UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-K
 
 RANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For
the fiscal year ended June 30, 2009
 
 oTRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the
transition period from ______________ to________________
 
 Commission
file number 000-33173
 
 Moller
International, Inc.
 
 California
              68-0006075(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 1222
Research Park Drive, Davis, CA 95618
 (530)
756-5086
 
 Securities
registered under Section 12(b) of the Exchange Act: None
 
 Securities
registered under Section 12(g) of the Exchange Act:
 Common
Stock, No Par Value
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
 
 Yes R No o
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes o No R
 
 The
issuer’s revenues for its most recent fiscal year ended June 30, 2009 are
$542,904.
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates is $5,332,578 with a total of 21,330,314 shares owned by
non-affiliates as of September 18, 2009and the
closing price of such common equity of $0.25 per share on the OTC Bulletin Board
on such date.
  As of
October 12, 2009, the Company had 47,623,450 common shares issued and
outstanding.
 
 Transitional
Small Business Disclosure Format: Yes þ No o
  -i-






PART
      IItem
      1
              Business
              1Item
      2
              Properties
              23Item
      3
              Legal Proceedings
              24Item
      4
              Submission of Matters to a Vote of Security Holders
              24PART
      IIItem
      5
              Market for Registrant’s Common Equity and Related Stockholder
      Matters
              25Item
      6
              Selected Financial Data
              26Item
      7
              Management’s Discussion and Analysis of Financial Condition and Results of
      Operation
              26Item
      8
              Financial Statements and Supplementary Data
                All Financials
                Balance Sheet
                Income Statement
                Notes to Financial Statements
              29Item
      9
              Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              41Item
      9A
              Controls and Procedures
              41Item
      9B
              Other Information
              41PART
      IIIItem
      10
              Directors and Executive Officers of the Registrant
              43Item
      11
              Executive Compensation
              44Item
      12
              Security Ownership of Certain Beneficial Owners and
    Management
              45Item
      13
              Certain Relationships and Related Transactions
              46Item
      14
              Principle Accounting Fees and Services
              46PART
      IVItem
      15
              Exhibits and Financial Statement Schedules
              46ExhibitsSignatures
              4731.1
              4831.2
              4932.1
              5032.2
              51




-ii-





PART
I


Item 1.
BUSINESS
  OUR
COMPANY
 
 Moller
International, Inc. was incorporated April 19, 1983 in California for the
purpose of designing, developing, manufacturing and marketing a line of Vertical
Take-off and Landing ("VTOL") aircraft. Our flagship model, the M400 Skycar(R)
is currently under development and testing and is projected to be a 4-passenger
aircraft that will combine the cruise performance of an airplane with the
vertical-flight capabilities of a helicopter. It is designated the "M400
Skycar(R)." A related product we are developing is the Aerobot(R) line of
unmanned aerial vehicles. While certain engineering problems remain to be solved
before we can deliver a production aircraft meeting our design performance
specifications, we have been able to conduct flight tests on a production
prototype since 2002, including approximately 30 unmanned, tethered tests of the
vehicle’s vertical takeoff and landing capabilities.
 
 The M200X,
a vehicle that was developed in the 1970s and demonstrated in approximately 150
manned flights up until the early 1990s, is now being readied for market.
Funding constraints have forced us to reschedule those vehicles scheduled for
completion this calendar year into next year’s goal of 12 to 40 units, but the
Company continues to move forward and anticipates that the M200-based products,
now referred to as the “Neuera” (pronounced “new era”), will be the first
vehicles that the company brings to market.
 
 Since our
inception, we have not been subject to a receivership, bankruptcy or similar
proceeding, nor have we been involved in any material reclassification, merger,
acquisition, or purchase or sale of a significant amount of our
assets.
 OUR
PRODUCTS
 
 We
currently have no products that are ready to go to market, although we
anticipate availability of M200-based products within the next 6-to-12 months.
We are in the latter stages of development of a number of other innovative
aviation products that we hope to launch in the coming years. Our founder, Dr.
Paul S. Moller, has for more than thirty-five years been engaged in research and
development activities aimed at designing and producing an aircraft that
combines the speed and efficiency advantages of the fixed-wing airplane with the
vertical take-off and landing and hovering capabilities of the helicopter. We
believe that such an innovation will deliver to a wide range of conventional
aircraft operators a new level of utility and economy for a variety of aerial
applications. By-products of our aircraft development activities, in particular
the Moller Rotary Engine and the Aerobot remotely-flown air-borne vehicle,
should become important products in their own right and could account for an
important segment of our overall sales once production commences. Except as
noted above it remains uncertain when, if ever, we will enter commercial
production of any of our other products.
 
 The
Skycar, Neuera and Aerobot are products we plan to offer in the future. They are
based upon fundamental research and on earlier prototypes developed by Moller
International. The Skycar concept is through the detail design stage and we have
a prototype undergoing testing at this point. There are significant technical
issues that remain unproven and may preclude us from meeting the design
objectives for the Skycar. The Aerobot is a limited-production vehicle, with
twelve prototypes built, tested and delivered to end-users. Neither vehicle is
ready for volume production at this time, nor is there any guarantee that they
will ever reach a point where they are viable products.
 
 M400
Skycar
 
 Our
principal product will be the M400 Skycar vertical take-off and landing (“VTOL”)
aircraft. The concept of the Skycar as a personal transportation vehicle is that
it would be so practical and affordable that it could become a preferred mode of
transport, replacing at once the automobile and the private or commercial
airplane for many trips. Should we succeed in achieving a production aircraft
design meeting our target specifications, we believe the M400 will support such
a degree of usefulness.
 -1-







Moller
M400 “Skycar” prototype
 Following
are our current target design and performance specifications for the M400
4-passenger (including pilot) aircraft:
 Passengers
                    4
                    
                    Dimensions
      (LxWxH)  19.5'x 8.5'x 7.5'Cruise
      speed @ 20,000’
                    275
      mph
                    
                    Takeoff
      and landing area
                    35-ft
      diaTop
      speed @ 13,200’
                    375
      mph
                    
                    Noise
      level at 500 ft (goal)
                    65
      dbaMaximum
      rate of climb
                    6,000
      fpm
                    
                    Critical
      failure components
                    noneMaximum
      range
                    750
      mi
                    
                    Complex
      moving parts
                    fewPayload
      excluding fuel
                    750
      lbs
                    
                    Piloting
      difficulty
                    lowFuel
      consumption
                    20
      mpg
                    
                    Vertical
      takeoff and landing
                    yesOperational
      ceiling
                    36,000
      ft
                    
                    Garage
      parking/roadability
                    yesGross
      weight
                    2,400
      lbs
                    
                    Uses
      non-fossil fuel (ethanol)
                    yesEngine
      power (2 min rating)
                    1200
      hp
                    
                    Emergency
      parachutes
                    yes
  Earlier
performance numbers vary somewhat from the number shown above. We continuously
revise the performance projections to reflect the results of ongoing analysis
and changes to the design characteristics of various components. Recent
decreases in projected range were the result of a change to ethanol fuel.
Installed horsepower has changed due the projected use of a multi-stage,
compound rotary engines of our design, and the on-board stabilization
electronics have been redesigned to be faster and more reliable.
 
 We believe
that if we succeed in achieving the above cruising speeds, altitudes, payloads,
and fuel economy per passenger mile in a production model aircraft, the Skycar
will compare favorably with today’s light twin-engine and turbo-prop airplanes.
But the M400 should offer the additional advantage of needing no runway for
take-off and landing, since it will be able to hover and take-off vertically
like a helicopter. But because the M400’s VTOL capability will be provided by
our proprietary “ducted fan” technology rather than a helicopter-type system of
main and anti-torque rotors, maintenance and repair costs should be
significantly less and safety should be considerably enhanced.
 
 It is
important to recognize that the above design specifications are theoretical,
based on research, engineering, and flight- and wind tunnel testing of various
components. They have not yet been demonstrated to be achievable in a production
model aircraft.
 -2-
  The
following table compares certain of the target performance specifications of the
M400 to a current production model helicopter and fixed-wing airplane that we
believe might be potential competitors for production model M400
customers:
  Powered-Lift
                  Helicopter
                  AirplaneMoller
      International
                    M400 Skycar®
                  McDonnell
      Douglas
                    MD
      520 N
                  Socata
      TMB S.A.
                    TBM
      700PerformanceHigh
      Speed Cruise
                    Maximum
      Speed
                    Operational
      Ceiling (ft)
                    Maximum
      range
                    Rate
      of Climb
                    Vertical
      takeoff
                    and landing
                  330
      mph
                    375
      mph
                    35,000
                    750
      mi
                    4,900
      fpm
                    yes
                  155
      mph
                    175
      mph
                    16,300
                    267
      mi
                    2,069
      fpm
                    yes
                  335
      mph
                    345
      mph
                    30,000
                    1,796
      mi
                    2,380
      fpm
                    noPayload
      and CapacityPassengers
                    Gross
      Weight
                    Maximum
      Net Payload
                  4
                    2,400
      lbs
                    750
      lbs
                  3 to
      4
                    1,591
      lbs
                    1,106
      lbs
                  6
                    4,685
      lbs
                    805
      lbsSafetyCritical
      failure
                    components
                    Complex
      moving components
                  None
                    Few
                  Several
                    Many
                  One
                    FewOtherMaintenance
      costs
                    Piloting
      difficulty
                    Garage
      parking / roadability
                  Low
                    Low
                    Yes
                  Very
      high
                    Very
      high
                    No
                  Moderate
                    High
                    NoPrice
                  $995,000
                  $1,010,000
                  $2,697,000
 
 The above
figures represent the actual manufacturers’ performance specifications for the
helicopter and airplane models listed, and our theoretical specifications for
the Skycar M400. They are presented here to illustrate the comparative utility
of the three types of aircraft. However, it is not yet certain that we will
indeed achieve our target specifications, nor will we know the actual values for
the Skycar until we have completed further development. Also, the $995,000
selling price for the Skycar is estimated, based on numerous assumptions that
may or may not bear out over time. The actual selling price may be more or less
than $995,000.
  We believe
that certain specific design features of the Skycar® will
further facilitate its eventual acceptance as an alternative vehicle of mass
transportation. These features will include:
 
 •
                ● 
      Computer-augmented flight stabilization
system
  •
                ● 
      Fly-by-wire control systems (electrical wires take the place of mechanical
      cables) and on-board computers which can interface with and be controlled
      by remote ATC system computer and navigation
  resources
  •
                ● 
      High-speed capability, which maximizes the benefits of personalized air
      travel.
  -3-
   •
                ●  Hover
      or low speed capability, which provides the ability to cue up for entry to
      or exit from highly controlled air
planes.
  •
                ● 
      Ability to climb, descend, accelerate and decelerate rapidly to enter and
      exit air-lanes quickly
  •
                ● 
      Relative insensitivity to gusts and wind shear that makes tightly
      constrained flight possible
  •
                ●  VTOL
      ability to land anywhere which allows emergency exit from
      air-lanes
  •
                ●  Small
      size which reduces required vertiport infrastructure
      dimensions
  Notwithstanding
these design features, the utility of the Skycar in mass transportation will be
limited by existing laws and regulations. For example, Federal Aviation
Regulations (“FARs”) prohibit operation of civil aircraft within certain
airspace, and require minimum altitudes above, and horizontal separation from,
obstacles on the ground and in other airspace. In addition, much of the airspace
in and around major metropolitan areas requires that pilots operating in such
areas hold special qualifications. And although we intend that the Skycar have
the capability to travel from “garage to garage,” in urban and suburban areas
existing laws and regulations will preclude most such “off-airport”
operations.
 
 Moreover,
mass transportation using the Skycar would likely have to rely on some future
navigation system such as NASA’s (National Aeronautics and Space Administration,
an agency of the federal government) proposed Small Aircraft Transportation
System (“SATS”), which is funded with public funds. Demonstrations of a “Highway
in the Sky” technologies have been emerging for the past several years and the
Company continues to believe it can rely on these technologies for many of the
navigational requirements of the Skycar.
 
 Environmental
Noise Issues
 
 The
theoretically achievable noise level of the M400 Skycar with conventional
muffling and noise abatement technologies would allow it to fly with somewhat
lower noise levels than present fixed-wing aircraft. It should be considerably
quieter than a helicopter because of the enclosed fans instead of the open rotor
blades. Use of urban area vertiports is unlikely due to city noise abatement
laws unless the Skycar were to employ some degree of mutual noise cancellation.
Tests to date by other researchers suggest that a 15-decibel drop in noise is
achievable with mutual noise cancellation. If so, it would be possible for the
Skycar to operate from most locations except the user’s home, where a 30-decibel
drop in noise may be required by noise abatement laws. To achieve this reduction
in noise level as needed for such a flight originating from a residence,
three-dimensional mutual noise cancellation would be required. There is no
assurance that such a reduced level of noise can be achieved for the noise
spectrum generated by the Skycar.
 
 Further
Skycar Development Stages
 
 The
company is currently preparing the M400 Skycar prototype, now designated the
M400X, for an anticipated manned, untethered flight test. The current
configuration of the M400X is equipped with experimental single-rotor rotary
engines. These single-rotor engines are being replaced with more powerful
twin-rotor engines.
 
 Since July
12, 2002, MI has been successfully conducting demonstration hover flights with
this Skycar prototype. The aircraft has flown several times and at altitudes up
to forty feet above ground level in stable, controlled flight. While an overhead
safety line is used during the flights, it has remained slack during the
majority of the flight and never used to support or stabilize the vehicle. The
aircraft has been flown by remote control from the ground and has flown without
an onboard pilot through this stage of the testing. Success at this stage has
depended upon demonstration of a controlled hovering flight, which has now been
achieved and documented for the four-passenger M400 Skycar model as it was on
several occasions for an earlier 2-passenger model. Success at the next stage
will be to demonstrate the same level of controlled flight while the aircraft is
under the control of an on-board pilot. In addition, payload objectives will be
tested with an increasing payload weight, up to the full payload of 750 pounds
if possible.
 -4-
  The
previous unmanned hover tests are complete, and many of the required components
for the engine upgrade are already fabricated. The purpose of the engine change
is to allow the M400 Skycar to undertake “maneuvering” tests at low speed with
the safety of significantly higher reserve power. (“Maneuvering” in this
context, means lateral and vertical movement at a modest speed where lift
remains entirely dependent upon the thrust from the engines (non-aerodynamic
lift.)) The cost for these extended tests is expected to be between $1.5 and $2
million. The risk at this stage centers almost entirely around the reliability
of the various aircraft systems. These flights are to be carried out over water
at altitudes up to 50 feet to lessen the damage to the Skycar should a system
fail and to reduce the risk of fire to the aircraft and injury to the
pilot.
 
 The third
phase of the Skycar test program involves flight speeds sufficiently high so
that direct lift from the ducts is replaced by aerodynamic lift generated on the
wing surfaces, referred to as “transition” testing. This segment of the flight
where the aircraft transitions from one mode of flight to the other is
considered the most technically challenging, and historically is the most
dangerous. Wind-tunnel tests indicate that the Skycar is capable of completing
this transition, however a number of factors are present in free flight that
cannot be accounted for in a wind tunnel. Therefore there is no assurance that
these tests will be successful without incidents that risk both the aircraft and
the pilot. Achieving even one successful transitioning flight would establish
the overall viability of the Skycar approach to this historically difficult
aspect of VTOL aircraft design.
 
