marketing
                  and sales efforts continue, but the number of SparrowHawk kits
                  sold is
                  below expectations, due in part to lack of funding to finalize
                  product
                  development and to pay for increased sales and marketing
                  efforts.
 
 The
        Company will continue to explore
        what it expects to be larger, untapped markets for fully assembled small
        gyroplane aircraft, including law enforcement agencies both in the United
        States
        and overseas for use as a surveillance aircraft.  The Company believes
        the margins on these completed aircraft will be substantially higher than
        on kit
        gyroplanes, although there is no assurance that higher margins will be
        realized.  However, through the date of this filing, no sales of fully
        assembled SparrowHawk gyroplane aircraft to law enforcement agencies have
        occurred.
 
 The
        Company does not expect revenues from the sale of Hawk 4 or Hawk 5 gyroplanes
        will be realized until the Company completes the Federal Aviation Administration
        (“FAA”) or equivalent international certification of the
        aircraft.  Currently, the Company estimates that approximately $40
        million and a two to three year period will be required to complete the
        certification.  The Company is in discussions with parties that have
        expressed interest in funding the completion of the certification and commencing
        the production of the Hawk 4 or Hawk 5 gyroplanes.  On December 14,
        2006, the Company announced the government of Aragón, Spain signed a Memorandum
        of Understanding with the Company to form a joint venture to complete FAA
        certification, production and delivery of the Company’s Hawk 5
        gyroplane.  Due diligence procedures and discussions relating to the
        potential joint venture, and discussions with other parties are ongoing,
        but the
        Company is not in a position to conclude how likely a favorable outcome to
        these
        opportunities is.  In addition, with the announcement of such a
        funding source, the Company believes prospects will improve to raise equity
        capital from other sources to fund operations and meet debt
        obligations.  Because of ongoing research and development efforts and
        the projected costs of certification, the Company does not project that it
        will
        have net income or positive cash flows from Hawk 4 or Hawk 5 operations until
        FAA certification is obtained and sales of these gyroplanes reach planned
        levels.
 
 As
        a result, the Company anticipates
        that operating costs of personnel, facilities, research and development and
        sales and marketing will increase from levels reported for fiscal year
        2007.
 
 There
        can be no guarantee or assurance
        that the Company will be successful in its ability to generate income from
        operations or from the DARPA contract, or to raise capital at favorable rates
        or
        at all.  The consolidated financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 **Note
        3:  DARPA Contract**
 
 The
        Company announced on November 7, 2005 that the US Defense Advanced Research
        Projects Agency (“DARPA”) has selected the Company to lead a team to design a
        proof of concept high speed, long range, vertical takeoff and landing (“VTOL”)
        aircraft.  This modern rotorcraft, named the “Heliplane” by DARPA, is
        an intended demonstration vehicle for future gyrodynes to be used in combat
        search and rescue roles.  Phase One of this potential multi year four
        phase program, as modified (Note 22), begins with a twenty-three month $10.4
        million award to develop the preliminary design and perform key technology
        demonstrations.  Substantial portions of Phase One payments are paid
        by the Company to subcontractors and consultants hired by the
        Company.  Payments under this contract are conditional upon the
        Company attaining several milestone objectives during the course of Phase
        One of
        the contract.  Contracts for subsequent phases are conditional on
        completion of Phase One and successor phases.
 
 
 F-15
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 The
        Company recognizes revenue on this contract as each defined milestone is
        completed and the requisite meetings are held and technical data submitted
        and
        accepted by DARPA.  At that time, DARPA will instruct the Company to
        submit an invoice for payment for the respective milestone at the amounts
        specified in the contract.  Through December 31, 2006,
        contract-related expenses incurred by the Company for each milestone of the
        contract, including its own labor, travel, supplies and other costs, and
        the
        costs of subcontractors and consultants, were deferred and expensed to cost
        of
        sales as the contract revenue for the milestone was recognized.  As
        discussed above, the Company is currently experiencing a negative profit
        margin
        on the DARPA contract; therefore, all contract-related costs and expenses
        are
        expensed as incurred.  Through June 30, 2007, the Company completed
        the first four milestones and substantially all of the fifth milestone of
        Phase
        One of the DARPA contract, and recognized revenues totaling $4,790,000,
        $2,350,000 recognized in the fiscal year ended June 30, 2006 and $2,440,000
        recognized in the current fiscal year ended June 30, 2007.
 
 At
        June 30, 2007, the Company had
        pledged approximately $2.4 million of the remaining Phase One payments to
        be
        received from DARPA to secure payment of certain notes payable to related
        parties.  The Company established an escrow arrangement with its bank
        whereby DARPA funds will be deposited directly into the escrow account and
        the
        lenders will be paid directly from the escrow account.
 
 **Note
        4:  Loss Per Common Share**
 
 The
        computation of basic net loss per common share is computed using the weighted
        average number of common shares outstanding during each period.  The
        computation of diluted net loss per common share is based on the weighted
        average number of shares outstanding during the period plus common stock
        equivalents which would arise from the exercise of stock options and warrants
        outstanding using the treasury stock method and the average market price
        per
        share during the period, as well as common shares issuable upon the conversion
        of debt to common stock.  Common stock equivalents were not included
        in the diluted loss per share calculation because the effect would have been
        antidilutive.
 
 The
        calculation of the weighted average
        number of common shares outstanding excludes common shares that have been
        issued
        as collateral for certain notes payable to related parties (Note
        9).  These collateral shares are restricted and bear a legend
        prohibiting the holder from selling or transferring the shares at any
        time.  The Company has assigned no value to these shares, and the
        terms of the notes payable require the holder of the collateral shares to
        return
        the shares to the Company when the applicable note and accrued interest are
        paid
        in full.  During the year ended June 30, 2006, 400,000 collateral
        shares were returned to the Company and cancelled when the related debt was
        repaid.  At June 30, 2007, the Company had issued 5,350,000 shares of
        common stock as collateral.
 
