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                       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, 2006

           [   ]   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                                87-0489865
    (State or other jurisdiction of      (I.R.S. Employer Identification No.)
     incorporation or organization)

                            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 $3,115,000.

         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 $22,815,000 as of September 30, 2006.

         The number of shares outstanding of the Issuer's no par value Common
Stock as of September 30, 2006 was 151,024,224.

                       Documents Incorporated by Reference
                                      None


<PAGE>
                          Groen Brothers Aviation, Inc.
                          Annual Report on Form 10-KSB
                                Table of Contents



Part I                                                                  Page No.
                                                                        --------
    Item 1.     Description of Business                                       1
    Item 2.     Description of Property                                      16
    Item 3.     Legal Proceedings                                            16
    Item 4.     Submission of Matters to a Vote of Security Holders          16

Part II
    Item 5.     Market for Common Equity, Related Stockholder Matters
                   and Small Business Issuer Purchases of Equity
                   Securities                                                17
    Item 6.     Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       19
    Item 7.     Financial Statements                                         32
    Item 8.     Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure                       32
    Item 8A     Controls and Procedures                                      33
    Item 8B     Other Information                                            34

Part III
    Item 9.     Directors, Executive Officers, Promoters and Control
                   Persons; Compliance with Section 16(a) of the
                   Exchange Act                                              35
    Item 10.    Executive Compensation                                       39
    Item 11.    Security Ownership of Certain Beneficial Owners and
                   Management                                                42
    Item 12.    Certain Relationships and Related Transactions               43

Part IV

    Item 13.    Exhibits and Reports on Form 8-K                             45
    Item 14.    Principal Accountant Fees and Services                       46

Signatures                                                                   48


<PAGE>

                                     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 Jay
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 gyroplane(1) 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 2X, 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/five-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 flown in 1999 and
the second, powered by a Rolls-Royce gas turbine, had its first fight 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


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

(1) 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
<PAGE>

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 due to lack of financial resources
during the first quarter of fiscal year 2003. Further development toward
commercial certification of the Hawk 4 has been deferred pending the obtaining
of the funding necessary to complete it.

         As described under "Company Products', the Company's business plan for
the Hawk 4 is now oriented in its immediate priorities toward offering this
aircraft in its already well tested form to Federal Agencies, and to State and
local agencies across the nation, particularly Homeland Defense, and to
governments of friendly countries, for Public Use applications that do not
require commercial certification.

         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 likely 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 (UAVs) 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.

         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, vertical takeoff and
landing ("VTOL") aircraft. This modern rotorcraft, named the "Heliplane" by
DARPA, is intended for use in combat search and rescue roles. It will offer the

                                       2
<PAGE>

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.

         The Company retains the rights for commercial use of the technology
emerging from the Heliplane contract and continues to pursue potential
opportunities for this and other of its technology in the UAV and VTOL fields.

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 dropped 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 gyroplane(2), 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 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.

         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. The percentage of today's
helicopter market that requires hovering is, however, quite small, perhaps no
more than 10 percent. 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.

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

(2) 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
<PAGE>

         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 split second reaction by the pilot, and requiring a minimum altitude
and/or airspeed. If a helicopter is operating with insufficient altitude or
speed when a power failure occurs, specifically beneath a line plotting height
and speed, known as the "dead man's curve", shown on graphs in the helicopter's
flight manual, 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 millions of pieces of 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.

         After World War II, there was a brief and modest resurgence as
investors enabled three two-seat commercial gyroplanes to be developed and
FAA-certified by private companies: 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.

                                       4
<PAGE>

         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 to purchase
and to operate for widespread civilian use. Large aviation companies capable of
developing and bringing a commercial-sized gyroplane to market have thus found
that the civilian side of helicopter production has not been highly profitable.
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.

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 2000(3).
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.

         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).



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

(3) 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
<PAGE>

         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, as well as
to similar agencies of friendly foreign governments.

         While the Company continues to believe that the initial market for the
Hawk 4 will be for government use, it continues to seek opportunities to raise
funding to complete FAA certification of the aircraft. In fiscal year 2004,
technical representatives of a mid-size European aerospace company visited GBA
to review the Hawk 4 certification program and reported positively on its
merits. The Company was subsequently advised that the Board of that company had
concluded that in light of the overall state of the global aerospace market it
would not be making any further investments in aerospace until conditions
improved.

         During fiscal year 2005, the Company was advised that independent
investors in Europe, knowledgeable of the favorable technical report on the Hawk
4 and recognizing market opportunities in the region, might consider funding the
certification program in return for certain marketing and production rights. The
Company has provided information requested by those parties and continued
detailed discussions on the subject in fiscal year 2006.

         Later in fiscal 2006, the Company was advised of the interest of
parties in another major European country in a similar venture and has been
exchanging information for that purpose. Subsequent to the end of fiscal 2006,
separate parties, each with interests in an Asian country, have also approached
the Company with respect to funding Hawk 4 certification. Certain of these
interests have expressed related interest in acquiring rights to SparrowHawk
manufacturing and sales. While the Company can make no assurance that any of
these preliminary discussions will lead to such funding, the Company is
convinced that each of the potential investors 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.

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

                                       6
<PAGE>

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. The Company recorded initial revenues from SparrowHawk sales in the
fourth quarter of fiscal year 2004.

         In December 2005, the Company announced the introduction of its
improved SparrowHawk model, the SparrowHawk II. SparrowHawk II offers added
comfort and robustness, and greatly eases the effort, and reduces the time,
needed by the customer to build the aircraft. All aircraft now being delivered
are manufactured to the SparrowHawk II standard.

         Through June 30, 2006, 116 orders for SparrowHawk kits, both
SparrowHawk and SparrowHawk II, and modification kits have been received (87 for
the complete SparrowHawk kit and 29 for the modification kit). By June 30, 2006,
58 complete kits had been delivered and 26 SparrowHawk customers had flown their
aircraft. Through June 30, 2006, 33 dealerships have been established, 25 in the
United States and 8 internationally.

         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 commercial
certification. 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 permit gyroplane manufacturers for three years to produce and sell complete
aircraft that meet the LSA standards, with the expectation that at the end of
the three-year period, the experience gained and demonstrated will justify full
LSA authorization for gyroplanes.

         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 SparrowHawk
and, more particularly, derivative product designs 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 and has applied for the E-LSA exemption
applicable to gyroplanes.

         As previously noted, the Company identified an important potential
untapped market for the Hawk 4 as a patrol and surveillance aircraft, both in
the United States and overseas. It has now become evident that a small,
professionally designed aircraft with ultra-low purchase and operating costs,
such as the SparrowHawk, 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 areas where skilled pilots and maintenance personnel
were not readily available. For this reason, the Company believes the
SparrowHawk sold as a fully assembled aircraft can be expected to be popular
with law enforcement agencies around the world. However, there can be no
assurance that the expected popularity will result in positive economic results.

         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, and the Company has
been encouraged that Federal funding for this purpose may be made available to
state agencies. Similarly, approaches are being made to the Department of
Defense ("DOD") for the use of the SparrowHawk for mine and bomb detection to
counter those threats in Iraq and elsewhere, emphasizing again its low cost and

                                       7
<PAGE>

early availability in relation to other solutions. Sales representatives have
also been appointed in Korea and India to present the capabilities of the
SparrowHawk 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, the Company has initiated design of a
corresponding SparrowHawk derivative directed toward government markets, which
it is naming the ShadowHawk.

         As a result of the new FAA regulations and the opportunities for
government acquisition of fully assembled aircraft, the market for the
SparrowHawk, and its SportHawk and ShadowHawk derivatives will likely now be
primarily focused on complete aircraft, rather than on kits as originally
envisaged. Thus the markets for the SparrowHawk and the Hawk 4 can no longer be
considered as quite separate, as was the case when the SparrowHawk was being
offered only as a kit built aircraft. As previously noted, the Company therefore
decided to move the SparrowHawk operation, initially developed within its AAI
subsidiary, into its GBA USA subsidiary.

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, or available to the Company in the public
domain, the concept is ready to be turned into a highly utilitarian aircraft.

         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 several agencies and military commands. These submissions
have ranged from small UAV gyroplanes to large vertical takeoff and landing
("VTOL") freighters. Several applications have 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.

         Phase One of this potential multi-year $40 million four-phase Heliplane
program has begun with a fifteen month $6.4 million award to develop the
preliminary design and perform key technology demonstrations. The Company

                                       8
<PAGE>

estimates its share of Phase One payments will approximate $4.3 million, with
the remaining portion to be 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.

         Through June 30, 2006, the Company completed the first three milestones
of Phase One of the DARPA contract and recognized revenues of $2,350,000. Total
costs of the first three milestones of approximately $2,052,000, including the
Company's allocation of overhead costs, were expensed to cost of sales during
the year ended June 30, 2006.

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.

         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.


                                       9
<PAGE>

         The attempted shooting down of an Israeli commercial aircraft
approaching Mombasa 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.

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: 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

                                       10
<PAGE>

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.

         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.


                                       11
<PAGE>

              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%.

         Light Sport Aircraft: The FAA has 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.

         The Company is intending to offer fully assembled aircraft for sale in
fiscal year 2007 that meet the E-LSA requirements. It has also begun the process
of modifying its design and manufacturing procedures so that it can meet the

                                       12
<PAGE>

SLSA standards. It will then manufacture and sell E-LSA aircraft to SLSA
standards with the expectation that by January 31, 2008, the FAA will have had
the opportunity to review sufficient gyroplane E-LSA operation to permit
gyroplanes to be included in the SLSA category.

         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, 2006, 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.

         Public use and military sales of the Hawk 4 will be made directly by
the Company.

         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 June 30, 2006, 33
dealerships have been established, 25 in the United States and 6
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

                                       13
<PAGE>

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. These high
level meetings were arranged by an investment group, executives of which
accompanied Company officials during the visits. 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.

         Marketing activities in China continued in fiscal year 2006, with the
Company participating in the Aviation Expo/China 2005 in Beijing in September
2005. At the Expo, in addition to its booth staffed with Chinese-speaking
employees, the Company hosted a technical seminar designed to broaden the
understanding of the concepts of gyroplanes and gyroplane technology and their
considerable merits for the Chinese commercial markets. The Company also
exhibited at the China International Exposition on Police Equipment in Beijing
in May 2006.

         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 a
gyroplane with modern technology, the CarterCopters, LLC (Carter), has designed
a hybrid between a gyroplane and a conventional airplane, with both a rotorwing
and a fixed wing. 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. The Company has based its designs and market objectives on
aircraft that adapt proven technology to the gyroplane and address the market
for efficient, low cost, and short haul vehicles. Carter, on the other hand, is
attempting the more technically challenging task of producing a high-speed, long
haul gyroplane. Further, 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.

         Other 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

                                       14
<PAGE>

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 in the two-seat closed cockpit class are
principally the Canadian side-by-side two-seat RAF 2000, 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 that its side-by-side configuration will be more popular than the tandem
Sycamore. There are also several manufacturers of amateur-built aircraft,
including fixed wing, helicopter and other aircraft, that represent competition
for the Company's kit built SparrowHawk gyroplane.

         As the Company's heavy lift 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 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 is
different 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.

Royalty Commitments

         Royalty payments of 1% of the gross sales price of gyroplanes are to be
paid to the Company's founders, David and Jay Groen. Through June 30, 2006,
royalties payable totaled $9,500 to each of these individuals.

         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.

                                       15
<PAGE>

Research and Development Expenditures

         Total research and development expenditures incurred by the Company for
the years ended June 30, 2006 and June 30, 2005 were $2,534,000 and $1,874,000,
respectively.

