SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                X ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 1996
                _____ TRANSITION REPORT PURSUANT TO SECTION 13 or
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 000-21749

                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
           (Name of Small Business Issue as specified in its charter)

                  Delaware                                     95-4257380
 (State or Other Jurisdiction of Incorporation              (I.R.S. Employer
              or Organization                              Identification No.)

              3501 Lakewood Boulevard, Long Beach, California 90808
               (Address of Principal Executive Offices) (Zip Code)
                                 (562) 938-8618
               Registrant's Telephone Number, including Area Code

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:
                                      Units
                Class A Common Stock, par value $.0001 per share
 Class A Warrants and the underlying Class A Common Stock, par value $.0001 per
                           share, and Class B Warrants
 Class B Warrants and the underlying Class A Common Stock, par value $.0001 per
                                     share

     Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in this  form,  and no  disclosures  will be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated  by  reference  in Part  III of this  Form
10-K-SB or any amendment to this Form 10-K-SB ___

     The Registrant's  revenues for the fiscal year ended December 31, 1996 were
$133,000.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant  as of March 27,  1997 was  $21,562,500.  For  purposes  of this
computation,  it has been assumed that the shares beneficially held by directors
and officers of Registrant were "held by affiliates;"  this assumption is not to
be  deemed to be an  admission  by such  persons  that  they are  affiliates  of
Registrant.

     As of March 27, 1997, the registrant had  outstanding  6,900,000  shares of
Class A Common Stock, 2,000,000 shares of Class B Common Stock, 4,000,000 shares
of Class E-1 Common Stock and 4,000,000 shares of Class E-2 Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's  Proxy Statement relating to its 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III.

     Specified  exhibits  listed in Part III of this report are  incorporated by
reference to the Registrant's  previously filed  Registration  Statement on Form
SB-2 (333-12273).

           Transitional Small Business Disclosure Format: Yes ___ No X

<PAGE>

                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
                              CROSS-REFERENCE SHEET

     The  following  items in Part III of  Registrant's  Annual  Report  on Form
10-KSB for its fiscal year ended  December 31,  1996 are incorporated  herein by
reference to  Registrant's  Proxy Statement and appear therein under the section
headings indicated below:


Item      Form Heading                           Section Heading

9.        Directors, Executive Officers,         Proxy Statement - Election of
          Promoters and Control Persons;         Directors- Information with
          Compliance With Section 16(a)of        respect to Nominees, Directors,
          the Exchange Act                       and Executive Officers

10.       Executive Compensation                 Proxy Statement - Management -
                                                 Compensation of Executive
                                                 Officers

11.       Security Ownership of Certain          Proxy Statement - Principal
          Beneficial Owners and                  Stockholders
          Management

12.       Certain Relationships and Related      Proxy Statement - Management -
          Transactions                           Certain Relationships and
                                                 Related Transactions




<PAGE>

                                     PART I
ITEM 1.   BUSINESS.

Overview

     The Company is a development  stage company  organized to design,  develop,
manufacture and market propjet and jet aircraft intended  primarily for business
use. The Company has obtained a type certificate  ("Type  Certificate") from the
Federal  Aviation  Administration  ("FAA")  with  respect to a  non-pressurized,
single-engine  aircraft  powered  by a  Pratt  &  Whitney  propjet  engine  (the
"JETCRUZER  450").  The Company intends to modify the JETCRUZER 450 to develop a
six-seat (including pilot),  pressurized version of such aircraft for commercial
sale (the "JETCRUZER 500") which, the Company anticipates, will takeoff and land
in less than 1,000 feet, be able to fly at  approximately  30,000 feet above sea
level,  and have a high  cruise  speed of  approximately  350 mph and a range of
approximately 1,600 miles.

     The Company began development of the JETCRUZER 450 in 1990 and obtained the
Type Certificate in 1994.  Throughout this period, the Company engaged in design
and  engineering  of the aircraft,  as well as  production  of the jigs,  forms,
tools,  dies and molds  necessary to  manufacture  the  aircraft.  The first FAA
conformed  JETCRUZER  450 was  completed in 1992.  This aircraft was used by the
Company  and the FAA to perform  static  (nonflight)  testing.  In late 1992 and
1993, two flight test aircraft were completed. These aircraft were flight tested
by the Company and the FAA from 1992 through 1994. The Company received the Type
Certificate for the JETCRUZER 450 on June 14, 1994.

     Although the Company received  preliminary  written indications of interest
to purchase  the  aircraft,  the  Company has decided  that it will not obtain a
production  certificate  with regard to the  JETCRUZER  450 or otherwise  pursue
commercialization  of that  aircraft  in part  because the Type  Certificate  is
subject to certain  limitations which the Company believes reduce the commercial
viability of the JETCRUZER  450.  Instead,  the Company has decided to amend the
Type  Certificate to develop the JETCRUZER 500 for commercial  sale,  which is a
modified  version of the JETCRUZER 450 that the Company  anticipates will not be
subject to the limitations imposed by the existing Type Certificate.

     Based on the limited  scope of the changes to be made to the  JETCRUZER 450
and the  experience  of other  manufacturers  that  have  modified  certificated
aircraft,  the  Company  believes  it will need to amend  its Type  Certificate,
rather than obtain a new type  certificate,  to develop  the  JETCRUZER  500 for
commercial  sale.  The  Company  currently  anticipates  that it can  obtain  an
amendment  to its Type  Certificate  within  approximately  the 14 to 20  months
following  the date of this  Report  and  obtain a  production  certificate  and
commence  commercial  production  of such  aircraft  within the same time frame.
There can be no assurance,  however,  that obtaining the amendment will not take
longer that  anticipated,  that the Company will not be required to obtain a new
type  certificate for the JETCRUZER 500, or that the Company will not experience
unforeseen  expense or delay in  certifying  and  commercializing  its  proposed
aircraft.

Industry Background

     The  general  aviation  industry  comprises   essentially  all  nonmilitary
aviation activity other than scheduled and charter commercial  airlines licensed
by the FAA and the Department of  Transportation.  General aviation aircraft are
frequently  classified by their type and number of engines and include  aircraft
with fewer than 20 seats.  There are three different  types of engines:  piston,
propjet and turbofan (jet). Piston aircraft use an internal combustion engine to
drive a  propeller.  There may be one or two  engines  and  propellers.  Propjet
aircraft  combine a jet turbine  powerplant with a propeller  geared to the main
shaft of the turbine.  There may be one or two engines and propellers.  Turbofan
aircraft use jet  propulsion  to power the  aircraft.  There are  generally  two
engines on general aviation turbofan aircraft, although there may also be one or
three.

     Purchasers of general  aviation  aircraft  include (i)  corporations,  (ii)
governments,  (iii) the  military,  (iv) the general  public and (v)  fractional
interest  entities.  A corporation may purchase a general aviation  aircraft for
transporting its employees and property. Many companies use an aircraft in their
line of business,  including on-demand air taxi services, air ambulance services
and freight and delivery services. Governments and military organizations may

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purchase an aircraft for the transportation of personnel, freight and equipment.
Members of the  general  public may  purchase an aircraft  for  personal  and/or
business  transportation and pleasure use. Fractional interest entities purchase
one or more aircraft and then sell interests in each aircraft to several persons
or entities.  Each entity pays for its share of maintenance  and operating costs
and its access to and use of the  aircraft.  Increased  corporate  earnings  may
encourage  corporations  to acquire an aircraft.  An aircraft must qualify under
FAA regulations in order to be used for certain purposes,  and the ability of an
aircraft to so qualify will have a material  affect on the potential  market for
such aircraft.

     Currently, there are fewer than ten major manufacturers of general aviation
aircraft  based in the United  States.  Piston  aircraft  make up the  numerical
majority of aircraft delivered by these manufacturers,  whereas propjets and jet
aircraft account for the majority of billings. In 1996, approximately 600 piston
aircraft,  approximately  289 propjets,  and approximately 243 jet aircraft were
delivered, generating total billings of approximately $3.1 billion.

     Total  shipments of general  aviation  aircraft  manufactured in the United
States reached a peak in 1978, when approximately  18,000 aircraft were shipped.
The number of units delivered annually has decreased since that time as a result
of a number of factors,  such as the cost of aviation fuel, high interest rates,
inflation and, most importantly, an increase in negligence and product liability
claims  arising from accidents  involving  small,  personal/recreational  piston
aircraft  and a  resulting  increase  in the price of  manufacturer's  liability
insurance. Since 1986, the number of units delivered per year from United States
manufacturers  has not  exceeded  1,500,  and fewer  than  1,000  aircraft  were
delivered from United States manufacturers in each of 1992, 1993 and 1994.

     Although the total number of general aviation aircraft  manufactured in the
United States declined from 1978 to 1994,  deliveries of more expensive  propjet
and jet aircraft  manufactured  in the United States  increased,  resulting in a
less  substantial  decline in the total  dollar  value of  shipments of aircraft
during such period and a substantial  increase in the average price of each such
aircraft  delivered from 1978 through 1994.  Deliveries of more costly corporate
aircraft  powered by propjet or jet engines were  affected to a lesser extent by
the liability and insurance coverage problems encountered by piston aircraft. In
addition,   on  August  17,  1994,   Congress   enacted  the  General   Aviation
Revitalization  Act of 1994  ("GARA").  The GARA  imposes an 18-year  statute of
limitations on product  liability suits  involving  airplane  manufacturers  and
suppliers. Although product liability suits will not disappear, nor is it likely
that settlements will be smaller,  the Company believes that the reduction to 18
years of an original  equipment  manufacturer's  exposure to lawsuits  may lower
insurance costs for the industry which may result in increased sales of aircraft
and a corresponding increase in the number of licensed pilots.  Shipments of all
types of general aviation  aircraft  manufactured in the United States increased
from 1,077 units in 1995 to 1,132 units in 1996.

Strategy

     The Company's  objective is to become a worldwide market leader in the sale
of small business  aircraft.  To achieve this objective,  the Company intends to
focus on the performance,  efficiency and safety of its proposed  aircraft.  The
Company's  strategy  is  to  capitalize  on a  perceived  current  lack  in  the
marketplace of low-priced,  high-performance aircraft. The Company believes that
its ability to offer an aircraft  which  outperforms  competitive  aircraft at a
reduced  cost will enable the Company to  penetrate  the  business,  private and
government  aircraft  markets.  Additionally,  the  Company  intends  to  expend
substantial  resources on a worldwide  sales and  marketing  program to position
itself with potential customers.

     The Company  believes  that  aircraft  sales are heavily  dependent  on the
quality and safety of a company's products.  Accordingly, the Company intends to
maintain  high  quality  and safety  standards  in all aspects of the design and
manufacture of its proposed  aircraft.  For example,  the Company  believes that
certain design features of the JETCRUZER 500, such as the canard wing, will make
the  aircraft  spin  resistant  and that the absence of wing flaps will make the
operation of the aircraft  less  susceptible  to pilot error.  In addition,  the
Company believes that the reliability of the Company's component suppliers, such
as Pratt & Whitney, will be viewed favorably by potential customers.

     The  Company  believes  that  it  will  be  able  to  offer  aircraft  at a
comparatively  low price by containing the costs of obtaining FAA  certification
and amendments to such certification as well as the costs of manufacturing. The

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<PAGE>

Company  believes  that it was  able to  obtain  its  Type  Certificate  for the
JETCRUZER 450 at a significantly  lower cost than its competitors with regard to
comparable  aircraft due, in part, to the Company's  smaller size as compared to
its competitors,  resulting in the Company's  ability to contain  administrative
costs  and  the  overhead  expenses   allocable  to  the  development   process.
Additionally,  the Company's Southern California location is home to a number of
workers from recently downsized defense and aerospace  companies who the Company
was able to hire to assist in the  certification  of the  JETCRUZER  450.  These
employees provided the Company with experience in testing,  certifying, tool and
jig manufacturing and other aspects of the certification  process that would not
otherwise have been available to the Company.  The Company  expects that many of
these key employees  will return to the Company as  development of the JETCRUZER
500 proceeds.

     The Company believes that it will be able to control manufacturing costs by
producing most of the tooling, jigs, dies and molds required for the manufacture
of its aircraft  in-house.  Also,  because the Company will produce the airframe
and most of the  associated  components of its aircraft  in-house,  it will have
greater control over the production process;  and the Company believes that this
control  will also help keep  construction  and  certification  costs at reduced
levels.

Proposed Aircraft

     General.  The Company's proposed aircraft are based on a canard wing design
in which a smaller wing (the  "canard") is installed in front of the  aircraft's
main wing. The Company  believes that this design  provides for improved  safety
margins and  performance,  including  spin  resistance  and increased  lift, and
increased ride comfort as compared to more conventional aircraft designs.

