**U.
S. SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-KSB**
 (Mark
One)
 
 x
    ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      (FEE REQUIRED)
 
 For the
fiscal year ended **December
31, 2004**
 **or**
 
 o
    TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      (NO FEE REQUIRED)
 
 For the
transition period from _____ to _____
 
 Commission
File No. 000-21749
 
 **MOONEY
AEROSPACE GROUP, LTD.**
 (Name of
Small Business Issuer in its Charter)
 
 **Delaware**
    
    **95-4257380**(State
      or Other Jurisdiction of
    
    (I.R.S.
      Employer Identification No.)Incorporation
      or Organization)
 
 **165
      Al Mooney Road North, Kerrville, Texas**
    
    **78028**(Address
      of Principal Executive Offices)
    
    (Zip
      Code)
 
 **(830)
896-6000**
 (Issuer'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
 Common
Stock, par value $.0001 per share
 
 Check
whether the issuer: (1) Filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
 Yes x  No o
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
 
 State
issuer's revenues for its most recent fiscal year: $19,314,271
 
 The
aggregate market value of the voting stock held by non-affiliates computed by
reference to the average bid and asked prices of such stock on March 31, 2005
was $20,983,114.
 
 The
number of shares outstanding of the issuer's common stock as of March 31, 2005
was 10,491,557.
 
 Transitional
Small Business Disclosure Format (check one): Yes o No x
  1
  **PART
I**
 
 **Item
      1.**
    **Business**
 
 *Cautionary
statement for purposes of "Safe Harbor Provisions" of the Private Securities
Litigation Reform Act of 1995.*
 
 Certain
statements contained in this Annual Report on Securities and Exchange Commission
("SEC") Form 10-KSB ("Form 10-KSB") constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different than any expressed or
implied by these forward-looking statements. These statements may be contained
in our filings with the Securities and Exchange Commission, press releases, and
written or oral presentations made by our representatives to analysts, rating
agencies, stockholders, news organizations and others. In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"intend", "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology. Although we believe that the expectations in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
 
 **Overview**
 
 We were
organized in 1990 to design, develop, manufacture and market general aviation
aircraft. During 2002, we recognized a unique opportunity and purchased the
assets of Mooney Aircraft Corporation ("MACorp"). MACorp. produced
high-performance, single engine piston aircraft for more that 50 years. Mooney
aircraft are recognized as the highest performance four-place piston engine
aircraft in commercial production. Over 10,000 airplanes have been manufactured,
with over 7,000 now in operation around the world.
 
 We
believe that there is a unique market opportunity to manufacture, sell and
support the Mooney aircraft, due to the following factors: 1) the deteriorating
comfort and convenience of airline travel, and the resurgence of interest in
purchasing light aircraft for business and personal transportation for small and
medium sized businesses and high net worth individuals; 2) reduction of product
liability legal exposure to manufacturers of general aviation aircraft as a
result of the General Aviation Revitalization Act of 1994, and 3) an excellent
competitive position in the retractable gear, all-metal, four place, high
performance piston powered aircraft market.
 
 To take
advantage of this opportunity, we have hired an experienced management team to
provide leadership to efficiently manufacture and profitably market the five
Mooney models, the, Ovation, Ovation 2 DX and GX, and the high performance Bravo
DX and GX.
 
 Our sales
strategy is based on a direct marketing approach, with the assistance of Mooney
Team Representatives (companies that are dealers who sell our products on a
commission basis). We have implemented this approach which includes a sales
strategy based on four factors: 1) Company sales representatives with highly
successful records of aviation sales, including Mooney products; 2) a
professional sales staff in Kerrville, Texas; 3) Mooney Team Representatives
("MTR") in the United States, of which we presently have two, one located in
California and another located in the Southeast, serving the states of Florida,
North Carolina, South Carolina, Tennessee, Arkansas, Georgia, Louisiana,
Alabama, Mississippi, and Texas; and 4) two international MTRs to market our
products outside the United States.
 
 We also
serve customers who visit the factory in Kerrville, Texas, providing tours and
demonstration flights when appropriate. This personalized service has shown to
be effective in the sale of our products.
 
 2
 
 **Industry
Background**
 
 The
general aviation industry comprises essentially all nonmilitary aviation
activity other than scheduled and 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, and there may be one or two engines and propellers. Propjet aircraft
combine a jet turbine power plant with a propeller geared to the main shaft of
the turbine, and there may be one or two engines and propellers. Turbofan
aircraft use jet propulsion to power the aircraft.
 
 Purchasers
of general aviation aircraft include corporations, governments, the military,
the general public and 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 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,
freight, equipment and pleasure use. 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 turboprop and jet aircraft account for
the majority of billings. Aircraft deliveries by United States manufacturers
have increased consistently; for example, sales were approximately $3.1 billion
in 1996, and grew to $11.9 billion in 2004.
 
 **Strategy**
 
 We
believe that an opportunity exists in the general aviation industry to create a
company whose products are the best aircraft models in their class. We began
implementing this strategy through our acquisition of MACorp assets at a federal
bankruptcy auction in San Antonio, Texas on April 19, 2002, and through the
provisions of an Asset Purchase Agreement with MACorp's general unsecured
creditors committee. We formed a new company to own and operate these assets,
Mooney Airplane Company, Inc. ("MAC").
 
 We are
producing five models, the Ovation, the Bravo DX and GX and the Ovation2 DX and
GX. We have hired a management team with significant experience in aviation and
business management and we believe that the team can make MAC profitable.
 
 **Manufacturing**
 
 We
manufacture all Mooney airplanes in Kerrville, Texas. We have a favorable
long-term lease on both land and buildings at the Kerrville Airport, which makes
Kerrville a financially attractive location to build aircraft. Additionally, the
Kerrville area has an experienced aerospace labor work force developed over the
many years the Mooney aircraft has been produced in this location. There are no
other aircraft manufacturers in the immediate area, so competition for
experienced workers is minimal. Additional labor to supply the needs created by
growth is available in nearby San Antonio.
 
 **Market
Opportunity**
 
 Historically,
Mooney has produced top of the line, single engine piston airplanes that now
include the Ovation, the Ovation2 and the Bravo, which are widely considered to
be the performance leaders in the four-passenger single engine aircraft market.
For over 50 years Mooney has produced high performance piston aircraft. There
are more than 7,000 Mooney aircraft in operation around the world. We also sell
aircraft parts and service to support many of these aircraft.
 
 **Domestic
Sales**
 
 Through
the combination of direct salespeople and Mooney Team Representatives, ("MTRs"),
we have adequately covered the U.S. geographically.
 
 We have
increased our advertising campaign nationwide featuring the choice of a Mooney
with either a classic flight deck (called the DX) or a glass panel flight deck
(called the GX). We provide one toll free telephone number to call and one
website to view. Our distributed sales force is supported by a professional
sales support staff at our facility in Kerrville, Texas. We believe that this
method is ideal for sales in today’s fast-paced market environment. The sales
process still requires personal contact between the salespeople and the
prospective customers.
 
 3
 **International
Sales**
 
 We have
appointed two international MTRs who will represent us in selected countries. In
addition we will evaluate other candidates in the future as business dictates.
Agents will conduct sales by signing international customers to a Mooney
contract and will be paid a commission for their success on a per aircraft
basis, unless they decide to step in-between and buy the aircraft at list-price
less the amount of their commission. We have made several sales in Europe that
will give us access to an aircraft for demonstrations.
 
 **New
Product Development Programs**
 
 Mooney’s
strategy for the M20 airframe is one of continually enhancing an
industry-leading design. In 2004 Mooney introduced and began to deliver aircraft
equipped with state of the art avionics utilizing the Garmin G1000 all glass
integrated avionics system, thereby creating the new Ovation GX and Bravo GX
models. We also introduced the Hartzell three blade propeller, the Amsafe
inflatable seatbelt, and a redesigned all-leather interior. Other product
developments for the M20 are in progress, but are not yet ready for
announcement.
 
 **Product-Liability
Risk Limitations**
 
 In 1994,
the United States enacted 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 us until eighteen years from
the date we delivered our first aircraft, management believes that GARA has
benefited us and will benefit us in the future, 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 our aircraft. However, there can be no assurance that our
view of GARA's effects will prove to be correct.
 
 With
respect to the MACorp assets, the U. S. Bankruptcy Court for the District of San
Antonio’s order and the Asset Purchase Agreement grant us ownership of the
MACorp assets free and clear of any product-liability claims for products
manufactured prior to our acquisition of the assets. Therefore we believe that
we would not be found liable for product-liability claims related to MACorp.
aircraft or parts manufactured prior to our acquisition of MACorp. assets.
However, we have been named as a defendant in future lawsuits and will incur
costs associated with the defense of such claims.
 
 **Foreign
Certification**
 
 In order
for us to sell our aircraft in foreign countries, we must comply with each
country's aircraft certification process. Certain countries will accept as
adequate certification issued by the FAA, while others impose additional
requirements. In countries that do require additional certification, the FAA
certification often provides a starting point from which such country begins its
certification process. We are currently seeking German noise certification for
the three bladed propeller. Garmin is seeking international certification of the
G1000 for us. Priorities for other certifications will be determined by the
level of interest in our products by dealers and distributors in the various
foreign markets.
 
 4
 **Risk
Factors**
 
 *An
investment in our common stock is highly speculative and involves a high degree
of risk. Therefore, you should consider all of the risk factors discussed below,
as well as the other information contained in this document. You should not
invest in our common stock unless you can afford to lose your entire investment
and you are not dependent on the funds you are investing.*
 
 **Payment
of convertible notes issued under various subscription agreements could be
demanded at any time under the terms of the notes if certain events of default
occur; demand could result in insolvency.**
 
 The
Secured Convertible Debenture Notes are convertible into shares of the Company's
common stock at a fixed per share conversion price of $2.22 cents per share. The
Maturity Date for the Secured Convertible Notes was extended for a period of
three (3) years, with Maturity Dates on the third anniversary of the Notes which
is either June 16, 2006 or November 7, 2006, depending on the inception date of
the Note. Interest will be paid in cash at the maturity date. The Unsecured
Notes (both principal and interest) and the interest on the Secured Notes were
discharged as of June 10, 2004, per the Amended Plan of Reorganization approved
by the U.S. Bankruptcy Court, for the District of Delaware on December 14, 2004.
Under the Amended Plan, the Secured Notes principal is convertible to Common
Stock at a conversion rate of $2.22 per share. This conversion must be completed
by August 30, 2005, unless extended by the Company's board of directors. The
Common Stock issued pursuant to this conversion feature is restricted to
prohibit any sales prior to March 15, 2005 and allows no more than 10% of each
shareholders holdings to be sold each month; thereafter unless this provision is
modified by the Company's board of directors.
 
 On
November 13, 2003, we closed a long-term loan with Business Loan Express
(‘BLX"). This loan is guaranteed by the U. S. Department of Agriculture Business
and Industry loan program. This loan is for $5,000,000 to Mooney Airplane
Company and is guaranteed by many of the assets of the Company, with all unpaid
principal and interest due on November 1, 2028.
 
 **Risk
of low-price stocks, including limitations on market
liquidity.**
 
 The
Securities and Exchange Commission classifies our Common Stock as a "penny
stock". This classification severely and adversely affects the market liquidity
for our Class Common Stock. Commission regulations define a "penny stock" to be
any non-NASDAQ equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery prior to any transaction in a penny stock a disclosure
schedule prepared by the Commission relating to the penny stock market.
Disclosure is required to be made about commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to disclose recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
 
 As a
"penny stock" shares of our Class Common Stock are subject to Rule 15g-9 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
imposes additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
prior written consent to the transaction. Consequently, the rule may adversely
affect the ability of broker-dealers to sell our securities and may adversely
affect the ability of holders of our securities to sell such securities in the
secondary market.
 
 5
 **We
have accumulated a substantial deficit; we have a history of losses and
continued lack of profitability could lead to a cessation of
operations.**
 
  To date,
we have incurred significant losses. At December 31, 2004, we had an accumulated
deficit of approximately $153,434,000. We have incurred net (losses) or profit
of ($14,191,000) in 2003, and ($12,470,000) in 2004 respectively. Losses prior
to 2004 resulted principally from significant costs associated with the
development of the Jetcruzer 500 and the acquisition of Mooney. We show a
reduced loss in 2004 due to the cancellation of debt that was realized from the
filing of Chapter XI Bankruptcy. This cancellation of debt amounted to
($1,033,000). We expect to incur further losses in the future due to significant
costs associated with manufacturing our aircraft, maintaining the necessary
regulatory approvals, and marketing and selling our aircraft. There can be no
assurance that sales of our aircraft will generate sufficient revenues to fund
our continuing operations, that we will generate positive cash flow from our
operations, or that we will attain or thereafter sustain profitability in any
future period. If we do not begin to generate profits, we may be forced to cease
or curtail our operations.
 
 **We
will need additional financing; failure to obtain financing could lead to a
cessation or curtailment of our operations.**
 
 We
obtained a revolving loan secured by a purchase money security agreement from
Alpha Capital Aktiengesellschaft, Bristol Investments Fund Ltd., Edward Turin,
MM&CTW Foundation Inc., Renaissance Development Holdings International,
Ltd., Taria Inc., and TRW Holdings Party Ltd. to Mooney Airplane Company Inc. as
borrower in the amount of $6,250,000 to purchase parts and materials for
manufacture of Mooney airplanes. The security agreement was amended to state,
among other things, that between Allen Holding Finance, Ltd., (“Parent”), Mooney
Airplane Company Inc. (“Borrower”), Esquire Trade & Finance, Inc.
(“Esquire”), Alpha Capital, AG (“Alpha”) the maximum amount of the loan shall
not exceed Seven Million Five Hundred Thousand Dollars ($7,500,000). The balance
of this loan as of December 31, 2004 was $6,250,000. The interest being accrued
on this loan is at 8% per annum.
 