Employees

         As of June 30, 2006, the Company had 66 full time employees and 72
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 has
assembled the Hawk 4 prototypes, and manufactured parts and assembled kits for
the SparrowHawk. The Company extended this lease through April 30, 2008.

         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. All 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 is 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 continues in the
process of obtaining a court order from Luxembourg to have the certificates
returned to the Company.

         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.

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 2006.


                                       16
<PAGE>

                                     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
                                                      ----              ---

                  2006     First Quarter              $0.21            $0.16
                           Second Quarter             $0.44            $0.21
                           Third Quarter              $0.26            $0.18
                           Fourth Quarter             $0.19            $0.16


                  2005     First Quarter              $0.25            $0.15
                           Second Quarter             $0.22            $0.13
                           Third Quarter              $0.22            $0.12
                           Fourth Quarter             $0.21            $0.18

         On September 30, 2006, the closing quotation for the common stock was
$0.16 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.

         (b) Number of equity security holders.

         The number of record holders of the Company's common stock as of
September 30, 2006 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.

                                       17
<PAGE>

         (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, 2006.

<TABLE>
<CAPTION>

                                                                                            Number of Securities
                                                                                           Remaining Available for
                                                                                            Future Issuance Under
                                    Number of Securities         Weighted-Average         Equity Compensation Plans
                                 to be Issued Upon Exercise      Exercise Price of          (Excluding Securities
                                   of Outstanding Options       Outstanding Options               Reflected
         Plan Category                  and Warrants               and Warrants                in Column (a))
-------------------------------- ---------------------------- ------------------------ ------------------------------
                                             (a)                        (b)                         (c)
<S>                                      <C>                           <C>                      <C>
Equity compensation plans
   approved by security
   holders                               38,725,000                    $0.49                    21,275,000
Equity compensation plans
   not approved by security
   holders                               60,286,502                    $0.29                        n/a
                                 ----------------------------                          ------------------------------

Total                                    99,011,502                                             21,275,000
                                 ============================                          ==============================
</TABLE>

         See also the Notes to Consolidated Financial Statements for further
information regarding the Plan and stock options and warrants issued by the
Company.

         (e) Recent sales of unregistered securities.

         During the three months ended June 30, 2006, the Company issued a total
of 1,662,701 shares of its restricted common stock, generally at a price of
$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: 575,000 shares for cash of $115,000; 57,857 shares in payment of
services of $10,000; 6,250 shares in payment of accrued expenses of $1,000;
808,594 shares in payment of interest expense of $124,000; 125,000 shares to
purchase property and equipment of $25,000; and 90,000 shares in reduction of
deferred revenue of $18,000. 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, 2006, the Company also issued a
total of 815,000 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 with exercise prices of $0.20 to $0.25 per share exercisable for
periods of 1 to 2 years.

                                       18
<PAGE>

         (f) Purchases of equity securities by the small business issuer and
affiliated purchasers.

         During the fourth quarter of fiscal year 2006, neither the Company nor
any of its affiliates purchased any equity securities of the Company.

Item 6.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

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 has been 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, 31 dealerships had been established, 25 in
the United States and 6 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. 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 offers improved performance, added comfort and
robustness, and greatly eases the effort, and reduces the time, needed by the
customer to build the aircraft. All aircraft now being delivered are
manufactured to the SparrowHawk II standard.

                                       19
<PAGE>

         While the initial market for the SparrowHawk lies 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, 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. Through June 30, 2006,
87 initial orders for SparrowHawk gyroplane kits have been received, with 57
complete kits delivered. In the same period, 29 orders for the stabilization
modification kits were received and delivered. During the year ended June 30,
2006, the Company reported SparrowHawk sales revenues of $667,000 on 18
delivered kits, upgrades and parts and 3 stabilization modification kits. The
Company has received substantial 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 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.

         In Phase One of this potential multi-year $40 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. The
Company estimates its share of Phase One payments will approximate $4.3 million,
with the remaining portion to be 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.

         Through June 30, 2006, the Company completed the first three milestones
of Phase One of the DARPA contract and recognized revenues of $2,350,000. Total
costs of the first three milestones of approximately $2,052,000, including the
Company's allocation of overhead costs, were expensed to cost of sales during
the year ended June 30, 2006. Cost of the contract related to other milestones
of approximately $127,000 were deferred and included in work-in-process
inventories at June 30, 2006.

                                       20
<PAGE>

         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.

Going Concern Uncertainty

         The accompanying condensed 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, 2006, the Company had total current liabilities of
$62,242,000 and current assets of $1,755,000, resulting in a working capital
deficiency of $60,487,000. Included in current liabilities and the working
capital deficiency at June 30, 2006 is a total of $46,221,000 in Series B
Preferred Stock obligations that are payable on January 1, 2007, the current
maturity date. The projected total Series B Preferred Stock obligation at
January 1, 2007, including a $10.7 million obligation related to new shares of
Series B Preferred Stock, is approximately $54.6 million. 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 an extension of the Series B Preferred Stock maturity
date, as it has accomplished in the past. There is no assurance that the Company
will be successful in these endeavors.

         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 the current year primarily from the
issuance of debt 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 for the
year ended June 30, 2006. The Company believes that its share of revenues from
phase one of the contract, currently estimated at approximately $4.3 million
($2,350,000 recognized through June 30, 2006), 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 will be required to add personnel,
expand facilities and make other significant purchases to meet its obligations
under this contract, which may result in a low or negative profit margin
realized on the DARPA contract.

         Operating revenues from the DARPA contract and from the sale of
SparrowHawk kit gyroplanes, the Company's primary source of operating revenues
prior to the award of the DARPA contract, are not currently sufficient, nor are
they projected to be sufficient in the near future, to cover operating expenses.
SparrowHawk kit sales, in particular, will not be sufficient to cover related
operating expenses for the following reasons:

                                       21
<PAGE>

         o    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.

         o    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 2007, although there is
              no assurance that the Company will be successful in reducing the
              negative gross margin.

         o    The Company continues to incur significant 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.

         o    Marketing and sales efforts continue, but the number of
              SparrowHawk kits sold is below expectations, due in part to lack
              of funding to undertake 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 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 to $60 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
gyroplane. These discussions 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
operations until FAA certification is obtained and sales of Hawk 4 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 2006.

         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 condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                       22
<PAGE>

Results of Operations

         Revenues

         The Company's consolidated revenues are comprised of the following:

                                                 Year Ended June 30,
                                                   2006                 2005
                                            ---------------- -------------------

          Government contract                    $2,350,000           $       -
          SparrowHawk kits and parts                667,000             802,000
          Flight training                            62,000              62,000
          Other operating                            36,000                   -
                                            ---------------- -------------------

          Total                                  $3,115,000           $ 864,000
                                            ================ ===================

         Total revenues increased to $3,115,000 in the year ended June 30, 2006
from $864,000 in the year ended June 30, 2005. The increase in revenues in the
current fiscal year was primarily attributed to the completion of the first
three milestones of Phase One of the DARPA contract and recognition of
government contract revenue of $2,350,000. The Company had no government
contracts in the fiscal year ended June 30, 2005.

         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.

         Revenues from the sale of SparrowHawk kits and parts decreased to
$667,000 in the year ended June 30, 2006 from $802,000 in the year ended June
30, 2005. The decrease in these revenues resulted from the Company selling 18
SparrowHawk kits during the current fiscal year compared to 26 SparrowHawk kits
during the year ended June 30, 2005. In December 2005, the Company announced the
introduction of its improved SparrowHawk model, the SparrowHawk II. Several
modifications were made to the aircraft to add comfort and robustness, improve
ease of effort, and reduce the time needed by the customer to build the
aircraft. However, these modifications required substantial time, and the
Company experienced a 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 and an increase
in the sales of parts due to the increased number of completed SparrowHawk
aircraft currently in use.

         At June 30, 2006, advance deposits recorded as deferred revenue and
collected over the past several quarters of $630,000 from customers and dealers
principally for SparrowHawk kits, have contributed to operating cash flow. The
Company recognizes revenues on the sale of SparrowHawk kits when a complete kit
has been delivered and the collection of the remaining purchase price is
reasonably assured.

                                       23
<PAGE>

         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 other, will continue to contribute to Company
cash flow.

         Costs and Expenses

         Comparing the year ended June 30, 2006 to the year ended June 30, 2005,
cost of sales increased to $3,358,000 from $1,237,000. The increase in the
current year was due to the cost of sales recorded for the DARPA contract of
$2,052,000 and cost of sales primarily related to the cost of sales of
SparrowHawk kits, options and parts of $1,306,000. The Company did not have any
government contracts during the fiscal year ended June 30, 2005. Cost of sales
for the fiscal year ended June 30, 2005 was $1,237,000. SparrowHawk-related cost
of sales increased in the current year in spite of a decrease in the number of
SparrowHawk kits sold.

         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 introduction of the SparrowHawk II, and the
transition of substantial portions of kit manufacturing and assembly operations
to the Salt Lake City facility in the current fiscal year also contributed to
increasing negative margins on the sale of SparrowHawk kits. The Company
anticipates that as the Company improves its manufacturing capabilities and
increases its sales efforts, the negative gross profit on sales will narrow in
fiscal year 2007, 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, 2006 have been
deferred and included in work-in-process inventories.

         Comparing the year ended June 30, 2006 to the year ended June 30, 2005,
research and development expenses increased to $2,534,000 from $1,874,000. The
increase in research and development expenses in the current fiscal year is due
primarily to the addition of new engineering employees in relation to the
development of applications for contracts from government agencies, including
the DARPA contract, subcontract opportunities with industry partners, and to
increases in compensation for current employees. Research and development
activities have also consisted of ongoing 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, 2006 to the year ended June 30, 2005,
general and administrative expenses decreased to $1,837,000 from $1,923,000. The
decrease on a year-to-date basis in the current year is due primarily to
additional overhead expenses allocated to the DARPA contract cost of sales,
partially offset by the addition of personnel and to increases in compensation
for current personnel supporting the sales and development of the SparrowHawk
and government contract opportunities.

         Other Income and Expenses

         Comparing the year ended June 30, 2006 to the year ended June 30, 2005,
related party interest income decreased to $6,000 from $8,000 due to repayment
of certain related party notes receivable in the prior fiscal year.

                                       24
<PAGE>

         Comparing the year ended June 30, 2006 to the year ended June 30, 2005,
interest and other income increased to $172,000 from $25,000 primarily because
of gains on the settlement of debt totaling approximately $166,000 recognized in
the current fiscal year. In addition to the gain on settlement of debt, interest
and other income is comprised of interest income earned on the Company's bank
deposits and other miscellaneous sources.

         Interest expense for the year ended June 30, 2006 compared to the year
ended June 30, 2005 increased to $1,509,000 from $1,214,000, due primarily to
additional interest expense incurred in the current fiscal year for the value of
stock options granted to lenders in connection with new debt or debt extensions,
and the effect of current fiscal year net additions to debt.

         Comparing the year ended June 30, 2006 to the year ended June 30, 2005,
Series B Preferred Stock interest expense increased to $14,136,000 from
$8,003,000. 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. As a result, the number of shares on which the interest expense
is computed has continued to increase. In addition, the $924,000 estimated value
of the additional warrants issued in connection with the extension of the due
date of the Series B Preferred Stock in October 2005 was charged to Series B
Preferred Stock interest expense. This interest expense in the year ended June
30, 2006 was also increased by $5,438,000 for the accretion of the future
obligation to issue additional shares of Series B Preferred Stock on January 1,
2007, the maturity date.

