SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the Fiscal Year Ended December 31, 1997
                                     _____
                               TRANSITION REPORT
                            PURSUANT TO SECTION 13 or
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 000-21749

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

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

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

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

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

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

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

         The  Registrant  generated  no  operating  revenues for the fiscal year
ended December 31, 1997.

         The aggregate  market value of the voting stock held by  non-affiliates
of the Registrant as of December 31, 1997 was $17,681,250.  For purposes of this
computation,  it has been assumed that the shares beneficially held by directors
and officers of Registrant were "held by affiliates;"  this assumption is not to
be  deemed to be an  admission  by such  persons  that  they are  affiliates  of
Registrant.

         As of December 31,  1997,  the  registrant  had  outstanding  6,900,000
shares  of Class A  Common  Stock,  2,000,000  shares  of Class B Common  Stock,
4,000,000  shares of Class E-1 Common  Stock and  4,000,000  shares of Class E-2
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's  Proxy Statement relating to its 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III.

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

           Transitional Small Business Disclosure Format: Yes ___ No X


<PAGE>



                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
                              CROSS-REFERENCE SHEET

         The following items in Part III of  Registrant's  Annual Report on Form
10-KSB for its fiscal year ended  December 31, 1997 are  incorporated  herein by
reference to  Registrant's  Proxy Statement and appear therein under the section
headings indicated below:

<TABLE>

Item              Form Heading                                Section Heading
<S>               <C>                                         <C>

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

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

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

12.               Certain Relationships and Related           Proxy Statement - Management - Certain
                  Transactions                                Relationships and Related Transactions
</TABLE>


<PAGE>



                                     PART I
ITEM 1.   BUSINESS.

Overview

         The Company is a  development  stage  enterprise  organized  to design,
develop,  manufacture and market propjet and jet aircraft intended primarily for
business use. The Company has obtained a type certificate  ("Type  Certificate")
from  the  Federal   Aviation   Administration   ("FAA")   with   respect  to  a
non-pressurized,  single-engine  aircraft  powered by a Pratt & Whitney  propjet
engine (the "JETCRUZER 450"). The Company intends to modify the JETCRUZER 450 to
develop a six-seat  (including pilot),  pressurized version of such aircraft for
commercial  sale (the  "JETCRUZER  500") which,  the Company  anticipates,  will
takeoff and land in less than 1,000 feet, be able to fly at approximately 30,000
feet above sea level, and have a high cruise speed of approximately  360 mph and
a range of approximately 1,500 miles.

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

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

         Based on the limited  scope of the changes to be made to the  JETCRUZER
450 and the experience of other  manufacturers  that have modified  certificated
aircraft,  the  Company  believes  it will need to amend  its Type  Certificate,
rather than obtain a new type  certificate,  to develop  the  JETCRUZER  500 for
commercial  sale.  The  Company  currently  anticipates  that it can  obtain  an
amendment to its Type Certificate  during the fourth quarter of 1998, and obtain
a production  certificate  and commence  commercial  production of such aircraft
within the same time frame. There can be no assurance,  however,  that obtaining
the amendment will not take longer than  anticipated,  that the Company will not
be required to obtain a new type  certificate for the JETCRUZER 500, or that the
Company  will not  experience  unforeseen  expense  or delay in  certifying  and
commercializing its proposed aircraft.

Industry Background

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


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<PAGE>



         Purchasers of general aviation aircraft include (i) corporations,  (ii)
governments,  (iii) the  military,  (iv) the general  public and (v)  fractional
interest  entities.  A corporation may purchase a general aviation  aircraft for
transporting its employees and property. Many companies use an aircraft in their
line of business,  including on-demand air taxi services, air ambulance services
and freight and delivery  services.  Governments and military  organizations may
purchase an aircraft for the transportation of personnel, freight and equipment.
Members of the  general  public may  purchase an aircraft  for  personal  and/or
business  transportation and pleasure use. Fractional interest entities purchase
one or more aircraft and then sell interests in each aircraft to several persons
or entities.  Each entity pays for its share of maintenance  and operating costs
and its access to and use of the  aircraft.  Increased  corporate  earnings  may
encourage  corporations  to acquire an aircraft.  An aircraft must qualify under
FAA regulations in order to be used for certain purposes,  and the ability of an
aircraft to so qualify will have a material  affect on the potential  market for
such aircraft.