 We
obtained additional financing in the amount of $3,100,000 referred to as
“Airplane Notes” from the same parties as the revolving loan. These notes bear
interest at 8% per annum and mature November 7, 2007.
 
 We also
obtained additional financing referred to as the Secured Promissory Notes in the
principal amount of $9,000,000 of which $4,400,000 was still outstanding at year
end. These notes were funded by the same parties as listed for the revolving
loan. These notes bear interest at 17.5% per annum and provide for a maturity
date of November 7, 2006 callable on March 7, 2005. They were called on that
date and the Company is now in default on the payment of this obligation.
However, discussions are ongoing between the Company and the lenders on
negotiating revised terms of the loan.
 
 As part
of the loans above we are required to pay Libra Finance, S.A. a finder’s fee of
$986,000 secured by a non-interest bearing promissory note which was due on
February 7, 2005. The due date has been extended by the lender and the loan is
in the process of renegotiation.
 
 Subsequent
to the year end, on March 8, 2005 we executed a Promissory Note in favor of
Guarantee & Finance Inc. in the amount of $1,000,000 with interest at 12%
per annum due and payable on April 5, 2005. The due date has been extended and
the lender and the loan is in process of renegotiation.
 
 We will
need to obtain additional financing to continue the production of new aircraft
and spare parts. Failure to obtain such additional financing would have a
material adverse effect on our business and prospects and could require that we
severely limit or cease our operations. Additional financing may not be
available on acceptable terms or at all.
 
 **Regulatory
uncertainty could result in additional costs or
liabilities.**
 
 Our
aircraft and our operations are also subject to the risk of modification,
suspension or revocation of any FAA certificate. A modification, suspension, or
revocation could occur if, in the FAA's judgment, compliance with airworthiness
or safety standards by us was in doubt. If the FAA suspended or revoked our type
or production certificate for an aircraft model, sales of that model would be
adversely affected or terminated. If, in the FAA's judgment, an unsafe condition
developed or was discovered after one or more of our aircraft had entered
service, the FAA could issue an Airworthiness Directive, which could result in a
requirement that we develop appropriate design changes at our expense. Foreign
authorities could impose similar obligations upon us as to aircraft within their
jurisdiction. Any or all of these occurrences could expose us to substantial
additional costs and liabilities.
 
 6
 **Limited
product line; fluctuations in sales of aircraft may result in periodic material
reductions in revenue and profitability.**
 
 If there
is a downturn in the market for general aviation aircraft due to economic,
political or other reasons, we would not be able to rely on sales of other
products to offset the downturn. It is possible that sales of business aircraft
could decline in the future for reasons beyond our control. Furthermore, if a
potential purchaser is experiencing an economic downturn or is for any other
reason seeking to limit its capital expenditures, the high unit selling price of
a new aircraft may result in such potential purchaser deferring its purchase or
electing to purchase a pre-owned aircraft or a lower priced aircraft. Further,
since we intend to rely on the sale of a relatively small number of high unit
selling price aircraft to provide substantially all of its revenue, small
decreases in the number of aircraft delivered in any year may have a material
negative effect on the results of operations for that year. In addition, small
changes in the number and timing of deliveries of, and receipt of payments on,
new aircraft may have a material effect on our liquidity.
 
 **We
face numerous competitors, some of whom have greater resources; competition may
improve or develop competitive products.**
 
 Our
aircraft compete with other aircraft that have comparable characteristics and
capabilities. Many of our competitors, including Cirrus Design (Cirrus), Lancair
Co. (Lancair Columbia) Textron (Cessna Aircraft Co.), Raytheon Aircraft Co.
(Beechcraft) and New Piper Aircraft Corp, are substantially larger in size and
have greater financial, technical, marketing, and other resources than we do.
Certain of our actual and potential competitors have greater financial and other
resources that may allow them to modify existing aircraft or develop alternative
new aircraft that could compete with our aircraft. Our ability to compete
effectively may be adversely affected by the ability of these competitors to
devote greater resources to the sale and marketing of their products than are
available to us. Future technological advances may result in competitive
aircraft with improved characteristics and capabilities that could adversely
affect our business. Our aircraft may also compete with used aircraft that
become available in the resale market at prices sufficiently lower to offset
deficits in performance, if any, as compared to our aircraft.
 
 **Reliance
on single source suppliers; problems with supplies could reduce revenue or
increase costs.**
 
 We are
dependent on certain suppliers of products in order to manufacture our aircraft.
Should our ability to obtain the requisite components be limited for any lengthy
period of time or the cost of the components increase, our ability to produce
and sell aircraft could be materially and adversely affected. Securing
acceptable pricing and terms from suppliers of the bankrupt MACorp has been
difficult because of financial difficulties caused by bankruptcy and damage to
the reputation of MACorp as a customer. In addition, the possible failure of
suppliers or subcontractors to meet our performance specifications, quality
standards or delivery standards or schedules could have a material adverse
effect on our operations. Moreover, our ability to significantly increase our
production rate could be limited by the ability or willingness of key suppliers
to increase their delivery rates; and, over time, the prices to obtain materials
and components may change and a number of suppliers may need to be replaced. Our
inability to obtain supplies to manufacture our products would have a material
adverse effect on our business prospects, operations and financial
condition.
 
 **Insurance
and product liability exposure increased premiums and damage awards could
increase costs.**
 
 Because
the failure of an aircraft manufactured by us or any other mishap involving such
an aircraft may result in physical injury or death to the occupants of the
aircraft or others, we could be subject to lawsuits involving product liability
claims, which lawsuits may involve claims for substantial sums. Although we have
obtained product liability insurance, such insurance is expensive and subject to
various coverage exclusions and may not be obtainable by us in the future on
acceptable terms or at all. Further, should we become involved in product
liability litigation, the expenses and damages awarded could be large, and the
scope of any coverage may be inadequate. Increased insurance costs and/or
liability costs could require an increase in the price of our aircraft and
therefore could have a negative impact on sales.
 
 **Fluctuations
in quarterly operating results may be caused by large unit
prices.**
 
 We expect
to derive a substantial portion of our 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 due to, for example, unanticipated shipment
re-scheduling or cancellations, supplier delays in the delivery of component
parts or unexpected manufacturing difficulties could have a material and adverse
effect on our financial position and results of operations for that
quarter.
 
 7
 **Risks
of international operations, including changes in tariffs and duties and
currency exchange losses, may increase costs.**
 
 We also
intend to market and sell our aircraft to foreign customers. Accordingly, we
will be subject to all of the risks inherent in international operations,
including work stoppages, transportation delays and interruptions, political
instability or conflict between countries in which we may do business, foreign
currency fluctuations, economic disruptions, differences in airworthiness and
certification standards imposed by foreign authorities, the imposition of
tariffs and import and export controls, changes in governmental policies
(including United States trade policy) and other factors, including other
foreign laws and regulations, which could have an adverse effect on our
business. With respect to international sales that are denominated in U.S.
dollars, an increase in the value of the U.S. dollar relative to foreign
currencies can increase the effective price of, and reduce demand for, our
products relative to competitive products priced in the local currency. These
international trade factors may, under certain circumstances, materially and
adversely impact demand for our products or our ability to sell aircraft in
particular countries or deliver products in a timely manner or at a competitive
price, which in turn may have an adverse impact on our relationships with its
customers. In addition, foreign certification or equivalent approval is required
prior to importing an aircraft into a foreign country, and we may not receive
such certification or equivalent approval in any country. Our success will
depend in part upon our ability to obtain and maintain foreign certifications or
equivalent approvals and manage international marketing, sales and service
operations.
 
 **Dependence
on key personnel; failure to hire or retain personnel could result in a
reduction of revenues and earnings.**
 
 The
results of our operations will depend in large part on the skills and efforts of
our executive team. Our future success will depend to a significant extent on
our ability to hire certain other key employees on a timely basis. Competition
for highly skilled business, product development, technical and other personnel
is intense, and there can be no assurance that we will be successful in
recruiting new personnel or in retaining our existing personnel. We will
experience increased costs in order to retain and attract skilled employees. Our
failure to attract additional qualified employees on a timely basis or to retain
the services of key personnel would have a material adverse effect on our
operating results and financial condition.
 
 **Planned
growth may be limited by constraints on human and financial
resources.**
 
 We
significantly expanded our operations in 2004 and plan to continue to expand
them during 2005, which could place a significant strain on our limited
personnel, financial and other resources. We intend to continue to enlarge the
manufacturing capabilities of our Mooney subsidiary and to manufacture Mooney
aircraft. Our efforts to conduct manufacturing activities may not be successful,
and we may not be able to satisfy commercial scale production requirements on a
timely and cost-effective basis. Our ability to manage this growth, should it
occur, will require significant expansion of our engineering and production
personnel. We may not be able to find qualified personnel to fill such
additional positions or be able to manage a larger organization successfully. We
may also seek to acquire additional aircraft product lines that will place
additional demands on our limited resources.
 
 **Limitation
on officers' and directors' liabilities under Delaware law may reduce damages
available for breach of duty by directors.**
 
 Pursuant
to our Certificate of Incorporation, and as authorized under applicable Delaware
law, our directors and officers are not liable for monetary damages for breach
of fiduciary duty, except (i) in connection with a breach of the duty of
loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for dividend
payments or stock repurchases illegal under Delaware law or (iv) for any
transaction in which a director has derived an improper personal benefit. These
provisions may limit the ability of our stockholders to obtain damages from our
directors, either directly or on a derivative basis, for breach of fiduciary
duty.
 
 **Possibility
of dilution arising from shares available for future sale may result in lower
stock prices.**
 
 Future
sales of common stock by existing stockholders pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise, could
have an adverse effect on the price of our securities. As of December 31, 2004,
Mooney had 9,997,773 outstanding shares of Common Stock, plus debentures issued
under various agreements convertible into shares of Common Stock. Sales of
Common Stock, or the possibility of such sales, in the public market may
adversely affect the market price of the securities offered hereby.
 
 8
 **Our
common stock trades on the OTC Bulletin Board, which may result in reduced
volume of trading and increased volatility in the market price of our common
stock.**
 
 Our
Common Stock trades on the OTC Bulletin Board an exchange operated by NASDAQ.
Consequently, the liquidity of our securities is less than if it was listed on
an exchange not only by the number of securities which can be bought and sold,
but also through delays in the timing of the market transactions, reductions in
the number and quality of security analysts' and the news media's coverage of
us, and volatility in the market price of our common stock
 
 **No
dividends.**
 
 We have
paid no dividends to our stockholders since our inception and do not plan to pay
dividends in the foreseeable future. We intend to reinvest earnings, if any, in
the development and expansion of our business.
 
 **Volatility
of stock market.**
 
 The stock
market from time to time experiences significant price and volume fluctuations,
some of which are unrelated to the operating performance of particular
companies. We believe that a number of factors can cause the price of our common
stock to fluctuate, perhaps substantially. These factors include, among
others:
 
 ·
    Announcements
      of financial results and other developments relating to our
      business;
 ·
    Changes
      in the general state of the economy; and
 ·
    Changes
      in market analyst estimates and recommendations for our common
      stock.
 
 **Employees**
 
 As of
December 31, 2004, we had 310 full time and 7 full time "contract" employees in
MAC, and 3full time employees and 1 part time employee in Mooney Aerospace
Group, Ltd. None of our employees are represented by a labor union.
 
 **Item
2.**  **Facilities**
 
 We are
currently leasing a 353,634 square feet building complex located in Kerrville,
Texas at monthly rent of $1,434 with set increases every 10 years. The lease
commenced on March 1, 2004 and expires on September 2033.
 
 **Item
      3.**
    **Legal
      Proceedings**
 
 All legal
proceedings previously reported were discharged in bankruptcy.
  Bankruptcy
Proceedings
 
 On June
10, 2004 the Company filed a voluntary petition in the United States Bankruptcy
Court pursuant to Chapter 11 of Title 11 of the U. S. Code. On December 14, 2004
the U. S. Bankruptcy Court for the District of Delaware confirmed the Company’s
Amended Plan of Reorganization, which has been fully executed by the Company. A
hearing on a final decree to close the bankruptcy case will be heard by the
Court on May 4, 2005. The Amended Plan of Reorganization provides that the
holders of all allowed unsecured claims against the Company are entitled to
their pro-rata share of stock representing 46% of the Company.
 
 All
senior debenture holders will continue to be secured by the stock of the
Company’s subsidiary, MAC after the stock is transferred to the unsecured
creditors, and the senior debenture holders will also continue to be secured by
MAC’s assets. Similarly, the holder of the Factor indebtedness will continue to
be secured by MAC’s aircraft and aircraft parts that now secure its claims, and
BLX will continue to be secured by substantially all of MAC’s assets. All
preferred shareholders received their pro-rata share of 2% of the stock of the
Company, and all common shareholders received their pro-rata share of 2% of the
stock of the Company. All allowed administrative expenses were paid in cash in
full.
 