 
 F-16
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Note
        5:  Related Party Accounts and Notes Receivable**
 
 Related
        party accounts and notes
        receivable at June 30, 2007 resulted primarily from cash advances to employees,
        and include three unsecured notes receivable totaling $57,000 from employees
        and
        former employees, which bear interest at 7% to 12% per annum.
 
 
 **Note
        6:  Detail of Certain Balance Sheet Accounts**
 
 Inventories
        consist of the
        following:
 
 Raw
                  materials and parts
              
              $
              255,000Work-in-progress
              
              
              197,000Finished
                  goods
              
              
              14,000$
              466,000
 
 Property
        and equipment consists of the
        following:
 
 Equipment
                  and tools
              
              $
              855,000Computer
                  equipment and software
              
              
              574,000Aircraft
              
              
              388,000Vehicles
              
              
              68,000Leasehold
                  improvements
              
              
              111,000Furniture
              
              
              59,000Construction-in-progress
              
              
              28,0002,083,000Accumulated
                  depreciation and amortization
              
              
              (1,402,000
              )$
              681,000
 
 Accounts
        payable consist of the
        following:
 
 Trade
                  accounts payable
              
              $
              3,052,000Related
                  party payables
              
              
              482,000$
              3,534,000
 
 Deferred
        revenue consists of the following:
 
 Related
                  party customer advance payments
              
              $
              289,000Customer
                  advance payments
              
              
              345,000$
              634,000
 
 
 F-17
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 Dealer
        deposits consist of the following:
 
 Related
                  party dealer deposits
              
              $
              1,741,000Dealer
                  deposits
              
              
              404,000$
              2,145,000
 
 Related
        parties consist of officers,
        directors, employees and shareholders.
 
 
 **Note
        7:  Accrued Expenses:**
 
 Accrued
        expenses reported as current
        liabilities consist of the following:
 
 Compensation
                  and related taxes
              
              $
              789,000Related
                  party interest
              
              
              4,843,000Interest
              
              
              506,000Loan
                  fees payable
              
              
              164,000Consulting
                  fees
              
              
              57,000Finders’
                  compensation
              
              
              33,000Royalties
                  to related parties (Note 20)
              
              
              25,000Other
              
              
              72,000Total
              
              $
              6,489,000
 
 
 Accrued
        related party interest payable
        is comprised of interest expense payable on notes payable to related parties,
        consisting primarily of stockholders of the Company.
 
 
 Long-term
        accrued expenses consist of the following:
 
 Deferred
                  compensation
              
              $
              4,195,000Accrued
                  payroll taxes on deferred compensation
              
              
              160,000Accrued
                  interest on deferred compensation
              
              
              309,000Total
              
              $
              4,664,000
 
 
 F-18
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 The
          deferred compensation is payable to
          twelve officers, directors, and senior management executives of the Company,
          with amounts originating from fiscal year 1998 through the current fiscal
          year.  In addition to cash compensation, the Company has a deferred
          compensation arrangement for executive officers and certain of its senior
          management that accrues additional salary.  The terms of the Company’s
          Series B Preferred Stock preclude the Company from making any deferred
          compensation payments until all outstanding amounts due relating to the
          Series B
          Preferred Stock have been paid in full.  Absent payment restrictions
          related to outstanding Series B Preferred Stock or other restrictions,
          the
          deferred compensation is payable in part or in whole only by resolution
          of the
          Company’s Board of Directors.  Through June 30, 2007, the Board of
          Directors has not authorized payment of any of the deferred compensation,
          and
          will not authorize payments until the Board determines such payments are
          allowed
          under the Company’s outstanding financing agreements and would be prudent in
          light of the Company’s financial condition and availability of
          cash.  In fiscal year 2001, the Company began accruing interest
          expense on the deferred compensation at the rate of 8% per annum.  The
          accrual of interest was permanently discontinued on July 1, 2004.  The
          deferred compensation and related accrued payroll taxes and interest payable
          are
          classified as long-term liabilities at June 30, 2007 as the Company does
          not
          anticipate payment of any of these amounts in the next twelve
          months.
 
 
 **Note
        8:  Notes Payable**
 
 Current
        notes payable are comprised of
        the following:
 
 Unsecured
                  notes payable to vendors with interest at 20% for the first three
                  months
                  and 25% thereafter, in default as of June 2007
              
              $
              269,000Unsecured
                  note payable to a vendor with interest at 12%, in default as of
                  June
                  2007
              
              
              272,000Unsecured
                  note payable to a company with interest at 10.5%, due on
                  demand
              
              
              10,000Current
                  portion of long-term debt (Note 10)
              
              
              7,000$
              558,000
 
 Short-term
        notes payable at June 30,
        2006 include notes payable to vendors totaling $541,000 that are technically
        in
        default.  In addition, the Company is delinquent in making payments of
        accrued interest payable of $487,000 on this debt at June 30,
        2007.  The Company continues ongoing negotiations with these vendors
        and has, in most instances, been granted grace periods and extensions without
        receipt of formal notices of default or threat of legal action.
 
 
 F-19
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Note
        9:  Related Party Notes Payable**
 
 Related
        party notes payable are
        comprised of the following notes payable either due on demand or within the
        twelve months:
 
 Unsecured
                  notes payable to stockholders with interest at 18%
              
              $
              3,755,000Unsecured
                  note payable to stockholder with interest at 16%
              
              
              50,000Unsecured
                  notes payable to stockholders with interest at 12%
              
              
              5,488,000Unsecured
                  notes payable to a stockholder with interest at 36%
              
              
              1,400,000Unsecured
                  note payable to stockholders with interest at 50% payable in shares
                  of the
                  Company’s common stock
              
              
              558,000Unsecured
                  note payable to a stockholder with interest at 25%
              
              
              20,000Unsecured
                  note payable to stockholder with interest at 12.5%
              
              
              100,000Unsecured
                  notes payable to stockholders with interest at 8%
              
              
              706,000Unsecured
                  note payable to stockholder with interest at 5%
              
              
              191,000Unsecured
                  note payable to an entity owned by certain members of senior management,
                  with interest at 12%
              
              
              180,000Note
                  payable to a stockholder with interest at 18%, due on demand, secured
                  by
                  research and development parts
              
              
              50,000Notes
                  payable to stockholders with interest at 12%, secured by shares
                  of the
                  Company’s common stock
              
              
              437,000Unsecured
                  note payable to a stockholders with interest at 12%, convertible
                  into
                  shares of the Company’s common stock upon successful completion of
                  proposed financing/recapitalization
              
              
              310,000Unsecured
                  notes payable to stockholders with interest at 10%
              
              
              198,000$
              13,443,000
 
 Related
        party notes payable at June 30, 2007 include notes payable totaling $2,270,000
        that are technically in default.  In addition, the Company is
        delinquent in making payments of accrued interest payable of $434,000 on
        this
        related party debt at June 30, 2007.
 