     The Company believes that the JETCRUZER  provides increased safety margins,
in part,  because  it has been  certified  under the latest  safety  regulations
adopted by the FAA. Additionally, the canard design, which provides dual lifting
surfaces,  makes the JETCRUZER  resistant to spins. An airplane may enter a spin
when one main wing stalls (i.e.  stops  producing lift) before the other. On the
JETCRUZER,  the  canard  wing will  stall  before  the main rear  wing,  thereby
automatically  lowering the aircraft's  nose and  increasing its airspeed,  thus
preventing  a stall of  either  of the main  wings.  Since  the main wing of the
JETCRUZER does not stall, it does not lose lift on one side before the other and
thus the aircraft is resistant to spins.  The JETCRUZER  has  increased  lift in
part because the graphite  composite fuselage of the JETCRUZER is lighter than a
fuselage made of aluminum, as is used by most of the Company's competitors,  and
the canard wing design  provides an  additional  lifting  surface as compared to
conventional aircraft. Generally, lighter weight and additional lifting surfaces
result in greater lifting  capacity.  Increased lift can provide  increased fuel
efficiency and thus increased range.

     Management   also  believes  that  the  Company's   aircraft  will  provide
performance  advantages over  competitors'  models,  including  better stall and
handling  characteristics,  increased  speed,  greater fuel efficiency and lower
operating  expenses.  Based on the reports of its test pilots,  the Company also
believes that the JETCRUZER provides increased ride comfort, and a quieter ride,
than aircraft of a  conventional  design.  The JETCRUZER  will not require pilot
licensing beyond that required for other single-engine propjet aircraft.

     The  fuselage  of  each  aircraft  will be  made  of an  advanced  graphite
composite/nomex honeycomb sandwich with embedded aluminum and copper screen mesh
for lightning  protection,  which is processed in the Company's (30 foot long by
10  foot  diameter)  nitrogen-pressurized  autoclave.  The  canard  wing  on the
JETCRUZER will be constructed of aircraft  aluminum;  and the canard wing on the
STRATOCRUZER, if that aircraft is developed, will be constructed of the graphite
composite.  The main rear wing and the ailerons of all of the  aircraft  will be
constructed of aircraft aluminum skin and spar and rib  construction.  Flaps are
not required on the JETCRUZER  because of the design and high lift  capabilities
of the canard and the main wing.  The  engine  and  propeller  of the  Company's
JETCRUZER  aircraft  are  located at the rear of the  fuselage,  thus  providing
passengers with a quieter ride.

     JETCRUZER  (TM)500.  The  JETCRUZER  500  is  intended  to  be  a  six-seat
(including pilot),  high performance  single engine propjet with  conventionally
constructed wings made from aluminum attached to a fuselage formed from

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a high-strength  graphite nomex honeycomb  composite  material.  The aircraft is
intended to have a canard configuration with two lift-producing  surfaces and no
conventional  wing flaps. The JETCRUZER 500 will be powered by a Pratt & Whitney
PT6A-64 propjet engine located at the rear of the aircraft. The JETCRUZER 500 is
intended to be a modified version of the JETCRUZER 450.

     In June  1994,  the FAA  awarded  the  Company a Type  Certificate  for the
JETCRUZER 450, which is a non-pressurized  propjet aircraft powered by a smaller
Pratt & Whitney engine.  However, the Type Certificate is subject to a number of
FAA limitations  which were imposed as a result of the aircraft's early stage of
development.  For example,  the maximum number of occupants is presently limited
to five, as compared to the six passenger (including pilot) design configuration
of the JETCRUZER 500, and the maximum  operating  speed is presently  limited to
178 mph, as compared to the  approximately 350 mph design speed of the JETCRUZER
500.  The  Company  intends  to  amend  the Type  Certificate  to  remove  these
limitations  in the  course of  further  development  and  certification  of the
JETCRUZER 500.

     In order to amend  the Type  Certificate  to  include  the  JETCRUZER  500,
additional  work  remains  to be  performed  on the  aircraft  by  the  Company,
including  adding  a larger  fuselage,  pressurization,  environmental  systems,
de-icing capability,  test retractable landing gear and autopilot certification,
all of which will be necessary to produce the JETCRUZER 500 for commercial sale.
The  Company  currently   anticipates   obtaining  the  amendment  to  its  Type
Certificate  within  approximately  the next 14 to 20 months.  The  Company  has
submitted  its  application  for  amendment  to the FAA.  The FAA has assigned a
project manager to the Company, and the Company has scheduled a meeting with the
FAA to set an anticipated  schedule for the amendment  process.  There can be no
assurance,  however,  that obtaining such an amendment will not take longer than
anticipated,  that  any of the FAA  limitations  will be  removed  or that  such
removal will not, in the FAA's  judgment,  necessitate  a new type  certificate,
thereby causing unforeseen expense and delay in certifying the JETCRUZER 500.

     Although no assurance can be given as to the performance characteristics of
any aircraft in its design phase, based on the performance of the JETCRUZER 450,
the Company believes that the JETCRUZER 500 will carry six passengers (including
pilot)  and have a cruise  speed of  approximately  350 mph.  The  Company  also
believes that such aircraft should be able to climb at approximately  2,600 feet
per minute,  cruise at an altitude of approximately 30,000 feet above sea level,
have a range of approximately 1,600 miles and takeoff and land in less than 1000
feet.  The  interior  of the  aircraft  will be  built  either  to a  customer's
specifications   or  in   accordance   with  one  of  the   Company's   standard
configurations.  These statistics reflect the overall anticipated performance of
the JETCRUZER 500. However, interior configuration,  optional equipment, weather
conditions  and flying  weight  will  affect the  performance  of an  individual
aircraft.

     Although there can be no assurance,  the Company currently anticipates that
the  JETCRUZER  500 will be available for  commercial  sale  initially at a base
price of  approximately  $1,300,000.  However,  since  the  Company  has not yet
completed  development  of the  JETCRUZER  500 and has  not  yet  established  a
facility  for  manufacturing  it on a  commercial  scale,  both of which  may be
subject to  unforeseen  delays,  the date on which the JETCRUZER 500 is actually
available for sale and its initial base purchase price could change materially.

     The  Company  has made only  limited  test  marketing  attempts to sell its
aircraft.  Notwithstanding these limitations, the Company has received more than
30 written  indications  of interest to purchase the JETCRUZER  500.  Generally,
written  indications  of interest are supported by a $10,000  deposit.  However,
each such  deposit is  refundable  at the request of the  purchaser  at any time
until the commencement of construction of the purchaser's  particular  aircraft.
Accordingly,  there can be no assurance  that any such  indications  of interest
will lead to the sale of an aircraft.

Other Proposed Aircraft

     JETCRUZER  (TM)650.  The Company currently intends to develop the JETCRUZER
650. This aircraft will be based on the JETCRUZER  450/500  design and will have
the same engine and components as the JETCRUZER 500. However,  it is intended to
have a longer  fuselage which will  accommodate up to twelve  passengers  plus a
pilot. To

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produce  the  JETCRUZER  650,  the  Company  will need  either to amend its Type
Certificate or obtain a new type certificate, as determined by the FAA.

     The Company  anticipates that the cruise speed of the JETCRUZER 650 will be
approximately  300 miles per hour, that it will takeoff in  approximately  1,800
feet, climb at a rate of 1,200 to 1,600 feet per minute and have a maximum range
of approximately  1,250 miles. The Company currently plans to offer two versions
of the JETCRUZER 650: a pressurized  corporate and on-demand  charter  passenger
aircraft,  which will  cruise at  approximately  30,000 feet above sea level and
have a maximum  passenger  seating  capacity  of twelve,  and a  non-pressurized
version  for use as a  utility/freight  aircraft  which  will  cruise at a lower
altitude than the pressurized version.

     Although it incorporates certain components and systems approved as part of
the JETCRUZER 450  certification  process,  the JETCRUZER 650 is in a very early
stage of engineering  and design,  and the completion of the  development of the
JETCRUZER 650 and the  certification  of such aircraft will require  substantial
capital  resources in addition to those the Company  currently has. There can be
no assurance  that the Company will obtain the  resources  necessary to continue
the  development  of the  JETCRUZER 650 or, if such  resources are obtained,  to
successfully  develop and certify the JETCRUZER 650.  Further,  the Company will
not continue  development of the JETCRUZER 650 until it has solicited orders for
the  aircraft  and  obtained  adequate  indications  of  interest to justify the
completion  of  its  design,   prototyping,   and  static  and  flight  testing.
Accordingly, the Company cannot predict when, if ever, the JETCRUZER 650 will be
available for commercial sale.

     STRATOCRUZER  (R)1250. The Company also currently intends to develop a twin
engine jet aircraft to be called the  STRATOCRUZER  1250. The  STRATOCRUZER,  if
developed,  is  expected  to be a canard  aircraft  with three  flying  surfaces
powered by two Williams/Rolls  Royce FJ44-2 fanjets.  It will be able to seat up
to 12 passengers,  plus the pilot. Based on its design and preliminary  testing,
it is  anticipated  that the  STRATOCRUZER  will have a maximum  cruise speed of
approximately  500 mph, a range of  approximately  3,700 miles and a pressurized
ceiling of approximately  42,000 feet. The STRATOCRUZER  will be able to takeoff
in less than 3,200 feet and land in less than 3,000 feet. The instrumentation of
the STRATOCRUZER will consist of digital electronic avionics, including EFIS (an
Electronic Flight Instrumentation System, which includes color monitors on which
flight instrument data, weather radar, maps and other navigation information are
available) and GPS (Global Positioning System) navigation.  The aircraft will be
of  lightweight  construction.  The  Company  believes  that the  STRATOCRUZER's
comparatively  light weight,  combined with, among other things,  its additional
lifting surfaces,  fuel efficient engines and aerodynamic  design, will give the
STRATOCRUZER superior range and fuel efficiency compared to other twin jets. The
Company  will  be  required  to  obtain  a new  FAA  type  certificate  for  the
STRATOCRUZER.

     The  STRATOCRUZER  is  in a  very  early  stage  of  development,  and  the
completion of such development will also require  substantial  capital resources
beyond those the Company  currently  has.  Therefore,  there can be no assurance
that the Company will obtain the resources necessary to continue the development
of the STRATOCRUZER or, if such resources are obtained, successfully develop and
certify the STRATOCRUZER. Accordingly, the Company cannot predict when, if ever,
the STRATOCRUZER will be available for commercial sale.

Manufacturing

     The Company has  designed and  produced or procured  most of the  equipment
necessary for  production  of the  JETCRUZER 450 and has used that  equipment to
certify the  aircraft.  The Company is in the process of obtaining and producing
additional sets of the equipment  necessary for production of the JETCRUZER 500.
The Company intends to produce in-house nearly all of the tooling  necessary for
the  production of its aircraft,  from master models to major jigs and fixtures.
The Company believes it achieves cost savings by  manufacturing  tooling itself.
Additionally,  nearly  all  airframe  assemblies  and parts are  intended  to be
produced in-house,  except for special tasks such as hydroforming,  spar milling
and painting.  The  manufacturing  process for the Company's  aircraft is highly
technical and requires  skilled  assembly  technicians.  The Company  intends to
rehire a number of employees who assisted the Company in the  development of the
JETCRUZER 450 as well as a number of additional employees. However, no assurance
can be

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given that former  employees of the Company or other personnel with the required
skills will in fact be available to the Company.

     The equipment and procedures used by the Company for manufacturing  must be
certified, and are subject to inspection and continuing oversight by the FAA.

     The  Company  has  a  complete  in-house   computer  design  system,   with
interactive,  computer-aided design ("CAD") capabilities.  The Company maintains
an Aircraft Quality Control System ("AQCS") designed to meet the requirements of
the military, the National Aeronautics and Space Administration ("NASA") and the
FAA.  An AQCS is a  system  mandated  and  approved  by the  FAA to  assure  the
integrity and traceability of aircraft  components,  parts,  and systems.  It is
required  as a  condition  to  obtaining  a type  certificate  and a  production
certificate.  All of the Company's  precision  tools and gauges are certified by
the National Bureau of Standards.

     The Company intends to manufacture the advanced graphite composite fuselage
structure   used   in  the   construction   of   its   aircraft   in   its   own
computer-controlled, nitrogen-pressurized autoclave. Although not operational at
this  time,  the  autoclave  was  purchased  new in  1990  and  was  used in the
construction of the certification aircraft. It can achieve temperatures of up to
650 degrees  Fahrenheit and pressure of 150 pounds per square inch. The graphite
material  is very strong and  lightweight  and in the course of  certifying  the
JETCRUZER  450,  the Company  believes it has  demonstrated  to the FAA that the
graphite  material  meets or exceeds all  standards  set by the FAA for aircraft
construction  material.  Use of the graphite composite  material  simplifies the
manufacturing  process, as opposed to metal construction,  because it eliminates
most riveting, which is a labor intensive,  time consuming process. The graphite
sections are bonded together through a process which provides  strength equal to
or greater  than  riveting.  The metal wings of the aircraft are attached to the
composite portions of the airframe through a manufacturing  technique  developed
by the Company.