 The
Amended Plan of Reorganization was implemented by restructuring its share
structure to allow the Company to issue 9,800,000 new shares on confirmation.
The Company’s shares were subject to a reverse split so as to leave 200,000
shares for the common shareholders. On the effective date of the plan, December
15, 2004, there were a total of 10,000,000 issued shares. Of the newly issued
shares, 5,000,000 were issued to the Allen Group in exchange for its
transferring all of the shares of MAC to the Company, thereby giving Allen 50%
of the shares of the Company. Furthermore, the Company is authorized to issue a
total of 50 million shares, and MAC’s secured creditors have the right to
convert debt of approximately $30,000,000 to, at the secured creditor’s option,
13,500,000 in additionally newly issued Company shares. The secured creditor may
convert all or part of its debt at the above ratio at its
discretion.
 
 All newly
issued or newly issuable shares of the Company are free trading under Rule 3a
(9), except that none could be traded until March 15, 2005 and then only 10% of
the holder’s shares can be traded each month thereafter. The Company realized
$1,033,000 of extraordinary gain from debt forgiveness as a result of the
discharge in bankruptcy of its debts.
   On
December 15, 2004 American Stock Transfer and Trust Co. issued about 10 million
shares of new common stock to our creditors as required by the Amended Plan of
Reorganization. Of this, 200,000 shares were issued to the existing shareholders
of record as of December 15, 2004. An additional 200,000 shares were issued to
the preferred stockholders of record as of December 15, 2004. 4,975,000 shares
were issued to Allen Holding & Finance Company Ltd., and about 4,600,000
million shares were issued to the unsecured general creditors.
 
 The
Amended Plan of Reorganization also provides that the secured debenture holders,
the airplane note holders and the factor note holders have the option to convert
their shareholdings into 13.5 million shares of new common stock All of the
stock is restricted, (except the shares issued to the existing common
shareholders of record on December 15, 2005), in that none of these shares could
have been sold until March 15, 2005, and then only 10% of each shareholder's
shares can be sold each month thereafter. As part of the Amended Plan of
Reorganization existing shareholders are entitled to be issued new shares of
Mooney Aerospace Group, Ltd. common stock based on a reverse split of 3,223 old
MASG shares for one share of new common stock,
 
 **Item
      4.**
    **Submission
      of Matters to a Vote of Security
Holders**
 
 None
 
 9
 
 **PART
II**
 
 **Item
      5.**
    **Market
      for the Company's Common Equity and Related Stockholder
      Matters**
 
 Our
common stock is traded on NASD Electronic Bulletin Board under the symbol "MNYG"
as of December 15, 2004. Our common stock was traded on NASD Electronic Bulletin
Board under the symbol "MASG" prior to December 15, 2004 .The following table
sets forth the range of high and low bid quotations for each of the prior two
fiscal years.. The quotations represent inter-dealer quotations without
adjustment for retail mark-ups, markdowns or commissions and may not represent
actual transactions.
 
 **High**
    **Low**1stQuarter 2003
    $0.0400
    $0.03002ndQuarter 2003
    $0.0600
    $0.01003rdQuarter 2003
    $0.0500
    $0.03004th
      Quarter 2003
    $0.0300
    $0.02001st
      Quarter 2004
    $0.0220
    $0.01312ndQuarter 2004
    $0.0048
    $0.00063rd
      Quarter 2004
    $0.0090
    $0.00064th
      Quarter 2004
    $0.1600
    $0.1100December
      16 - December 31, 2004
    $0.0000
    $0.0000
 
 As of
December 31, 2004, there were 264 shareholders of record of our common stock.
This does not include shares held in street names.
 
 **Item
      6.**
    **Management's
      Discussion & Analysis of Financial
  Condition**
 
 **Forward
Looking Statements**
 
 This
Annual Report on Form 10-KSB and the documents incorporated herein by reference
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward
looking statements to encourage companies to provide prospective forward looking
information about them so long as they identify these statements as forward
looking and provide meaningful cautionary statements identifying important
factors that could cause actual results to differ from the projected results.
All statements other than statements of historical fact made in this Annual
Report on Form 10-KSB are forward looking. In particular, the statements herein
regarding industry prospects and future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect
management's current expectations and are inherently uncertain. Our actual
results may differ significantly from management's expectations.
 
 **General**
 
 On
February 6, 2002 the U.S. Bankruptcy Court in San Antonio, Texas approved an
operating agreement that allowed us to manage MACorp until a plan of
reorganization was approved. On February 8, 2002, we announced we had purchased
Congress Financial Corporation's ("Congress") position as senior secured
creditor for Mooney Aircraft Corporation of Kerrville, Texas ("MACorp"). The
Bankruptcy Court approved the sale of substantially all of the MACorp assets to
us on March 18, 2002 and on April 19, 2002 we completed the Mooney asset
acquisition.
 
 MACorp
was the world's leading supplier of high performance single engine general
aviation aircraft primarily serving business and owner-flown markets. MACorp
produced over 10,000 aircraft since its founding in 1947, and presently has over
7,000 aircraft in operation in the US alone. We acquired substantially all of
MACorp's assets and have returned to full production of the Mooney aircraft
line. MACorp's assets are held by our wholly owned subsidiary named Mooney
Airplane Company, Inc. ("MAC"). On July 23, 2002, we changed our name to Mooney
Aerospace Group, Ltd.
 
 We derive
a substantial portion of our 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 our financial position and
results of operations for that quarter. Our policy is to collect not less than a
10% deposit prior to construction of aircraft and final payments upon the
delivery of aircraft. Construction or delivery delays near the end of a
particular quarter due to, for example, shipment rescheduling, delays in the
delivery of component parts or unexpected manufacturing difficulties, could
cause the financial results of the quarter to fall significantly below our
expectations and could materially and adversely affect our financial position
and results of operations for the quarter.
 
 10
 During
2005, we intend to focus our efforts on the following events:
 ·             
An increase in production of MAC's manufacturing line in Kerrville, Texas.
·             
Enhancement and aggressive implementation of our marketing program.
·             
Reduction of costs to increase profit margins.
·             
Production of Garmin G-1000 equipped aircraft.
 
 On June
27, 2002 MAC announced that we had received a Federal Aviation Administration
(FAA) production certificate for the Eagle2 (Mooney M20S), Ovation2 (Mooney
M20R) and the Bravo2 (Mooney M20M). We are making good progress in getting the
factory up to full production.
 
 On August
8, 2002 we announced that MAC had received FAA certification as a repair
station. The repair station is co-located with the MAC production facility in
Kerrville, Texas. This enhances our support to Mooney owners and provides us
with additional business opportunities.
 
 In
December 2004 we were granted the use of the certification of the Garmin G1000
for both the Ovation2 GX and Bravo GX models.
 
 We have
generated $19,314,000 in operating revenues for the year ended December 31, 2004
from the sale of aircraft and spare parts sales, and have incurred a net loss
during the same period of $12,470,000. The loss has been reduced as result
of cancellation of debt in the amount of ($1,033,000) due to the filing of
Chapter XI Bankruptcy. We believe we will continue to experience losses until
such time as we attain a commercial scale for the production and sale of our
aircraft. No assurance can be made that we will be able to attain the necessary
scale in the foreseeable future that will allow us to generate revenue
sufficient to maintain its operations without other sources of
financing.
 
 **Liquidity
and Capital Resources**
 
 At
December 31, 2004, we had a negative working capital of $3,840,000 and
stockholders' deficiency of $23,797,000. Since our inception in January 1990, we
have experienced continuing negative cash flow from operations, which have
resulted in our inability to pay certain existing liabilities in a timely
manner. We have financed our operations through private funding of equity and
debt and through the proceeds generated from our December 1996 initial public
offering.
 
 We expect
to continue to incur losses until such time as we increase our production
processes to planned production levels and increase market acceptance of our
aircraft at selling prices and volumes which provide adequate gross profit to
cover operating costs and generate positive cash flow. Our working capital
requirements will depend upon numerous factors, including the level of resources
devoted to the scale-up of manufacturing and the establishment of sales and
marketing. No assurance can be made that we will be able to restore Mooney's
production processes to planned levels, regain market acceptance for our
aircraft or generate positive cash flow in the foreseeable future, or ever. If
we are unable to generate cash flow through our operations as necessary, we will
have to continue to obtain financing through equity or debt financing. No
assurance can be made that we will be able to obtain sufficient equity or debt
financing under terms acceptable to us to allow us to maintain operations
according to our current operating plans, or at all.
 
 Our
management team has developed a financial plan to address our working capital
requirements. Since early 2001, this has included the issuance of convertible
debentures. The secured debentures are convertible into shares of common stock
at a fixed price set at $2.22 per share and must be converted by August 30,
2005, in accordance with the Amended Plan of Reorganization that was confirmed
and effective December 15, 2004. The notes earn interest at the rate of 8% per
annum and the payment terms vary with each agreement. The interest is payable in
cash at the maturity date which is either in June or November 2006 depending
upon the terms of the particular note. The unsecured debenture holders and the
preferred stockholders were issued stock effective December 15, 2004 to satisfy
Mooney Aerospace Group's obligations to them as provided for in the Amended Plan
of Reorganization.
 
 The
restructuring plan conversions reported in previous filings were changed
pursuant to the provisions of the Amended Plan of Reorganization as confirmed by
the Bankruptcy Court.
 
 On
November 14, 2003, we issued a long-term note payable in the amount of
$5,000,000 to a bank. This note is guaranteed by the U. S. Department of
Agriculture Business and Industry Guaranteed Loan Program. The note is
guaranteed and secured by many of the Company's assets and its final installment
payment is due on November 13, 2028.
 
 11
 On
November 17, 2003, we issued a secured revolving note which was amended by
Amendment No. 4 Dated September 29, 2004 in the aggregate principal amount of
$7,500,000 issued by MAC. These notes were issued by Alpha Capital
Aktiengesellschaft, Bristol Investment Fund Ltd, Edward Turin, MM&CTW
Foundation Inc, Renaissance Development Holdings International., Ltd, Taria Inc,
and TRW Holdings Party Ltd in the current amount of $6,250,000. The revolving
loan is a demand loan and bears interest at a rate of 17.5% per annum. The
proceeds of the revolving loan will be used to finance the purchase of airplane
parts and material to be used in the manufacture of airplanes, and is secured by
parts and equipment purchased with such proceeds. The issuers of the revolving
loan have the option of converting any and all the amounts outstanding under the
loan to shares of our common stock at $2.22 per share. As of December 31, 2004,
there was $6,250,000 outstanding under this revolving loan.
 
 Our
current cash balance, along with amounts available to us under the revolving
loan, will not be sufficient to meet our operating needs for the next 12 months.
If additional funding is required it may be obtained either through additional
stock issuances or debt financing provided by certain private parties. The
following table summarizes the Company's contractual obligations at December 31,
2004:
 
 **Contractual
      Obligations**
    **2005**
    **2006**
    **2007**
    **2008**
    **2009**
    **Total**Convertible
      debentures
    $
      -
    $20,926,476
    $
      -
    $
      -
    $
      -
    $20,926,476Notes
      payable
    1,986,000
    9,000,000
    3,100,000
    --
    --
    14,086,000Capital
      leases
    --
    --
    --
    --
    --
    --Operating
      leases
    17,000
    17,000
    17,000
    17,000
    17,000
    85,000Employment
      agreements
    825,000
    --
    --
    --
    --
    $825,000$2,828,000
    $29,943,476
    $3,117,000
    $17,000
    $
      17,000
    $35,922,476
 
 **Critical
Accounting Policies**
 
 Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. When we prepare
these consolidated financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to investments, long-lived assets, deferred
tax assets, other liabilities and revenue recognition. We base our estimates and
judgments on historical experience and on various other factors that we believe
to be reasonable under the circumstances, the results of which form the basis
for our judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
 
 Revenue
Recognition - We recognize revenue on substantially all aircraft sales and parts
and service sales when each of the following four criteria is met: 1) a contract
or sales arrangement exists; 2) products have been shipped or services have been
rendered; 3) the price of the products or services is fixed or determinable; and
4) collectibility is reasonably assured. We also recognize revenue on aircraft
sales under bill-and-hold transactions when each of the following seven criteria
are met: 1) the risk of ownership has passed to the buyer; 2) the buyer has made
a fixed commitment to purchase the goods; 3) the buyer has requested that the
transaction be on a bill-and-hold basis and has a substantial business purpose
for ordering so; 4) there is a fixed schedule for delivery of the goods and the
delivery date is reasonable and consistent with the buyer's business practices;
5) we have not retained any specific performance obligations such that the
earnings process is not complete; 6) the aircraft has been segregated from our
inventory and is not subject to being used to fill other orders; and 7) the
aircraft must be complete and ready for shipment.
 
 Inventory
Obsolescence -- We provide an inventory obsolescence reserve for parts whose
values have been determined to be impaired or whose future utility appears
limited based on usage over the prior two years.
 
 For
further information regarding the accounting policies that we believe to be
critical accounting policies and that affect our more significant judgments and
estimates used in preparing our consolidated financial statements see our
December 31, 2004 consolidated financial statements contained elsewhere is this
Form 10-KSB.
 
 12
 **Results
of Operations**
 
 Year
ended December 31, 2004 vs. December 31, 2003
 
 Net sales
for the year ended December 31, 2004, increased by $2,697,000, or 16%, from
$16,617,000 for the year ended December 31, 2003, compared to $19,314,000 for
the same period in 2004. During the year ended December 31, 2003, we sold 34
airplanes as compared to the sale of 36 airplanes for the year ended December
31, 2004.
 