         Net Loss

         During the year ended June 30, 2006, the Company continued to record
losses as it progressed toward full marketing and manufacturing of the
SparrowHawk gyroplane kit, continued research and development activities on
SparrowHawk gyroplane derivatives and other applications of the Company's
gyroplane technology, and continued work on the DARPA contract. For the year
ended June 30, 2006, the loss from operations was $4,614,000 compared to the
loss from operations of $4,170,000 for the year ended June 30, 2005. The
increase in the loss from operations in the current fiscal year resulted from
negative gross margins on SparrowHawk revenues and increases in research and
development expenses as described above, offset by the increase in revenues.

         The net loss for the year ended June 30, 2006 was $20,081,000 compared
to $13,354,000 for the year ended June 30, 2005. The increase in the net loss in
the current fiscal year resulted from increases in operating costs and expenses
and Series B Preferred Stock interest expense, as described above, partially
offset by the increase in revenues.

                                       25
<PAGE>

Liquidity and Capital Resources

         Series B Preferred Stock Obligation

         As previously discussed, at June 30, 2006, the Company had total
current liabilities of $62,242,000 and current assets of $1,755,000, resulting
in a working capital deficiency of $60,487,000. Included in current liabilities
and the working capital deficiency at June 30, 2006 is a total of $46,221,000 in
Series B Preferred Stock obligations that are payable on January 1, 2007, the
current maturity date. The projected total Series B Preferred Stock obligation
at January 1, 2007, including a $10.7 million obligation related to new shares
of Series B Preferred Stock, is approximately $54.6 million. 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 an extension of the Series B Preferred Stock maturity
date, as it has accomplished in the past. There is no assurance that the Company
will be successful in these endeavors.

         On October 11, 2005, the holders of the Series B 15% Preferred Stock
("Series B Holders") extended the redemption date of the Series B 15% Preferred
Stock from October 31, 2005 to January 1, 2007. The Company amended its Articles
of Incorporation on October 11, 2005 to reflect the modification to the
redemption date. The Series B 15% Preferred Stock has been reported as a current
liability of $40,783,000 in the consolidated balance sheet as of June 30, 2006
because of the pending redemption date of January 1, 2007.

         The October 11, 2005 extension required the following consideration to
be paid to the Series B Holders:

         o    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.

         o    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.

         o    The issuance of additional shares of Series B 15% 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 cumulative accretion of the obligation to issue additional shares
of Series B Preferred Stock is also recorded as a current liability of
$5,438,000 in the Company's consolidated balance sheet as of June 30, 2006.

         In connection with the extension of the redemption date of the original
issuance of the Company's Series B 15% Preferred Stock and the sale of 8,000
shares of the Series B 15% 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 15% Preferred Stock be paid in cash.

         The Articles of Incorporation have been further amended to define the
maturity date as the first to occur of (a) January 1, 2007, (b) the occurrence
of a defined "liquidation event", or (c) the date that is six months following

                                       26
<PAGE>

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 15%
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 15% Preferred Stock in
advance of the January 1, 2007 maturity date.

         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. As of June 30, 2006, the Company was delinquent in making payments
on substantially all promissory notes to vendors and to other unrelated party
lenders, which totaled $586,000. The Company continues ongoing negotiations with
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. The Company intends to repay in full all vendors and lenders,
including accrued interest where applicable. The Company is also delinquent in
making payments on related party notes payable totaling $1,236,000, and accrued
interest payable on debt of $782,000.

         Operating, Investing and Financing Activities

         Net cash used in operating activities was $3,651,000 for the year ended
June 30, 2006 compared to $3,365,000 for the year ended June 30, 2005, primarily
due to negative gross margins on revenues and increases in research and
development expenses as described above. The Company anticipates that operating
costs of personnel, facilities, research and development, and sales and
marketing will increase from levels reported for fiscal year 2006.

         The Company has funded losses from operations in the current fiscal
year and historically primarily from the issuance of debt 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.

         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
and the issuance of related party notes receivable of $29,000, offset by related
party notes receivable repayments of $5,000. Net cash used in investing
activities for the year ended June 30, 2005 was $6,000 comprised of the purchase
of property and equipment of $95,000, offset by related party notes receivable
repayments of $89,000.

         Net cash provided by financing activities was $3,796,000 for the year
ended June 30, 2006, comprised of a net increase in debt of $1,542,000 and net
proceeds from the issuance of common stock of $2,254,000. Net cash provided by

                                       27
<PAGE>

financing activities for the year ended June 30, 2005 was $3,414,000, comprised
of a net increase in debt of $919,000 and net proceeds from the issuance of
common stock of $2,495,000. 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.

         In July 2007, the Company received the $1,200,000 payment for Milestone
Three of Phase One of the DARPA contract. This amount was included in accounts
receivable at June 30, 2006.

         During the three months ended September 30, 2006, the Company received
cash proceeds from the sale of its restricted common stock of $50,000 and from
new short-term debt to related parties (net of repayments) of $778,000.

         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.

Off Balance Sheet Commitments

         The Company leases facilities and a vehicle under noncancellable
operating leases. Future minimum rental payments required under these leases are
as follows:

         Years Ending June 30,                              Amount
         ---------------------                              ------

                  2007                                     $147,000
                  2008                                      122,000
                                                         ------------

                                                           $269,000
                                                         ============

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

                                       28
<PAGE>

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 and expensed to cost of sales as the contract revenue for the milestone
is recognized.

         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 15% Preferred Stock and a put option obligation as
liabilities. The carrying value of the Series B 15% 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.

         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.

Recently Issued Accounting Pronouncements

                                       29
<PAGE>

         In December 2004, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standard ("FAS") No. 123(R), Share-Based Payment, an
amendment of FASB Statements No. 123 and 95. FAS No. 123(R) replaces FAS No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement requires companies to
recognize the fair value of stock options and other stock-based compensation to
employees prospectively beginning with the first interim or annual period of the
first fiscal year beginning after December 15, 2005 for small business issuers,
as deferred by the Securities and Exchange Commission. This means that the
Company will be required to implement FAS No. 123(R) no later than the quarter
beginning July 1, 2006. The Company currently measures stock-based compensation
in accordance with APB Opinion No. 25, as discussed above. The Company
anticipates adopting the modified prospective method of FAS No. 123(R) on July
1, 2006. The impact on the Company's financial condition or results of
operations will depend on the number and terms of stock options outstanding on
the date of change, as well as future options that may be granted. However, the
Company believes the adoption of FAS No. 123(R) may have a material effect on
the Company's financial position and results of operations.

         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 will be effective for the Company on July 1, 2007. 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 Company has not yet determined the potential financial
statement impact of adopting FIN 48.

         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 new standard is
effective as of the end of fiscal years ending after December 15, 2006 for
companies with publicly traded securities. 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.

         The FASB has issued SFAS Statement No. 157, Fair Value Measurements.
This new standard provides enhanced guidance for using fair value to measure
assets and liabilities, and requires expanded information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. Under the new standard, fair
value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. The standard clarifies the
principle that fair value should be based on the assumptions market participants

                                       30
<PAGE>

would use when pricing the asset or liability. The new standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Early adoption is permitted. The
Company anticipates adopting SFAS No. 157 on July 1, 2008, but is currently
unable to determine the impact of the adoption of the standard on its
consolidated financial statements.

         The FASB has issued SFAS Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. Among other changes, SFAS 154 requires that a voluntary
change in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it is
impracticable to do so. SFAS 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
statements 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 Company anticipates adopting SFAS No. 154 on July 1, 2006, and does
not believe the adoption of this new accounting standard will result in a
material impact on the consolidated financial statements of the Company.

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.

         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

                                       31
<PAGE>

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

         (a)      Change in Independent Registered Accounting Firm

         On March 1, 2006, the Company engaged HJ & Associates, LLC ("HJ"), as
the Company's independent registered accounting firm to audit the Company's
consolidated financial statements for the fiscal year ending June 30, 2006. On
March 1, 2006, the Company dismissed Tanner LC ("Tanner") as the Company's
independent registered accounting firm. The Board of Directors of the Company
recommended and approved the decision to change accountants.

         Tanner's report dated September 30, 2005, except for Note 21, which is
dated October 11, 2005, on the Company's consolidated balance sheet as of June
30, 2005, and the consolidated statements of operations, stockholders' deficit
and cash flows for the years ended June 30, 2005 and 2004 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles with the exception of a
modification for uncertainty as to the Company's ability to continue as a going
concern.

         During the two-year period ended June 30, 2005 and from that date
through March 1, 2006, there were no disagreements between Tanner and the
Company on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Tanner, would have caused Tanner to make reference to the
subject matter of such disagreements in connection with its reports.

         During the two-year period ended June 30, 2005 and from that date
through March 1, 2006, Tanner and the Company identified the following
reportable conditions in the Company's internal controls over financial
reporting:

         1)   The Company's ability to identify, record and report 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;
         2)   An overall lack of segregation of duties resulting from the
              limited number of personnel in the Company's accounting
              department; and
         3)   The timely evaluation and recording of transactions related to the
              Company's Series B 15% Preferred Stock and the Company's put
              option liability.


                                       32
<PAGE>

         The Board of Directors of the Company has discussed these reportable
conditions with Tanner, and has authorized Tanner to respond fully to the
inquiries of HJ concerning the subject matter of these reportable conditions.

         During the two-year period ended June 30, 2005 and from that date
through March 1, 2006, neither the Company nor anyone on behalf of the Company
has consulted with HJ regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or any
other matters required to be disclosed under Item 304(a) (1) (iv) of Regulation
S-B.

         (b)      Disagreements with Accountants on Accounting and Financial
Disclosure

         None.

Item 8A.  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, 2006. 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.

         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 2006 and continuing during the first quarter of
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 2007. 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 four to six
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 in the second or third quarter of fiscal year 2007.

                                       33
<PAGE>

         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.

         Other than as described above, during the fourth quarter of 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.

                                       34
<PAGE>

                                    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.

         Name                             Age      Positions
         ----                             ---      ---------

         David L. Groen                   55       Director, President, Chief
                                                   Executive Officer, and
                                                   Treasurer

         Dennis P. Gauger                 54       Director, Chief Financial
                                                   Officer, Secretary

         Robert (Robin) H. H. Wilson      70       Director, Executive Vice
                                                   President of Groen
                                                   Brothers Aviation USA, Inc.

         The Company has announced the death on October 9, 2006 of H. Jay Groen,
one of the founders of the Company and the former Chairman of the Company's
Board of Directors. Jay Groen has been instrumental in the development of the
Company's technology and business opportunities since its inception. However, in
light of the addition of engineering, technical and key management personnel,
the Company does not believe that ongoing operations and continued development
of technology will be negatively impacted by his passing.

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. Gauger was appointed a member of the Board of Directors on
January 22, 2004. Mr. Wilson was appointed a member of the Board of Directors on
October 3, 2006. 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 years, nearly a decade and
a half of which as its President and Chief Executive Officer. David and his
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 60 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.

                                       35
<PAGE>

         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.

         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.

         Dennis P. Gauger, CPA Dennis P. Gauger, Certified Public Accountant,
has over 29 years of experience as a financial executive, corporate
troubleshooter and 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 eight years operating his own
Certified Public Accounting firm specializing in contract financial and
executive management.

         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 for
two 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.

         Robert (Robin) H.H. Wilson has had a long and prominent career in
aviation. 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,

                                       36
<PAGE>

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 3 1/2 years in this position were
marked by significant improvement in the railroad with a commendation by the NY
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 turnround 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.