Marketing, Distribution and Service

     Marketing and  Distribution.  To date,  the Company has  conducted  limited
marketing   activity   through   advertisements   and  news  releases  in  trade
publications.  The Company is  developing  an in-house  sales  organization  and
intends to market  its  aircraft  in a number of  different  territories  in the
United States and abroad through trade  publications,  aircraft trade shows, and
independent distributors and agents.

     The Company's  efforts will emphasize  aircraft trade shows,  from which it
believes a significant  amount of new aircraft sales are generated.  The Company
intends to  participate  in,  among  others,  the Paris Air Show,  the  National
Business  Aircraft  Association  USA  Show  and the  Singapore  Aerospace  Show.
Management  believes  that,  in addition to sales  generated  directly from such
events,  participation in trade shows will help introduce the Company's aircraft
to  other  potential  purchasers  and help  increase  overall  awareness  of the
Company's products. The Company also intends to promote general knowledge of the
Company's   products  by  issuing  press  releases  to  aviation  magazines  and
newspapers.  The  Company  will also use paid  advertising  in trade  magazines,
general  interest  flying  magazines  and  international  business  magazines to
promote its products.

     Management  anticipates that most of the Company's aircraft will be sold to
corporations for transportation of their personnel, guests and company property.
The  Company  intends  to  develop  direct  marketing  programs  to target  such
corporations.  The Company believes that its aircraft will also be attractive to
customers other than  corporations  and intends to address these markets.  These
markets  include  current owners of single and twin engine  aircraft who operate
their  own  aircraft  for  business  purposes,  governmental  entities  that use
aircraft for  surveillance or mapping  photography,  forest fire detection,  and
other  purposes,  and  fractional use entities who purchase one or more aircraft
and sell interests in each aircraft to several persons or entities.  The Company
believes that the relatively low purchase price, performance, safety and cost of
operations of its aircraft will make them attractive to such  purchasers.  Other
potential  specialty  markets may include  air  freight and  delivery  services,
on-demand air taxi services and/or charter and air ambulance use.

                                       6

<PAGE>

     The  Company  intends  to  provide  assistance  to  customers  who  require
financing  to complete the  purchase of an aircraft  from the Company.  Overseas
sales may be financed  through the United States  Export/Import  Bank  ("EXIM"),
which may provide loans to qualified  overseas  customers,  and several domestic
banks,  of which at least one provides  20-year  loans for  corporate  aircraft.
Additionally,  EXIM may provide  low-cost  working  capital loans to the Company
upon the receipt of evidence of export sales commitments.

     Service.  The Company's  aircraft will be serviced  primarily by fixed base
operations ("FBO's")  authorized by the Company.  FBO's are established aircraft
maintenance  companies  located at airports  throughout  the world which service
general   aviation   aircraft   produced  by   virtually   all  major   aircraft
manufacturers.  If and when customers in a particular region or country begin to
acquire aircraft  manufactured by the Company,  an appropriate FBO for that area
will be identified  and  authorized by the Company after  consultation  with the
agent and/or  distributor for that area. The Company will provide training and a
service  manual to the employees of its  authorized  FBO's.  Required  parts and
repair materials will be air freighted to the FBO's as required. Maintenance and
repair of major systems included in the Company's aircraft,  such as engines and
avionics, will be provided by the manufacturers of those systems.

Suppliers

     The  Company  will rely on  certain  suppliers  of  products  necessary  to
manufacture its aircraft, including a number of different suppliers of materials
and components. In particular,  the engines and the avionics will be provided by
outside  manufacturers.  These  suppliers  also produce  equipment  for aircraft
manufacturers  other  than  the  Company.  Engines  for  the  JETCRUZER  will be
manufactured by Pratt & Whitney. Engines for the STRATOCRUZER,  if that aircraft
is developed,  will be manufactured by Williams/Rolls  Royce. The Company has no
contractual right to obtain any specified number of engines from Pratt & Whitney
or any other manufacturer.  Should the Company's ability to obtain the requisite
number of engines be limited for any lengthy  period of time or the cost of such
engines  increase,  the Company's  ability to produce and sell aircraft could be
materially and adversely affected.  In addition,  the failure of other suppliers
or  subcontractors  to meet the Company's  performance  specifications,  quality
standards  or delivery  standards  or  schedules  could have a material  adverse
effect  on  the  Company's  operations.   Moreover,  the  Company's  ability  to
significantly  increase its production  rate following the  introduction  of the
JETCRUZER  500  could  be  limited  by the  ability  or  willingness  of its key
suppliers to increase their delivery rates.

Competition

     The  JETCRUZER  500 will compete  against  several other types of aircraft,
including  new and used single and  multi-engine  propjets and  high-end  piston
powered aircraft.  Management  believes that competition will be based primarily
on the aircraft's price,  performance and operating cost. Single engine propjets
have only recently come into use in the general aviation industry, and there are
not many competitors in this category.  Twin engine propjets are far more common
and vary significantly in size.

     The following table lists the number of seats (including pilot),  estimated
price and high cruise  speed of the aircraft  which the Company  considers to be
the principal competitors of the JETCRUZER 500.

                                       7
<PAGE>


<TABLE>
                                                                                                     High Cruise
                        NAME AND MODEL                                          Approximate        Speed-Miles Per
       (Number and type of engines noted in parenthesis)          Seats         Base Price               Hour
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>                 <C>


JETCRUZER 500 (1) (Propjet)                                          6          $1,295,000                350
Cessna Caravan 208B(1) (Propjet)                                     9          $1,493,000                210
Socata TBM 700 (1) (Propjet)                                         6          $2,607,000                345
Pilatus PC - 12 (1) (Propjet)                                        10         $2,315,000                310
Raytheon/Beech King Air C-90B (2) (Propjet)                          7          $2,488,000                284
Piper Malibu Mirage (1) (Piston)                                     6          $755,000                  267

</TABLE>

     There are currently only three single engine propjet aircraft on the market
in the  JETCRUZER  500  category:  the Socata TBM 700, the Pilatus PC-12 and the
Cessna  Caravan.  The  TBM  700  is a  pressurized,  single  engine  propjet  of
conventional  design with a Pratt & Whitney engine. It is made in France and has
passenger capacity and performance  similar to the JETCRUZER 500. Its base price
is approximately  $2,607,000.  The Pilatus PC-12 is also a single engine propjet
of conventional  design with a Pratt & Whitney engine. The Pilatus PC-12 is made
in Switzerland, has an airspeed of 310 mph and has a base price of approximately
$2,315,000. The Cessna Caravan 208B has a base price of approximately $1,493,000
and is designed primarily for hauling freight at low altitude. Its high speed is
210 mph, its landing gear does not retract,  and it is not pressurized.  Each of
these  competitive  products  is a standard,  one  lifting-wing  aircraft  built
primarily from aircraft aluminum, rather than graphite.

     Additional  competition  to the JETCRUZER 500 may be provided by the Malibu
Mirage.  The Malibu Mirage is a single engine piston  powered  aircraft,  rather
than a  propjet.  It is  manufactured  in the  United  States  by The New  Piper
Aircraft  Corp.  It has an  airspeed  of 267  miles  per  hour  and a  range  of
approximately  1,200 miles. Its approximate base price is $755,000.  The Company
believes that piston  aircraft  such as the Mirage and propjet  aircraft such as
the  JETCRUZER  500  compete  for  different   customers  based  on  performance
(particularly speed) and reliability. However, the price differential may induce
certain purchasers to select the lower-priced piston aircraft.

     The Company  believes  that the JETCRUZER  500, and the proposed  JETCRUZER
650, if developed, may compete with and compare favorably to various twin engine
propjets,  such as the King Air C-90B,  in airspeed and  passenger  seating at a
significantly  lower purchase price and operating  cost. The King Air C-90B is a
twin engine propjet of  conventional  design which is manufactured in the United
States  by  Raytheon   Aircraft  Co.   (Beechcraft).   It  has  an  airspeed  of
approximately 284 miles per hour and has seven seats. Its approximate base price
is  $2,488,000.  However,  certain  customers  may be  reluctant  to  purchase a
single-engine  aircraft due to the  perception of additional  safety  associated
with  twin-engine  aircraft.   Additionally,   single-engine  aircraft  are  not
permitted by FAA regulations to be used for commercial passenger  revenue-paying
flights  (whether  on-demand  charter or scheduled)  in  instrument  conditions.
However,  single  engine  aircraft  may  currently  be used  for  revenue-paying
on-demand charter and scheduled flights under VFR (visual flight rules) provided
the  pilot  and  the  aircraft  meet  certain  FAA  certification,  proficiency,
maintenance and additional equipment and airworthiness requirements.

     Most of the Company's competitors are substantially larger in size and have
far  greater  financial,  technical,  marketing,  and other  resources  than the
Company.  Certain of the  Company's  actual and potential  competitors  may have
technological  capabilities,  or other resources that would allow them to modify
existing  aircraft or develop  alternative new aircraft which could compete with
the Company's aircraft.  Therefore, there can be no assurance that the Company's
ability  to  market  its  proposed  aircraft  will not be  materially  adversely
affected by future technological changes or marketing initiatives on the part of
its competitors.

     Additionally,  indirect  competition and potential sales will come from the
used aircraft market,  both propjets and jets, which have sales prices near that
anticipated for the JETCRUZER 500. As the prices of new aircraft have increased,
buyers have turned in greater numbers to the used aircraft market.  The Company,
however,  believes that it may be able to attract purchasers who might otherwise
acquire a used aircraft by emphasizing the price, performance,  technology, fuel
efficiency and operational costs advantages of the Company's aircraft.

     Product Liability and Insurance. The failure of an aircraft manufactured by
the  Company  or any other  mishap  involving  such an  aircraft  may  result in
physical  injury  or death to the  occupants  of the  aircraft  or  others,  and
therefore,  the Company could be subject to lawsuits involving product liability
claims. The Company intends to obtain product liability insurance with regard to
aircraft  purchased  by  customers  commencing  on the  delivery  of  the  first
customer's

                                       8
<PAGE>

aircraft.  However,  such insurance is expensive,  subject to various exclusions
and,  although the product  liability  insurance  for  manufacturers  of general
aviation  aircraft has become  somewhat more  available and less costly over the
last two years,  there can be no assurance  that such coverage will be available
to the Company on acceptable terms or at all. Further, should the Company become
involved in product liability litigation, the expenses and damages awarded could
be large and the scope of any  coverage  may be  inadequate.  In the past it has
obtained  other  insurance as needed,  including  flight test  insurance for the
pilots and aircraft used during the FAA certification process.

Government Regulation

     The  manufacture  of aircraft  is subject to  extensive  regulation  by the
Federal  Aviation  Administration  ("FAA").  Both the  finished  product and the
process of  manufacturing  itself must be certified by the FAA, as must the type
design. Failure to obtain or maintain all required FAA certifications would have
a material adverse effect on the Company's operations.

     Certification.  On June 14, 1994, the Company  obtained a Type  Certificate
from the FAA for the JETCRUZER 450. For an aircraft model to be manufactured for
sale, the FAA must issue a type certificate and production  certificate for that
model;  for an  individual  aircraft  to be  operated,  the FAA  must  issue  an
airworthiness certificate for that aircraft. Type certificates are issued by the
FAA when an aircraft model is determined to meet applicable performance, safety,
environmental, and other technical criteria. In the case of aircraft such as the
Company's which have one or more unconventional design characteristics for which
there are no applicable criteria, such criteria are developed and applied in the
course of the type certification process. More stringent  airworthiness criteria
and additional equipment  requirements become applicable if the aircraft will be
used in commercial passenger operations, whether on-demand charter or scheduled.
Production  certificates are issued by the FAA after it determines that the type
certificate  holder (or its licensee)  has the  facilities  and quality  control
capability to manufacture  aircraft that will meet the design  provisions of the
applicable type certificate.  An airworthiness  certificate is issued by the FAA
for a particular  aircraft when it is certified to have been built in accordance
with  specifications  approved under the type  certificate  for that model;  the
airworthiness  certificate  remains in effect so long as  required  maintenance,
repairs and upkeep are performed.

     The  Company  intends  to amend its Type  Certificate  with  respect to the
JETCRUZER 450 to include the JETCRUZER  500,  although there can be no assurance
that the FAA will not require  application  for a new type  certificate  for the
JETCRUZER  500. In  addition,  the Company  will be required to obtain a further
amendment  to its  Type  Certificate  or a new type  certificate  if and when it
proceeds with  development of the JETCRUZER 650. The Company will be required to
obtain a new type  certificate  if and when it proceeds with  development of the
STRATOCRUZER 1250.

