SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

                 Annual Report Pursuant to Section 15(d) of the
                         Securities Exchange Act of 1934

                     For the Fiscal Year Ended June 30, 1998
                         Commission File Number 0-18958

                          Groen Brothers Aviation, Inc.
             (Exact name of Registrant as specified in its charter)


                Utah                                       87-0376766
(State or other jurisdiction of            I.R.S. Employer Identification Number
Incorporation or organization)

2640 W. California Ave. Ste A, Salt Lake City, UT                     84104-4100
(Address of principal executive offices)                              (Zip Code)

        Company's telephone number, including area code: (801) 973-0177

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:


                         Common Stock (Par Value $.005)
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days . Yes XX No

         As of June 30, 1998, the Registrant had outstanding  43,561,249  shares
of common stock, par value $.005 per share, which is the Registrant's only class
of common stock.

Documents Incorporated by Reference:  None

Note:  Exhibit index required by item 601 of Regulation S-K appears on page 12.



                                        1

<PAGE>



                                     PART I

Item 1.   Business

The Company

         Groen Brothers  Aviation,  Inc. ("the Company") was incorporated in the
state of Utah on July 28, 1980. On September 18, 1990, the Company  exchanged 80
percent of its common  stock for 100  percent of the common  stock of Sego Tool,
Inc.,  a Utah  Corporation.  This was in  effect a  reverse  acquisition  of the
Company by the owners of Sego Tool.  The Company  changed its name from New Wave
Energy to Groen Brothers  Aviation on October 3, 1990. Prior to July 1, 1993 the
Company's  intent was to lease the  technology to other  entities to develop the
gyroplane, and the Company would receive royalties on its technology.  Effective
July 1, 1993,  the Company  determined  that it would complete  development  and
manufacture  the gyroplane by itself.  Because of this change in business focus,
the Company  became a development  stage business on July 1, 1993 under SFAS No.
7.

         The Company,  through its now  wholly-owned  Subsidiary,  Sego Tool, is
developing for manufacture the Hawk gyroplane. The Company's only operations are
through its wholly-owned subsidiary.  Hereafter, "the Company" will refer to the
operations of Groen Brothers  Aviation,  Inc. and its  wholly-owned  subsidiary,
Sego Tool, Inc.

The Product

         The Company's  product,  the Hawk gyroplane  (Hawk),  flies on the same
principle as the gyroplane (or autogiro) of the 1930s, but with modern aerospace
design and performance. The Hawk is a rotorcraft which is a hybrid cross between
the helicopter and the airplane,  employing a free-spinning rotor blade for lift
and an engine  driven  propeller  for  thrust.  It is far easier to operate  and
maintain and it is quieter in flight than all  helicopters  and many  airplanes.
The Hawk is capable of  vertical  takeoff  and  landing,  and yet is  relatively
inexpensive to operate.

         The Company has completed  flight  testing the third flying  prototype,
the H2X, from which the Company has derived the Hawk III (3 seats).  The H2X was
flown successfully demonstrating vertical takeoff and landing (VTOL) capability,
employing the Company's patented rotorhead technology.  The H2X VTOL performance
has been a significant improvement over that of gyroplanes in the past. In 1997,
the Company set a weight and density altitude record for vertical  takeoffs by a
gyroplane.   Such   benchmarks   have   brought   attention   to   the   Company
internationally.

         FAA Type Certified Hawk Series

         The Hawk III is the Company's  first  production  gyroplane,  and it is
undergoing FAA certification.  Presently,  the Company is constructing four Hawk
IIIs,  which  will  serve as  certification  and flight  test  aircraft  through
completion ofl FAA certification in the year 2000 or before.


                                        2

<PAGE>



         The Hawk III will be the basis of a subassembly package to be assembled
and sold in China,  and will also be  offered  in  finished  form to  additional
markets  described  below.  The Hawk III is the first of four planned  gyroplane
models  to be FAA  type-certified  for  manufacture,  including  the Hawk III (3
seat), Hawk V (5 seat), Night Hawk (tandem 2 seat), and Hawk VIII (8 seat).

         The  Hawk V may  finally  account  for the  majority  of the  Company's
planned  gyroplane  production.  The Hawk V will  seat two in front and three in
back,  similar to  helicopters  of this size. All models will be variants of the
Hawk III, using the same basic rotor system.  The fuselage of the Hawk V will be
longer than the Hawk III, and that of the Hawk VIII will be  stretched  further.
The fuselage of the Nighthawk will be a narrow version of the Hawk V used in air
surveillance  and crop  spraying.  A  mockup  of the  Hawk V now  exists.  It is
designed to carry five people,  each  weighing 180 pounds,  and five bags,  each
weighing 35 pounds. The planned range of the Hawk V is 500 miles.

         Jets  may be  added  to the tips of the  rotor  blades  of the  heavier
gyroplanes of the Hawk series to better facilitate vertical takeoff and landing.
At present the company is evaluating  ramjets and pulse jets for this role. With
the exception of the Hawk III, which uses Continental  Motors' TSIO 550 (350 hp)
piston engine,  the main powerplants on the other of the Hawk series will be FAA
certified turboprop jet engines.

         The Company presently has forty-five full-time  employees.  The Company
employs  dozens  of  additional   consultants,   including  FAA   airworthiness,
conformity and engineering personal.  For further discussion see Item 7 and Item
13.

Marketing

         The projected  market for  gyroplanes  can be broken into three general
categories,  with  their  respective  sub-categories  as shown in the  following
tabulation.

         Public Sector Sales

                  A.  Law Enforcement Agencies (Hawk III, Night Hawk)
                           1.  Police Forces
                           2.  Highway Patrol
                           3.  Border Patrol
                           4.  Coast Guard
                           5.  Sheriff Departments
                           6.  Customs and Excise Departments
                           7.  Drug Enforcement Agencies

                  B.  Public Protection Services (Night Hawk, Hawk III, V, VIII)
                           1.  Fire Departments
                           2.  Forest Management and Fire Patrol
                           3.  Fish and Wildlife
                           4.  Land Management

                                        3

<PAGE>



                  C.  Military (Night Hawk)
                1. Manned & Unmanned Observation and Surveillance
                           2.  Armed Escort
                           3.  Ground Attack

         Commercial Sector Sales (Hawk III, V, VIII, Night Hawk)
                  A.  Oil/Gas Pipe Line and Power Line Inspection
                  B.  Land Survey and Inspection
                  C.  Aerial Photography
                  D.  Agricultural Spraying, Herd Management, Etc.
                  E.  Air Taxi Services

         Private Sector Sales (Hawk III, V, VIII)
                  A.  Personal Travel
                  B.  Flying Clubs
                  C.  Sport Aviation

         At present the world market for rotorcraft  described  above is largely
not being  served.  Airplanes  are not capable of vertical  takeoff and landing,
which is often a  requirement  of the above  markets,  and  helicopters  are too
expensive.  While the  selling  price of a Hawk V and a Bell 206  helicopter  (5
seat) will be about the same, the operating cost (fuel, maintenance,  insurance)
of the Hawk will be less than half that of the Bell. It is the  Company's  plan,
with its  gyroplanes,  to deliver rotary wing  (helicopter)  performance at near
fixed wing (airplane)  operating  costs.  The estimated price of the Hawk III is
$250 thousand.  The estimated  prices of the Hawk V and Hawk VIII are to be $900
thousand and $1.2 million respectively.