         Currently,  there are fewer  than ten major  manufacturers  of  general
aviation  aircraft  based in the  United  States.  Piston  aircraft  make up the
numerical  majority  of  aircraft  delivered  by  these  manufacturers,  whereas
propjets  and jet  aircraft  account  for the  majority  of  billings.  In 1996,
aircraft deliveries by United States manufacturers  generated approximately $3.1
billion.  In  1997,   deliveries  by  United  States   manufacturers   generated
approximately $4.76 billion.

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

         Although the total number of general aviation aircraft  manufactured in
the United  States  declined  from 1978 to 1994,  deliveries  of more  expensive
propjet and jet aircraft manufactured in the United States increased,  resulting
in a less substantial decline in the total dollar value of shipments of aircraft
during such period and a substantial  increase in the average price of each such
aircraft  delivered from 1978 through 1994.  Deliveries of more costly corporate
aircraft  powered by propjet or jet engines were  affected to a lesser extent by
the liability and insurance coverage problems encountered by piston aircraft. In
addition,   on  August  17,  1994,   Congress   enacted  the  General   Aviation
Revitalization  Act of 1994  ("GARA").  The GARA  imposes an 18-year  statute of
limitations on product  liability suits  involving  airplane  manufacturers  and
suppliers. Although product liability suits will not disappear, nor is it likely
that settlements will be smaller,  the Company believes that the reduction to 18
years of an original  equipment  manufacturer's  exposure to lawsuits  may lower
insurance costs for the industry which may result in increased sales of aircraft
and a corresponding increase in the number of licensed pilots.  Shipments of all
types of general aviation  aircraft  manufactured in the United States increased
from 1,077 units in 1995 to 1,132 units in 1996, to 1,569 units in 1997.

Strategy

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

         The Company  believes that aircraft sales are heavily  dependent on the
quality and safety of a company's products.  Accordingly, the Company intends to
maintain high quality and safety standards in all aspects of the

                                        2

<PAGE>



design and  manufacture  of its  proposed  aircraft.  For  example,  the Company
believes that certain  design  features of the JETCRUZER 500, such as the canard
wing,  will make the aircraft spin  resistant and that the absence of wing flaps
will make the  operation of the aircraft  less  susceptible  to pilot error.  In
addition,  the Company believes that the reliability of the Company's  component
suppliers,  such as Pratt &  Whitney,  will be  viewed  favorably  by  potential
customers.

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

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

Aircraft

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

         The Company  believes that the JETCRUZER 500 provides  increased safety
margins,  in part,  because  it has  been  certified  under  the  latest  safety
regulations adopted by the FAA. Additionally,  the canard design, which provides
dual lifting  surfaces,  makes the JETCRUZER 500 resistant to spins. An airplane
may enter a spin when one main wing stalls (i.e.  stops  producing  lift) before
the other. On the JETCRUZER 500, the canard wing will stall before the main rear
wing,  thereby  automatically  lowering the  aircraft's  nose and increasing its
airspeed,  thus  preventing a stall of either of the main wings.  Since the main
wing of the  JETCRUZER  500 does not  stall,  it does not lose  lift on one side
before the other and thus the aircraft is resistant to spins.  The JETCRUZER 500
has  increased  lift in part  because  the  graphite  composite  fuselage of the
JETCRUZER 500 is lighter than a fuselage  made of aluminum,  used by most of the
Company's competitors, and the canard wing design provides an additional lifting
surface as compared to  conventional  aircraft.  Generally,  lighter  weight and
additional  lifting surfaces result in greater lifting capacity.  Increased lift
can provide increased fuel efficiency and thus increased range.

