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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, 2005

                  [   ]    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
    incorporation or organization)                          Identification No.)

                        2640 W. California Ave., Suite A
                         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 ]

         The issuer's revenues for its most recent fiscal year were $864,000.

         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 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 $21,699,000 as of September 15, 2005.

         The number of shares outstanding of the Issuer's no par value Common
Stock as of September 15, 2005 was 133,902,136.

                       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                                     14
    Item 3.    Legal Proceedings                                           14
    Item 4.    Submission of Matters to a Vote of Security Holders         15

Part II
    Item 5.    Market for Common Equity and Related Stockholder
                  Matters                                                  16
    Item 6.    Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                      18
    Item 7.    Financial Statements                                        27
    Item 8.    Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure                      28
    Item 8A.   Controls and Procedures                                     28
    Item 8B.   Other Information                                           29

Part III
    Item 9.    Directors, Executive Officers, Promoters and Control
               Persons; Compliance with Section 16(a) of the
                  Exchange Act                                             30
    Item 10.   Executive Compensation                                      34
    Item 11.   Security Ownership of Certain Beneficial Owners and
                  Management                                               37
    Item 12.   Certain Relationships and Related Transactions              38
    Item 13.   Exhibits and Reports on Form 8-K                            40
    Item 14.   Principal Accountant Fees and Services                      41

Signatures                                                                 42


<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 next 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-seat gyroplane, the Hawk 4, intended for Federal Aviation
Administration ("FAA") certification for a wide range of commercial and public
use applications.

         During the first quarter of fiscal year 2003, the Company suspended its
flight testing of the Hawk 4 due to lack of financial resources, and 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 in its immediate priorities 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. Consistent with this


--------------
(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 Item 1.



                                       1
<PAGE>


objective, the Company has been presenting 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 for Public Use applications, particularly
Homeland Defense, and is seeking orders within the Federal 2006 Budget. The
Company is also currently in discussions with foreign investors relating to
potential funding of Hawk 4 certification. There is no assurance that the
Company will reach an acceptable agreement with these foreign entities, and
therefore no assurance that the Company will be able to soon fund the completion
of the Hawk 4 business plan or be able to sell its gyroplanes to government
entities.

         The Company has also designed, and now manufactures and sells
SparrowHawk gyroplane kits for the home-built market. In addition, the Company
developed and sells modification kits designed to improve in-flight stability
and safety for another manufacturer's kit gyroplane. Through June 30, 2005, over
60 initial orders for SparrowHawk gyroplane kits have been received, with 39
complete kits delivered.

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), powered in flight
only by the onrushing air, much like a windmill, will not stall, however,
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 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 be able 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 is inherently safer, simpler, quieter, 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



------------------
(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.



                                       2
<PAGE>

ground effect, whenever possible, will avoid hovering because of the danger
inherent in doing so. In a low level surveillance roll, such as law enforcement,
border patrol, traffic control, etc., proper procedure for all rotorcraft is to
circle in a slow orbit, something the Hawk 4 and SparrowHawk can do efficiently
and safely.

         In summary, gyroplanes in flight, being in constant autorotation, are
much safer in low and slow flight than either airplanes or helicopters.
Airplanes flying low and slow risk a stall/spin crash, which cannot happen in a
gyroplane. If power fails in a gyroplane, the autorotation continues and the
aircraft can be guided softly to the ground from any altitude. When power fails
in a helicopter, the pilot must convert from powered flight to autorotative
flight to keep the rotor blades turning. This is an unforgiving process,
requiring 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, or beneath a line 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 by torque from the main
engine located in the aircraft fuselage, a gyrodyne 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 Cierva, in
America, Harold Pitcairn and his colleague Walter Kellett, under license from
Cierva, designed and built a series of gyroplanes, 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.

         By the early 1940s the private aircraft market had collapsed in the
Great Depression and the build up toward Word War II, when 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.

         The commitment to the helicopter effectively ended government funding
for technical development of the gyroplane. After World War II, however, 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
gyroplanes performed well and the companies failed. More significantly, during
the 1950s, Igor Benson, a colleague of Sikorsky, developed a home-built
open-frame gyroplane kit for amateurs, which he called the "gyrocopter."

                                       3
<PAGE>

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.
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 and low operating cost characteristics of the aircraft. The
Company has flown the Hawk 4 in several hundred incident-free sorties, 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, but
without the requirement for a runway for take-off or landing. Potential
customers include the following:

         1.   Law enforcement (police, sheriff, border patrol, customs, and drug
              interdiction).
         2.   Public service agencies (fire patrol, medical transport, wildlife
              and land management).
         3.   Military (courier, armed surveillance, VIP transport, forward
              artillery control, ground attack, unmanned aerial vehicle).
         4.   Commercial (oil, gas, and power line patrol and inspection, land
              survey, aerial photography, crop spraying, herd management, air
              taxi service, corporate transport, and flight training).
         5.   Private (commuting, sport flying, training).



                                       4
<PAGE>

         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 those of 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 for 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 the company concerned 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. However, during fiscal year 2005, the Company was advised that
independent investors in that country, 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 continues detailed discussions on the subject into fiscal year 2006.
While the Company can make no assurance that these preliminary discussions will
lead to such funding, the Company is convinced that 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.

         The Company recently announced that in exchange for a minimum equity
investment of $1 million, the Company has granted a Chinese investment group a
six-month period in which to bring to the Company a funding/partnering package
sufficient to fund the completion of the Hawk 4 Gyroplane program up through FAA
certification and production. In addition, during this same period, the Company
has granted this investment group the right to bring a funding/partnering
package for the development of larger commercial GBA GyroLiner gyrodynes of the
Company's design. Since then, the Company has hired the head of that group, Mr.
Jason Chen, as Vice President of Business Development in Asia, who is now
leading the Company's efforts in Asia. This essentially brought "in-house" the
Company's relationship to the investment group, thereby removing the middle
layer between the Company and government and commercial interests in China, and
permitting the six-month window for investment from this group to expire without
losing the contemplated opportunities. This group has nearly doubled its
investment in the Company since reaching its first million dollar mark, and
continues to invest in the Company.

         As a result of this agreement and the hiring of Mr. Chen, executive
officers and employees of the Company have traveled to China to meet with
government officials and aerospace executives. These high level meetings were
arranged by this investment group, executives of which accompanied Company


                                       5
<PAGE>

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. 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 believes that China represents a 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 China's burgeoning economy.

SparrowHawk Gyroplane

         In fiscal year 2003, the Company noted that the general aviation
kit-plane market still lacked the safe, economical, easy-to-fly gyroplane that
it originally intended to produce and that, in the opinion of management, this
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
believes these gyroplanes have not been designed and manufactured to aerospace
standards, thereby incorporating a full understanding of gyroplane dynamics.
Moreover, some have suffered accident and fatality statistics that do 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 AAI in December 2002. AAI was tasked with
developing a new small gyroplane designed to aerospace standards that would set
a new standard for safety in that class of aircraft. 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 then 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 its two-seat piston-powered
gyroplane 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. This
resulted in the Company recording initial revenues from this aircraft in the
fourth quarter of fiscal year 2004. Effective November 1, 2004, the Company
merged AAI into GBA USA. GBA USA will continue the manufacturing, sales and
marketing, and customer support functions of the SparrowHawk.

         Through June 30, 2005, 93 orders for the SparrowHawk and modification
kits have been received (66 for the complete SparrowHawk kit and 27 for the
modification kit). By June 30, 2005, 39 complete kits had been delivered and 13
SparrowHawk customers had flown their aircraft. Through June 30, 2005, 27
dealerships have been established, 21 in the United States and 6
internationally.

                                       6
<PAGE>

         During fiscal year 2005, as expected, the FAA announced that it was
introducing a new category of aircraft, called Light Sport Aircraft (LSA), that
will permit 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 (ELSA). The ELSA category for
gyroplanes will permit gyroplane manufacturers for three years to produce and
sell 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 product designs will be well suited to
this market and be capable of conforming to the new regulations.

         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.

         The Company's discussions with 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 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.

         As a result of the new FAA regulations and the opportunities for
government acquisition of fully assembled aircraft, the SparrowHawk market 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.

Future Company Gyrodyne Aircraft

         The Company's technology is fully scalable and readily adaptable to the
gyroplane's derivative form, the gyrodyne. As detailed later, 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


                                       7
<PAGE>

substantial payloads in gyrodyne mode and covering substantial range as a
gyroplane. The British Fairey Rotodyne demonstrated the technical validity of
this concept in the 1960's. With the application of modern technology developed
by the Company or 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. The
Company's concept aircraft, which it calls the GBA GyroLifter, incorporates a
rotary wing on an existing fixed-wing aircraft and has received wide-ranging
coverage in the aerospace press.

         The gyrodyne technology developed for the GyroLifter also has direct
application to the design of short-range vertical take off and landing ("VTOL")
commercial airliners. 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.

Potential Government Contracts

         In recognition of the potential of both its gyroplane and gyrodyne
technologies contributing to the military and security needs of the United
States Government, the Company has responded to requests for proposals from
several agencies and military commands. These submissions have ranged from small
UAV gyroplanes to large VTOL freighters. Several applications have been made in
partnership with either a major aerospace company or an academic institution
with preeminent aerospace credentials.

         While the Company has not yet been successful to date in achieving an
award from its proposals, the proposals that it 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 remains optimistic that the team that it leads will succeed in achieving
a specific and very significant research grant to develop its technology to meet
an important government objective that other technologies are unlikely to be
able to achieve. Successful performance under such a grant could lead to a
substantial contract for production aircraft following the research and
development program.

         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. The Company also
continues to offer its SparrowHawk and Hawk 4 aircraft to government agencies
for patrol and surveillance duties under wet lease, that is including crew and
maintenance.


                                       8
<PAGE>

Market

         Management believes that it is in the national interest that the
Company's unique gyroplane technology is developed. The terrorist actions of
September 11, 2001 and later have triggered important new opportunities to use
the Company's technology in new counter-terrorism markets. The new circumstance
of our country, as well as other countries, is requiring sharply increased
levels of vigilance by many branches of government to protect critical national
assets against terrorist attack. Public use regulations would permit the Hawk 4
to be utilized as a highly efficient, safe, and inexpensive means of providing
needed surveillance by government agencies for such roles. These include border
patrol as well as protection of pipelines, nuclear power plants and key
transportation infrastructures for which the Hawk 4 is particularly well suited,
performing such missions far more effectively, and often at far lower cost, than
other air or ground vehicles.

         The attempted shooting down of an Israeli commercial aircraft
approaching 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 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 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, as well as
representatives of airport authorities, to present the case for the Hawk 4 in
this role.

         The Company is also seeking orders from foreign governments with
intensive border patrol needs. Since the maintainability of the Hawk 4 Gyroplane
enables it to excel in operating where infrastructure is relatively undeveloped,
the potential for sales in foreign countries is great. In the expectation of
such sales, the Company has evaluated the efficiency of assembling Hawk 4
Gyroplanes in strategic overseas locations, and has had discussions with
different foreign entities on possible locations.