 
 F-20
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 Certain
        shareholder related party note holders may choose to convert outstanding
        principal and interest balances to common stock of the Company.  The
        conversion prices per share range from $0.20 per share to $1.25 per
        share.  At June 30, 2007, $14,074,000 of principal and interest
        is convertible into 50,565,682 shares of the Company’s common stock (see Note
        13).
 
 A
        total
        of 5,350,000 shares of the Company’s common stock have been issued as collateral
        for related party notes payable totaling $635,000 (see Note 4).
 
 
 **Note
        10:  Long-Term Debt**
 
 Long-term
        debt is comprised of the
        following:
 
 Unsecured
                  note payable to a government-sponsored  organization, due in
                  monthly installments of $200 with final payment of $87,000 due
                  December
                  2010
              
              $
              95,000Capital
                  lease obligations (Note 11)
              
              
              21,000116,000Less
                  current portion
              
              
              (7,000
              )Total
              
              $
              109,000
 
 
 Related
        party long-term debt is
        comprised of the following:
 
 Unsecured
                  note payable to a stockholder with interest at 18%, due May
                  2009
              
              $
              745,000Unsecured
                  note payable to a stockholder with interest at 12%, due February
                  2010
              
              
              186,000Total
              
              $
              931,000
 
 The
        stockholders may choose to convert
        outstanding principal and interest balances to common stock at $0.20 per
        share.  At June 30, 2007, $1,141,000 of principal and interest is
        convertible into 5,704,681 shares of the Company’s common stock (see Note
        13).
 
 
 
 
 
 
 F-21
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 Future
        maturities of long-term debt are
        as follows:
 
 Years
                  Ending June 30:2008
              
              $
              7,0002009
              
              
              752,0002010
              
              
              193,0002011
              
              
              7,0002012
              
              
              5,000Thereafter
              
              
              83,0001,047,000Less
                  current portion
              
              
              (7,000
              )Long-term
                  portion
              
              $
              1,040,000
 
 **Note
        11:  Capital Lease Obligations**
 
 The
        Company has entered into capital
        lease agreements with financial institutions for office
        equipment.  Assets held under capital lease included in property and
        equipment at June 30, 2007 are as follows:
 
 Office
                  equipment
              
              $
              24,000Accumulated
                  amortization
              
              
              (3,000
              )$
              21,000
 
 Amortization
        expense for assets under
        capital lease is included with depreciation expense for all other depreciable
        assets.
 
 Future
        minimum lease payments are as
        follows:
 
 Year
                  Ending June 30:2008
              
              $
              6,0002009
              
              
              6,0002010
              
              
              6,0002011
              
              
              5,0002012
              
              
              3,00026,000Less
                  amount representing interest
              
              
              (5,000
              )Present
                  value of minimum lease payments (Note 10)
              
              $
              21,000
 
 
 F-22
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Note
        12:  Put Option Liability**
 
 During
        the year ended June 30, 2004,
        the Company and a stockholder entered into an Amendment to a Common Stock
        Purchase Agreement Dated November 7, 2000 whereby the Company extended the
        dates
        to which the stockholder could exercise a put option and the Company could
        exercise the option to redeem, and increased both the put prices and the
        optional redemption prices.  As a result, the stockholder had the
        right to put up to 750,000 shares of common stock of the Company, exercisable
        on
        November 7, 2005 or at any time during the three years ending on November
        7,
        2008.  The put price could be paid by the Company in cash or in
        registered, unrestricted, freely tradable common shares of the Company at
        $2.08
        per share prior to May 7, 2006, $2.16 per share between May 7 and November
        6,
        2006, $2.25 per share between November 7, 2006 and May 6, 2007, $2.33 per
        share
        between May 7 and November 6, 2007, $2.41 per share between November 7, 2007
        and
        May 6, 2008, and $2.50 per share between May 7 and November 7,
        2008.
 
 At
        its option, the Company could have
        redeemed up to 750,000 shares of common stock of the Company at any time
        from
        December 15, 2003 through November 7, 2005.  The redemption price was
        payable in cash at $1.72 per share prior to May 7, 2004, $1.84 per share
        between
        May 7 and November 6, 2004, $1.96 per share between November 7, 2004 and
        May 6,
        2005, and $2.08 per share between May 7 and November 7, 2005.  The
        Company’s option to redeem the 750,000 shares expired on November 7,
        2005.
 
 The
        Company used the Black-Scholes
        option pricing model to periodically reassess the fair value of the put option
        liability to determine if the carrying value of the liability in the
        consolidated financial statements required adjustment, with the adjustment
        recorded as an increase or decrease to interest expense.
 
 In
        November 2005, the shareholder put
        the 750,000 shares to the Company.  The Company did not have the cash
        or the ability to issue shares of registered, unrestricted common stock of
        the
        Company.  However, the shareholder agreed to accept 5,004,009
        unregistered, restricted shares of the Company’s common stock in satisfaction of
        the put option liability of $1,560,000, or approximately $0.31 per
        share.
 
 
 **Note
        13:  Preferred Stock**
 
 The
        Company has authorized 200,000,000 shares of preferred stock having no par
        value.  There are four series of preferred stock with 50,000,000
        shares authorized within each series.  The rights, terms and
        preferences of preferred stock are set by the Board of Directors.  As
        of June 30, 2007, the Board of Directors has set rights, terms and preferences
        of Series A and Series B Preferred Stock for issue.
 