 Cost of
sales for the year ended December 31, 2004 increased by $2,447,000, or 16%, from
$15,106,000 for the year ended December 31, 2003, compared to $17,553,000 for
the year ended December 31, 2004. The increase in cost of sales is related to
the increase in aircraft sales, increased sale of used airplanes, increased
sales in service parts and the service center. We have the capacity to produce
more airplanes than have been produced in the past thereby reducing the fixed
manufacturing cost associated with each airplane produced. As we increase our
production of airplanes we expect our gross margin to improve.
 
 Research
and development costs for the year ended December 31, 2004 increased by
$214,000, or 40%, from $534,000 for the year ended December 31, 2003, compared
to $748,000 for the year ended December 31, 2004. The significant decrease is
due to the change in avionics with the introduction of the G1000 glass panel.
Additional projects were the air bag restraint system, changes in propellers,
expanded fuel tank and recasting of the control wheel.
 
 Selling
and support expenses for the year ended December 31, 2004 increased by
$2,473,000, or 126%, from $1,957,000 for the year ended December 31, 2003,
compared to $4,430,000 for the year ended December 31, 2004. The increase is
related to an increase of marketing and sales personnel, increased advertising,
MTR commissions, flight training and the increase in aircraft
sales.
 
 General
and administrative expenses for the year ended December 31, 2004 increased by
$4,092,000, or 109%, from $3,764,000 for the year ended December 31, 2003,
compared to $8,429,000 for the year ended December 31, 2004. The increase is due
to an increase in employee compensation, consultant fees expense, bankruptcy
settlement cost and financing cost.
 
 Other
income (expense) for the year ended December 31, 2004 changed by $831,000, or
167%, from ($497,000) for the year ended December 31, 2003, compared to 334,000
for the year ended December 31, 2004. The change is principally due to
settlement of prior year law suits which resulted in cancellation of debt and in
2003 the expense was due to change in fair value of the accrued warrant
liability.
 
 Amortization
of debt issue costs and discounts for the year ended December 31, 2004 decreased
by $3,519,000 or 100%, from $3,519,000 for the year ended December 31, 2003,
compared to $0.0 for the year ended December 31, 2004. The decrease is due to
the debt discounts being written off in the 2 nd quarter
of 2003 as a result of the debt restructuring on 6/17/2003. There was no
remaining debt discounts to amortize subsequent to the debt
restructuring.
 
 Interest
expense for the year ended December 31, 2004, decreased by $3,387,000, or 62%,
from $5,431,000 for the year ended December 31, 2003, compared to $2,044,000 for
the year ended December 31, 2004. The decrease is principally due to the removal
of interest liability for Mooney Aerospace Group investors by Chapter XI
bankruptcy and an increase in interest due by Mooney Airplane Company
(MAC).
 
 Cash used
in operating activities for the year ended December 31, 2004, increased by
$14,013,000 as compared to the same period in 2003, due principally to the
combination of operating losses of $8,000,000 in MAC and by the increased
working capital requirements of the subsidiary MAC. MAC’s inventory increased by
$6,390,000.
 
 Mooney
Airplane Company is the only operating entity and the changes in operating
assets and liabilities are mainly related to the operations of that business,
including changes in inventory, property and equipment and accounts
payable.
 
 Cash used
in investing activities for the year ended December 31, 2004, increased by
$695,000 as compared to the same period in 2003. This was primarily for premises
improvements of the manufacturing entity MAC.
 
 Cash
provided by financing activities for the year ended December 31, 2004, increased
by $13,830,000 as compared to the same period in 2003. During the 2004 period,
the Company borrowed through short term debt to fund working capital
requirements in the subsidiary.
 
 13
 **Item
7.**  **Financial
Statements**
 
 See
"Index To Consolidated Financial Statements" Beginning on Page F-1.
 
 **Item
8.**  **Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure**
 
 Change
in Registrant's Certifying Accountant
 
 On
September 23, 2004, the Mooney Aerospace Group, Ltd, (the "Company"), notified
Stonefield Josephson, Inc. ("Stonefield"), its independent public accountants,
that the Company was terminating its services, effective as of that date. On
September 16, 2004, the Company engaged Bernstein & Pinchuk LLP ("B&P")
as its principal independent accountant. This decision to dismiss Stonefield and
engage B&P was taken upon the unanimous approval of the Board of Directors
of the Company.
 
 During
the last two fiscal years ended December 31, 2003 and December 31, 2002 and
through September 23, 2004, (i) there were no disagreements between the Company
and Stonefield on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Stonefield would have caused Stonefield to make reference to
the matter in its reports on the Company's financial statements, and (ii)
Stonefield's report on the Company's financial statements did not contain any
other adverse opinion, disclaimer of opinion, or modification or qualification
of opinion except that Stonefield's opinion in its report on the Company's
financial statements for the years ended December 31, 2003 and 2002 expressed
substantial doubt with respect to the Company's ability to continue as a going
concern as a result of incurred net losses and negative cash flows from
operations since its inception, working capital deficit and stockholders'
deficit. During the last two most recent fiscal years ended December 31, 2003
and December 31, 2002 and through September 15, 2004, there were no reportable
events as the term is described in Item 304(a)(1)(iv) of Regulation
S-B.
 
 During
the two most recent fiscal years and through September 15, 2004, the Company has
not consulted with B&P regarding either:
 
 1. the
application of accounting principles to any specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, and neither a written report was provided to
the Company nor oral advice was provided that B&P concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or
 
 2. any
matter that was either subject of disagreement or event, as defined in Item
304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item 304 of
Regulation S-B, or a reportable event, as that term is explained in Item
304(a)(1)(iv)(A) of Regulation S-B
 
 Retention
of B&P was approved by the U. S. Bankruptcy Court for the District of
Delaware. There were no disagreements on accounting, auditing or financial
disclosures with the previous or present auditors.
 
 **Item
8 a. Controls and Procedures**
 
 As
required by SEC rules, we have evaluated the effectiveness of the design and
operation of Mooney Aerospace Group’s disclosure controls and procedures at the
end of the period covered by this report. This evaluation was carried out under
the supervision and with the participation of its management, including the
principal executive officer and principal financial officer. Based on this
evaluation, the Company has concluded that the design and operation of our
disclosure controls and procedures are not effective. There were no significant
changes to our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
 
 Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 14
 **Item
8 b. Other Matters Subject to Disclosure**
 
 None
 
 **Item
9:**  **Directors,
Executive Officers, Promoters and Control Persons, Compliance with Section 16(a)
of the Exchange Act**
 
 **Directors
and Executive Officers**
 
 Our
directors and executive officers as follows:
 
 Name
    Age
    Positions
      HeldSam
      Rothman
    51
    ChairmanJ.
      Nelson Happy
    61
    Vice
      Chairman, President, Chief Financial Officer and
  SecretarySholom
      Babad
    30
    Director
      of Planning and DirectorSol
      Mayer
    51
    Director**Other
      Officers:**James
      C. Price
    65
    Assistant
      Secretary
 
 Directors
serve until the next annual meeting or until their successors are elected or
appointed. All Officers are appointed by and serve at the discretion of the
Board of Directors, although Mr. Happy has entered into an employment agreement.
See "Management Employment Agreements." There are no family relationships
between any of our directors and officers.
 
 **Sam
Rothman** has
served as a director of Mooney since December 2001. He was elected Chairman of
the Board on August 19, 2002. Mr. Rothman has been self-employed in real estate
and security investments during the past five years.
 
 **J.
Nelson Happy** has
served as President, Chief Financial Officer and Secretary of the Company since
November 14, 2002. Prior to that he was named Vice Chairman of the Company's
board on August 19, 2002. Prior to that he served as Executive Vice President
and General Counsel since January 8, 2002. He was previously the CEO of Cenco
Refining Company from September 1999 to December 2001. From September 1993 to
August 1999, he served as the Dean of Regent University School of Law. Mr. Happy
received his B.S. Degree from Syracuse University in 1964 and his JD Degree from
Columbia University School of Law in 1967.
 
 **Sholom
Babad** is a
consultant to Mooney and was appointed as a director in April 2002 and became
Director of Planning at that time. Prior to being employed by Mooney, he was a
self employed consultant in fundraising and security investments during the
previous five years.
 
 **Sol
Mayer** is a
member of the board and audit committee. For more than five years prior to
joining the board, Mr. Mayer acted as an independent investment manager and
entrepreneur. His professional focus is in marketing.  He was appointed to
the board in April 2002.
 
 **James
C. Price** was
appointed Assistant Secretary in December 2004. For over 43 years he has had
experience in accounting, finance, and administration. He has been in either
Controller or V/P of Finance positions for the last 20 plus years. For more than
five years prior to joining the Company he was self employed as a consultant. He
has a BBA in Accounting from the University of Houston and an MA from Oblate in
San Antonio.
 
 **Board
Committees**
 
 **Audit
Committee**
 The
Company has an Audit Committee consisting of Sol Mayer, who is not a financial
expert. J. Nelson Happy, the Company's President, is an ex officio member of the
Audit Committee.
 
 15
 **Code
of Ethics**
 
 The
Company has adopted a Code of Ethics.
 
 **Section
16(a) Beneficial Ownership Reporting Compliance**
 
 Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors,
and persons who beneficially own more than 10% of our common stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and others who
own greater than 10% beneficial owners are also required by rules promulgated by
the SEC to furnish us with copies of all Section 16(a) forms they
file.
 
 Based
solely upon a review of the copies of such forms furnished to us, or written
representations that no Form 5 filings were required, we believe that during the
fiscal year ended December 31, 2004, there was compliance with all Section 16(a)
filing requirements applicable to our officers, directors and other with greater
than 10% beneficial owners.
 
 **Item
10: Executive Compensation**
 
 The
following table sets forth information the remuneration of our chief executive
officers and our most highly compensated executive officers who earned in excess
of $100,000 per annum during any part of our last three fiscal years:
 
 **Summary
Compensation Table**
 
 **Annual
      Compensation**
    **Long
      Term Compensation****Awards**
    **Payouts****Name
      and**
      **Principal**
      **Position**
    **Fiscal**
    
    
    **Other**
      **Annual**
      **Compensation**
    **Restricted**
      **Stock**
      **Award(S)**
    **Securities**
      **Underlying**
      **Options**
    **LTIP**
      **Payouts**
    **All
      Other**
      **Compensation****Year**
    **Salary********($)**
    **Bonus
      ($)**
    **($)**
    **($)**
    **SARs
      (#)**
    **($)**
    **($)**J.
      Nelson Happy
      Vice
      Chairman, CFO and Secretary
    2004
      2003
      2002
    207,692
      200,000
      200,000
    
    29,489Nicolas
      Chabbert,
      Executive
      Vice
      President
    2004
      2003
      2002
    156,302
      150,000
      150,000
    
    
    
    
    
    52383Sholom
      Babad
      Director
      of Planning
    2004
    151,615
 
 **Options/SAR
Grants Last Fiscal Year**
 
 **NONE**
 
 **Individual
Grants**
  **NONE**
 
 **Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values**
 
 **NONE**
 
 16
 **Compensation
of Directors**
 
 The
directors other than Mr. Happy, Sholom Babad and Sam Rothman do not receive
compensation but are reimbursed for their expenses for each meeting of the board
that they attend. Sholom Babad currently receives $84,000 annually in salary
plus benefits and Sam Rothman receives medical benefits only.
 
 **Employment
Contracts**
 
 We have
entered into a three-year employment agreement with J. Nelson Happy, Vice
Chairman, President and Chief Financial Officer. Mr. Happy receives an annual
salary of $200,000 plus reimbursement of expenses. Mr. Happy’s employment
contract was extended on January 8, 2005, and is for a term of 9 months from a
notice of termination if made by the Board of Directors. No notice of
termination has been made at this time.
 
 **Item
      11:**
    **Security
      Ownership of Certain Beneficial Owners and
    Management**
 
 The
following table sets forth certain information regarding our Common Stock
beneficially owned on March 15, 2005 by (i) each person who is known by us to
own beneficially or exercise voting or dispositive control over 5% or more of
our Common Stock, (ii) each Director and (iii) all executive officers and
Directors as a group. Except as otherwise indicated, all stockholders have sole
voting and investment power with respect to the shares listed as beneficially
owned by them, subject to the rights of spouses under applicable community
property laws.
 
 Name
      and Address (1)
      of
      Beneficial Owner
      or
      Identity of Group
    Number
      of Shares
      of
      Common Stock
    Percentage
      of
      BeneficialOwnershipAllen
      Holdings & Finance Ltd
    4,925,000
    20.96%Alpha
      Capital AG
    3,928,244
    16.72%Esquire
      Trade & Finance Inc.
    514,488
    2.19%Guaranty
      & Finance Corporation
    2,022,032
    8.61%Lewis
      Family Investments Pty. Limited
    983,640
    4.19%Libra
      Finance S.A
    809,442
    3.44%Renaissance
      Development Holdings
    2,016,352
    8.58%TRW
      Holdings PTY. Limited
    983,640
    4.19%Tusk
      Investments
    849,418
    3.61%All
      directors and officers as a group.(4
      persons)Common
      Stock
    76,854
    0.003%
 
 Except as
otherwise indicated, the address of each principal stockholder is c/o Mooney at
165 Al Mooney Road, North, Kerrville, TX 78028. We believe that all persons
named have sole voting power, subject to community property laws where
applicable.
 