         This included the offering of the Hawk 4 to the agency responsible for
security for the 2002 Winter Olympic Games held in Utah, for whom the Hawk 4
Gyroplane, fitted with infrared camera and other gear, performed effectively and
flawlessly. Following this success, the Company was one of 50 companies from
around the nation that were selected from among hundreds of applicants to
display products designed to strengthen homeland security at the Small Business
Homeland Defense Expo. Through these and other demonstrations, the Company has
received positive response from potential law enforcement agency users.



                                       9
<PAGE>

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
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;

                                       10
<PAGE>

              (ii) owned by the United States Government and operated by any
         person for purposes related to crew training, equipment development, or
         demonstration; or

              (iii) owned and operated (except for commercial purposes), or
         exclusively leased for at least 90 continuous days, by a government
         (except the United States Government), including a State, the District
         of Columbia, or a territory or possession of the United States, or
         political subdivision of that government;

         It does not include a government-owned aircraft:

              (i) transporting property for commercial purposes; or

              (ii) transporting passengers other than -

                     (I)   transporting (for other than commercial purposes)
                           crewmembers or other persons aboard the aircraft
                           whose presence is required to perform, or is
                           associated with the performance of, a governmental
                           function such as firefighting, search and rescue, law
                           enforcement, aeronautical research, or biological or
                           geological resource management; or

                     (II)  transporting (for other than commercial purposes)
                           persons aboard the aircraft if the aircraft is
                           operated by the Armed Forces or an intelligence
                           agency of the United States.

              An aircraft described in the preceding sentence shall,
         notwithstanding any limitation relating to use of the aircraft for
         commercial purposes, be considered to be a public aircraft for the
         purposes of this part without regard to whether the aircraft is
         operated by a unit of government on behalf of another unit of
         government, pursuant to a cost reimbursement agreement between such
         units of government, if the unit of government on whose behalf the
         operation is conducted certifies to the Administrator of the Federal
         Aviation Administration that the operation was necessary to respond to
         a significant and imminent threat to life or property (including
         natural resources) and that no service by a private operator was
         reasonably available to meet the threat.

         Military Use: Aircraft sold to the US military are not required to meet
FAA regulations, but must conform to military specifications that serve a
similar purpose. The Company has not attempted to sell its Hawk 4 to the United
States Armed Forces and is thus not familiar with the detailed requirements that
would have to be met. It believes, however, that should a military application
for the Hawk 4 be needed by the US Armed Forces, a version of the Hawk 4 could
be designed to meet military specifications.

GBA SparrowHawk Gyroplanes

         Homebuilt Kit Aircraft: While it might be possible to design and
manufacture a gyroplane in the size and performance class of the SparrowHawk to
meet the FAA FAR Parts 21 and 27 regulations that the Hawk 4 is designed to
meet, the Company has not chosen to do this. The Company's entry to the
SparrowHawk market has been through the alternative path of producing homebuilt
aircraft kits for which there is an established market. Homebuilt aircraft kits
are permitted by the FAA under its FAR Part 21 regulations governing the
certification and operation of amateur-built aircraft. Such kits, however,
require that the majority portion of the kit be built by an amateur (the "51%
rule"), limiting the manufacturer's portion to 49%.

                                       11
<PAGE>

         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 ("ELSA"). 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 ELSA. ELSA
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 ELSA 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 2006 that meet the ELSA requirements. It has also begun the process
of modifying its design and manufacturing procedures so that it can meet the
SLSA standards. It will then manufacture and sell ELSA aircraft to SLSA
standards with the expectation that by January 31, 2008, the FAA will have had
the opportunity to review sufficient gyroplane ELSA 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 described above.

Test Aircraft Flown under Government Contract

         Any aircraft developed and flown under government contracts that the
Company may be granted will be 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, 2005, 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.

                                       12
<PAGE>

         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 intends that it will
sell its kits primarily through this network. Through June 30, 2005, 27
dealerships have been established, 21 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
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.

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
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.

         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 tilt rotors in both two and four rotor
configurations, proposed by Bell and Boeing, compound tandem helicopters with

                                       13
<PAGE>

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.

         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.

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.

Item 2.   Description of Property

         The Company leases its development/manufacturing facility located at
2640 W. California Avenue, Suite A, Salt Lake City, UT 84104-4593 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 takes place at Buckeye, as well as
machining of certain parts and assembly of SparrowHawk products.

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.

                                       14
<PAGE>


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 2005.


                                       15
<PAGE>

                                     PART II


Item 5.   Market for Common Equity and Related Stockholder Matters

         (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

                  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


                  2004     First Quarter                 $0.25            $0.12
                           Second Quarter                $0.25            $0.14
                           Third Quarter                 $0.31            $0.20
                           Fourth Quarter                $0.27            $0.14

         On September 15, 2005, the closing quotation for the common stock was
$0.18 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 15, 2005 was 1,564, 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.


                                       16
<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, 2005.

<TABLE>
<CAPTION>


                                                                                           Number of Securities
                                                                                          Remaining Available for
                                                                                           Future Issuance Under
                                                                                           Equity Compensation Plans
                                    Number of Securities         Weighted-Average          (Excluding Securities
                                 to be Issued Upon Exercise      Exercise Price of               Reflected
         Plan Category             of Outstanding Options       Outstanding Options           in Column (a))

-------------------------------- ---------------------------- ------------------------ ------------------------------
                                             (a)                         (b)                          (c)
<S>                                      <C>                           <C>                      <C>
Equity compensation plans
   approved by security
   holders                               49,000,000                    $0.50                    25,825,000
</TABLE>


         See also Notes 12 and 13 of the accompanying 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, 2005, the Company issued a total
of 3,721,250 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 shares
were issued for the following consideration: 3,542,500 shares for cash of
$709,000; 5,000 shares in payment of finders' compensation on the sale of common
stock; 47,500 shares in payment of accounts payable of $9,000; 76,250 shares in
payment of accrued expenses of $15,000; and 50,000 shares in payment of
consulting services of $10,000. In addition, cash finders' compensation and
accrued finders' compensation on the sale of common stock totaled $6,000 and
$27,000, respectively, during the three month period. The Company did not use
underwriters in the sale or placement of these unregistered shares of common
stock.

         The Company has generally placed a value of $0.20 per share on the
non-cash transactions where shares of the Company's restricted common stock have
been issued in payment of goods and services, reduction of debt and other
purposes. The Company believes, based on the many cash sales of the Company's
restricted common stock during the year ended June 30, 2005, all at $0.20 per
share, that $0.20 per share is an appropriate value per share to use for
issuances of restricted common shares in non-cash transactions. The $0.20 per
share also approximated the average quoted market price of the Company's common
stock during the year.

         During the three months ended June 30, 2005, the Company issued a total
of 7,736,591 stock options not subject to the Company's Registration Statement
on Form S-8: 6,240,000 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

                                       17
<PAGE>

exercisable for periods of 1 to 2 years; 996,591 options as a loan origination
fee or other compensation to lenders with an exercise price of $0.20 per share
exercisable for a period of 1 to 3 years; and 500,000 options to vendors for
services with an exercise price of $0.20 to $1.00 per share exercisable for
periods of one to five years.

         In connection with the extension of the maturity date of the Series B
15% Preferred Stock to January 1, 2007, holders of the preferred shares were
issued warrants exercisable through January 1, 2009 to purchase 6,850,000 shares
of the Company's common stock at $0.30 per share. Existing warrants to purchase
2,500,000 shares held by the holders were cancelled.

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

         During the fourth quarter of fiscal year 2005, 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 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 lack of
financial resources. 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 in its immediate priorities 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.
Consistent with this objective, the Company has been presenting 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 for Public Use
applications, particularly Homeland Defense, and is seeking orders within the
Federal 2006 Budget. 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.
As noted earlier, 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.

         The Company has designed, and now manufactures and sells SparrowHawk
gyroplane kits for the home-built market. In addition, the Company developed and
sells modification kits designed to improve in-flight stability and safety for
another manufacturer's kit gyroplane.

                                       18
<PAGE>

         During the years ended June 30, 2005 and 2004, the Company's operating
focus has been directed to the final development of the two-seat piston engine
powered SparrowHawk. The initial market for this aircraft lies with builders of
home-built aircraft from kits; however, management also believes that there are
larger, untapped markets for fully assembled SparrowHawk gyroplane aircraft.
Important among these emerging markets is the potential use of the SparrowHawk
as a patrol aircraft by law enforcement agencies both in the United States and
overseas. An intensive marketing program for the SparrowHawk is being developed.
Through June 30, 2005, 27 American Autogyro dealerships have been established,
21 in the United States and 6 internationally.

         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, 2005,
66 initial orders for SparrowHawk gyroplane kits have been received, with 39
complete kits delivered. During the year ended June 30, 2005, the Company
reported SparrowHawk sales revenues of $746,000 on 26 delivered kits, upgrades
and parts. The Company has received substantial advance payments from dealers
and customers on SparrowHawk gyroplane kit orders, 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.

         The Company's technology is scalable to much larger aircraft and has
potential applications for both heavy lift vertical take-off military aircraft
and runway independent short-haul airliners. The Company has been actively
engaged in discussions with government agencies and potential aerospace
strategic partners in this country and in Europe and China with respect to those
applications.

Going Concern Uncertainty

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Because of recurring
operating losses, the excess of current liabilities over current assets, the
stockholders' deficit, and negative cash flows from operations, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent on attaining
profitable operations, restructuring its debt obligations, and obtaining
additional outside financing. 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. 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.

         Operating revenues from the sale of SparrowHawk kit gyroplanes, the
Company's primary source of revenues through June 30, 2005, are not currently
sufficient, and not projected to be sufficient in the near future, to cover
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 production of a new product.

         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 2006, although there is
              no assurance that the Company will be successful in reducing the
              negative gross margin.

                                       19
<PAGE>

         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 heavy lift vertical take-off 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 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. 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 FAA or equivalent international
certification of the aircraft. Currently, the Company estimates that
approximately $40 million and a two to three year period will be required to
complete the certification. As previously discussed, 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, and the Company is not in a position to conclude
how likely a favorable outcome to these opportunities is, and there is no
assurance that additional funding will be realized. If one or more of these
funding transactions is completed, the Company believes there will be sufficient
working capital to fund operating deficits for fiscal year 2006 and for the next
2 to 3 years. 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 operations until FAA certification is obtained and sales of Hawk 4
gyroplanes reach planned levels.

         The Company does not anticipate that operating costs of personnel,
facilities, research and development and sales and marketing will decrease from
levels reported for fiscal year 2005, and may increase.