 
 F-23
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Series
        A Convertible Preferred Stock**
 
 As
        of
        June, 2007, 1,400,000 shares of Series A Convertible Preferred Stock were
        issued
        and outstanding.
 
 The
        Company announced the death on October 9, 2006 of H. Jay Groen, one of the
        Company’s founders and the then Chairman of the Company’s Board of
        Directors.  Mr. Groen’s death necessitated a division of the 500,000
        shares of Series A Convertible Preferred Stock owned by him.
 
 On
        November 17, 2006, the Company amended and restated its Articles of
        Incorporation to change the terms of its Series A Convertible Preferred Stock
        related to the division of the Series A Convertible Preferred Shares upon
        the
        death or permanent incapacity of a holder of the Series A Convertible Preferred
        Stock.
 
 Pursuant
        to these amended terms, the 500,000 shares of Series A Convertible Preferred
        Stock previously held by Jay Groen were distributed 125,000 shares to his
        surviving spouse and 125,000 shares each to David Groen, Dennis Gauger and
        Robin
        Wilson, members of the Company’s Board of Directors.  As a result,
        David Groen owns 1,025,000 shares of the Series A Convertible Preferred
        Stock.
 
 The
        rights, terms and preferences of the Series A Convertible Preferred Stock,
        as
        amended, are summarized as follows:
 
 ·
              Each
                  share may cast one hundred (100) votes on all matters submitted
                  to the
                  stockholders for a vote, voting together with the holders of the
                  common
                  stock of the Company as a single class, effectively giving current
                  voting
                  control to the Company's founders.
 
 ·
              The
                  voting rights expire seven years from the date of
                  issue.
 
 ·
              Upon,
                  and only upon, the Company reaching significant revenue milestones,
                  the
                  shares are convertible into common stock of the Company through
                  payment of
                  a cash conversion price of $0.50 per share of common stock, convertible
                  on
                  a one-for-one hundred (1:100) basis (100 shares of common stock
                  for each
                  share of Series A Convertible Preferred Stock).  Conversion is
                  allowed at the rate of 25% of the preferred shares for each $30
                  million in
                  defined cumulative gross sales, for a total of $120 million in
                  sales.  This convertibility is also only available if these
                  significant revenue milestones are met within seven years from
                  the date of
                  issue of the Series A Convertible Preferred
                  Stock.
 
 ·
              The
                  shares, including all voting and conversion rights, to the extent
                  not
                  converted into common shares, will expire seven years from the
                  date of
                  issue, and will be cancelled by the
                  Company.
 
 ·
              Upon
                  the death or permanent incapacity of a holder of Series A Convertible
                  Preferred Stock, all shares held by such holder will be divided
                  equally
                  between the then existing members of the Company’s Board of Directors and
                  the holder’s survivor(s) (if more than one person, treated collectively as
                  one person).  Upon a temporary mental incapacity of a holder of
                  Series A Convertible Preferred Stock, all shares will be voted
                  by the
                  remaining holders of the Series A Convertible Preferred Stock until
                  the
                  end of the temporary incapacity.
 
 
 F-24
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 ·
              The
                  shares are non-transferable, non-assignable, and have no dividend
                  or
                  liquidation rights.
 
 **Series
        B Preferred
        Stock**
 
 At
        June 30, 2007, there were 58,771
        shares of Series B 15% Cumulative Redeemable Non-Voting Preferred Stock (the
        “Series B Preferred Stock”) outstanding.  The rights, terms, and
        preferences of the outstanding preferred shares, as amended, are as
        follows:
 
 ·
              The
                  shares have no voting rights other than those voting rights provided
                  under
                  applicable laws.
 
 ·
              Each
                  share’s original Stated Value, upon which unpaid dividends may accumulate,
                  is $1,000.
 
 ·
              The
                  shares have right to dividends at a 15% annual dividend rate, payable
                  in
                  cash or in kind at the end of each fiscal quarter.  Accumulated
                  but unpaid dividends shall be cumulative and shall be added to
                  the Stated
                  Value for purposes of subsequent quarterly dividend
                  calculations.
 
 ·
              The
                  shares shall have superior liquidation priority to any other series
                  of the
                  Company’s capital stock, equal to the Stated Value plus all accrued but
                  unpaid dividends thereon.
 
 ·
              The
                  redemption price of the shares must be paid by the Company in
                  cash.
 
 ·
              The
                  Company may incur indebtedness of up to $18.5 million without consent
                  of
                  the holders of the shares.
 
 ·
              The
                  Company is required to give notice to holders of the shares prior
                  to
                  making any capital expenditures in excess of
                  $300,000.
 
 ·
              The
                  maturity date of the shares is defined as the first to occur of
                  (a) June
                  15, 2007, or such later date as agreed to in writing by at least
                  80% of
                  the holders of the Series B Preferred Stock (“Series B Holders”), (b) the
                  occurrence of a defined “liquidation event”, or (c) the date that is six
                  months following the receipt by the Company or its affiliates of
                  proceeds
                  from one or more financing transactions in excess of $50
                  million.
 
 ·
              The
                  Company is required to make pro rata redemptions of the shares
                  months from
                  the date that the Company receives proceeds from certain financing
                  transactions that exceed $20 million in the
                  aggregate.
 
 On
        October 11, 2005, the Series B
        Holders extended the redemption date of the Series B Preferred Stock from
        October 31, 2005 to January 1, 2007.  The extension required the
        following consideration to be paid to the Series B Holders:
 
 
 F-25
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 ·
              The
                  cancellation on October 11, 2005 of existing warrants issued to
                  the Series
                  B Holders to purchase 2.5 million shares of the Company’s common stock at
                  an exercise price of $0.30 per
                  share.
 
 ·
              The
                  issuance on October 11, 2005 of warrants to purchase 6.85 million
                  shares
                  of the Company’s common stock exercisable through January 1, 2009 at an
                  exercise price of $0.30 per share.
 