 Near-term
Objectives
 
 With over
150 manned and unmanned flight demonstrations of the M200X volantor since 1989
we recognize that these successful and extensive test flights of the Neuera may
provide the Company with a more easily achieved, nearer term product. We also
see an opportunity to offer derivatives of this basic aircraft design for
various utilitarian and recreational applications. While the Skycar is designed
for much higher speed it is also expected to require a lengthy and expensive FAA
certification program. The M200-based products may provide a less expensive and
shorter time to market opportunity. Since the Company is experiencing shortfalls
in available funding which have slowed production plans for the Skycar, we are
now looking to other potential Moller products and their potential ability to
generate near-term revenue.
 
 The
Company feels that the initial market for M200-based products will be for
derivatives that appear exempt from FAA certification requirements. FAA
certification is a detailed analysis, documentation and test process that
applies to most aircraft that operate in the US National air space. It can
require over two years to complete. However there are a number of exceptions to
this requirement. For example, if the user completes 50% of the construction,
the aircraft falls into a category of a “home built” and other rules apply. The
Company estimates there are presently over 35,000 aircraft under construction
nationwide in this category.
 
 Building
aircraft for the “home built” market has been a milestone on the path to a
manufacturer’s FAA certified aircraft production while mitigating some of the
legal liabilities to the manufacturer during this startup period. In the case of
the M200E Neuera volantor we anticipate that the builder will not be required to
participate in the construction of the vehicle’s powerplants or computer
controls, and since the airframe is composed of two halves bolted together, the
user’s assembly time is estimated at less than 50 hours and will require only
rudimentary technical skills. From the Company’s perspective the lower product
liability and minimal assembly labor requirements make the M200E Neuera an
attractive and achievable product to bring to market.
 
 Another
variation to the basic M200 series is the M200G. The M200G Neuera is intended to
operate within ground effect, and thereby may also be exempt from FAA
certification requirements. This low-level of flight allows the craft to operate
below what is commonly considered to be the National Air Space and therefore
appears to not to fall under the jurisdiction of the FAA.
  The
following is a list of potential models that could be derived from the
M200-class volantor:
  • As
demonstrators for marketing purposes and use over one’s own property
(M200D)
  • For
operation within ground effect (up to 10 ft altitude) (M200G)
  • As a
rescue vehicle from side of skyscrapers (Firefly)
 -5-
  • As a
military aircraft (M200M, M200R)
  • Under
the EAA category (home built) (M200E)
  The
Company has extensive hard tooling in place to rapidly produce the airframe and
engines for M200-class vehicles. We intend to replace the analog artificial
stability system used in the original M200X with the latest digital system
originally developed for the M400 Skycar. The most significant differences
between various models involve engine horsepower and seating
arrangement.
  The
various models will emphasize safety as the number one design criteria. The
following design elements will be incorporated in the vehicles to achieve
this:
  • Fueled
by a mixture of 70% ethanol – 30% water. This combination will barely ignite
outside the engine. It then burns very slowly for a short time before
extinguishing itself as the ethanol reduces and the water remains.
  • Air-bags
will be used extensively throughout the cockpit.
  • The
artificial stability system will be highly redundant with at least four
identical computers providing stability control.
  • Able to
tolerate one engine failure during hover. A second failure will lead to a
survivable hard landing.
  • Racecar
impact-resistant fuel tanks will be used.
  •
Redundant fuel level warning system will be incorporated.
  • Vehicle
parachutes will be available on all models.
  • Damage
resistant composite fan blades will be used based on the Company’s proven
experience.
  Vehicle
prices will vary depending on the model and use. The goal is to take orders for
a sufficient number that economy of scale can apply. The minimum quantity sought
is 1,000 vehicles to be delivered over a three-year period. Beyond the first 40
M200G models sold, the Company believes the prices will vary from approx.
$95,000 for a single passenger M200G model to approximately $350,000 for the
Firefly 3, a high-performance model intended for missions requiring a payload of
three people or less.
  Our goal
is to complete the construction of a minimum of a up to 6 demonstrators,
followed by 40 vehicles in the first year of production, 270 in the second year,
and 650 in the third year. The plan requires that sufficient capital be raised
and the foregoing projections are dependent on this funding being available,
demand for the product develops as expected and that the anticipated production
schedule can be kept.
  The
Company has not sought a legal opinion nor obtained a preliminary ruling from
the FAA regarding the feasibility of any exemption from the FAA certification
requirements for the M200G. Therefore, the ability to successfully market the
M200 and any variants may or may not be achieved due to such
uncertainty.
  There is a
continuing potential market for other products that have been designed,
developed and tested by the Company but these are not being immediately pursued
due to the focus on the M200 Neuera volantor and variations on that
design.
  The
Company believes the M400 Skycar and their derivative are capable of much higher
speed and range and anticipates that they will enter the civilian market
following a successful FAA certification effort. As stated earlier, the funding
required for this effort is significant and while it remains the long-term
objective of the Company, we do not expect to enter into this program before
2011 at the earliest.
  Aerobot
Remotely-operated Aerial Vehicles
 
 Aerobot®
is our design for a line of remotely piloted VTOL vehicles. The principal
advantage of these craft is the ability to hover at a fixed point in space,
which we believe makes them suitable for payloads such as video cameras and
other sensors for data acquisition and inspection. The Aerobot is intended to
carry a wide variety of customer supplied mission specific payload packages.
Payload requirements are model-specific and there are restrictions on weight,
size and location. We have incorporated video camera technology, and believe
other technologies such as sensors and transmitters are within the Aerobot’s
payload capabilities, although we cannot guarantee that any payload within
weight and size limitations will perform as desired or allow the Aerobot to
function properly. Moller has developed and demonstrated both electric- and
fuel-powered Aerobots® for commercial and military applications, although we
have not commenced commercial marketing of them.
 -6-
  The
electric-powered Aerobot®, which employs an umbilical cord to transmit power,
data and control signals, can stay aloft for extended periods (8-12 hours or to
the limitation of ground-supplied electrical power) at heights of up to 250
feet. The fuel-powered Aerobot® utilizes Moller’s rotary engines, which produce
greater than 2 horsepower per pound of engine weight. A high power-to-weight
ratio, a lightweight airframe, and a patented system for automatic stabilization
and control are key design elements of both types of Aerobot®.
 The
demonstrated performance specifications for the two Aerobot models are set forth
in the following table:
   Electric-Powered
                    ES20-9
                  Fuel-Powered
                    FS24-50Payload
      (including fuel)
                  15
      lbs
                  65
      lbsEmpty
      weight
                  40
      lbs
                  90
      lbsHover
      time
                  8-12
      hours*
                  1.5
      hrsHover
      ceiling
                  250
      ft
                  2,500
      ftForward
      speed
                  —
                  50
      mphSize
                  26”L
      x 26” W x 14” H
                  30”L
      x 30”W x 16”H
 * Flight
duration is calculated based on estimated run-time of ground-based electrical
generator.
  We expect
to continue to solicit and execute contracts for government use of our Aerobots.
As in the past and for the next 18 months, these contracts are expected to be
for one-off demonstration vehicles. The $200,000 to $300,000 price of these
one-off Aerobots will remain 200-to-300% higher than the desired target price of
approximately $100,000 as long as volume is insufficient to establish quantity
discounts for its components. This may restrict initial sales to those clients,
if any, to whom price is less important than the functional characteristics of
the Aerobot. However, if expressed interest translates into increased sales, the
production price could reduce to a point where civilian, paramilitary and
military use could be broadened, resulting in increased sales. However at this
time there is no assurance that volume sales of the company’s Aerobots can be
achieved.
  Moller
Rotary Engine
 
 Moller has
acquired and developed proprietary technology enabling the Company to
manufacture a high performance, low-cost rotary engine that produces more than 2
horsepower per pound of engine weight. Key design characteristics and the
resulting attributes of Moller’s engines are outlined below and are applied to
its intended use as a ducted fan power plant:
  -7-
  Design
      Feature
                  AttributesAir-cooled
      or charge-cooled rotor
                  Light
      WeightAluminum
      housingsSimplified
      Lubrication SystemFew
      moving parts
                  Low
      cost + ReliabilityPerfect
      dynamic balance
                  High
      propulsiveLow
      vibration
                  efficiencySolid
      engine mountsSmall
      fan tip clearanceFour-stroke
      combustion cycle
                  Good
      fuel economy + Low emissions +Low noise
  We believe
that Moller’s rotary engine, called the Rotapower engine, will be advantageous
for ducted fan VTOL applications such as those required by the Skycar® and
Aerobot® product lines. The engine’s round shape and small size will allow it to
be hidden in the center of the duct behind the fan hub. Furthermore, the
engine’s power-to-weight ratio should enhance performance in VTOL applications,
where all of the required lift must be provided by the engine/fan unit without
benefit of a wing surface as in a rolling take-off or landing.
 
 Moller
International granted Freedom Motors a license to manufacture, market and
distribute the Rotapower engine for all applications except for aviation and use
in ducted fans. In return for this license, Freedom Motors agreed to pay Moller
International a 5% royalty on all sales of the Rotapower engine. See Note G and
Note K for additional details.
 
 Moller’s
unique engine design is based on a rotary engine that was mass-produced by
Outboard Marine Corporation (“OMC”) from 1972 to 1976. In 1985, Moller purchased
the OMC drawings, production routing sheets and engineering support man-hours.
The Company subsequently hired the key OMC engineers who had developed the
engine, participated in the production engineering process and contributed to
the establishment of the service organization.
 
 Using the
OMC single-rotor engine as a starting point, Moller created a high-performance,
modular design engine. The Company added electronic fuel injection and thermal
barrier coatings, and introduced unique seal, lubrication and cooling systems.
In all, Moller has made more than 25 major engine design improvements, of which
eight are deemed patentable and two are patented and one is patent pending.
Prior to entering production, Moller expects to have applied for patents on all
key elements.
   -8-
   
  Specifications
of Moller’s high-performance engines are as follows:
  High
      PerformanceSingle-Rotor
                  Two-RotorSpecifications
                    Weight
                    Dimensions
      (L, Diameter)
                    Displacement
                  55
      lb
                    14
      in, 11 in
                    530cc
                  85
      lb
                    19
      in, 11 in
                    1060ccPerformance
                    Rated
      Power
                    Rated
      Speed
                    Maximum
      Speed
                    Idle
      Speed
                    Porting
                  80
      hp
                    7000
      RPM
                    7500
      RPM
                    1800
      RPM
                    Radial
                  160
      hp
                    7000
      RPM
                    7500
      RPM
                    1800
      RPM
                    RadialGeneral
                  All
      engines can operate on regular grade gasoline
   To
demonstrate the significance of Moller’s rotary engine technology for aircraft
applications, the following table and graphs compare the high performance
two-rotor engine to a standard piston engine of similar
horsepower.
  -9-
  MOLLER
      ROTARY(1)
                  STANDARD
      PISTON(2)POWER
                  160
      hp
                  180
      hpWEIGHT
                  85
      lbs
                  260
      lbsVOLUME
                  1.0
      ft3
                  8.6
      ft3FRONTAL
      AREA
                  0.8
      ft2
                  3
      ft2
    Horsepower
      per Poundof Engine Weight
                  
                  Horsepower
      per Cubic Footof Engine Volume
                  
                  Horsepower
      per Square Footof Engine Frontal Area2001602.00.74015MollerRotary(1)
                  
                  StandardPiston(2)
                  
                  
                  
                  Moller
      Rotary(1)
                  
                  StandardPiston(2)
                  
                  
                  
                  Moller
      Rotary(1)
                  
                  StandardPiston(2)
  Moller
Advantage:  3:1   Moller
Advantage:  11:1   Moller
Advantage:  5:1
 
 (1)Two
rotor, 530cc/rotor
 (2)Avco Lycoming 0-360-A
  
 Comparison
of Moller rotary and Standard Piston Engines
 
 Our
Rotapower engine is in very limited production. It has been installed in a
number of non-aircraft products for field-testing. The company is presently
under contract to develop a diesel-fueled version of its engine. To date the
company has demonstrated the ability to operate its engine on diesel fuel at
about 60% of the power it can generate on gasoline.
  Because
of the military’s interest in lightweight engine running on diesel or jet fuel
the company has previously received government support to achieve its present
level of success. Presently the company is testing its engine for long-term
durability that means establishing a time between overhauls of at least 1000
hours. It has successfully completed an FAA-type engine durability test of
running the engine on gasoline for 150 hours at maximum power. If a
1000-hour-plus test can be achieved with diesel fuel the potential for military
and civilian sales of an aircraft Rotapower engine is likely to increase. There
is no assurance at this time that this endurance test will be successful. The
company intends to license the production of the engines to a firm with the
resources it believes will be adequate for the task. As part of these
negotiations, the company hopes to retain a favorable position for the
procurement of these engines for its own incorporation into potential products
as well as continued testing and development.
  -10-
  Liability
Insurance
  Frank
Crystal & Co. has provided us with a comprehensive insurance plan dated July
20, 2000. This plan outlines a Product Liability Proposal for an estimated
initial product exposure of $6,250,000 in annual engine sales. (We estimated our
annual sales for the purpose of obtaining the insurance quote and planning our
operating costs – we have no particular basis for projecting such volume of
sales as of any specific date in the future.) The cost identified in this
proposal was an initial deposit of $25,000 per annum with an audit adjustable
rate of $4.00 per $1,000 of sales below $6,250,000 and $3.00 per $1,000 of sales
above $6,250,000. We did not accept the insurance proposal, but believe the
premiums quoted (adjusted for inflation) to be representative of our costs to
insure ourselves against product liability issued in the near-term. There is no
guarantee that these rates will remain effective or apply to the Rotapower
engine when actually needed. Higher costs could adversely impact our ability to
produce and market an economically competitive engine.
  Regulation
of Aerobots and Engines
  The
Aerobot’s use is controlled by the FAA if it is untethered, except for military
use. No federal, state or local approval is required at this time regarding the
design or construction of either the engine or the Aerobot. However there is no
assurance that such regulations will not come into existence in the
future.
  -11-
 PATENTS
 The
current Moller International’s U.S. and Foreign Patents and Trademarks are
listed below:
  Name
                  Patent/Application
      Number
                  CountryTrademark
      Aerobot
                  326,708
                  CanadaTrademark
      Aerobot
                  1,367,510
                  USTrademark
      Rotapower
                  2,101,936
                  USTrademark
      Skycar
                  76,066,387
                  USTrademark
      Skycar
                  1,739,687
                  USTrademark
      Skycar
                  1,964,355
                  USTrademark
      Skycar
                  2000/14455
                  South
      AfricaTrademark
      Skycar
                  2000/14454
                  South
      AfricaRobotic
      or Remotely
                  0279391
                  EuropeRobotic
      or Remotely
                  4795111
                  USStabilizing
      Control
                  1144249
                  EuropeStabilizing
      Control
                  99/30392
                  InternationalStabilizing
      Control
                  6,450,445
                  USRotary
      Engine Having
                  9827045
                  InternationalRotary
      Engine Having
                  6325603
                  USRotary
      Engine Having
                  99/29821
                  InternationalRotary
      Engine Having
                  6164942
                  USDiesel/Otto
      Cycle Multi-Fuel
                  60/874,398
                  USDiesel/Otto
      Cycle Multi-Fuel
                  60/918,130
                  USVTOL
      Aircraft
                  5115996
                  USVTOL
      Aircraft
                  0512345
                  EuropeVTOL
      Aircraft
                  91/00247
                  InternationalImproved
      Vertical Takeoff & Landing
                  6808140
                  USImproved
      Vertical Takeoff & Landing
                  0303730
                  InternationalImproved
      Vertical Takeoff & Landing
                  2004/002796
                  InternationalImproved
      Vertical Takeoff & Landing
                  2004/254553
                  AustraliaImproved
      Vertical Takeoff & Landing
                  2006/532279
                  JapanImproved
      Vertical Takeoff & Landing
                  2514777
                  CanadaVertical
      Takeoff & Landing
                  D498201
                  USVertical
      Takeoff & Landing
                  266,288
                  FranceVertical
      Takeoff & Landing
                  000243464-0001/0004
                  EuropeVertical
      Takeoff & Landing
                  03709001.6
                  Europe
 -12-
  OUR
MARKETS
 
 Due to the
innovative nature of the Moller Skycar, we cannot be certain of any level of
market acceptance for the product. The following discussion of potential markets
for our Skycar, Neuera and Aerobot products is based upon: 1) our observations
and understanding of the ways various owners and operators of conventional
fixed-wing and rotary-wing aircraft have used those vehicles; 2) our assumptions
as to how the proposed design capabilities of our products may prove more
efficient, utilitarian, or cost-effective features in those same or similar
applications; and 3) anecdotal data from a small number of potential customers
who have visited our facilities and expressed interest in the Skycar. However,
until we can manufacture and deliver production model aircraft, we cannot be
certain that operators will indeed realize benefits by employing our products in
place of conventional aircraft employing significantly dissimilar technologies.
Our ability to successfully market our Skycar and Aerobot products will depend
in large part on the ability of those products to deliver a realizable benefit
to users.
 