         There can be no guarantee or assurance that the Company will be
successful in its ability to generate revenue or to raise capital at favorable
rates or at all. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


                                       20
<PAGE>

Results of Operations

         Revenues

         Total revenues increased to $864,000 in the year ended June 30, 2005
from $509,000 in the year ended June 30, 2004. The revenues in fiscal year 2005
were comprised of $746,000 from the sale of 26 SparrowHawk kits, options and
parts, $56,000 from the sales of modification kits, and $62,000 from flight
training. The revenues in fiscal year 2004 were comprised of $343,000 from the
sale of 13 SparrowHawk kits, $77,000 from the sales of modification kits,
$39,000 from flight training and $50,000 from subcontract manufacturing. The
Company began delivering SparrowHawk kits in the third quarter of fiscal year
2004. The increase in the number of SparrowHawk kits sold in fiscal year 2005
resulted from a full year of related sales and marketing activities.

         At June 30, 2005, advance deposits of $588,000, included in deferred
revenue, from customers and dealers principally for SparrowHawk kits, have added
significantly to overall cash flow. During fiscal year 2006, the Company will be
progressively increasing its focus on satisfying a growing demand for
SparrowHawk kits, and, to a lesser extent, for modification kits. 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. While less in dollar amount, flight training revenue will be an ongoing
addition to Company cash flow. The Company does not consider subcontract
manufacturing revenues as a significant future source of ongoing revenue to the
Company.

         Costs and Expenses

         Comparing fiscal year 2005 to fiscal year 2004, cost of sales increased
to $1,237,000 from $495,000. The increase in fiscal year 2005 was primarily due
to the cost of sales of the SparrowHawk kits of $1,172,000 resulting from more
kits sold in the current year. The Company continues to experience a negative
gross profit on the SparrowHawk kits because of the nonrecurring and "learning
curve" costs that are normally experienced in the introductory production of a
new product. Ongoing improvements to the design and packaging of the kits
without a similar increase in the sales price of the kits and the transition of
substantial portions of kit manufacturing and assembly operations to the Salt
Lake City facility also contributed to increasing negative margins on the sale
of SparrowHawk kits. The Company projects that as the Company improves its
manufacturing capabilities and increases its sales efforts, the negative gross
profit on sales will narrow in fiscal year 2006, but may not turn positive. In
addition, only nominal gross margin is realized on the sale of modification kits
and on flight training. The consolidated statement of operations for the year
ended June 30, 2004 reported a modest gross margin on total sales. However, this
margin was attributed primarily to flight training and subcontract manufacturing
revenues. All costs of incomplete SparrowHawk kits delivered as of June 30, 2005
have been deferred and included in work-in-process inventories.

         Comparing fiscal year 2005 to fiscal year 2004, research and
development expenses increased to $1,874,000 from $1,796,000. 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 grants from government agencies and to increases in
compensation for current employees. Research and development activities have
consisted of ongoing modifications 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.

                                       21
<PAGE>

         Comparing fiscal year 2005 to fiscal year 2004, general and
administrative expenses increased to $1,923,000 from $1,697,000, a 13% increase.
The increase in the current year is due primarily to the addition of personnel
and to increases in compensation for current personnel supporting the sales and
development of the SparrowHawk.

         Other Income and Expenses

         Comparing fiscal year 2005 to fiscal year 2004, related party interest
income decreased from $9,000 to $8,000 due to repayment of related party notes
receivable in the current fiscal year.

         Comparing fiscal year 2005 to fiscal year 2004, interest and other
income decreased to $25,000 from $170,000 due to the gain on sale of assets
recorded in fiscal year 2004 primarily from the sale of investment art against
which full impairment losses had been recorded in prior years.

         Interest expense for fiscal year 2005 compared to fiscal year 2004
decreased to $1,214,000 from $1,583,000. The decrease in the current fiscal year
was due primarily to additional interest expense incurred in the prior fiscal
year on the issuance of stock options and warrants to lenders in connection with
new debt or debt extensions, net of the effect of current fiscal year additions
to debt.

         Comparing fiscal year 2005 to fiscal year 2004, Series B Preferred
Stock interest expense increased to $8,003,000 from $7,639,000. 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 increased
during the current fiscal year. In addition, 66,603 new shares of Series B
Preferred Stock were issued in November 2004 upon the conversion of a promissory
note and related accrued interest payable.

         Net Loss

         During fiscal year 2005, the Company continued to record losses as it
progressed toward full marketing and manufacturing of the SparrowHawk gyroplane
kit and continued research and development activities on SparrowHawk gyroplane
derivatives and other applications of the Company's gyroplane technology. For
fiscal year 2005, the loss from operations was $4,170,000 compared to the loss
from operations of $3,479,000 for fiscal year 2004. The increase in the loss
from operations in the current fiscal year resulted from negative gross margins
on revenues and increases in operating costs and expenses as described above,
offset by the increase in revenues.

         The net loss for fiscal year 2005 was $13,354,000 compared to
$12,522,000 for fiscal year 2004. 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, offset by the increase in
revenues.

         The net loss applicable to common stockholders for fiscal year 2004
included a charge of $1,448,000 from the issuance of a put option in that year.
As a result, the net loss applicable to common stockholders was $13,970,000 in
fiscal year 2004 compared to the net loss applicable to common stockholders in
fiscal year 2005 of $13,354,000, which is equal to the fiscal year 2005 net
loss.


                                       22
<PAGE>

Liquidity and Capital Resources

         At June 30, 2005, the Company had total current liabilities of
$14,543,000 and current assets of $550,000, resulting in a working capital
deficiency of $13,993,000. Total liabilities exceed total assets by $52,766,000
at June 30, 2005.

         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
long-term liability of $33,009,000 in the consolidated balance sheet as of June
30, 2005 because of the extension of the redemption date to January 1, 2007,
thus improving the working capital position of the Company.

         The extension requires the following consideration to be paid to the
Series B Holders:

         o    The cancellation 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 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 of amounts due to the
              Series B Holders in accordance with an agreed-upon formula.

         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
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

                                       23
<PAGE>

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 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.

         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, 2005, the Company was delinquent in making payments
on substantially all promissory notes to vendors and to an unrelated party
lender, which totaled $663,000. The Company continues ongoing negotiations with
these vendors and lender, 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 capital lease obligations to a related party of $660,000, other
related party notes payable totaling $443,000, and accrued interest payable on
debt of $517,000.

         Net cash used in operating activities was $3,365,000 for fiscal year
2005 compared to $3,809,000 for fiscal year 2004. In fiscal year 2004, compared
to fiscal year 2005, the Company reduced accounts payable and also paid
significant amounts of accrued expenses from the proceeds of the issuance of
Series B preferred stock, which resulted in more cash used in operating
activities in the prior fiscal year. The Company also had an increase in
inventories of $396,000 during fiscal year 2004, which decreased the net cash
used in operating activities in the prior year, compared to a decrease in
inventories of $93,000 during the current fiscal year, which increased the net
cash used in operating activities in the current fiscal year.

         The Company has funded losses from operations in the current fiscal
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. Net cash
provided by financing activities for fiscal year 2005 was $3,414,000, comprised
primarily of a net increase in debt of $919,000 and net proceeds from the
issuance of common stock of $2,495,000. Net cash provided by financing
activities for fiscal year 2004 was $3,754,000, comprised of a net increase in
debt of $422,000, net proceeds from the issuance of common stock of $1,332,000,
and $2,000,000 proceeds from the issuance of Series B preferred stock. 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. However, there is no assurance that the
Company will be successful in either raising sufficient capital or improving
operations.

         The Company does not anticipate that operating costs of personnel,
facilities, research and development and sales and marketing will decrease from
levels reported for fiscal year 2005, and may increase.

                                       24
<PAGE>

         Management does not anticipate that revenues or expenses will be
materially affected by inflation during the next twelve months of operations.

Off Balance Sheet Commitments

         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

                  2006                                   $144,000
                  2007                                    147,000
                  2008                                    122,000
                                                         --------
                                                         $413,000
                                                         ========

Critical Accounting Policies

         The Company's critical accounting policies include the following:

         Research and Development Costs- Research and development costs are
expensed as incurred in accordance with SFAS No. 2, "Accounting for Research and
Development Costs." The costs of materials and other costs acquired for research
and development activities are charged to expense as incurred. Salaries, wages,
and other related costs of personnel, as well as other facility operating costs
are allocated to research and development expense through management's estimate
of the percentage of time spent by personnel in research and development
activities.

         Revenue Recognition - The Company recognizes revenues from goods and
services when there is a binding agreement, the product has been completely
shipped or service has been delivered, collection is reasonably assured, and the
Company has no significant obligations remaining. Portions of the purchase price
of the Company's products collected from customers in advance of product
delivery are recorded as deferred revenue. Therefore, revenues from the sale of
SparrowHawk gyroplane kits are not recorded until all kit components and parts
are delivered to the customer and collection of any remaining amounts due is
reasonably assured.

         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.

                                       25
<PAGE>

         Put Option Liability - To comply with SFAS No. 150, the Company
estimated the fair value of the put option liability at $1,515,000 at June 30,
2005 using the Black-Scholes option-pricing model. Until the obligation is
satisfied, the Company will continue to use 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 requires
adjustment, with changes in the fair value recognized as interest cost. The fair
value of the put option liability is 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 may result 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 Principles

         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 FAS 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, Statement 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. Statement 154 also provides that (1) a change in method
of depreciating or amortizing a long-lived nonfinancial 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 FAS No. 154 on January 1,
2006, and does not believe the adoption of this new accounting pronouncement
will result in a material impact on the Company's financial condition or results
of operations.

                                       26
<PAGE>

Forward Outlook and Risks
-------------------------

         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
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.

                                       27
<PAGE>


Item 8.   Changes in and 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, 2005. Based on their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective, except as described below, 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.

         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 reportable condition 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 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 the first quarter of fiscal year 2006, the Company has
implemented 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 2006.
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 committed to hire 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.

         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.

         In connection with the audit of the Company's consolidated financial
statements for the year ended June 30, 2004, management and the Company's
independent auditors identified certain material weaknesses in the Company's
internal control over the financial reporting process pertaining to the timely
evaluation and recording of transactions related to the Company's Series B 15%
Preferred Stock and the Company's put option liability. The Company recorded
adjusting entries in the fourth quarter of its fiscal year ended June 30, 2004

                                       28
<PAGE>

to correct errors in the second and third quarters of fiscal year 2004 related
to these financial statement items. Subsequently, the Company restated the
condensed consolidated statements of operations for the quarterly periods in
fiscal year 2004 included for comparison purposes in its quarterly reports on
Form 10-QSB for fiscal year 2005 to reflect the correcting entries in the
appropriate interim periods of the prior fiscal year.

         During fiscal year 2005, the Company implemented changes to improve its
internal controls over financial reporting. These changes included, among other
procedures, more comprehensive documentation of accounting policies and
procedures, implementation of analytical review procedures, schedules and
checklists for the preparation of interim and annual financial statements, and
executive level review of journal entries.

         Other than the matters discussed above, there were no other significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the most recent
evaluation of these controls by the Company's Chief Executive Officer and Chief
Financial Officer.