         Management  also  believes  that the  Company's  aircraft  will provide
performance  advantages over  competitors'  models,  including  better stall and
handling  characteristics,  increased  speed,  greater fuel efficiency and lower
operating  expenses.  Based on the reports of its test pilots,  the Company also
believes that the JETCRUZER 500 provides  increased ride comfort,  and a quieter
ride, than aircraft of a conventional design. The JETCRUZER 500 will not require
pilot licensing beyond that required for other single-engine propjet aircraft.

         The  fuselage  of  each  aircraft  is  made  of  an  advanced  graphite
composite/nomex honeycomb sandwich with embedded aluminum and copper screen mesh
for lightning  protection,  which is processed in the Company's (30 foot long by
10  foot  diameter)  nitrogen-pressurized  autoclave.  The  canard  wing  on the
JETCRUZER 500 is  constructed of aircraft  aluminum.  The main rear wing and the
ailerons of all of the aircraft will be  constructed  of aircraft  aluminum skin
and spar and rib  construction.  Flaps are not  required  on the  JETCRUZER  500
because of

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the design  and high lift  capabilities  of the  canard  and the main wing.  The
engine and propeller of the Company's  JETCRUZER 500 aircraft are located at the
rear of the fuselage, thus providing passengers with a quieter ride.

         JETCRUZER (TM)500.  The JETCRUZER 500 is a six-seat  (including pilot),
high performance  single engine propjet with  conventionally  constructed  wings
made from aluminum  attached to a fuselage formed from a high-strength  graphite
nomex honeycomb composite material. The aircraft has a canard configuration with
two lift-producing surfaces and no conventional wing flaps. The JETCRUZER 500 is
powered by a Pratt & Whitney  PT6A-66A propjet engine located at the rear of the
aircraft. The JETCRUZER 500 is a modified version of the JETCRUZER 450.

         In June 1994,  the FAA awarded the Company a Type  Certificate  for the
JETCRUZER 450, which is a non-pressurized  propjet aircraft powered by a smaller
Pratt & Whitney engine.  However, the Type Certificate is subject to a number of
FAA limitations  which were imposed as a result of the aircraft's early stage of
development.  For example,  the maximum number of occupants is presently limited
to five, as compared to the six passenger (including pilot) design configuration
of the JETCRUZER 500, and the maximum  operating  speed is presently  limited to
178 mph, as compared to the  approximately 360 mph design speed of the JETCRUZER
500. The Company is amending the Type Certificate to remove these limitations in
the certification of the JETCRUZER 500.

         In order to amend the Type  Certificate  to include the JETCRUZER  500,
additional  work is being  performed on the  aircraft by the Company,  including
adding  a  larger  fuselage,  pressurization,  environmental  systems,  de-icing
capability,  retractable landing gear and autopilot certification,  all of which
will be necessary to produce the JETCRUZER 500 for commercial  sale. The Company
currently anticipates obtaining the amendment to its Type Certificate during the
fourth quarter of 1998. The Company has submitted its  application for amendment
to the FAA.  The FAA has  assigned a project  manager and the Company has held a
meeting with the FAA to set a schedule for the amendment  process.  There can be
no assurance,  however,  that  obtaining  such an amendment will not take longer
than anticipated.