         The Company is  attempting  to serve the U.S.  market  first.  However,
there has been  acute  interest  by  foreign  companies  and  governments,  with
attractive  monetary  offers,  for locating  manufacturing  facilities  in those
countries.  These  include  Canada,  China,  and the United Arab  Emirates.  The
Company  has signed a contract  with a private  company in China,  the  Shanghai
Energy and Chemical  Company (SECC).  This contract is for the Company to supply
200 Hawk III gyroplanes,  an order totaling more than $50 million,  with options
for 300 of the larger  models,  which will be worth more than $200 million.  The
Company's financial  statements do not reflect these pending orders, as no money
has yet changed  hands.  A key provision of the sales contract with SECC is that
the gyroplanes first be certified in China.

         The China Market

         SECC  delivers  natural  gas and  propane  to urban  housing,  and fine
chemicals to industry.  In doing so, it has entered the transportation  business
to distribute  its  products.  As an extension of this  business,  SECC plans to
transport  people in a regional  air-taxi  business,  using the Hawk  Gyroplane.
Provisions  in the  Contract  between  the  Company  and SECC will allow SECC to
substitute,  at the higher cost, Hawk Vs for Hawk IIIs as they become available.
The plan is to ship subassemblies of the Hawk III to China for final assembly by
a Chinese subsidiary which is wholly owned by the Company. Creating a subsidiary
in China is more difficult than participating in a joint venture, but it insures
complete control by the Company.

                                        4

<PAGE>



         It is common  practice  for  aircraft  manufacturing  companies to take
orders up to two years before  delivery,  especially on a new design such as the
Hawk gyroplane.  The Hawk V and VIII will eventually be used in China. Following
extensive studies of the Company's  projected  models,  the Chinese see roles in
private and government use.

         China's  economy is growing at a real rate of more than ten percent per
year on a very large economic base, and the population of 1.2 billion is showing
signs of stabilizing.  The transportation  sector, which serves an area as large
as the  U.S.  with no  comparable  highway  system,  is  falling  behind  due to
increased  demand for personal  travel and the  movement of goods.  All forms of
transport  will remain  heavily  oversubscribed  for years to come. The air taxi
service  eventually will fill an important  market niche serving high government
officials, wealthy Chinese, and foreign residents who cannot afford to spend the
distressingly  long time it takes to  travel by train or bus to cities  that are
not served by airlines. The Hawk V will be able to take off and land vertically,
eliminating  the need for  runways,  but it will be much safer than a helicopter
and will  operate  at a  fraction  of the cost.  The taxi  service  will be most
profitable  at  distances  up to 350  miles,  but  could  reach 550 miles on one
fueling.

United States Public Use-Market

         The public-use  market  includes all civil  government use of aircraft,
primarily law  enforcement.  Under  pubic-use law,  government  entities may fly
aircraft that have not been certified by the FAA,  because these entities do not
fall under the  jurisdiction  of the FAA.  Although  the Company is building its
aircraft to FAA specifications (FAR Part 27), and expects to achieve an FAA type
certificate,  it has an  opportunity  to  enter  the  commercial  market  before
certification,  through  public-use.  In recent months, the Company has received
over five hundred  direct  inquiries  from Sheriff and Police  Departments  from
numerous states.

Manufacturing

         In 1997,  the Company moved into a new facility with enough floor space
to  create  an  interim  manufacturing   facility,  with  parts  being  made  by
subcontractors.   This  interim   manufacturing  plan  provides  guidelines  and
procedures for all materials  management,  floor plan, FAA quality control,  and
assembly.  The  Company  plans  eventually  to build a larger  factory,  but the
current facility will be capable of producing up to 300 gyroplanes per year. The
Company  presently  has a  manufacturing  plant  design that can be  constructed
anywhere in the world. This design,  which has taken eight years to develop,  is
capable of producing up to 1,800 gyroplanes per year from one plant.

Item 2.   Properties

         The Company leases its present facility of approximately  25,000 square
feet,  within which it is  assembling  the Hawk III, and designing the follow on
models. This interim development/  manufacturing  facility is located at 2640 W.
California Avenue, Suite A, Salt Lake City, UT 84104-4100.

Item 3.   Legal Proceedings

                                        5

<PAGE>



         The Company is a plaintiff in litigation in Germany. Pursuant to a loan
agreement with a German citizen and two European  banks,  the Company  delivered
four million  shares of common stock as  collateral  in July of 1993. A loan was
never  received on the  collateral  and in  December  of 1993 the Company  filed
criminal  charges  and  retained  a  law  firm  in  Germany  to  commence  civil
litigation.  In 1997, the German Courts judged  favorably for the Company on all
counts.  The defendant  appealed on a technicality and the appellate court ruled
in favor of the Company.  The Company  expects to have its stock returned during
fiscal year 1999.

Item 4.   Submission of Matters to a Vote of Security Holders

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year covered by this report.

Item 5.   Market for the Registrant's Common Stock and Related
             Security Holder Matters

         The Company's common stock,  $.005 par value,  traded Over The Counter,
is listed on the OTC Bulletin  Board as GNBA. No cash  dividends  have been paid
for the past four quarters.


             Quarterly Common Stock Bid Price Ranges (Calendar Year)

Year           Quarter              High             Low
----           -------              ----             ---
1996             1st                  .44             .25
                 2nd                  .66             .44
                 3rd                 2.75             .94
                 4th                 2.00             .94
1997             1st                 1.88            1.25
                 2nd                 1.69             .94
                 3rd                 1.38            1.00
                 4th                 1.31             .50
1998             1st                  .75             .41
                 2nd                 1.09             .35


The number of shareholders  of record for the company's  common stock as of June
30,  1998  were  690,  and the  number of shares  issued  and  outstanding  were
43,561,249.

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

Results of Operations

         Revenue

         During 1998, total revenue increased over seven-fold  compared to 1997,
from  $1,694 to  $14,474  because  there was an  increase  in  interest  income.
Although the  percentage  increase is large,  the base for comparison was small.
Company revenue in 1998 and 1997 consisted only of interest income.

                                        6

<PAGE>



         During 1997,  total revenue  decreased by 358 percent compared to 1996,
from $7,761 to $1,694, because there was a decrease in interest income. Although
the percentage decrease is large, the base for comparison was small.

         Research and Development Costs

         During  1998,  development  costs  increased  from  $768,424 in 1997 to
$1,669,819,  a 117 percent increase. The increase took place across the board as
the number of  employees  doubled,  and tooling and  equipment  costs went up in
preparation for production of the Hawk III.