Item 8B.  Other Information

         None


                                       29
<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       54       Director, President, Chief Executive
                                         Officer, and Treasurer

         H. Jay Groen         61       Director, Chairman of the Board of
                                         Directors

         Dennis P. Gauger     53       Director, Chief Financial Officer,
                                         Secretary

Term of Office

         The appointment of Messrs. Groen as members 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. The terms of service of Messrs. Groen and Mr. Gauger as
members of the Board of Directors continue 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.

Family Relationships

         H. Jay Groen and David L. Groen are brothers.

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.

         Immediately prior to forming Groen Brothers Aviation, David Groen was a
founding partner and Chief Financial Officer for Seagull Recycling Company.

                                       30
<PAGE>

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.

         H. Jay Groen In addition to his Chairman of the Board duties, Jay Groen
is currently based in Washington D.C., representing Groen Brothers Aviation's
interests to Congress and the Pentagon. Amongst his many successes, GBA has
received special recognition by the US Senate's Homeland Defense Industries
Small Business Development Program and by the Aerospace Industries Association
who published in their 2002 annual report that, "What the Wright Brothers have
done for fixed wing aviation, the Groen Brothers are doing for rotor-wing
aviation," a complement from the nation's most important organization
representing the interest of the aerospace industry.

         Before Jay and his brother David formed GBA, Jay Groen co-founded
Seagull Recycling Company, an organization that developed an original supply of
secondary paper fiber for sale to domestic and Far East markets. Prior to this
business venture, he was the President of China West, Inc., a Washington D.C.
based organization representing U.S. firms in the Peoples Republic of China. In
this role, Mr. Groen negotiated joint venture and trade agreements in such
diverse industries as machine building, petroleum, coal, agriculture, light
manufacturing, handicrafts, and forest products.

         Early in his career, Mr. Groen spent ten years as an Economist for the
Central Intelligence Agency (CIA) doing original research on Asia, with a
particular interest on the People's Republic of China. As part of his
responsibilities with the CIA, Mr. Groen prepared written and oral briefs for
the White House staff and members of Congress, and lectured at the National War
College. Mr. Groen served in the U.S. Air Force as a Chinese Linguist in both
Vietnam and Asia, logging more than 100 combat missions in a special airborne
intelligence function.

         Mr. Groen is the co-author, along with his brother David, of a best
selling book entitled Huey, a novel about the Vietnam War. He has also published
several other writings including: 1) "The Sweet and Sour China Market", China
Under Four Modernizations; and, 2) "Buying from China", U.S.-China Economic
Relations: A reappraisal.

         Mr. Groen has an M.A. in Economics from Virginia Polytechnic Institute,
a B.A. in Economics from the University of Utah and a Language Certificate in

                                       31
<PAGE>

Mandarin Chinese from Yale University. A private pilot with a practical
background in aeronautical design, Mr. Groen has added much innovation to the
Hawk Gyroplane.

         Dennis P. Gauger, CPA Dennis P. Gauger, Certified Public Accountant,
has over 28 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 seven 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.

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@gbagyros.com.

         The Company did not hold an annual meeting of shareholders during the
fiscal year ended June 30, 2005.

                                       32
<PAGE>

Officers of Subsidiary Corporations

         As stated earlier, the Company has a wholly-owned subsidiary, Groen
Brothers Aviation USA, Inc. Robert (Robin) H. H. Wilson currently serves as
Executive Vice President of Groen Brothers USA, Inc. and a member of that
company's Board of Directors. A background on Mr. Wilson follows:

         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, 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.

         James P. Mayfield III, who previously served as a non-executive officer
Vice President of Groen Brothers Aviation USA, Inc., resigned effective January
18, 2005.

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

                                       33
<PAGE>

requirements applicable to its officers, directors, and greater than 10%
beneficial owners were complied with during the year ended June 30, 2005 with
the exception of two Form 4 reports which were filed late by Jay Groen and were
related to private transfers of common stock not transacted in the open market.

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
auditors, including recommending the selection of the independent auditors. 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.

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, 2004, 2003 and 2002 for the President and Chief Executive Officer (the
"Named Executive Officer").
<TABLE>
<CAPTION>


                                           Annual Compensation                       Long-Term Compensation
                                   ------------------------------------- -----------------------------------------------
                                                                          Restricted    Securities
                                                         Other Annual       Stock       Underlying       All Other
                                   Salary (1)   Bonus    Compensation       Awards       Options      Compensation (2)
    Name and Position       Year        $         $            $              $             #                $


<S>                         <C>        <C>        <C>          <C>            <C>         <C>                     <C>
David Groen                 2005       103,404    -            -              -           4,925,000               1,151
   President and Chief      2004        95,000    -            -              -              50,000                 110
   Executive Officer        2003        95,000    -            -              -           2,500,000                 238
</TABLE>

(1)           Represents annual salary for the fiscal year. Unpaid back salary
              included in these amounts payable to Mr. Groen at June 30, 2005
              included $71,250 for fiscal year 2005, $58,462 for fiscal year
              2004 and $18,269 for fiscal year 2003.
(2)           Includes matching contributions made by the Company on behalf of
              Mr. Groen pursuant to the Company's Profit Sharing 401(k) Plan.

       At June 30, 2005, unpaid back wages from the past three fiscal years
payable to David Groen were $147,981. Unpaid back wages from the past three
fiscal years payable to another officer were $169,308 at June 30, 2005.

                                       34
<PAGE>

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

       Jay Groen is not an employee of the Company, but is 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, currently at $95,000 per year.
At June 30, 2005, unpaid consulting fees to Jay Groen for the past several years
were $312,945. The Company does 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. 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. Therefore, deferred compensation totaling $3,010,000, related
accrued payroll taxes of $131,000 and related accrued interest payable of
$383,000 are classified as long-term liabilities at June 30, 2005. 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. 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, 2005, deferred
compensation and related interest accrued to executive officers, resulting from
accruals originating from fiscal years 1998 through 2005, amounted to $1,408,565
to David Groen, $460,251 to Jay Groen for years when he was an employee,
$538,297 to Robin Wilson, and $45,833 to Dennis Gauger.


                                       35
<PAGE>

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

         The following table sets forth as to the Named Executive Officer
certain information with respect to options to purchase shares of the Company's
common stock granted during fiscal year 2005.
<TABLE>
<CAPTION>

                               Number of
                              Securities             % of Total
                              Underlying            Options/SARS
                             Options/SARS            Granted to            Exercise or
                                Granted             Employees in            Base Price            Expiration
         Name                      #              Fiscal Year 2005          ($/Share)                Date

      <S>                      <C>                     <C>                 <C>                     <C>
      David Groen              4,925,000               21.18%              0.25 - 1.00             10/19/09

</TABLE>

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 Officer on
June 30, 2005. There were no options exercised by the Named Executive Officer
during the year ended June 30, 2005.
<TABLE>
<CAPTION>


                                                                       Number of                  Value of
                                                                 Securities 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)

      <S>                         <C>                <C>         <C>                             <C>
      David Groen                 -                  -           5,041,667 / 4,958,333           100,000 / -
</TABLE>

(1)      Reflects the difference between the exercise price of the options
         granted and the value of the common stock on June 30, 2005. The closing
         price of the Company's common stock was $0.19 per share on June 30,
         2005.


                                       36
<PAGE>

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

         The following tabulation shows, as of September 30, 2005, 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 Officer and (d) all other Executive 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>            <C>
  David Groen
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104             18,880,884  (2)    12.3      900,000      64.3        108,880,884    37.1

  Jay Groen
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104             11,003,470  (3)     7.2      500,000      35.7         61,003,470    20.8

  Dennis P. Gauger
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104              1,216,667  (4)     0.8          -         -            1,216,667     0.4

  Robert H. H. Wilson
  2640 W. California Ave., Ste. A
  Salt Lake City, Utah 84104              4,050,000  (5)     2.6          -         -            4,050,000     1.4

  All officers and directors as a
  group  (4 persons)                     35,151,021         22.9    1,400,000     100.0        175,151,021    59.7
</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 118,123,368 plus
         22,250,001 options which are exercisable by executives and directors
         within 60 days.
(2)      Includes 8,452,884 shares owned by David Groen, 2,103,000 shares
         beneficially owned held by family trusts and 8,325,000 options
         exercisable by David Groen.
(3)      Includes 4,547,645 shares owned by Jay Groen, 14,158 shares
         beneficially owned held by family trusts and 6,441,667 options
         exercisable by Jay Groen.
(4)      Includes 50,000 shares owned by Dennis Gauger and 1,166,667 options
         exercisable by Dennis Gauger. (5) Includes 300,000 shares owned by
         Robin Wilson, 100,000 shares beneficially owned held by family trusts
         and 3,650,000 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
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.


                                       37
<PAGE>

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 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.

         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

                                       38
<PAGE>

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, 2005, the Company had a note payable, originating in 1990,
of $180,000, plus accrued interest of $122,086, due to a company owned by David
and Jay Groen.

         At June 30, 2005, the Company had unsecured notes receivable from
officers and related parties, resulting primarily from cash advances, totaling
$31,000, bearing interest at 8% and due on demand. These notes receivable
totaled $48,000 at June 30, 2004. 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, 2005,
royalties payable totaled $6,000 to each of these individuals, which amounts are
included in cost of sales in the accompanying consolidated statement of
operations for the year ended June 30, 2005. No royalties were recorded in
fiscal year 2004.

         Included in accrued expenses in the consolidated balance sheet at June
30, 2005 is $3,010,000 in deferred compensation to ten 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. Therefore, deferred compensation
totaling $3,010,000, related accrued payroll taxes of $131,000 and related
accrued interest payable of $383,000 are classified as long-term liabilities at
June 30, 2005. 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. 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, 2005, the Company had notes payable to related parties,
primarily stockholders of the Company, totaling $6,570,000. Most of these notes
are unsecured, due on demand, and bear interest at annual rates ranging from 8%
to 25%. Included in these notes payable at June 30, 2005 are two notes payable
to stockholders totaling $422,000 that are payable in monthly payments and that
are in default. Also included in these notes payable at June 30, 2005 are
capital lease obligations to a finance company owned by stockholders of the
Company totaling $660,000 that are in default. See Notes 8 and 10 to the
accompanying consolidated financial statements.

         At June 30, 2005, the Company had long-term notes payable to two
stockholders totaling $361,000. See Note 9 to the accompanying consolidated
financial statements.

         At June 30, 2005, the Company had accrued interest expense to related
parties totaling $2,844,000, comprised of interest payable on the notes payable
to related parties.