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:

         o    In writing, to Groen Brothers Aviation, Inc., 2640 West California
              Avenue, Suite A, Salt Lake City, Utah 84104, Attention of Board of
              Directors

         o    By Email, at directors@groenbros.com.

         The Company did not hold an annual meeting of shareholders during the
fiscal year ended June 30, 2006.

                                       37
<PAGE>

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, 2006 with
the exception of two Form 4 reports which were filed late by Jay Groen.

Committees of the Board of Directors

         The three members of the Company's Board of Directors, none of whom is
deemed independent, currently serve as the Audit Committee and Compensation
Committee of the Board.

         The Audit Committee reviews internal accounting and financial practices
and controls, as well as all services performed by the Company's independent
registered accounting firm, including recommending the selection of that firm.
The Audit Committee has not adopted a written charter. The Company's Board of
Directors has determined that Dennis P. Gauger is an "audit committee financial
expert," as that term is defined by the rules and regulations of the Securities
and Exchange Commission.

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.


                                       38
<PAGE>

Item 10.          Executive Compensation

         Set forth below is information concerning the annual and long-term
compensation for services in all capacities to the Company for the years ended
June 30, 2006, 2005 and 2004 for David Groen, Jay Groen and Dennis Gauger, the
"Named Executive Officers".
<TABLE>
<CAPTION>

                                             Annual Compensation                       Long-Term Compensation
                                   ---------------------------------------- ----------------------------------------------
                                                                            Restricted    Securities
                                                           Other Annual        Stock      Underlying        All Other
                                   Salary (1)   Bonus    Compensation (2)   Awards (3)      Options      Compensation (4)
    Name and Position       Year        $         $             $                $             #                $
<S>                         <C>        <C>        <C>         <C>             <C>            <C>                   <C>
David Groen                 2006       105,000    -             -                -             750,000              1,155
   President and Chief      2005       103,404    -             -                -           4,925,000              1,151
   Executive Officer        2004        95,000    -             -                -              50,000                110

Jay Groen                   2006             -    -           95,000             -             750,000             54,000
   Chairman of the          2005             -    -           92,692             -           1,575,000             34,500
   Board of Directors       2004             -    -           95,754             -              50,000                  -

Dennis Gauger               2006        95,000    -             -                -             750,000              5,702
   Chief Financial          2005        93,531    -             -                -           3,500,000              2,386
   Officer & Secretary      2004        45,231    -             -             10,000           500,000                  -

Robin Wilson                2006       100,000    -             -                -             750,000             10,327
   Executive Vice           2005        97,769    -             -                -           3,950,000              5,962
   President of             2004        95,000    -             -                -           1,050,000                  -
   GBA USA
</TABLE>

         (1)  Represents annual salary for the fiscal year. Unpaid back salary
              included in these amounts payable to David Groen at June 30, 2006
              included $67,231 for fiscal year 2005, $58,462 for fiscal year
              2004 and $16,756 for fiscal year 2003. Unpaid back salary included
              in these amounts payable to Robin Wilson at June 30, 2006 included
              $43,923 for fiscal year 2005, $55,577 for fiscal year 2004 and
              $62,115 for fiscal year 2003. No additional compensation has been
              paid to David Groen or Mr. Gauger for service as a member of the
              Company's Board of Directors for fiscal years 2006, 2005 and 2004.
         (2)  Represents annual consulting fees for the fiscal year payable to
              Mr. Groen as a member of the Company's Board of Directors and as
              the Company's representative in Washington DC. Unpaid back fees
              payable to Mr. Groen at June 30, 2006 were $376,000.
         (3)  Represents 50,000 shares of the Company's restricted common stock
              with an estimated value of $0.20 per share granted to Mr. Gauger
              upon his employment with the Company.
         (4)  Includes matching contributions made by the Company on behalf of
              David. Groen pursuant to the Company's Profit Sharing 401(k) Plan.
              Amounts for Jay Groen include payments of interest accrued on
              deferred compensation. Amounts for Mr. Gauger include matching
              contributions made by the Company on behalf of Mr. Gauger pursuant
              to the Company's Profit Sharing 401(k) Plan and amounts
              contributed by the Company to Mr. Gauger's health savings account
              pursuant to a Company benefit plan. Amounts for Mr. Wilson include
              matching contributions made by the Company on behalf of Mr. Wilson
              pursuant to the Company's Profit Sharing 401(k) Plan.

         The Company does not have written employment agreements with its
executive officers.

                                       39
<PAGE>

         Effective July 2, 2006 annual salaries for David Groen, Jay Groen,
Dennis Gauger, and Robin Wilson were established at $135,000, $120,000,
$120,000, and $125,000, respectively, with no additional compensation for
service on the Company's Board of Directors.

         Prior to July 2, 2006, Jay Groen was not an employee of the Company,
but was paid consulting fees for services rendered as a member of the Board of
Directors of the Company and as the Company's representative in Washington DC,
most recently at $95,000 per year for fiscal year 2006. At June 30, 2006, unpaid
consulting fees to Jay Groen for the past several years were $376,000. The
Company did not have a written consulting agreement with Jay Groen.

         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
15% Preferred Stock preclude the Company from making any deferred compensation
payments until all outstanding amounts due relating to the Series B 15%
Preferred Stock have been paid in full. Absent payment restrictions related to
outstanding Series B 15% 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, 2005, 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 $3,555,000, related accrued payroll taxes of $147,000 and related
accrued interest payable of $319,000 are classified as long-term liabilities at
June 30, 2006. 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, 2006,
deferred compensation and related interest accrued to the Named Executive
Officers were as follows:

                                  Deferred           Accrued
                                 Compensation        Interest           Total
                              ----------------- --------------- ---------------

      David Groen                $1,399,354           $179,711      $1,579,065

      Jay Groen                     407,219                  -         407,219

      Dennis Gauger                 100,833                  -         100,833

      Robin Wilson                  647,139             41,158         688,297

         Amounts added to deferred compensation payable for the year ended June
30, 2006 for David Groen, Jay Groen, Dennis Gauger, and Robin Wilson were
$170,500, $0, $55,000, and $150,000, respectively. Deferred compensation has
been accrued for Jay Groen only for those years that he has worked as an
employee of the Company.

                                       40
<PAGE>

Option/SAR Grants in Fiscal Year 2005
-------------------------------------

         The following table sets forth as to the Named Executive Officers
certain information with respect to options to purchase shares of the Company's
common stock granted during fiscal year 2006.

                     Number of
                    Securities        % of Total
                    Underlying       Options/SARS
                   Options/SARS       Granted to       Exercise or
                      Granted        Employees in       Base Price    Expiration
         Name            #         Fiscal Year 2006     ($/Share)        Date

David Groen           750,000           13.16%             0.25         6/20/11

Jay Groen             750,000           13.16%             0.25         6/20/11

Dennis Gauger         750,000           13.16%             0.25         6/20/11

Robin Wilson          750,000           13.16%             0.25         6/20/11


Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
-----------------------------------------------------------------------
Option/SAR Values
-----------------

         The following table sets forth the aggregate value of unexercised
options to acquire shares of common stock held by the Named Executive Officers
on June 30, 2006. There were no options exercised by the Named Executive
Officers during the year ended June 30, 2006.

                                                Number of
                                                Securities         Value of
                                                Underlying        Unexercised
                                               Unexercised        In-the-Money
                    Shares                     Options/SARs       Options/SARs
                  Acquired on    Value        at FY-End (#)       at FY-End ($)
                   Exercise    Realized        Exercisable/       Exercisable/
         Name          #           $          Unexercisable     Unexercisable(1)

      David Groen      -           -      8,379,168 / 2,220,832    25,000 / -

       Jay Groen       -           -      6,645,834 / 1,104,166    30,000 / -

     Dennis Gauger     -           -      2,120,833 / 2,629,167       - / -

     Robin Wilson      -           -      4,854,166 / 2,895,834       - / -

         (1)  Reflects the difference between the exercise price of the options
              granted and the value of the common stock on June 30, 2006. The
              closing price of the Company's common stock was $0.16 per share on
              June 30, 2006.

                                       41
<PAGE>

Item 11.         Security Ownership of Certain Beneficial Owners and Management.

         The following tabulation shows, as of September 15, 2006, 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:
<TABLE>
<CAPTION>
                                                               Amount and Nature of
                                                             Beneficial Ownership (1)
                                    ----------------------------------------------------------------------------

    Name and Address of Beneficial                                   Series A                 Total Voting
    ------------------------------                                   --------                 ------------
                 Owner                    Common Shares          Preferred Shares              Shares (6)
    ------------------------------        -------------          ----------------             ------------

                                         Shares          %       Shares        %             Shares         %
                                         ------         --       ------       --             ------        --
  <S>                                 <C>                <C>       <C>          <C>         <C>            <C>
  David Groen
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104          20,471,718  (2)    11.6      900,000      64.3        110,471,718    35.0

  Jay Groen
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104          11,605,934  (3)     6.6      500,000      35.7         61,605,934    19.5

  Dennis Gauger
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104           2,670,833  (4)     1.5          -         -            2,670,833     0.8

  Robin. Wilson
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104           5,904,166  (5)     3.4          -         -            5,904,166     1.9

  All officers and directors as a
  group  (4 persons)                  40,652,651         23.1    1,400,000     100.0        180,652,651    57.2
</TABLE>

         (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
              150,555,681 plus 25,316,667 options which are exercisable by
              executives and directors within 60 days.
         (2)  Includes 8,047,884 shares owned by David Groen, 2,403,000 shares
              beneficially owned held by family trusts and 10,020,834 options
              exercisable by David Groen.
         (3)  Includes 30,100 shares owned by Jay Groen, 4,405,000 shares
              beneficially owned held by family trusts and 7,170,834 options
              exercisable by Jay Groen.
         (4)  Includes 50,000 shares owned by Dennis Gauger and 2,620,833
              options exercisable by Dennis Gauger.
         (5)  Includes 300,000 shares owned by Robin Wilson, 100,000 shares
              beneficially owned held by family trusts and 5,504,166 options
              exercisable by Robin Wilson.
         (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.

         David Groen, President and Chief Executive Officer, owns 900,000 shares
of the Company's Series A Convertible Preferred Stock, and Jay Groen, Chairman
of the Board of Directors, owns 500,000 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

                                       42
<PAGE>

of 90,000,000 and 50,000,000 votes, respectively, 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.

         Voting control by one of the Company's founders, David Groen, had
existed from November 7, 2000 by means of shares of Series A Preferred Stock
issued to him in exchange for a note receivable. The note receivable matured in
November 2003, and Mr. Groen surrendered all Series A Preferred Stock in
cancellation of the note. The Board of Directors and management of the Company
believed that the continuity of voting control by one or both of the founders of
the Company was crucial to the ongoing operations and growth of the Company.

         On October 8, 2004, the Company amended and restated its Articles of
Incorporation to change the rights and terms of its Series A Convertible
Preferred Stock. On October 8, 2004, the Board of Directors approved the
issuance of 1,400,000 shares of Series A Convertible Preferred Stock to the
Company's founders: 900,000 shares to David Groen, President and Chief Executive
Officer, and 500,000 shares to Jay Groen, Chairman of the Board of Directors, at
a purchase price of $0.05 per share, or total consideration of $70,000. The
amended rights, terms and preferences of the Series A Convertible Preferred
Stock are summarized as follows:

         o    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.

         o    The voting rights expire seven years from the date of issue.

         o    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.

         o    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.

         o    Upon the death or permanent incapacity of a holder of Series A
              Convertible Preferred Stock, all shares held by such holder will
              be divided between the then existing members of the Company's
              Board of Directors on a pro-rata basis, based upon the number of
              months they have served on the Board, with the holder's
              survivor(s) (if more than one person, treated collectively as one
              person) being included in the same pro-rata basis, crediting the
              survivor's "months served" as those of the deceased or permanently
              mentally incapacitated holder. 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.

         o    The shares are non-transferable, non-assignable, and have no
              dividend or liquidation rights.