         Although   no   assurance   can  be   given   as  to  the   performance
characteristics of any aircraft in its design phase, based on the performance of
the  JETCRUZER  450, the Company  believes that the JETCRUZER 500 will carry six
passengers  (including  pilot) and have a cruise speed of approximately 360 mph.
The  Company  also  believes  that  such  aircraft  should  be able to  climb at
approximately  2,600 feet per minute,  cruise at an  altitude  of  approximately
30,000  feet  above sea level,  have a range of  approximately  1,500  miles and
takeoff and land in less than 1000 feet.  The interior of the  aircraft  will be
built either to a customer's  specifications  or in  accordance  with one of the
Company's  standard   configurations.   These  statistics  reflect  the  overall
anticipated  performance of the JETCRUZER 500. However,  interior configuration,
optional  equipment,  weather  conditions  and  flying  weight  will  affect the
performance of an individual aircraft.

         The JETCRUZER 500 will be available for commercial  sale initially at a
base  price  of  approximately  $1,400,000.  However,  the  Company  has not yet
received  the amended Type  Certificate  for the  JETCRUZER  500 and has not yet
completed a facility for manufacturing it on a commercial scale (currently under
construction),  both of which may be subject to unforeseen delays, the estimated
date of October  16, 1998 which the  JETCRUZER  500 is  actually  available  for
delivery could change materially.

Other Aircraft

         STRATOCRUZER  (R)1250.  The Company currently intends to develop a twin
engine jet aircraft to be called the STRATOCRUZER  1250. The STRATOCRUZER  1250,
if developed,  is expected to be a canard  aircraft  with three flying  surfaces
powered  by two  Williams/Rolls  Royce  FJ44-2  fanjets.  It will  seat up to 12
passengers,  plus the pilot. Based on its design and preliminary  testing, it is
anticipated  that the  STRATOCRUZER  1250 will have a  maximum  cruise  speed of
approximately  500 mph, a range of  approximately  3,700 miles and a pressurized
ceiling of  approximately  42,000 feet.  The  STRATOCRUZER  1250 will be able to
takeoff  in less  than  3,200  feet  and  land  in less  than  3,000  feet.  The
instrumentation  of the  STRATOCRUZER  1250 will  consist of digital  electronic
avionics,  including EFIS (an Electronic Flight  Instrumentation  System,  which
includes color

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monitors  on which  flight  instrument  data,  weather  radar,  maps  and  other
navigation  information  are  available)  and GPS  (Global  Positioning  System)
navigation.  The  aircraft  will be of  lightweight  construction.  The  Company
believes that the STRATOCRUZER 1250's comparatively light weight, combined with,
among other things, its additional lifting surfaces,  fuel efficient engines and
aerodynamic  design,  will give the  STRATOCRUZER  1250 superior  range and fuel
efficiency compared to other twin jets. The Company will be required to obtain a
new FAA type certificate for the STRATOCRUZER 1250.

         The STRATOCRUZER 1250 is in a very early stage of development,  and the
completion of such development will also require  substantial  capital resources
beyond those which the Company currently possesses.  Therefore,  there can be no
assurance  that the  Company  will  obtain the capital  resources  necessary  to
continue the  development  of the  STRATOCRUZER  1250 or, if such  resources are
obtained,  successfully develop and certify the STRATOCRUZER 1250.  Accordingly,
the  Company  cannot  predict  when,  if ever,  the  STRATOCRUZER  1250  will be
available for commercial sale.

         JETCRUZER  (TM)650.  The Company also currently  intends to develop the
JETCRUZER  650. This aircraft will be based on the JETCRUZER  450/500 design and
will have the same engine and  components as the JETCRUZER 500.  However,  it is
intended  to  have  a  longer  fuselage  which  will  accommodate  up to  twelve
passengers  plus a pilot.  To produce the  JETCRUZER  650, the Company will need
either  to amend  its Type  Certificate  or  obtain a new type  certificate,  as
determined by the FAA.