                                       39
<PAGE>


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. (this filing)

              3.6   By-laws (this filing)

              4.1   Amended and Restated 2000 Option Plan (6)

              10.1  Amendment to the Common Stock Purchase Agreement Dated
                    November 7, 2000 (2)

              10.2  Form of SparrowHawk Dealer Agreement (this filing)

              10.3  Form of Amendment No. 2 to Securities Exchange Agreement
                    (this filing)

              10.4  Form of Stock Option (this filing)

              11    Statement re: computation of per share earnings. (4)

              14.1  Groen Brothers Aviation Corporate Values (2)

              14.2  Standards of Conduct (2)

              19.1  Notice of Action to be Taken Pursuant to the Joint Written
                    Consent of the Board of Directors and Majority Stockholders
                    in Lieu of a Special Meeting of the Stockholders (5)

              21    Subsidiaries of the small business issuer. (4)

              23    Independent Auditors' Consent (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).

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

                                       40
<PAGE>

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

         (1)  Filed as exhibits to the Company's report on Form 10-QSB for the
              quarter ended December 31, 2003 and incorporated herein by
              reference.

         (2)  Filed as exhibits 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)  Information included in Notes to Consolidated Financial statements
              filed with this report.

         (5)  Included in Definitive Information Statement on Schedule 14C filed
              with the Securities and Exchange Commission on December 10, 2004
              and incorporated herein by reference.

         (6)  Filed as an exhibit to the Company's registration statement on
              Form S-8 filed June 10, 2005 and incorporated herein by reference.

     (b) The Company did not file any reports on Form 8-K during the fourth
     quarter of the year ended June 30, 2005.

Item 14.  Principal Accountant Fees and Services

         The following schedule presents the professional fees paid to Tanner
LC, the Company's independent auditors, for the fiscal years ended June 30, 2005
and 2004.

                                                        2005             2004

         Audit fees                                    $47,653         $31,175
         Audit related fees                             21,618          16,315
         Tax fees                                          160           5,200
         Other fees                                        -               -
                                               ---------------- ---------------

         Total                                         $69,431         $52,690
                                               ================ ===============

         Audit related fees were for services related to the review of periodic
reports of the Company, including Forms 10-QSB and 10-KSB. Tax fees were for
preparation of federal and state income tax returns and related tax
consultation. No other fees were incurred to Tanner LC during 2005 and 2004.


                                       41
<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, 2005


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

  Signatures                     Capacity in Which Signed             Date
  ----------                     ------------------------             ----

/s/ David Groen        President and Chief Executive Officer    October 13, 2005
---------------
David Groen            (Principal Executive Officer)


/s/ Dennis P. Gauger   Chief Financial Officer and Secretary    October 13, 2005
-------------------
Dennis P. Gauger       (Principal Financial Officer)


/s/ Jay Groen          Director                                 October 13, 2005
-------------
Jay Groen


                                       42
<PAGE>


                          GROEN BROTHERS AVIATION, INC.
                   Index to Consolidated Financial Statements


           Report of Independent Registered Public Accounting Firm          F-2

           Consolidated Balance Sheet                                       F-3

           Consolidated Statements of Operations                            F-4

           Consolidated Statements of Stockholders' Deficit                 F-5

           Consolidated Statements of Cash Flows                            F-7

           Notes to Consolidated Financial Statements                       F-8



                                       F-1




<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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


We have audited the consolidated balance sheet of Groen Brothers Aviation,  Inc.
(the Company) as of June 30, 2005,  and the related  consolidated  statements of
operations,  stockholders'  deficit  and cash flows for the years ended June 30,
2005 and 2004. These consolidated financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance  with 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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Groen  Brothers
Aviation,  Inc., as of June 30, 2005,  and the results of its operations and its
cash  flows for the years  ended  June 30,  2005 and 2004,  in  conformity  with
accounting principles generally accepted in the United States of America.

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


Salt Lake City, Utah
September 30, 2005, except for Note
21, which is dated October 11, 2005


                                      F-2

<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                           Consolidated Balance Sheet

Assets
------                                                           June 30, 2005
                                                           ---------------------

Current assets:
   Cash                                                           $     70,000
   Accounts receivable                                                  49,000
   Related party notes receivable                                       32,000
   Prepaid expenses                                                      4,000
   Inventories                                                         395,000
                                                           ---------------------

   Total current assets                                                550,000

Property and equipment, net                                            291,000
                                                           ---------------------

   Total assets                                                   $    841,000
                                                           =====================

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

Current liabilities:
   Accounts payable                                               $    942,000
   Accrued expenses                                                  4,149,000
   Deferred revenue                                                    588,000
   Notes payable                                                       779,000
   Related party notes payable                                       6,570,000
   Put option liability                                              1,515,000
                                                           ---------------------

   Total current liabilities                                        14,543,000

Long-term liabilities:
   Accrued expenses                                                  3,524,000
   Deferred revenue                                                     25,000
   Related party long-term debt                                        361,000
   Related party deposits                                            2,145,000
   Series B 15% cumulative redeemable
      non-voting preferred stock, no par
      value, 50,000,000 shares authorized,
      35,199 shares issued and outstanding                           33,009,000
                                                           ---------------------

   Total liabilities                                                53,607,000
                                                           ---------------------

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, 130,424,172
      shares issued and outstanding                                 23,590,000
   Accumulated deficit                                             (76,426,000)
                                                           ---------------------

   Total stockholders' deficit                                     (52,766,000)
                                                           ---------------------

   Total liabilities and stockholders' deficit                    $    841,000
                                                           =====================

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>



                          GROEN BROTHERS AVIATION, INC.
                      Consolidated Statements of Operations

                                                   Years Ended June 30,
                                             -----------------------------------
                                                                     2004
                                                 2005            As Restated

Revenues                                       $    864,000        $    509,000
                                             ---------------- ------------------

Costs and expenses:
   Cost of sales                                  1,237,000             495,000
   Research and development                       1,874,000           1,796,000
   General and administrative expenses            1,923,000           1,697,000
                                             ---------------- ------------------

   Total costs and expenses                       5,034,000           3,988,000
                                             ---------------- ------------------

   Loss from operations                          (4,170,000)         (3,479,000)
                                             ---------------- ------------------

Other income (expense):
   Related party interest income                      8,000               9,000
   Interest and other income                         25,000             170,000
   Interest expense                              (1,214,000)         (1,583,000)
   Series B preferred stock interest
     expense                                     (8,003,000)         (7,639,000)
                                             ---------------- ------------------

   Total other income (expense)                  (9,184,000)         (9,043,000)
                                             ---------------- ------------------

Loss before income taxes                        (13,354,000)        (12,522,000)

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

Net loss                                       $(13,354,000)       $(12,522,000)
                                             ================ ==================

Issuance of put option                                    -          (1,448,000)
                                             ---------------- ------------------

Net loss applicable to common stockholders     $(13,354,000)       $(13,970,000)
                                             ================ ==================


Net loss per share - basic and diluted         $      (0.11)       $      (0.14)
                                             ================ ==================

Weighted average number of common shares
   outstanding - basic and diluted              116,597,000         101,369,000
                                             ================ ==================



          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                Consolidated Statements of Stockholders' Deficit
                       Years Ended June 30, 2005 and 2004


<TABLE>
<CAPTION>
                          Series B 15%
                     Cumulative Redeemable                               Series A
                          Non-Voting          Series A Convertible     Convertible
                        Preferred Stock        Preferred Stock       Preferred Stock     Common Stock
                     ------------------------ ---------------------   Subscription  --------------------  Accumulated
                     Shares    Amount          Shares      Amount     Receivable     Shares      Amount     Deficit       Total
                     ---------------------------------------------------------------------------------------------------------------
<S>                   <C>    <C>           <C>        <C>          <C>           <C>         <C>         <C>           <C>
Balance, July 1,
  2003                18,443 $ 19,964,000  10,000,000 $ 2,717,000  $ (2,717,000) 98,819,978  $14,938,000 $(50,550,000) $(15,648,000)

Reclassify Series
   B preferred
   stock to debt
   per SFAS 150      (18,443) (19,964,000)          -           -             -           -            -            -   (19,964,000)
Capital contribution
   of Series B
   preferred stock
   premium accretion       -            -           -           -             -           -    4,844,000            -     4,844,000
Accrued interest on
   subscription
   receivable              -            -           -      43,000       (43,000)          -            -            -             -

Surrender of Series
   A preferred
   stock                   -            - (10,000,000) (2,760,000)    2,760,000           -            -            -             -
Issuance of common
  stock for:
   Cash                    -            -           -           -             -   6,843,413    1,368,000            -     1,368,000
   Finders'
    compensation           -            -           -           -             -      81,500            -            -             -
   Accounts payable        -            -           -           -             -     830,473      180,000            -       180,000
   Notes payable           -            -           -           -             -     312,659       63,000            -        63,000
   Collateral for
    notes payable          -            -           -           -             -     900,000            -            -             -
   Interest expense        -            -           -           -             -     601,254      124,000            -       124,000
   Return of deposits      -            -           -           -             -   1,583,625      317,000            -       317,000
   Employer 401(k)
    expense                -            -           -           -             -     340,841       68,000            -        68,000
Settlement of put
  option                   -            -           -           -             -   6,125,000            -            -             -
Issuance of put
  option                   -            -           -           -             -           -   (1,448,000)           -    (1,448,000)
Finders'
  compensation             -            -           -           -             -           -      (36,000)           -       (36,000)
Issuance of stock
  options for:
   Interest expense        -            -           -           -             -           -      391,000            -       391,000
   Accounts payable        -            -           -           -             -           -       50,000            -        50,000
Net loss                   -            -           -           -             -           -            -  (12,522,000)  (12,522,000)
                     ---------------------------------------------------------------------------------------------------------------
Balance, June 30,
  2004                     - $          -           -  $        -  $          - 116,438,743  $20,859,000 $(63,072,000) $(42,213,000)
                     ---------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                Consolidated Statements of Stockholders' Deficit
                       Years Ended June 30, 2005 and 2004


<TABLE>
<CAPTION>
                          Series B 15%
                     Cumulative Redeemable                               Series A
                          Non-Voting          Series A Convertible     Convertible
                        Preferred Stock        Preferred Stock       Preferred Stock     Common Stock
                     ------------------------ ---------------------   Subscription  --------------------  Accumulated
                     Shares    Amount          Shares      Amount     Receivable     Shares      Amount     Deficit        Total
                     ---------------------------------------------------------------------------------------------------------------
<S>                   <C>    <C>           <C>        <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
   Consulting fees         -        -               -           -             -     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)
                     ---------------------------------------------------------------------------------------------------------------


</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                          GROEN BROTHERS AVIATION, INC.
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>