 ·
              The
                  issuance of additional shares of Series B Preferred Stock with
                  a
                  redemption value of $10.7 million face value (10,700 shares) on
                  January 1,
                  2007, with reductions in the number of shares to be issued allowed
                  for
                  repayments during the extension period of amounts due to the Series
                  B
                  Holders in accordance with an agreed-upon
                  formula.
 On
          February 13, 2007, the Series B Holders further extended the redemption
          date to
          May 1, 2007.  On May 10, 2007, the Series B Holders agreed to an
          extension of the redemption date of the Series B Preferred Stock to June
          16,
          2007, or such later date as agreed to in writing by at least 80% of the
          Series B
          Holders.  Subsequently, the Series B Holders agreed in writing to an
          extension of the redemption date to November 30, 2007.
 The
        Company reviewed the requirements of Emerging Issues Task Force (EITF) No.
        02-4,
*Determining Whether a Debtor’s Modification or Exchange of Debt Instruments
        Is Within the Scope of FASB Statement 15,*and determined that the extension
        of the redemption date of the original issuance of the Company’s Series B
        Preferred Stock in October 2003 met the criteria of a troubled debt
        restructuring outlined in Statement of Financial Accounting Standards (SFAS)
        No.
        15, *Accounting for Debtors and Creditors for Troubled Debt Restructurings.*No gain or loss was recorded on the October 2003 extension and subsequent
        extension of the due date in October 2005.  The value of the warrants
        issued to the Series B Holders in connection with the extensions of the due
        dates, estimated by the Black-Scholes option pricing model, was charged to
        interest expense.  The value of the net additional warrants issued in
        October 2005 and charged to interest expense was $924,000.  The Series
        B Preferred Stock will be classified through its redemption as a troubled
        debt
        restructuring.
 
 Included
        in the periodic interest expense on the Series B Preferred Stock is the
        accretion of the $10,700,000 obligation to issue 10,700 shares of additional
        Series B Preferred Stock on January 1, 2007, calculated on the interest
        method.  The 10,700 additional shares of Series B Preferred Stock were
        issued in January 2007.
 
 As
        a result of amendments to the
        features of the Series B Preferred Stock, if the Company is successful in
        raising the levels of funding that it requires to bring its debt obligations
        current, fund its planned operations, and complete aircraft certification
        requirements for its Hawk 4 gyroplane, significant portions of this funding
        may
        be required to make redemption payments on the Series B Preferred Stock in
        advance of the maturity date.  At June 30, 2007, the recorded value of
        the Series B Preferred Stock was $58,771,000, which was recorded as a current
        liability.
 
 
 F-26
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 Statement
        of Financial Accounting
        Standards No. 150 (SFAS 150), “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” establishes standards for how
        an issuer classifies and measures in its statement of financial position
        certain
        financial instruments with characteristics of both liabilities and
        equity.  SFAS 150 requires that an issuer classify a financial
        instrument that is within its scope as a liability (or an asset in some
        circumstances) because that financial instrument embodies an obligation of
        the
        issuer.  Many of those instruments were previously classified as
        equity.  The Company’s Series B Preferred Stock is classified as a
        liability because it embodies an obligation of the Company and falls within
        the
        scope of SFAS 150.  Preferred Stock accretion and dividends are
        expensed as interest expense.
 
 
 **Note
        14:  Common Stock**
 
 During
        the year ended June 30, 2007, the Company issued a total of 9,163,722 shares
        of
        its restricted common stock, primarily to accredited investors in transactions
        exempt from registration.  These shares were issued at prices of $0.14
        to $0.25 per share through private placement offerings in reliance upon the
        exemption from registration contained in Rule 506 of Regulation
        D.  The prices per share recorded in these equity transactions
        approximated the quoted market price of the Company’s common
        stock.  The shares were issued for the following consideration:
        2,891,135 shares for cash of $578,000; 427,495 shares in payment of accrued
        expenses of $82,000; 3,645,800 shares in payment of interest expense and
        prepaid
        interest expense of $493,000; 175,000 shares in reduction of deferred revenue
        of
        $35,000; 300,000 shares to purchase property and equipment of $45,000; 150,000
        shares in reduction of stock deposit of $30,000; 983,142 shares in payment
        of
        the Company’s matching contribution to its 401(k) plan of $187,000; and 591,150
        shares in payment of services of $114,000.  In addition, total
        finders’ compensation on the sale of common stock totaled
        $35,000.  The Company did not use underwriters in the sale or
        placement of these unregistered shares of common stock.
 
 The
        Company has been a plaintiff in connection with four million shares of the
        Company’s common stock issued for the purposes of obtaining a foreign loan in
        Luxembourg in 1993.  In that suit, the Company obtained injunctions in
        Germany and Luxembourg preventing those shares from being sold or
        liquidated.  The Company prevailed in the case at appellate
        levels.  The Company obtained a court order from Luxembourg to have
        the certificates returned to the Company.  The shares were returned to
        the Company and were cancelled in May 2007.
 
 During
        the year ended June 30, 2007, the Company issued options to purchase a total
        of
        23,638,788 shares of common stock:  4,575,385 options to investors in
        connection with the sale of common stock of the Company with exercise prices
        of
        $0.20 to $0.25 per share exercisable for periods of 1 to 2
        years;  2,868,403 options as loan fees or interest expense to lenders
        with exercise prices of $0.16 to $0.25 per share exercisable for a period
        of 1
        to 3 years; 1,500,000 options to an individual for services with an exercise
        price of $0.18 per share exercisable for a period of five years; and 14,695,000
        options to employees with exercise prices of $0.14 to $0.25 per share
        exercisable for a period of 5 to 7 years (granted under the Company’s employee
        stock option plan for which a Form S-8 registration statement has been
        filed).
 
 During
        the year ended June 30, 2007, the Company issued warrants to purchase a total
        of
        420,000 shares of common stock as loan fees or interest expense to lenders
        with
        exercise prices of $0.16 to $0.24 per share exercisable for a period of five
        years.
 