 Skycar
 
 Prior to
full FAA certification (See “Regulation – Airworthiness Certificate
Requirements” below), we hope to be able to sell our products to certain
operators who are exempt from the civil aviation certification requirements.
These may include:
 
 •
                  ● 
      military and para-military (rescue, drug enforcement, and border
      patrol)
 •
                  ● 
      wealthy individuals, for use within their own property in the U.S.,
      Australia, Canada, etc.
 •
                  ● 
      foreign countries where FAA certification is not
  mandatory
 
 No such
customers have made any binding commitments with regard to our
products.
  Market
Segments
 
 Although
there is no assurance we will be successful, we will attempt to develop markets
for the Skycar®
within the following aircraft operator segments:
  General
      Aviation
                  MilitaryPrivate
      Individuals
                  SurveillanceCorporations
                  Air
      utility vehicleCharter
      and Rental Services
                  RescueAviation
      Schools
                  Medical
      EvacuationUtilitiesNews
      GatheringPolice/Fire/Rescue/AmbulanceDrug
      EnforcementExpress
      DeliveryBorder
      Patrol
  We have
relied upon our own research and anecdotal data from a small number of potential
customers who have visited our facilities and expressed interest in the Skycar
to support our belief that operators in the above categories will be interested
in purchasing Skycars. Individual fixed- and winged-aircraft owners, charter and
rental service owners, corporate officers, and a variety of other interested
parties have given us their input on the suitability and desirability of the
aircraft within these fields of use. However, such subjective input does not
necessarily indicate that an economically viable market exists for the Skycar.
Further, the above listing of potential market segments does not imply that
Moller has contacted or received an expression of interest from each such market
segment.
  -13-
  Competition
 
 Today,
there is no company that we are aware of offering a vehicle that is
substantially similar to the Skycar®.
Companies periodically emerge with preliminary designs, but to date none has
succeeded in demonstrating a working model, owing presumably to the high cost of
developing the required technologies. Moller has test-flown an experimental
vehicle and is completing the construction of a production prototype. Moreover,
we have applied for and obtained patents on many key aspects of the Skycar,
which we expect will stave off direct competition to some extent, although there
can be no assurance of our ability to successfully defend our patents against
infringement. The nearest competition, insofar as we are aware, appears to be
the six to nine passenger tilt-rotor BA 609 (Bell-Augusta) which is in
development. Its announced price of $10 million, however, will likely constrain
it to a different market than the target market for the Skycar®.
 
 If we are
able to successfully demonstrate the Skycar’s flight characteristics, we expect
that such success will generate renewed competitive interest. Primary
competition is expected to come from large aircraft manufacturers because they
have the resources necessary to enter the personal VTOL market. Given adequate
financing, however, any of a number of existing small and large aircraft
manufacturers could develop competitive products. We believe we have one
advantage that will prove difficult for potential competitors to overcome,
however, and that is our rotary engine and ducted fan propulsion technology. The
advantage, however, may depend upon our future ability to successfully defend
our intellectual property rights against infringement, of which we cannot be
certain.
 
 It is
difficult for us to predict the precise sources of competition for our products,
or our competitive position in the marketplace, owing to the fundamental
dissimilarities between our products and the products that historically have
been used in the roles for which our products are intended. Although we may
surmise significant benefits to customers in switching to our products, because
they represent a unique and innovative technology there is no historical basis
for believing that customers will in fact switch.
 
 In
marketing the Skycar as a vehicle for personal transportation, we will have to
compete against the sundry existing forms of transportation with which people
are already familiar and comfortable. These include the automobile, railroads,
buses, commercial aviation, and general aviation, among others. Each mode of
transportation offers a unique set of advantages and disadvantages, relating to
cost, convenience, comfort, safety, and perhaps other considerations. In order
for the Skycar to gain acceptance as a mode of personal transportation,
prospective users will have to conclude that its particular advantages justify
its cost. There is no assurance that sufficient numbers of people will perceive
such advantages as to create a viable market for Skycar.
 
 NEUERATM
 
 Based on
the M200X, the Neuera is both old and new. Originally conceived as a
stepping-stone on the path to the development of the M400 Skycar®, the NeueraTM
is now seen as a potential product that can stand on its own merits. Potentially
a low cost, easy to operate and uniquely agile aircraft, the Company views the
Neuera as a product that it can produce in the near-term that might gain wide
acceptance as a recreational and/or utility vehicle. With the anticipated
software and computer hardware implementations the Company also believes it can
constrain specific versions of the M200-class vehicle to operational speeds and
altitudes that would exclude it from the necessity of obtaining FAA approvals
and inspections as well as allow it to be operated by persons with little to no
formal flight training. The Company feels that under these conditions, the cost
to produce and operate a Neuera would be significantly less than other types of
aircraft, and make it even more attractive to own.
 
 AEROBOTS®
 
 Many of
the potential markets for air-borne remotely flown vehicles (Aerobot®) are
currently addressed by manned helicopters and airplanes, both of which in our
opinion represent significantly less economical solutions. In addition, the
unmanned Aerobot® can
operate in areas that are prohibitively dangerous for manned aircraft.
Furthermore, the Aerobot®’s
ducted fan design is well suited for operation in confined quarters where the
exposed propeller or rotor blades of alternative solutions (both manned and
unmanned) pose significant risks to people nearby and to the aircraft
itself.
  -14-
  Market
Segments
 
 We believe
the Aerobot® is
suitable for a variety of commercial and military
applications:
 Commercial
                  MilitaryBridge
      and utility line inspection
                  Battle
      damage assessmentBuilding
      heat loss detection
                  Electronic
      counter measuresSmoke
      stack air quality testing
                  Target
      acquisitionElectronic
      news gathering
                  SurveillanceSports
      event reporting
                  Communications
      relayHazardous
      waste detection
                  Decoy
      operationsNatural
      disaster damage assessmentLaw
      enforcementFire
      surveillance
  COMPETITION
 
 To date
there are three fundamentally different aircraft design approaches to providing
this vertical takeoff and landing (VTOL) capability:
 ·•
                  Helicopters
 ·•
                  Tilt-rotor
      aircraft
 ·•
                  Ducted
      fan aircraft
 
 Helicopters
 Capable of
lifting heavy loads with modest horsepower, the helicopter is capable of
hovering for extended periods and its top speed is low, but adequate in most
paramilitary roles. However, the helicopter is very complicated with over 100
critical drive train moving parts and over 40 engine moving parts even when
powered by a single engine. Failure of any one of the critical drive train or
engine’s moving parts while hovering below 200 feet of altitude above the ground
is likely to be fatal for all aboard. Above 200 feet the failure of any one of
these moving components could be fatal. As a result of the helicopter’s
complexity and potential consequences of a component failure the operating
maintenance and insurance costs are very high.
   Tilt-rotor
      Aircraft

                The
      tilt-rotor configuration is in reality a helicopter with added capability,
      which makes it more complicated and expensive to operate.  By
      rotating the helicopter’s rotors into a vertical rotating plane, the
      tilt-rotor aircraft is able to translate at approximately twice the speed
      of the high performance light helicopter.  The purchase price of
      the Bell Augusta BA-609 tilt-rotor is approximately $1 million per
      passenger seat versus $200,000 for a high performance light helicopter
      like those made by Hughes.
              
              page 16a graphic
   Ducted
Fan Aircraft
 There
are two design directions to duct fan aircraft:
 ·
                  Enclose
      the twin rotors of a helicopter-like aircraft within protective ducts. The
      aircraft is often referred to as an “aerial jeep.”
 ·
                  Use
      many ducted fans with each fan driven directly by an engine, generally
      referred to as a volantor.
  -15-
  Aerial
Jeep Approach
 There
have been a number of vehicles developed beginning in the 1950’s that attempted
to use two large ducted fans driven by a central powerplant. A few of these are
shown below along with the date of their introduction.
   page 16b graphic
  Upper
left:  Piasecki VZ-8 (1958), Upper right: Chrysler VZ-6 (1959), Lower
left: Piasecki 59H (1962); Lower right:  X-Hawk (2006)
  The
limitations of this design (and that ultimately led to its termination after one
or two prototypes) are as follows:
 ·
                    The
      design involved a large number of critical components in which the failure
      of any one and at any altitude was likely to be
  fatal.
 ·
                    Large
      ducted fans have inherently adverse reactions to airflow over the duct’s
      leading edge as they begin to translate. The instabilities created greatly
      limit the forward speed since the airflow can stall at the leading edge of
      the duct. Once this occurs the aircraft is lost. The Chrysler VZ-6 and
      Piasecki VZ-8 never attempted to exceed 50 mph in forward
      speed.
 ·
                    The
      large fans made it difficult to locate a significant and/or bulky payload
      in a practical location.
 ·
                    Their
      complex drive train with many of the elements of the helicopter meant that
      the vehicle’s initial cost would be high, and it would have result in
      maintenance and insurance costs.
 
 Clearly if
this approach had any merit further development would have occurred. It would
seem that the recent X-Hawk, which is very similar to the previous “aerial jeep”
concepts is relying on the adage “we repeat what we choose to
forget.”
 
 Volantors
 The
volantor uses enough ducted fans driven directly by individual engines to ensure
that it can continue to hover on a hot day at altitude following the failure of
an engine. This requires a minimum of five engines with eight chosen to minimize
installed power.
  -16-
  Since
hover stability and control are achieved only through engine control no added
mechanical complexity is needed. This reduces cost and does not compromise the
inherent statistical reliability of the volantor. Since the engines directly
drive the fans a drive train is also eliminated.
 
 The
Company believes the volantor’s simplicity will allow it to achieve the lowest
cost per seat for an aircraft with both VTOL-capability and a reasonably
fail-safe design.
 REGULATION
 
 Airworthiness
Certification Requirements
 
 The
Federal Aviation Act of 1958, as amended, vests in the Federal Aviation
Administration (commonly, the “FAA”) the authority to regulate virtually all
aspects of civil (i.e., non-military) aviation within the United States,
including pilot certification, airspace usage, and the certification of
aircraft. The FAA exercises its authority primarily through the issue and
enforcement of regulations, known as the Federal Aviation Regulations (or
“FAR”s), which are codified in Title 14 of the Code of Federal Regulations.
Among other things, the FARs set forth the type certification requirements
(known as “airworthiness standards”) for aircraft designs, the requirements for
manufacturers’ production quality control systems, the requirements for
airworthiness certification of individual aircraft, and the operations and
maintenance rules for air carriers and repair facilities.
 
 The
Aircraft Certification Service (designated “AIR” by FAA) is the department
within the FAA that develops and administers safety standards for aircraft and
related products that are manufactured in the United States or are used by
operators of aircraft registered in the United States. Related products include
engines, propellers, equipment, and replacement parts. As a regulatory function,
AIR’s mission priorities are:
 
 1.
                  Continued
      airworthiness and other activities related to continued operational
      safety;
 2.
                  Rulemaking
      and policy development; and
 3.
                  Certification.
 
 Continued
airworthiness is given the highest priority because these activities have the
greatest impact on the safety of operating aircraft and because they promote the
continued satisfactory performance of approved systems, such as manufacturers’
approved quality control systems. Rulemaking and policy development are
considered to be a higher priority than issuing new certificates because the
integrity of the certification program depends on the currency of applicable
rules and policies.
 
 One of the
key goals of the certification and continued airworthiness standards is that
each safety-critical system have a reliability of at least 0.999999999 per
flight hour, which is another way of saying that a particular safety-critical
component or system should have no more than a one-in-one-billion chance of
failure for each flight hour. In pursuit of this goal, the regulations address a
combination of requirements for design, analysis, test, inspection, maintenance,
and operations. To permit design innovation, the regulations for the most part
avoid specifying details such as materials, structural concepts, etc.; instead,
designers are given a free hand as long as they accept the responsibility for
showing that systems with innovative design features meet the FAA’s stringent
reliability standards.
 
 The
cornerstone of AIR’s certification process is the “airworthiness certificate,”
issued for each individual aircraft. Generally, regulations prohibit operating
an aircraft without an airworthiness certificate, or in violation of any
limitation or restriction of its airworthiness certificate. Certificates may be
issued as either “standard” or “special.” Aircraft certificated in the Standard
category are subject only to the same operating restrictions as most other
production aircraft, that is, that they be operated within the manufacturers’
approved design limitations for the particular type. “Special” category aircraft
might include experimental designs or homebuilt aircraft, for example, and may
be subject to various operational restrictions, such as a prohibition against
carrying non-crewmember passengers, or operating over densely populated
areas.
  -17-
  For a
civil aircraft to receive an airworthiness certificate, the FAA must determine
that the aircraft conforms in detail to an FAA-approved type design and is in
safe operating condition. Similar requirements exist for engines, propellers,
and certain materials, parts and equipment installed on certificated aircraft.
The first step in the certification of a new design is to establish which body
of standards will apply. Because the original aircraft classifications of
“airplane,” “airship,” “rotorcraft,” etc. would not accommodate the radical
design of the Moller 400 Skycar® (and
a couple of other VTOL designs in development by other companies), the FAA in
the early 1990s established a new category and class of aircraft: “Powered-lift
-- Normal Category,” and set about developing an airworthiness criteria manual
that would serve as the basis for certification. As of this filing, the manual
has not been finalized, but we expect that the draft will suffice for us to
proceed with initial testing toward certification. In fact, the FAA has
indicated to us that because of the uniqueness of the Skycar®, they
expect to develop the final airworthiness criteria as we progress through the
test program.
 
 Once the
company has been issued a “Type Certificate” for a particular design, each
production aircraft we manufacture to those same specifications will be entitled
to a “standard” airworthiness certificate. Even after the Type Certificate is
issued, however, AIR has the authority to order us to make design changes if it
determines that safety so requires.
 