                                                                             Years Ended June 30,
                                                                     -------------------------------------
                                                                           2005               2004
                                                                           ----               ----
<S>                                                                     <C>                <C>
Cash flows from operating activities:
   Net loss                                                             $ (13,354,000)     $ (12,522,000)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
      Depreciation and amortization expense                                   117,000            142,000
      Common stock issued for interest expense                                 13,000            124,000
      Common stock issued for services                                         32,000                  -
      Common stock issued for 401(k) expense                                   88,000             68,000
      Stock options issued for interest expense                                73,000            391,000
      Interest expense accrued on Series B preferred stock                  8,003,000          7,639,000
      Interest expense on put option liability                                 67,000                  -
      Accrued interest expense added to debt principal                         24,000             42,000
      Interest income added to related party notes receivable                  (9,000)           (13,000)
      Gain on disposal of assets                                                    -           (107,000)
      (Increase) decrease in:
         Accounts receivable                                                  (32,000)           (36,000)
         Prepaid expenses                                                           -              8,000
         Inventories                                                           93,000           (396,000)
      Increase (decrease) in:
         Accounts payable                                                     158,000            (18,000)
         Accrued expenses                                                   1,386,000            500,000
         Deferred revenue                                                     (24,000)           406,000
         Related party deposits                                                     -            (37,000)
                                                                     ------------------ ------------------
   Net cash used in operating activities                                   (3,365,000)        (3,809,000)
                                                                     ------------------ ------------------

Cash flows from investing activities:
   Purchase of property and equipment                                         (95,000)            (6,000)
   Proceeds from the sale of assets                                                 -            107,000
   Issuance of related party notes receivable                                       -            (23,000)
   Payments of related party notes receivable                                  89,000                  -
                                                                     ------------------ ------------------
   Net cash provided by (used in) investing activities                         (6,000)            78,000
                                                                     ------------------ ------------------

Cash flows from financing activities:
   Proceeds from the issuance of debt                                       1,126,000            605,000
   Repayment of debt                                                         (207,000)          (183,000)
   Proceeds from the issuance of Series B preferred stock                           -          2,000,000
   Proceeds from the issuance of common stock                               2,515,000          1,368,000
   Payment of finders' compensation on issuance of common stock               (20,000)           (36,000)
                                                                     ------------------ ------------------
   Net cash provided by financing activities                                3,414,000          3,754,000
                                                                     ------------------ ------------------

Net increase in cash                                                           43,000             23,000
Cash, beginning of year                                                        27,000              4,000
                                                                     ------------------ ------------------

Cash, end of year                                                           $  70,000          $  27,000
                                                                     ================== ==================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-7
<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 intercompany 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.

         Inventories - Inventories are stated at the lower of cost or market.
Cost is determined using primarily the first-in-first-out (FIFO) method.

         Property and Equipment - Property and equipment are carried at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed under an accelerated method 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.

         Related Party Deposits - Deposits consist of amounts received from the
Company's authorized dealers on aircraft in anticipation of full-scale
production of the Company's Hawk 4 gyroplane. The deposit guarantees a delivery
sequence number and represents a percentage of the total estimated purchase
price. The Company has also issued common stock to dealers as partial
consideration for the delay in the certification of the Hawk 4 gyroplane. These
costs have been charged to interest expense as incurred. The dealers have been
given the opportunity to convert a portion of their deposits into shares of the
Company's restricted common stock. As stockholders of the Company, the dealers
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.

                                      F-8
<PAGE>


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



         Impairment of Long-Lived Assets - The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through undiscounted
future cash flows. If it is determined that an impairment loss has occurred
based on expected cash flows, such loss is recognized in the statement of
operations.

         Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

         Stock Options and Stock-Based Compensation - For stock options granted
to employees, the Company 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:
<TABLE>
<CAPTION>

                                                                Years Ended June 30,
                                                                                  2004
                                                              2005             As Restated
                                                            ---------------------------------

    <S>                                                      <C>              <C>
    Reported net loss applicable to common stockholders      $ (13,354,000)   $ (13,970,000)

    Deduct: Total stock-based employee compensation
       determined under fair value based method, net of
       related tax effects                                      (1,328,000)      (2,058,000)
                                                            ---------------------------------

    Pro forma net loss                                       $ (14,682,000)   $ (16,028,000)
                                                            =================================

    Basic and diluted loss per share:
             As reported                                     $       (0.11)   $       (0.14)
                                                            =================================

             Pro forma                                       $       (0.13)   $       (0.16)
                                                            =================================
</TABLE>


                                      F-9

<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,
                                                     2005               2004
                                             --------------------------------

        Expected dividend yield              $            -    $           -
        Expected stock price volatility                  59%              66%
        Risk-free interest rate                         3.5%             2.2%
        Expected life of options                 1 - 7 years      1 - 7 years

         The weighted average fair value of options and warrants granted during
2005 and 2004 was $0.07 and $0.08, respectively.

         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.

         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 at $1,515,000 at June 30,
2005 using the Black-Scholes option-pricing model. Until the obligation is
satisfied, the Company will continue to use 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 requires



                                      F-10

<PAGE>


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



adjustment, with changes in the fair value recognized as interest cost. The fair
value of the put option liability is 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 may result 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.

         Advertising - Advertising costs are non-direct in nature, and are
expensed over the periods in which the advertising takes place. Advertising
expense totaled $7,000 and $8,000 for the years ended June 30, 2005 and 2004,
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 78,215,921
shares of common stock at exercise prices ranging from $0.15 to $1.10 and
49,985,504 shares of common stock at exercise prices ranging from $0.15 to $1.41
were outstanding at June 30, 2005 and 2004, respectively. Certain notes payable,
long-term debt and related accrued interest payable were convertible into a
total of 24,167,515 and 18,344,901 shares of common stock at June 30, 2005 and
2004, 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 2004 have been reclassified to conform with the current year
presentation.


                                      F-11
<PAGE>


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


         Recently Issued Accounting Pronouncements - 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 FAS 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, Statement 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. Statement 154 also provides that (1) a change in method
of depreciating or amortizing a long-lived nonfinancial 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 FAS No. 154 on January 1,
2006, and does not believe the adoption of this new accounting pronouncement
will result in a material impact on the Company's financial condition or results
of operations.


                                      F-12

<PAGE>

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



Note 2:  Going Concern

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Because of recurring
operating losses, the excess of current liabilities over current assets, the
stockholders' deficit, and negative cash flows from operations, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent on attaining
profitable operations, restructuring its debt obligations, and obtaining
additional outside financing. 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.

         Operating revenues from the sale of SparrowHawk kit gyroplanes, the
Company's primary source of revenues through June 30, 2005, are not currently
sufficient, nor will they be sufficient in the near future, to cover 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 production of a new product.

         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 2006, 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 heavy lift vertical take-off 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 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. 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 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, and the Company is not in a position to conclude
how likely a favorable outcome to these opportunities is. If one or more of
these funding transactions is completed, the Company believes there will be


                                      F-13

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



sufficient working capital to fund operating deficits for fiscal year 2006 and
for the next 2 to 3 years. 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 operations until FAA certification is obtained and sales of Hawk 4
gyroplanes reach planned levels.

         The Company does not anticipate that operating costs of personnel,
facilities, research and development and sales and marketing will decrease from
levels reported for fiscal year 2005, and may increase.

         There can be no guarantee or assurance that the Company will be
successful in its ability to generate revenue or to raise capital at favorable
rates or at all. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Note 3: Restatement and 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 8). 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. At June 30, 2005, the Company had issued 5,750,000 shares of
common stock as collateral.

         The calculation of the weighted average number of common shares
outstanding previously reported for the year ended June 30, 2004 and prior years
did not exclude common shares that have been issued as collateral for certain
notes payable to related parties. Therefore, the calculation of net loss per
share was not correctly made. The consolidated statement of operations for the
year ended June 30, 2004 has been restated to correct the error in reporting the
weighted average number of common shares outstanding and the net loss per share
as follows.



                                      F-14
<PAGE>

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




  Weighted average number of common shares
     outstanding - basic and diluted as previously reported         107,119,000
  Adjustment                                                         (5,750,000)
                                                                  --------------
  Weighted average number of common shares
     outstanding - basic and diluted as adjusted                    101,369,000
                                                                  ==============


  Net loss per share  - basic and diluted as previously reported  $       (0.13)
  Adjustment                                                              (0.01)
                                                                  --------------

  Net loss per share  - basic and diluted as restated             $       (0.14)
                                                                  ==============


Note 4:  Related Party Notes Receivable

         Related party notes receivable, resulting primarily from cash advances,
consist of two unsecured notes receivable totaling $32,000 from officers and
shareholders, bearing interest at 8% per annum and due on demand.


Note 5:  Detail of Certain Balance Sheet Accounts

  Inventories consist of the following:

  Raw materials and parts                                         $     226,000
  Work-in-progress                                                      169,000
                                                                  --------------

                                                                  $     395,000
                                                                  ==============


  Property and equipment consists of the following:

  Equipment and tools                                             $     825,000
  Computer equipment and software                                       317,000
  Aircraft                                                              120,000
  Vehicles                                                               66,000
  Leasehold improvements                                                 53,000
  Furniture                                                              55,000
                                                                  --------------

                                                                      1,436,000
  Accumulated depreciation and amortization                          (1,145,000)
                                                                  --------------

                                                                  $     291,000
                                                                  ==============

                                      F-15
<PAGE>

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



  Accounts payable consist of the following:

  Trade accounts payable                                          $     365,000
  Related party payables                                                577,000
                                                                  --------------

                                                                  $     942,000
                                                                  ==============

  Deferred revenue consists of the following:

  Related party customer advance payments                         $     274,000
  Customer advance payments                                             314,000
                                                                  --------------

                                                                  $     588,000
                                                                  ==============

  Deposits consist of the following:

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

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

         Related parties consist of officers, directors and shareholders.


Note 6:  Accrued Expenses:

         Accrued expenses reported as current liabilities consist of the
following:


         Compensation and related taxes                           $     563,000
         Related party interest                                       2,844,000
         Interest                                                       497,000
         Consulting fees                                                 81,000
         Finders' compensation                                           74,000
         Royalties to related parties (Note 19)                          12,000
         Other                                                           78,000
                                                                  --------------

         Total                                                    $   4,149,000
                                                                  ==============

         Accrued related party interest payable is comprised of interest expense
payable on notes payable to related parties, consisting primarily of
stockholders of the Company.



                                      F-16
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)


         Long-term accrued expenses consist of the following:


         Deferred compensation                                    $   3,010,000
         Accrued payroll taxes on deferred compensation                 131,000
         Accrued interest on deferred compensation                      383,000
                                                                  --------------

         Total                                                    $   3,524,000
                                                                  ==============

         The deferred compensation is payable to ten 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. Therefore, the deferred compensation and related accrued
payroll taxes and interest payable are classified as long-term liabilities at
June 30, 2005. 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. 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.


Note 7:  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 2005                     $291,000

         Unsecured note payable to a vendor with interest
            at 12%, in default as of June 2005                          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

         Unsecured note payable to a company with interest
            at 12%, due on demand                                        10,000


                                      F-17
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         Unsecured notes payable to a governmental sponsored
            organization due in monthly installments of 3%
            of gross monthly revenues, including interest at
            the prime rate plus 2%(6% at June 30, 2005), in
            default as of June 2005                                     100,000

         Other unsecured notes payable                                    7,000
                                                                  --------------

                                                                  $     779,000
                                                                  ==============

         Short-term notes payable at June 30, 2005 include notes payable to
vendors and others totaling $663,000 that is technically in default. In
addition, the Company is delinquent in making payments of accrued interest
payable of $460,000 on this debt at June 30, 2005. The Company continues ongoing
negotiations with these lendors and has, in most instances, been granted grace
periods and extensions without receipt of formal notices of default or threat of
legal action.