     Obtaining a new or amended FAA type  certificate can be difficult,  costly,
and time consuming.  In either case, the Company must accomplish,  to the extent
deemed  necessary  by  the  FAA,  among  other  things,  (a)  the  filing  of an
appropriate  application with the FAA, (b) development and submission to the FAA
of an  appropriate  design and  substantiating  data and receipt of FAA approval
that such design and data comply with  applicable FAA  airworthiness  standards,
(c)  development  and  receipt  of FAA  approval  of a  flight  test  plan,  (d)
successful  completion of conformity  inspections requested by the FAA from time
to time  to  ensure  compliance  of the  aircraft  with  the  type  design,  (e)
modification  and  reassembly  of an existing  JETCRUZER 450 for use for initial
flight  testing,  (f)  modification  and  reassembly of an  additional  existing
JETCRUZER 450 for flight and static  testing,  (g)  completion of Company flight
tests and receipt of  precertification  approval from the FAA, (h) completion of
additional  flight tests under FAA  supervision,  (i) development and receipt of
FAA approval of an airplane  flight manual,  and (j)  development and receipt of
FAA  approval of  maintenance  and  inspection  requirements  for the  aircraft.
Although the time required to obtain a new or amended type certificate may vary,
the Company  believes  that it can obtain a new or amended  certificate  for the
JETCRUZER  500 within  the 15 to 21 months  following  the date of this  report.
There can be no assurance that the Company will be successful in obtaining a new
type  certificate or amendments to its existing Type Certificate for its planned
aircraft  models,  or,  if  the  Company  is  successful  in  obtaining  a  type
certificate for its planned  aircraft,  that the new or amended type certificate
will not be  subject to  conditions  which may  adversely  affect the use of the
planned aircraft models for their intended purpose or the Company's  operations.
In the event that the FAA determines that a new

                                        9
<PAGE>

type  certificate is required for any of the Company's  planned  aircraft models
(including the JETCRUZER 500), the time and cost of obtaining such certification
may be  substantial,  may render it impossible  for the Company to complete such
certification and may have an adverse effect on the Company's operations.

     The Company will also need to obtain an FAA production  certificate for the
commercial  production  of  its  aircraft.  In  order  to  obtain  a  production
certificate,  the Company  must  commence  production  of an  aircraft  and make
application for the  certificate.  The FAA will regularly  inspect the Company's
facilities  and  procedures  during the  production  process.  When the  initial
aircraft  is nearly  complete,  the Company  must have  submitted  all  required
materials,  including a copy of the applicable quality assurance manual. The FAA
will then review the materials  submitted and the results of its inspections and
will either issue the production  certificate or require that the Company modify
either or both of its quality  assurance  manual or the  manufacturing  process.
While production does not necessarily stop during the review process,  a failure
to  receive a  production  certificate  would  likely  delay  the  manufacturing
process.  The time required to obtain a production  certificate  is identical to
and   concurrent   with   the   time   required   to   manufacture   the   first
commercially-produced  applicable  aircraft;  which the Company believes will be
five to six months in the case of the  JETCRUZER  500.  The  Company  expects to
obtain the production  certificate within the 14 to 20 months following the date
of this report.

     There can be no assurance  that the Company  will not  encounter a delay in
obtaining  a  production   certificate  for  its  planned  aircraft  models,  or
airworthiness certificates for individual aircraft.

     The Company will also be subject to the risk of modification, suspension or
revocation of any FAA certificate it holds. Such  modification,  suspension,  or
revocation could occur if, in the FAA's judgement, compliance with airworthiness
or safety  standards by the Company was in doubt.  If the FAA were to suspend or
revoke the Company's  type or  production  certificates  for an aircraft  model,
sales of that model would be adversely affected or terminated.  If, in the FAA's
judgement,  an unsafe condition developed or was discovered after one or more of
the   Company's   aircraft  had  entered   service,   the  FAA  could  issue  an
"Airworthiness  Directive,"  which could result in a regulatory  obligation upon
the Company to develop  appropriate  design  changes at the  Company's  expense.
Foreign  authorities  could impose  similar  obligations  upon the Company as to
aircraft within their  jurisdiction.  Any or all of the above  occurrences could
expose the Company to substantial additional costs and/or liability.

     Government  Assistance.  The  Company has  negotiated  with local and state
governments  regarding  incentives  for locating the  Company's  facilities in a
certain state or locality,  including facility construction,  tax incentives and
employee  training.  One city in which the Company may locate its facilities has
informed  the  Company  that the city  would  assist the  Company  by  providing
coordinated  permit  processing  and  possibly  matching  funds for  federal job
training  subsidies.  The city has also  informed the Company that the potential
site being  considered by the Company would cause the Company to be eligible for
enterprise zone, state  revitalization  zone and  manufacturers'  investment tax
credits.  If the Company is able to obtain such  assistance  or  financing,  the
Company may be subject to certain  restrictions on its operations,  including an
inability to relocate or to obtain certain types of financing.

     Product  Liability.  In 1994,  the United  States  Congress  passed and the
President signed the General Aviation  Revitalization Act of 1994 ("GARA"). GARA
provides  protection for  manufacturers  of general  aviation  aircraft  against
certain  lawsuits  for  wrongful  death or injuries  resulting  from an aircraft
accident.  Except as set forth in GARA,  and  provided  a period of 18 years has
passed from the date of delivery of the  aircraft to the  original  purchaser or
retailer,  no claim for damages resulting from personal injury or wrongful death
may be brought against the manufacturer of a general aviation aircraft. Although
GARA will not directly  affect the Company until eighteen years from the date it
delivers  its first  aircraft,  management  believes  that GARA will  indirectly
benefit  the  Company   immediately,   in  that  it  may   encourage   increased
manufacturing and sales of general aviation aircraft and this increased activity
may in turn  result  in an  increased  number  of  licensed  pilots.  Management
believes  that a greater  number of  licensed  pilots may  provide an  increased
market for the  Company's  aircraft.  However,  there can be no  assurance  that
Management's view of GARA's effects will prove to be correct.

                                       10

<PAGE>

     Foreign  Certification.  In order for the  Company to sell its  aircraft in
foreign  countries,  it must comply with each country's  aircraft  certification
process.  Certain countries will accept as adequate the certification  issued by
the FAA,  while others impose  additional  requirements.  In countries  which do
require  additional  certification,  the  FAA  certification  often  provides  a
starting point from which such country  begins its  certification  process.  The
Company intends to begin  certification  processes in foreign  countries once it
has received the amendment to the Type Certificate for the JETCRUZER 500 and has
finalized a sale or  distributorship  in that  country.  The Company has not yet
determined which foreign markets it will first address.  Priorities in this area
will be  established  by the levels of  interest  in the  Company's  products of
dealers and distributors in the various foreign markets.

Employees

     As of March 12, 1997 the Company had twenty six  full-time  employees.  The
Company  believes that its relations with its employees are good. The Company is
not a party to any collective bargaining agreement.

ITEM 2.   PROPERTIES.

     The  Company's  executive  offices and research  and limited  manufacturing
facilities  are  located in an  approximately  23,000 sq. ft.  building  on Long
Beach,  California airport property,  pursuant to one year lease which commenced
January 1, 1997, at a monthly rent of $15,000.  The Company intends to establish
a larger facility to enable the Company to expand its manufacturing capabilities
as  soon  as a  suitable  location  is  found.  The  Company  is  currrently  in
negotiations  with the City of Long Beach with  regard to such a  location.  The
Company presently has no other facilities.


ITEM 3.   LEGAL PROCEEDINGS.

     As of March 12, 1997, there were no material  pending legal  proceedings to
which the Company was a party or to which any of its properties were subject.


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

     No matters were submitted to a vote of the security  holders of the Company
during the fourth quarter of 1996.

                                       11
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

     Since December 3, 1996, the Company's  Class A Common Stock has been traded
on the Nasdaq National Market under the symbol "AASI".  The following table sets
forth  the  range of high and low last  sale  prices  per  share for the Class A
Common Stock as quoted on the Nasdaq National Market, for the periods indicated.


                                                    High             Low
                                              ----------------  --------------

Year Ended December 31, 1996
Fourth Quarter (from December 3, 1996)             5-1/4            3-1/2

     At March 26,  1997,  there were  approximately  13 holders of record of the
Company's  Class A Common Stock,  4 holders of record of the  Company's  Class B
Common Stock and Class E-1 Common Stock and 5 holders of record of the Company's
Class E-2 Common Stock. The Company  believes that there are significant  number
of  beneficial  owners  of its Class A Common  Stock  whose  shares  are held in
"street name."

     The Company has not paid cash  dividends  on its Common  Stock and does not
anticipate  that it will do so in the near  future.  The  present  policy of the
Company is to retain earnings to finance the development of its operations.


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS

     Certain  statements   contained  in  this  report,   including   statements
concerning the Company's future cash and financing  requirements,  the Company's
ability to obtain market  acceptance of its aircraft,  the Company's  ability to
obtain  regulatory  approval for its aircraft,  and the  competitive  market for
sales of small business aircraft and other statements contained herein regarding
matters that are not historical  facts, are forward looking  statements;  actual
results  may  differ  materially  from  those set forth in the  forward  looking
statements, which statements involve risks and uncertainties,  including without
limitation   those  rights  and   uncertainties   set  forth  in  the  Company's
Registration  Statement on Form SB-2 (Commission  File No.  333-12273) under the
heading "Risk Factors."

                               PLAN OF OPERATIONS

     The following  discussion and analysis  should be read in conjunction  with
the financial statements and notes thereto appearing elsewhere in this report.

General

     The Company is a development stage enterprise organized to design, develop,
manufacture and market propjet and jet aircraft intended  primarily for business
use. Since its inception,  the Company has been engaged  principally in research
and development of its proposed aircraft.  In January 1990, the Company acquired
the assets of Aerodynamics & Structures,  Inc. ("ASI"), a New Jersey corporation
engaged in the design of an aircraft  prototype,  in exchange for 139,407 shares
of Class B Common Stock,  278,815 shares of Class E-1 Common Stock,  and 278,815
shares of Class E-2 Common Stock. In connection with this exchange,  the Company
assumed  liabilities of ASI in the amount of  approximately  $400,000.  In March
1990,  the Company made  application to the FAA for a Type  Certificate  for the
JETCRUZER  450,  which  Certificate  was  ultimately  granted in June 1994. As a
result,  the Company has not generated  any  operating  revenues to date and has
incurred losses from such  activities.  The Company believes it will continue to
experience  losses  until such time as it  commences  the sale of  aircraft on a
commercial scale.


                                       12
<PAGE>

     Prior to commencing commercial sales, the Company will need to, among other
things,  complete the  development  of the JETCRUZER  500,  obtain the requisite
regulatory  approvals,  establish an appropriate  manufacturing  facility,  hire
additional  engineering  and  manufacturing  personnel  and expand its sales and
marketing efforts.  The Company estimates that the cost to complete  development
of the JETCRUZER 500 and obtain an amendment of its FAA Type Certificate will be
approximately $8,000,000. This amount includes the cost of equipment and tooling
(estimated  at  approximately  $1,500,000),  static  and  flight  testing of the
aircraft  (estimated  at  approximately  $2,500,000)  and the  employment of the
necessary  personnel to build and test the aircraft  (estimated at approximately
$4,000,000).  The Company estimates that the cost of establishing an appropriate
manufacturing facility will be approximately $7,000,000.  The Company intends to
use  $1,100,000  of the proceeds  from the its recent  initial  public  offering
("IPO") for this purpose and to finance the remaining  portion through  mortgage
financing   and/or  other  similar  means.  The  Company  also  intends  to  use
approximately $900,000 of the proceeds of the Offering for sale and marketing of
the aircraft.

     At such time, if ever, as the Company  commences the commercial sale of its
proposed aircraft, the Company will derive a substantial portion of its revenues
from the sale of a relatively  small number of  aircraft.  As a result,  a small
reduction in the number of aircraft  shipped in a quarter  could have a material
adverse effect on the Company's financial position and results of operations for
that  quarter.  The  Company  expects to receive  progress  payments  during the
construction  of aircraft  and final  payments  upon the  delivery of  aircraft.
Therefore, construction or delivery delays near the end of a particular quarter,
due to, for example, shipment reschedulings, delays in the delivery of component
parts or unexpected manufacturing difficulties experienced by the Company, could
cause the  financial  results  of the  quarter to fall  significantly  below the
Company's  expectations  and could materially and adversely affect the Company's
financial position and results of operations for the quarter.

     During the next 14 to 20 months,  the Company  intends to focus its efforts
in the following areas:

     *    To complete the  development  of the JETCRUZER 500,  including,  among
          other things,  adding a larger engine,  pressurization,  environmental
          systems, de-icing capability and autopilot certification.