 Effect
of Certification Requirements On Our Operations
 
 An
aircraft’s airworthiness certification bears on its usefulness to its owner or
operator. In particular, the value to a prospective purchaser of an
un-certificated or “special” certificated aircraft may be affected to some
extent by the corresponding operational restrictions, which can prevent them
from taking full advantage of the aircraft’s design capabilities. Certain
operators, however, are exempt from the airworthiness requirements to varying
degrees, and we expect that such operators may provide a market for our products
prior to final FAA certification. See “Marketing Strategy” below.
 
 Certification
testing will be a recurring expense for us as we bring our products to market,
and incorporate design improvements into previously certificated models. The
initial type certification testing on each aircraft design will encompass design
approvals for materials, spare parts, and other equipment to be installed.
Therefore, if we or any of our potential strategic partners should choose to
make a major modification in a model, such as an airframe re-design or changing
a safety-related onboard system, the change may have to undergo additional
testing to prove the new system’s reliability.
 
 As a
future aircraft manufacturer, we will undertake an ongoing obligation to monitor
the serviceability and safety of the aircraft we expect to build and sell. We
intend to establish and maintain, at our expense, a system of feedback and
reporting whereby maintenance mechanics and inspectors can report back to us any
and all failures, excessive or unpredicted wear, malfunctions, and flight safety
issues of any kind that arise or are detected during maintenance and repair
activities. Where appropriate, we will issue “service bulletins” to owners and
operators of the affected model, detailing the problem and our recommendation
for correction. Where the problem may potentially affect the safety of flight
operations, we may recommend to the FAA that they issue an Airworthiness
Directive (commonly called an “AD”) making the correction mandatory for every
operator.
 
 It is
impossible to predict the future costs to us of ongoing compliance with federal
airworthiness regulations; however, we expect that the costs will be manageable
and that we will be able to absorb them in our pricing structure.
 
 Pre-production
Test Flight Program
 
 Tethered
flight tests have been conducted with the M200X aircraft using the same number
of rotary engines (eight) and a forerunner of the type of electronic control and
stabilization system as is employed on the M400 Skycar®. We
have conducted extensive ground tests of all of the M400’s systems and have now
completed the initial tethered flight tests and hover
demonstration.
 
 We began
test flying the pre-production model of the M400 in late 2002. The aircraft was
flown tethered so we could test and de-bug the stabilization and control
electronics. These flight tests first explored systems functions in the safest
portions of the flight envelope then expanded the envelope. We expect the entire
test program, involving many hours of powered tests on the ground and in
tethered flight, and several hundred hours of free flight tests, to extend until
we achieve FAA “Experimental” certification, hopefully within the next 12
months. However, this forecast is based upon the assumptions that (a) the
Company will succeed in raising sufficient capital to cover the costs of flight
testing, (b) a number of remaining engineering problems will be resolved through
further development, and (c) that the FAA will establish certification criteria
for the Skycar that are within our technical capabilities. All of these
assumptions remain highly uncertain as of the date of filing of this
registration statement.
  -18-
  Pilot
Requirements
  Initially,
a private pilot’s license will be required to pilot the Skycar®,
primarily to ensure adequate flight management and navigational skills. To
obtain a license, the prospective pilot must pass a flight test administered by
a licensed flight instructor in order to demonstrate familiarity with its
simplified controls. The Skycar®
is not piloted like a traditional fixed-wing airplane and has only two hand
control sticks that the pilot uses to inform the redundant computer control
systems of his or her desired flight maneuvers. The Company plans to have its
own pilot training program until the Skycar®
is FAA certified. Once the Skycar®
is certified, it is expected that all training programs will be provided by
private and/or military aircraft flight training schools. The FAA has begun
awarding “Powered Lift” pilot’s licenses.
  MARKETING
STRATEGY
  In
the early stages of sales development, we plan to market primarily through
direct selling by Company sales specialists to individual customers within our
target markets. Brand exposure may be accomplished through displays at trade
shows and industry exhibitions, direct mail, advertisements in aviation
publications, and cooperation with the news media. For at least three decades
the news media has followed the progress of Paul Moller’s VTOL research and
experimentation, underscoring the public’s perennial fascination with the
promise of convenient and affordable air travel made as personal and
individualized as automobile travel has been. We expect, but cannot be certain,
that the Skycar will continue to receive periodic media coverage as we approach
our first delivery schedules.
  M400 Skycar®
  Although
sales of the Skycar®
into most civilian markets will require that we be able to deliver an FAA
certificated aircraft, the regulations permit certain types of operations by
certain defined operators to be conducted without the standard airworthiness
certification requirement. These markets include:
  Government -- domestic and
foreign agencies including:
  Police
departments
 Border
Patrol
 Forest
Service
 Drug
Enforcement agencies
 Medical services
  Initially,
we anticipate that most sales to this segment will consist of Skycars®
for test and evaluation. The craft’s capabilities should make drug enforcement
agencies and Border Patrol viable candidates for early purchases. However, we
have not received any commitments from those agencies to make any such
purchases.
   Military -- Initial sales to
domestic and foreign military organizations will likely be for test and
evaluation purposes. We anticipate that military organizations will utilize the
Skycar®
in critical applications for which competing aircraft are ill suited. For
example, the Skycar®
is expected to have superior speed, range and VTOL capability for the rescue of
crews of downed aircraft with minimal risks. In addition, military
subcontractors may wish to use the Skycar®
as a platform for autonomous aircraft programs, one of the fastest growing areas
of military spending. Autonomous aircraft applications currently utilize
un-manned aircraft piloted by infrequent remote control commands or under the
control of a monitoring computer. Such aircraft are currently in use by the
military as remote data gathering platforms that feed information via radio or
other communication links back to a flight control center. Moller expects that
military organizations will wish to use Skycars®
in a broader range of applications if volume production reduces manufacturing
costs and overall pricing. Eventually, we believe the Skycar®
has the potential to become the aerial counterpart of the “HMMWV,” the
military’s current ground utility vehicle.
  -19-
  Corporations — Moller intends
to sell the M400 Skycar®
to corporations for use in the airspace above their property and we plan to
specifically target companies in industries such as timber and oil that have
survey and exploration needs. The Company also expects that it will be able to
address a broader range of commercial applications in some foreign markets due
to fewer legal restrictions than in the United
States.
  Assuming
that the Skycar eventually receives full airworthiness certification, we will
consider augmenting our sales efforts with retail dealerships, either existing
or newly-franchised. Further, we intend to establish a network of regional
maintenance and repair facilities, either Company-owned or partnered with
existing service facilities, to handle routine maintenance and repair services
for non-military Skycars.
  NeueraTM
  The
Neuera is a directed-thrust vertical takeoff and landing aircraft in the late
stages of production design. The design relies on thrust generated by the eight
ducted fans to lift the vehicle, as well as provide for forward movement up to
about 100 miles per hour. The eight ducted fans are located in a circular
pattern around the vehicle and embedded into the saucer-like fuselage. Four of
the ducted fans have moving vanes at the exit of the duct, which are designed to
deflect the thrust to provide forward movement and directional control. Each of
the individual engines directly drives a fan, with engine speed being the
determining factor for the amount of thrust produced. The Company has developed
a flight control system that maintains stability through the use of precise
throttle commands to each engine. Any un-commanded change in the attitude of the
aircraft will be detected and the system will issue multiple commands per second
until it is corrected.
  The
Neuera volantors are intended for use "off-road" somewhat like an ATV or
hovercraft would be used. The Neuera is meant as an alternative to a trail bike,
boat, jeep, airboat or other off-road vehicle to access remote areas that would
otherwise not be open for travel. It is not intended for use above roads,
trails, walkways, etc. and especially not within an urban area where there are
lots of other alternatives. The exception to this would be for emergency
services like fire fighting, search and rescue, and emergency medical evacuation
from high-rise buildings and such.
  It
is the Company’s intent to directly market the Neuera to end-users initially,
and then if demand is sufficient, solicit distributors from the among existing
high-end recreational product distributors such as boat, snowmobile and ATV
dealers.
  MANUFACTURING
  Skycars®
  We
believe that the long-term success of any aircraft manufacturer is dependent on
the quality of the vehicle produced. The quality of both the design and
manufacturing processes is important. Moller expects to purchase or contract out
the major Skycar®
components that require capital intensive equipment, subject to Moller’s rigid
specifications and stringent quality assurances and testing requirements. We
expect that some components and parts will be finish-machined in Moller' s
facilities when they have proprietary technological content, require special
finishing, or are small custom parts with little tooling required. Moller plans
to perform quality control, assembly and final test work at its own facilities.
During 2011 and 2012 any manufacturing work will necessarily be executed using
low volume techniques. Special tooling and manufacturing processes are expected
to be developed for higher volume production in the future.
  Airframe
manufacture encompasses the assembly of the major airframe components (fuselage,
wing and nacelles) and installation of fuel and oil tanks, parachutes, seats,
canopy, landing gear, and the vertical thrust vane system. Moller anticipates
that a key strategic partner will be required in order to complete composite
airframe construction. Moller will require a complete test of all systems
through an extensive flight test program before final
release.
 -20-
  Important
electronic systems include computer stabilization, pilot controls, display,
power regulation and engine controls. Electronics manufacture will include the
following activities:
  Assembly
of electronic sub-systems
 Burn-in
of electronic components
 Mounting
of printed circuit boards
 Fabrication
of electronic enclosures
 Interconnection
of components and wiring
 Installation
of equipment in airframe
  While
no specific firm has been identified at this point, we expect to work with one
or two key strategic partners to provide electronics and avionics systems for
the Skycar®.
  The
quality control department will be an autonomous organization carefully
integrated into every aspect of the production operation. Every employee will
play a part in assuring the highest possible level of quality and
performance.
  NeueraTM
  The
Neuera is remarkably simple to manufacture. The complete airframe is composed of
two halves with tooling in place for their manufacture. This allows the
production of approximately one airframe per workday with the existing molds.
The Company believes this is sufficient to address the near-term production
requirements through our third year of production. With present facilities of
only 35,000 square feet, high-volume airframe production would have to occur
elsewhere and we have not evaluated the cost associated with expanding
production capacity. All electronics will be subcontracted, as will the engines
and their support structure. Assembly of the first year’s production is
projected to be accomplished within the present facility but lower cost
facilities may be available or, if necessary, our operations might be
cost-effectively expanded (space available for additional 50,000 square feet).
Alternatively assembly could be moved to facilities nearby. Engine components
may be subcontracted with assembly and inspection occurring within the present
facility, but the simplicity of the Rotapower engine makes its assembly and test
operations elsewhere feasible.
  In
the simplest of terms, the volantor is basically made up of a number of
computers coupled through algorithms to a number of engines. Both of these
components lend themselves to volume production in which economy of scale can
have a dramatic effect on cost.
  Aerobots®
  Both
electric-powered and fuel-powered Aerobots can be produced in the present Moller
facility in volumes of up to four per week, which is sufficient for currently
projected production. The electric-powered Aerobots consists of off-the-shelf
components and high performance motors, electronic control boards, and a
composite frame manufactured by Moller. Both individual components and final
assembly are inspected to assure product quality. The fuel-powered Aerobots
utilizes the Moller rotary engine (single-rotor) and thus requires more
extensive facilities. The frame of the fuel-powered Aerobots is of welded
construction; the fuel tank, duct and cowling are composites. Some component and
subassembly tests will supplement the basic assembly quality control. Costs of
manufacture are expected to decrease for both Aerobots as production volumes
increase. However, no specific amount or rate of decrease can be projected at
this time.
  In
most cases, customers require a complete operating system, not just a vehicle.
Moller plans to supply the radio control system and, in some cases, install the
interface for the payload sensor system.
  Engines
  We
expect that our Freedom Motors affiliate will supply most of the primary engine
components necessary to generate a FAA certified Rotapower® engine. For that
reason various elements are already incorporated into the basic engine design to
satisfy future requirement for FAA certification. For example, dual spark plugs
and an appropriate thrust load carrying bearing are already part of the basic
design. Moller will inspect, assemble, and test completed engines prior to their
sale or incorporation in Skycars® and Aerobots®.
 -21-
  EMPLOYEES
 
 We
currently have 3 full-time management and executive management personnel and 3
part-time employees. We have no specific plans for a significant increase or
decrease in the number of our employees. Future staffing needs will depend in
large part on any partnering or out-sourcing arrangements we may make for
manufacturing of components and sub-systems.
  
 NEED
TO RAISE ADDITIONAL CAPITAL TO COMPLETE DEVELOPMENT AND FLIGHT
TESTING
 
 We
estimate a cost of $26 million to demonstrate a flight worthy pre-production
model of the M400 Skycar. Likewise, $24 million is the estimated start up cost
for the production of the Neuera volantor. The Company’s current plan assumes
that the required funds will be raised through the sale of equity, although no
offer has been made nor are talks underway with any potential
purchasers.
 
 RISK
FACTORS
 
 Business
Viability
 
 We are
still in the process of developing our products, and have yet to produce any
meaningful level of sales or any profits from these products. There is no clear
basis for judging our viability as a business enterprise, or our management’s
ability to develop the company to profitability.
  Limited
Experience
 
 Our
management has limited experience in aircraft manufacturing. While our
management has considerable general business and management experience, and some
specialized knowledge and experience in the in the aircraft industry, none of
our current management has significant experience managing a business that
manufactures and markets aircraft. Accordingly, our success will depend in large
part on our ability to recruit or to contract individuals with specialized
skills and knowledge relating to aircraft manufacturing and marketing without
adversely impacting the overall budget for employee compensation. There is no
assurance that we will be successful in retaining such specialists.
 
 Need
for Additional Capital
 
 We will
have to raise substantial amounts of capital before we can produce meaningful
revenues from sales of our products with no assurance as to when or at what
level revenues will commence. We estimate that we will need $26 million to
demonstrate a fully-functional, pre-production prototype Skycar, and an
additional $40 - $90 million to complete FAA certification and begin initial
production of certified aircraft. Alternatively we believe we would require $24
million to fund the production startup of the Neuera. Should we be unsuccessful
in raising the needed capital, we may never develop into a viable business
enterprise. At this time, we have no specific arrangements with any underwriters
for the placement of our shares, nor any binding commitments from any person to
invest in the Company.
 
 Dilution
of Share Value
 
 We will
likely sell shares of our stock to raise capital needed to fund future
operations. Any such sales will have the effect of reducing the proportionate
ownership of existing shareholders.
 -22-
  Impact
of Emerging Technologies
 
 Evolving
technologies may force us to alter or even abandon our product designs, or may
render our proprietary technologies obsolete or non-competitive. Although we
believe strongly in the existence of a substantial market for our products, new
technologies are being developed and deployed at a rapid rate. It is possible
that as time goes on, technological advances in such areas as power plants,
propulsion systems, airframe materials, manufacturing systems, and perhaps
others, will require us to make costly changes in our strategy or additional
investments in equipment and in research and development in order to become or
remain competitive.
 
 Impact
of Potential Product Liability Claims
 
 The
Company may expend an inordinate amount of its resources in litigating product
liability claims. Historically, manufacturers of aircraft have been held by the
courts to be liable for injuries suffered by crewmembers, passengers, and others
where some design deficiency or manufacturing defect was found to have
contributed to the injury. Although we intend to take all reasonable precautions
in the design and manufacture of our products to ensure that they can be
operated safely and without undue risk to life, health, or property, and we
intend to purchase insurance against potential product liability claims, it is
nevertheless possible that our operations could be adversely affected by the
costs and disruptions of answering such claims.
 