         During 1997,  development  costs increased to $768,424 from $477,138 in
1996 a 61 percent increase.

         General and Administrative Costs

         General and  administrative  costs in 1998 increased to $1,275,534 from
$1,026,798,  in 1997,  an increase of 24 percent.  The increase was adequate for
supporting the large increase in R & D personnel.

         General and administrative costs in 1997 increased 106 percent compared
to 1996 to $1,026,798 from $497,814.  The large increase reflected a larger work
force  and a  move  into a  bigger  facility,  which  will  accommodate  initial
manufacturing of the Company's aircraft.

         Net Earnings

         During  1998 and 1997 the  Company  continued  to  record  losses as it
conducted flight tests,  built new models,  and made the transition  toward full
marketing and manufacturing of the Hawk gyroplane series .

Liquidity and Capital Resources

         The  Company   estimates  that  capital   requirements   will  increase
significantly over the next year as more resources are required to reach planned
goals.  The Company is now making the  transition  into  manufacture of the Hawk
III. The actual schedule of the planned  expansion  ultimately  depends upon the
Company's ability to attract capital.

         Over the next six months the Company plans to fund its operations  with
up to $5 million in equity  investments from accredited  investors.  The Company
anticipates  that  beginning  in  1999,  sales of  gyroplanes  will  provide  an
additional  source of  capital  in the form of cash from  down  payments.  It is
common  practice in the  aircraft  industry to take down  payments to  establish
delivery  positions on new aircraft  which may not be delivered for two years or
more. High capital costs, and the lack of competition  resulting from strict FAA
regulation are responsible for this practice.

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



                                        7

<PAGE>



Item 7.   Financial Statements

         Index to Consolidated Financial Statements

         Independent auditors' report of Tanner + Co.

         Financial statements:

                  Consolidated balance sheet, June, 30, 1998.

                  Consolidated  statement of operations  for the two years ended
                  June 30, 1998 and 1997.

                  Consolidated statement of stockholder's  (deficit) for the two
                  years ended June 30, 1998 and 1997.

                  Consolidated  statement  of cash flows for the two years ended
                  June 30, 1998 and 1997.

                  Notes to consolidated financial statements.


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

         There has been no change of accountants or reporting  disagreements  on
any matter of accounting principle,  practice, financial statement disclosure or
auditing scope or procedure.

Item 9.  Directors and Executive Officers of the Registrant

         The following  table contains the names and ages of all directors;  all
positions and offices with the Registrant held by each such person.

         Name                     Age                    Positions
         ----                     ---                    ---------
         David L. Groen           47                     Director and President
         H. Jay Groen             54                     Director
         Philip F. Cannon(1)      84                     Director
         James P. Mayfield(2)     50                     Vice-President

Term of Office

The terms of service of Messrs.  Groen,  and Mayfield as members of the Board of
Directors
--------
         1 At June 30, 1998, Mr. Cannon was a director of registrant. Just prior
to this filing, Mr. Cannon passed away and was replaced by Mr. Mayfield.

         2 Mr. Mayfield was appointed to fill Mr. Cannon's vacancy.

                                        8

<PAGE>



continue  until the next  annual  meeting  of the  stockholders.  These  persons
respective appointments were adopted,  ratified and approved by the stockholders
at a meeting  thereof called for that purpose on October 7, 1991.  Stockholders'
meetings have been waived since then.  With the exception of compliance with the
duties of a director as set forth in the Articles of  Incorporation or Bylaws of
the Registrant or in the provisions of the Utah Business  Corporation Act, there
are no  arrangements  or  understandings  pursuant to which any of the foregoing
persons were selected to serve on the Board of Directors of the Registrant. Each
of the  foregoing  persons  consented  to serve as a director of the  Registrant
prior to their designation and subsequent election as such.

Family Relationships

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

Background on Directors and Officers

         David Groen is President & CEO, Secretary and Treasurer, and a Director
of the Registrant.  Immediately prior to forming Groen Brothers Aviation,  David
Groen was a founding  partner  and Chief  Financial  Officer  (CFO) for  Seagull
Recycling Company.  Previously,  he has held numerous executive positions in the
helicopter  industry with Sales and Marketing,  Safety Officer,  Branch Manager,
and Chief Pilot  responsibilities.  Having  extensive  military  and  commercial
experience  in  helicopters,  Mr.  Groen has logged  7,000  hours in  rotor-wing
aircraft  and  400  hours  in  fixed-wing  aircraft.   Mr.  Groen  received  his
Certificate  of  Graduation in 1970 from the U.S.  Army Warrant  Officer  Flight
Training  School,  was awarded  Army  Aviator  Wings and promoted to the rank of
Warrant Officer. As a combat helicopter pilot and Aircraft Commander in Vietnam,
he flew  hundreds  of combat  missions  and was awarded the Air Medal and Bronze
Star.  He is qualified as a pilot in most American and French  helicopters,  and
has attended  Aerospatiale  factory schools on the SA315B Lama and the SA316 and
SA319 Alouette III helicopters.  Over the years, Mr. Groen's numerous commercial
helicopter  missions have involved such work as EMS (emergency  medical  service
hospital  air  ambulance),  power line  construction  and patrol,  topographical
survey,  USGS  map  making,   forest  fire  fighting,   long  line  seismic  oil
exploration,  and wildcat on shore and off shore oil drilling operations.  David
Groen is co-author, along with his brother Jay, of a best selling novel entitled
Huey.

         H. Jay Groen, Chairman is a Director of the Registrant.  Before joining
GBA, Jay Groen  co-founded  Seagull  Recycling  Company,  an  organization  that
developed an original  supply of secondary  paper fiber for sale to domestic and
Far East markets.  Prior to this business venture, he was the President of China
West, Inc., a Washington D.C. based organization  representing U.S. firms in the
Peoples  Republic of China. In this role, Mr. Groen negotiated joint venture and
trade  agreements  in such diverse  industries as machine  building,  petroleum,
coal, agriculture, light manufacturing,  handicrafts, and forest products. Early
in his  career,  Mr.  Groen  spent ten  years as an  Economist  for the  Central
Intelligence  Agency (CIA) doing  original  research on Asia,  with a particular
interest on the People's Republic of China. As part of his responsibilities with
the CIA,  Mr. Groen  prepared  written and oral briefs for the White House staff
and members of Congress,  and  lectured at the  National War College.  Mr. Groen
served in the U.S.  Air Force as a Chinese  Linguist  in both  Vietnam and Asia,
logging  more  than 100  combat  missions  in a  special  airborne  intelligence
function.  He is the co-author,  along with his brother David, of a best selling
book entitled  Huey, a novel about the Vietnam War. Mr. Groen has also published
several other writings  including:  1) "The Sweet and Sour China Market",  China
Under Four Modernizations; and, 2) "Buying from China", U.S.-China Economic

                                        9

<PAGE>



Relations:  A  reappraisal.  Mr.  Groen has an M.A. in Economics  from  Virginia
Polytechnic  Institute,  a B.A. in Economics  from the University of Utah and. a
Language  Certificate in Mandarin Chinese from Yale University.  A private pilot
with a practical  background in  aeronautical  design,  Mr. Groen has added much
innovation to the Hawk gyroplane.