                                       43
<PAGE>

         The value of $.05 per share was assigned to the Series A Preferred
Stock by the Company's Board of Directors after evaluating several factors,
including those listed above relating to limitations on the transferability of
the shares, the limited life of the voting rights, the significant revenue
milestones to be met before conversion to common stock can occur, and the
absence of dividend or liquidation rights.

         At June 30, 2006, the Company had a note payable, originating in 1990,
of $180,000, plus accrued interest of $143,686, due to a company owned by David
and Jay Groen.

         At June 30, 2006, the Company had related party accounts and notes
receivable from officers and employees, resulting primarily from cash advances,
totaling $65,000, bearing interest at 8% to 12%. For notes receivable from
executive officers, the Company has implemented a procedure to reduce these
notes receivable each quarter by offsetting amounts due to the officers 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 and Jay Groen. Through June 30, 2006,
royalties payable totaled $9,500 to each of these individuals, which amounts are
included in cost of sales in the accompanying consolidated statement of
operations.

         Included in long-term accrued expenses in the consolidated balance
sheet at June 30, 2005 is deferred compensation payable to twelve management
employees, including officers and directors of the Company, with amounts
originating from fiscal year 1998 through fiscal year 2005. 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 15% Preferred Stock preclude the Company
from making any deferred compensation payments until all outstanding amounts due
relating to the Series B 15% Preferred Stock have been paid in full. Absent
payment restrictions related to outstanding Series B 15% 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 $3,555,000, related accrued payroll taxes of $147,000 and related
accrued interest payable of $319,000 are classified as long-term liabilities at
June 30, 2006. Through June 30, 2006, 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.

         At June 30, 2006, the Company had short-term notes payable to related
parties, primarily stockholders of the Company, totaling $7,532,000, with
accrued interest payable of $3,704,000. Most of these notes are unsecured, due
on demand, and bear interest at annual rates ranging from 8% to 25%, with one
note at 36%. Included in these notes payable at June 30, 2006 are notes payable
totaling 1,236,000 that are technically in default. In addition, the Company is
delinquent in making payments of accrued interest payable of $385,000 on this
related party debt at June 30, 2006.

         At June 30, 2006, 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 $53,000 at June 30,
2006.

                                       44
<PAGE>
                                     PART IV

Item 13.          Exhibits and Reports on Form 8-K.

(a)      Exhibits

         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         By-laws (4)

         4.1         Amended and Restated 2000 Option Plan (5)

         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. (6)

         14.1        Groen Brothers Aviation Corporate Values (2)

         14.2        Standards of Conduct (2)

         16.1        Letter from Tanner LC (6)

         21          Subsidiaries of the small business issuer. (7)

         23.1        Consent of Independent Registered Accounting Firm
                     (this filing).

         23.2        Consent of Independent Registered Accounting Firm
                     (this filing).

         31.1        Certification of Principal Executive Officer required by
                     Rule 13a-14(a) (this filing).

         31.2        Certification of Principal Financial Officer required by
                     Rule 13a-14(a) (this filing).

                                       45
<PAGE>

         32.1        Certification of Principal Executive Officer required by
                     Rule 13a-14(b) and 18 U.S.C. 1350 (this filing).

         32.2        Certification of Principal Financial Officer required by
                     Rule 13a-14(b) and 18 U.S.C. 1350 (this filing).

         (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 registration statement on
              Form S-8 filed June 10, 2005 and incorporated herein by reference.
         (6)  Filed as an exhibit to the Company's current report on Form 8-KA
              filed on March 7, 2006 and incorporated herein by reference.
         (7)  Information included in Notes to Consolidated Financial statements
              filed with this report.

         (b) The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended June 30, 2006.

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 year ended June 30, 2006.



         Audit fees                                            $42,250
         Audit related fees                                          -
         Tax fees                                                2,838
         Other fees                                                -
                                                         --------------

         Total                                                 $45,088
                                                         ==============

                                       46
<PAGE>

         The following schedule presents the professional fees incurred to
Tanner LC, the Company's former independent registered accountants, for the
fiscal years ended June 30, 2006 and 2005.

                                                      2006             2005
                                                      ----             ----

         Audit fees                                   $23,743         $79,578
         Audit related fees                               -               -
         Tax fees                                         -               -
         Other fees                                     2,450           2,408
                                                -------------- ---------------

         Total                                        $26,193         $81,986
                                                ============== ===============

         Tax fees were for preparation of federal and state income tax returns
and related tax consultation. Other fees were for Edgar services.

         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.

                                       47
<PAGE>

                                   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 Groen
                                       ---------------
                                       David Groen, President and Chief
                                       Executive Officer
                                       (Principal Executive Officer)

                                       Date:  October 13, 2006

         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         October 13, 2006
---------------           Officer (Principal Executive
David Groen               Officer)



/s/ Dennis P. Gauger      Chief Financial Officer and           October 13, 2006
--------------------      Secretary (Principal Financial
Dennis P. Gauger          Officer)



/s/ Robert Wilson         Director                              October 13, 2006
-----------------
Robert Wilson

                                       48
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Index to Consolidated Financial Statements


   Report of Independent Registered Public Accounting
      Firm - HJ & Associates, LLC                                           F-2

   Report of Independent Registered Public Accounting
      Firm - Tanner LC                                                      F-3

   Consolidated Balance Sheet                                               F-4

   Consolidated Statements of Operations                                    F-5

   Consolidated Statements of Stockholders' Deficit                         F-6

   Consolidated Statements of Cash Flows                                    F-8

   Notes to Consolidated Financial Statements                               F-9



                                      F-1

<PAGE>

             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, 2006, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit provides 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, 2006, and the results of their operations
and their cash flows for the year then ended 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.



/s/ HJ & Associates, LLC

HJ & Associates, LLC
Salt Lake City, Utah
September 26, 2006



                                      F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------


To the Board of Directors and Stockholders
of Groen Brothers Aviation, Inc.


We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Groen Brothers Aviation, Inc. for the
year ended June 30, 2005. 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 audit.

We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board of the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Groen Brothers Aviation, Inc. for the year ended June 30, 2005, in conformity
with U.S. generally accepted 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 has suffered recurring losses,
has a stockholders' deficit, and has a net working capital deficiency. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to 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.



/s/ TANNER LC

TANNER LC
Salt Lake City, Utah
September 30, 2005


                                      F-3
<PAGE>

                                          GROEN BROTHERS AVIATION, INC.
                                            Consolidated Balance Sheet

Assets                                                        June 30, 2006
------                                                  -----------------------

Current assets:
   Cash                                                      $            4,000
   Accounts receivable                                                1,216,000
   Related party accounts and notes receivable                           84,000
   Prepaid expenses                                                       2,000
   Inventories                                                          449,000
                                                         -----------------------

   Total current assets                                               1,755,000

Property and equipment, net                                             513,000
                                                         -----------------------

   Total assets                                              $        2,268,000
                                                         =======================

Liabilities and Stockholders' Deficit
-------------------------------------

Current liabilities:
   Accounts payable                                          $        1,992,000
   Accrued expenses                                                   5,148,000
   Stock deposits                                                        30,000
   Deferred revenue                                                     630,000
   Notes payable                                                        689,000
   Related party notes payable                                        7,532,000
   Series B 15% cumulative redeemable non-voting
      preferred stock, no par value, 50,000,000
      shares authorized, 40,783 shares issued
      and outstanding                                                40,783,000
   Liability to issue additional shares of Series
      B 15% preferred stock                                           5,438,000
                                                         -----------------------

   Total current liabilities                                         62,242,000

Long-term liabilities:
   Accrued expenses                                                   4,021,000
   Deferred revenue                                                      25,000
   Long-term debt                                                       105,000
   Related party long-term debt                                         931,000
   Dealer deposits                                                    2,145,000
                                                         -----------------------

   Total liabilities                                                 69,469,000
                                                         -----------------------

Stockholders' deficit:
   Series A convertible preferred stock, no par
      value, 50,000,000 shares authorized,
      1,400,000 shares issue and outstanding                             70,000
   Common stock, no par value, 500,000,000
      shares authorized, 149,358,709 shares
      issued and outstanding                                         29,236,000
   Accumulated deficit                                              (96,507,000)
                                                         -----------------------

   Total stockholders' deficit                                      (67,201,000)
                                                         -----------------------

   Total liabilities and stockholders' deficit               $        2,268,000
                                                         =======================

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                      Consolidated Statements of Operations

                                                       Years Ended June 30,
                                              ----------------------------------

                                                   2006             2005

Revenues                                        $   3,115,000    $      864,000
                                              ----------------- ----------------

Costs and expenses:
   Cost of sales                                    3,358,000         1,237,000
   Research and development                         2,534,000         1,874,000
   General and administrative expenses              1,837,000         1,923,000
                                              ----------------- ----------------

   Total costs and expenses                         7,729,000         5,034,000
                                              ----------------- ----------------

   Loss from operations                            (4,614,000)       (4,170,000)
                                              ----------------- ----------------

Other income (expense):
   Related party interest income                        6,000             8,000
   Interest and other income                            6,000            25,000
   Gain on extinguishment of debt                     166,000                 -
   Interest expense                                (1,509,000)       (1,214,000)
   Series B preferred stock interest expense      (14,136,000)       (8,003,000)
                                              ----------------- ----------------

   Total other income (expense)                   (15,467,000)       (9,184,000)
                                              ----------------- ----------------

Loss before income taxes                          (20,081,000)      (13,354,000)

Income tax benefit                                          -                 -
                                              ----------------- ----------------

Net loss                                        $ (20,081,000)   $  (13,354,000)
                                              ================= ================


Net loss per share - basic and diluted          $       (0.15)   $        (0.11)
                                              ================= ================

Weighted average number of common shares
   outstanding - basic and diluted                136,904,000       116,597,000
                                              ================= ================







          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                                 GROEN BROTHERS AVIATION, INC.
                                       Consolidated Statements of Stockholders' Deficit
                                              Years Ended June 30, 2006 and 2005


                                         Series A Convertible
                                           Preferred Stock             Common Stock
                                      ------------------------------------------------         Accumulated
                                          Shares       Amount        Shares       Amount          Deficit          Total
                                      ---------------------------------------------------------------------------------------
<S>                                      <C>        <C>          <C>          <C>             <C>               <C>
Balance forward, June 30, 2004                   -  $        -   116,438,743  $20,859,000     $ (63,072,000)    $(42,213,000)

Issuance of Series A preferred stock
   for accrued expenses                  1,400,000      70,000             -            -                 -           70,000
Issuance of common stock for:
   Cash                                          -           -    12,574,580    2,515,000                 -        2,515,000
   Finders compensation                          -           -        10,750            -                 -                -
   Accounts payable                              -           -       287,500       57,000                 -           57,000
   Accrued expenses                              -           -       355,125       71,000                 -           71,000
   Interest expense                              -           -        65,109       13,000                 -           13,000
   Return of deposits                            -           -        66,375       13,000                 -           13,000
   Employer 401(k) expense                       -           -       440,990       88,000                 -           88,000
   Services                                      -           -       185,000       32,000                 -           32,000
Finders' compensation                            -           -             -     (131,000)                -         (131,000)
Issuance of stock options for:
   Interest                                      -           -             -       61,000                 -           61,000
   Accounts payable                              -           -             -       12,000                 -           12,000
Net loss                                         -           -             -            -       (13,354,000)     (13,354,000)
                                        ----------- ----------- -------------------------- ----------------- ----------------
Balance, June 30, 2005                   1,400,000  $   70,000   130,424,172  $23,590,000     $ (76,426,000)    $(52,766,000)
                                        ----------- ----------- -------------------------- ----------------- ----------------

                                 See accompanying notes to consolidated financial statements.