 All
Beneficial Owners showing a percentage ownership of 9.99% are restricted by a
stipulated ownership restriction. Their investment if totally converted would
exceed this restriction.
 
 **Item
12.**  **Certain Relationships and Related Party Transactions.**
 
 Consultant
    Cash
      Received in 2004
    Amount
      earned in 2004 but paid in January 2005 (3)
    Total
      earned in 2004
    Earned
      and due in 2004 (excl. Dec work paid in Jan)Tom
      Gray
    240,028.69
    103,049.46
    343,078.15
    318,948.306 OthersTotal
      (1)
    524,749.78
    130,170.37
    654,920.15
    603,660.39
 Note 1:
Thomas Gray received no financial benefit from MAC’s use of other consultants
who billed to MAC through Telecom Expert Group.
 
 
 17
 
 **PART
IV**
 
 **Item
      13.**
    **Exhibits
      List**
 
 (a) The
following exhibits are submitted herewith:
 
 The
following exhibits are filed or incorporated by reference as part of this
Registration Statement.
 
 Exhibit
      No.
    Description(1)
    2.1
    Agreement
      of Merger dated July 16, 1996 between Advanced Aerodynamics and
      Structures, Inc., California Corporation, and Advanced Aerodynamics &
      Structures, Inc., a Delaware corporation(15)
    2.2
    Order
      of the U.S. Bankruptcy Court dated March 18, 2002 re Mooney Aircraft
      Corporation(15)
    2.3
    Asset
      Purchase Agreement by and between the Company and Mooney Aircraft
      Corporation dated March 18, 2002(15)
    2.4
    First
      Amendment to Asset Purchase Agreement by and between the Company and
      Mooney Aircraft Corporation dated March 19, 2002(1)
    3.1
    Certificate
      of Incorporation3.2
    Bylaws
      as amended on August 19, 2002(1)
    3.3
    Amended
      and Restated Certificate of Incorporation(10)
    3.4
    Amendment
      to the Certificate of Incorporation(19)
    3.5
    Amendment
      to the Certificate of Incorporation(7)
    3.6
    Certificate
      of Designation(8)
    3.7
    Amendment
      to Certificate of Designation(15)
    3.8
    Certificate
      of Incorporation for Mooney Airplane Company, Inc. (a wholly-owned
      subsidiary)(15)
    3.9
    Certificate
      of Amendment of Certificate of Incorporation for Mooney Airplane Company,
      Inc. (a wholly-owned subsidiary)(19)
    3.10
    Bylaws
      as amended on July 22, 2002 for Mooney Airplane Company, Inc. (a
      wholly-owned subsidiary)(1)
    4.1
    Specimen
      Certificate of Class A Common Stock(1)
    4.2
    Warrant
      Agreement (including form of Class A and Class B Warrant
      Certificates)(1)
    4.3
    Form
      of Underwriter's Unit Purchase Option(6)
    4.5
    Form
      of March 2000 Common Stock Purchase Warrant to be issued to the Series A
      Preferred Stock Subscribers and Placement Agents(6)
    4.6
    Form
      of Special Common Stock Purchase Warrant to be issued to the Series A
      Preferred Placement Agent(6)
    4.7
    Form
      of Funds Escrow Agreement related to the March 2000 Subscription
      Agreement
  18
 (7)
    4.8
    Private
      Equity Line of Credit Agreement, dated August 15, 2000, between the
      Company and certain Investors(7)
    4.9
    Registration
      Rights Agreement between the Company and the investors participating in
      the Private Equity Line of Credit Agreement(7)
    4.10
    Form
      of Warrant issued in connection with Private Equity Line of Credit
      Agreement(8)
    4.11
    Waiver
      Agreement between the Registrant and the Series A Preferred Stock
      Subscribers(8)
    4.12
    Form
      of March 27, 2001, Subscription Agreement between the Registrant and the
      5% Secured Convertible Note Subscribers(8)
    4.13
    Form
      of March 27, 2001, Secured Convertible Note between the Registrant and the
      5% Secured Convertible Note Subscribers(8)
    4.14
    Form
      of March 27, 2001, Common Stock Purchase Warrant to be issued to the 5%
      Secured Convertible Note Subscribers(8)
    4.15
    Form
      of March 27, 2001, Collateral Agent Agreement between the Collateral Agent
      and the 5% Secured Convertible Note Subscribers(8)
    4.16
    Form
      of March 27, 2001, Security Agreement between the Registrant and the
      Collateral Agent(11)
    4.18
    Form
      of June 27, 2001, Subscription Agreement ("SA") and Form of Note (Exhibit
      A to the SA) and Form of Warrant (Exhibit D to the SA)(9)
    4.19
    Form
      of October 26, 2001 Subscription Agreement ("SA") and Form of Secured Note
      (Exhibit A to the SA) and Form of Warrant (Exhibit D to the
      SA)(9)
    4.20
    Form
      of October 26, 2001 Security Agreement(9)
    4.21
    Form
      of October 26, 2001 Lockup Agreement(9)
    4.22
    Form
      of October 26, 2001 Put Agreement(12)
    4.23
    Secured
      Traunche A Promissory Note for $500,000, dated January 29, 2002, issued to
      Congress Financial Corporation (Southwest), as executed
  12)4.24
    Secured
      Traunche B Promissory Note for $2,500,000, dated January 29, 2002, issued
      to Congress Financial Corporation (Southwest), as
  executed(12)
    4.26
    Limited
      Recourse Secured Traunche D Promissory Note for $5,714,408.71, dated
      January 29, 2002, issued to Congress Financial Corporation (Southwest), as
      executed(13)
    4.27
    January
      30, 2002 Subscription Agreement and Form of Secured Note (Exhibit A to the
      Subscription Agreement) and Form of Warrant (Exhibit D to the Subscription
      Agreement) for subsequent closing under October 26, 2002 Subscription
      Agreement(13)
    4.28
    Notice
      of Put, Officer's Certificate and Modification of Put Agreement Terms for
      the Put dated January 30, 2002(13)
    4.29
    January
      30, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement)(14)
    4.30
    March
      26, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under January 30, 2002
      Subscription Agreement(16)
    4.31
    April
      11, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under January 30, 2002
      Subscription Agreement
  19
 (19)
    4.32
    May
      16, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement)(19)
    4.33
    June
      5, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under May 16, 2002
      Subscription Agreement)(19)
    4.34
    June
      10, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under May 16, 2002
      Subscription Agreement(19)
    4.35
    June
      18, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under May 16, 2002
      Subscription Agreement(19)
    4.36
    June
      28, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement) for subsequent closing under May 16, 2002
      Subscription Agreement(19)
    4.37
    July
      10, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement)(19)
    4.38
    Waiver
      and Agreement of Amendment(20)
    4.39
    July
      31, 2002 Subscription Agreement and Form of Unsecured Note (Exhibit A to
      the Subscription Agreement) and Form of Warrant (Exhibit D to the
      Subscription Agreement)(1)
    10.1
    Form
      of Indemnification Agreement(2)
    10.2
    Amended
      1996 Stock Option File(1)
    10.3
    Employment
      Agreement dated as of May 1, 1996 between the Company and Dr. Carl L.
      Chen(15)
    10.4
    Severance
      Agreement and Warrant Agreement, each between the Company and Dr. Carl L.
      Chen(2)
    10.5
    Lease
      dated December 19, 1996 between Olen Properties Corp., a Florida
      corporation, and the Company(3)
    10.6
    Standard
      Sublease dated June 27, 1997 with Budget Rent-a-Car of Southern
      California(3)
    10.8
    Standard
      Industrial/Commercial Multi-Tenant Lease-Gross dated March 12, 1997 with
      the Golgolab Family Trust(5)
    10.9
    Loan
      Agreement dated as of August 1, 1997 between the Company and the
      California Economic Development Authority(5)
    10.10
    Indenture
      of Trust dated as of August 1, 1997 between the Company and the California
      Economic Development Authority and First Trust of California, National
      Association(4)
    10.11
    Official
      Statement dated August 5, 1997(5)
    10.12
    Letter
      of Credit issued by The Sumitomo Bank, Limited(5)
    10.13
    Reimbursement
      Agreement dated as of August 1, 1997 between the Company and the Sumitomo
      Bank, Limited(5)
    10.14
    Purchase
      Contract dated August 1, 1997 by and among Rauscher Pierce Refnes, Inc.,
      the California Economic Development Authority and the Treasurer of the
      State of California, and approved by the
Company
  20
 (5)
    10.15
    Remarketing
      Agreement dated as of August 1, 1997 between the Company and Rauscher
      Pierce Refnes, Inc.(5)
    10.16
    Blanket
      Letters of Representations of the California Economic Development
      Authority and First Trust of California, National
    Association(5)
    10.17
    Tax
      Regulatory Agreement dated as of August 1, 1997 by and among the
      California Economic Development Authority, the Company and First Trust of
      California, National Association(5)
    10.18
    Custody,
      Pledge and Security Agreement dated as of August 1, 1997 between the
      Company and The Sumitomo Bank, Limited(5)
    10.19
    Investment
      Agreement dated August 5, 1997 by and between the Company and the Sumitomo
      Bank, Limited(5)
    10.20
    Specimen
      Direct Obligation Note between the Company and the Sumitomo Bank,
      Limited(4)
    10.21
    Lease
      Agreement dated October 17, 1997 between the Company and the City of Long
      Beach(4)
    10.22
    Construction
      Agreement dated October 29, 1997 between the Company and Commercial
      Developments International/West(12)
    10.23
    Assignment
      and Assumption Agreement between Advanced Aerodynamics and Structures,
      Inc. and Congress Financial Corporation (Southwest), dated January 29,
      2002, as executed(12)
    10.24
    Collateral
      Assignment of Debt and Security Agreements between Advanced Aerodynamics
      and Structures, Inc. and Congress Financial Corporation (Southwest), dated
      January 29, 2002, as executed(17)
    10.25
    Roy
      Norris Employment Agreement(17)
    10.26
    Dale
      Ruhmel Employment Agreement(17)
    10.27
    L.
      Peter Larson Employment Agreement(17)
    10.28
    J.
      Nelson Happy Employment Agreement(17)
    10.29
    Exhibit
      1 to Employment Agreements(19)
    10.30
    Nicolas
      Chabbert Employment Agreement(19)
    10.31
    2002
      Stock Option Plan(20)
    10.32
    Audit
      Committee Charter adopted July 22, 2002(21)
    10.33
    Amended
      Disclosure Statement(22)
    10.34
    Amended
      Plan of Reorganization(23)
    10.35
    Confirmation
      Order December 2004(24)
    10.36
    Specimen
      Certificate of Common Stock(25)
    10.37
    Contract
      for Thomas H Gray Inc., and Illinois subchapter S Corporation doing
      business as (dba) Telecom Expert Group, FEIN
36-4315031.(26)
    31.1
    Certification
      Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002(26)
    32.1
    Certification
      Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906
      of the Sarbanes-Oxley Act of
2002
 
 
 21
 
 
 **Signatures**
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 **Mooney
      Aerospace Group, Ltd.**Date:
      March 30 , 2005
    By:/s/
      Sam RothmanSam
      Rothman, Chairman
 
 
 In
accordance with the Exchange Act, 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/
      Sam Rothman
    Chairman
    March
      30, 2005Name:
      Sam Rothman/s/
      J. Nelson Happy
    Vice
      Chairman, President &
    March
      30, 2005Name:
      J. Nelson Happy
    Chief
      Financial Officer and Secretary(Principal
      Executive Financial andAccounting
      Officer)/s/
      Sholom Babad
    Director
      and Director of Planning
    March
      30, 2005Name:
      Sholom Babad/s/
      Sol Mayer
    Director
    March
      30, 2005Name:
      Sol Mayer
 
  22
    
 Mooney Aerospace Group, Ltd. and Subsidiary Consolidated Financial Statements   Table of Contents      PageReports
      of Independent Registered Public Accounting FirmsReport 
      from current year auditors
    F-1Report
      from predecessor auditors
    F-2Consolidated
      Financial StatementsBalance
      Sheet
    F-3Statements
      of Operations
    F-4Statements
      of Stockholders’ Deficiency
    F-5Statements
      of Cash Flows
    F-6Notes
      to Consolidated Financial Statements
    F-7


Report
of Independent Registered Public Accounting Firm
  
  
  To the
Board of Directors and Stockholders of
  Mooney
Aerospace Group, Ltd.
  Kerrville,
Texas
  We have
audited the accompanying balance sheets of Mooney Aerospace Group, Ltd. and
subsidiary as of December
31, 2004, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended . These
financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1, the
Company has incurred significant losses from operations since its inception and
has a working capital deficiency. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  
 */s/
Bernstein & Pinchuk LLP*
 Certified
Public Accountants
 
 New York,
New York
 February
5, 2005
  F-1






F-2
 Mooney
      Aerospace Group, Ltd. and SubsidiaryConsolidated
      Balance SheetDecember
      31, 2004**ASSETS**CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    59,000Accounts
      receivable
    
    
    1,568,000Other
      receivables
    
    
    1,646,000Inventory
    
    
    15,056,000Prepaid
      expenses and other current assets
    
    
    391,000TOTAL
      CURRENT ASSETS
    
    
    18,720,000PROPERTY
      AND EQUIPMENT - at cost, net of accumulateddepreciation
      and amortization
    