         Philip F.  Cannon was a Director of the  Registrant  through the end of
the current  reporting period.  Philip Cannon began his distinguished  career in
international  business  as  an  engineer  for  Colgate  Company,  then  assumed
management  consulting  and  production  manufacturing  posts  with  McKinsey  &
Company,  Emhart  Manufacturing,  Federal Pacific Electric  Company,  and Hoover
Worldwide Corporation.  As a Vice President at Hoover, Mr. Cannon oversaw all of
the company's production  trouble-shooting in Canada, Latin America and England.
He was a founder of Coloney,  Cannon, Main and Pursell, a diversified management
consulting  firm with offices in London and New York.  This firm was acquired by
Towers,  Perrin,  from  which Mr.  Cannon  retired  as Vice  President  in 1979.
Following  an  additional  six years of private  consulting  in  Europe,  Cannon
returned to Salt Lake City and joined GBA as Director of  Manufacturing in 1990.
Mr. Cannon was  responsible for the overall  production  strategy and management
for the manufacturing of GBA's Hawk series gyroplanes.  He wrote a comprehensive
manufacturing  plan  and  facilities  plan  for  the  continuing  phases  of the
company's development.

         James P. Mayfield III, is a Vice  President,  Chief  Operating  Officer
(COO), Chief of Flight  Operations,  and replaces Philip Cannon as a Director of
the Registrant.  James Mayfield,  one of only a handful of individuals certified
as a gyroplane pilot examiner by the FAA, brings to GBA more than 3,300 hours of
flight time in gyroplanes.  As GBA's Chief Test Pilot, Mr. Mayfield was recently
honored by being  inducted  into "The Society of  Experimental  Test Pilots," an
elite  world-wide   organization  of  only  1800  pilots,   whose  distinguished
membership  include  Chuck  Yeager,  Deke Slayton,  Scott  Crossfield  and Jimmy
Doolittle  II. Mr.  Mayfield has logged more than 12,800 total hours flight time
that  includes  extensive  experience  test flying a wide range of  aircraft.  A
career U.S. Marine Corps officer,  Mr. Mayfield retired from the Marines in 1989
following  nearly 25 years of distinguished  service and leadership  experience.
His  last  tour of duty  was in the  Operations  Department  at Camp  Pendleton,
California,  responsible  for the safety and security of Special  Weapons in the
Pacific region.  With a staff of 400 people reporting to him, he was responsible
for training,  outfitting,  and  evaluating  the First Marine  Division  (30,000
Marines) in Special Weapons  employment and defense.  Mr. Mayfield possesses two
baccalaureate  degrees,  one in psychology and a second in sociology bestowed by
the University of New York.

Item 10. Executive Compensation

         No  director  or  executive  officer of the  Registrant  received  cash
compensation  in excess of $100,000  during the past fiscal year. Each Jay Groen
and  David  Groen  hold  options  of  2,475,000  shares  at $.09 per share to be
purchased by 1999.


                                       10

<PAGE>



Item 11. Security Ownership of Certain Beneficial Owners and
             Management

         The  following  shows the shares of common  stock  owned as of June 30,
1998  by  all  the  Directors  and  Officers  individually  and as a  group.  No
individual investors,  other than those shown, own more than five percent of the
outstanding  common  stock.  Each  individual  has sole  voting  power  and sole
investment power with respect to the number of shares beneficially owned.


Name  and  Address                                Amount of           Percent of
of Beneficial Owner                               Ownership              Class
-------------------                               ---------            ---------

David Groen, President                            8,928,988              20.49
2640 California Avenue
Salt Lake City, UT 84104

Jay Groen, Director                               6,160,078              14.14
2640 California Avenue
Salt Lake City, UT 84104

Philip Cannon, Director                             161,544              00.37
2640 California Avenue
Salt Lake City, UT 84104

James P. Mayfield, Vice President                    71,000              00.16
2640 W. California Avenue
Salt Lake City, UT 84104

All Officers and Directors                       15,321,610              35.16


Lyle Campbell                                     3,604,400              08.27
c/o Chapman & Cuttler
111 W. Monroe Street
Chicago, IL 60603




         Does not  include  options  by David  Groen and Jay  Groen to  purchase
2,450,000  shares each. If such shares were  purchased,  their  ownership  would
equal 23.48 percent and 17.77 percent respectively.

Item 12.  Certain Relationships and Related Transactions

         The Company owes $180,000, plus accrued interest, to a company owned by
Directors Jay and David Groen.





                                       11

<PAGE>



Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1)  The following financial statements are included in Part II:  Report of
         Independent Certified Public Accountants


                   Index to Consolidated Financial Statements
                           and Supplemental Schedules

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


                                                                            Page


Independent auditors' report                                                 F-1

Financial statements:

    Consolidated balance sheet, June 30, 1998                                F-2

    Consolidated  statement of operations  for the two years 
    ended June 30, 1998 and 1997 and cumulative amounts since 
    July 1, 1993 (date of commencement of development stage)                 F-3

    Consolidated statement of stockholders' deficit for the 
    two years ended June 30,  1998  and 1997 and  cumulative  
    amounts  since  July 1,  1993  (date of commencement of 
    development stage)                                                       F-4

    Consolidated  statement  of cash flows for the two 
    years ended June 30, 1998 and 1997 and cumulative 
    amounts since July 1, 1993 (date of commencement 
    of development stage)                                                    F-7

    Notes to consolidated financial statements.                              F-9


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




<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)

                                                    INDEPENDENT AUDITORS' REPORT




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

We have audited the  accompanying  consolidated  balance sheet of Groen Brothers
Aviation, Inc. and subsidiary, (the Company), a development stage company, as of
June  30,  1998,  and  the  related   consolidated   statements  of  operations,
stockholder's  deficit  and cash  flows for each of the two years in the  period
ended  June  30,  1998  and  cumulative  amounts  since  July 1,  1993  (date of
commencement of development stage). These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Groen  Brothers
Aviation,  Inc. and  subsidiary,  as of June 30, 1998,  and the results of their
operations  and their cash  flows for each of the two years in the period  ended
June 30, 1998, and cumulative  amounts since July 1, 1993 (date of  commencement
of  development   stage),  in  conformity  with  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in note 10 to
the consolidated financial statements, the Company has suffered recurring losses
and has a net working capital  deficiency that raise substantial doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in note 10. The consolidated  financial statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.


                                                       TANNER + CO.