</TABLE>

                                                             F-6
<PAGE>
<TABLE>
<CAPTION>

                                                 GROEN BROTHERS AVIATION, INC.
                                  Consolidated Statements of Stockholders' Deficit Continued
                                              Years Ended June 30, 2006 and 2005


                                         Series A Convertible
                                           Preferred Stock             Common Stock
                                      ------------------------------------------------         Accumulated
                                          Shares       Amount        Shares       Amount          Deficit          Total
                                      ---------------------------------------------------------------------------------------
<S>                                      <C>        <C>          <C>          <C>             <C>               <C>
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                 -        2,236,000
   Accrued expenses                              -           -       861,171      179,000                 -          179,000
   Interest expense                              -           -     1,059,533      190,000                 -          190,000
   Reduction of deferred revenue                 -           -       184,907       37,000                 -           37,000
   Payment of debt                               -           -     1,146,213      234,000                 -          234,000
   Purchase of property and
equipment                                        -           -       530,093      106,000                 -          106,000
   Customer refund                               -           -         5,000        1,000                 -            1,000
   Settlement of put option
liability                                        -           -     5,004,009    1,560,000                          1,560,000
   Employer 401(k) expense                       -           -       505,980       99,000                 -           99,000
   Services                                      -           -       338,214       71,000                 -           71,000
Finders' 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                 -           44,000
   Interest expense                                                                56,000                             56,000
   Services                                      -           -             -       38,000                 -           38,000
Issuance of warrants for Series B
   preferred stock interest expense                                               924,000                            924,000
Net 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-7
</TABLE>
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                      Consolidated Statements of Cash Flows

                                                       Years Ended June 30,
                                                 -------------------------------
                                                       2006            2005
Cash flows from operating activities:
   Net loss                                      $  (20,081,000)  $ (13,354,000)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
      Depreciation and amortization expense             160,000         117,000
      Common stock issued for interest expense          190,000          13,000
      Common stock issued for services                   71,000          32,000
      Common stock issued for 401(k) expense             99,000          88,000
      Stock options issued for interest expense          56,000          73,000
      Stock options issued for services                  38,000               -
      Interest expense accrued on Series B
        preferred stock                              14,136,000       8,003,000
      Interest expense on put option liability           45,000          67,000
      Interest expense added to debt principal           23,000          24,000
      Other expenses added to debt principal              4,000               -
      Interest income added to related party
        notes receivable                                 (6,000)         (9,000)
      Gain on extinguishment of debt                   (166,000)              -
      (Increase) decrease in:
         Accounts and notes receivable               (1,187,000)        (32,000)
         Prepaid expenses                                 2,000               -
         Inventories                                    (54,000)         93,000
      Increase (decrease) in:
         Accounts payable                             1,202,000         158,000
         Accrued expenses                             1,737,000       1,386,000
         Deferred revenue                                80,000         (24,000)
                                                 -------------------------------
   Net cash used in operating activities             (3,651,000)     (3,365,000)
                                                 -------------------------------

Cash flows from investing activities:
   Purchase of property and equipment                  (187,000)        (95,000)
   Issuance of related party notes receivable           (29,000)              -
   Payments of related party notes receivable             5,000          89,000
                                                 -------------------------------
   Net cash used in investing activities               (211,000)         (6,000)
                                                 -------------------------------

Cash flows from financing activities:
   Proceeds from the issuance of related party
     debt                                             2,012,000       1,126,000
   Repayment of related party debt                     (417,000)       (193,000)
   Repayment of debt                                    (53,000)        (14,000)
   Proceeds from the issuance of common stock
     and stock options                                2,280,000       2,515,000
   Deposits received for the purchase of
     common stock                                        30,000               -
   Payment of finders' compensation on issuance
     of common stock                                    (56,000)        (20,000)
                                                 -------------------------------
   Net cash provided by financing activities          3,796,000       3,414,000
                                                 -------------------------------

Net increase (decrease) in cash                         (66,000)         43,000
Cash, beginning of year                                  70,000          27,000
                                                 -------------------------------

Cash, end of year                                $        4,000       $  70,000
                                                 ===============================

          See accompanying notes to consolidated financial statements.

                                       F-8

<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements


Note 1:  Organization and Summary of Significant Accounting Policies

         Organization and Principles of Consolidation -Effective November 1,
2004, Groen Brothers Aviation, Inc. (the "Company") merged American Autogyro,
Inc. ("AAI"), a wholly owned subsidiary, into Groen Brothers Aviation USA, Inc.
("GBA-USA"), a wholly owned subsidiary. GBA-USA will continue the manufacturing,
sales, marketing, and customer support functions of AAI's SparrowHawk gyroplane.
GBA-USA will be doing business as (d.b.a.) American Autogyro for most of the
SparrowHawk operations.

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, GBA-USA and, through November 1,
2004, AAI. 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, 2006.

         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, 2006.

         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 consist of
SparrowHawk kits which have not been delivered in a completed status to
customers and costs incurred on the Company's government contract prior to the
completion and billing of defined contract milestones. 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.

         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. 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


                                      F-9
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


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.

         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.

         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


                                      F-10
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)

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 Options and Stock-Based Compensation - In December 2004, the
Financial Accounting Standards Board ("FASB") issued Financial Accounting
Standard ("FAS") No. 123(R), Share-Based Payment, an amendment of FASB
Statements No. 123 and 95. FAS No. 123(R) replaces FAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. This statement requires companies to recognize the
fair value of stock options and other stock-based compensation to employees
prospectively beginning with fiscal periods beginning after June 15, 2005
(December 15, 2005 for small business issuers). This means that the Company will
be required to implement FAS No. 123(R) on July 1, 2006. The impact on the
Company's financial condition or results of operations will depend on the number
and terms of stock options outstanding on the date of change, as well as future
options that may be granted. However, the Company believes the adoption of FAS
No. 123(R) may have a material effect on the Company's financial position and
results of operations.

         For stock options granted to employees, the Company currently utilizes
the footnote disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
encourages entities to adopt a fair-value based method of accounting for stock
options or similar equity instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company has
elected to continue to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123 as applicable. Accordingly, no
compensation cost has been recognized in the consolidated financial statements
for stock options granted to employees. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net loss and loss
per share would have been as indicated below:

                                                     Years Ended June 30,
                                                   2006               2005
                                                --------------------------------

    Reported net loss applicable
        to common stockholders                   $ (20,081,000)   $ (13,354,000)

    Deduct: Total stock-based
       employee compensation
       determined under fair
       value based method, net of
       related tax effects                          (1,570,000)      (1,328,000)
                                                --------------------------------

    Pro forma net loss                           $ (21,651,000)   $ (14,682,000)
                                                ================================

    Basic and diluted loss per
     share:
             As reported                         $       (0.15)   $       (0.11)
                                                ================================

             Pro forma                           $       (0.16)   $       (0.13)
                                                ================================

                                      F-11
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         The fair value of each option and warrant granted is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:

                                                     Years Ended June 30,
                                                   2006               2005
                                             -----------------------------------

        Expected dividend yield              $             -    $             -
        Expected stock price volatility                   61%                59%
        Risk-free interest rate                          4.2%               3.5%
        Expected life of options                  1 - 7 years        1 - 7 years

         The weighted average fair value of options and warrants granted during
2006 and 2005 was $0.10 and $0.07, respectively.

         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 15% Preferred Stock and a put option obligation as
liabilities. The carrying value of the Series B 15% 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 an increase or decrease to interest expense.


                                      F-12
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         Advertising - Advertising costs are non-direct in nature, and are
expensed over the periods in which the advertising takes place. Advertising
expense totaled $5,000 and $7,000 for the years ended June 30, 2006 and 2005,
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 99,011,502
shares of common stock at exercise prices ranging from $0.15 to $1.10 and
78,215,921 shares of common stock at exercise prices ranging from $0.15 to $1.10
were outstanding at June 30, 2006 and 2005, respectively. Certain notes payable,
long-term debt and related accrued interest payable were convertible into a
total of 34,659,722 and 24,167,515 shares of common stock at June 30, 2006 and
2005, 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 2005 have been reclassified to conform with the current year
presentation.

         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 will be effective for the Company on July 1, 2007. 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


                                      F-13
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


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 Company
has not yet determined the potential financial statement impact of adopting FIN
48.

         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 new standard is
effective as of the end of fiscal years ending after December 15, 2006 for
companies with publicly traded securities. 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.

         The FASB has issued SFAS Statement No. 157, Fair Value Measurements.
This new standard provides enhanced guidance for using fair value to measure
assets and liabilities, and requires expanded information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. Under the new standard, fair
value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. The standard clarifies the
principle that fair value should be based on the assumptions market participants
would use when pricing the asset or liability. The new standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Early adoption is permitted. The
Company anticipates adopting SFAS No. 157 on July 1, 2008, but is currently
unable to determine the impact of the adoption of the standard on its
consolidated financial statements.

         The FASB has issued SFAS Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. Among other changes, SFAS 154 requires that a voluntary
change in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it is
impracticable to do so. SFAS 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
statements 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 Company anticipates adopting SFAS No. 154 on July 1, 2006, and does
not believe the adoption of this new accounting standard will result in a
material impact on the consolidated financial statements of the Company.


                                      F-14
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


Note 2:  Going Concern Uncertainty

         The accompanying condensed 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. The Company's continuation as a going concern is dependent on attaining
profitable operations, obtaining additional outside financing and/or
restructuring its debt obligations. The Company has funded losses from
operations in the current year primarily from the issuance of debt 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.

         As discussed in Note 3, 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 designed for use in combat search
and rescue roles. This contract has been a significant source of revenues for
the year ended June 30, 2006. The Company believes that its share of revenues
from phase one of the contract, currently estimated at approximately $4.3
million ($2,350,000 recognized through June 30, 2006), 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 and will continue to
be required to add personnel, expand facilities and make other significant
purchases to meet its obligations under this contract, which may result in a low
or negative profit margin realized on the DARPA contract.

         Operating revenues from the DARPA contract and from the sale of
SparrowHawk kit gyroplanes, the Company's primary source of operating revenues
prior to the award of the DARPA contract, are not currently sufficient, nor will
they be sufficient in the near future, to cover operating expenses. SparrowHawk
kit sales, in particular, will not be sufficient to cover related operating
expenses for the following reasons:

         o    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.

         o    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 2007, although there is
              no assurance that the Company will be successful in reducing the
              negative gross margin.

         o    The Company continues to incur significant research and
              development expenditures related to improvements to the design of
              the SparrowHawk kit gyroplane, 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-15
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         o    Marketing and sales efforts continue, but the number of
              SparrowHawk kits sold is below expectations, due in part to lack
              of funding to undertake 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 SparrowHawk gyroplane aircraft, including
law enforcement agencies both in the United States and overseas using the
SparrowHawk 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 June 30, 2006, 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 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 to $60 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
gyroplane. These discussions are ongoing, but the Company is not in a position
to conclude how likely a favorable outcome to these opportunities is. 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 operations until FAA certification
is obtained and sales of Hawk 4 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 2006.