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

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

Manufacturing

         The Company has  designed,  produced or procured  most of the equipment
necessary for  production  of the  JETCRUZER 450 and has used that  equipment to
certify the  aircraft.  The Company is in the process of obtaining and producing
additional sets of the equipment  necessary for production of the JETCRUZER 500.
The Company will produce in-house substantially all of the tooling necessary for
the  production of its aircraft,  from master models to major jigs and fixtures.
The  Company  believes  it has and will  continue  to  achieve  cost  savings by
manufacturing tooling in-house. Additionally, nearly all airframe assemblies and
parts are  intended to be produced  in-house,  except for special  tasks such as
hydroforming,  spar  milling and  painting.  The  manufacturing  process for the
Company's   aircraft  is  highly   technical  and  requires   skilled   assembly
technicians.  The Company believes that a number of such skilled individuals are
available in Southern  California in general,  and in Long Beach in  particular.
However,  no  assurance  can be given  that  these  individuals  will in fact be
available to the Company.


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

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

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

Marketing, Distribution and Service

         Marketing and Distribution. The Company has developed an in-house sales
organization  and is  marketing  its  aircraft  in the United  States and abroad
through trade have  publications,  news  releases,  attendance at aircraft trade
shows, and independent distributors and agents.

         The  Company's  marketing  and sales  efforts  to date have  emphasized
aircraft  trade shows,  from which a significant  amount of new aircraft  orders
have been generated.  The Company participates in numerous air shows,  including
the Paris Air Show, the National Business Aircraft  Association USA Show and the
Singapore  Aerospace  Show.  Management  believes  that,  in  addition  to sales
generated directly from such events, participation in trade shows introduces the
Company's  aircraft to potential  purchasers and increases  overall awareness of
the  Company's  products.  The Company also  promotes  general  knowledge of the
Company's   products  by  issuing  press  releases  to  aviation  magazines  and
newspapers.  The Company also uses paid advertising in trade magazines,  general
interest flying magazines and  international  business  magazines to promote its
products.

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

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

                                        6

<PAGE>



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

Suppliers

         The Company  relies on various  suppliers of materials  and  components
which are necessary to manufacture its aircraft. In particular,  the engines and
the avionics are provided by outside manufacturers. These suppliers also produce
equipment  for aircraft  manufacturers  other than the Company.  Engines for the
JETCRUZER 500 are manufactured by Pratt & Whitney.  Engines for the STRATOCRUZER
1250, if developed,  will be manufactured by  Williams/Rolls  Royce. The Company
has no contractual  right to obtain any specified number of engines from Pratt &
Whitney or any other  manufacturer.  Should the Company's  ability to obtain the
requisite  number of engines be limited  for any  lengthy  period of time or the
cost of such  engines  increase,  the  Company's  ability  to  produce  and sell
aircraft could be materially and adversely affected. In addition, the failure of
other   suppliers  or   subcontractors   to  meet  the   Company's   performance
specifications,  quality standards or delivery standards or schedules could have
a material adverse effect on the Company's operations.  Moreover,  the Company's
ability to significantly increase its production rate following the introduction
of the JETCRUZER 500 could be limited by the ability or  willingness  of its key
suppliers to increase their delivery rates.

Competition

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

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

<TABLE>
                                                                                            High Cruise
                    NAME AND MODEL                                    Approximate         Speed-Miles Per
   (Number and type of engines noted in parenthesis)     Seats         Base Price              Hour
<S>                                                      <C>          <C>                 <C>
JETCRUZER 500 (1) (Propjet)                                6           $1,400,000               360
Cessna Caravan 208B(1) (Propjet)                           9           $1,400,000               210
Socata TBM 700 (1) (Propjet)                               6           $2,607,000               345
Pilatus PC - 12 (1) (Propjet)                              10          $2,315,000               310
Raytheon/Beech King Air C-90B (2) (Propjet)                7           $2,488,000               284
Piper Malibu Mirage (1) (Piston)                           6             $780,000               267
</TABLE>