Salt Lake City, Utah
August 4, 1998


                                                                             F-1

<PAGE>

<TABLE>
<CAPTION>

                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                                                Consolidated Balance Sheet

                                                                                             June 30, 1998
----------------------------------------------------------------------------------------------------------


<S>                                                                                     <C>               
              Assets
Current assets:
     Cash                                                                               $          240,150
     Receivables                                                                                       812
     Prepaid expense                                                                               109,947
                                                                                        ------------------

                  Current assets                                                                   350,909

Machinery and equipment less accumulated
  depreciation of $364,615                                                                         459,469
                                                                                        ------------------

                  Total assets                                                          $          810,378
                                                                                        ------------------

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

              Liabilities and Stockholders' Deficit Current liabilities:
     Accounts payable                                                                   $          140,516
     Accrued liabilities                                                                         1,030,527
     Note payable                                                                                  150,000
     Current portion of related party note payable                                                 198,137
     Current portion of long-term debt                                                             411,351
                                                                                        ------------------

                  Total current liabilities                                                      1,930,531
                                                                                        ------------------

Long-term debt                                                                                      45,851
Long-term portion of related party note payable                                                      9,463
Commitments and contingency                                                                              -
                                                                                        ------------------

                  Total liabilities                                                              1,985,845
                                                                                        ------------------

Stockholders' deficit:
     Common stock, par value $.005 per share;
       authorized 100,000,000 shares, issued and
       outstanding 43,561,249 shares                                                               217,807
     Additional paid-in capital                                                                  7,657,141
     Retained deficit                                                                           (9,050,415)
                                                                                        ------------------

                  Total stockholders' deficit                                                   (1,175,467)
                                                                                        ------------------

                  Total liabilities and stockholders' deficit                           $          810,378
                                                                                        ------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                      Consolidated Statement of Operations

                                                                      Years Ended June 30, 1998, 1997 and
                                                                     Cumulative Amounts Since July 1, 1993
                                                               (Date of Commencement of Development Stage)
----------------------------------------------------------------------------------------------------------




                                                                                            Cumulative
                                                                                             Amounts
                                                                                          Since July 1,
                                                            1998             1997              1993
                                                     -----------------------------------------------------
<S>                                                  <C>                 <C>              <C>             
Revenue-
     Interest and other                              $           14,474  $         1,694  $         35,501
                                                     -----------------------------------------------------

Expenses:
     Research and development                                 1,669,819          768,424         3,211,825
     General and administrative expenses                      1,275,534        1,026,798         3,559,026
     Interest expense                                           125,415           96,074           447,510
                                                     -----------------------------------------------------

                  Total expenses                              3,070,768        1,891,296         7,218,361
                                                     -----------------------------------------------------

                  Net loss                           $       (3,056,294) $    (1,889,602) $     (7,182,860)
                                                     -----------------------------------------------------


----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                       F-2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                           Consolidated Statement of Stockholders' Deficit

                                          Years  Ended June 30, 1998 and 1997 and Cumulative Amounts Since  
                                                  July 1, 1993 (Date of Commencement of Development Stage)
----------------------------------------------------------------------------------------------------------




                                                             Additional
                                    Common Stock              Paid-In         Retained
                           -------------------------------
                                Shares         Amount         Capital         Deficit          Total
                           -------------------------------------------------------------------------------

<S>                              <C>         <C>            <C>             <C>             <C>            
Balance, July 1, 1993            27,153,509  $     135,768  $      937,642  $   (1,867,555) $     (794,145)

Issuance of common stock for:
     Cash                         1,083,611          5,418         275,377               -         280,795
     Collateral on a loan         4,000,000         20,000         (20,000)              -               -
     Satisfaction of debt
       obligations                  172,222            861          28,927               -          29,788
     Services                        63,185            316          14,572               -          14,888
     Commissions                     40,857            204           9,642               -           9,846

Cancellation of shares
previously issued                   (50,000)          (250)            250               -               -

Issuance of stock
options at 50% of bid
at option date                            -              -          10,000               -          10,000

Net loss for the year
ended June 30, 1994                       -              -               -        (479,995)       (479,995)
                           -------------------------------------------------------------------------------

Balance, June 30,
1994                             32,463,384        162,317       1,256,410      (2,347,550)       (928,823)

Issuance of common stock for:
     Services                       138,860            694          59,525               -          60,219
     Satisfaction of debt
       obligation                   487,027          2,435          54,253               -          56,688
     Commissions                     18,546             93           8,907               -           9,000
     Cash                         1,028,923          5,145         426,777               -         431,922
     Assets                           2,286             11             989               -           1,000



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


See accompanying notes to consolidated financial statements.
                                                                                                       F-3
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                           Consolidated Statement of Stockholders' Deficit
                                                                                                 Continued

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



                                                             Additional
                                     Common Stock             Paid-In         Retained
                            ------------------------------
                                Shares         Amount         Capital         Deficit          Total
                            ------------------------------------------------------------------------------
<S>                              <C>               <C>           <C>            <C>             <C>    
Net loss for the year
ended June 30, 1995                       -              -               -        (711,207)       (711,207)
                            ------------------------------------------------------------------------------

Balance, June 30, 1995           34,139,026        170,695       1,806,861      (3,058,757)     (1,081,201)

Issuance of common stock for:
     Services                       686,708          3,434         164,800               -         168,234
     Satisfaction of debt
       obligation                    10,000             50           2,450               -           2,500
     Commissions                    124,719            624          39,782               -          40,406
     Cash                         1,669,404          8,347         539,103               -         547,450
     Assets                         100,000            500          49,500               -          50,000

Net loss for the year
ended June 30, 1996                       -              -               -      (1,045,762)     (1,045,762)
                            ------------------------------------------------------------------------------

Balance, June 30, 1996           36,729,857        183,650       2,602,496      (4,104,519)     (1,318,373)

Issuance of common stock for:
     Services                       468,003          2,340         265,266               -         267,606
     Satisfaction of debt
       obligation                   689,802          3,449         474,451               -         477,900
     Commissions                     11,607             58          12,879               -          12,937
     Cash                         1,359,442          6,797       1,208,674               -       1,215,471
     Assets                       2,500,000         12,500       2,187,500               -       2,200,000

Net loss for the year
ended June 30, 1997                       -              -               -      (1,889,602)     (1,889,602)
                            ------------------------------------------------------------------------------

Balance, June 30, 1997           41,758,711        208,794       6,751,266      (5,994,121)        965,939



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


See accompanying notes to consolidated financial statements.
                                                                                                       F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                           Consolidated Statement of Stockholders' Deficit
                                                                                                 Continued

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



                                                             Additional
                                     Common Stock             Paid-In         Retained
                            ------------------------------
                                Shares         Amount         Capital         Deficit          Total
                            ------------------------------------------------------------------------------
<S>                              <C>         <C>            <C>             <C>             <C>            
Issuance of common stock for:
  Services                           79,617            398          57,638               -          58,036
  Commission                        109,299            547          52,769               -          53,316
  Cash                            1,613,622          8,068         795,468               -         803,536

Net loss for the year
ended June 30, 1998                       -              -               -      (3,056,294)     (3,056,294)
                            ------------------------------------------------------------------------------