     *    To  obtain  an  amendment  to its  Type  Certificate  to  include  the
          JETCRUZER 500,  including the  manufacture of FAA conformed  models of
          the JETCRUZER 500 and static and flight testing.

     *    To  establish  an  appropriate   manufacturing   facility  capable  of
          producing  the  JETCRUZER  500 on a commercial  scale,  including  the
          establishment   of  a  production   line  in  such  facility  and  the
          acquisition of production inventory and additional items of equipment,
          tooling and computer hardware and software systems.

     *    To  obtain  a  production   certificate  from  the  FAA  and  commence
          commercial production of the JETCRUZER 500.

     *    To expand its sales and  marketing  staff and increase  its  marketing
          efforts with respect to the JETCRUZER 500.

     *    To increase its engineering, manufacturing and administrative staff in
          anticipation of increased development and production activities.

     The  Company  believes  that the net  proceeds  from its recent IPO will be
sufficient  to finance its plan of  operations  for at least the 14 to 20 months
following the date of this report, based upon the current status of its business
operations,  its current plans and current economic and industry conditions.  If
the Company's estimates prove to be incorrect,  however, then during such period
the Company may have to seek additional  sources of financing,  reduce operating
costs and/or curtail growth plans.


                                       13
<PAGE>

Results of Operations

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
operating amounts and results.

                                                   Period from January 26, 1990
                                                   (inception) to December 31,
                      Years Ended December 31                 1996
                      -----------------------      ----------------------------
                      1995               1996
                     ------------------------

Income                $   27,000   $  133,000             $   880,000
Research and general
and administrative     1,453,000    1,927,000              22,426,000
expenses
Interest expense         262,000      652,000               1,840,000
Extraordinary Loss          --        942,000                 942,000
Net Loss               1,688,000    3,388,000              24,328,000

     The Company has not generated any revenues from operations.  For the period
from inception (January 26, 1990) through December 31, 1996 the Company incurred
a net loss of  $24,328,000,  $1,688,000  and  $3,388,000  of which was  incurred
during the years ended  December 31, 1995 and  December 31, 1996,  respectively.
These losses have resulted  primarily from  expenditures made in connection with
the research and development of the Company's  proposed aircraft and general and
administrative  activities.  During 1996 the Company  incurred an  extraordinary
loss of $942,000, resulting from the retirement of debt at the time of its IPO.

     Research and development  expenses have consisted primarily of the costs of
personnel,  facilities  and  materials  and  equipment  required  to conduct the
Company's  development  activities.  Such expenses  aggregated  $13,636,000 from
inception  through December 31, 1996. Such expenses were incurred to develop the
JETCRUZER 450, to obtain a Type Certificate  with respect thereto,  and to begin
the  design  of the  JETCRUZER  500,  the  JETCRUZER  650 and the  STRATOCRUZER.
Research  and  development  expenses  will  increase  in  1997  as  the  Company
accelerates the development of the JETCRUZER 500 and amends its Type Certificate
with respect thereto.

     General  and   administrative   expenses   have   consisted   primarily  of
administrative  salaries and benefits,  rent, marketing expenses,  insurance and
other administrative  costs. Such expenses aggregated  $7,390,000 from inception
through  December 31, 1996,  $1,453,000 and $1,927,000 of which were incurred in
1995 and 1996, respectively.  General and administrative expenses have increased
since 1995  primarily  due to  increased  compensation  expenses  payable to the
Company's executive officers who were engaged principally in capital raising and
marketing activities. Such increases were partially offset by decreases in rent,
insurance,  employee  payroll and other  administrative  costs occasioned by the
Company's  limited  development   activities  during  the  period.  General  and
administrative  expenses are expected to increase  substantially  in 1997 due to
the  addition  of   personnel   and  other   resources   to  support   increased
administrative, marketing, and development activities.

     Interest  expense  has  consisted  primarily  of  interest  expended by the
Company for bank and private financing.  Interest expense aggregated  $1,840,000
from inception  through  December 31, 1996,  $262,000 and $652,000 of which were
incurred in 1995 and 1996, respectively.

     The Company  accounts  for income  taxes in  accordance  with  Statement of
Financial  Accounting  Standards  No. 109,  "Accounting  for Income  Taxes." The
Company  has  incurred  net  losses  in  each  year  since  its   inception  and
consequently has paid no federal or state income taxes.

     At December  31,  1996,  the Company had a federal tax net  operating  loss
carryforward  of  approximately  $22,000,000  which,  if unused,  will expire in
varying  amounts in the years 2004  through  2010 and a state tax net  operating
loss carryforward of approximately  $4,000,000 which, if unused,  will expire in
various amounts in the years 1997 through 2000.

                                       14
<PAGE>

     At December  31,  1996,  the Company  had  federal and state  research  and
development  ("R&D")  credit  carryforwards  of  approximately   $1,356,000  and
$542,000,  respectively. The federal R&D credit carryforwards will expire in the
years  2004  through  2009.  The state R&D credit  carryforwards  can be carried
forward indefinitely. See Note 4 of Notes to Financial Statements.

Liquidity and Capital Resources

     At December 31, 1996, the Company had working  capital of  $26,112,000  and
stockholders'  equity of  $27,798,000.  Since its inception in January 1990, the
Company has experienced  continuing  negative cash flow from operations,  which,
prior to its IPO,  resulted in the Company's  inability to pay certain  existing
liabilities in a timely manner.  The Company has financed its operations through
private fundings of equity and debt and most recently, its IPO.

     Prior to mid-1994, the activities of the Company were financed primarily by
(i) equity  contributions  from Mr.  Song Gen Yeh and  members of his  immediate
family,  who were at that  time  directors  and  principal  stockholders  of the
Company,  in the aggregate  amount of $7,280,000 and (ii) loans in the aggregate
amount of  $10,728,000  from Mr.  Yeh.  The loans  made by Mr.  Yeh were  repaid
through the issuance of 598,011 shares of Class B Common Stock, 1,196,021 shares
of Class E-1 Common Stock, and 1,196,021 shares of Class E-2 Common Stock of the
Company in June 1996. Additionally, in October 1993, the Company received a loan
of $60,000, bearing interest at a rate of 12%, from SIDA Corporation ("SIDA"), a
corporation  then  affiliated  with Dr.  Carl  Chen,  the  President  and  Chief
Executive Officer and a Director of the Company; and, in February and July 1994,
the Company received loans in an aggregate amount of $565,000,  bearing interest
at a rate of 12%, from four individuals who were at the time not affiliated with
the Company.  One of such persons,  C.M. Cheng, became a Director of the Company
in June 1996. These loans were repaid in September 1996 with the proceeds of the
Bridge Financing described below.

     In the second half of 1994, the Company's  expenditures  decreased  because
capital   constraints   required  a  reduction  of  the  Company's   development
activities. The Company's capital requirements during that period were satisfied
primarily by a loan from General Bank in the principal  amount of  approximately
$550,000,  bearing  interest  at the  prime  rate  plus 1 1/2%,  which  loan was
guaranteed by the Small Business  Administration,  the California Export Finance
Office and Dr. Chen and secured by  substantially  all of the Company's  assets.
The Company also received an additional $50,000 loan from SIDA.

     During  1995 and  1996,  the  Company's  capital  requirements  were met by
additional  advances of $350,000  pursuant to the bank loan described  above and
loans by Dr. Chen, bearing interest at a rate of 12%, in the aggregate principal
amount of $562,000.  In June 1996,  $336,000 of indebtedness owed by the Company
to Dr. Chen was converted into 187,118  shares of Class B Common Stock,  374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.

     In September  1996,  the bank loan,  in the aggregate  principal  amount of
$900,000 plus $15,000 in accrued interest, $226,000 of the principal amount owed
to Dr. Chen, together with interest thereon of $36,000,  and the loan from SIDA,
in the aggregate  principal amount of $110,000 plus $31,000 in accrued interest,
were repaid with the proceeds of the Bridge Financing described below.

     In August 1996,  the Company  completed the Bridge  Financing of $7,000,000
principal  amount of Bridge  Notes and  3,500,000  Bridge  Warrants  (which were
automatically converted to Class A Warrants upon completion of the IPO). The net
proceeds of the Bridge Financing were  approximately  $6,195,000 after deducting
commissions and a non-accountable expense allowance aggregating $805,000 paid to
the placement agent and other expenses of the Bridge Financing. The net proceeds
of  the  Bridge  Financing  were  used  to  repay  bank  and  other  outstanding
indebtedness,  loans from officers and directors,  accrued compensation and past
due accounts payable and as working  capital.  The Company used a portion of the
net proceeds of its IPO to repay the Bridge Notes.  Additionally,  in 1996,  the
Company recognized a extraordinary loss of approximately $942,000,  representing
the combined  unamortized  debt  discount and  issuance  costs  arising from the
Bridge Financing, in the quarter in which the Bridge Notes were repaid.

                                       15
<PAGE>

     The Company expects its cash  requirements to increase in the future due to
higher expenses associated with product development,  the scale-up of production
(including  capital  investment in production  equipment),  implementation  of a
sales and  marketing  program,  the hiring of  personnel  and other  anticipated
operating activities. The Company also expects to continue to incur losses until
such time, if ever, as it obtains regulatory  approval for the JETCRUZER 500 and
related production  processes and market acceptance for its proposed aircraft at
selling  prices  and  volumes  which  provide  adequate  gross  profit  to cover
operating costs and generate  positive cash flow. The Company's  working capital
requirements will depend upon numerous factors, including the level of resources
devoted by the Company to the scale-up of manufacturing and the establishment of
sales and marketing  capabilities and the progress of the Company's research and
development program for the JETCRUZER 500 and other proposed aircraft.

     The Company expects that the net proceeds of the IPO will enable it to meet
its liquidity and capital  requirements  for the next 14 to 20 months,  by which
time the Company  expects to have received a type  certificate  and a production
certificate for the JETCRUZER 500 and commenced  commercial  production and sale
of the JETCRUZER  500.  During this period such proceeds will be used  primarily
for  amendment of the Type  Certificate,  the purchase of equipment and tooling,
the  establishment  of a manufacturing  facility,  and sales and marketing.  The
Company's capital requirements are subject to numerous contingencies  associated
with  development  stage  companies.  Specifically,  in the  event  that the FAA
determines that a new type certificate is required, or if delays are encountered
in amending the current Type  Certificate,  the time and cost of obtaining  such
certification  may be  substantial,  may render it impossible for the Company to
complete such new or amended certification and may therefore have a material and
adverse  effect on the Company's  operations.  Further,  following such 14 to 20
month period,  if the Company has not completed the development of the JETCRUZER
500,  received the required  regulatory  approvals  and  successfully  commenced
commercial sales of its aircraft,  the Company may require additional funding to
fully implement its proposed  business plan. The Company has no commitments from
any third parties for any future funding, and there can be no assurance that the
Company  will be able to obtain  financing  in the future from bank  borrowings,
debt or equity financings or other sources on terms acceptable to the Company or
at all. In the event necessary financing were not obtained, the Company would be
materially  and  adversely  affected  and might  have to cease or  substantially
reduce operations.

     The Company had no material  capital  commitments at December 31, 1996. The
Company  intends to hire a number of  additional  employees  and to  establish a
larger  manufacturing  facility,  both of which will require substantial capital
resources.  The Company anticipates that it will hire approximately 25 employees
over the next six months and 150  employees  over the next 20 months,  including
engineers  and  manufacturing  technicians  necessary  to produce its  aircraft.
Additionally,  the  Company  plans to  acquire,  build  and/or  improve a larger
manufacturing  facility.  The  Company  estimates  that the  total  cost of such
facility  will  be  approximately  $7,000,000  and has  allocated  approximately
$1,100,000 to fund a portion of such cost. The Company  anticipates  funding the
remaining  portion of such cost through mortgage  financing and/or other similar
means. There can be no assurance,  however,  that such funding will be available
on terms acceptable to the Company or at all. In the event the Company is unable
to fund fully the costs of the  facility  from such  sources,  it may  utilize a
portion of the proceeds from the Offering  allocated to working capital for such
purpose or it may lease a facility until adequate funds become available.

Charge to Income in the Event of Conversion of Performance Shares

     In the  event  the  Company  attains  certain  earnings  thresholds  or the
Company's Class A Common Stock meets certain minimum bid price levels, the Class
E Common Stock will be  converted  into Class B Common  Stock.  In the event any
such converted Class E Common Stock is held by officers, directors, employees or
consultants,  the maximum  compensation expense recorded for financial reporting
purposes  will be an amount  equal to the fair value of the shares  converted at
the time of such  conversion  which  value  cannot be  predicted  at this  time.
Therefore,  in the event the Company  attains such earnings  thresholds or stock
price levels, the Company will recognize a substantial charge to earnings during
the  period in which  such  conversion  occurs,  which  would have the effect of
increasing the Company's loss or reducing or eliminating  its earnings,  if any,
at that time. In the event the Company does not attain these earnings thresholds
or minimum bid price levels, and no conversion  occurs, no compensation  expense
will be recorded for financial reporting purposes.