 
 F-27
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 The
        Company estimated the value of the 2,868,403 options issued to lenders at
        $147,000 using the Black-Scholes option pricing model, and charged this amount
        to interest expense.  The Company estimated the value of the 1,500,000
        options issued to an individual for services at $120,000 using the Black-Scholes
        option pricing model, and charged this amount to general and administrative
        expense.  The Company estimated the value of the 420,000 warrants
        issued to lenders at $44,000 using the Black-Scholes option pricing model,
        and
        charged this amount to interest expense.  In addition, the Company
        reduced interest expense by $6,000 through periodic adjustments to the value
        of
        3,200,000 variable stock options during the year ended June 30, 2006 using
        the
        Black-Scholes option pricing model, and charged a total of $7,500 to general
        and
        administrative expense for the current year vesting of the grant date fair
        value
        of 500,000 options issued to a non-employee consultant.
 
 The
        Company has issued shares of its
        common stock as collateral for certain notes payable to related
        parties.  These collateral shares are restricted and bear a legend
        prohibiting the holder from selling or transferring the shares at any
        time.  The legend will only be removed if the Company is in default on
        the applicable loan, at which time, a new certificate will be issued and
        a value
        recorded for the shares to account for the loan and accrued interest
        settled.  In addition, the terms of the notes payable require the
        holder of the collateral shares to return the shares to the Company when
        the
        applicable loan and accrued interest are paid in full.  To date, the
        Company has not defaulted on any loan where common stock has been pledged
        as
        collateral.  It is the Company’s position that there will be no
        default on these loans, and therefore, all issued collateral shares will
        be
        returned.  Under this assumption, the Company believes it is
        appropriate to not assign any value to the collateral shares issued and to
        not
        include these shares in the calculation of loss per share.  During the
        year ended June 30, 2006, 400,000 collateral shares were returned to the
        Company
        and cancelled when the related debt was repaid.  At June 30, 2007, the
        Company had issued 5,350,000 shares of common stock as collateral.
 
 As
        discussed in Note 12, the Company
        acquired 750,000 shares of its common stock in November 2005 when a shareholder
        exercised a put option.  These shares were subsequently
        cancelled.
 
 The
        conversion prices per share of the
        convertible notes payable and long-term debt disclosed in Notes 9 and 10
        were
        based on the cash price per common share paid in private placement transactions
        on or near the date the debt agreements were negotiated.  The cash
        price per common share and the conversion prices per share approximated the
        quoted market price per share of the Company’s common stock on or near the date
        the note agreements were negotiated.  The conversion prices per share
        have all been set at the market price of the common stock, or above the market
        price whenever possible, with market price typically established at the price
        per share that the Company was selling restricted common shares for cash
        at the
        time.  Because the conversion price per share was generally “under
        water” in substantially all of these transactions, the Company concluded that
        the conversion terms did not represent a beneficial conversion
        feature.  Therefore, no beneficial conversion features have been
        accounted for in the Company’s consolidated financial statements for these
        transactions.
 
 
 
 F-28
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 **Note
        15:  Stock Option Plan and Stock Based
        Compensation**
 
 Under
        the Company’s 2000 amended and
        restated stock option plan (Plan), there are 60 million shares that are
        authorized for stock options.  The Company may issue both
        non-qualifying stock options and qualifying incentive stock
        options.  All stock options have an exercise price that is not less
        than 100 percent of the fair market value on the date of the
        grant.  While expiration dates vary on particular grants, no stock
        options may be exercised more than ten years after the date of
        grant.  Qualifying incentive stock options are granted only to
        employees, while non-qualifying options may be granted to employees, directors,
        and non-employees.
 
 On
        May 17, 2002 and June 10, 2005,
        the Company filed Form S-8 Registration Statements (“Registration”) for the Plan
        under the Securities Act of 1933.  Options granted under the Plan
        prior to the filing of the 2002 Registration can only be exercised for
        restricted common stock as defined under the Securities and Exchange Commission
        Rule 144.  Options granted under the Plan after the 2002 Registration
        can be exercised for unrestricted and free trading common stock.
 
 The
        Company’s Board of Directors may
        also authorize the issuance of other stock options and warrants outside of
        the
        Plan.
 
 Prior
        to
        July 1, 2006, as permitted under Statement of Financial Accounting Standards
        (“SFAS”) No. 123, the Company accounted for its stock option awards following
        the recognition and measurement principles of Accounting Principles Board
        (“APB”) No. 25, *Accounting for Stock Issued to Employees*, and related
        interpretations.  Accordingly, no stock-based compensation expense was
        reflected in the Company’s consolidated statements of operations as all options
        granted had an exercise price equal to or greater than the market value of
        the
        underlying common stock on the date of grant and the related number of shares
        granted was fixed at that time.
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123(R), *Share Based Payments*.  This statement revised SFAS
        No. 123 by eliminating the option to account for employee stock options under
        APB No. 25 and requires companies to measure the cost of employee services
        received in exchange for awards of equity instruments based on the grant-date
        fair value of those awards and to recognize the compensation expense over
        the
        requisite service period during which the awards are expected to
        vest.
 
 Effective
        July 1, 2006, the Company adopted the fair value recognition provisions of
        SFAS
        No. 123(R) using the modified prospective application method.  Under
        this transition method, the Company recorded compensation expense on a
        straight-line basis for year ended June 30, 2007, for: (a) the vesting of
        options granted prior to July 1, 2006 (based on the grant-date fair value
        estimated using the Black-Scholes option pricing model and previously presented
        in pro-forma footnote disclosures), and (b) stock-based awards granted on
        or
        subsequent to July 1, 2006 (based on the grant-date fair value estimated
        using
        the Black-Scholes option pricing model).  In accordance with the
        modified prospective application method, results for the year ended June
        30,
        2006 have not been restated.
 