         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.

         As of June 30, 2006, the Company had Series B Preferred Stock
obligations totaling $46,221,000 included in current liabilities (see Note 13).
The projected total obligation of the Series B 15% Preferred Stock at January 1,
2007, the current maturity date, including a $10.7 million obligation to issue
new shares of Series B Preferred Stock, is approximately $54.6 million. 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 an extension as it has accomplished in the
past. There is no assurance that the Company will be successful in these
endeavors.

         The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.


                                      F-16
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)

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 designed for use in combat search and rescue roles. Phase One
of this potential multi year four phase program begins with a fifteen month $6.4
million award to develop the preliminary design and perform key technology
demonstrations. The Company estimates its share of Phase One payments will
approximate $4.3 million, with the remaining portion to be 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. 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, will be deferred
and expensed to cost of sales as the contract revenue for the milestone is
recognized. Through June 30, 2006, the Company completed the first three
milestones of Phase One of the DARPA contract and recognized revenues of
$2,350,000. Total costs of the first three milestones of approximately
$2,052,000, including the Company's allocation of overhead costs, were expensed
to cost of sales during the year ended June 30, 2006. Cost of the contract
related to other milestones of approximately $127,000 were deferred and included
in work-in-process inventories at June 30, 2006.

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 and preferred stock 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, 2006, the Company had issued 5,350,000 shares of common stock as
collateral.


                                      F-17
<PAGE>

                          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, 2006 resulted
primarily from cash advances to employees, and include four unsecured notes
receivable totaling $65,000 from employees and former employees, which bear
interest at 8% to 12% per annum.

Note 6:  Detail of Certain Balance Sheet Accounts

         Inventories consist of the following:

         Raw materials and parts                               $      209,000
         Work-in-progress                                             240,000
                                                               ---------------

                                                               $      449,000
                                                               ===============

         Property and equipment consists of the following:

         Equipment and tools                                   $      839,000
         Computer equipment and software                              443,000
         Aircraft                                                     300,000
         Vehicles                                                      68,000
         Leasehold improvements                                       108,000
         Furniture                                                     59,000
                                                               ---------------

                                                                    1,817,000
         Accumulated depreciation and amortization                 (1,304,000)
                                                               ---------------

                                                               $      513,000
                                                               ===============

         Accounts payable consist of the following:

         Trade accounts payable                                $      485,000
         Related party payables                                     1,507,000
                                                               ---------------

                                                               $    1,992,000
                                                               ===============

         Deferred revenue consists of the following:

         Related party customer advance payments               $      274,000
         Customer advance payments                                    356,000
                                                               ---------------

                                                               $      630,000
                                                               ===============

         Dealer deposits consist of the following:

         Related party dealer deposits                         $    1,741,000
         Dealer deposits                                              404,000
                                                               ---------------

                                                               $    2,145,000
                                                               ===============


                                      F-18
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         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                        $      693,000
         Related party interest                                     3,758,000
         Interest                                                     479,000
         Consulting fees                                               95,000
         Finders' compensation                                         32,000
         Royalties to related parties (Note 20)                        19,000
         Other                                                         72,000
                                                               --------------

         Total                                                 $    5,148,000
                                                               ==============

         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                                 $    3,555,000
         Accrued payroll taxes on deferred compensation               147,000
         Accrued interest on deferred compensation                    319,000
                                                               --------------

         Total                                                 $    4,021,000
                                                               ==============

         The deferred compensation is payable to twelve officers and directors
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 15% Preferred Stock preclude the Company from making any deferred
compensation payments until all outstanding amounts due relating to the Series B
15% Preferred Stock have been paid in full. Absent payment restrictions related
to outstanding Series B 15% 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, 2006, the Board of Directors has not


                                      F-19
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


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, 2006 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 2006     $      314,000

         Unsecured note payable to a vendor with interest
            at 12%, in default as of June 2006                        272,000

         Unsecured note payable to an individual with
            interest at 12%, due on demand                             89,000

         Unsecured note payable to a company with interest
            at 10.5%, due on demand                                    10,000

         Current portion of long-term debt (Note 10)                    4,000
                                                               ---------------

                                                               $      689,000
                                                               ===============

         Short-term notes payable at June 30, 2006 include notes payable to
vendors totaling $586,000 that are technically in default. In addition, the
Company is delinquent in making payments of accrued interest payable of $397,000
on this debt at June 30, 2006. 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.

         One of these note holders may choose to convert outstanding principal
and interest balances to common stock of the Company at a price of $0.20 per
share. At June 30, 2006, $115,000 of principal and interest is convertible into
576,906 shares of the Company's common stock (see Note 13).


                                      F-20
<PAGE>

                          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:

         Unsecured notes payable to stockholders with
            interest at 18%, due on demand or within twelve
            months                                             $    3,581,000

         Unsecured note payable to stockholder with
            interest at 16%, due on demand                             50,000

         Unsecured notes payable to stockholders with
            interest at 12%, due on demand or within twelve
            months                                                  1,712,000

         Unsecured notes payable to a stockholder with
            interest at 36%, due October 2006                         300,000

         Unsecured note payable to a stockholder with
            interest at 25%, in default as of June 30, 2005            21,000

         Unsecured note payable to stockholder with
            interest at 12.5%, due December 2006                      100,000

         Unsecured notes payable to stockholders with
            interest at 8%, due on demand                             606,000

         Unsecured note payable to stockholder with
            interest at 5%, due February 2007                         175,000

         Unsecured note payable to an entity owned by
            certain members of senior management, with
            interest at 12%, due on demand                            180,000

         Note payable to a stockholder with interest at
            18%, due on demand, secured by research and
            development parts                                          50,000

         Notes payable to stockholders with interest at
            12%, due on demand, secured by common stock               325,000

         Unsecured note payable to a stockholder with
            interest at 12%, monthly payments of principal
            and interest of $11,000 beginning January
            2005 through December 2006, in default as of
            June 2005                                                 224,000

         Notes payable to stockholders with interest
            at 10%, monthly payments of principal and
            interest ranging from $2,000 to $5,000
            through September to November 2006, secured
            by common stock, in default as of June 2005               198,000

         Other unsecured note payable                                  10,000
                                                               ----------------

                                                               $    7,532,000
                                                               ===============


                                      F-21
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         Related party notes payable at June 30, 2006 include notes payable
totaling $1,236,000 that are technically in default. In addition, the Company is
delinquent in making payments of accrued interest payable of $385,000 on this
related party debt at June 30, 2006.

         Certain shareholder related party note holders may choose to convert
outstanding principal and interest balances to common stock of the Company. The
prices per share range from $0.20 per share to $1.25 per share. At June 30,
2006, $9,605,000 of principal and interest is convertible into 29,037,019 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 $523,000 (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                                               $       97,000

         Capital lease obligations (Note 11)                           12,000
                                                               --------------

                                                                      109,000
         Less current portion                                          (4,000)
                                                               --------------

         Total                                                 $      105,000
                                                               ==============

         Related party long-term debt is comprised of the following:

         Unsecured note payable to a stockholder with
            interest at 18%, due May 2009                      $      745,000

         Unsecured note payable to a stockholder with
            interest at 12%, due February 2010                        186,000
                                                               ---------------

         Total                                                 $      931,000
                                                               ===============



                                      F-22
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         The stockholders may choose to convert outstanding principal and
interest balances to common stock at $0.20 per share. At June 30, 2006, $984,000
of principal and interest is convertible into 4,922,362 shares of the Company's
common stock (see Note 13).

         Future maturities of long-term debt are as follows:

         Years Ending June 30:

                  2007                                         $        4,000
                  2008                                                  5,000
                  2009                                                750,000
                  2010                                                191,000
                  2010                                                 90,000
                                                               -----------------

                                                                    1,040,000
         Less current portion                                           4,000
                                                               -----------------

         Long-term portion                                     $    1,036,000
                                                               =================

Note 11:  Capital Lease Obligations

         The Company has entered into capital lease agreements with a financial
institution for office equipment. Assets held under capital lease included in
property and equipment at June 30, 2006 are as follows:

         Office equipment                                      $       13,000
         Accumulated amortization                                      (1,000)
                                                               ---------------

                                                               $       12,000
                                                               ===============

         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:
                2007                                           $        3,000
                2008                                                    3,000
                2009                                                    3,000
                2010                                                    4,000
                2011                                                    3,000
                                                               ---------------
                                                                       16,000
                Less amount representing interest                      (4,000)
                                                               --------------

         Present value of minimum lease payments (Note 10)     $       12,000
                                                               ==============

                                      F-23
<PAGE>

                          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, 2006, the Board of
Directors has set rights, terms and preferences of Series B and Series A
Preferred Stock for issue.


                                      F-24
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)

         Series B 15% Preferred Stock

         At June 30, 2006, there were 40,783 shares of Series B 15% Cumulative
Redeemable Non-Voting Preferred Stock (the "Series B 15% Preferred Stock")
outstanding. The rights, terms, and preferences of the outstanding preferred
shares, as amended, are as follows:

         o    The shares have no voting rights other than those voting rights
              provided under applicable laws.

         o    Each share's original Stated Value, upon which unpaid dividends
              may accumulate, is $1,000.

         o    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.

         o    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.

         o    The redemption price of the shares must be paid by the Company in
              cash.

         o    The Company may incur indebtedness of up to $18.5 million without
              consent of the holders of the shares.

         o    The Company is required to give notice to holders of the shares
              prior to making any capital expenditures in excess of $300,000.

         o    The maturity date of the shares is defined as the first to occur
              of (a) January 1, 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.

         o    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.

         In October 2004, the Company issued 67 shares of its Series B 15%
Preferred Stock in payment of a related party note payable of $40,000 and
accrued interest payable of $27,000.

         On October 11, 2005, the holders of the Series B 15% Preferred Stock
("Series B Holders") extended the redemption date of the Series B 15% Preferred
Stock from October 31, 2005 to January 1, 2007. The extension required the
following consideration to be paid to the Series B Holders:

         o    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.



                                      F-25
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         o    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.

         o    The issuance of additional shares of Series B 15% 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 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 15% 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 15% Preferred Stock will be classified
through its redemption as a troubled debt restructuring.

         Included in the periodic interest expense on the Series B 15% Preferred
Stock is the accretion of the $10,700,000 obligation to issue 10,700 shares of
additional Series B 15% Preferred Stock on January 1, 2007, calculated on the
interest method. The cumulative accretion of this obligation is recorded as a
current liability of $5,438,000 in the Company's condensed consolidated balance
sheet as of June 30, 2006.

         As a result of amendments to the features of the Series B 15% 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 15% Preferred Stock in advance of the January 1, 2007 maturity
date. At June 30, 2006, the recorded value of the Series B 15% Preferred Stock
was $40,783,000, which was recorded as a current liability.

         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 15% 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.

                                      F-26
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         Series A Convertible Preferred Stock

         Voting control by one of the Company's founders, David Groen, had
existed from November 7, 2000 by means of shares of Series A Preferred Stock
issued to him in exchange for a note receivable. The note receivable matured in
November 2003, and Mr. Groen surrendered all Series A Preferred Stock in
cancellation of the note. The Board of Directors and management of the Company
believed that the continuity of voting control by one or both of the founders of
the Company was crucial to the ongoing operations and growth of the Company.