                                       16
<PAGE>

ITEM 7.    FINANCIAL STATEMENTS.


                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
                        (A Development Stage Enterprise)

                          INDEX TO FINANCIAL STATEMENTS


                                                                          Page
                                                                         Number

Report of Independent Accountants                                          18
Balance Sheet                                                              19
Statement of Operations                                                    20
Statement of Stockholders' Equity                                          21
Statement of Cash Flows                                                    23
Notes to Financial Statements                                              24

                                       17
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Stockholders of Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)

In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  of stockholders'  equity,  and of cash flows present fairly, in all
material respects, the financial position of Advanced Aerodynamics & Structures,
Inc. (a Development  Stage  Enterprise) at December 31, 1996, and the results of
its operations and its cash flows for the years ended December 31, 1995 and 1996
and for the period from January 26, 1990  (inception)  to December 31, 1996,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.



PRICE WATERHOUSE LLP

Los Angeles, California
March 26,1997


                                       18
<PAGE>

                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                                 Balance Sheet



<TABLE>

                                                           December 31, 1996
                                                           -----------------
<S>                                                        <C>

Assets
Current Assets:
   Cash and cash equivalents                                  $24,222,000
   Marketable securities                                        2,026,000
   Certificate of deposit                                          12,000
   Prepaid expenses and other current assets                      155,000
                                                              ------------
         Total current assets                                  26,415,000
Property and equipment, net (Note 3)                            1,686,000
                                                              ------------
         Total assets                                         $28,101,000
                                                              ------------

Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                               145,000
   Accrued liabilities                                            158,000
                                                              ------------
         Total current liabilities                                303,000
                                                              ------------

Commitments and contingencies (Note 6)
Stockholders' equity (Notes 1, 7 and 8):
   Preferred stock, par value $.0001 per share;
       5,000,000 shares authorized; no shares
       issued and outstanding                                          --
   Class A Common Stock, par value $.0001 per share;
        60,000,000 shares authorized; 6,900,000
        shares issued and outstanding                               1,000
   Class B Common Stock, par value $.0001 per share;
       10,000,000 shares authorized; 2,000,000 shares
       issued and outstanding                                          --
   Class E-1 Common Stock, par value $.0001 per share;
       4,000,000 shares authorized; 4,000,000 shares
       issued and outstanding                                          --
   Class E-2 Common Stock, par value $.0001 per share;
       4,000,000 shares authorized; 4,000,000 shares
       issued and outstanding                                          --

   Warrants to purchase common stock:
       Public Warrants                                            473,000
       Class A Warrants                                        11,290,000
       Class B Warrants                                         4,632,000
   Additional paid-in capital (Note 5)                         35,730,000
   Deficit accumulated during the development stage           (24,328,000)
                                                              ------------
            Total stockholders' equity                         27,798,000
                                                              ------------
            Total liabilities and stockholders' equity        $28,101,000
                                                              ------------

</TABLE>

                 See accompanying notes to financial statements.

                                       19
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                            Statement of Operations



<TABLE>

                                                                                      Period from
                                                                                   January 26, 1990
                                                                                    (inception) to
                                                    Year Ended December 31,           December 31,
                                                   ---------------------------     ------------------
                                                     1995           1996                 1996
<S>                                                <C>            <C>                 <C>

Other income                                       $27,000        $23,000             $710,000
Interest income                                                   110,000              170,000
                                                   -------        --------            ---------
                                                    27,000        133,000              880,000
                                                   -------        --------            ---------
Costs and expenses:
   Research and development costs                                                   13,636,000
   Preoperating costs                                                                  282,000
   General and administrative expenses           1,453,000      1,927,000            7,390,000
   Loss on disposal of assets                                                          357,000
   Interest expense                                262,000        652,000            1,840,000
   In-process research and development acquired                                        761,000
                                                 ---------      ----------          -----------
                                                 1,715,000      2,579,000           24,266,000
                                                 ---------      ----------          -----------
Loss before extraordinary item                  (1,688,000)    (2,446,000)         (23,386,000)
Extraordinary loss on retirement of
   Bridge Notes                                                  (942,000)            (942,000)
                                                ----------      ----------         ------------
         Net loss                              ($1,688,000)    $3,388,000)        ($24,328,000)
                                                ----------      ----------         ------------

Loss per share before extraordinary item             $(.50)         $(.69)
Extraordinary loss per share on retirement
   of Bridge Notes                                      --           (.27)
                                                ----------      ----------
Net loss per share                                   $(.50)         $(.96)
                                                ----------      ----------
Weighted average number of shares outstanding    3,400,000      3,546,000
                                                ----------      ----------

</TABLE>

                 See accompanying notes to financial statements.

                                       20
<PAGE>

                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                       Statement of Stockholders' Equity


<TABLE>
                                                                       Common Stock
                                          ---------------------------------------------------------------------
                        Preferred Stock       Class A          Class B          Class E-1         Class E-2
                        ---------------   ---------------   ---------------   ---------------   ---------------
                        Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount
                     ------------------------------------------------------------------------------------------
<S>                     <C>      <C>      <C>       <C>     <C>      <C>      <C>      <C>      <C>      <C>

Common stock issued                                         418,094  $ --       836,189 $ --   836,189  $ --
Common stock issued in
 exchange for in-
 process research and
 development                                                201,494    --       402,988   --   402,988    --
Imputed interest on
 advances from
 stockholder (Note 5)
Net loss from inception
 to December 31, 1994
                     -----------------------------------------------------------------------------------------

Balance at December
 31, 1994                                                   619,588    --     1,239,177  --  1,239,177     --
Imputed interest on
 advances from
 stockholder (Note 5)
Net loss
                     -----------------------------------------------------------------------------------------

Balance at December
 31, 1995                                                   619,588    --     1,239,177  --  1,239,177     --

Conversion of
 stockholder advances
  (Note 5)                                                  598,011    --     1,196,021  --  1,196,021     --
Conversion of officer
 loans (Note 5)                                             187,118    --       374,236  --    374,236     --
Stock issued in
 consideration for
 services in 1994, 1995,
 and 1996 (Note 6)                                          595,283    --     1,190,566  --  1,190,566     --
Imputed interest on
 advances from
 stockholder (Note 5)
Net proceeds from initial
 public offering of
 Units (Note 8)                          6,000,000 $1,000
Net proceeds from
 exercise of over-
 allotment option
 (Note 8)                                  900,000     --
Warrants issued in
  connection with
  issuance of Bridge
  Notes (Note 8)
Net loss
                     ---------------------------------------------------------------------------------------

Balance at December
  31, 1996                 --     $ --   6,900,000 $1,000 2,000,000 $  --    4,000,000  $ -- 4,000,000  $ --
                     ---------------------------------------------------------------------------------------
</TABLE>

                 See accompanying notes to financial statements.

                                       21


<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                  Statement of Stockholders' Equity (Continued)

<TABLE>
                                                                                           Deficit
                                                                                         Accumulated
                                                                                          During the
                            Public       Class A        Class B          Additional      Development
                           Warrants      Warrants       Warrants       Paid-In Capital      Stage       Total
                           ---------------------------------------------------------------------------------------
<S>                         <C>          <C>            <C>            <C>                <C>           <C>

Common stock issued                                                    $7,500,000                       $7,500,000
Common stock issued in
 exchange for in-
 process research and
 development                                                              361,000                          361,000
Imputed interest on
 advances from
 stockholder (Note 5)                                                     776,000                          776,000
Net loss from inception
 to December 31, 1994                                                                    $(19,252,000) (19,252,000)
                     ----------------------------------------------------------------------------------------------

Balance at December
 31, 1994                                                               8,637,000         (19,252,000) (10,615,000)
Imputed interest on
 advances from
 stockholder (Note 5)                                                      23,000                           23,000
Net loss                                                                                  ( 1,688,000) ( 1,688,000)
                     ----------------------------------------------------------------------------------------------

Balance at December
 31, 1995                                                               8,660,000         (20,940,000) (12,280,000)

Conversion of
 stockholder advances
  (Note 5)                                                             10,728,000                       10,728,000
Conversion of officer
 loans (Note 5)                                                           336,000                          336,000
Stock issued in
 consideration for
 services in 1994, 1995,
 and 1996 (Note 6)                                                      1,507,000                        1,507,000
Imputed interest on
 advances from
 stockholder (Note 5)                                                      11,000                           11,000
Net proceeds from initial
 public offering of
 Units (Note 8)                         $9,583,000     $4,166,000      12,566,000                       26,316,000
Net proceeds from
 exercise of over-
 allotment option
 (Note 8)                                1,707,000        466,000       1,922,000                        4,095,000
Warrants issued in
  connection with
  issuance of Bridge
  Notes (Note 8)          $473,000                                                                         473,000
Net loss                                                                                   ( 3,388,000)( 3,388,000)
                     ---------------------------------------------------------------------------------------------
Balance at December
  31, 1996                $473,000      $11,290,000    $4,632,000     $35,730,000         $(24,328,000)$27,798,000
</TABLE>

                 See accompanying notes to financial statements.

                                       22
<PAGE>

                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                             Statement of Cash Flows


<TABLE>
                                                                                  Period from January 26,
                                                                                   1990 (inception) to
                                                       Year Ended December 31,         December 31,
                                                     --------------------------  --------------------
                                                        1995           1996                1996
                                                      -------------------------- --------------------
<S>                                                    <C>             <C>        <C>

Cash flows from operating activities:
 Net loss                                            $(1,688,000)  $(3,388,000)       $(24,328,000)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation and amortization                         325,000       327,000           1,814,000
   Extraordinary loss on retirement of Bridge Notes                    942,000             942,000
   Noncash stock compensation expense                    367,000       590,000           1,207,000
   Noncash interest expense                                            336,000             336,000
   Loss on disposal of assets                                                              357,000
   Cost of in-process research and development
     acquired                                                                              761,000
   Imputed interest on advances from stockholder          23,000        11,000             810,000
   Changes in assets and liabilities:
       Increase in prepaid expenses and other current
          assets                                                        (5,000)           (155,000)
       (Decrease) increase in accounts payable           (86,000)     (107,000)            145,000
       Increase (decrease) in accrued liabilities        403,000      (403,000)             58,000
       Increase (decrease) in interest payable           150,000      (235,000)
             Net cash used in operating activities      (506,000)   (1,932,000)        (18,053,000)
Cash flows from investing activities:
 Capital expenditures                                                   (6,000)         (3,847,000)
 Proceeds from insurance claims upon loss of aircraft                                       30,000
 Purchase of marketable securities                                  (2,026,000)         (2,026,000)
 Purchase of certificate of deposit                                     (2,000)            (12,000)
     Net cash used in investing activities                          (2,034,000)         (5,855,000)
Cash flows from financing activities:
 Advances from stockholder                                                              10,728,000
 Proceeds from issuance of common stock prior to
    initial public offering                                                              7,500,000
 Net proceeds from initial public offering and exercise
    of over-allotment option                                        30,411,000          30,411,000
 Net proceeds from bridge financing                                  6,195,000           6,195,000
 Repayment of bridge financing                                      (7,000,000)         (7,000,000)
 Repayment of obligation under capital leases            (4,000)       (19,000)            (40,000)
 Proceeds from (repayment of) bank notes                350,000       (900,000)                 --
 Net proceeds from loans from officer                   160,000        176,000             336,000
 Repayment of loans from SIDA Corporation                             (110,000)
 Repayment of other short-term loans                                  (565,000)
    Net cash provided by financing activities           506,000     28,188,000          48,130,000
Net increase in cash and cash equivalents                    --     24,222,000          24,222,000
Cash and cash equivalents at beginning of period             --             --                  --
Cash and cash equivalents at end of period                   --    $24,222,000         $24,222,000
Supplemental cash flow information:
   Cash paid for interest                                             $540,000            $694,000
Supplemental disclosure of noncash investing and
financing activities:
   Stockholder advances converted to common stock                  $10,728,000         $10,728,000
   Loans from officer converted to common stock                       $336,000            $336,000
   Common stock issued for noncash consideration
       and compensation                                             $1,507,000          $1,507,000
   Liabilities assumed from ASI                                                           $400,000
   Common stock issued for in-process research
        and development acquired                                                          $361,000
   Equipment acquired under capital leases                                                 $40,000
   Deposit surrendered as payment for rents due         $80,000                            $80,000

</TABLE>
                 See accompanying notes to financial statements.

                                       23
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements



1.   The Company

     Advanced  Aerodynamics  & Structures,  Inc.  (the  "Company" or "AASI") was
     incorporated  in  California  on January  26,  1990.  The Company is in the
     development stage of designing a multi-purpose light aircraft.  The present
     design of the aircraft is based on Pratt &  Whitney-designed  engines;  the
     Company's  ability  to  manufacture  aircraft  to  its  present  design  is
     dependent on its having access to such engines.