    
    3,994,000TRADE
      NAME
    
    
    1,802,000OTHER
      ASSETS
    
    
    401,0006,197,000**$**
    **24,917,000****LIABILITIES
      AND STOCKHOLDERS' DEFICIENCY**CURRENT
      LIABILITIESAccounts
      payable
    
    $
    2,152,000Accrued
      expenses
    
    
    851,000Accrued
      interest and penalties
    
    
    1,680,000Advanced
      deposits - deferred liabilities
    
    
    2,481,000Notes
      payable, current portion
    
    
    8,105,000Notes payable,
      revolver loan
    
    
    6,250,000Accrued
      taxes payable
    
    
    287,000Accrued
      used aircraft trade in liability
    
    
    416,000Accrued
      warrant costs
    
    
    163,000Notes
      payable, related party
    
    
    7,000Insurance
      loan
    
    
    163,000Accrued
      legal & audit
    
    
    5,000TOTAL
      CURRENT LIABILITIES
    
    
    22,560,000CONVERTIBLE
      DEBENTURES
    
    
    20,926,000NOTES
      PAYABLE
    
    
    4,847,000ENVIRONMENTAL
      CLEANUP LIABILITY
    
    
    381,00048,714,000STOCKHOLDERS'
      DEFICIENCYCommon
      stock, $0.0001 par value; 50,000,000 shares authorized;9,997,773
      shares issued and outstanding
    
    
    1,000Additional
      paid In capital
    
    
    129,636,000Accumulated
      deficit
    
    
    (153,434,000
    )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIENCY
    
    
    (23,797,000
    )**$**
    **24,917,000**The
      accompanying notes are an integral part of these financial
      statements.
   F-3
 Mooney
      Aerospace Group, Ltd. and SubsidiaryConsolidated
      Statements of Operations********Years
      ended December 31,2004
    
    
    2003NET
      SALES
    
    $
    19,314,000
    
    $
    16,617,000COST
      OF SALES
    
    
    17,553,000
    
    
    15,106,000GROSS
      MARGIN
    
    
    1,761,000
    
    
    1,511,000OPERATING
      EXPENSESResearch
      and development expenses
    
    
    748,000
    
    
    534,000Selling
      and support expenses
    
    
    4,430,000
    
    
    1,957,000General
      and administration expenses
    
    
    8,429,000
    
    
    3,764,00013,607,000
    
    
    6,255,000LOSS
      BEFORE OTHER INCOME (EXPENSE), PROVISIONFOR
      INCOME TAXES AND EXTRAORDINARY GAIN
    
    
    (11,846,000
    )
    
    (4,744,000
    )OTHER
      INCOME (EXPENSE)Interest
      income
    
    
    2,000
    
    
    -Other
      income (expense), net
    
    
    334,000
    
    
    (497,000
    )Amortization
      of debt issue costs and discount
    
    
    -
    
    
    (3,519,000
    )Interest
      expense
    
    
    (2,044,000
    )
    
    (5,431,000
    )Income
      from disposition of property and equipment
    
    
    51,000
    
    
    -Gain on forgiveness of debt
    
    
    1,033,000
    
    
    -(1,657,000
    )
    
    (9,447,000
    )LOSS
      BEFORE PROVISION FOR INCOME TAXESAND
      EXTRAORDINARY GAIN
    
    
    (13,503,000
    )
    
    (14,191,000
    )PROVISION
      FOR INCOME TAXES
    
    
    -
    
    
    -LOSS
      BEFORE EXTRAORDINARY GAIN
    
    
    (13,503,000
    )
    
    (14,191,000
    )NET
      LOSS
    
    $
    (12,470,000
    )
    $
    (14,191,000
    )NET
      LOSS PER SHARE - BASIC AND DILUTED
    
    $
    (1.2473
    )
    $
    (0.0600
    )The
      accompanying notes are an integral part of these financial
      statements.
 F-4
 
 Mooney
      Aerospace Group, Ltd. And Subsidiary**Consolidated
      Statement of Stockholders' Deficit****Preferred
      Stock**
    
    
    
    
    
    
    
    **Common
      Stock**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **Additional****Series
      A**
    
    
    
    **Common
      Stock**
    
    
    
    **Class
      A**
    
    
    
    **Class
      B**
    
    
    
    **Class
      E-1**
    
    
    
    **Class
      E-2**
    
    
    
    **Paid
      in**
    
    **Accumulated****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **Capital**
    
    **Deficit**
    
    **Total****Balance,
      December 31, 2002**
    
    
    **35,889**
    
    **$**
    **2,798,000**
    
    
    
    
    
    
    
    
    **80,510,761**
    
    **$**
    **8,000**
    
    
    **1,013,572**
    
    
    **-**
    
    
    **4,000,000**
    
    
    **-**
    
    
    **4,000,000**
    
    
    **-**
    
    **$**
    **97,911,000**
    
    **$**
    **(126,719,000**
    **)**
    **$**
    **(26,002,000**
    **)**Conversion
      of preferred stock to class A
    
    
    (9,921
    )
    
    (770,000
    )
    
    
    
    
    
    
    
    69,679,607
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    763,000
    
    
    
    
    
    -Amortization
      of discount on preferred stock
    
    
    
    
    
    54,000
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54,000
    )
    
    -Conversion
      of debentures to class A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,627,442
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,934,000
    
    
    
    
    
    4,958,000Conversion
      of accrued interest to class A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,120,599
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545,000
    
    
    
    
    
    548,000Issuance
      of common stock for professional services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,900,000
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,000
    
    
    
    
    
    237,000Conversion
      of accrued expenses to class A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,564,133
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725,000
    
    
    
    
    
    728,000Forgiveness
      of non-registration penalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,420,000
    
    
    
    
    
    7,420,000Contribution
      of warrant rights pursuantto
      restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    880,000
    
    
    
    
    
    880,000Write
      off of discounts related to warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,700,000
    )
    
    
    
    
    (5,700,000
    )Write
      off of discounts related to beneficial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -conversion
      features
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,370,000
    )
    
    
    
    
    (11,370,000
    )Reclass
      of warrant liability to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    
    
    16,000Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,191,000
    )
    
    (14,191,000
    )**Balance,
      December 31, 2003**
    
    
    **25,968**
    
    
    **2,082,000**
    
    
    
    
    
    
    
    
    **457,402,542**
    
    
    **46,000**
    
    
    **1,013,572**
    
    
    **-**
    
    
    **4,000,000**
    
    
    **-**
    
    
    **4,000,000**
    
    
    **-**
    
    
    **96,360,000**
    
    
    **(140,964,000**
    **)**
    
    **(42,476,000**
    **)**Conversion
      of preferred stock to class A
    
    
    (8,352
    )
    
    (321,000
    )
    
    
    
    
    
    
    
    23,271,576
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,000
    
    
    
    
    
    321,000Conversion
      of debentures to class A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,972,946
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,000
    
    
    
    
    
    117,000Conversion
      of accrued interest to class A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,821,497
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    23,000Issuance
      of common stock for professional services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,110,453
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,000
    
    
    
    
    
    89,000Balance
      prior to bankruptcy writeoff
    
    
    17,616
    
    
    1,761,000
    
    
    
    
    
    
    
    
    644,579,014
    
    
    64,000
    
    
    1,013,572
    
    
    -
    
    
    4,000,000
    
    
    -
    
    
    4,000,000
    
    
    -
    
    
    96,892,000
    
    
    (140,964,000
    )
    
    (41,926,000
    )Write
      off for bankruptcy
    
    
    (17,616
    )
    
    (1,761,000
    )
    
    
    
    
    
    
    
    (644,579,014
    )
    
    (64,000
    )
    
    (1,013,572
    )
    
    
    
    
    (4,000,000
    )
    
    
    
    
    (4,000,000
    )
    
    
    
    
    -
    
    
    
    
    
    (1,825,000
    )Issuance
      of new common stock
    
    
    
    
    
    
    
    
    9,997,773
    
    $
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,744,000
    
    
    -
    
    
    -Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,470,000
    )
    
    (12,470,000
    )**Balance,
      December 31, 2004**
    
    
    **-**
    
    
    **-**
    
    
    **9,997,773**
    
    **$**
    **1,000**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    
    
    
    **-**
    
    
    
    
    
    **-**
    
    
    
    
    **$**
    **129,636,000**
    
    **$**
    **(153,434,000**
    **)**
    **$**
    **(23,797,000**
    **)**
   F-5
 Mooney
      Aerospace Group, Ltd. and SubsidiaryConsolidated
      Statements of Cash FlowsYears
      ended December 31,2004
    
    
    2003CASH
      FLOW FROM OPERATING ACTIVITIES:Net
      loss
    
    $
    (12,470,000
    )
    $
    (14,191,000
    )Adjustment
      to reconcile net loss to net cashused
      in operating activities:Gain
      on forgiveness of debt
    
    
    (1,033,000
    )
    
    -Noncash
      professional service expense
    
    
    -
    
    
    237,000Amortization
      of discount on convertible debentures
    
    
    -
    
    
    2,968,000Amortization
      of debt issuance costs
    
    
    -
    
    
    553,000Depreciation
      and amortization expense
    
    
    819,000
    
    
    781,000Income
      from disposition of property and equipment
    
    
    (51,000
    )
    
    -Environmental
      cleanup accrual
    
    
    381,000
    
    
    -Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (1,440,000
    )
    
    (83,000
    )Other
      receivable
    
    
    (1,646,000
    )
    
    -Inventory
    
    
    (6,390,000
    )
    
    (1,114,000
    )Prepaid
      expenses and other current assets
    
    
    (208,000
    )
    
    159,000Other
      assets
    
    
    (401,000
    )
    
    -Accounts
      payable
    
    
    410,000
    
    
    379,000Accrued
      expenses
    
    
    (489,000
    )
    
    794,000Accrued
      interest
    
    
    1,920,000
    
    
    4,843,000Accrued
      warrant liability
    
    
    164,000
    
    
    497,000Advanced
      deposits
    
    
    -
    
    
    58,000Accrued
      taxes payable
    
    
    286,000
    
    
    -Accrued
      used aircraft trade in liability
    
    
    416,000
    
    
    -Accrued
      legal & audit
    
    
    5,000
    
    
    -Deferred
      revenue
    
    
    1,595,000
    
    
    -Net
      cash used in operating activities
    
    
    (18,133,000
    )
    
    (4,119,000
    )CASH
      FLOW FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
    
    
    (818,000
    )
    
    (72,000
    )Proceeds
      from disposition of property and equipment
    
    
    51,000
    
    
    -Net
      cash used in investing activities
    
    
    (767,000
    )
    
    (72,000
    )CASH
      FLOW FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible debentures
    
    
    -
    
    
    573,000Proceeds
      from issuance of notes payable
    
    
    27,574,000
    
    
    10,650,000Payments
      for debt issue costs
    
    
    379,000
    
    
    (653,000
    )Payments
      on notes payable
    
    
    (10,177,000
    )
    
    (6,617,000
    )Notes
      payable related party
    
    
    7,000
    
    
    -Net
      cash provided by financing activities
    
    
    17,783,000
    
    
    3,953,000NET
      INCREASE (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
    
    
    (1,116,000
    )
    
    (238,000
    )CASH
      AND CASH EQUIVALENTS, Beginning of year
    
    
    1,175,000
    
    
    1,413,000CASH
      AND CASH EQUIVALENTS, End of year
    
    $
    59,000
    
    $
    1,175,000SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid
    
    $
    414,000
    
    $
    365,000Income
      taxes paid
    
    
    -
    
    
    -The
      accompanying notes are an integral part of these financial
      statements.
  F-6
 **Supplemental
Schedule of Non-Cash Investing and Financing Activities:**
 
 
 During
the year ended December 31, 2004, the Company: 1) converted 8,352 shares of
Series A preferred stock into 23,271,576 shares of Class A common stock valued
at $321,000, 2) converted $1,938000 of convertible debentures into 102,924,000
shares of Class A common stock, 3) converted $550,000 of accrued interest into
36,422,000 shares of Class A common stock, 4) issued 15,874,000 shares of Class
A common stock for deferred compensation and consulting fees valued at $163,090,
5) issued 24,511,000 and 17,391,000 shares of Class A common stock for
settlement fees and commitment fees valued at $468,000 and $400,000
respectively. In addition, during the year ended December 31, 2004, the Company
consummated a reverse split of the Class A Common Stock into a new issue of
Common Stock per the plan of Bankruptcy. There was a conversion of 644,579,000
shares of Class A Common Stock into 200,000 shares of Common Stock.
 