 The
        stock-based compensation expense has been allocated to the various categories
        of
        operating costs and expenses in a manner similar to the allocation of payroll
        expense as follows:
 
 
 F-29
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 Cost
                  of sales
              
              $
              119,000Research
                  and development
              
              
              453,000General
                  and administrative
              
              
              211,000Total
                  stock-based compensation expense realized and increase in net
                  loss
              
              $
              783,000Impact
                  on basic loss per common share
              
              $
              (0.01
              )Impact
                  on diluted loss per common share
              
              $
              (0.01
              )
 
 There
        was
        no stock compensation expense capitalized during the year ended June 30,
        2007.
  The
        grant
        date fair value of the stock options and warrants issued during the year
        ended
        June 30, 2007 was estimated using the Black-Scholes option pricing model
        with
        the following weighted average assumptions:
 
 Expected
                  dividend yield
              
              $
              -Expected
                  stock price volatility
              
              
              60%Risk-free
                  interest rate
              
              
              4.7%Expected
                  life of options and warrants
              
              1
–
                  7 years
 
 
 The
        following table summarizes the stock option and warrant activity during the
        year
        ended June 30, 2007:
 
 **Options**
                **and
                  Warrants**
              
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              
              **Weighted
                  Average**
                **Remaining
                  Contract Term**
              
              
              **Aggregate**
                **Intrinsic
                  Value**Outstanding
                  at June 30, 2006
              
              
              99,011,502
              
              
              $
              0.37Granted
              
              
              24,058,788
              
              
              
              0.20Exercised
              
              
              -
              
              
              
              -Cancelled
              
              
              (4,081,666
              )
              
              
              0.29Expired
              
              
              (31,828,252
              )
              
              
              0.37Outstanding
                  at June 30, 2007
              
              
              87,160,372
              
              
              
              0.33
              
              
              
              2.51
              
              
              $
              150,000Options
                  and warrants vested and exercisable at June 30, 2007
              
              
              66,005,786
              
              
              
              0.34
              
              
              
              1.69
              
              
              $
              88,000
 
 The
aggregate
        intrinsic value in the preceding table represents the total
        pretax intrinsic value, based on the Company’s closing stock price of $0.16 as
        of June 30, 2007, which would have been received by the holders of in-the-money
        options had the option holders exercised their options as of that
        date.
 
 
 F-30
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 
 As
        of
        June 30, 2007, the total future compensation cost related to non-vested
        stock-options not yet recognized in the consolidated statements of operations
        was $1,736,000, and the weighted average period over which these awards are
        expected to be recognized was 1.72 years.
 
 Under
        the
        modified prospective method, results for prior periods have not been restated
        to
        reflect the effects of implementing SFAS No. 123(R).  The following
        pro-forma information is presented for comparative purposes and illustrates
        the
        effect on net loss and net loss per common share for the year ended June
        30,
        2006, as if the Company had applied the fair value recognition provisions
        of
        SFAS No. 123(R) to stock-based compensation prior to July 1, 2006:
 
 Net
                  loss as reported
              
              $
              (20,081,000
              )Deduct:Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method
              
              
              (1,570,000
              )Pro
                  forma net loss
              
              $
              (21,651,000
              )Basic
                  and diluted loss per share:As
                  reported
              
              $
              (0.15
              )Pro
                  forma
              
              $
              (0.16
              )
 
 
 **Note
        16:  Income Taxes**
 
 The
        benefit for income taxes differs
        from the amount computed at the federal statutory rate as follows:
 
 **Years
                  Ended June 30,****2007**
              
              
              **2006**Income
                  tax benefit at federal statutory rate
              
              $
              9,913,000
              
              
              $
              7,832,000Series
                  B preferred stock interest expense
              
              
              (4,895,000
              )
              
              
              (5,513,000
              )Stock
                  and stock options issued for services and interest
              
              
              (737,000
              )
              
              
              -Research
                  and development credit
              
              
              161,000
              
              
              
              180,000Other
              
              
              (4,000
              )
              
              
              (6,000
              )Change
                  in valuation allowance
              
              
              (4,438,000
              )
              
              
              (2,493,000
              )$
              -
              
              
              $
              -
  
  
 F-31
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
  Deferred
        tax assets (liabilities) as of June 30, 2007 are as follows:
  Net
                  operating loss carryforwards
              
              $
              25,567,000Research
                  and development credit carryforward
              
              
              2,227,000Accrued
                  interest payable
              
              
              1,889,000Accrued
                  payroll and related
              
              
              1,840,000Deferred
                  revenue
              
              
              247,000Other
              
              
              75,000Depreciation
              
              
              (81,000
              )Valuation
                  allowance
              
              
              (31,764,000
              )$
              -
 
 At
        June 30, 2007, the Company has net operating loss carryforwards available
        to offset future taxable income of approximately $66 million which will begin
        to
        expire in 2008.  The utilization of the net operating loss
        carryforwards is dependent upon the tax laws in effect at the time the net
        operating loss carryforwards can be utilized.  The Tax Reform Act of
        1986 limits the annual amount that can be utilized for certain of these
        carryforwards as a result of changes in ownership of the Company.  An
        ownership change may have occurred which may severely impact the utilization
        of
        the net operating loss carryforwards.
 
 Due
        to uncertainties surrounding the
        realization of all carryforwards and currently non-deductible accruals, a
        valuation allowance has been established to offset the net deferred income
        tax
        asset resulting from such deferred tax items.
 
 
 **Note
        17:  Supplemental Statement of Cash Flows
        Information**
 
 During
        the year ended June 30, 2007, the Company:
 
 ·
              Decreased
                  related party notes receivable through reduction of accrued expenses
                  payable to related parties of
                  $10,000.
 
 ·
              Decreased
                  inventory and increased property and equipment by
                  $6,000.
 
 ·
              Acquired
                  property and equipment of $127,000 through the issuance of accounts
                  payable.
 
 ·
              Issued
                  debt to acquire property and equipment of
                  $11,000.
 
 ·
              Issued
                  300,000 shares of common stock to acquire property and equipment
                  of
                  $45,000.
 
 ·
              Increased
                  related party notes payable and decreased accounts payable by $96,000
                  for
                  the transfer of accounts payable to
                  debt.
 
 
 F-32
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 ·
              Issued
                  427,495 shares of common stock in payment of accrued expenses of
                  $82,000.
 
 ·
              Issued
                  175,000 shares of common stock in repayment of deferred revenue
                  of
                  $35,000.
 
 ·
              Increased
                  accrued expenses and decreased common stock by $35,000 for accrued
                  finders’ compensation.
 