 Impacts
related to Sarbanes-Oxley Act of 2002
 
 We may be
exposed to potential risks relating to our disclosure controls including our
internal controls over financial reporting. Section 404a of the Sarbanes-Oxley
Act of 2002 (“SOX 404”) requires public companies to include a report of
management on the company’s internal controls over financial reporting in their
annual reports, including Form 10-K.
 
 Effective
with this annual report for the fiscal year ended June 30, 2008, we have been
required to evaluate our internal control systems in order to allow our
management to report on our internal controls.
 
 In the
event we have identified significant deficiencies or material weaknesses in our
internal controls that we cannot correct in a timely manner with respect to our
internal controls, investors and others may lose confidence in the reliability
of our financial statements and our ability to obtain equity or debt financing
could suffer.
 
 Impacts
related to M200 sales projections
 
 The
Company’s ability to obtain an exemption from the FAA for the use of the M200G
without a pilot’s license may impact its potential marketability and/or use and
therefore has an undetermined impact on potential sales.
 
 Impact
related to majority shareholder’s financial status
 
 Moller
International’s President and majority shareholder, Paul S. Moller (“Dr.
Moller”), has filed for protection under the Chapter 11 reorganization
provisions of the federal bankruptcy law. The application was filed on 18 May
2009 in U.S. Bankruptcy Court for the Eastern District of California in
Sacramento. With the outcome of these proceedings as yet undetermined there is
uncertainty over the potential impact on the Company, if any. The impact of this
action on the Company’s ability to raise needed capital as well as the
possibility that Dr. Moller could lose some or all of his holdings in the
Company to third party creditors has not been determined.
 
 Item 2.
PROPERTY
 
 We
currently lease and occupy a 34,500 square foot building located in Davis,
California, which is owned by Dr. Paul S. Moller, the majority shareholder of
Moller International. (see Note I to the financial
statements)
  -23-
  Item
3. LEGAL PROCEEDINGS
  J.F.
Wilson & Associates Ltd. V. Estate of Percy Symens, et al.
  Moller
International (MI) is named as a defendant in a lawsuit pending in Yolo County,
California Superior Court – J.F. Wilson & Associates Ltd. V. Estate of Percy
Symens, et al. The complaint, filed in April 2005, alleges that MI unlawfully
discharged solvents into the environment while doing business at 203 J Street
and 920 Third Street in Davis, California during 1968 to 1980. The complaint
seeks injunctive relief and damages of an unspecified amount. The Company’s
Answer, which denies the allegations in the complaint, was filed in June of
2005, and initial discovery commenced in August of 2005. The case has not been
set for trial. On December 20, 2006, defendant and cross-complainant Donald M.
Miller died; and on January 7, 2008, the court ordered a stay of proceedings
until the court’s Probate Department rules on an application for letters of
instruction in connection with Mr. Miller’s estate. The court’s Probate
Department has not yet issued a ruling, and the stay remains in
place.
  In
a related administrative proceeding initiated on September 26, 2006, the
California Central Valley Regional Water Quality Control Board (RWQCB) issued a
draft Cleanup and Abatement Order (CAO) in connection with the property at 920
Third Street. MI was named as one of the responsible parties in the draft
CAO, and intends to challenge the characterization of MI as a discharger of
environmental contaminants, while also complying with the orders of the RWQCB.
MI and other parties have submitted comments regarding the draft cleanup and
abatement order. The draft CAO has not been finalized. The property owner is
proceeding with work to investigate, characterize and remediate the soil and
groundwater contamination at this property, with RWQCB
oversight.
  MI’s
probable loss has been estimated at this time in the range of $200,000 to
$1,000,000 and has accrued $200,000. It is reasonably possible that these
estimates may be significantly revised as the site investigation and other
research and analysis proceeds. MI will continue to assess its potential loss in
the future as more information is available.
  United
States Bankruptcy Court: Paul S. Moller/Rosa Maria Moller, Case
#09-29936-C-11
  Moller
International’s President and majority shareholder, Paul S. Moller (“Dr.
Moller”), has filed for protection under the Chapter 11 reorganization
provisions of the federal bankruptcy law. The application was filed on 18 May
2009 in U.S. Bankruptcy Court for the Eastern District of California in
Sacramento.
  The
proceedings are underway but no final outcome has yet to be made. MI will
continue to assess it potential loss in the future as more information is
available.
  Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  During
the 2008 Annual Shareholders meeting held on December 6, 2008, the following
individuals were elected to the MI Board of Directors by unanimous vote of
shareholders present: Paul S. Moller, Faulkner White, Jim Toreson, Mike Shanley,
and Stephan P. Smith.
  -24-
  PART
II
 
 Item 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 Moller
International common stock is being publicly traded on the OTC-BB stock market.
According to NASDAQ Financial data, the average adjusted closing price has
ranged from a low of $0.17 to a high of $0.54 per share during this reporting
period with a trading volume of 23,200 shares per trading day.
 
 The
following table is a summary of Moller International stock performance by
calendar quarter since being listed by the OTC market in August
2002.
  High
                  Low2002-Q3
      (28 Aug to 30 Sep 2002)
                  $7.50
                  $4.152002-Q4
      (1 Oct 2002 to 31 Dec, 2002)
                  $6.50
                  $2.002003-Q1
      (1 Jan 2003 to 31 Mar 2003)
                  $2.20
                  $0.702003-Q2
      (1 Apr 2003 to 27 Jun 2003)
                  $1.00
                  $0.342003-Q3
      (1 Jul 2003 to 30 Sep 2003)
                  $0.90
                  $0.502003-Q4
      (1 Oct 2003 to 30 Dec 2003)
                  $2.30
                  $0.652004-Q1
      (1 Jan 2004 to 31 Mar 2004)
                  $1.50
                  $0.952004-Q2
      (1 Apr 2004 to 30 Jun 2004)
                  $1.45
                  $1.302004-Q3
      (1 July 2004 to 30 Sep 2004)
                  $2.12
                  $0.952004-Q4
      (1 Oct 2004 to 31 Dec 2004)
                  $1.50
                  $1.252005-Q1
      (1 Jan 2005 to 31 Mar 2005)
                  $1.30
                  $0.782005-Q2
      (1 Apr 2005 to 30 Jun 2005)
                  $1.20
                  $0.822005-Q3
      (1 July 2005 to 30 Sep 2005)
                  $1.15
                  $0.932005-Q4
      (1 Oct 2005 to 30 Dec 2005)
                  $1.40
                  $0.602006-Q1
      (1 Jan 2006 to 31 Mar 2006)
                  $1.01
                  $0.752006-Q2
      (1 Apr 2006 to 30 Jun 2006)
                  $1.00
                  $0.532006-Q3
      (1 Jul 2006 to 30 Sep 2006)
                  $0.75
                  $0.382006-Q4
      (1 Oct 2006 to 31 Dec 2006)
                  $0.65
                  $0.322007-Q1
      (1 Jan 2007 to 31 Mar 2007)
                  $0.48
                  $0.312007-Q2
      (1 Apr 2007 to 30 Jun 2007)
                  $1.01
                  $0.372007-Q3
      (1 Jul 2007 to 30 Sep 2007)
                  $1.25
                  $0.402007-Q4
      (1 Oct 2007 to 30 Dec 2007)
                  $1.05
                  $0.512008-Q1
      (1 Jan 2008 to 31 Mar 2008)
                  $0.80
                  $0.462008-Q2
      (1 Apr 2008 to 30 Jun 2008)
                  $0.76
                  $0.552008-Q3
      (1 Jul 2007 to 30 Sep 2008)
                  $0.54
                  $0.512008-Q4
      (1 Oct 2007 to 30 Dec 2008)
                  $0.35
                  $0.322009-Q1
      (1 Jan 2008 to 31 Mar 2009)
                  $0.21
                  $0.192009-Q2
      (1 Apr 2008 to 30 Jun 2009)
                  $0.18
                  $0.17
  Shareholders
of Record
  As of
October 12, 2009 there are 601 shareholders of record for common shares of
Moller International.
 
 Dividends
 
 The
holders of our common stock have equal ratable rights to dividends from funds
legally available for dividend payments when, as and if declared by the Board of
Directors of the Company.
 -25-
  To date we
have not paid or declared any dividends and we have no intention of declaring or
paying any dividends in the foreseeable future.
 If we
decide to pay dividends, that decision will be made by our Board of Directors,
which will likely consider, among other things, our earnings, our capital
requirements and our financial condition, as well as other relevant factors. Our
Board of Directors may declare and pay dividends to the Company's shareholders
in the form of bonus shares. The shareholders would receive bonus shares in lieu
of cash dividends, if any, declared and paid by the Company.
 
 Item 6.
SELECTED
FINANCIAL DATA
  Not
applicable
   Year Ended
June 30, 2009
 
 Moller
International continues its research and development activities on the Skycar
project primarily in the area of its flight control system (FCS) and the
performance advantages of introducing a hybrid approach to generating the high
power required to take off and land. These efforts are an extension of
successful flights throughout the previous years and extensive ongoing engine
tests, which we believe, will result in incremental improvements to the existing
prototype, future prototypes and/or production aircraft, should we continue to
operate. Staffing levels declined as the company continues to cut labor costs in
an effort to conserve available operating funds. Management was successful in
keeping Administrative salaries and wages below last year’s level. Seeking
additional funding remains a top priority for the company. The Company continues
with its initial stages of low-volume production for a variation of its M200X
that would allow it to operate without a pilot’s license and a rescue version
capable of extracting three people at a time from the side of a skyscraper.
Although there is no assurance that this vehicle will meet with success in the
market place, the Company is actively seeking support for the program and, if
found, may choose to move more rapidly into the production of these
vehicles.
 
 Fiscal
2009 compared to 2008
 
 Results of
operations for the 2009 fiscal year varied from 2008. We incurred net losses of
$2,672,094 and $2,004,555 in fiscal 2009 and 2008 respectively.
 
 Consolidated
loss per share was $.06 and $.04 for the 2009 and 2008 fiscal years,
respectively. We generated no significant amount of revenue in either fiscal
year. We are currently using cash to fund operations at an approximate rate of
$79,000 per month, net of engineering revenue received, the deferral of certain
executive salaries at an annual rate of $250,000, the deferral of building rent
of $496,800 per year and the recognition of compensation expense related to the
fair market value of stock issued for services and stock options granted to our
employees of $1,005,079 and $257,406 in fiscal 2009 and 2008,
respectively.
 
 Cash
salaries and wages, including benefits, remained relatively constant, and
representing 32% and 35% of total expenses for the 2009 and 2008 fiscal years,
respectively. With the company continuing to conserve cash on hand, some
employees voluntarily consented to defer pay, resulting in a total of $239,562
of accumulated short-term deferred payroll excluding accrued interest as of June
30, 2009. Interest expense increased by $31,433 over the prior year. Loans from
Dr. Moller are unsecured and carry a 10% annual interest rate. At June 30, 2009,
the outstanding principal amount was $3,105,357. Loans from Dr. Moller may be
subject to the provisions of Dr. Moller’s Chapter 11 filing and future terms and
conditions might vary depending on the party or parties in control of these
debts.
 
 As of June
30, 2009, Dr. Moller had a balance of $1,085,414 in deferred wages along with
accrued interest.
  Revenues
decreased by $10,938 in 2009. Contract revenues from our affiliated entity,
Freedom Motors decreased $10,938. Only the amounts received in cash from this
affiliated entity are recognized in revenue. Miscellaneous revenues remained
relatively constant. These increases are not indicative of any meaningful
revenue trends.
  -26-
  Going
Concern
 
 MI has a
net loss of $2,672,094 for fiscal 2009 and has an equity deficit of $12,450,072.
MI currently has no revenue-producing products and is continuing its development
of products in both the Skycar and Rotary engine programs. Successful completion
of product development activities for either or both of these programs will
require significant additional sources of capital. Continuation as a going
concern is dependent upon the Company’s ability to obtain additional financing
sufficient to complete product development activities and provide working
capital to fund the manufacture and sale of MI’s products. These factors raise
substantial doubt as to MI’s ability to continue as a going
concern.
 
 Liquidity
and Capital Resources
 
 Management
is currently pursuing additional sources of capital in quantities sufficient to
fund product development and manufacturing and sales activities.
 
 Historically,
certain shareholders, including the majority shareholder provided funding in the
form of short-term notes payable. In addition, the majority shareholder granted
us a deferral on the payment of rent for our building. There is no assurance
that we will continue to receive funding from shareholders, particularly our
major shareholder given he recently filed for protection under the federal
Chapter 11 reorganization provisions. Consequently, we are evaluating several
alternatives to raise the additional capital through debt or equity
transactions. The financial statements do not include any adjustments that might
be necessary if we are unable to continue as a going concern.
 
 The
majority shareholder of MI is providing funds received from the refinance of
both real property owned by him personally and real property owned by a limited
partnership of which he is the general partner, in the form of short-term,
interest-bearing demand loans to MI. Due to Dr. Moller Chapter 11 filing,
short-term loan terms may require the approval of the bankruptcy court. As of
June 30, 2009, a total of $3,105,357 has been loaned to MI from these
transactions. In addition, he has deferred payment of current year building rent
owed by MI of approximately $496,800. The total deferred rent owing to Dr.
Moller at June 30, 2009 is $1,715,690.
 
 There can
be no assurance that this majority shareholder will continue to have the ability
to continue to make such short-term loans to MI in the future. Dr. Moller is
under no legal obligation to provide additional loans to the company. In the
event that he cannot continue to make such loans, or that MI does not receive
funds from other sources, MI may be unable to continue to operate as a going
concern. The impact of Dr. Moller’s recent filing for protection under Chapter
11 reorganization provisions may adversely affect his ability to provide loans
to the Company.
 
 There is
no assurance that the funds generated from these activities or other sources
will be sufficient to provide MI with the capital needed to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
 
 CRITICAL
ACCOUNTING POLICIES
 
 Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of any contingent assets and liabilities. On an on-going
basis, we evaluate our estimates. We base our estimates on various assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
 
 We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our financial
statements:
   -27-
  Revenue
Recognition
  We
recognize revenue based on the four principles established in GAAP. Those
principles state that revenue generally is realized or realizable and earned
when all of the following criteria are met:
  1.
                  Persuasive
      evidence of an arrangement exists,
  2.
                  Delivery
      has occurred or services have been
rendered,
  3.
                  The
      seller's price to the buyer is fixed or determinable,
  and,
  4.
                  Collectability
      is reasonably assured.
  Revenue
generated from our former subsidiary, Freedom Motors, under the Technology
agreement is only recognized to the extent amounts are collected due to
collectability concerns.
 
 Stock
Based Compensation
 In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No.
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services.
 
