UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB
                                  ANNUAL REPORT
                            YEAR ENDED JUNE 30, 2006


                           Moller International, Inc.
                           --------------------------
                  Name of small business issuer in its charter)

           California                                      68-0006075
           ----------                                      ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


                            1222 RESEARCH PARK DRIVE
                             DAVIS, CALIFORNIA 95618
                    (Address of principal executive offices)

                    Issuer's telephone number (530) 756-5086
                    Issuer's Facsimile number (530) 756-5179

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

<PAGE>


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.
[ X ] Yes   [  ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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-KSB
or any amendment to this Form 10-KSB. [ X ]

Revenues for this fiscal year are $73,817.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)

     As of June 30, 2006, the Company had 45,507,953 common shares issued and
outstanding, with a total of 16,562,862 owned by non-affiliates. As of September
7, 2006, the closing price of such common equity was $0.52 per share, giving an
aggregate market value of the voting and non-voting common equity held by
non-affiliates as $8,612,688.24.

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

     As of June 30, 2006, the company had 45,507,953 common shares issued and
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]

<PAGE>


                                     PART I

Item 1. DESCRIPTION OF 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 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 research and development of our proposed products has been financed from
various sources, including sales of our stock to investors, capital
contributions and loans from our founder, Dr. Paul S. Moller, and various
government and private contracts. We will need to raise substantial additional
capital in order to complete the development of our products and to market them.

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.

On March 31, 2001, Moller International distributed its 95% ownership of the
shares of its (former) subsidiary, Freedom Motors, Inc. to the shareholders of
Moller International in a tax-free reorganization.


                                  OUR PRODUCTS

We currently have no products that are commercially marketable. We are in the
latter stages of development of a number of 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. As of the date of this filing, however,
it remains uncertain when, if ever, we will enter commercial production of any
of our products.

The Skycar 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.

<PAGE>


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.

                                [GRAPHIC OMITTED]
                      [Please see pdf attached for graphic]

                         Moller M400 "Skycar" prototype

Following are our current target design and performance specifications for the
M400 4-passenger (including pilot) aircraft:
<TABLE>
<CAPTION>
<S> <C>                                                  <C>
    Passengers.......................................4    Dimensions (LxWxH)                   19.5'x 8.5'x 7.5'
    Cruise speed @ 20,000'.....................275 mph    Takeoff and landing area.....................35-ft dia
    Top speed @ 13,200'........................375 mph    Noise level at 500 ft (goal)....................65 dba
    Maximum rate of climb....................6,000 fpm    Critical failure components.......................none
    Maximum range...............................750 mi    Complex moving parts...............................few
    Payload excluding fuel.....................750 lbs    Piloting difficulty................................low
    Fuel consumption............................20 mpg    Vertical takeoff and landing.......................yes
    Operational ceiling......................36,000 ft    Garage parking/roadability.........................yes
    Gross weight.............................2,400 lbs    Uses non-fossil fuel (ethanol).....................yes
    Engine power (2 min rating)................1200 hp    Emergency parachutes...............................yes
</TABLE>

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.

<PAGE>


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.

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:
<TABLE>
<CAPTION>
<S>     <C>                                <C>                        <C>                        <C>
                                           -----------------------------------------------------------------------
                                                Powered-Lift               Helicopter                Airplane
                                           -----------------------------------------------------------------------
                                            Moller International       McDonnell Douglas          Socata TMB S.A.
                                                M400 Skycar(R)              MD 520 N                  TBM 700
------------------------------------------------------------------------------------------------------------------
Performance
     High Speed Cruise                            330 mph                   155 mph                   335 mph
     Maximum Speed                                375 mph                   175 mph                   345 mph
     Operational Ceiling (ft)                      35,000                    16,300                   30,000
     Maximum range                                 750 mi                    267 mi                  1,796 mi
     Rate of Climb                               4,900 fpm                 2,069 fpm                 2,380 fpm
     Vertical takeoff                               yes                       yes                       no
      and landing


Payload and Capacity
     Passengers                                      4                       3 to 4                      6
     Gross Weight                                2,400 lbs                 1,591 lbs                 4,685 lbs
     Maximum Net Payload                          750 lbs                  1,106 lbs                  805 lbs


Safety
     Critical failure                               None                    Several                     One
        components
     Complex moving components                      Few                       Many                      Few

Other
     Maintenance costs                              Low                    Very high                 Moderate
     Piloting difficulty                            Low                    Very high                   High
     Garage parking / roadability                   Yes                        No                       No

Price                                             $995,000                 $1,010,000               $2,697,000
------------------------------------------------------------------------------------------------------------------
</TABLE>

     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.

<PAGE>


     We believe that certain specific design features of the Skycar(R) will
further facilitate its eventual acceptance as an alternative vehicle of mass
transportation. These features will include:

o    Computer-augmented flight stabilization system

o    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

o    High-speed capability, which maximizes the benefits of personalized air
     travel.

o    Hover or low speed capability, which provides the ability to cue up for
     entry to or exit from highly controlled air lanes.

o    Ability to climb, descend, accelerate and decelerate rapidly to enter and
     exit air-lanes quickly

o    Relative insensitivity to gusts and wind shear that makes tightly
     constrained flight possible

o    VTOL ability to land anywhere which allows emergency exit from air-lanes

o    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 require 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. NASA predicts
demonstration of a "Highway in the Sky" system by the year 2008, and had a
partial demonstration of the system during the first quarter of 2005.


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.

<PAGE>


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.

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.

<PAGE>


While the Skycar is marketable during the entire period, a successful
demonstration of transition to forward flight may provide the catalyst for
credibility of the design and promote capital investments that would allow us to
enter into an initial low rate of production. We continue to actively market the
vehicle to military and selected non-military clients. Military sales
projections are based on the level of interest expressed by military
representatives visiting our facilities over the years. While such interest does
not constitute a legally-binding commitment, we believe it provides us with some
indication of future sales potential. Other near-term potential sales could be
to individuals who have contacted us and requested to purchase a Skycar and have
subsequently been issued a delivery position. Approximately 100 delivery
positions have been assigned. (A delivery position is a right to purchase, but
not an obligation to purchase.) Sales, if any, prior to the end of 2005 would
likely be limited to sophisticated clients who have evaluated the technical data
and arrived at a conclusion about the potential of the aircraft without the
added "proof" of a transitioning flight.

Reliability and production feasibility under FAA "airworthiness" standards will
next become the company's objective. Tooling up for limited production of an
airworthy vehicle for military use will require approximately $25 million and is
expected to take 12 to 15 months. This military model is expected to be
developed under military contracts. However there is no assurance that a
mass-producible model will result from a limited number of sales to the military
or that the military will in fact act upon their current interests.


Aerobot Remotely-operated Aerial Vehicles
-----------------------------------------

Aerobot(R) 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(R) for commercial and military applications, although we
have not commenced commercial marketing of them.

The electric-powered Aerobot(R), 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(R) 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(R).

The demonstrated performance specifications for the two Aerobot models are set
forth in the following table:

<PAGE>


                              ----------------------------------------------
                                 Electric-Powered           Fuel-Powered
                                      ES20-9                  FS24-50
----------------------------------------------------------------------------
Payload (including fuel)              15 lbs                   65 lbs
----------------------------------------------------------------------------
Empty weight                          40 lbs                   90 lbs
----------------------------------------------------------------------------
Hover time                         8-12 hours*                1.5 hrs
----------------------------------------------------------------------------
Hover ceiling                         250 ft                  2,500 ft
----------------------------------------------------------------------------
Forward speed                           --                      50 mph
----------------------------------------------------------------------------
Size                           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:

Design Feature                              Attributes
--------------                              ----------

Air-cooled or charge-cooled rotor           Light Weight
Aluminum housings
Simplified Lubrication System

Few moving parts                            Low cost + Reliability

Perfect dynamic balance                     High propulsive
  Low vibration                              efficiency
  Solid engine mounts
  Small fan tip clearance

Four-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(R) and Aerobot(R) 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.