Balance, June 30, 1998           43,561,249  $     217,807  $    7,657,141  $   (9,050,415) $   (1,175,467)
                            ------------------------------------------------------------------------------




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


See accompanying notes to consolidated financial statements.
                                                                                                       F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                                      Consolidated Statement of Cash Flows

                                                                       Years Ended June 30, 1998, 1997 and
                                                                     Cumulative Amounts Since July 1, 1993
                                                               (Date of Commencement of Development Stage)
----------------------------------------------------------------------------------------------------------



                                                                                            Cumulative
                                                                                             Amounts
                                                                                          Since July 1,
                                                            1998             1997              1993
                                                     -----------------------------------------------------
<S>                                                  <C>                 <C>              <C>              
Cash flows from operating activities:
     Net loss                                        $       (3,056,294) $    (1,889,602) $     (7,182,860)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
         Depreciation expense                                   156,911          110,762           307,258
         Common stock issued for services                       111,352          280,543           702,876
         Stock options issued below market                            -                -            10,000
         Loss on disposal of assets                              25,713                -            25,713
         (Increase) decrease in:
              Accounts receivable                                 3,063           (1,000)             (812)
              Prepaid expense                                  (109,948)               -          (109,948)
         Increase (decrease) in:
              Accounts payable                                  120,102          (13,600)           82,991
              Accrued payroll                                    88,439          (32,169)          521,928
              Accrued interest                                   49,524           34,052           213,791
              Accrued liabilities                                 3,637               (7)          107,125
                                                     -----------------------------------------------------
                  Net cash used in
                  operating activities                       (2,607,501)      (1,511,021)       (5,321,938)
                                                     -----------------------------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                        (218,672)               -          (234,916)
     Sale of property and equipment                           2,200,000               30         2,200,030
     Increase in note receivable                                      -                -            (6,250)
     Collections on notes receivable and
       advances                                                       -                -             6,250
                                                     -----------------------------------------------------
                  Net cash provided by
                  investing activities                        1,981,328               30         1,965,114
                                                     -----------------------------------------------------

Cash flows from financing activities:
     Proceeds from long-term debt                                     -          150,000           282,000
     Reduction of long-term debt                                 (3,228)               -           (70,728)
     Reduction of capitalized lease obligation                 (145,803)        (118,286)         (271,639)
     Proceeds from related party debt                                 -          350,000           488,894
     Reduction of related party debt                                  -                -          (116,690)
     Proceeds from issuance of common stock                     803,536        1,215,471         3,279,174
                                                     -----------------------------------------------------
                  Net cash provided by
                  financing activities                          654,505        1,597,185         3,591,011
                                                     -----------------------------------------------------


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


See accompanying notes to consolidated financial statements.
                                                                                                       F-6
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                              GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                                             (A Development Stage Company)

                                                                      Consolidated Statement of Cash Flows
                                                                                                 Continued

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



                                                                                            Cumulative
                                                                                             Amounts
                                                                                          Since July 1,
                                                            1998             1997              1993
                                                     -----------------------------------------------------
<S>                                                  <C>                 <C>               <C>            

                  Net increase in cash                           28,332            86,194          234,187

Cash, beginning of period                                       211,818           125,624            5,963
                                                     -----------------------------------------------------

Cash, end of period                                  $          240,150  $        211,818  $       240,150
                                                     -----------------------------------------------------

Schedule of supplemental disclosures:

         Interest paid                               $           75,891  $         71,023  $       102,125
                                                     -----------------------------------------------------

         Income taxes paid                           $              100  $            100  $           500
                                                     -----------------------------------------------------
</TABLE>

Schedule of non-cash investing and financing activities:

During the year ended June 30, 1997:

     o   The Company issued  689,802  shares of its  restricted  common stock to
         satisfy $469,400 of related party debt and $8,500 of accrued interest.

     o   The Company issued 2,500,000  shares of its restricted  common stock to
         purchase equipment held for sale costing $2,200,000 .

     o   The Company  assumed  capital lease  obligations  totaling  $299,882 in
         exchange for the use of property and equipment.



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


See accompanying notes to consolidated financial statements.
                                                                             F-7

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)

                                      Notes to Consolidated Financial Statements

                                                                   June 30, 1998
--------------------------------------------------------------------------------


1.   Summary of Significant Accounting Policies
Organization
The financial statements include those of Groen Brothers Aviation, Inc.,
and its wholly owned subsidiary Sego Tool, Inc. (Company).


The primary business purpose of the Company is the manufacturing and
marketing of the "gyroplane."


Development Stage Company
Effective July 1, 1993, the Company is considered a development stage Company as
defined in SFAS  No.7.  The  Company  has,  at the  present  time,  not paid any
dividends and any dividends  that may be paid in the future will depend upon the
financial requirements of the Company and other relevant factors.


Machinery and Equipment
Machinery  and  equipment are carried at cost,  less  accumulated  depreciation.
Depreciation is computed under the accelerated  method based on estimated useful
lives of five to  thirty-nine  years.  When  assets  are  retired  or  otherwise
disposed of, the cost and related accumulated  depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The  cost  of  maintenance  and  repairs  is  charged  to  income  as  incurred;
significant renewals and betterments are capitalized.


Income Taxes
The Company  accounts for its income taxes based on the  provisions  of SFAS 109
"Accounting  for Income  Taxes." The asset and  liability  method  requires  the
recognition  of deferred tax  liability  and assets for the expected  future tax
consequences of temporary  differences between tax bases and financial reporting
bases of other assets and liabilities.


Income (Loss) Per Common Share
Income  (loss) per share of common  stock is  calculated  based on the  weighted
average number of common and common  equivalent  shares  outstanding  during the
period.  Common equivalent shares consist of the Company's stock options and are
considered to be dilutive common  equivalents,  using the treasury stock method.
Fully diluted earnings per share is the same or antidilutive,  and, accordingly,
is not presented.


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



                                                                             F-8

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



1.   Summary of Significant Accounting Policies
     Continued
Accounting 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  labilities  and  disclosure  of
contingent assets and labilities at the date of the financial statements and the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from those estimates.


Concentration of Credit
The Company is in the business of developing  and  manufacturing  the gyroplane.
Substantially all operations relate to this business.


The Company  maintains its cash in bank deposit  accounts which,  at times,  may
exceed federally  insured limits.  The Company has not experienced any losses in
such accounts.  The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.


Cash and Cash Equivalents
For purposes of the  statement of cash flows,  the Company  considers all highly
liquid  debt  instruments  with a  maturity  of three  months or less to be cash
equivalents.


Revenue
Revenue  consists  of interest  and  sales-of-information  packages.  Revenue is
recognized when earned.