 MI
recognizes stock based compensation for options granted to its employees in
accordance with SFAS 123R. MI estimates the fair market value of the awards
issued to employees using a Black Scholes pricing model. The model is based on
assumptions including (1) fair market value of its common stock on the date of
grant; (2) volatility of its common stock at 152.95 (3) discount rate at 1.45
and (3) expected dividend of zero. As a result of these assumptions, MI
recognized total stock based compensation of $1,029,403 and $72,867 during the
fiscal years ended June 30, 2009 and 2008.
  Intangible
Asset and Impairment
 
 Costs to
develop and perfect patents are capitalized and amortized over the lesser of
the patent’s economic life or legal life. The carrying value of patents is
reviewed periodically to determine whether the patents have continuing
value. For the year ended June 30, 2009, we evaluated the fair value of
our intangible assets related to patents and based on that analysis,
we recorded an impairment charge of $72,529.
  -28-
  Item 8.
FINANCIAL STATEMENTS
 
 REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders of
 Moller
International, Inc.
 Davis,
California
  We have
audited the accompanying consolidated balance sheets of Moller International,
Inc. (the “Company”) as of June 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of June 30, 2009 and
2008, and the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note B to the financial
statements, the Company suffered recurring losses from operations and has a
working capital deficiency, which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are
described in Note B. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
 
 MALONE & BAILEY,
PC
 www.malone-bailey.com
 Houston,
Texas
 
 October
13, 2009
 -29-
 
 MOLLER
INTERNATIONAL, INC.
 CONSOLIDATED
BALANCE SHEETS
 June
      30, 2009
                
                
                June
      30, 2008ASSETSCURRENT
      ASSETSCash
                
                $
                3,276
                
                
                $
                -Advances
      to Employees
                
                
                639
                
                
                
                362Accounts
      Receivable Trade
                
                
                -
                
                
                
                9,800Accounts
      Receivable Other
                
                
                441
                
                
                
                3,401Total
      current assets
                
                
                4,356
                
                
                
                13,563PROPERTY
      AND EQUIPMENT, net of accumulated depreciation
                
                
                11,214
                
                
                
                11,933OTHER
      ASSETSPatent
      costs
                
                
                -
                
                
                
                72,529Others
                
                
                353
                
                
                
                1,167Total
      other assets
                
                
                353
                
                
                
                73,696$
                15,923
                
                
                $
                99,192LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                
                $
                644,099
                
                
                $
                545,171Accrued
      liabilities
                
                
                469,130
                
                
                
                433,448Accrued
      liabilities-related parties
                
                
                486,984
                
                
                
                413,290Accrued
      liabilities-majority shareholder
                
                
                2,887,346
                
                
                
                2,453,161Notes
      payable-other
                
                
                978,182
                
                
                
                958,078Note
      payable - majority shareholder
                
                
                3,105,357
                
                
                
                2,897,399Notes
      payable - minority shareholders
                
                
                369,307
                
                
                
                348,671Notes
      payable - related parties
                
                
                1,735,766
                
                
                
                1,737,596Deferred
      wages - employees
                
                
                309,643
                
                
                
                155,921Customer
      deposits
                
                
                394,767
                
                
                
                394,767Total
      current liabilities
                
                
                11,380,581
                
                
                
                10,337,502LONG
      TERM LIABILITIESDeferred
      wages and interest-majority shareholder
                
                
                1,085,414
                
                
                
                761,333Total
      long term liabilities
                
                
                1,085,414
                
                
                
                761,333Total
      liabilities
                
                
                12,465,995
                
                
                
                11,098,835Commitments
      and contingencies (Note I)STOCKHOLDERS'
      DEFICITCommon
      stock, authorized, 150,000,000 shares, no par value,45,980,565
      and 45,736,914 issued and outstanding respectively
                
                
                32,712,733
                
                
                
                31,491,068Accumulated
      deficit
                
                
                (45,162,805
                )
                
                
                (42,490,711
                )Total
      stockholders' deficit
                
                
                (12,450,072
                )
                
                
                (10,999,643
                )$
                15,923
                
                
                $
                99,192
 
 See
summary of significant accounting policies and notes to financial
statements.
 -30-
  MOLLER
INTERNATIONAL, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Years Ended June 30, 2009 and 2008
  2009
                  
                  
                  2008REVENUE:Revenues - related
      parties
                  
                  $
                  519,386
                  
                  
                  $
                  530,324Other revenue
                  
                  
                  23,518
                  
                  
                  
                  21,993Total revenues
                  
                  
                  542,904
                  
                  
                  
                  552,317COST
      OF REVENUE:Direct project
      expenses
                  
                  
                  126,773
                  
                  
                  
                  285,922Gross Profit
                  
                  
                  416,131
                  
                  
                  
                  266,395OPERATING
      EXPENSESSelling,
      general and administrative
                  
                  
                  1,911,934
                  
                  
                  
                  1,198,660Rent
      expense - majority shareholder
                  
                  
                  528,145
                  
                  
                  
                  527,389Depreciation
      and amortization
                  
                  
                  720
                  
                  
                  
                  1,437Impairment
      of intangible assets
                  
                  
                  72,529
                  
                  
                  
                  -Total
      expenses
                  
                  
                  2,513,328
                  
                  
                  
                  2,013,408Operating
      Loss
                  
                  
                  (2,097,197
                  )
                  
                  
                  (1,461,091
                  )OTHER
      EXPENSEInterest
      expense
                  
                  
                  271,022
                  
                  
                  
                  264,931Interest
      expense - majority shareholder
                  
                  
                  303,875
                  
                  
                  
                  278,533Total
      other expense
                  
                  
                  574,897
                  
                  
                  
                  543,464NET
      LOSS
                  
                  $
                  (2,672,094
                  )
                  
                  $
                  (2,004,555
                  )Loss
      per common share, basic and diluted
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.04
                  )Weighted
      average common shares outstanding
                  
                  
                  45,875,455
                  
                  
                  
                  45,712,315
 
 See
summary of significant accounting policiesand notes to financial
statements.
 -31-
  MOLLER
INTERNATIONAL, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
 FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
 
 Common
      Stock
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Deficit
                
                
                TotalBalances
      at June 30, 2007
                
                
                45,725,979
                
                
                $
                31,233,662
                
                
                $
                (40,486,156
                )
                
                $
                (9,252,494
                )Shares
      issued for services
                
                
                71,650
                
                
                
                46,767
                
                
                
                -
                
                
                
                46,767Fair
      value of employee stock options
                
                
                -
                
                
                
                202,105
                
                
                
                -
                
                
                
                202,105Fair
      value of executive stock options
                
                
                -
                
                
                
                8,534
                
                
                
                -
                
                
                
                8,534Canceled
      Shares
                
                
                (60,715
                )
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                (2,004,555
                )
                
                
                (2,004,555
                )Balance
      at June 30, 2008
                
                
                45,736,914
                
                
                
                31,491,068
                
                
                
                (42,490,711
                )
                
                
                (10,999,643
                )Shares
      issued for Services
                
                
                243,651
                
                
                
                85,418
                
                
                
                -
                
                
                
                85,418Fair
      value of employee stock options
                
                
                -
                
                
                
                63,021
                
                
                
                -
                
                
                
                63,021Fair
      value of executive stock options
                
                
                -
                
                
                
                962,410
                
                
                
                -
                
                
                
                962,410Shares
      issued for services
                
                
                -
                
                
                
                66,500
                
                
                
                -
                
                
                
                66,500Imputed
      interest
                
                
                -
                
                
                
                44,316
                
                
                
                -
                
                
                
                44,316Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                (2,672,094
                )
                
                
                (2,672,094
                )Balance
      at June 30, 2009
                
                
                45,980,565
                
                
                $
                32,712,733
                
                
                $
                (45,162,805
                )
                
                $
                (12,450,072
                )
  See
summary of significant accounting policies and notes to financial
statements.
 -32-
  MOLLER
      INTERNATIONAL, INC.CONSOLIDATED
      STATEMENT OF CASH FLOWSFor
      the Years Ended June 30, 2009 and 20082009
                
                
                2008Operating
      activitiesNet
      loss
                
                $
                (2,672,094
                )
                
                $
                (2,004,555
                )Adjustments
      to reconcile lossto
      net cash used y operating activitiesImpairment
      expense
                
                
                72,529
                
                
                
                -Depreciation
      and amortization
                
                
                719
                
                
                
                1,437Stock-based
      compensation
                
                
                1,177,349
                
                
                
                257,406Imputed
      interest
                
                
                44,316
                
                
                
                -Change
      in operating assets and liabilities:Accounts
      receivable
                
                
                12,483
                
                
                
                52,907Accounts
      payable
                
                
                98,928
                
                
                
                195,979Accrued
      liabilities – related parties
                
                
                507,879
                
                
                
                775,954Other
      liabilities
                
                
                477,803
                
                
                
                -Accrued
      liabilities
                
                
                35,682
                
                
                
                -Customer
      deposits
                
                
                -
                
                
                
                (15,000
                )Other
      assets
                
                
                814
                
                
                
                (108
                )Net
      Cash Used in Operating Activities
                
                
                (243,592
                )
                
                
                (735,980
                )Investing
      ActivitiesPurchase
      of equipment
                
                
                -
                
                
                
                (1,856
                )Proceeds
      from sale of equipment
                
                
                -
                
                
                
                350Net
      Cash Used in investing Activities
                
                
                -
                
                
                
                (1,506
                )Financing
      ActivitiesProceeds
      from related party note payable
                
                
                288,448
                
                
                
                521,375Payments
      on related party note payable
                
                
                (61,684
                )
                
                
                (214,714
                )Proceeds
      from note payable
                
                
                20,104
                
                
                
                433,110Payments
      of notes payable
                
                
                -
                
                
                
                (8,000
                )Net
      Cash Provided by Financing Activities
                
                
                246,868
                
                
                
                731,771Net
      increase (decrease) in cash
                
                
                3,276
                
                
                
                (5,715
                )Cash,
      beginning of year
                
                
                -
                
                
                
                5,715Cash,
      end of year
                
                $
                3,276
                
                
                $
                -Supplemental
      DisclosuresInterest
      paid
                
                
                -
                
                
                
                -Income
      taxes paid
                
                
                -
                
                
                
                -
 See
summary of significant accounting policies and notes to financial
statements.
 -33-
  MOLLER
INTERNATIONAL, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
A – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 Moller
International has for the past fifteen years devoted most of its efforts to the
design and development of a Vertical Takeoff and Landing (VTOL) vehicle known as
the Skycar. One of the enabling technologies for the Skycar is the Rotapower®
rotary engine, which has been the focus of our attention for the past two years.
The Company is now attempting to attract a suitable manufacturer for its engine
technology and is currently in discussions with several potential licensees and
/or buyers of this technology although there is no assurance at this stage that
the Company will be successful in these efforts.
 
 Moller
International Inc., (MI) consolidates the accounts of its wholly owned, inactive
subsidiaries, Aerobotics Inc. (AI) and Moller Corporation (MC). All intercompany
transactions and balances have been eliminated.
 
 Dr. Paul
S. Moller is the majority shareholder of MI.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“GAAP”) and include the accounts of MI and its wholly-owned subsidiary.
Intercompany accounts and transactions have been eliminated.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenditures/expenses during the reporting
periods. Actual results could differ from those estimates.
 
 Reclassifications
 
 Certain
items from the June 30, 2008 consolidated financial statements have been
reclassified in the June 30, 2009 financial statements to conform to current
year presentation.
 
 Cash
and Cash Equivalents
 
 We
consider all highly liquid debt instruments with an initial maturity date of 90
days or less to be cash equivalents.
 
 Property
and Equipment
 
 Property
and equipment is stated at cost net of accumulated depreciation. Depreciation is
recorded utilizing the straight-line method over the estimated useful lives,
ranging from five to fifteen years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
 
 Intangible
Asset and Impairment
 
 Costs to
develop and perfect patents are capitalized and amortized over the lesser of the
patent’s economic life or legal life. The carrying value of patents is reviewed
periodically to determine whether the patents have continuing value. For the
year ended June 30, 2009, we evaluated the fair value of our intangible assets
related to patents and based on that analysis, we recorded an impairment charge
of $72,529.
 -34-
  Long-Lived
Assets
 
 In
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets("FAS 144"), we periodically assess the
impairment of long-lived assets when events or changes in circumstances indicate
that the carrying value may not be recoverable. FAS 144 requires impairment
losses to be recorded on long-lived assets used in operations when the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. As of June 30, 2009 and 2008, there were no impairments to
our long-lived assets.
 
 Fair
Value of Financial Instruments
 
 The
carrying value of short-term financial instruments, including cash, accounts
receivables, accounts payable and accrued expenses and notes payable approximate
fair value due to the relatively short period to maturity for these
instruments.
 
 Revenue
Recognition
  We
recognize revenue when persuasive evidence of an arrangement exists, services
have been rendered, the sales price is fixed or determinable, and collectability
is reasonably assured
  For the
years ended June 30, 2009 and 2008, substantially all of our revenue was derived
from services provided to Freedom Motors, an affiliated entity and former
subsidiary, which shares common ownership with some of the existing shareholders
of MI, under the 1998 Technology Development and License Agreement. Under this
agreement, we provide engineering services related to the scientific and
engineering technical support for the rotary engine. Specifically, we provide
personnel and facilities as required to adapt the Rotapower engine to
applications where the potential exists for high volume production. In addition,
we also provide bookkeeping and other administrative services.
 
 Delivery
is considered complete when a specific defined task or milestone is completed,
as demonstrated by the issuance of engineering documents (procedures, drawings,
models, prototypes, etc.) and provided to Freedom Motors or its assigns. The
date the information or material is provided to Freedom Motors is considered the
delivery date.
 
 However,
because Freedom Motors is a startup company, it has not been in a position to
pay until it acquired contracts and received revenue from those contracts.
Consequently, collection is not reasonably assured until Freedom Motors actually
makes the payment. As a result, the final criterion is met when we receive the
payment for services and we then recognize revenue in an amount equal to the
fees received.
 
 Because
collectability is uncertain, we do not record any accounts receivable related to
accumulated revenues billed but not yet collected. As of June 30, 2009 and 2008,
the total accumulated and uncollected billings totaled $9,563,587 and
$8,068,632, respectively. These amounts have been fully reserved.
 
 Other
revenue derived from the sale of t-shirts, model cars, information packets and
other items is recognized at the time of sale, which is when the merchandise is
delivered.
 
 Research
and Development Costs
 
 Research
and development costs are expensed as incurred.
 
 Stock
Based Compensation
 
 We account
for stock-based compensation issued to employees and non-employees as required
by SFAS No. 123R Share Based
Payments(“SFAS 123R”) and related interpretations. Under the provisions
of this statement, stock based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense over the
requisite service period, usually the vesting period, using the straight-line
method. Share-based awards that vest upon grant are expensed
immediately.
  -35-
  Interest
expense
 
 Certain
loans obtained from related parties do not bear interest. As such, we have
imputed interest on these related party loans at a rate of $44,316 and $0 for
the years ended June 30, 2009 and 2008, respectively, which are based on current
market rates for similar type of loans.
 
 Income
Taxes
 
 We have
adopted the provisions of SFAS 109, Accounting for Income Taxes,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount more likely than not to be
realized.
 
 We have
adopted the provisions of FASB issued Interpretation 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Under FIN 48, we recognize tax benefits
only for tax positions that are more likely than not to be sustained upon
examination by tax authorities. The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely to be realized upon
settlement. A liability for “unrecognized tax benefits” is recorded for any tax
benefits claimed in our tax returns that do not meet these recognition and
measurement standards. To date, we do not have any unrecognized tax
benefits.
 