<PAGE>


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.


                               [GRAPHIC OMITTED]
                      [Please see pdf attached for graphic]

<PAGE>


Specifications of Moller's high-performance engines are as follows:

                               -------------------------------------------------
                                              High Performance
                               -------------------------------------------------
                                  Single-Rotor                 Two-Rotor
--------------------------------------------------------------------------------

Specifications
     Weight                          55 lb                       85 lb
     Dimensions (L, Diameter)     14 in, 11 in                19 in, 11 in
     Displacement                    530cc                       1060cc

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

Performance
     Rated Power                     80 hp                       160 hp
     Rated Speed                    7000 RPM                    7000 RPM
     Maximum Speed                  7500 RPM                    7500 RPM
     Idle Speed                     1800 RPM                    1800 RPM
     Porting                         Radial                      Radial

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

General                        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.


                                 ------------------------------------------
                                  MOLLER ROTARY(1)       STANDARD PISTON(2)
         ------------------------------------------------------------------
         POWER                         160 hp                  180 hp
         ------------------------------------------------------------------
         WEIGHT                        85 lbs                  260 lbs
         ------------------------------------------------------------------
         VOLUME                       1.0 ft(3)               8.6 ft(3)
         ------------------------------------------------------------------
         FRONTAL AREA                 0.8 ft(2)                3 ft(2)
         ------------------------------------------------------------------

<PAGE>


                               [GRAPHIC OMITTED]
                      [Please see pdf attached for graphic]


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 does not intend to produce the Rotapower engine for aircraft use, but
intends to license it for aircraft and ducted fan use while retaining production
of the rotor which requires unique high volume production equipment that the
company has exclusive access to.


Liability Insurance

Frank Crystal & Co. have 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.

<PAGE>


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.



                                     PATENTS

The current status of Moller International's U.S. and Foreign Patents and
Trademarks is listed below:
<TABLE>
<CAPTION>
<S>     <C>                            <C>                      <C>                 <C>
------------------------------------------------------------------------------- -----------------
Name (Abbreviated)                      Patent/Application           Country         Issued (I)
                                               Number                                Pending (P)
------------------------------------------------------------------------------- -----------------
Diesel Fueled Engine                        60/671,605                 US                 P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2004/002796             Australia             P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2004/002796              Canada               P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2003/003730              Europe               P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2004/002796              Europe               P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing           0303730             International           P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2004/002796           International           P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing         2004/002796               Japan               P
------------------------------------------------------------------------------- -----------------
Improved Vertical Takeoff & Landing           6808140                  US                 I
------------------------------------------------------------------------------- -----------------
Robotic or Remotely                           0279391                Europe               I
------------------------------------------------------------------------------- -----------------
Robotic or Remotely                           4795111                  US                 I
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          2315639                Canada               I
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          2355653                Canada               P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                         989648001               Europe               P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                         999630924               Europe               P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          9827045             International           P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                         99/29821             International           P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                        2000-588502               Japan               P
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          3385273                 Japan               I
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          6164942                  US                 I
------------------------------------------------------------------------------- -----------------
Rotary Engine Having                          6325603                  US                 I
------------------------------------------------------------------------------- -----------------
Stabilizing Control                          2,354,583               Canada               P
------------------------------------------------------------------------------- -----------------
Stabilizing Control                           1144249                Europe               I
------------------------------------------------------------------------------- -----------------
Stabilizing Control                           1144249                Germany              I
------------------------------------------------------------------------------- -----------------
Stabilizing Control                          99/30392             International           P
------------------------------------------------------------------------------- -----------------
Stabilizing Control                         2000-592187               Japan               P
------------------------------------------------------------------------------- -----------------
Stabilizing Control                          6,450,445                 US                 I
------------------------------------------------------------------------------- -----------------
Trademark Aerobot                            1,367,510                 US                 I
------------------------------------------------------------------------------- -----------------
Trademark Rotapower                          2,101,936                 US                 I
------------------------------------------------------------------------------- -----------------
Trademark Skycar                            2000/14454            South Africa            I
------------------------------------------------------------------------------- -----------------
Trademark Skycar                            2000/14455            South Africa            I
------------------------------------------------------------------------------- -----------------
Trademark Skycar                             1,739,687                 US                 I
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</TABLE>

<PAGE>


<TABLE>
<CAPTION>
<S>     <C>                            <C>                      <C>                 <C>
------------------------------------------------------------------------------- -----------------
Trademark Skycar                             1,964,355                 US                 I
------------------------------------------------------------------------------- -----------------
Trademark Skycar                            76,066,387                 US                 P
------------------------------------------------------------------------------- -----------------
Vertical Takeoff & Landing                   000243464               Europe               I
------------------------------------------------------------------------------- -----------------
Vertical Takeoff & Landing                    266,288                France               I
------------------------------------------------------------------------------- -----------------
Vertical Takeoff & Landing                    D498201                  US                 I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 636273                Australia             I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 2075043                Canada               I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 0512345                Europe               P
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 0512345                France               I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 0513245                Germany              I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                91/00247             International           P
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 0512345             United Kingdom           I
------------------------------------------------------------------------------- -----------------
VTOL Aircraft                                 5115996                  US                 I
------------------------------------------------------------------------------- -----------------
</TABLE>


                                   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 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.

In October 1993 Moller International obtained general, infrastructure,
environmental, public safety and communications statistical data that we
combined with our own research to aid in producing our marketing forecasts. We
have continued to develop, update and maintain this data with input from
Shephard's Unmanned Vehicles and other publications from the public domain.


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:

     o    military and para-military (rescue, drug enforcement, and border
          patrol)
     o    wealthy individuals, for use within their own property in the U.S.,
          Australia, Canada, etc.
     o    foreign countries where FAA certification is not mandatory

No such customers have made any binding commitments with regard to our products.

<PAGE>


Market Segments

Although there is no assurance we will be successful, we will attempt to develop
markets for the Skycar(R) within the following aircraft operator segments:

              General Aviation                               Military
              ----------------                               --------
              Private Individuals                            Surveillance
              Corporations                                   Air utility vehicle
              Charter and Rental Services                    Rescue
              Aviation Schools                               Medical Evacuation
              Utilities
              News Gathering
              Police/Fire/Rescue/Ambulance
              Drug Enforcement
              Express Delivery
              Border 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.


Competition

Today, there is no company that we are aware of offering a vehicle that is
substantially similar to the Skycar(R). 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-Agusta) which is in development. It's announced price of
$10 million, however, will likely constrain it to a different market than the
target market for the Skycar(R).

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.

<PAGE>


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.


AEROBOTS(R)

Many of the potential markets for air-borne remotely flown vehicles (Aerobot(R))
are currently addressed by manned helicopters and airplanes, both of which in
our opinion represent significantly less economical solutions. In addition, the
unmanned Aerobot(R) can operate in areas that are prohibitively dangerous for
manned aircraft. Furthermore, the Aerobot(R)'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.


Market Segments

We believe the Aerobot(R) is suitable for a variety of commercial and military
applications:

       Commercial                                   Military
       ----------                                   --------

       Bridge and utility line inspection           Battle damage assessment
       Building heat loss detection                 Electronic counter measures
       Smoke stack air quality testing              Target acquisition
       Electronic news gathering                    Surveillance
       Sports event reporting                       Communications relay
       Hazardous waste detection                    Decoy operations
       Natural disaster damage assessment
       Law enforcement
       Fire surveillance

<PAGE>


Competition

There are a number of unmanned aerial vehicles ("UAVs") in production today
worldwide; however none of these, so far as we are aware, possesses
characteristics substantially similar to the Aerobot. The most similar is the
CYPHER, developed by United Technologies. The CYPHER is not capable of
transitioning to significant aerodynamic flight, is much larger than the Aerobot
and is considerably more expensive than the Aerobot. The CYPHER's design is very
similar to a helicopter and the price is expected to be roughly equivalent to a
small helicopter at $500,000 or more per vehicle.