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



                                                                             F-9

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



2.   Machinery and Equipment
Machinery and equipment consisted of the following at June 30:


Aircraft                                                  $          87,997
Office equipment                                                    180,655
Shop equipment and tools                                             57,982
Furniture                                                            36,649
Leased property under capital leases                                438,811
Vehicles                                                             21,990
                                                          -----------------

                                                                    824,084

Less accumulated depreciation and amortization                      364,615
                                                          -----------------

                                                          $         459,469
                                                          -----------------



3.   Note Payable
At June 30, 1998, the Company had a note payable  consisting of a line of credit
payable  to a bank of  $150,000.  The line of  credit  matured  on  March  1998.
Interest is at the banks  prime  lending  rate plus 2.0%.  The line of credit is
secured by  stand-by  letters of credit.  The line of credit is  callable by the
bank. The Company and the bank are in  negotiations  to extend the terms of this
agreement.


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



                                                                            F-10

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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




4.   Long-Term Debt
Long-term debt consist of the following at June 30:


Notes payable to a local governmental agency, including interest at 2% above the
prime rate (8.5% at June 30,  1998).  After  principal  amount is paid,  monthly
installments  of 3% of  monthly  gross  revenues  are due  until  an  additional
$150,000 is paid. The notes were in default at June 30, 1998 $ 150,000

Notes  payable  to  a  governmental   sponsored   organization  due  in  monthly
installments of 3% of gross monthly revenues, including interest at 2% above the
prime rate (8.5% at June 30, 1998) 100,000

Note payable to a company at 15% interest, due
on demand, unsecured                                      $          10,000

Capital lease obligations (see note 5)                              197,202
                                                          -----------------

                                                                    457,202

Less:  current portion                                             (411,351)
                                                          -----------------

                                                          $          45,851
                                                          -----------------



Future maturities of long-term debt at June 30, 1998, are as follows:


                           Year                                Amount
                                                          -----------------

                           1999                           $         411,351
                           2000                                      45,851
                                                          -----------------

                                                          $         457,202
                                                          -----------------




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



                                                                            F-11

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



5.   Capital Lease Obligations
During the year ended June 30, 1997,  the Company  entered  into  capital  lease
agreements  with a financial  institution  for certain  property and  equipment.
Assets under  capital lease have been  capitalized  and are included in property
and equipment as follows:


Office equipment                                          $         161,034
Shop equipment and tools                                            222,260
Furniture                                                            18,778
Leasehold Improvements                                               36,739
                                                          -----------------

Total property and equipment                                        438,811

Accumulated amortization                                           (192,657)
                                                          -----------------

                                                          $         246,154
                                                          -----------------



Future minimum lease payments at June 30, 1998 are as follows:


Year Ending June 30,

     1999                                                 $         171,727
     2000                                                            48,386
                                                          -----------------

     Total minimum lease payments                                   220,113

     Less amount representing interest                              (22,911)
                                                          -----------------

     Present value of net minimum lease payments          $         197,202
                                                          -----------------



The  Company  has entered  into an  arrangement  with a third party in which the
person has the option to pay the capital lease in a  dollar-for-dollar  exchange
for stock valued at $.40 per share. At June 30, 1998, the number of shares under
this option is 1,030,140  shares,  none of which have been  exercised as of June
30, 1998.



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



                                                                            F-12

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



6.   Preferred Stock
The  Company  filed  amended  Articles  of  Incorporation  in which the  Company
authorized four additional  classes of preferred stock. Each class is authorized
to have  50,000,000  shares  having a $.001 par value.  The rights,  terms,  and
preferences  are to be set by the board of  directors.  As of June 30, 1998,  no
preferred stock has been issued.


7.   Earnings Per Share
In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128 (SFAS 128)  "Earnings Per Share," which
requires  companies  to  present  basic  earnings  per share  (EPS) and  diluted
earnings per share,  instead of the primary and fully  diluted EPS as previously
required. The new standard also requires additional  informational  disclosures,
and makes certain  modifications  to the previously  applicable EPS calculations
defined in Accounting  Principles  Board No. 15. The new standard is required to
be adopted by all public  companies for reporting  periods ending after December
15, 1997, and requires restatement of EPS for all prior periods reported. During
the year ended June 30, 1998, the Company adopted this standard.


Earnings per share information in accordance with SFAS 128 is as follows:


                                            Year Ended June 30, 1998
                                 -----------------------------------------------
                                       Loss           Shares        Per-Share
                                   (Numerator)     (Denominator)      Amount
                                 -----------------------------------------------

Net loss                         $     (3,056,294)
Less preferred stock
  dividends                                     -
                                 ----------------
Basic EPS
Loss available to
  common stockholders                  (3,056,294)      42,649,921  $      (.07)
                                                                  --------------
Effect of Dilutive Securities
Stock options                                   -                -
                                 ---------------------------------
Diluted EPS
Loss available to common
  stockholders plus assumed
  conversions                    $     (3,056,294)      42,649,921  $      (.07)
                                 -----------------------------------------------



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



                                                                            F-13

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



7.   Earnings Per Share
     Continued

                                              Year Ended June 30, 1997
                                 -----------------------------------------------
                                       Loss           Shares        Per-Share
                                   (Numerator)     (Denominator)      Amount
                                 -----------------------------------------------

Net loss                         $     (1,889,602)
Less preferred stock
  dividends                                     -
                                 ----------------
Basic EPS
Loss available to
  common stockholders                  (1,889,602)      38,296,858  $      (.05)
                                                                  --------------
Effect of Dilutive Securities
Stock options                                   -                -
                                 ---------------------------------
Diluted EPS
Loss available to common
  stockholders plus assumed
  conversions                    $     (1,889,602)      38,296,858  $      (.05)
                                 -----------------------------------------------



8.   Related
     Party
     Transactions
The Company has notes payable to shareholders totaling $27,600 at June 30, 1998.
These notes are all due within one year at interest  rates of 8.00%,  unsecured.
The Company has a note payable  totaling  $180,000 to Hawk  Autogyro,  a company
related  by common  ownership  with  interest  at 12%.  The note was past due at
September 26, 1995, and remains  delinquent at June 30, 1998.  Accrued  interest
totaled $96,108 at June 30, 1998.


Included in accrued expenses is payroll payable to officer shareholders totaling
$600,289.


Future maturities of related party debt at June 30, 1998 are as follows:


Year Ending June 30,

     1999                                                 $         198,137
     2000                                                             6,182
     2001                                                             3,281
                                                          -----------------

                                                          $         207,600
                                                          -----------------



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



                                                                            F-14

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



9.   Commitments
As conditions to obtain  financing from a local government  agency,  the Company
has agreed to, in effect,  pay royalties to the agency. The royalties will be 3%
of the monthly  revenues  until a total of $150,000 has been paid.  No royalties
have been earned or paid as of June 30, 1998.


Also,   as  conditions  to  obtain   financing   from  a  government   sponsored
organization,  the Company has agreed to assume a royalty agreement of a company
related by common ownership,  previously licensed with the autogyro  technology.
The terms of the agreement  state that the Company must, in effect,  pay monthly
royalties of 3% of its gross revenues up to a total of $149,100.