 Loss
Per Share (LPS)
 
 Basic LPS
excludes dilution and is computed by dividing the loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted LPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that shared in the
earnings of the entity. Diluted LPS is the same as basic LPS for all periods
presented because all potentially dilutive securities have an anti-dilutive
effect on LPS due to the net losses incurred. At June 30, 2009, the total number
of shares of common stock relating to outstanding stock options and other
potentially dilutive securities that have been excluded from the LPS calculation
because their effect would be anti-dilutive approximated 10,029,044
shares.
 
 Recent
Accounting Pronouncements
 
 On June 3,
2009, the FASB approved the FASB Accounting Standards Codification (“the
Codification”), as the single source of authoritative nongovernmental Generally
Accepted Accounting Principles (“GAAP”), in the United States. The Codification
will be effective for interim and annual periods ending after September 15,
2009. Upon the effective date, the Codification will be the single source of
authoritative accounting principles to be applied by all nongovernmental United
States entities. All other accounting literature not included in the
Codification will be non-authoritative. We do not expect the adoption of the
Codification to have an impact on our financial position or results of
operations.
 
 In May
2009, the FASB issued SFAS No. 165, Subsequent Events. FAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which any entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. FAS 165 is effective for interim and
annual periods ending after June 15, 2009 and applies prospectively. The
adoption of this standard did not have a material impact on the financial
position, results of operations or cash flows of MI. We evaluated all events and
transactions after June 30, 2009 up through October 13, 2009, the date these
financial statements were issued. During this period, we did not have any
material recognizable subsequent events. We did have non-recognizable subsequent
events as indicated in Note K.
  -36-
  On January
1, 2009, we adopted SFAS No. 157, Fair Value of Financial
Instruments, (“SFAS 157”) as delayed by FSP 157-2-2 for all non-financial
assets and non-financial liabilities. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. The adoption of this standard did not have a material impact on
our financial statements.
 
 NOTE
B – GOING CONCERN
 
 As shown
in the accompanying financial statements, we have incurred net losses of
$2,672,094 and $2,004,555 for the years ended June 30, 2009 and 2008,
respectively. In addition, we have an accumulated deficit of $45,162,805 and a
working capital deficit of $11,376,225 as of June 30, 2009. These conditions
raise substantial doubt as to our ability to continue as a going concern.
Historically, funding was provided by certain shareholders, including the
majority shareholder, in the form of short-term notes payable. In addition, the
majority shareholder granted us a deferral on the payment of rent for our
building. There is no assurance that we will continue to receive funding from
shareholders, particularly our major shareholder given he recently filed for
protection under the federal Chapter 11 reorganization provisions. Consequently,
we are evaluating several alternatives to raise the additional capital through
debt or equity transactions. The financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.
 
 Moller
International’s President and majority shareholder, Paul S. Moller (“Dr.
Moller”), has filed for protection under the Chapter 11 reorganization
provisions of the federal bankruptcy law. The application was filed on 18 May
2009 in U.S. Bankruptcy Court for the Eastern District of California in
Sacramento. With the outcome of these proceedings as yet undetermined there is
uncertainty over the potential impact on the Company, if any. The impact of this
action on the Company’s ability to raise needed capital as well as the
possibility that Dr. Moller could lose some or all of his holdings in the
Company to third party creditors has not been determined.
 
 NOTE
C - Property and Equipment
 
 Property
and Equipment consist of:
 
 June
      30, 2009
                  
                  
                  June
      30, 2008Production
      and R&D Equipment
                  
                  $
                  394,664
                  
                  
                  $
                  394,664Computer
      equipment and software
                  
                  
                  420,099
                  
                  
                  
                  420,099Furniture
      and fixtures
                  
                  
                  75,650
                  
                  
                  
                  75,650890,413
                  
                  
                  
                  890,413Less
      accumulated depreciation
                  
                  
                  (879,199
                  )
                  
                  
                  (878,480
                  )$
                  11,214
                  
                  
                  $
                  11,933
 
 
 NOTE D – CUSTOMER DEPOSITS
 
 From time
to time, we received advances from customers related to our Skycars product for
the purpose of reserving specific delivery positions for Skycars when they
become available for sale to the public. Deposits are refundable at any time
upon request. At June 30, 2009 and 2008, we have received an aggregate $394,767
of customer deposits.
 
 NOTE
E – DEFERRED WAGES
 
 Due to our
cash flow constraints, the President, members of management and other employees
have agreed to defer all or a portion of their annual salaries. At June 30, 2009
and 2008, members of management and other employees have deferred $239,562 and
$110,826 of wages along with accrued interest of $70,081and
$45,095.
  -37-
  These
amounts are reflected as deferred wages, which is reported as a component of
current liabilities.
 
 However,
the President’s annual salary of $250,000 is being deferred until we reach a
consistent level of profitability, which is not expected to occur during the
next twelve months. As a result, deferred wages related to the President’s
salary is recorded as a component of long-term liabilities. As of June 30, 2009
and 2008, a liability of $875,000 and $625,000, respectively, along with the
accrued interest of $210,414 and $136,333, respectively, were recorded as a
component of non-current liabilities.
 
 NOTE
F – NOTES PAYABLE
 
 Majority
Shareholder
 
 At June
30, 2009 and 2008, the outstanding debt owed to our majority shareholder totaled
$3,105,357 and $2,897,399, respectively. This debt is evidenced by two notes,
one of which is non-interest bearing. Interest is imputed at 10% on this
non-interest bearing note. The stated interest rate on the other note is also
10%. Both notes are unsecured and payable upon demand. Aggregate accrued
interest on these notes was $1,171,656 and $867,781 at June 30, 2009 and 2008,
respectively.
 
 Minority
Shareholder
 
 At June
30, 2009 and 2008, the outstanding debt owed to minority shareholders totaled
$369,307 and $348,671, respectively. This debt is unsecured, payable upon demand
and bears an annual interest rate of 10%.  Aggregate accrued interest
on these notes was $172,132 and $134,392 at June 30, 2009 and 2008,
respectively.
 
 Related
Party
 
 At June
30, 2009 and 2008, the outstanding debt owed to other related parties totaled
$1,735,766 and $1,737,596, respectively. This debt is unsecured, payable upon
demand and bears an annual interest rate of 5%.  Aggregate accrued
interest on these notes was $486,984 and $413,290 at June 30, 2009 and 2008,
respectively.
 
 Non-Related
Party
 
 At June
30, 2009 and 2008, the outstanding debt owed to other parties totaled $978,182
and $958,078, respectively. This debt primarily consists of $500,000 owed to
Pelican Ventures and $453,214 owed to Barry Malizia.
 
 The amount
owed to Mr. Malizia relates to non-interest bearing advance made by Mr. Malizia.
Under the agreement, Mr. Malizia advanced the Company $453,214, which is payable
within 90 days of demand. Mr. Malizia is the Chairman of Rotapower Engine
Systems Limited (RES), a potential licensee of the Rotapower engine technology.
Paul
Moller, our majority shareholder, guaranteed this advance.
 
 The amount
owed to Pelican Ventures relates to an advance for the development of a
diesel-powered rotary engine. The loan carries interest at 9%, is secured by
substantially all assets, and was originally due in 2002. Pelican canceled the
agreement in June 2002 and the dispute has not been resolved. MI ceased accruing
interest in August 2002.
 
 Aggregate
accrued interest on these notes was $14,842 and $13,180 at June 30, 2009 and
2008, respectively.
 
 NOTE
G – STOCK BASED COMPENSATION
 Shares
of stock
 
 During the
year ended June 30, 2009 and 2008, MI issued 243,651 and 71,650 shares of common
stock to certain individuals in recognition of various services provided. MI
recorded compensation expense of $85,418 and $46,767 based on a fair market
value per share of $0.18 to $0.42 and $0.53 to $0.93, determined by taking the
closing price for the stock at the dates the services were
provided.
 
 As of June
30, 2009 and 2008, unamortized compensation expense related to shares granted
amounted to $0 and $83,547, respectively.
 -38-
  Stock
options
 
 On January
21, 2004, MI adopted its 2004 Stock, Option and Restricted Stock Benefit Plan.
The total shares available for grant under the plan aggregate
7,500,000.
 
 Previously,
MI had its 1991 Stock Option Plan that allowed for the granting of Non-qualified
Stock Options to employees and consultants and Incentive Stock Options to
employees. The total shares available for grant under that plan were
7,500,000.
 
 Our
employee directors do not receive any compensation for their services as
directors. Non-employee directors are entitled to standardized stock option
grants on the first day of a directorship year, which begins on the date of
election to the board. It is pro-rated for a new director appointed after a
board year has begun. Non-employee directors receive a grant of 5,000 options to
purchase common stock at an exercise price equal to the closing price on the
date of appointment.
 
 During the
years ended June 30, 2009 and 2008, we issued the following stock
options:
 
 ·
                  6,496,040
      and 218,311options to employees with contract terms ranging from one to
      two years
 ·
                  85,000
      and 15,000 options to non employee board
  members.
 ·
                  200,000
      options to a consultant for services rendered related to legal matters
      resulting from lawsuit filed that names the Company as a defendant in an
      environmental contamination case (see Note
I).
 
 Compensation
expense of $939,054 and $83,143 was recognized during the years ended June 30,
2009 and 2008, respectively. There were no unamortized compensation amount at
June 30, 2009 and 2008.
 
 The fair
value of the stock options granted were estimated using the Black Scholes method
based on assumptions including (1) risk-free interest rates ranging from 1.45 %
to 1.63%, (2) exercise prices ranging from $0.19 to $1.50, (3) an estimated
expected term approximately one year based on the “plain vanilla” method allowed
under SAB 107 and SFAS 123R, (4) no dividend rate and (5) computed volatility
rates ranging from 152.95% to 247.15% on the underlying stock.
 
 Option
activity for the years ended June 30, 2009 and 2008 is as
follows:
  WeightedTotal
      Granted
                  
                  
                  Range
      of Option Prices
                  
                  
                  Total
      Vested
                  
                  
                  Average
      Exercise PriceBalance
      at June 30, 2007
                  
                  
                  
                  13,227,589
                  
                  
                  
                  
                  
                  
                  
                  13,227,589
                  
                  
                  $
                  2.00Granted
                  
                  
                  201,819
                  
                  
                  $
                  0.60
      to $0.88
                  
                  
                  
                  201,819
                  
                  
                  
                  0.75Exercised
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Balance
      at June 30, 2008
                  
                  
                  
                  13,429,408
                  
                  
                  
                  
                  
                  
                  
                  13,429,408
                  
                  
                  $
                  1.80Granted
                  
                  
                  6,781,040
                  
                  
                  $
                  0.19
      to $1.50
                  
                  
                  
                  6,781,040
                  
                  
                  
                  0.23Exercised
                  
                  
                  -Forfeited
                  
                  
                  10,181,404
                  
                  
                  $
                  0.38
      to $4.51
                  
                  
                  
                  
                  
                  
                  
                  1.80Balance
      at June 30, 2009
                  
                  
                  
                  10,029,044
                  
                  
                  
                  
                  
                  
                  
                  10,029,044
                  
                  
                  $
                  0.43
   -39-
  Additional
option information for the year ended June 30, 2009, is as
follows:
   WeightedAverageWeighted
                  Remaining
                  
                  WeightedAverage
                  Life
      in
                  
                  AveragePrice
      Range
                  Outstanding
                  Price
                  Years
                  Exercisable
                  Price$3.82
                  6,000
                  $1.50
                  4.58
                  6,000
                  $1.50$0.86
                  3,194,762
                  $0.86
                  1.75
                  3,194,762
                  $0.86$0.60
                  47,242
                  $0.60
                  1.66
                  47,242
                  $0.60$.19
      to $.20
                  6,781,040
                  $0.86
                  4.66
                  6,781,040
                  $0.8610,029,044
                  $0.44
                  
                  10,029,044
                  $0.44
  NOTE
H – INCOME TAXES
  At
June 30, 2009, MI had $17,955,845 in net operating loss (NOL) carryforwards to
offset future federal taxable income, resulting in a deferred tax asset of
$5,872,474. In view of the uncertainty over MI’s ability to generate sufficient
taxable income in future years to utilize the NOLs, a full valuation allowance
of $5,872,474 has been recorded to offset the deferred tax asset, resulting in
no net deferred tax asset or liability. The valuation allowance also results in
a difference between the statutory rate of 35% and the effective rate of 0%. The
cumulative net operating losses are scheduled to expire through
2029.
   NOTE
I – COMMITMENTS AND CONTINGENCIES
  Lease
commitment
   MI’s
operations are housed in one 34,500 square foot building, which is leased from
Dr. Moller. The term of the current lease is for ten years ending June 30, 2013,
at $41,400 per month with a provision for an adjustment in the monthly rent in
2008. MI remains liable for all property taxes and insurance on the leased
property. The minimum rental commitment remaining on the leased property is
$496,800 per year.
  The
office operating lease agreements require that the Company pays certain
operating expenses applicable for the leased premises. Future minimum rental
payments required under these operating leases are as
follows:
  Years
      Ending June 30,
                    
                    Amount2010
                    
                    $
                    496,8002011
                    
                    
                    496,8002012
                    
                    
                    496,8002013
                    
                    
                    496,8002014
                    
                    
                    -Years
      thereafter
                    
                    
                    -Total
                    
                    $
                    1,987,200
  Total rental expense for the twelve months ended
June 30, 2009 and 2008 amounted to approximately $496,800 and $496,800,
respectively.
 -40-
 
 Rent
expense charged to operations under this lease, including property taxes,
aggregated $528,145 and $527,389 for fiscal 2009 and 2008,
respectively.
 
 Contingencies
 
 J.F. Wilson & Associates Ltd. v.
Estate of Percy Symens, et al.
 Moller
International (MI) is named as a defendant in a lawsuit pending in Yolo County,
California Superior Court – J.F. Wilson & Associates Ltd. V. Estate of Percy
Symens, et al. The complaint, filed in April 2005, alleges that MI unlawfully
discharged solvents into the environment while doing business at 203 J Street
and 920 Third Street in Davis, California during 1968 to 1980. The complaint
seeks injunctive relief and damages of an unspecified amount. The Company’s
Answer, which denies the allegations in the complaint, was filed in June of
2005, and initial discovery commenced in August of 2005. The case has not been
set for trial. On December 20, 2006, defendant and cross-complainant Donald M.
Miller died; and on January 7, 2008, the court ordered a stay of proceedings
until the court’s Probate Department rules on an application for letters of
instruction in connection with Mr. Miller’s estate. The court’s Probate
Department has not yet issued a ruling, and the stay remains in
place.
 
 In a
related administrative proceeding initiated on September 26, 2006, the
California Central Valley Regional Water Quality Control Board (RWQCB) issued a
draft Cleanup and Abatement Order (CAO) in connection with the property at 920
Third Street. MI was named as one of the responsible parties in the draft
CAO, and intends to challenge the characterization of MI as a discharger of
environmental contaminants, while also complying with the orders of the RWQCB.
MI and other parties have submitted comments regarding the draft cleanup and
abatement order. The draft CAO has not been finalized. The property owner is
proceeding with work to investigate, characterize and remediate the soil and
groundwater contamination at this property, with RWQCB
oversight.
 
 MI’s
probable loss has been estimated at this time in the range of $200,000 to
$1,000,000 and has accrued $200,000. It is reasonably possible that these
estimates may be significantly revised as the site investigation and other
research and analysis proceeds. MI will continue to assess its potential loss in
the future as more information is available.
 