The applications identified above in "Market Segments" have been compiled from
lists of functions for existing UAVs. For example, the US Air Force has defined
the roles and missions for a UAV with VTOL characteristics. This information is
published on a publicly available web site
(http://www.edwards.af.mil/articles98/docs_html/splash/may98/cover/future.htm).
The US Navy's needs and requirements have been described in several articles,
one of which is "Autonomous Vehicles and the Net-Centric Battlespace", by
Barbara Fletcher, Space and Naval Warfare Systems Center, San Diego. In her
paper dated April 24, 2000, Ms. Fletcher describes the potential role of UAVs in
communications and control scenarios and specifically discusses the features of
the Cypher VTOL UAV. In information describing the Cypher
(http://users.chariot.net.au/~theburfs/URcypher.html) the company is reported to
claim its product's non-defense roles outnumber potential military missions for
the UAV, including counter-narcotics, ordnance disposal, forestry, law
enforcement and search and rescue. We believe that if a less costly alternative
with substantially the same performance characteristics to the Cypher were
available, it would be considered by several government agencies.

Model helicopters are also competitors but are dangerous and very difficult to
fly. Since both these competitors rely principally on direct lift their range
and endurance are both limited compared to a transition-capable Aerobot.

The main advantage of the non-transitioning Aerobot is safety, size, ease of
control, and low relative cost even at modest volumes. However the political and
financial resources of companies like United Technologies are such that the
Aerobot's superior performance does not guarantee it an economically viable
market.


                                   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.

<PAGE>


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.

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(R) (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(R), they expect to develop the final
airworthiness criteria as we progress through the test program.

<PAGE>


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.


Establishment of Skycar Certification Criteria

In 1990 Mr. Jack Allison, formerly a vice president and a director of Moller
International, began working with the FAA with the goal of identifying the
appropriate airworthiness criteria for certification in a newly-established
aircraft category designated "powered lift - normal category," in which the M400
Skycar is classified. The first meeting was to organize the effort to complete
the airworthiness criteria manual, and was attended by about 75 representatives
from seven foreign and domestic aircraft and aerospace manufacturing companies,
and members of the press. As a result of that meeting, Mr. Allison was appointed
to the "technical issues panel" charged with responsibility for the primary
flight systems. Other panels handled powerplants, avionics, and the airframe. A
draft of the manual was issued and is now available.

The FAA has recently informed us that of the original seven firms involved in
the effort, Moller appears to be the only one moving toward certification. The
FAA has displayed what we regard as a very cooperative attitude through all of
our preparatory work.

On May 19, 1999, Mr. Allison provided an informational briefing at Edwards Air
Force Base on the Skycar. In attendance were a consortium of (1) test pilots
from the Air Force stationed at Edwards AFB, (2) scientists and engineers from
NASA Dryden, and (3) flight instructors and aircraft inspectors from the
National Test Pilots School. As a consequence of this meeting, Moller received a
proposal from this consortium that outlined a combined certification and
airworthiness program for the Skycar, whereby the flight certification
documentation would be written in parallel with the flight testing. This
procedure would accelerate the process of identifying certification criteria and
reduce the time necessary to achieve production-oriented procedures and
processes. The consortium estimates that the proposal would require Moller to
budget $1.2 million for the program with a time frame of approximately three
years to define the requirements for FAA certification. The FAA has not approved
or disapproved the proposal, nor is it the agency's function to do so. The
objective of this activity is to provide suggested appropriate additions to what
we feel is the currently immature language of the FAA's regulations regarding
the issuance of Airworthiness Criteria for Powered Lift Normal Category
aircraft.


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.

<PAGE>


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(R). 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
through the year 2006 to achieve FAA "Experimental" certification. 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.

<PAGE>


Pilot Requirements

Initially, a private pilot's license will be required to pilot the Skycar(R),
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(R) 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(R) is FAA
certified. Once the Skycar(R) 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(R)

Although sales of the Skycar(R) 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(R) 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.

<PAGE>


         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(R) in
         critical applications for which competing aircraft are ill suited. For
         example, the Skycar(R) 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(R) 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(R) in a broader
         range of applications if volume production reduces manufacturing costs
         and overall pricing. Eventually, we believe the Skycar(R) has the
         potential to become the aerial counterpart of the "HMMWV," the
         military's current ground utility vehicle.

         Corporations -- Moller intends to sell the M400 Skycar(R) 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.


                                  MANUFACTURING

Skycars(R)

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(R) 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 2002 and 2003, 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 year 2004 and beyond.

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.

<PAGE>


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(R).

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.


Aerobots(R)

Both electric-powered and fuel-powered Aerobots(R) can be produced in the
present Moller facility in volumes of up to four per week, which is sufficient
for currently projected production through 2002. The electric-powered Aerobot(R)
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 Aerobot(R) utilizes the Moller rotary engine (single-rotor) and
thus requires more extensive facilities. The frame of the fuel-powered
Aerobot(R) 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(R) 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.


Engine

We expect that our Freedom Motors affiliate will supply most of the primary
engine components necessary to generate a FAA certified Rotapower(R) 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(R) and Aerobots(R).

<PAGE>


                                    EMPLOYEES

We currently have 7 full-time employees and 4 part-time employees, including 5
management and executive management personnel. 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. If we are successful, we believe that the M400 Skycar
would generate interest within the U. S. military in the larger M600 Skycar. It
may require an additional $40 million to complete an FAA-approved production
facility that would allow the production of two M400 Skycars per day. Additional
capital of $20 to $30 million will be required for start-up and inventory costs.
Mass production of a civilian aircraft has never occurred but assuming success
at a modest production level we anticipate that both military and civilian
interest would justify the very large amount of capital (automobile-level
production costs) necessary to achieve volume production of the Skycar. Such a
level of production would be most likely to occur by means of a licensing
arrangement or a strategic partnership with an established and well-capitalized
company.

We anticipate that that if we successfully demonstrate translational flight
capability in early 2007, the credibility of the company's technology will be
greatly improved. We believe that such credibility, if realized, should provide
a business basis for an initial public offering of the Company's common stock to
raise the approximately $90 to $100 million required to support a modest Skycar
production rate of 2 vehicles per day by the end of year 2009. Depending upon
the advice of financial consultants we expect to engage, it may be necessary to
seek the required capital in two or more stages and from both public and private
sources. However, there can be no assurance that we will be able to raise the
required capital for such limited production.

If translational flight capability is delayed or prevented for any reason, we
may be unable to raise sufficient capital to support future development or
production. In that event, the Company may be unable to continue its operations.



                                  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.

<PAGE>


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 about $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. 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.


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.

<PAGE>


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 and our ability to have
those controls attested to by our independent registered public accounting firm.
Section 404 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-KSB. In
addition, the independent registered public accounting firm auditing a company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal controls over financial reporting
as well as the operating effectiveness of the company's internal controls.

We will be required to evaluate our internal control systems in order to allow
our management to report on, and our independent auditors attest to, our
internal controls, as a required part of our Annual Report on Form 10-KSB
beginning with our report for the fiscal year ending June 30, 2007. While we
expect to expend significant resources over the next year in developing the
necessary documentation and testing procedures required by SOX 404, there is a
risk that we will not comply with all of the requirements imposed thereby. At
present, there is no precedent available with which to measure compliance
adequacy. Accordingly, there can be no positive assurance that we will receive a
positive attestation from our independent auditors.

In the event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot correct in a timely manner or we are unable to
receive a positive attestation from our independent auditors 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.