     Upon  formation  of AASI,  an aircraft  prototype  and related  proprietary
     technology were contributed by Aerodynamics and Structures, Inc. ("ASI") in
     exchange for 2,500,764 AASI common shares with a fair value of $250,000. In
     connection with this exchange,  the Company also assumed ASI's  liabilities
     of approximately  $400,000.  Three other individuals  contributed technical
     information  in exchange for 1,113,740 AASI common shares with a fair value
     of $111,000.  Such  technology  and  prototype  acquired  were  immediately
     expensed  as  in-  process  research  and  development.   Finally,  certain
     investors  contributed  $7,500,000 in cash in exchange for 7,500,000 shares
     of convertible preferred stock of AASI. ASI was subsequently liquidated and
     its sole asset,  investment in AASI common shares, was distributed to ASI's
     stockholders.   Upon   reincorporation   of  the  Company,   the  Company's
     aforementioned   common  and   preferred   shares   were   converted   into
     approximately  619,588,  1,239,177 and 1,239,177 shares,  respectively,  of
     Class B,  Class  E-1 and Class  E-2  Common  Stock as part of the July 1996
     recapitalization described below.

     In July 1996,  the Company  reincorporated  by merging  with a newly formed
     corporation  in Delaware (the  "reincorporation").  In connection  with the
     reincorporation,  the Company:  (i) increased the authorized capital of the
     Company to  63,000,000  shares of $.0001 par value common  stock,  of which
     45,000,000 were designated Class A Common Stock, 10,000,000 were designated
     Class B Common Stock,  4,000,000 were designated Class E-1 Common Stock and
     4,000,000  were  designated  Class E-2  Common  Stock  (Note  7);  and (ii)
     authorized  5,000,000  shares of $.0001  par value  preferred  stock.  Each
     issued and  outstanding  share of common and preferred stock at the time of
     the reincorporation was exchanged into approximately .0557 share of Class B
     common  stock,  approximately  .1115  share of Class E-1  common  stock and
     approximately    .1115    share   of   Class   E-2   common    stock   (the
     "recapitalization").  All share and per share data have been  retroactively
     restated to reflect the recapitalization.

     In November 1996, the Company  increased the number of authorized shares of
     Class A Common Stock to 60,000,000.

     The  Company is a  development  stage  enterprise.  On December 3, 1996 the
     Company  successfully  completed  an initial  public  offering  (Note 8) to
     finance the continued development, manufacture and marketing of its product
     to achieve commercial viability.  The net proceeds of the offering were and
     will be used to amend its  Federal  Aviation  Administration  ("FAA")  Type
     Certificate  for  technical  revisions  to its  product,  to  obtain  a FAA
     Production  Certificate for its product, to repay borrowings under a bridge
     loan (Note 8), to expand the  Company's  sales and  marketing  efforts,  to
     establish a new manufacturing facility, and to acquire production materials
     and additional tooling and equipment.

2.   Summary of significant accounting policies

     Research and development costs

     All costs incurred in the design,  testing,  and  certification of aircraft
     being developed by the Company  (including cost of in-process  research and
     development acquired) are expensed as incurred.


                                       24
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements




     Preoperating costs

     Preoperating costs are expensed as incurred.

     Cash equivalents

     Cash equivalents represent short-term,  highly liquid instruments that have
     original  maturities of three months or less and are readily convertible to
     cash. Such investments consist primarily of a money market account and U.S.
     Treasury Bills.  The cost of such  investments  approximates  fair value at
     December 31, 1996.

     Marketable securities and other financial instruments

     Company's   investment   in   marketable   securities   is   classified  as
     "available-for-sale"  and is reported at fair market value.  Any unrealized
     holding   gains  or  losses  are  reported  as  a  separate   component  of
     stockholders'  equity. The Company's investment  strategies consider safety
     of principal,  availability of funds and maximum return on investment.  The
     Company's marketable  securities portfolio at December 31, 1996 consists of
     investments in U.S.  Treasury Bills. The carrying value of these marketable
     securities approximates fair value at December 31, 1996.

     The Company's other  financial  instruments  consist  primarily of cash and
     cash  equivalents,  a certificate of deposit,  accounts payable and accrued
     liabilities. The carrying value of these financial instruments approximates
     fair value due to their short-term nature.

     Property and equipment

     Property and  equipment  are stated at cost and are  depreciated  using the
     straight-line  method  over  their  estimated  useful  lives of five to ten
     years.  Leasehold  improvements  are  amortized  over the  shorter of their
     estimated useful lives or the term of the lease.

     Income taxes

     Income taxes are accounted  for under an asset and liability  approach that
     requires the  recognition  of deferred tax assets and  liabilities  for the
     expected future tax consequences of events that have been recognized in the
     Company's  financial  statements or tax returns.  A valuation  allowance is
     established  to reduce  deferred  tax assets if it is more  likely than not
     that all or some portion of such deferred tax assets will not be realized.

     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
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

     Net loss per share

     The Company's net loss per share was computed based on the weighted average
     number of  shares  of  common  stock  outstanding  during  the years  ended
     December 31, 1995 and 1996 and excludes all outstanding shares of Class E-1

                                       25
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements




     and  Class  E-2  Common  Stock  because  the  conditions  for the  lapse of
     restrictions on such shares have not been satisfied (Note 7).

     Pursuant to Securities and Exchange  Commission Staff  Accounting  Bulletin
     No. 83, certain common stock equivalents issued by the Company from July 1,
     1995 through  September 30, 1996 have been included as  outstanding  in net
     loss per share computations.  Common stock equivalents were not included in
     the net loss per share  computation  subsequent  to  September  30, 1996 as
     their effect on net loss per share is antidilutive.

3.   Property and equipment

     Property and equipment consist of the following:


                                                        December 31, 1996
                                                        -----------------
         Office furniture and equipment                      $129,000
         Machinery and equipment                            3,063,000
                                                        -----------------
                                                            3,192,000
         Accumulated depreciation and amortization         (1,506,000)
                                                        -----------------
                                                           $1,686,000
                                                        -----------------


     Effective  January 1, 1996,  the Company  adopted  Statement  on  Financial
     Accounting  Standards  (SFAS) No. 121,  "Accounting  for the  Impairment of
     Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of'". SFAS No.
     121  establishes  accounting  standards  for the  impairment  of long-lived
     assets  to be  reviewed  for  impairment  whenever  events  or  changes  in
     circumstances  indicate  that the  carrying  amount  of an asset may not be
     recoverable.  In addition,  SFAS No. 121 requires  that certain  long-lived
     assets be reported at the lower of carrying  amount or fair value less cost
     to sell. The adoption of SFAS No. 121 did not have a material impact on the
     Company's financial position, results of operations or liquidity.

4.   Income taxes

     The  temporary  differences  and  carryforwards  which  give  rise  to  the
     Company's net deferred tax assets at December 31, 1996 of  $9,467,000  were
     subject to a full  valuation  allowance  because their  realization  is not
     likely. The primary components of the temporary  differences consist of net
     operating loss and research and development credit carryforwards.

     At December  31,  1996,  the Company  had  Federal tax net  operating  loss
     ("NOL")  carryforwards of approximately  $22 million which will, if unused,
     expire in varying  amounts in the years 2004 through 2010. The Company also
     had California  franchise tax NOL carryforwards of approximately $4 million
     which will, if unused,  expire in various amounts in the years 1997 through
     2000.

     At December 31, 1996, the Company had Federal and  California  research and
     development  ("R&D") credit  carryforwards of approximately  $1,356,000 and
     $542,000, respectively. The Federal R&D credit carryforwards will expire in
     the years 2004 through 2009. The California R&D credit carryforwards can be
     carried forward indefinitely.


                                       26
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements



     Utilization of the net operating loss and tax credit  carryforwards  may be
     subject  to an annual  limitation  if a change in the  Company's  ownership
     should  occur as defined by Section  382 and  Section  383 of the  Internal
     Revenue Code.

     As a result of the Company's  operating losses, no income tax provision has
     been recorded.

5.   Debt and related party transactions

     In 1993 and 1994, the Company obtained loans from SIDA Corporation (Note 6)
     in the aggregate principal amount of $110,000,  bearing interest at 12% per
     annum. These loans,  together with accrued interest of $31,000, were repaid
     from the proceeds of the Bridge Notes (Note 8).

     In 1994, the Company  received loans in the aggregate  principal  amount of
     $565,000, bearing interest at 12% per annum, from four individuals who were
     at the time not affiliated with the Company.  One such individual  became a
     director of the Company in June 1996.  These loans,  together  with accrued
     interest of  $161,000,  were repaid with the  proceeds of the Bridge  Notes
     (Note 8).

     In 1994 and 1995,  the Company  obtained loans from a bank in the aggregate
     principal  amount of  $900,000,  bearing  interest of prime rate plus 1.5%.
     These loans,  together with accrued  interest of $15,000,  were repaid with
     the proceeds of the Bridge Notes (Note 8).

     In 1995 and through  August  1996,  an officer of the Company made loans to
     the Company in the aggregate  principal amount of $562,000 bearing interest
     at 12% per annum.  In May 1996,  $336,000 of such loans were converted into
     187,118 shares of Class B Common Stock and 374,236 shares each of Class E-1
     and Class E-2 Common Stock.  The  remaining  $226,000  principal  amount of
     these loans, together with accrued interest of $36,000, was repaid with the
     proceeds of the Bridge Notes (Note 8).

     On  December  23,  1993,  the  Company  entered  into an  agreement  with a
     stockholder  to convert  the  advances  from such  stockholder  aggregating
     $10,478,000 at that date into 584,074  shares of Class B Common Stock,  and
     1,168,148  shares each of Class E-1 and Class E-2 Common Stock. The Company
     issued  these  shares in June 1996.  Interest  expense was not  recorded on
     these advances subsequent to December 23, 1993 due to the intent to convert
     the advances into stockholders'  equity. In 1994, the stockholder  provided
     additional advances aggregating $250,000,  which were converted into 13,937
     shares of Class B Common  Stock and  27,873  shares  each of Class E- 1 and
     Class E-2 Common  Stock in June 1996.  Based on  prevailing  market  rates,
     imputed  interest of $11,000 in 1996,  $23,000 in 1995 and $810,000 for the
     period  from  January  26, 1990  (inception)  to  December  31, 1996 on the
     advances was charged to expense and credited to additional paid-in capital.

6.   Commitments, contingencies and employment agreements

     In January 1990, the Company entered into a five-year  management  services
     agreement (the "1990 Agreement") with SIDA Corporation, the stockholders of
     which were also  minority  stockholders  of the Company.  During the period
     from  January  26,  1990  (inception)  to December  31,  1996,  the Company
     incurred  $700,000 of service fees (including  $12,000 in 1995) pursuant to
     this  agreement.  Unpaid  service fees of $259,000,  together  with accrued
     interest of $64,000,  were  repaid  from the  proceeds of the Bridge  Notes
     (Note 8).

     In January  1995,  the 1990  Agreement  expired  and was  replaced by a new
     management  services agreement (the "1995 Agreement") entered into with the
     Company's President on December 29, 1994 for an original term of ten years.

                                       27
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements




     The 1995 Agreement  provided for an annual base compensation of $350,000 to
     be paid to the Company's President, a $250,000 signing incentive payable in
     shares  of common  stock  and  additional  common  stock to be  earned  for
     services performed. Base compensation of $300,000 and the signing incentive
     of $250,000 were subsequently converted to shares of Class B, Class E-1 and
     Class E-2 Common Stock as discussed below.

     In May 1996,  the 1995  Agreement  was  terminated  and  renegotiated  (see
     below).  The  following  shares of Class B,  Class E-1 and Class E-2 Common
     Stock were issued to the Company's  President  pursuant to the terms of the
     1995 Agreement and in consideration of the termination thereof:


                                              Class B   Class E-1   Class E-2
                                           -------------------------------------

Consideration for termination
   of the 1995 Agreement                      237,076    474,152     474,152
Partial settlement of $300,000 of accrued
   1995 base compensation                      16,724     33,448      33,448
Signing incentive provided per the
   1995 Agreement                             139,365    278,730     278,730
Shares earned for services performed
   per the 1995 Agreement                     184,658    369,317     369,317


                                      28
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements



     Stock  compensation  cost  of  $367,000  and  $559,000  in 1995  and  1996,
     respectively,  was charged to expense  based on the fair value of the stock
     awarded by reference to an independent appraisal.

     In May 1996,  the Company  entered into an  employment  agreement  with the
     Company's  President,  which replaced the terminated 1995  Agreement.  This
     employment  agreement  extends to April 30, 2004 and provides for an annual
     salary of  $200,000.  If the  employment  agreement  is  terminated  by the
     Company  without  cause,  the  President  may be  entitled to receive up to
     eighteen months' salary as severance payment.