 NOTE
J – SUBSEQUENT EVENTS
 
 The
following events occurred subsequent to June 30, 2009:
 
 a.)
                  On
      July 06, 2009 MI has issued 1,602,941 shares of stock for debt
      extinguishment of $272,500 notes payable. These shares were issued under
      the Moller International Stock, Restricted Stock, Options Benefit Plan of
      2004 until the plan expired on 28 January 2009, and under the Moller
      International Stock, Restricted Stock, and Options Benefit Plan of 2009 as
      of its effective start date in March
2009.
 b.)
                  On
      July 29, 2009, MI entered into an investor relation service agreement and
      as of September 02, 2009, 18,667 shares of common stock options from 2009
      stock benefit plan had been granted to the consultant of the
      company.
 c.)
                  On
      October 1, 2009 the Company issued 21,277 shares of its common stockin
      accordance with an ongoing agreement for services to a consultant of theCompany.
      Cost basis was $0.235 per share determined from the closing priceof
      the Company's stock on
9/30/2009.
   Item 9.
CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  None.
 Item
9A(T). Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is accumulated and communicated to the issuer's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. As of the end of the six-month period
covered by this Transition Report, we carried out an evaluation, under the
supervision and with the participation of our President and Chief Executive
Officer who also acts as our Chief Financial Officer. This study examined the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our President/CEO/CFO concluded that our
disclosure controls and procedures are not effective because of the
identification of a material weakness in our internal control over financial
reporting which is identified below, which we view as an integral part of our
disclosure controls and procedures.
  Management's
Annual Report on Internal Controls over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Our internal control system was designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes, in accordance
with generally accepted accounting principles. Because of inherent limitations,
a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate due to
change in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
  The
Company’s management team carried out an assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2008.
Based on that assessment, management concluded that our internal control over
financial reporting was not effective as of December 31, 2008. This conclusion
results from the continued existence of material weaknesses in our internal
control over financial reporting including a lack of segregation of duties in
financial reporting, a lack of accounting expertise at the Chief Executive
Officer level, a general lack of entity level controls and an over reliance on
consultants in the financial reporting process. A material weakness is a
deficiency, or a combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial statements will not be
prevented or detected on a timely basis.
  These
weaknesses stem primarily from the early stage of our business operations and
related lack of working capital to hire additional staff during the periods
covered by this Transition Report and our last report on Form 10-K filed in
October 2008.
 
 In light
of the foregoing, and as we move forward with the development of our aircraft
and engine product lines, we intend to implement a number of measures to
remediate such ineffectiveness and strengthen our internal controls environment.
Planned action includes our retention of an outside consulting firm to assist us
in the evaluation and testing of our internal control system and the
identification of opportunities to improve the efficacy of our accounting and
financial reporting processes. Additional anticipated remedial action will
involve organizational and process changes to address the identified
deficiencies, including (i) hiring additional personnel to assist with financial
reporting and business operations as soon as our finances will allow, (ii)
establishing and complying with delegation of authority guidelines to be
prepared for approval by the Board of Directors, (iii) modifying analytical
procedures to ensure the accurate, timely and complete reconciliation of all
major accounts; (iv) ensuring proper segregation of duty controls throughout the
Company, and (v) implementing formal processes requiring periodic
self-assessments and independent tests.
 -41-
  Along
these lines, we approached potential candidates to serve as additional members
to our Board of Directors, including candidates having accounting backgrounds to
participate on our audit committee. We are pleased to report that Stephen P.
Smith has joined the Board of Directors. After graduating with a Bachelor's
degree in accounting from Fairfield University in Fairfield, CT, Steve started
his professional career at Deloitte & Touche, LLP, in the Stamford office
where he achieved senior accountant status and earned his CPA. Subsequent to his
tenure with D&T, Steve accepted the Manager of Accounting position at
Universal Studios Hollywood. After completing his MBA with an emphasis in
Finance at Pepperdine University in December 2004, Steve was hired as the Global
Financial Reporting Manager at CB Richard Ellis Investors Group located in
downtown Los Angeles. Ultimately, after nearly 10 years of technical accounting
and financial reporting experience, Steve joined his current employer, Vaco, in
March 2006.
 At this
time, our management recognizes that many of the intended actions and
enhancements will require continual monitoring and evaluation for effectiveness,
and will necessarily evolve as we continue to evaluate and improve our internal
controls over financial reporting. Management will accordingly review progress
on activities taken on a consistent and ongoing basis at the CEO and senior
management level in conjunction with our Board of Directors.
  This
Transition Report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to the attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this annual
report.
  Changes
in Internal Controls over Financial Reporting
  There have
been no changes in our internal controls over
financial reporting as defined in Rule 139-15(f) of the Act, in the quarter
period ended Decemeber 31, 2008that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
   -42-
  PART
III
 Item 10.
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
 The
following information is provided for current members of the Board of Directors
who served during this reporting period:
  Director
                  Age
                  Current
      Term of Office
                  Director/Officer
      in any other SEC-reporting CompanyPaul
      Moller
                  72
                  12/2008
      – 12/2009
                  NoFaulkner
      White
                  58
                  12/2008
      – 12/2009
                  NoJim
      Toreson
                  67
                  12/2008
      – 12/2009
                  NoMike
      Shanley
                  60
                  12/2008
      – 12/2009
                  NoStephen
      Smith
                  35
                  12/2008
      – 12/2009
                  No
 
 Resumes
of Board of Directors
 
 Paul
Moller, Chairman of the Board--Dr. Moller founded the Company and has served as
the company's President since its formation. He holds a Masters in Engineering
and Ph.D. from McGill University. Dr. Moller was a professor of Mechanical and
Aeronautical Engineering at the University of California, Davis, from 1963 to
1975, where he developed the Aeronautical Engineering program. In 1972 he
founded SuperTrapp Industries and was Chief Executive Officer as SuperTrapp
became the most recognized international name in high-performance engine
silencing systems. SuperTrapp Industries was sold in 1988. In 1983 he founded
Moller International to develop powered lift aircraft. Under his direction
Moller International completed contracts with NASA, NOSC, DARPA, NRL, Harry
Diamond Labs, Hughes Aircraft Company, California Department of Transportation
and the U.S. Army, Navy, and Air force. These contracts included the development
and deployment of numerous unmanned aerial vehicles and Wankel based engines.
Dr. Moller has received 43 patents including the first U.S. patent on a
fundamentally new form of powered lift aircraft. In 1980 he developed the Davis
Research Park, a 38-acre industrial-research complex within the city of Davis,
CA in which Moller International is located.
 
 Faulkner
White, Director--Mr. White received his B.A. in Psychology (Distinction) with a
minor in Computer Science from Dartmouth College in 1972. He has consulted for
Apple Computer, Motorola and McDonnell Douglas. In 1995 Mr. White collaborated
in the development of a new type of breast biopsy gun for Biopsys Medical Inc.,
developing software to track the efficacy of the new design for the FDA, and
subsequently for the customers themselves. He is currently developing Customer
Relationship Management software for the laser eye surgery and cosmetic surgery
markets. Mr. White is also a certified DBA in Oracle database
technology.
 
 Jim
Toreson, Director--Dr. Toreson has over 16 years experience as a chief
executive, and over 20 years experience in manufacturing, including quality
control, materials management, JIT production, process control, and
manufacturing engineering. Eight years of experience in flexible automation,
statistical process control (SPC), and quality system including ISO 9000 and Six
Sigma programs. More recently as the founder of ONSHORE, a management consulting
firm specializing in technology-intensive products and services he has acted as
the CEO of Chineseinvestors.com, an Internet portal serving the world-wide
ethnic Chinese marketplace for financial services; VP of Marketing and Sales of
APPIANT Technology, Inc., a NASDAQ company providing ASP services for speech
recognition; and VP of Business Development for eSpaces, a company providing
physically secure and cyber-secure work spaces. Dr. Toreson has a BSEE and MSEE
from the University of Michigan, a Dr. of Science from the University of Nevada,
and has completed coursework for his PhD EE at the University of
Pennsylvania.
 
 Mike
Shanley, Director—Mr. Shanley has been a pilot since 1969, serving with the
Royal Australian Air Force in Vietnam in 1971 and has been an enthusiastic
supporter of the Skycar project since 1987. Mr. Shanley has a BA in English
Literature from the University of Queensland, Australia, is the author of the
novel “Strela” and was a magazine publisher and editor from 1987 to 1996. He is
presently co-director of a security company based in the United Kingdom
providing security at Heathrow, Gatwick, Manchester and Stansted airports, with
company revenue in excess of $3m US. Mr. Shanley is also Chairman of Shanley
International Ltd., a company set up specifically to facilitate trade with
China.
 -43-
  Stephen
Smith, Director—After graduating with a Bachelor's degree in Accounting from
Fairfield University in Fairfield, CT, Steve started his professional career at
Deloitte & Touche, LLP, in the Stamford office where he achieved senior
accountant status and earned his CPA. Subsequent to his tenure with D&T,
Steve accepted the Manager of Accounting position at Universal Studios
Hollywood. After completing his MBA with an emphasis in Finance at Pepperdine
University in December 2004, Steve was hired as the Global Financial Reporting
Manager at CB Richard Ellis Investors Group located in downtown Los Angeles.
Ultimately, after nearly 10 years of technical accounting and financial
reporting experience, Steve joined Vaco in March 2006.
 Item 11.
EXECUTIVE COMPENSATION
 
 The
following table sets forth a summary of compensation received by each of our
officers and directors who received compensation from the Company during the
past fiscal year.
  Name
      & Principal Position
                  Year
                  Salary
      ($)
                  Bonus
      ($)
                  Stock
      Awards ($)
                  Option
      Awards ($)
                  Non-equity
      Incentive Plan Compensation ($)
                  Change
      in Pension Value and Nonqualified Deferred
      Compensation Earnings ($)
                  All
      Other Compensation ($)
                  Total
      ($)Paul
      Moller, President
                  2009
                  $250,000(1)
                  $0
                  $0
                  $0
                  $0
                  
                  $0
                  $250,000(1)Faulkner
      White
                  2009
                  $0
                  $0
                  $0
                  $6,000
                  $0
                  
                  $0
                  $6,000Jim
      Toreson
                  2009
                  $0
                  $0
                  $0
                  $9,000
                  $0
                  
                  $0
                  $9,000Mike
      Shanley
                  2009
                  $0
                  $0
                  $0
                  $2,000
                  $0
                  
                  $0
                  $2,000Stephen
      Smith
                  2009
                  $0
                  $0
                  $0
                  $0
                  $0
                  
                  $0
                  $0
 
 (1)$250,000
of this amount shown is deferred at the election of the Executive, not as part
of any plan.
 (2) Each
member of the Board of Directors (with the exclusion of Paul Moller) was issued
options for 5,000 shares of Moller International stock as compensation for
service on the Board for the 12-month term of office.
 -44-
  ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  The
following are all of the individuals or groups known by the company to be the
beneficial owner of more than five (5) percent of any class of the issuer's
securities as of September 1, 2008:
 
 Name
and Address of Amount & Nature of Percent
 Title
of Class Beneficial Owner  Beneficial Ownership of Class
 -------------------------------------------------------------------------------
 
 Common
Stock(1) Paul S. Moller (1) (2) 33,092,025  56.08% (3)
 9350
Currey Rd
 Dixon,
CA 95620
 
 (1)
                Has
      options to purchase 9,194,762
shares.
 (2)
                Total
      includes 4,900,000 shares beneficially owned by Moller Corp., a California
      corporation controlled by Paul S.
Moller.
 (3)
                57.74%
      of class if all existing options are
exercised.
 
 
 Paul S.
Moller, President, Director and Chairman of the Board of Directors is the sole
shareholder of Moller Corp. Moller Corporation holds legal title to 25,319,909
of the shares of Common stock listed above as beneficially owned by Paul S.
Moller. Rosa Maria Moller, the spouse of Paul S. Moller, owns 547,848 shares of
Common stock, which are included in the figure above, although she holds them as
separate property in her name alone.
 
 The
following are all of our officers and directors who held office during the
fiscal year ending September 30, 2009 and who are beneficial owners of our
securities:
 
 Title
      of Class
                Name
      and Address of Beneficial Owner
                Amount
      & Nature of Beneficial Ownership
                Percent
      of Class (3)Common
      Stock
                Paul
      S. Moller (1) (2)
                23,897,263
      (D,I)
                51.9%9350
      Currey RdDixon,
      CA 95620Common
      Stock
                Faulkner
      White
                187,280
      (D)
                00.003%51
      PinewoodIrvine,
      CA 92604Common
      Stock
                Jim
      Toreson
                25,000
      (D)
                00.00%HCR61
      Box 51Alamo,
      NV 89001Common
      Stock
                Mike
      Shanley
                7,583
      (D)
                00.00%Bradfield
      Close WorkingSurrey
      GU22 7RE, UKCommon
      Stock
                Stephen
      Smith
                0
      (D)
                00.00%724
      Vallombrosa Drive
                  Pasadena,
      CA 91107
  (1)
                Total
      include options to purchase 9,194,762
shares.
 (2)
                Total
      includes 4,900,000 shares beneficially owned by Moller Corp., a California
      corporation controlled by Paul S.
Moller
 (3)
                Percentage
      of class based on 59,009,609 potential shares
  outstanding.
   -45-




ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
 We
currently lease and occupy a 34,500 square foot building located in Davis,
California, which is owned by Dr. Paul S. Moller, the majority shareholder of
Moller International. (see Note I to the financial statements)
 
 Notes
payable to the majority shareholder, Dr. Paul S. Moller (Moller) are unsecured,
and due on demand. There are two separate notes, one for $2,616,599 which bears
interest at $10% per annum, and another note for $280,800 that is non-interest
bearing. (see Note E to the financial statements)
 
 During the
year ended June 30, 2009, the Company repaid $21,243.49 in loans and had a
$1,735,766 balance owed to the Milk Farm Associates (Milk Farm), a limited
partnership, and a related entity. Dr. Moller is the general partner in Milk
Farm and has a 32% ownership interest. (see Note G to the financial
statements)
 ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Year
      ended June 30,2009
                
                
                2008Audit
      and Quarterly Review Fees
                
                $
                61,903
                
                
                $
                79,619Audit-related
      Fees
                
                
                
                
                
                
                0Tax
      Fees
                
                
                0
                
                
                
                0All
      Other Fees
                
                
                0
                
                
                
                0Total
      Fees
                
                $
                61,903
                
                
                $
                79,619
 ITEM 15.
EXHIBITS AND REPORTS ON FORM 8-K.
 
 (a.)
              Exhibits
 
 Exhibit No.Description
 Exhibit
31.1           Certification
of CEO / CFO
 
 Exhibit
32.1           Certification
of CEO / CFO
 
 (b.)
              Reports
      on Form 8-K
 
 The
following reports were filed on Form 8-K during the period ending 30 June
2009:
 
 Not
applicable
   -46-




SIGNATURES
 
 Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
 MOLLER
INTERNATIONAL, INC.
 
 10/13/2009/s/ Dr. Paul S. Moller
 Date              President,
Director
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934 this report is signed
below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
 
 SIGNATURE
                TITLE
                DATE/s/
      Dr. Paul S. Moller
                CEO,
      President, Director
                10/13/2009/s/
      Faulkner White
                Director
                10/13/2009/s/
      Jim Toreson
                Director
                10/13/2009/s/
      Mike Shanley
                Director
                10/13/2009/s/
      Stephen Smith
                Director
                10/13/2009
    -47-