 During
the year ended December 31, 2003, the Company: 1) converted 9,921 shares of
Series A preferred stock into 69,679,607 shares of Class A common stock valued
at $770,000, 2) converted $4,958,000 of convertible debentures into 245,627,442
shares of Class A common stock,
  3)
converted $548,000 of accrued interest into 25,120,599 shares of Class A common
stock, 4) issued 30,564,133 shares of Class A common stock for deferred
compensation and consulting fees valued at $728,000,
  5) issued
$88,000 and $700,000 of convertible debentures for services rendered, and
commissions and fees, respectively and 6) issued 5,900,000 shares of Class A
common stock for professional services valued at $237,000. In addition, during
the year ended December 31, 2003, the Company implemented a restructuring plan
whereby certain convertible debenture noteholders agreed to waive all
outstanding defaults including waiver of penalties due to them totaling
$8,300,000 as a contribution to capital and wrote off the remaining debt
discount related to the convertible debentures of $17,070,000. (See Note 7) In
addition, as part of the restructuring plan, $6,322,000 of promissory notes were
converted to convertible debentures (See Note 7).
  During
the year ended December 31, 2002, the Company acquired certain assets of MACorp
for $9,881,000. Of the total consideration paid, approximately $4,082,000 was in
cash, of which, $3,500,000 was paid directly to Congress Financial Corporation;
$4,500,000 was in the form of notes payable to Congress; 3,260,871 shares of
Class A Common Stock were issued with a fair value of $900,000, and warrants to
purchase 3,623,189 shares of Class A Common Stock were issued with a fair value
of $399,000. Assets purchased included trade name, inventory and property, and
equipment, and totaled $1,802,000, $4,833,000 and $5,193,000 respectively.
Liabilities assumed totaled to $1,947,000. In addition, the Company: 1)
converted 10,759 shares of Series A preferred stock into 12,662,905 shares of
Class A common stock valued at $1,041,000, 2) converted $2,527,000 of
convertible debentures into 17,381,383 shares of Class A common stock, 3)
exchanged 886,752 shares of Class B common stock for 886,752 shares of Class A
common stock, 4) issued 980,000 shares of Class A common stock for professional
services valued at $210,000, and 5) issued 2,000,000 warrants as part of a
severance package valued at $320,000. Also, during the year ended December 31,
2002, the Company incurred discounts on the issuance of convertible debentures
totaling $14,315,000.
 
 **Note 1 -
Organization and Significant Accounting Policies**
 
 Organization
and Line of Business
 
 Mooney
Aerospace Group, Ltd., formerly known as Advanced Aerodynamics & Structures,
Inc. (the "Company" or "Mooney"), was incorporated under the laws of the State
of California on January 26, 1990. In July 1996, the Company reincorporated by
merging into a newly formed corporation in Delaware. Upon approval of the
Company's Board of Directors and the State of Delaware, the Company, on July 23,
2002, changed its the name from Advanced Aerodynamics & Structures, Inc. to
Mooney Aerospace Group, Ltd. The consolidated financial statements as of
December 31, 2003 and for the two years then ended have been adjusted to reflect
this name change.
 
 On April
19, 2002, the Company completed the acquisition of certain assets and the
assumption of certain liabilities of Mooney Aircraft Corporation ("MACorp") out
of bankruptcy through its newly formed and wholly owned subsidiary, Mooney
Airplane Company ("MAC"), for approximately $9,881,000 (see Note 2). MACorp was
an operating company that had a long history of generating revenue.
 
 After the
acquisition, the Company's business operations included (i) the design and
manufacture of four-place, single-engine, retractable gear aircraft, (ii) sale
of spare parts for Mooney aircraft, (iii) manufacture of aircraft components for
other aerospace companies, and (iv) service and repair of aircraft. Aircraft
sales, both domestic and international, are largely through a Mooney Marketing
Center distribution system. Spare parts are sold worldwide through a Mooney
Service Center distribution system. The manufacture of aircraft components and
the Company's service and repair of aircraft are primarily domestic
operations.
 
 Since its
inception in 1990 to June 30, 2002, the Company was in the development stage, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 7 and
had accumulated a deficit while in the development stage of $99,216,000.
Effective July 1, 2002, the Company was no longer considered to be in the
development stage due to its recent acquisition of MACorp's assets and
business.
 
 Basis
of Presentation
 
 The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has incurred a cumulative net loss of $153,434,000 as of December 31, 2004. The
Company also has a working capital deficiency of $3,840,000 as of December 31,
2004.
 
 F-7
 These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. These
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
 
 Management
plans to take the following steps that it believes will be sufficient to provide
the Company with the ability to continue in existence:
 
 a)
    The
      Company's management team has been developing a financial plan to address
      its working capital requirements and believes that if executed
      successfully, the plan will substantially improve the Company's ability to
      meet its working capital requirements throughout the year ended December
      31, 2005. The plan includes obtaining additional short term funding for
      increased working capital consistent with the planned growth of the
      Company, additional long term funding which may be obtained under the USDA
      guaranteed loan program, and additional capital
raising.
 
 b)
    Management
      has restructured its current outstanding debt and obtained a $7,500,000
      revolving loan as of September 29, 2004, from which it plans to fund its
      current operations and increase the number of airplanes produced to
      generate sufficient revenue to achieve profitable operating
      results.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Mooney Airplane Company ("MAC"),
incorporated under the laws of the state of Delaware on March 4, 2002 (see Note
2). All inter-company accounts and transactions have been
eliminated.
 
 Use of
Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting periods. As of December 31, 2004 and
2003, the Company used estimates in determining the realization of its accounts
receivable, inventory and its intangible assets. Actual results could differ
from these estimates.
 
 
 Fair
Value of Financial Instruments
 
 For
certain of the Company's financial instruments, including cash, accounts
receivable, inventory, other current assets, accounts payable, accrued expenses,
accrued interest and advanced deposits, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for convertible
debentures and notes payable also approximate fair value because current
interest rates and terms offered to the Company for similar debt are
substantially the same.
 
 Cash
and Cash Equivalents
 
 For
purposes of the statements of cash flows, the Company defines cash equivalents
as all highly liquid debt instruments purchased with a maturity of three months
or less, plus all certificates of deposit.
 
 F-8
 Concentration
of Credit Risk
 
 Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and accounts receivables. The Company places its cash with
high quality financial institutions and at times may exceed the FDIC $100,000
insurance limit. The Company extends credit based on an evaluation of the
customer's financial condition, generally without collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses, as required.
 
 Inventory
 
 Inventory
consists of raw materials, work in process and finished goods and is stated at
the lower of cost (moving average) or market. An obsolescence allowance is
estimated for parts whose values have been determined to be impaired or whose
future utility appears limited. If an inventory part has not been used in the
past two years, it is deemed to be impaired.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost and are depreciated using the straight-line
method over their estimated useful lives of 5-10 years for machinery and
equipment and 3-5 years for office furniture and equipment. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the lease.
 
 Expenditures
for maintenance and repairs are charged to operations as incurred while renewals
and betterments are capitalized. Gains and losses on disposals are included in
the results of operations.
 
 The
Company recognized an impairment expense relating to certain fixed assets during
the year ended December 31, 2002 (see Note 13).
  Trade
Name
 
 Trade
name consists of the value assigned to the Mooney Airplane name and certificates
acquired as part of the Mooney purchase, as described in Note 2. The Company
evaluates its trade name each balance sheet date, based principally on a market
capitalization approach, to determine whether events and circumstances have
occurred that indicate possible impairment. If there are indications of
impairment, the trade name will be written down to its estimated fair
value.
 
 Impairment
of Long-Lived Assets
 
 Long-lived
assets to be held and used are analyzed for impairment whenever events or
changes in circumstances indicate that the related carrying amounts may not be
recoverable. The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. If there are
indications of impairment, the Company will use future undiscounted cash flows
of the related asset or asset grouping over the remaining life in measuring
whether the assets are recoverable. In the event such cash flows are not
expected to be sufficient to recover the recorded asset values, the assets will
be written down to their estimated fair value. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value of the asset less
cost to sell.
  F-9
 Stock
Based Compensation
 
 SFAS No.
123, "Accounting for Stock-Based Compensation," establishes and encourages the
use of the fair value based method of accounting for stock-based compensation
arrangements under which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and is recognized
over the periods in which the related services are rendered. The statement also
permits companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the intrinsic value based method
and has disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. The Company uses the fair value method
for options granted to non-employees. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under the Stock Option Plan consistent with the methodology prescribed by SFAS
No. 123, the Company's net loss and loss per share would be reduced to the pro
forma amounts indicated below for the year ended December 31, 2004 and
2003:
 
 2004
    2003Net
      lossAs
      reported
    $(12,470,000)
    $(14,191,000)Compensation
      recognized under APB 25
    -
    -Compensation
      recognized under SFAS 123
    -
    -Pro
      forma
    $(12,470,000)
    $(14,191,000)Basic
      and diluted loss per common share:
    New
      Common
    Old
      Class AAs
      reported
    $(1.2473)
    $(0.06)Pro
      forma
    $(1.2473)
    $(0.06)
 
 Advanced
Deposits
 
 The
Company has a policy that requires a deposit of no less than $10,000.00 for the
purchase of airplanes manufactured by MAC.
 
 Revenue
Recognition
 
 The
Company recognizes revenue on substantially all aircraft sales and parts and
service sales when each of the following four criteria is met: 1) a contract or
sales arrangement exists; 2) products have been shipped or services have been
rendered; 3) the price of the products or services is fixed or determinable; and
4) collectibility is reasonable assured.
 
 The
Company also recognizes revenue on aircraft sales under bill-and-hold
transactions when each of the following seven criteria are met: 1) the risk of
ownership has passed to the buyer; 2) the buyer has made a fixed commitment to
purchase the goods; 3) the buyer has requested that the transaction be on a
bill-and-hold basis and has a substantial business purpose for ordering so; 4)
there is a fixed schedule for delivery of the goods and the delivery date is
reasonable and consistent with the buyer's business practices; 5) the Company
has not retained any specific performance obligations such that the earnings
process is not complete; 6) the aircraft has been segregated from the Company's
inventory and is not subject to being used to fill other orders; and 7) the
aircraft must be complete and ready for shipment.
 
 Advertising
and Marketing Costs
 
 The
Company expenses costs of advertising and marketing as incurred. Advertising and
marketing expense for the years ended December 31, 2004 and 2003 amounted to
$1,371,000 and $423,000, respectively.
 
 F-10
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
 
 Earnings
Per Share
 
 The
Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect. The following potential common
shares have been excluded from the computation of diluted net loss per share for
the years ended December 31, 2004 and 2003 because the effect would have been
anti-dilutive:
 
 2004
    2003Conversion
      of Series A preferred stock
    23,272,000
    67,625,000Conversion
      of convertible debentures
    102,824,000
    1,503,975,734Stock
      options issued to employees
    
    300,000Warrants
      issued with convertible debentures
    
    --Warrants
      issued with Series A preferred stock
    
    --Warrants
      issued with equity line
    
    4,268,764Warrants
      issued with severance package
    
    2,000,000Warrants
      issued with acquisition of MAC
    
    3,623,189126,096,000
    1,581,792,687
 
 Comprehensive
Loss
 
 SFAS No.
130, "Reporting Comprehensive Loss," establishes standards for the reporting and
display of comprehensive income and its components in the financial statements.
For the year ended December 31, 2004 and 2003, the Company did not have items
that represented other comprehensive income and, accordingly, a statement of
comprehensive loss has not been included herein.
 
 Research
and Development
 
 All costs
incurred in the design, testing, and certification of aircraft being developed
by the Company (including costs of in-process research and development acquired)
are expensed as incurred.
 
 F-11
 Warranty
 
 A
warranty period of three years is provided for each aircraft sold. Periodically,
the recorded warranty liability is evaluated with consideration given to actual
warranty expense incurred on a historical basis, the volume of products still
under warranty, and the warranty period remaining for those
products.
 
 Product
Liability
 
 An
accrual is provided for product liability expenses on manufactured products.
Periodically, the recorded product liability accrual is evaluated with
consideration given to actual product liability expenses, the number of product
liability claims still outstanding, the severity of the alleged and actual
damages specified in each claim, and the likelihood that actual expenses will be
incurred on each claim. Product liability, if any, is included in accrued
expenses.
  Environmental
Remediation Costs
 
 Expenses
associated with environmental remediation obligations are accrued when such
losses are probable and reasonably estimable. Accruals for estimated expenses
from environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.
 
 Recently
Issued Accounting Pronouncements
 
 During
April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", effective for contracts entered into or
modified after September 30, 2003, except as stated below and for hedging
relationships designated after September 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after September 30, 2003. The Company does not participate in such transactions
and is evaluating the effect of this new pronouncement, if any, and will adopt
FASB 149 within the prescribed time.
 
 During
May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The Company is evaluating the effect of
this new pronouncement and will adopt FASB 150 within the prescribed
time.
 
 In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities." Interpretation 46 changes the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. Interpretation 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to other entities in the
first fiscal year or interim period beginning after December 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. In December 2003, the FASB concluded to revise certain elements of
FIN 46, which will be issued shortly. The FASB also modified the effective date
of FIN 46. For all entities that were previously considered special purpose
entities, FIN 46 should be applied in periods ending after December 15, 2003.
Otherwise, FIN 46 is to be applied for registrants who file under Regulation SX
in periods ending after March 15, 2004, and for registrants who file under
Regulation SB, in periods ending after December 15, 2004. The Company does not
expect the adoption to have a material impact on the Company's consolidated
financial position or results of operations.
 
 F-12
 In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities." Interpretation 46 changes the criteria by which one company
includes another entity in its financial statements. Previously, the criteria
were based on control through voting interest. Interpretation 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity.
 
 On
December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December
2003), *Consolidation of Variable Interest Entities* ,
(FIN-46R), primarily to clarify the required accounting for interests in
variable interest entities *.* FIN-46R
replaces FIN-46, *Consolidation of Variable Interest Entities,* that was
issued in January 2003 *.* FIN-46R
exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. While FIN-46R modifies or clarifies various provisions of FIN-46, it
also incorporates many FASB Staff Positions previously issued by the
FASB .
 