In addition to the above, in the event that our independent auditors are unable
to rely on our internal controls in connection with their audit of our financial
statements, and in the further event that they are able to unable to devise
alternative procedures in order to satisfy themselves as to the material
accuracy of our financial statements and related disclosures, it is possible
that we would receive a qualified or adverse audit opinion on those financial
statements and investors and others may lose confidence in the reliability of
our financial statements and our ability to obtain equity or debt financing
could suffer.


Item 2. DESCRIPTION OF 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)



Item 3. LEGAL PROCEEDINGS

Moller International, Inc. is named as a defendant in a lawsuit pending in Yolo
County, California Superior Court captioned Houlihan v. Moller International,
Inc., et al. The Complaint, filed in January of 2004 in Sacramento County
Superior Court and later transferred to Yolo County Superior Court, alleges that
the Company violated certain federal and state securities laws at the time the
plaintiff purchased his shares of common stock in the Company, and later when
the Company offered to repurchase those shares. The plaintiff alleges damages of
$490,000 plus interest. The Company's Answer was filed in September 2004, and
initial discovery commenced in early October 2004.

<PAGE>


The Company intends to contest the case vigorously and while it is too early to
assess the likelihood of a favorable outcome or the amount or range of potential
loss, the Company and its counsel currently believe that there exist multiple
viable defenses to the causes of action in the Complaint.

J.F. Wilson & Associates Ltd. v. Estate of Percy Symens, et al.

Moller International, Inc. is named as a defendant in this lawsuit pending in
Yolo County, California Superior Court. The Complaint, filed in April of 2005,
alleges that we 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. Our answer, which denies the allegations in the complaint, was filed in
June of 2005, and initial discovery commenced in August of 2005. Discovery has
not been completed, no motions have been filed, and the case has not been set
for trial. Further site investigation is required to determine the extent of the
environmental contamination at these sites, and to determine or estimate its
source or sources.

In a related administrative proceeding, on 9/26/06 the California Central Valley
Regional Water Quality Control Board issued a draft Cleanup and Abatement Order
(CAO) in connection with the property at 920 Third Street. We were named as one
of the responsible parties in the draft CAO, along with our CEO and a number of
individuals and entities not affiliated with us. This proceeding is at a very
early stage, with comments on the draft CAO due by 11/20/06. We intend to
challenge the characterization of us as a discharger of environmental
contaminants, while also complying with the orders of the Central Valley
Regional Water Quality Control Board. Our probable loss has been estimated at
this time in the range of $200,000 to $1,000,000. We have accrued our estimated
liability. It is reasonably possible that these estimates may be revised in the
near term as the site investigation and other research and analysis proceeds.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the 2005 Annual Shareholders meeting held on November 5, 2005, the
following individuals were elected to the MI Board of Directors by unanimous
vote of shareholders present: Paul S. Moller, Faulkner White, Umesh Khimji, Jim
Toreson, and Mike Shanley.



                                     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 $0.53 to a high of $1.30 per share during this
reporting period with an trading volume of 12,479 shares per trading day (as of
7 September 2006).

<PAGE>


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         Low
2002-Q3 (28 Aug to 30 Sep 2002)               $7.50       $4.15
2002-Q4 (1 Oct 2002 to 31 Dec, 2002)          $6.50       $2.00
2003-Q1 (1 Jan 2003 to 31 Mar 2003)           $2.20       $0.70
2003-Q2 (1 Apr 2003 to 27 Jun 2003)           $1.00       $0.34
2003-Q3 (1 Jul 2003 to 30 Sep 2003)           $0.90       $0.50
2003-Q4 (1 Oct 2003 to 30 Dec 2003)           $2.30       $0.65
2004-Q1 (1 Jan 2004 to 31 Mar 2004)           $1.50       $0.95
2004-Q2 (1 Apr 2004 to 30 Jun 2004)           $1.45       $1.30
2004-Q3 (1 July 2004 to 30 Sep 2004)          $2.12       $0.95
2004-Q4 (1 Oct 2004 to 31 Dec 2004)           $1.50       $1.25
2005-Q1 (1 Jan 2005 to 31 Mar 2005)           $1.30       $0.78
2005-Q2 (1 Apr 2005 to 30 Jun 2005)           $1.20       $0.82
2005-Q3 (1 July 2005 to 30 Sep 2005)          $1.15       $0.93
2005-Q4 (1 Oct 2005 to 30 Dec 2005)           $1.40       $0.60
2006-Q1 (1 Jan 2006 to 31 Mar 2006)           $1.01       $0.75
2006-Q2 (1 Apr 2006 to 30 Jun 2006)           $1.00       $0.53



Shareholders of Record

As of September 8, 2006 there are 626 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.

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. MANAGEMENT'S DISCUSSION AND ANALYSIS

Year Ended June 30, 2006

Moller International continues its research and development activities on the
Skycar project with the objective of improving flight duration and range of the
aircraft. 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. In addition, the Company
continued its efforts to help Freedom Motors promote the Rotapower engine and
assisted in discussions that resulted in Freedom Motor receiving two contracts
for engine sales and development. Staffing levels decreased slightly as the
company continues to reduce labor costs in an effort to conserve available
operating funds. Management was successful in keeping Administrative salaries
and wages significantly below the prior year's level. Seeking additional funding
remains a top priority for the company.

<PAGE>


Fiscal 2006 compared to 2005

Results of operations for the 2006 fiscal year varied significantly from 2005.
We incurred net losses of $6,902,166 and $1,433,425 in fiscal 2006 and 2005
respectively.

Consolidated loss per share was $.15 and $.03 for the 2006 and 2005 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 $65,000 per month, net of engineering revenue received, with the
significant non-cash charges being depreciation and amortization of
approximately $30,000 per year, 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
$3,509,642 in fiscal 2006. $3,304,172 of this amount related to the fair market
value of stock options granted to our CEO and majority shareholder.

Salaries and wages, including benefits, remained relatively constant,
representing 11% and 39% of total expenses for the 2006 and 2005 fiscal years,
respectively. With the company continuing to conserve cash on hand, some
employees voluntarily consented to defer pay, resulting in a total of $ 293,866
of accumulated short-term deferred payroll as of June 30, 2006. Interest expense
increased by $350,580 over the prior year primarily as a result of the accrual
of interest on our loans from Milk Farm Associates and from Dr. Moller. Milk
Farm is a related entity because Dr. Moller is the general partner in Milk Farm
and has a 34% ownership interest. The loan from Milk Farm is unsecured. It is
due on demand and accrues interest at the maximum rate allowed by law. At the
fiscal year-end 2006, the outstanding principal amount was $647,065. Loans from
Dr. Moller are also unsecured and carry a 10% annual interest rate. At June 30,
2006, the outstanding principal amount was $2,037,238.

As of June 30, 2006, Dr. Moller had a balance of $1,640,987 in deferred wages
along with accrued interest. Subsequent to June 30, 2006, Dr. Moller waived the
payment of $1,449,248 and forfeited a portion of this accumulated amount.

Revenues decreased by $565,015 in 2006. Contract revenues from our affiliated
entity, Freedom Motors decreased $594,300. Miscellaneous revenues increased by
$29,285 due to speaking engagements and, display and rental fees. These
increases are not indicative of any meaningful revenue trends.

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 principals 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.

<PAGE>


We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:


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.   Collectibility is reasonably assured.

EFFECT OF ADOPTING NEW ACCOUNTING PRONOUNCEMENTS

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. This Statement
focuses primarily on accounting for transactions in which and entity obtains
employee services in share-based payment transactions. SFAS No. 123R requires
that the fair value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. Prior to SFAS No.
123R, only certain pro forma disclosures of fair value were required. SFAS No.
123 shall be effective for small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The impact of the adoption of this new accounting pronouncement is included in
the footnotes to the financial statements.