 ·
              Issued
                  150,000 shares of common stock in reduction of stock deposits of
                  $30,000.
 
 ·
              Increased
                  debt and decreased accrued expenses by $490,000 for the reclassification
                  of interest payable.
 
 ·
              Issued
                  10,700 shares of Series B Preferred Stock, resulting in an increase
                  to
                  Series B cumulative redeemable non-voting preferred stock and a
                  decrease
                  to liability to issue additional shares of Series B preferred stock
                  of
                  $10,700,000.
 
 During
        the year ended June 30, 2006,
        the Company:
 
 ·
              Increased
                  related party notes receivable and increased accrued expenses payable
                  to
                  related parties by $16,000.
 
 ·
              Decreased
                  related party notes receivable through reduction of accrued expenses
                  payable to related parties of
                  $14,000.
 
 ·
              Increased
                  related party accounts and notes receivable and decreased accounts
                  receivable by $20,000 for the issuance of an employee note
                  receivable.
 
 ·
              Issued
                  common stock in payment of related party notes payable of
                  $234,000.
 
 ·
              Increased
                  related party notes payable and decreased accounts payable by $106,000
                  for
                  the transfer of accounts payable to
                  debt.
 
 ·
              Issued
                  common stock to acquire property and equipment of
                  $106,000.
 
 ·
              Issued
                  common stock in payment of accrued expenses of
                  $179,000.
 
 ·
              Issued
                  common stock in payment of put option liability of
                  $1,560,000.
 
 ·
              Issued
                  common stock in repayment of deferred revenue of
                  $37,000.
 
 ·
              Increased
                  accrued expenses and decreased common stock by $129,000 for accrued
                  finders’ compensation.
 
 ·
              Issued
                  common stock in payment of a customer refund of
                  $1,000.
 
 
 F-33
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 ·
              Issued
                  debt to acquire property and equipment of
                  $89,000.
 
 ·
              Increased
                  debt and decreased accrued expenses by $24,000 for the reclassification
                  of
                  interest payable.
 
 ·
              Increased
                  accrued expenses and decreased accounts payable by $39,000 for
                  the
                  reclassification of accounts
                  payable.
 
 Actual
        cash paid for interest was
        $195,000 and $90,000 in fiscal years 2007 and 2006,
        respectively.
 
 
 **18:  Operating
        Lease Obligations**
 
 The
        Company leases certain property,
        vehicles and facilities under noncancellable operating leases.  Future
        minimum rental payments required under these leases are as follows:
 
 **Years
                  Ending June 30,**
              
              **Amount**2008
              
              $
              228,0002009
              
              
              235,0002010
              
              
              242,0002011
              
              
              61,000$
              766,000
 
 Rental
        expense for noncancellable
        operating leases was $324,000 and $262,000 for the years ended June 30,
        2007 and 2006, respectively.
 
 
 **Note
        19:  401(k) Saving Plan**
 
 The
        Company has a 401(k) Plan (the
        Plan) to provide retirement and incidental benefits for its
        employees.  Employees may contribute from 1% to 25% of their gross pay
        to the Plan, limited to a maximum annual amount as set periodically by the
        Internal Revenue Service.  The Company may contribute a matching
        contribution at a rate set by the Board of Directors.  The Plan
        operates on a calendar year basis.  In fiscal year 2007, and based on
        contributions by employees during calendar year 2006, the Company made a
        matching contribution to the Plan of $187,000 in the form of shares of its
        common stock.  In fiscal year 2006, and based on contributions by
        employees during calendar year 2005, the Company made a matching contribution
        to
        the Plan of $124,000 in the form of shares of its common
        stock.  Shares issued under the Plan are “restricted” as defined under
        the Securities and Exchange Commission Rule 144.
 
 
 
 F-34
 
 **GROEN
        BROTHERS AVIATION, INC.**
 **Notes
        to Consolidated Financial Statements**
 ***(Continued)***
 
 **Note
        20:  Commitments and Contingencies**
  Royalty
        payments of 1% of the gross
        sales price of gyroplanes are to be paid to the Company’s founders, David Groen
        and the estate of the late Jay Groen.  Through June 30, 2007,
        royalties payable totaled $12,500 to each of these parties, which amounts
        are
        included in cost of sales in the consolidated statement of
        operations.
 
 The
        Company has royalty agreements with
        two holders of notes payable totaling $300,000 which entitle the note holders
        to
        receive royalties on the sales by the Company of certain gyroplanes other
        than
        the SparrowHawk gyroplane.  The royalties are calculated on each
        aircraft sold, and are limited to a combined maximum total of $1.3
        million.
 
 The
        Company has a royalty agreement
        with an investor entitling the investor to receive royalties equal to $2,500
        for
        each Hawk 4 Gyroplane sold, limited to a maximum total of $125,000.
 
 The
        Company has various agreements to
        compensate individuals and companies with finders’ compensation up to 10% for
        securing debt and equity financing for the Company.
 
 The
        Company is subject to various
        claims and legal actions arising in the ordinary course of business, including
        certain matters relating to past due amounts due creditors.  The past
        due amounts are recorded as liabilities in the consolidated balance sheet,
        and
        management of the Company believes that the amount, if any, that may result
        from
        other claims will not have a material adverse effect on the consolidated
        financial statements.
 
 
 **Note
        21:  Fair Value of Financial Instruments**
 
 The
        Company’s financial instruments
        consist of cash, receivables, payables, and notes payable.  The
        carrying amount of cash, receivables and payables approximates fair value
        because of the short-term nature of these items.  The aggregate
        carrying amount of the notes payable approximates fair value as the individual
        borrowings bear interest at market interest rates.
 
 
 **Note
        22:  Subsequent Events**
 On
          September 19, 2007, the DARPA contract was modified, increasing the contract
          award for Phase One from $6.4 million to $10.4 million, and extending the
          term
          of Phase One from fifteen to twenty-three months.  The Company will
          invoice and recognize the additional revenues for Phase One as the requisite
          meetings are held and technical data submitted and accepted by
          DARPA.
 
 F-35