 In
December 2003, the FASB issued a revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which replaces the previously
issued Statement. The revised Statement increases the existing disclosures for
defined benefit pension plans and other defined benefit postretirement plans.
However, it does not change the measurement or recognition of those plans as
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Specifically, the
revised Statement requires companies to provide additional disclosures about
pension plan assets, benefit obligations, cash flows, and benefit costs of
defined benefit pension plans and other defined benefit postretirement plans.
Also, companies are required to provide a breakdown of plan assets by category,
such as debt, equity and real estate, and to provide certain expected rates of
return and target allocation percentages for these asset categories. The Company
has implemented this pronouncement and has concluded that the adoption has no
material impact to the consolidated financial statements.
  **Note 2 -
Acquisitions**
 
 The
Company acquired Mooney Aircraft Corporation's ("MACorp") assets out of
bankruptcy. Historically, MACorp produced top of the line, single engine piston
airplanes including the Eagle, the Ovation 2, and the Bravo, which are
considered to be the performance leaders in the four-passenger single engine
aircraft market. MACorp is located in Kerrville, Texas. On February 6, 2002, the
U.S. Bankruptcy Court in San Antonio, Texas, approved an operating agreement,
which allowed the Company to manage MACorp while a plan of reorganization was
prepared for approval. MACorp had operated under the protection of Chapter 11
bankruptcy since July 2001.
 
 F-13
 On
February 8, 2002, the Company purchased Congress Financial Corporation's
position (the "Congress Position") as senior secured creditor for MACorp. Under
the terms of the Assignment and Assumption Agreement, the purchase price paid by
the Company in connection with the acquisition of the Congress Position was
$8,000,000 with $3,500,000 paid in cash and $4,500,000 payable in secured notes.
Each note is secured by substantially all the assets acquired from MACorp. As
additional security for the Company's compliance with the fulfillment of its
obligations pursuant to the Assignment and Assumption Agreement and the
acquisition notes, the Company delivered to Congress Financial Corporation a
Limited Recourse Secured Promissory Note for $5,700,000. This note was a
contingent note, payable only in the event that the Company defaulted under the
terms of the original acquisition notes. In November 2003, all of the Congress
Financial Corporation notes were paid in full and, as of December 31, 2003, the
Company has no obligations to Congress Financial Corporation.
 
 On March
18, 2002, the bankruptcy court approved the sale of MACorp's assets to the
Company, which was completed on April 19, 2002. On April 19, 2002, the Company
completed the acquisition of certain assets and the assumption of certain
liabilities of MACorp through its newly formed and wholly owned subsidiary, MAC,
for approximately $9,881,000. Of the total consideration paid, approximately
$4,082,000 was in cash, of which, $3,500,000 was paid directly to Congress;
$4,500,000 was in the form of notes payable to Congress; 3,260,871 shares of
Class A Common Stock were issued with a fair value of $900,000, and warrants to
purchase 3,623,189 shares of Class A Common Stock were issued with a fair value
of $399,000. Assets purchased included trade name, inventory and property, and
equipment, and totaled $1,802,000, $4,833,000 and $5,193,000 respectively.
Liabilities assumed totaled to $1,947,000.
 
 This
transaction was accounted for by the purchase method of accounting, as required
by SFAS No. 141, "Business Combinations", and accordingly, the purchase price
has been allocated to the assets acquired and the liabilities assumed based upon
the estimated fair values at the date of acquisition. The allocation is
preliminary, and may be adjusted upon the completion of an appraisal of the
property and equipment and other future analysis during the allocation period,
not to exceed one year.
 
 The
operating results of the acquisition are included in the Company's consolidated
results of operations from April 19, 2002.
  **Note 3 -
Inventory**
 
 Inventory
      at December 31, 2004 consisted of the following:Raw
      materials and purchased parts
    $
      4,525,000Work-in-process
    6,721,000Semi
      finished Manufactured Components
    3,476,000Finished
      goods
    1,971,000Totals
    16,693,000Less
      : Allowances
    (
      1,637,000)$15,056,000
 
 **Note 4 -
Property and Equipment**
 
 Property
      and equipment at December 31, 2004 consisted of the
    following:Experimental
      aircraft
    $
      650,000Office
      furniture and equipment
    845,000Machinery
      and equipment
    4,220,000Buildings
      and Improvements
    361,000Motor
      Vehicles
    46,000Totals
    6,122,000Less
      accumulated depreciation and amortization
    (2,126,000)$
      3,994,000
 
 F-14
 Depreciation
expense for the years ended December 31, 2004 and 2003 was $819,000,000 and
$781,000, respectively.
  **Note 5 -
Notes Payable**
 
 Notes
      payable at December 31, 2004 consisted of the following:Note
      payable to BLX Commercial Capital, LLC - interest rate prime plus 2%;
      collateralized by virtually all the assets of the Company and a $2,000,000
      life insurance policy on the Company’s Chief Executive Officer and is
      guaranteed under the U.S. Department of Agriculture Business and Industry
      Guaranteed Loan Program; monthly principal and interest payments of
      $32,516, with any unpaid principal and interest due on November 1,
      2028.
    $4,911,000Notes
      payable to a group of investors -interest rate of 17.5% secured by
      virtually all the assets of the Company. Due November 2006. Originally the
      loan was for $9,000,000. This is a working capital loan.
    3,930,000Notes
      payable to a group of investors -- interest rate of 8% secured by specific
      aircraft with a maturity of November 2007.
    3,100,000Bank
      loan for Automobile - interest rate of 5.49% with a maturity of September
      2009.
    26,000Note
      payable to Libra Finance S.A with a maturity of February
    2005
    986,000Less
      current maturities
    (8,106,000)$
      4,847,000Principal
      payments on notes payable are as follows:Year
      ending December 31,2005
    $
      8,106,000Thereafter
    4,487,000$
      12,953,000
 
 F-15
 **Note 6 -
Revolving Loan**
 
 On
November 17, 2003, the Company finalized a revolving loan in the aggregate
principal amount of $4,000,000 issued by MAC to related parties, pursuant to an
Amended and Restated Loan and Purchase Money Security Agreement. The amount of
this loan was increased to a maximum of $7,500,000 with a balance as of December
31, 2004 of $6,250,000. The revolving loan has a term of three (3) years and
bears interest at a rate of 10% per annum. The proceeds of the revolving loan
will be used to finance the purchase of airplane parts to be used in the
manufacture of airplanes, and is secured by parts and equipment purchased with
such proceeds. In connection with this revolving loan, the Company is required
to pay a commitment fee of $400,000 payable in shares of the Company's common
stock. As of December 31, 2004, the shares had been issued.
 
 **Note 7 -
Convertible Debentures**
 
 Convertible
      debentures at December 31, 2004 consisted of the
following:Secured
      convertible debentures to various individual investors (including $75,000
      to the Company's Chairman) - interest rate 8%; convertible into shares of
      the Company's Class A common stock at a rate of $2.22 per shares;
      debentures matures at various dates in the year 2007.
    $
      20,926,000The
      principal amount of the convertible debentures mature as
      follows:A
      roll forward of the convertible debentures is as follows:Balance,
      December 31, 2002
    5,829,000Issuance
      of convertible debentures for cash
    573,000Issuance
      of convertible debentures for finder's fees
    1,360,000Conversions
      into equity
    (4,958,000)Conversions
      of notes payable to convertible debentures
    6,322,000Write
      off of discounts due to restructuring
    17,070,000Amortization
      of discounts
    2,968,000Balance,
      December 31, 2003
    $
      29,164,000Write
      off of unsecured debentures
    $5,862,000Balance,
      December 31, 2004
    $20,926,000
 
 On June
17, 2003, the Company implemented a restructuring plan, whereby, all convertible
note holders agreed to waive all outstanding defaults, including waiver of the
penalties for non-registration of the shares underlying the convertible
debentures, and set fixed note conversion prices of $0.0192 and $0.0384 per
Class A common shares for the secured and unsecured debenture holders,
respectively. In addition, as part of the restructuring, holders of notes
payable totaling $6,322,000 converted their notes payable into secured
convertible debentures.
  The debt
holders were, due to their beneficial ownership of significant equity interests
in the Company, considered to be related parties as defined in Statement of
Financial Accounting Standards No. 57, "Related Party Disclosures". Therefore,
the Company accounted for this restructuring consistent with its economic
substance, as set forth in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings". Since
the debt holders had agreed to the restructuring primarily to ensure the
Company's continuation as a going concern thereby protecting their equity
interests, the restructuring was accounted for as an equity transaction and no
amounts were charged to operations. The contribution of the warrants and the
forfeiture of the original beneficial conversion rights were treated as a
contribution to capital. The elimination of the unamortized debt discount
attributable to these equity features was similarly treated as an equity
distribution to these debt holders. A summary follows:
  
 F-16
 Waiver
      of interest and penalties for non-registration of
    securities
    $
      7,420,000Contribution
      of warrant rights, at net book value of warrantliability
      at date of restructuring
    880,000Elimination
      of unamortized discount at date of restructuring,accounted
      for as a distribution of rights to equity holders
    (17,070,000)Net
      distribution to related parties at date of restructuring
    $
      (8,770,000)
 
 On June
10, 2004 the company filed a petition in Bankruptcy seeking reorganization under
Chapter XI of the U.S. Bankruptcy Code and as a result all debentures holders
except the Secured Debenture holders were issued stock for their interest. The
Secured debenture holders will be paid cash at maturity for the interest accrued
from June 10, 2004 until the maturity date of their note.
  **Note 8 -
Stockholders' Deficit**
 
 Common
Stock
 
 As of
December 31, 2004, the Company has one class of common stock except that the
holder of each outstanding share of Common Stock is entitled to one vote. In
connection with the Company's initial public offering in 1996, Class A Warrants
were issued, which entitle the holder to purchase one share of Class A Common
Stock and one Class B Warrant. Each Class B Warrant entitles 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. The warrants originally expired on December 3, 2001, but were
subsequently extended through October 31, 2002, at which time they expired
unexercised.
  Preferred
Stock
 
 The
Company entered into a preferred stock agreement with certain investors, to
issue up to 100,000 shares of 5% Cumulative Convertible Series A Preferred Stock
("Preferred Stock") with a stated value of $100 per share and Common Stock
Purchase Warrants to purchase Class A Common Stock, for the aggregate purchase
price of $10 million. As of December 31, 2003, the Company has issued 91,085
shares of Preferred Stock with a stated value of $9,108,500. The remaining
$891,500 in Preferred Stock funding will not occur until certain criteria have
been met. The Preferred Stock was settled per the Amended Plan of Reorganization
for 200,000 shares of Common Stock.
  **Note 9 -
Income Taxes**
 Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial statement purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 2004 are as follows:

Deferred
      tax assets:Federal
      net operating loss
    $43,807,000State net
      operating lossResearch
      & development credits
    1,251,000Depreciation
    320,000Other
    80,000$45,458,000Valuation
      Allowance
    ($45,458,000)


F-17

At December 31,
2004, the Company had federal net operating loss ("NOL") carryforwards of
approximately $128,845,000 respectively. Federal NOLs could, if unused, expire
in varying amounts in the years 2005 through 2024.

At December 31,
2004, the Company had federal research and development ("R&D") credit
carryforwards of approximately $1,251,000. The federal R&D credit
carryforwards started to expire in 2004.

The valuation
allowance increased by $4,256,000 during 2004.

The reconciliation
of the effective income tax rate to the federal statutory rate for the years
ended December 31, 2004 and 2003 is as follows:

2004
    2003Federal
      income tax rate
    (34.0%)
    (34.0%)State
      tax, net of federal benefit
    (6.0%)
    (6.0%)Increase
      in valuation allowance
    40.0%
    40.0%Effective
      income tax rate
    0.0%
    0.0%

Utilization of the
net operating loss and tax credit carryforwards is subject to significant
limitations imposed by the change in control under I.R.C. 382, limiting its
annual utilization to the value of the Company at the date of change in control
times the federal discount rate.  A significant portion of the NOL may
expire before it can be utilized. **Note 10 – Commitments and Contingencies**
 Litigation
 
 None
 
 Employment
Contracts
 
 The
Company has executed a three-year employment agreement with one executive dated
January 8, 2002, which has been extended.
 
 **Note 11 - Per
Share Information**
 
 The
Company calculates basic net loss per share as required by SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities, and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The following table sets forth the computation of
basic loss per share:
  2004
    2003NumeratorLoss
      before extraordinary item
    $
      (13,503,000)
    $(14,191,000)Dividends
      in arrears
    
    (504,000)Amortization
      of discount on preferred stock
    
    (54,000)Numerator
      for basic loss per share
    $
      (12,470,000)
    $
      (14,749,000)DenominatorWeighted
      average shares of shares of Class B
    
    1,014,000Weighted
      average shares of shares
    9,998,000
    235,895,000Denominator
      for basic loss per share
    9,998,000
    236,909,000New
      Common
    Old
      Class ABasic
      loss per share
    $
      (1.2473)
    $
      (0.06)
 
 F-18
 There is
no difference between the loss per common share amounts computed for basic and
dilutive purposes in 2003.
 
 **Note 12 -
Employee Benefits**
 
 The
Company has a 401(k) Plan for its employees. For the years ended December 31,
2004, 2003 and 2002, the Company did not make any contributions to the
Plan.
 
 **Note 13 -
Other Income (Expense)**
 
 Other
income (expense) in the accompanying consolidated statements of operations for
the year ended December 31, 2004 is principally related to the change due to the
Amended Plan of Reorganization and the cancellation of debt associated with
it.
 
 **Note
14 - Subsequent Events**
 
 Conversions
2005 - Secured debenture holders converted $1,074,000 of convertible debentures
into 483,784 shares of common stock.
 F-19