<PAGE>


Item 7. 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 sheet of Moller
International, Inc. as of June 30,2006, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year ended June 30,
2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit 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. 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 audit provides 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 Moller International, Inc. as
of June 30, 2006, and the results of operations and cash flows for the year
ended June 30, 2006, in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial statements have been prepared assuming that Moller
International, Inc. will continue as a going concern. As discussed in Note B to
the financial statements, Moller International, Inc. 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 also 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 13,2006

<PAGE>


             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 Moller International, Inc. and subsidiaries
(the Company) consolidated statements of operations, stockholders' deficit and
cash flows for the year ended June 30, 2005. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, Moller International, Inc., and subsidiaries'
consolidated results of operations and cash flows for the year ended June 30,
2005, 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 has not generated any significant revenue from
operations and is in need of additional infusions of operating capital in order
to complete the development of its Skycar product and other product offerings.
This factor raises substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to this matter are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
Pleasanton, California
August 8, 2005

<PAGE>


                           MOLLER INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEET
                               AS OF JUNE 30, 2006
                                                                    (Audited)
                                      ASSETS
CURRENT ASSETS
      Cash                                                        $      1,431
      Accounts receivable - employees                                   79,945
                                                                  -------------
              Total current assets                                      81,376
                                                                  -------------

PROPERTY AND EQUIPMENT, net of $875,498 accumulated depreciation        11,186

OTHER ASSETS                                                            51,548
                                                                  -------------

                                                                  $    144,110
                                                                  =============

     LIABILITIES AND DEFICIT IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable, trade                                     $    270,176
      Accrued liabilities                                              285,544
      Accrued liabilities-related parties                              135,324
      Accrued liabilities-majority shareholder                       1,798,968
      Other notes payable                                              544,968
      Notes payable - majority shareholder                           2,037,238
      Notes payable - minority shareholders                            318,729
      Note payable - related parties                                   647,065
      Deferred wages - employees                                       293,866
      Customer deposits                                                442,267
                                                                  -------------
              Total current liabilities                              6,774,145
                                                                  -------------

LONG TERM LIABILITIES
      Deferred wages and interest-majority shareholder               1,640,987
                                                                  -------------
              Total liabilities                                      8,415,132
                                                                  -------------
DEFICIT IN STOCKHOLDERS' EQUITY
      Common stock, authorized, 150,000,000 shares, no par value,
       issued and outstanding, 45,526,821 shares at June 30, 2006   29,538,873
      Accumulated deficit                                          (37,809,895)
                                                                  -------------
              Total deficit in stockholders' equity                 (8,271,022)

                                                                  $    144,110
                                                                  =============

                 See summary of significant accounting policies
                        and notes to financial statements

<PAGE>


                           MOLLER INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDING JUNE 30, 2006 AND 2005
                                                       2006             2005
                                                   -----------------------------
REVENUE

     Contract revenues, affiliated entity          $     12,600    $    606,900

     Miscellaneous                                       61,224          31,939
                                                   -----------------------------
             Total income                                73,824         638,839
EXPENSES

     Project labor                                      216,112         305,788

     Stock based compensation                         3,509,642               -

     Bad debt expense                                 1,241,692               -

     Project materials                                   41,103          77,317

     Project subcontracted services                      17,651         110,696

     Administrative salaries and wages                  355,025         302,704

     Other labor                                         12,336          91,724

     Employee benefits and payroll taxes                125,843         118,229

     Marketing materials                                  2,184           5,781

     Office and shop supplies                            15,144          21,992

     Shipping and postage                                 7,678          12,009

     Telephone                                            7,532           8,516

     Travel, automotive, meals                           18,021          16,588

     Legal, accounting, and consulting fees             319,279         110,718

     Patent expense                                           -          52,276

     Rent expense to majority shareholder               526,539         496,800

     Utilities                                           41,035          38,347

     Repairs and maintenance                              4,206           5,560

     Insurance                                              300          27,246

     Depreciation and amortization expense               11,878          29,205

     Property, sales and use taxes                        5,360          36,835

     Bank and loan fees                                   2,385           2,283

     Other expenses                                     (54,209)          2,976
                                                   -----------------------------
             Total expenses                           6,426,736       1,873,590
                                                   -----------------------------
             Loss from operations                    (6,352,912)     (1,234,751)
OTHER EXPENSES

       Interest                                         549,254         198,674

NET LOSS                                           $ (6,902,166)   $ (1,433,425)
                                                   =============================
Loss per common share, basic and diluted           $      (0.15)   $      (0.03)
                                                   =============================
Weighted average common shares outstanding           45,204,585      44,650,281
                                                   =============================

                 See summary of significant accounting policies
                        and notes to financial statements

<PAGE>

<TABLE>
<CAPTION>
<S>     <C>                                 <C>          <C>          <C>              <C>            <C>
                           MOLLER INTERNATIONAL, INC.
            CONSOLIDATED STATEMENT OF DEFICIT IN STOCKHOLDERS' EQUITY
                   FOR THE YEARS ENDED JUNE 30, 2006 AND 2005

                                                  Common Stock          Accumulated    Related Party
                                               Shares       Amount         Deficit      Receivable        Total
                                             ----------------------------------------------------------------------
Balances at June 30, 2004                    44,625,281  $ 25,392,447  $ (29,474,306)  $ (1,210,248)  $ (5,292,107)

Common Stock issued                             25,000         30,000                                       30,000

Increase in receivable from related party                                                 (45,800)         (45,800)
Net loss for the year                                                      1,433,423)                   (1,433,423)
                                             ----------------------------------------------------------------------
Balances at June 30, 2005                    44,650,281    25,422,447    (30,907,729)    (1,256,048)    (6,741,330)

Shares issued for Services                      291,251       269,542                                      269,542
Shares issued for deferred compensation         315,532       320,842                                      320,842
Shares issued for settlement of debt            269,757       285,942                                      285,942
Decrease in receivable from related party                                                    14,356         14,356
Fair value of employee stock options                          205,928                                      205,928
Fair value of executive stock options                       3,034,172                                    3,034,172
Write off balance due from affiliate                                                      1,241,692      1,241,692
Net Loss For the Year                                                     (6,902,166)                   (6,902,166)
Balances at June 30, 2006                    45,526,821  $ 29,538,873  $ (37,809,895)             -   $ (8,271,022)
                                             ======================================================================

                 See summary of significant accounting policies
                        and notes to financial statements
</TABLE>
<PAGE>


                            MOLLER INTERNATIONAL INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                   FOR THE YEARS ENDING JUNE 30, 2006 AND 2005

                                                        2006            2005
Cash Flows Used in Operating Activities

Net Loss                                            $ (6,902,166)  $ (1,433,425)
Adjustments to Reconcile Net Loss
to Net Cash Used :
    Depreciation Expense                                  11,878         25,017
    Stock based compensation                           3,509,642         30,000
    Bad debt expense-                                  1,241,692              -
    Changes in assets and liabilities:

    Accounts receivable                                   22,885        (51,491)
    Accounts payable                                     112,660         76,850
    Accrued liabilities                                  728,027        729,932
    Customer deposits                                     (5,374)        25,141
    Deferred wages and accrued interest-majority
     shareholder                                         432,126        159,998
    Due from affiliate                                    14,356        (45,800)
Net Cash Used in Operating Activities                   (834,274)      (483,778)

Cash Used in Investing Activities
    Purchase of equipment                                      -          4,178
    Purchase of other assets                             (51,548)             -
Net Cash Used in Investing Activities                    (51,548)         4,178

Cash Flows Provided from Financing Activities
    Borrowings from debt                               1,228,139        644,719
    Payments of notes payable                           (367,899)      (139,824)
Net Cash Provided from Financing Activities              860,240        504,895

Net (decrease) In Cash                                   (25,589)        25,295
  Cash Balance at End of Period                            1,431         27,013
  Cash Balance at Beginning or Period               $     27,013   $      1,718


Schedule of Non-cash Operating and Financing
 Activities:
Shares issued for accrued liabilites                $    320,842   $          -
Shared issued for notes payable - majority
 shareholder                                        $    285,942   $          -

Cash Paid During the Period For:
Interest                                            $    123,870   $     14,187

                 See summary of significant accounting policies
                        and notes to financial statements

<PAGE>


                           MOLLER INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Moller International Inc., (MI) consolidates the accounts of its wholly owned,
inactive subsidiary, Aerobotics Inc. (AI).