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


Year Ending June 30,

     1999                                                 $         103,236
     2000                                                           103,236
     2001                                                           103,236
     2002                                                           103,236
     2003                                                                 -
                                                          -----------------

                                                          $         412,944
                                                          -----------------



During  the  year  ended   June  30,   1997,   the   Company   entered   into  a
sublessor/sublessee  relationship, where the Company is the sublessor. The terms
of this  relationship is for the sublessee to occupy the office space and assume
the terms of the lease. The lease expires December 31, 2002.


Rental expenses for  noncancellable  operating  leases were $141,748 and $60,738
for the years ended June 30, 1998 and 1997, respectively.


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



                                                                            F-15

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



9.   Commitments
     Continued
Effective September 1, 1990, the Company entered into employment agreements with
several officers of the Company. The employment  agreements can be terminated at
any time. Upon termination,  the Company retains all rights to the gyroplane and
the relating  technology  and the officers  have a covenant not to compete for a
period of three  years.  Royalty  payments of 1% of the gross sales price of the
gyroplane are to be paid to the majority shareholders.


10.  Going Concern
The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue as a going  concern.  Because of  significant  operating
losses, the excess of current liabilities over current assets, and negative cash
flows from operations,  the Company's  ability to continue as a going concern is
dependent on attaining future profitable operations, restructuring its financing
arrangements,   and  obtaining  additional  outside  financing  and/or  capital.
Management  of the Company is  currently  following a plan to obtain  additional
working capital through a capital  infusion  and/or  governmental  and corporate
borrowing. As part of the plan, the Company has been given a fifteen acre parcel
of real estate by a  governmental  unit in which to  construct  a  manufacturing
facility.  It is not  possible to predict the  outcome of future  operations  or
whether  the  necessary  alternative  financing  or  additional  capital  may be
arranged.  The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.


11.  Unasserted Claim
In 1990, the Company has been informed that an action may be brought against the
Company  as a  result  of  the  termination  of the  agreement  to  develop  and
manufacture  the  gyroplane.  Management  is unable to determine  the  financial
impact,  if any, of the proposed  action against the Company and no amounts have
been  reflected in the  financial  statements.  As of the date of the  financial
statements, no claim has been made.


12.  Income Taxes
The Company  accounts for its income taxes under SFAS No. 109,  "Accounting  for
Income Taxes," which requires the liability  approach to account for the effects
of income taxes.


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



                                                                            F-16

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



12.  Income Taxes
     Continued
The (provision) benefit for income taxes differs from the amount computed at the
federal statutory rate as follows:


                                               1998             1997
                                        -----------------------------------

Income tax benefit at federal
  statutory rates                       $        1,039,000  $       705,000
Valuation allowance                             (1,039,000)        (705,000)
                                        -----------------------------------

Total current income taxes              $                -  $             -
                                        -----------------------------------



At June 30,  1998,  the Company  had  incurred  net  operating  losses  totaling
approximately $9,052,000. These losses will be carried forward to offset taxable
income in future periods.  This operating loss carryforward  begins to expire in
2006.  The  consolidated  taxable loss of GBA includes the operations of GBA for
the seven years ended June 30, 1998, and the operations of Sego Tool,  Inc., for
the period from  September  18, 1990, to June 30, 1998 The deferred tax asset at
June 30, 1998 is as follows:


Tax benefit of net operating loss carryforward            $       3,078,000
Valuation allowance                                              (3,078,000)
                                                          -----------------

Net tax benefit                                           $               -
                                                          -----------------



Due to  uncertainties  surrounding  the  utilization  of the net operating  loss
carryforwards,  a valuation  allowance has been established to offset a deferred
income tax benefit of such net operating loss carryforwards.



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



                                                                            F-17

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



13.  Stock-Based
     Compensation
In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation"  (FAS 123) which  established  financial  accounting and reporting
standards for stock-based  compensation.  The new standard  defines a fair value
method of accounting for an employee stock option or similar equity  instrument.
This statement gives entities the choice between  adopting the fair value method
or  continuing  to use the intrinsic  value method under  Accounting  Principles
Board (APB) Opinion No. 25 with footnote disclosures of the pro forma effects if
the fair value  method had been  adopted.  The  Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation  expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1998 and 1997
consistent  with  the  provisions  of FAS No.  123,  the  Company's  results  of
operations would have been reduced to the pro forma amounts indicated below:


                                                          June 30,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------

Net Income - as reported                    $       (3,056,294)   $  (1,889,602)
Net Income - pro forma                      $       (3,147,469)   $           -
Earnings per share - as reported            $             (.07)   $        (.05)
Earnings per share - pro forma              $             (.07)   $        (.05)
                                            ------------------------------------



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



                                                                            F-18

<PAGE>


                                    GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)


                                      Notes to Consolidated Financial Statements
                                                                       Continued

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



13.  Stock-Based Compensation
     Continued
The fair value of each option  granted is  estimated  on the date of grant using
the Black-Scholes option pricing model with the following assumptions:


                                                         June 30,
                                            -----------------------------------
                                                   1998             1997
                                            -----------------------------------

Expected dividend yield                      $            -  $               -
Expected stock price volatility                       152 %              157 %
Risk-free interest rate                               5.6 %              4.5 %
Expected life of options                            5 years          1-3 years
                                            -----------------------------------



The  weighted  average  fair value of options  granted  during 1998 and 1997 are
$1.07 and $0, respectively.


The following table summarizes information about fixed stock options outstanding
at June 30, 1998:


                        Options Outstanding              Options Exercisable
              ------------------------------------------------------------------
                             Weighted
                              Average
                 Number      Remaining    Weighted      Number       Weighted
   Range of    Outstanding  Contractual    Average    Exercisable    Average
   Exercise        at          Life       Exercise         at        Exercise
    Prices       6/30/98      (Years)       Price       6/30/98       Price
--------------------------------------------------------------------------------

$  .09 to  .23   5,268,261    5.06     $     0.10      5,268,261  $         0.10
   .25 to  .63   2,074,878    3.38           0.32      2,074,878            0.32
  2.00 to 2.00      86,667    2.84           2.00         86,667            2.00
--------------------------------------------------------------------------------

$  .09 to 2.00   7,429,806    4.56     $     0.18      7,429,806  $         0.18
--------------------------------------------------------------------------------

                                                                            F-19

<PAGE>


                                                    Signatures


         Pursuant  to the  requirements  of Section or 15 (d) of the  Securities
Exchange Act of 1934, Groen Brothers Aviation,  Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized:



                                           Groen Brothers Aviation, Inc.



         /s/ David L. Groen                 Date:     September 24, 1998
         -------------------------------    ----------------------------
         David L. Groen, President



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


         /s/ H. Jay Groen                   Date:     September 24, 1998
         -------------------------------    ----------------------------
         H. Jay Groen, Director


         /s/ David L. Groen                 Date:     September 24, 1998
         -------------------------------    ----------------------------
         David L. Groen, Director


         /s/ James P. Mayfield              Date:     September 24, 1998
         -----------------------------      ----------------------------
         James P. Mayfield, Director






                                       13