         Certain of these note holders may choose to convert outstanding
principal and interest balances to common stock at a price of $0.20 per share.
At June 30, 2005, $118,000 of principal and interest were convertible into
587,578 shares of the Company's common stock (see Note 13).


Note 8:  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                                 $   3,292,000

         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                                       821,000

         Unsecured notes payable to a stockholder with interest
            at 60%, due on demand                                        50,000

         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 on demand                                     100,000

         Unsecured notes payable to stockholders with interest
            at 8%, due in the next twelve months or on demand           554,000

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

                                      F-18

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



         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                      365,000

         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                                     5,000

         Capital lease obligations (see Note 10)                        660,000
                                                                  --------------

                                                                  $   6,570,000
                                                                  ==============

         Related party notes payable at June 30, 2005 include notes payable and
capital lease obligations totaling $1,103,000 that are technically in default.
In addition, the Company is delinquent in making payments of accrued interest
payable of $57,000 on this related party debt at June 30, 2005.

         Certain shareholder related party note holders may choose to convert
outstanding principal and interest balances to common stock. The prices per
share range from $0.20 per share to $1.25 per share. At June 30, 2005,
$7,561,000 of principal and interest were convertible into 21,646,246 shares of
the Company's common stock (see Note 13).

         A total of 5,750,000 shares of the Company's common stock have been
issued as collateral for related party notes payable totaling $563,000 (see Note
3).


                                      F-19
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



Note 9:  Related Party Long-Term Debt

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

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

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

         Total                                                    $     361,000
                                                                  ==============

         The stockholders may choose to convert outstanding principal and
interest balances to common stock at $0.20 per share. At June 30, 2005, $382,000
of principal and interest were convertible into 1,910,545 shares of the
Company's common stock (see Note 13).

         Future maturities of related party long-term debt are as follows:

         Years Ending June 30:

                  2006                                            $           -
                  2007                                                  175,000
                  2008                                                        -
                  2009                                                        -
                  2010                                                  186,000
                                                                  -------------

                                                                  $     361,000
                                                                  ==============

Note 10:  Capital Lease Obligations

         The Company has entered into capital lease agreements with a related
party financial institution for certain property and equipment and research and
development components. The principals of the financial institution are
shareholders of the Company who are also considered related parties. Assets held
under capital lease and included in property and equipment at June 30, 2005 are
as follows:

         Shop equipment and tools                                 $     170,000
         Accumulated amortization                                      (125,000)
                                                                  --------------

                                                                  $      60,000
                                                                  ==============

         Depreciation expense for assets under capital lease is included with
depreciation expense for all other depreciable assets.



                                      F-20
<PAGE>

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



         Future minimum lease payments are as follows:

         Year Ending June 30:
                2005                                              $     684,000

                Less amount representing interest                       (24,000)
                                                                  --------------

         Present value of minimum lease payments (see Note 8)     $     660,000
                                                                  ==============

         Under the terms of the capital leases, if a lease is in default the
lessor has the ability to declare as due and payable all unpaid rentals under
the lease. As of June 30, 2005, all capital leases were in default.

Note 11:  Stockholder Put Options and Put Option Liability

         In September 2000, the Company entered into a Common Stock Purchase
Agreement with a stockholder whereby the stockholder purchased from the Company
875,000 shares of the Company's restricted common stock for $350,000 cash, or
$0.40 per share. In the agreement, the Company granted the stockholder the right
to put to the Company, at the stockholder's election, up to 875,000 shares of
the common stock at the rate of $1.60 per share, exercisable on September 28,
2003 or within thirty calendar days thereafter.

         During the year ended June 30, 2004, the Company and the stockholder
entered into a modified Stock Purchase Agreement to redefine and complete the
obligations of the first agreement. Pursuant to the modified agreement, the
stockholder put the 875,000 common shares to the Company for an aggregate price
of $1,400,000. The Company issued 6,125,000 shares of restricted common stock in
net settlement of the put, with a market value of $.20 per share, or $1,400,000
assigned to the shares issued and recorded as an increase to the common stock
account. However, the other side of this accounting entry, a debit of $1,400,000
for the redemption of the 875,000 shares was also recorded to the common stock
account. The debit and credit for the same amount in the same account netted to
zero with the net result of no value assigned to the transaction in the common
stock account. The Company retained an exclusive option through November 15,
2004 and a non-exclusive option from November 16, 2004 through November 15, 2008
to repurchase the 6,125,000 common shares. The exercise price of this option
initially was $0.20 per share, increasing by once cent ($0.01) per share every
four months from November 15, 2003 until July 15, 2008.

         In November 2000, the Company entered into a Common Stock Purchase
Agreement with the same stockholder whereby the stockholder purchased 750,000
shares of the Company's restricted common stock for $300,000 cash, or $0.40 per
share. In the agreement the Company granted the stockholder the right to put to
the Company, at the stockholder's election, up to 750,000 shares of the common
stock at the rate of $1.60 per share, exercisable on November 7, 2003 or within
thirty calendar days thereafter. At the option of the Company, the Company
retained the right to redeem up to 750,000 of the shares of common stock from
the stockholder at redemption prices of $1.20 per share prior to November 7,
2002, $1.40 per share between November 8, 2002 and May 7, 2003 and $1.60 per
share between May 8, 2003 and November 7, 2003.



                                      F-21

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



         During the year ended June 30, 2004, the Company and the stockholder
entered into an Amendment to the Common Stock Purchase Agreement Dated November
7, 2000 whereby the Company extended the dates to which the stockholder can
exercise the put option and the Company can exercise the option to redeem, and
increased both the put prices and the optional redemption prices. As a result,
the stockholder has 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 may 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 may redeem 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 shall be paid 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 Amendment to the Common Stock Purchase Agreement Dated November 7,
2000 was finalized in the fiscal year ended June 30, 2004, therefore the put
option is subject to the accounting requirements of Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, which was effective for periods
beginning after June 15, 2003. Pursuant to SFAS No. 150, the Company has
estimated the value of its obligation under the put option at $1,515,000 at June
30, 2005 using the Black-Scholes option pricing model. This obligation is
recorded as a current liability in the consolidated balance sheet as of June 30,
2005. Until the obligation is satisfied, the Company will continue to use 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 requires adjustment, with changes in fair
value recognized as interest cost. The fair value of the put option liability is
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 may result in material
changes in the fair value of the put option liability.

         At its option, the Company may redeem 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 shall be paid 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.

Note 12:  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, 2005, the Board of
Directors has set rights, terms and preferences of Series B and Series A
Preferred Stock for issue.



                                      F-22

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



         Series B 15% Preferred Stock

         At June 30, 2005, there were 35,199 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 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.

         In February 2002, a total of 15,000 shares of Series B 15% Preferred
Stock with a Stated Value of $15,000,000 were originally issued in exchange for
12,500,000 shares of common stock and related put options valued at $5,000,000.
Accretion of the difference was computed under the straight-line method over the
life of the Series B 15% Preferred Stock.

         When originally issued, the Company was obligated on October 31, 2003
to redeem all issued and outstanding shares of the Series B 15% Preferred Stock.
The Company had the option to pay the redemption price, for a premium, in
registered, unrestricted, shares of common stock of the Company with a
redemption price equal to 125% of the Stated Value of the shares of the Series B
15% Preferred Stock plus 125% of all accrued but unpaid dividends thereon.
Accretion of the premium was computed under the straight-line method over the
life of the initial Stated Value and over the life of accrued but unpaid
dividends thereon, as applicable.

         On October 14, 2003, and in exchange for 2,500,000 warrants to purchase
common shares at $0.30 per common share, exercisable within three years of the
date of issue, the holders of the shares of the Series B 15% Preferred Stock
agreed to extend the redemption date to October 31, 2005. The Company estimated
the value of these warrants at $125,000 using the Black-Scholes option pricing
model and charged this amount to interest expense. In connection with this
extension, the Company and the holders also agreed to certain modifications to
the features of the Series B 15% Preferred Stock, and the Company amended its
Articles of Incorporation as follows:

         o    Eliminated the Company's option to pay the redemption price in
              shares of its common stock and requires the redemption price to be
              paid in cash.

         o    Increased the amount of indebtedness that the Company may incur
              without consent of the holders of the Series B 15% Preferred Stock
              from $18 million to $18.5 million.

         o    Requires the Company to give notice to the holders of the Series B
              15% Preferred Stock prior to making any capital expenditures in
              excess of $300,000.


                                      F-23

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



         With the elimination of the option to redeem the Series B Preferred
Stock with shares of the Company's common stock, the Company discontinued
accretion of the anticipated premium, and recorded a contribution to capital for
the amount of the accretion of the premium recorded prior to the amendment to
the Articles of Incorporation. The result was an increase to common stock and a
decrease to the Series B Preferred Stock in the amount of $4,844,000.

         In October 2003, the Company issued 180 shares of Series B 15%
Preferred Stock, with a redemption date of October 31, 2005, in exchange for
notes payable and accrued interest payable totaling $180,000.

         In November 2003, the Company issued 8,000 shares of Series B 15%
Preferred Stock with a Stated Value of $8,000,000 in exchange for cash of
$2,000,000. Accretion of the difference is computed under the straight-line
method over the life of the Series B 15% Preferred Stock. In connection with
this transaction, the Company and the holders of the Series B 15% Preferred
Stock agreed to additional modifications to the features of the Series B 15%
Preferred Stock, and the Company further amended its Articles of Incorporation
as follows:

         o    Defined the maturity date of the Series B 15% Preferred Stock as
              the first to occur of (a) October 31, 2005 (see however Note 21),
              (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    Requires pro rata redemptions of the Company's Series B 15%
              Preferred Stock six months from the date that the Company receives
              proceeds from certain financing transactions that exceed $20
              million in the aggregate.

         o    Requires all redemptions of Series B 15% Preferred Stock to be
              made wholly in cash.

         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.

         As a result of the November 2003 modifications 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
October 31, 2005 maturity date (extended to January 1, 2007, see Note 21). At
June 30, 2005, the recorded value of the Series B 15% Preferred Stock was
$33,009,000, which was recorded as a long-term liability.

         Statement of Financial Accounting Standards No. 150 (SFAS 150),
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity," was issued in May 2003 and is effective for periods
beginning after June 15, 2003. SFAS 150 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.