MI is the successor to Moller Corporation (MC), an inactive entity. MC's only
significant asset is its investment in MI as it holds 25,919,909 shares of MI,
representing 58.1% of the outstanding common stock of MI. Dr. Paul S. Moller is
the sole shareholder of MC, and thus, the majority shareholder of MI. All
significant intercompany transactions and balances have been eliminated.

MI has historically entered into several lines of revenue-producing business
activities including the design and development of rotary engines, remotely
controlled flying vehicles, automotive mufflers and vertical takeoff and landing
aircraft. MI 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. The Skycar program is still in the development stage at this point.

Research and Development Costs

All research and development costs are expensed as incurred.

Cash and Cash Equivalents

MI considers all highly liquid debt instruments with an initial maturity date of
90 days or less to be cash equivalents.

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.

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, 2006, 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 13,074,212 shares.

<PAGE>


Property and Equipment

Property and Equipment is recorded at cost and is depreciated over its estimated
service life on a straight-line basis. Estimated service lives range from five
to fifteen years.



Production and R&D Equipment                $  393,158
Computer equipment and software                417,876
Furniture and fixtures                          75,650
                                            -----------
                                               886,684
   Less accumulated depreciation              (875,498)
                                            -----------

                                            $  11,186
                                            ===========


Revenue Recognition

MI recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured

In the case of MI's recognition of revenue from engineering services provided to
Freedom Motors, an affiliated entity and former subsidiary, which shares common
ownership with some of the existing shareholders of MI, the arrangement is the
Technology Development and License Agreement entered into between Freedom Motors
and Moller International in 1998 (previously filed as Exhibit 10 to the
Company's Form 10-SB, filed on EDGAR September 21, 2001). Under this agreement,
Moller International committed to providing engineering services, as deemed
reasonable, to perform scientific and engineering technical support for the
rotary engine. The support is generally in the form of labor using the expertise
of MI's employees, and temporary use of a portion of MI's facilities or
equipment.

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.

<PAGE>


The final criterion, Collectibility, is determined by Freedom Motors' ability
and willingness to pay its debts. Since Freedom Motors is itself a startup
company, it has not been in a position to pay until it acquired contracts and
received revenue from those contracts. When Freedom Motors received revenue
during this reporting period, they notified Moller International and stated
their intent to pay a portion of fees accumulated for services rendered. When
the payment for services is received by Moller International, then management
recognizes and records revenue that is equal to the fees received.

Miscellaneous income derived from the sale of t-shirts, model cars, information
packets and other items is recognized at the time of sale. Additional contract
revenues are generated from the leasing of a full-scale Skycar model for various
exhibitions. Revenue from the leasing of the Skycar model is recognized over the
term of the contract period. Miscellaneous income and leasing revenues are
considered to be insignificant and not critical to the goal of achieving
profitable operations.

The company performs contract services for its former subsidiary, Freedom Motors
(FM). In accordance with the Technology Development and License Agreement
between MI and FM dated October 28, 1999, MI provides FM the personnel and
facilities as required to adapt its Rotapower engine to applications where the
potential exists for high volume production. MI also handles FM's bookkeeping
and other administrative functions. From the date of the spin-off, April 1,
2001, forward, due to the uncertainty of FM's ability to pay amounts owed, MI
does not recognize any revenue related to these transactions with until it
receives payment from FM. Accumulated billings to FM for the period from April
1, 2001 to June 30, 2005 totaled $4,109,617. For the year ended June 30, 2006,
contract services billed to FM totaled $1,864,252, resulting in accumulated
billings of $5,109,714. The amount of these billings have been fully reserved
against, with a resulting increase in bad debt expense during the period ended
June 30, 2006 of $1,241,692.

For the year ended June 30, 2006, FM remitted a total of $12,600 in payments to
MI which has been recognized as contract revenues in the statement of operations
for the year ended June 30, 2006. In addition, in prior years, FM had remitted a
total of $931,317 in payments to MI. Those amounts had been previously
classified as a reduction in the A/R from affiliate receivable between the two
companies. This receivable was reflected as a reduction in stockholders' equity
in MI's financial statements. For the year ended June 30, 2006, this amount was
considered uncollectible by management due to Freedom Motor's development stage
activities.

NOTE B - GOING CONCERN

MI has a net loss of $6,902,166 for fiscal 2006 and has an equity deficit of
$8,271,022 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.

<PAGE>


Management is currently pursuing additional sources of capital in quantities
sufficient to fund product development and manufacturing and sales activities.

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. As of June 30, 2006, a total of $2,037,238
has been loaned to MI from these transactions. In addition, he has deferred
payment of current year building rent owed by MI of approximately $342,200. The
total deferred rent owing to Dr. Moller at June 30, 2006 is $1,421,479.

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.

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.


NOTE C - Stock-Based Compensation

Prior to December 31, 2005, MI accounted for stock-based compensation under
Statement of Financial Accounting Standards No. 123. As permitted under this
standard, compensation cost was recognized using the intrinsic value method
described in Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in determining
compensation cost for options issued to employees. Accordingly, no compensation
cost had been recognized upon issuance of the option prior to January 1, 2006.

Effective January 1, 2006, MI adopted Statement of Financial Accounting Standard
No. 123(R) and applied the provisions of the Securities and Exchange Commission
Staff Accounting Bulletin No. 107 using the modified - prospective transition
method. During the year ended June 30, 2006, MI issued 3,988,914 options with
terms ranging from five to ten years and exercise prices ranging from $0.85 to
$1.03 to employees, of which 3,194,762 were issued to an executive officer with
a term of five years and an exercise price of $0.86 per share. As such, total
compensation expense of $3,240,100 was recognized during the year ended June 30,
2006. Of this amount $3,034,172 related to the fair value of the stock options
granted to an executive officer and $205,928 related to stock options granted to
employees. The following table illustrates the effect on net loss and net loss
per share if MI had applied the fair value provisions of SFAS 123R, Accounting
for Stock-Based Compensation, to stock-based employee compensation relating to
stock options for the prior periods presented.

<PAGE>


                                                        2006            2005
Net income (loss) as reported                      $ (6,902,166)   $ (1,433,425)
Add: stock based compensation determined under
intrinsic value                                               -               -

Less: stock based compensation determined under
fair value-based method                               3,240,100           24,433

Pro forma net loss                                 $ (3,662,066)   $ (1,457,858)

Basic and diluted net loss per common share:
As reported                                        $      (0.15)   $      (0.03)
Pro forma                                                 (0.08)          (0.03)


The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black Scholes method, based on
assumptions including (1) risk-free interest rates ranging from 3.98% to 4.88%,
(2) an estimated life of the options of five to ten years, (3) no dividend rate
and (4) computed volatility rates ranging from 177.58% to 187% on the underlying
stock.

During the year ended June 30, 2006, MI issued 291,251 shares for services to
outside consultants and estimated the value of these shares at the market value
on the date of issuance of $269,542.

NOTE D - CUSTOMER DEPOSITS

Customer deposits are payments made to MI, generally at $10,000 per unit, 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.


NOTE E - DEFERRED WAGES

The annual salary of the president $250,000 is being deferred until MI has
reached a consistent level of profitability.