         On October 8, 2004, the Company amended and restated its Articles of
Incorporation to change the rights and terms of its Series A Convertible
Preferred Stock. On October 8, 2004, the Board of Directors approved the
issuance of 1,400,000 shares of Series A Convertible Preferred Stock to the
Company's founders: 900,000 shares to David Groen, President and Chief Executive
Officer, and 500,000 shares to Jay Groen, Chairman of the Board of Directors, at
a purchase price of $0.05 per share, or total consideration of $70,000. The
amended rights, terms and preferences of the Series A Convertible Preferred
Stock are summarized as follows:

         o    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.

         o    The voting rights expire seven years from the date of issue.

         o    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.

         o    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.

         o    Upon the death or permanent incapacity of a holder of Series A
              Convertible Preferred Stock, all shares held by such holder will
              be divided between the then existing members of the Company's
              Board of Directors on a pro-rata basis, based upon the number of
              months they have served on the Board, with the holder's
              survivor(s) (if more than one person, treated collectively as one
              person) being included in the same pro-rata basis, crediting the
              survivor's "months served" as those of the deceased or permanently
              mentally incapacitated holder. 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-27
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         o    The shares are non-transferable, non-assignable, and have no
              dividend or liquidation rights.

         The value of $.05 per share was assigned to the Series A Preferred
Stock by the Company's Board of Directors after evaluating several factors,
including those listed above relating to limitations on the transferability of
the shares, the limited life of the voting rights, the significant revenue
milestones to be met before conversion to common stock can occur, and the
absence of dividend or liquidation rights.

Note 14:  Common Stock

         During the year ended June 30, 2006, the Company issued a total of
18,934,537 shares of its restricted common stock, primarily to accredited
investors in transactions exempt from registration. These shares were issued at
prices of $0.20 to $0.35 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: 10,449,417 shares for cash of
$2,236,000; 861,171 shares in payment of accrued expenses of $179,000; 1,059,533
shares in payment of interest expense of $190,000; 184,907 shares in reduction
of deferred revenue of $37,000; 1,146,213 shares in payment of debt of $234,000;
530,093 shares to purchase property and equipment of $106,000; 5,000 shares in
payment of a customer refund of $1,000; 5,004,009 shares in settlement of a put
option liability of $1,560,000; 505,980 shares in payment of the Company's
matching contribution to its 401(k) plan of $99,000; and 338,214 shares in
payment of services of $71,000. In addition, total finders' compensation on the
sale of common stock totaled $129,000. The Company did not use underwriters in
the sale or placement of these unregistered shares of common stock.

         During the year ended June 30, 2006, the Company issued options to
purchase a total of 25,050,408 shares of common stock: 16,822,000 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; 1,528,408 options as a loan origination fee or interest to a lenders with
exercise prices of $0.20 to $0.25 per share exercisable for a period of 1 to 3
years; 1,000,000 options to a vendor for services with an exercise price of
$0.50 per share exercisable for a period of three years; and 5,700,000 options
to employees with an exercise price of $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).

         The Company estimated the value of the 1,528,408 options issued to the
lenders at $104,000 using the Black-Scholes option pricing model, and charged
this amount to interest expense. The Company estimated the value of the
1,000,000 options issued to a vendor for services at $30,000 using the
Black-Scholes option pricing model, and charged this amount to general and
administrative expense. The Company also issued options to purchase a total of
1,000,000 shares of common stock for cash of $44,000, with an exercise price of
$0.20 per share for a period of one year. In addition, the Company reduced
interest expense by $48,000 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.

         The Company cancelled warrants to purchase 2.5 million shares of the
Company's common stock at $0.30 per share issued to the Series B Holders and
issued the Series B Holders warrants to purchase 6.85 million shares of the

                                      F-28
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


Company's common stock exercisable through January 1, 2009 at an exercise price
of $0.30 per share. The Company recorded interest expense estimated at $924,000
using the Black-Scholes option pricing model during the year ended June 30, 2006
attributable to the net additional warrants issued.

         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, 2006, 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 8, 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.

Note 15:  Stock Option Plan

         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.

                                      F-29
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         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.

         A summary of the Company's stock options and warrants is as follows:

                                             Number of Options  Weighted Average
         Year Ended June 30, 2005              and Warrants      Exercise Price
                                            ------------------------------------
         Outstanding at Beginning of Year         49,985,504          $ 0.45
         Granted                                  44,889,921            0.37
         Exercised                                         -
         Canceled                                 (6,875,000)           0.75
         Expired                                  (9,784,504)           0.25
                                            ------------------------------------

         Outstanding at End of Year               78,215,921          $ 0.40
                                            ====================================

         Exercisable at End of Year               54,242,589          $ 0.37
                                            ====================================

                                             Number of Options  Weighted Average
         Year Ended June 30, 2006              and Warrants      Exercise Price
                                            ------------------------------------
         Outstanding at Beginning of Year         78,215,921          $ 0.40
         Granted                                  31,900,408            0.26
         Exercised                                  (246,250)           0.20
         Canceled                                 (3,500,000)           0.36
         Expired                                  (7,358,577)           0.26
                                            ------------------------------------

         Outstanding at End of Year               99,011,502          $ 0.37
                                            ====================================

         Exercisable at End of Year               78,545,670          $ 0.36
                                            ====================================

         Of the total options and warrants outstanding, 38,725,000 and
34,175,000 options were granted under the Plan at June 30, 2006 and 2005,
respectively.

         The following table summarizes information about stock options and
warrants outstanding at June 30, 2006:

                                      F-30
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)

<TABLE>
<CAPTION>

                           Options and Warrants Outstanding                     Options and Warrants Exercisable
         -------------------------------------------------------------------------------------------------------
                                                                Weighted
                                                                 Average
                                                Weighted        Remaining
         Range of Exercise      Number          Average     Contractual Life        Number      Weighted Average
               Prices         Outstanding    Exercise Price      (Years)         Exercisable    Exercise Price
         -------------------------------------------------------------------------------------------------------
             <S>                  <C>              <C>               <C>         <C>                  <C>
             $  0.15 - 0.20       21,591,908       $    0.18         1.07        20,591,908           $    0.18
                0.25 - 0.30       57,747,344            0.26         2.70        42,501,512                0.26
                0.35 - 0.63        3,697,250            0.51         0.87         3,613,916                0.52
                1.00 - 1.10       15,975,000            1.01         2.32        11,838,334                1.01
         -------------------------------------------------------------------------------------------------------

              $ 0.15 - 1.10       99,011,502        $   0.37         2.22        78,545,670           $    0.36
         =======================================================================================================
</TABLE>

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,
                                                --------------------------------
                                                      2006               2005
                                                --------------------------------
         Income tax benefit at
           federal statutory rate               $    7,832,000    $   5,208,000
         Series B preferred stock interest
           expense                                  (5,513,000)      (3,121,000)
         Research and
           development credit                          180,000           96,000
         Other                                          (6,000)        (251,000)
         Change in valuation
           allowance                                (2,493,000)      (1,932,000)
                                                --------------------------------

                                                $            -    $           -
                                                ================================

         Deferred tax assets (liabilities) as of June 30, 2006 are as follows:

         Net operating loss carryforwards       $  21,998,000
         Research and development credit
           carryforward                             2,066,000
         Accrued interest payable                   1,465,000
         Accrued payroll and related                1,663,000
         Deferred revenue                             246,000
         Depreciation                                 (82,000)
         Valuation allowance                      (27,356,000)
                                                --------------

                                                $           -
                                                ==============

         At June 30, 2006, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $56 million which
will begin to expire in 2007. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect at the time the net


                                      F-31
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



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, 2006, the Company:

         o    Increased related party notes receivable and increased accrued
              expenses payable to related parties by $16,000.

         o    Decreased related party notes receivable through reduction of
              accrued expenses payable to related parties of $14,000.

         o    Increased related party accounts and notes receivable and
              decreased accounts receivable by $20,000 for the issuance of an
              employee note receivable.

         o    Issued common stock in payment of related party notes payable of
              $234,000.

         o    Increased related party notes payable and decreased accounts
              payable by $106,000 for the transfer of accounts payable to debt.

         o    Issued common stock to acquire property and equipment of $106,000.

         o    Issued common stock in payment of accrued expenses of $179,000.

         o    Issued common stock in payment of put option liability of
              $1,560,000.

         o    Issued common stock in repayment of deferred revenue of $37,000.

         o    Increased accrued expenses and decreased common stock by $129,000
              for accrued finders' compensation.

         o    Issued common stock in payment of a customer refund of $1,000.

         o    Issued debt to acquire property and equipment of $89,000.


                                      F-32
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         o    Increased debt and decreased accrued expenses by $24,000 for the
              reclassification of interest payable.

         o    Increased accrued expenses and decreased accounts payable by
              $39,000 for the reclassification of accounts payable.

         During the year ended June 30, 2005, the Company:

         o    Decreased related party notes receivable through reduction of
              accrued expenses payable to related parties of $25,000.

         o    Issued debt to acquire property and equipment of $7,000.

         o    Issued common stock in payment of accounts payable of $57,000.

         o    Issued common stock in payment of accrued expenses of $71,000.

         o    Increased accrued expenses and decreased common stock by $111,000
              for accrued finders' compensation.

         o    Decreased accrued expenses and increased Series A convertible
              preferred stock by $70,000 for the issuance of 1,400,000 shares of
              Series A convertible preferred stock.

         o    Decreased accrued expenses by $27,000, decreased debt by $40,000
              and increased Series B preferred stock by $67,000 for the
              conversion of debt and accrued interest payable into 67 shares of
              Series B preferred stock.

         o    Increased accrued expenses and decreased debt by $14,000 for the
              reclassification of interest payable.

         o    Issued common stock in return of deposits of $13,000.

         o    Decreased deferred revenue through the issuance of debt of
              $28,000.

         Actual cash paid for interest was $90,000 and $162,000 in fiscal years
2006 and 2005, respectively.


                                      F-33
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



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

                  2007                                         $      147,000
                  2008                                                122,000
                                                               --------------

                                                               $      269,000
                                                               --------------

         Rental expense for noncancellable operating leases was $262,000 and
$236,000 for the years ended June 30, 2006 and 2005, 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 2006, and based on contributions by
employees during calendar year 2005, the Company committed to make a matching
contribution to the Plan of $124,000 in the form of shares of its common stock.
The Company partially funded this contribution by issuing 505,980 shares of its
common stock valued at $99,000, and has recorded a liability of $25,000 for the
issuance of additional shares as of June 30, 2006. In fiscal year 2005, and
based on contributions by employees during calendar year 2004, the Company made
a matching contribution to the Plan in the form of 440,990 shares of its common
stock valued at $88,000. Shares issued under the Plan are "restricted" as
defined under the Securities and Exchange Commission Rule 144.

Note 20:  Commitments and Contingencies

         The Company has entered into employment agreements with certain
officers of the Company. The employment agreements can be terminated at any
time. Upon termination, the Company retains all rights to the gyroplane and the
related technology and the officers have a covenant not to compete for a period
of three years.

         Royalty payments of 1% of the gross sales price of gyroplanes are to be
paid to the Company's founders, David and Jay Groen. Through June 30, 2006,
royalties payable totaled $9,500 to each of these individuals, which amounts are
included in cost of sales in the consolidated statement of operations for the
years ended June 30, 2006 and 2005.

         The Company has royalty agreements with two holders of notes payable
totaling $300,000 which entitle the note holders to receive royalties on the

                                      F-34
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


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 (Unaudited)

         In July 2007, the Company received the $1,200,000 payment for Milestone
Three of Phase One of the DARPA contract. This amount was included in accounts
receivable at June 30, 2006.

         During the three months ended September 30, 2006, the Company received
cash proceeds from the sale of its restricted common stock of $50,000 and from
new short-term debt to related parties (net of repayments) of $778,000.





                                      F-35







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