                                      F-24

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



         For the years ended June 30, 2005 and 2004, and for all periods
beginning after June 15, 2003, 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. Previously, the Company's Series B 15%
Preferred Stock was classified as equity. As a result, at June 30, 2005 the
Company's Series B 15% Preferred Stock is classified as a liability. Because the
carrying value of the Series B 15% Preferred Stock was the same before and after
adoption of SFAS 150, the Company's consolidated statement of operations for the
year ended June 30, 2004 does not include the cumulative effect of a change in
accounting principle as required by Paragraph 29 of SFAS 150. Series B 15%
Preferred Stock accretion and dividends have been expensed during the years
ended June 30, 2005 and 2004 as an interest cost. Previously, Series B 15%
Preferred Stock accretion and dividends were not expensed as an interest cost,
but were applied to the net loss applicable to common stockholders.

         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 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.



                                      F-25
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         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.

         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 13:  Common Stock

         On October 8, 2004, pursuant to the joint written consent of the Board
of Directors of the Company and the combined majority of holders of the
Company's common stock and holders of the Company's Series A Preferred Stock
entitled to vote together on such matters as one class (the "Majority
Stockholders") in lieu of a special meeting of the stockholders, the following
actions were approved:

         o    The Company amended its articles of incorporation to increase the
              number of authorized shares of common stock from two hundred
              million (200,000,000) shares to five hundred million (500,000,000)
              shares.

         o    The Company amended its 2000 Stock Option Plan to increase the
              number of shares of common stock available for issuance under the
              Plan from thirty million (30,000,000) shares to sixty million
              (60,000,000) shares.

         The notice of these actions taken pursuant to the joint written consent
of the Majority Stockholders was mailed to the stockholders of the Company in
December 2004.

         During the year ended June 30, 2005, the Company issued a total of
13,985,429 shares of its restricted common stock, primarily to accredited
investors in transactions exempt from registration. These shares were issued
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 shares were issued for the following consideration: 12,574,580
shares for cash of $2,515,000; 10,750 shares in payment of finders' compensation
on the sale of common stock; 287,500 shares in payment of accounts payable of
$57,000; 355,125 shares in payment of accrued expenses of $71,000; 440,990
shares in payment of the Company's matching contribution to its 401(k) plan of
$88,000; 185,000 shares in payment of consulting services of $32,000; 65,109
shares in payment of interest expense of $13,000; and 66,375 shares for the
return of $13,000 of deposits. In addition, total finders' compensation on the
sale of common stock totaled $131,000. The Company did not use underwriters in
the sale or placement of these unregistered shares of common stock.


                                      F-26
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



         The Company has generally placed a value of $.20 per share on non-cash
transactions where shares of the Company's restricted common stock have been
issued in payment of goods and services, reduction of debt and other purposes.
The Company believes, based on the many cash sales of the Company's restricted
common stock during the year ended June 30, 2005, all at $.20 per share, that
$.20 per share is an appropriate value per share to use for issuances of
restricted common shares in non-cash transactions. The $.20 per share also
approximated the average quoted market price of the Company's common stock
during the year.

         During the year ended June 30, 2005, the Company issued a total of
44,889,921 stock options: 23,250,000 options to employees under the Company's
ISO 2000 stock option plan with exercise prices of $0.25 to $1.00 per share
exercisable for periods of 3 to 7 years; 19,265,830 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; 1,596,591
options as a loan origination fee or other compensation to lendors with an
exercise price of $0.20 per share exercisable for a period of 1 to 3 years; and
777,500 options to vendors for services with exercise prices of $0.20 to $1.00
per share exercisable for periods of 1 to 5 years. The Company estimated the
value of the vested portion of options issued to lenders at $61,000 using the
Black-Scholes option pricing model, and charged this amount to interest expense.
The Company estimated the value of the 277,500 options issued to vendors for
services at $12,000 using the Black-Scholes option pricing model, and charged
this amount to general and administrative expense.

         During the years ended June 30, 2003 and 2004, the Company issued a
total of 4,850,000 and 900,000 shares of restricted common stock, respectively,
as collateral for certain convertible notes payable. No value was assigned to
these shares because the shares are further 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 5,750,000
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.

         The conversion prices per share of the convertible notes payable and
long-term debt disclosed in Notes 7, 8 and 9 were based on the cash price per
common share paid in private placement transactions on or near the date the debt
agreements were negotiated. The cash price per common share and the conversion
prices per share approximated the quoted market price per share of the Company's
common stock on or near the date the note agreements were negotiated. The
conversion prices per share have all been set at the market price of the common
stock, or above the market price whenever possible, with market price typically
established at the price per share that the Company was selling restricted
common shares for cash at the time. Because the conversion price per share was
generally "under water" in substantially all of these transactions, the Company
concluded that the conversion terms did not represent a beneficial conversion
feature. Therefore, no beneficial conversion features have been accounted for in
the Company's consolidated financial statements for these transactions.


                                      F-27
<PAGE>
                          GROEN BROTHERS AVIATION, INC.
                   Notes to Consolidated Financial Statements
                                   (Continued)



Note 14:  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.

         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, 2004                and Warrants        Exercise Price
                                         --------------------------------------
    Outstanding at Beginning of Year             40,630,567             $ 0.56
    Granted                                      20,718,851               0.26
    Exercised                                       (25,000)              0.20
    Canceled                                     (1,175,000)              0.55
    Expired                                     (10,163,914)              0.50
                                         --------------------------------------

    Outstanding at End of Year                   49,985,504             $ 0.45

                                         ======================================

    Exercisable at End of Year                   41,307,169             $ 0.45

                                         ======================================


                                 F-28
<PAGE>

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



                                          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
    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

                                         =======================================


         Of the total options and warrants outstanding, 34,175,000 and
17,300,000 options were granted under the Plan at June 30, 2005 and 2004,
respectively.

         The following table summarizes information about stock options and
warrants outstanding at June 30, 2005:

<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
---------------------------------------------------------------------------------------------------------

<C>       <C>        <C>              <C>                   <C>         <C>                  <C>
$  0.15 - 0.20       18,756,171       $    0.18             1.81        17,756,171           $    0.18
   0.25 - 0.30       40,083,750            0.25             3.38        24,518,751                0.26
   0.50 - 0.63        2,901,000            0.54             1.36         2,734,333                0.54
   1.00 - 1.10       16,475,000            1.01             3.27         9,233,334                1.01
-------------------------------------------------------------------------------------------------------

 $ 0.15 - 1.10       78,215,921        $   0.40             2.90        54,242,589           $    0.37
=======================================================================================================
</TABLE>


                                      F-29
<PAGE>


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


Note 15:  Income Taxes

         The benefit for income taxes differs from the amount computed at the
federal statutory rate as follows:

                                                     Years Ended June 30,
                                               ---------------------------------
                                                   2005             2004
                                               ---------------------------------
         Income tax benefit at
           federal statutory rate                 $  5,208,000     $  4,257,000
         Series B preferred stock interest
           expense                                  (3,121,000)      (2,597,000)
         Research and
           development credit                           96,000          126,000
         Other                                        (251,000)         (76,000)
         Change in valuation
           allowance                                (1,932,000)      (1,710,000)
                                               ---------------------------------

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


         Deferred tax assets (liabilities) are as follows:

           Net operating loss carryforwards                       $  21,245,000
           Research and development credit carryforward               1,845,000
           Charitable contributions carryforward                         57,000
           Accrued payroll                                            1,341,000
           Other                                                         51,000
           Valuation allowance                                      (24,539,000)
                                                                  --------------

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

         At June 30, 2005, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $54 million which
will begin to expire in 2006. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect at the time the net
operating loss carryforwards can be utilized. The Tax Reform Act of 1986 limits
the annual amount that can be utilized for certain of these carryforwards as a
result of changes in ownership of the Company. An ownership change may have
occurred which may severely impact the utilization of the net operating loss
carryforwards.

         Due to uncertainties surrounding the realization of all carryforwards
and currently non-deductible accruals, a valuation allowance has been
established to offset the net deferred income tax asset resulting from such
deferred tax items.


                                      F-30
<PAGE>


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



Note 16:  Supplemental Statement of Cash Flows Information

         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.

         During the year ended June 30, 2004, the Company:

         o    Acquired aircraft through reduction in accounts receivable of
              $29,000.

         o    Increased related party notes receivable and accrued expenses by
              $5,000.

         o    Decreased related party notes receivable through reduction of
              accrued expenses payable to related parties of $38,000.

         o    Issued common stock in payment of debt of $63,000.

         o    Issued common stock in return of deposits of $317,000.

         o    Issued common stock in payment of accounts payable of $180,000.



                                      F-31

<PAGE>

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



         o    Increased prepaid expenses through the issuance of accounts
              payable of $12,000.

         o    Issued stock options in payment of accounts payable of $50,000.

         o    Decreased deposits through the issuance of debt of $187,000.

         o    Paid debt of $100,000 and accrued interest payable of $80,000
              through the issuance of Series B Preferred Stock of $180,000.

         o    Reduced debt through the increase of accrued expenses of $162,000.

         o    Increased the put option liability and decreased common stock by
              $1,448,000 through the amendment of a put option.

         o    Transferred debt of $3,000 to accounts payable.

         o    Accrued interest on the stock subscription receivable, which
              effectively increased the Series A Convertible Preferred Stock
              amount by $43,000.

         o    Cancelled the Series A Convertible Preferred Stock of $2,760,000
              through reduction of the stock subscription receivable of
              $2,760,000.

         o    Issued 6,125,000 shares of common stock as net settlement of a
              stockholder put option.

         o    Collateralized certain notes payable with 900,000 shares of common
              stock.

         o    Issued 81,500 shares of common stock in satisfaction of finders'
              compensation on equity sales.

         o    Increased common stock and decreased the Series B 15% Preferred
              Stock by $4,844,000 for the contribution to capital of accretion
              of premium on the Series B 15% Preferred Stock.

         Actual cash paid for interest was $162,000 and $162,000 in fiscal years
2005 and 2004, respectively.


                                      F-32
<PAGE>

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




17:  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

                  2006                                             $    144,000
                  2007                                                  147,000
                  2008                                                  122,000
                                                                   ------------

                                                                   $    413,000
                                                                   ------------

         Rental expense for noncancellable operating leases was $236,000 and
$221,000 for the years ended June 30, 2005 and 2004, respectively.

Note 18:  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 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. In
fiscal year 2004, and based on contributions by employees during calendar year
2003, the Company made a matching contribution to the Plan in the form of
340,841 shares of its common stock valued at $68,000. Shares issued under the
Plan are "restricted" as defined under the Securities and Exchange Commission
Rule 144.

Note 19:  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, 2005,
royalties payable totaled $6,000 to each of these individuals, which amounts are
included in cost of sales in the consolidated statement of operations for the
year ended June 30, 2005. No royalties were recorded in fiscal year 2004.

         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.



                                      F-33

<PAGE>

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



         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 20:  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 21.  Subsequent Events

         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
long-term liability of $33,009,000 in the consolidated balance sheet as of June
30, 2005 because of the extension of the redemption date to January 1, 2007.

         The extension requires the following consideration to be paid to the
Series B Holders:

         o    The cancellation 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 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.


                                      F-34

<PAGE>

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



         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 of amounts due to the
              Series B Holders in accordance with an agreed-upon formula.




                                      F-35