The president is aware and has expressly agreed to defer any accrued wages until
such time that the company becomes profitable. The President expects
profitability of MI to be greater than a one-year time frame. At of June 30,
2006, as a result of these expectations, has classified the accrued wages of
$1,428,861 along with the accrued interest of $212,126 as non-current.

At of June 30, 2006, members of management and other employees have deferred
$245,194 of wages along with accrued interest of $48,672.

<PAGE>


NOTE F - NOTES PAYABLE

MAJORITY SHAREHOLDER

Notes payable to the majority shareholder, Dr. Paul S. Moller,are unsecured, and
due on demand. There are two separate notes, one for $1,766,438 which bears
interest at $10% per annum, and another note for $270,800 that is non-interest
bearing. During fiscal 2006, Moller loaned MI an additional $79,254,
representing an increase in the interest bearing loan balance. Accrued interest
on this loan aggregated $377,489 at June 30, 2006.

MINORITY SHAREHOLDER

Notes payable to minority shareholders, at June 30, 2006 consisted of short-term
borrowings, all due on demand with an interest rate of 10% per annum. The
aggregate balance outstanding at June 30, 2006, was $318,729.

RELATED PARTY

During the year ended June 30, 2006, MI repaid $169,060 in loans and borrowed an
additional $428,149 had a $647,065 balance owed to Milk Farm and a related
entity. The note is unsecured and bears the maximum interest allowed by law.
Accrued interest on this loan totaled $135,324 at June 30, 2006.

OTHER NOTES - Pelican Ventures

In 2001, Pelican Ventures LLC loaned $500,000 to MI 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.


NOTE G - COMMON STOCK TRANSACTIONS

During the year ended June 30, 2006, MI issued 291,251 shares of common stock to
certain individuals in recognition of various services provided MI recorded
compensation expense of $269,542 based on a fair market value per share of $0.53
to $1.06, determined by taking the closing price for the stock at the dates the
services were provided.

During fiscal 2006, MI issued 315,532 shares to a former officer to settle
unpaid wages that had been deferred by MI in the amount of $320,842. Also during
the year, MI issued 269,757 shares to the same individual for an outstanding
debt amount that MI owed the majority shareholder and CEO. The former officer
had loaned the majority shareholder and CEO money, that the CEO in turn loaned
to MI. The outstanding debt settled with these shares totaled $285,942.

During fiscal 2005, MI issued 25,000 restricted shares of common stock to
certain individuals in recognition of various services provided. MI recorded
compensation expense of $30,000 based on a fair market value per share of $1.20,
determined by taking the closing price for the stock at the date the services
were provided.

<PAGE>


NOTE H - 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.

Rent expense charged to operations under this lease, including property taxes,
aggregated $526,539 and $532,582 for fiscal 2006 and 2005, respectively.

NOTE I - STOCK OPTION PLANS

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 of which 1,158,507 are outstanding and 1,408,416 are reserved for
issued options to purchase shares as of September 7, 2006.

Previously, MI had its 1991 Stock Option Plan that allowed for the granting of
Nonqualified Stock Options (NSO's) to employees and consultants and Incentive
Stock Options (ISO's) to employees. The total shares available for grant under
that plan were 7,500,000 of which 1,066,552 are reserved for issued options
granted as of June 30, 2004.

Neither plan includes either 6,000,000 share options granted to Dr. Moller, or
2,463,829 share options granted to certain non-employees.

Options shall vest and become exercisable at such time or times and on such
terms as the Plan Administrators may determine at the time of the grant of the
Option. The Plan Administrators shall establish the exercise price payable to MI
for shares to be obtained pursuant to Options, which exercise price may be
amended from time to time as the Plan Administrators shall determine.

On April 1, 2006, MI granted options to purchase 3,194,762 shares to Dr. Moller,
at $.86 per share, which was the average closing price during the period
December 19, 2005 to January 20, 2006. The options terminate on March 1, 2011.

Compensation of Directors

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.

<PAGE>

<TABLE>
<CAPTION>
<S>     <C>                    <C>           <C>              <C>          <C>
Option activity for the years ended June 30, 2006 and 2005 is as follows:

                                                                            Weighted
                                                                            Average
                                  Total          Range of        Total      Exercise
                                 Granted       Option Prices     vested      Price
                                 -------       -------------     ------      -----

    Balance at June 30, 2004     9,530,381    $1.34 to $4.58                 $1.74
     Vested at June 30, 2004                                    9,182,324    $1.61

                     Granted       614,264
                   Exercised             -
                   Forfeited    (1,059,352)
    Balance at June 30, 2005     9,085,293                                   $1.57
     Vested at June 30, 2005                                    9,060,293    $1.57
                     Granted     3,988,919    $0.86 to $1.03                 $0.85
                   Exercised
                   Forteited             -
    Balance at June 30, 2006    13,074,212
     Vested at June 30, 2006                                   13,074,212
</TABLE>

Additional option information for the year ended June 30, 2006, is as follows:

                                              Weighted
                                               Average
                                  Weighted    Remaining                 Weighted
                                   Average     Life in                   Average
    Price Range    Outstanding      Price       Years     Exercisable     Price

   $.81 to $1.35     6,141,880      $1.15        3.17       6,116,880     $1.15
  $1.72 to $2.67     2,459,644      $2.16        0.75       2,459,644     $2.15
  $3.24 to $5.50     483,769        $3.94        9.17         483,769     $3.94
  $.86  to $1.03     3,998,919      $0.85        7.53       3,988,919
--------------------------------------------------------------------------------
                    13,074,212      $1.57                  13,074,212     $1.57

<PAGE>


NOTE J - INCOME TAXES

At June 30, 2005, MI had $28,680,000 in net operating loss (NOL) carryforwards
to offset future federal taxable income. During fiscal 2006, the NOL increased
by $1,085,458 resulting in a net operating loss carryforward of $29,765,458. 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 $29,765,458
million has been recorded to offset the deferred tax asset, resulting in no net
deferred tax asset or liability (changes pending discussion with tax
accountant).


NOTE K - LEGAL PROCEEDINGS

Houlihan v. Moller International, Inc., et al.

MI is named as a defendant in this lawsuit pending in Yolo County, California
Superior Court. The complaint, filed in January 2004, alleges that MI violated
certain federal and state securities laws and failed to disclose pertinent
information at the time the plaintiff purchased his shares of MI common stock,
and later breached a contract when MI offered to repurchase those shares. The
plaintiff alleges damages of $490,000 plus interest.

The case has been set for trial in November 2006.


J.F. Wilson & Associates Ltd. v. Estate of Percy Symens, et al.

MI is named as a defendant in this lawsuit pending in Yolo County, California
Superior Court. 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.

Subsequent to June 30, 2006, in a related administrative proceeding on September
26, 2006, the California Central Valley Regional Water Quality Control Board
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 Central
Valley Regional Water Quality Control Board. MI's probable loss has been
estimated at this time in the range of $200,000 to $1,000,000. MI has accrued
its estimated cleanup obligation. It is reasonably possible that these estimates
may be revised in the near term as the site investigation and other research and
analysis proceeds.

<PAGE>


NOTE L - SUBSEQUENT EVENTS

As of June 30, 2006, Dr. Moller is owed $1,640,987 in deferred wages along with
accrued interest. Subsequent to June 30, 2006, Dr. Moller waived the payment of
$1,449,248.


Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

Vavrinek, Trine, Day & Co., LLP (VTD) has served as our independent registered
public accounting firm since 2001. VTD informed us on May 16, 2006 that they
declined to be reelected.

The reports of VTD on our consolidated financial statements as of June 30, 2005
and 2004 and for the years then ended contained no adverse opinion or disclaimer
of opinion and were not qualified as to uncertainty, audit scope, or accounting
principles. During our two most recent fiscal years and through the interim
period ended March 31, 2006 and date of this Current Report on Form 8-K, there
have been no disagreements with VTD on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
would have caused VTD to make reference thereto in their reports on the
financial statements for such years. During the years ended December 31, 2005
and 2004 and through the interim period ended March 31, 2006 and the date of
this Current Report on Form 8-K, there have been no reportable events (as
defined in Item 304(a)(1)(v) of Regulation S-K).