     Also in May 1996,  an officer of the Company was awarded  17,460  shares of
     Class B Common  Stock  and  34,919  shares  each of Class E-1 and Class E-2
     Common  Stock for  services  rendered.  Compensation  cost of  $31,000  was
     charged to expense in 1996 based on the fair value of the stock  awarded by
     reference to an independent appraisal.

     The Company leases its office and warehouse  facility for $15,000 per month
     with a lease term expiring on December 31, 1997.

     In the  ordinary  course of business,  the Company is generally  subject to
     claims, complaints, and legal actions. The Company is not currently a party
     to any material lawsuits.

7.   Stockholders' equity

     Common stock

     The  rights  and  privileges  of holders of Class A, Class B, Class E-1 and
     Class E-2  Common  Stock are  substantially  the same on a  share-for-share
     basis,  except that:  (i) the holder of each  outstanding  share of Class A
     Common  Stock is  entitled  to one vote and the holder of each  outstanding
     share of Class B, Class E-1 and Class E-2 Common  Stock is entitled to five
     votes;  and (ii) Class B Common  Stock  cannot be  transferred  or sold for
     thirteen  months  following  the  effective  date  of  the  initial  public
     offering, after which time the Class B Common Stock may be converted at any
     time at the option of the holder into one share of Class A Common Stock.

     Class E-1 and E-2 Common Stock

     All shares of Class E-1 and Class E-2 Common Stock  ("Performance  Shares")
     are not  transferable  or  assignable  and may be converted  into shares of
     Class B Common Stock in the event income before provision for income taxes,
     exclusive of any extraordinary  earnings or losses, reaches certain targets
     over the next seven  years,  or if the  market  price of the Class A Common
     Stock reaches  specified levels over the next three years.  With respect to
     targeted earnings, Class E-1 Common Stock shares may be converted if pretax
     income exceeds $17.5 million in 1998,  $22.5 million in 1999, $28.5 million
     in 2000,  $36.0 million in 2001, $45.0 million in 2002 and $56.0 million in
     2003.  Class E-2 Common  Stock  shares may be  converted  if pretax  income
     exceeds $21.875 million in 1998,  $28.125 million in 1999,  $35.625 million
     in 2000, $45.0 million in 2001,  $56.25 million in 2002 or $69.5 million in
     2003.  With  respect to market  price  levels,  the Class E-1 Common  Stock
     shares may be converted  if,  commencing  on December 3, 1996 and ending 18
     months  thereafter,  the bid price of the  Company's  Class A Common  Stock
     averages in excess of $14.00 per share for 30 consecutive business days, or
     commencing  18  months  after   December  3,  1996  and  ending  36  months
     thereafter,  the bid price  averages  $18.50  per share for 30  consecutive
     business days. Class E-2 Common Stock shares may be converted if commencing
     at December 3, 1996 and ending 18 months  thereafter,  the bid price of the
     Company's  Class A Common Stock  averages in excess of $18.00 per share for
     30 consecutive business days or commencing 18 months after December 3, 1996
     and ending 36 months thereafter, the bid price averages in excess of $23.00
     for 30 consecutive business days.

                                      29
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements




     All  Performance  Shares that have not been converted by March 31, 2004 may
     be redeemed by the Company for $.01 per share. For accounting purposes, the
     Performance  Shares  are  treated in a manner  similar to a variable  stock
     option award. As a consequence,  a compensation  charge will be recorded in
     an amount equal to the then fair value of any  Performance  Shares that are
     ultimately converted into Class B Common Stock.

     Stock option plan

     In July 1996,  the Company's  Board of Directors  approved the Stock Option
     Plan  (the  "Plan").  The Plan  provides  for the  grant of  incentive  and
     non-qualified  stock  options to certain  employees,  officers,  directors,
     consultants,  and agents of the  Company.  Under the Plan,  the Company may
     grant  options with respect to 500,000  shares of the Class A Common Stock.
     The options are to be granted at not less than fair market  value,  vest in
     equal annual installments over five years and may be exercised for a period
     of one to ten years as determined  by the Board of Directors.  In September
     1996,  options  to  purchase  110,000  shares of Class A Common  Stock were
     granted at an exercise price of $5 per share.

     Effective  January 1, 1996, the Company  adopted SFAS No. 123,  "Accounting
     for  Stock-Based  Compensation."  In accordance with the provisions of SFAS
     No. 123,  the Company  applies  APB Opinion No. 25,  "Accounting  for Stock
     Issued to  Employees,"  and related  interpretations  in accounting for its
     plan  and does  not  recognize  compensation  expense  for its  stock-based
     compensation  plan based on the fair market value method prescribed by SFAS
     No. 123. If the Company had elected to recognize compensation expense based
     upon the fair value at the grant date for awards under this Plan consistent
     with the  methodology  prescribed  by SFAS No. 123, the pro forma impact on
     the Company's 1996 net loss and loss per share would not be material.

     The weighted  average fair value of options  granted  during 1996 for which
     the  exercise  price  equals the  market  price on the grant date was $.73,
     based on the  Black-Scholes  option-pricing  model.  The  weighted  average
     exercise price is $5.00.  No shares were  exercisable at December 31, 1996.
     The weighted average remaining  contractual life of options  outstanding is
     9.67 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  have  no  vesting
     restrictions  and are fully  transferable.  In addition,  option  valuation
     models  require the input of highly  subjective  assumptions  including the
     expected  stock price  volatility.  Because the  Company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options,  and  because  changes in the  subjective  input  assumptions  can
     materially  affect the fair value estimate,  in management's  opinion,  the
     existing models do not necessarily provide a reliable single measure of the
     fair value of employee stock options.



                                      30
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements



     At December 31, 1996,  options to purchase 390,000 shares of Class A Common
     Stock were available for future grants and 110,000 shares of Class A Common
     Stock were  reserved  for the exercise of options.  Transactions  under the
     Plan during the year ended December 31, 1996 are summarized as follows:


                                                              Weighted Average
                                               Shares          Exercise Price
                                        ---------------------------------------
Outstanding at December 31, 1995                   --                     --
Granted                                       110,000                  $5.00
Exercised                                          --                     --
Canceled                                           --                     --
                                        ----------------------------------------
Outstanding at December 31, 1996              110,000                  $5.00
                                        ----------------------------------------




                                      31
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                         Notes to Financial Statements



     On March 4, 1997,  options  to  purchase  310,000  shares of Class A Common
     Stock  were  granted  by  the  Company's  Board  of  Directors  to  certain
     employees,  officers,  consultants, and agents of the Company. The grant is
     subject to obtaining the approval of the  underwriter of the initial public
     offering (Note 8) in accordance with the Underwriting Agreement.

8.   Initial public offering

     On December 3, 1996, the Company  completed an initial  public  offering of
     6,000,000  units (the "Units) at an initial public offering price of $5 per
     Unit.  Each Unit is composed of one share of the  Company's  Class A Common
     Stock,  one Class A Warrant and one Class B Warrant.  The Company  realized
     net proceeds of $26,316,000 from this offering.  Upon exercise, the Class A
     Warrants  entitle the holder to purchase  one share of Class A Common Stock
     and one Class B  Warrant.  Each  Class B  Warrant  entities  the  holder to
     purchase  one share of Class A Common  Stock.  Class A Warrants and Class B
     Warrants  may be  exercised  at an  exercise  price  of  $6.50  and  $8.75,
     respectively,  at anytime until December 3, 2001.  Commencing one year from
     December  3,  1996,  Class A Warrants  are  subject  to  redemption  by the
     Company,  upon 30 days written notice,  at a price of $.05 per Warrant,  if
     the  average  closing  bid  price of the  Class A Common  Stock  for any 30
     consecutive  trading  days  ending  within 15 days of the date on which the
     notice of redemption is given shall have exceeded $12.00 per share. Class B
     Warrants are subject to redemption by the Company  commencing one year from
     December  3,  1996,  upon 30 days  written  notice,  at a price of $.05 per
     Warrant,  if the average  closing bid price of the Class A Common Stock for
     any 30 consecutive  trading days ending within 15 days of the date on which
     the notice of redemption is given shall have exceeded $15.00 per share. For
     purposes of these  financial  statements,  the Class A and Class B Warrants
     have been  valued at their  relative  closing  prices on the first day they
     were traded.

     On December  23,  1996,  the  underwriter  in the initial  public  offering
     exercised its over-allotment option to purchase 900,000 additional Units at
     the initial public offering price of $5 per Unit. resulting in net proceeds
     of $4,095,000 to the Company.

     On August  30,  1996,  the  Company  completed  a private  placement  of an
     aggregate  of  $7,000,000  principal  amount of notes  payable (the "Bridge
     Notes")  bearing  interest  at the  rate of 10%  per  annum  and  3,500,000
     warrants  (the  "Bridge  Warrants")  in which it received  net  proceeds of
     approximately  $6,195,000  (after  expenses of issuance).  The Bridge Notes
     were fully repaid upon the closing of the initial  public  offering and the
     Company  recognized  an  extraordinary  loss on  extinguishment  of debt of
     $942,000.

     Each  Bridge  Warrant  was  converted  on the  closing  date of the  public
     offering into one Class A Warrant ("Public  Warrant") which is identical in
     all  respects to the Class A Warrant  sold in the public  offering,  except
     that  purchasers  of the Bridge Notes  acquiring  the Bridge  Warrants have
     agreed:  (i) not to exercise  the Public  Warrants for a period of one year
     from December 3, 1996;  and (ii) not to sell  publicly the Public  Warrants
     except as provided in certain  lock-up  provisions  which expire between 90
     and 270 days after December 3, 1996. The fair value of the Bridge  Warrants
     ($473,000),  together with the cost of issuance  (approximately  $805,000),
     has been treated as additional interest expense over the term of the Bridge
     Notes.


                                       32
<PAGE>


                                    PART III

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

     Information  regarding directors and executive officers of the Company will
appear in the Proxy  Statement  of the  Annual  Meeting of  Stockholders  and is
incorporated  herein by this  reference.  The Proxy Statement will be filed with
the SEC within 120 days following December 31, 1996.

ITEM 10.    EXECUTIVE COMPENSATION

     Information  regarding  executive  compensation  will  appear  in the Proxy
Statement for the Annual Meeting of Stockholders  and is incorporated  herein by
this reference.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  regarding  security ownership of certain beneficial owners and
management  will  appear  in the  Proxy  Statement  for the  Annual  Meeting  of
Stockholders and is incorporated herein by this reference.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  regarding certain  relationships and related transactions will
appear in the Proxy  Statement  for the Annual  Meeting of  Stockholders  and is
incorporated herein by this reference.

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:


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

*3.1              Certificate of Incorporation
 3.2              Bylaws
*3.3              Amendment to Certificate of Incorporation
*4.1              Specimen Certificate of Class A Common Stock
*4.2              Warrant Agreement (including form of Class A and Class B
                     Warrant Certificates
*4.3              Form of Underwriter's Unit Purchase Option
*10.1             Form of Indemnification Agreement
10.2              Amended 1996 Stock Option Plan
*10.3             Employment Agreement dated as of May 1, 1996 between the
                     Company and Dr.  Carl L. Chen
*10.4             Agreement of Merger dated July 16, 1996 between Advanced
                     Aerodynamics and Structures, Inc., California corporation,
                     and Advanced Aerodynamics & Structures, Inc., a
                     Delaware corporation
10.5              Lease dated December 19, 1996 between Olen Properties Corp., a
                  Florida corporation, and the Company
11.1              Statement re: Computation of Per Share Earnings
27                Financial Data Schedule

     * Incorporated by reference to the Company's Registration Statement on Form
SB-2 (333-12273) declared effective by the Securities and Exchange Commission on
December 3, 1996.


                                       33
<PAGE>




     Reports on Form 8-K:

     During the quarter  ended  December 31, 1996,  the Company did not file any
reports on Form 8-K.



<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  March 31, 1997                     ADVANCED AERODYNAMICS &
                                           STRUCTURES, INC.

                                           By:/s/ Carl L. Chen
                                              ---------------------------------
                                              Carl L. Chen, President

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


Signature                       Title                                 Date


/s/ Carl L. Chen                President, Chief Executive       March 31, 1997
Carl L. Chen                    Officer, and Chairman of
                                the Board

/s/ Gene Comfort                Executive Vice President,        March 31, 1997
Gene Comfort                    Secretary and Director

/s/ Dave Turner                 Vice President - Finance         March 31, 1997
Dave Turner                     and Chief Financial Officer

/s/ C.M. Cheng                  Director                         March 31, 1997
C.M. Cheng

/s/ Steve Gorlin                Director                         March 31, 1997
Steve Gorlin

/s/ Jim Lovell                  Director                         March 31, 1997
Jim Lovell


                                       34