On May 30, 2006, the Audit Committee retained Malone & Bailey, PC as MI's
independent registered public accounting firm for the fiscal year ending June
30, 2006.

Item 8A. Controls and Procedures

Our Chief Financial Officer (the "Certifying Officer"), is responsible for
establishing and maintaining disclosure controls and procedures for the Company.
The Certifying Officer has designed such disclosure controls and procedures to
ensure that material information is made known to him, particularly during the
period in which this report was prepared. The Certifying Officer has evaluated
the effectiveness of our disclosure controls and procedures as of the date of
this report and believes that the disclosure controls and procedures are not
effective based on the required evaluation. Our auditors discovered numerous
accounting adjustments relating to our estimate of its stock based compensation
and treatment of its amounts due from affiliate which resulted in additional
charges to expense totaling $4,502,657. We believe this is due to the limited
resources devoted to accounting activities during this reporting period and the
Company has taken steps to remedy the shortfall by hiring additional personnel
to address its accounting functions.

There have been no significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

<PAGE>


Audit Committee

We have an audit committee consisting of a representative of the Board of
Directors and two others that meets the definition of "audit committee" set
forth in Section 3a(58)(A) of the Exchange Act. The Audit Committee maintains an
active role in communication with the Company's independent auditors and with
the management of the Company and performs its duties and responsibilities. The
Audit Committee for this report period consisted of the following non-employees:
Faulkner White and Charles Guenther, and the Moller International General
Manager, Bruce Calkins. The members currently serving on the Audit Committee are
expected to continue to serve on the Audit Committee until the next annual
meeting of the Board of Directors following our Annual Meeting of Shareholders.


                                    PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following information is provided for current members of the Board of
Directors who served during this reporting period:


                                                       Director/Officer in any
  Director          Age    Current Term of Office    other SEC-reporting Company
--------------------------------------------------------------------------------
Paul Moller         69       10/2005 - 10/2006                     No
Faulkner White      55       10/2005 - 10/2006                     No
Umesh Khimji        43       10/2005 - 10/2006                     No
Jim Toreson         64       10/2005 - 10/2006                     No
Mike Shanley        57       10/2005 - 10/2006                     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.

<PAGE>


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.

Umesh Khimji, Director--Mr. Khimji is the Chief Executive Officer of the Ajit
Khimji Group of Companies, LLC, Muscat in the Sultanate of Oman. He is a member
of the Board of Directors in AKGC and in Asha, a group comprised of ten
Sultanate of Oman companies, as well as in two companies in France, two in
India, two here in the United States (Moller International and a spin-off of
Moller International, Freedom Motors, Inc., a privately held Nevada
Corporation). He has been instrumental in the start up and direction of private
and public companies since 1986. Mr. Khimji's experience includes management,
public and private finance, investment planning, development and operations. His
firms are actively involved in a variety of market segments including travel &
tourism, hotels, resorts; commercial and industrial banking, advertising,
construction, contract services, computer software and other types of research
and development activities. Mr. Khimji holds a Bachelor of Business
Administration from University of San Diego, and is fluent in English, French
and several Indian languages. He is experienced in working with people with
diverse cultural backgrounds. He was selected as a candidate MI Director when
his father, Ajit Khimji, resigned from his position on the Board earlier this
year.

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.

<PAGE>


Item 10. 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.
<TABLE>
<CAPTION>
<S>       <C>    <C>        <C>    <C>     <C>        <C>           <C>           <C>           <C>
                                                                      Change in
                                                                    Pension Value
                                                                         and
                                                        Non-equity   Nonqualified
Name &                              Stock    Option   Incentive Plan   Deferred     All Other
Principal                    Bonus  Awards   Awards    Compensation  Compensation  Compensation
Position   Year   Salary ($)  ($)    ($)      ($)          ($)       Earnings ($)      ($)         Total ($)
--------------------------------------------------------------------------------------------------------------
Paul       2006  $250,000(1)  $0     $0    $3,034,172       $0                          $0       $3,284,172(1)
Moller,
President

Faulkner
White      2006       $0      $0     $0        $0           $0                          $0

Umesh
Khimiji    2006       $0      $0     $0        $0           $0                          $0

Jim
Toreson    2006       $0      $0     $0        $0           $0                          $0

Mike
Shanley    2006       $0      $0     $0        $0           $0                          $0
</TABLE>

(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.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         AND RELATED STOCKHOLDER MATTERS

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, 2005:

                    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)          27,203,161        56.74% (3)
                    9350 Currey Rd
                    Dixon, CA  95620

(1)  Has options to purchase 9,194,762 shares.
(2)  Total includes 25,819,909 shares beneficially owned by Moller Corp., a
     California corporation controlled by Paul S. Moller.
(3)  63.98% 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
25,819,909 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.

<PAGE>


The following are all of our officers and directors who held office during the
fiscal year ending June 30, 2005 and who are beneficial owners of our
securities:
                                              Amount & Nature of
                  Name and Address of              Beneficial        Percent of
Title of Class    Beneficial Owner                 Ownership          Class (3)
--------------------------------------------------------------------------------

Common Stock      Paul S. Moller  (1) (2)       36,397,923 (D,I)        64.87%
                  9350 Currey Rd
                  Dixon, CA  95620

Common Stock      Faulkner White                   187,280   (D)        00.37%
                  51 Pinewood
                  Irvine, CA 92604

Common Stock      Umesh Khimji                   1,540,717 (D,I)        02.75%
                  PO Box 144
                  Muscat, Sultanate of Oman

Common Stock      Jim Toreson                       25,000   (D)        00.05%
                  HCR61 Box 51
                  Alamo, NV 89001

Common Stock      Mike Shanley                       2,583   (D)
                  Bradfield Close Working
                  Surrey GU22 7RE, UK

(1)  Total include options to purchase 9,194,762 shares.
(2)  Total includes 25,819,909 shares beneficially owned by Moller Corp., a
     California corporation controlled by Paul S. Moller
(3)  Percentage of class based on 56,111,131 potential shares outstanding.



ITEM 12. 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 $1,766,438
which bears interest at $10% per annum, and another note for $270,800 that is
non-interest bearing. (see Note E to the financial statements)

<PAGE>


During the year ended June 30, 2006, the Company repaid $169,060 in loans and
had a $647,065 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 34% ownership interest. (see Note F to the financial statements)


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

Exhibit No.           Description
-----------           -----------

Exhibit 31.1          Certification of CEO / CFO

Exhibit 32.1          Certification of CEO / CFO



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

---------------------------------------------------------
                                    Year ended June 30,
                                   ----------------------
                                     2006         2005
---------------------------------------------------------
Audit and Quarterly Review Fees    $ 34,000     $ 20,108
---------------------------------------------------------
Audit-related Fees                                     0
---------------------------------------------------------
Tax Fees                              9,475        5,275
---------------------------------------------------------
All Other Fees                            0            0
---------------------------------------------------------
Total Fees                         $ 43,475     $ 25,383
---------------------------------------------------------


                                   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.

November 2, 2006                                      /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.

<PAGE>


     SIGNATURE                      TITLE                         DATE
     ---------                      -----                         ----

/s/ Dr. Paul S. Moller        CEO, President, Director          11/02/06
-----------------------


/s/ Faulkner White            Director                          11/02/06
-----------------------


/s/ Umesh Khimji              Director                          11/02/06
-----------------------


/s/ Jim Toreson               Director                          11/02/06
-----------------------


/s/ Mike Shanley              Director                          11/02/06
-----------------------