         There are currently three single engine propjet  aircraft on the market
in the  JETCRUZER  500  category:  the Socata TBM 700, the Pilatus PC-12 and the
Cessna  Caravan.  The  TBM  700  is a  pressurized,  single  engine  propjet  of
conventional  design with a Pratt & Whitney engine. It is made in France and has
passenger capacity and performance  similar to the JETCRUZER 500. Its base price
is approximately  $2,607,000.  The Pilatus PC-12 is also a single engine propjet
of conventional  design with a Pratt & Whitney engine. The Pilatus PC-12 is made
in

                                        7

<PAGE>



Switzerland,  has an airspeed  of 310 mph and has a base price of  approximately
$2,315,000. The Cessna Caravan 208B has a base price of approximately $1,493,000
and is designed primarily for hauling freight at low altitude. Its high speed is
210 mph, its landing gear does not retract,  and it is not pressurized.  Each of
these  competitive  products  is a standard,  one  lifting-wing  aircraft  built
primarily from aircraft aluminum, rather than graphite.

         Additional  competition  to the  JETCRUZER  500 may be  provided by the
Malibu  Mirage.  The Malibu Mirage is a single engine piston  powered  aircraft,
rather than a propjet.  It is manufactured in the United States by The New Piper
Aircraft  Corp.  It has an  airspeed  of 267  miles  per  hour  and a  range  of
approximately  1,200 miles. Its approximate base price is $780,000.  The Company
believes that piston  aircraft  such as the Mirage and propjet  aircraft such as
the  JETCRUZER  500  compete  for  different   customers  based  on  performance
(particularly speed) and reliability. However, the price differential may induce
certain purchasers to select the lower-priced piston aircraft.

         The Company believes that the JETCRUZER 500, and the proposed JETCRUZER
650, if developed, may compete with and compare favorably to various twin engine
propjets,  such as the King Air C-90B,  in airspeed and  passenger  seating at a
significantly  lower purchase price and operating  cost. The King Air C-90B is a
twin engine propjet of  conventional  design which is manufactured in the United
States  by  Raytheon   Aircraft  Co.   (Beechcraft).   It  has  an  airspeed  of
approximately 284 miles per hour and has seven seats. Its approximate base price
is  $2,488,000.  However,  certain  customers  may be  reluctant  to  purchase a
single-engine  aircraft  such  as the  JETCRUZER  500 due to the  perception  of
additional safety associated with twin-engine aircraft.

         Pursuant to new FAA resolutions  approved August 6, 1997,  effective as
of May 3, 1998,  single-engine  aircraft  may be used for  commercial  passenger
revenue-paying  flights (whether  on-demand  charter or scheduled) in instrument
conditions.  Single  engine  aircraft may  currently be used for  revenue-paying
on-demand charter and scheduled flights under VFR (visual flight rules) provided
the  pilot  and  the  aircraft  meet  certain  FAA  certification,  proficiency,
maintenance and additional equipment and airworthiness requirements.

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

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

         Product   Liability   and   Insurance.   The  failure  of  an  aircraft
manufactured  by the Company or any other mishap  involving such an aircraft may
result in physical  injury or death to the  occupants of the aircraft or others,
and  therefore,  the  Company  could be subject to  lawsuits  involving  product
liability claims. The Company intends to obtain product liability  insurance for
aircraft  purchased  by customers  before the  delivery of the first  customer's
aircraft.  However,  such insurance is expensive,  subject to various exclusions
and,  although the product  liability  insurance  for  manufacturers  of general
aviation  aircraft has become  somewhat more  available and less costly over the
last two years,  there can be no assurance  that such coverage will be available
to the Company on acceptable terms or at all. Further, should the Company become
involved in product liability litigation, the expenses and damages awarded could
be large  and the scope of any  coverage  may be  inadequate.  The  Company  has
obtained  other  insurance as needed,  including  flight test  insurance for its
pilots and aircraft used during the FAA certification process.


                                        8

<PAGE>



Government Regulation

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

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

         The  Company is in the process of amending  its Type  Certificate  with
respect to the  JETCRUZER  450 to include the  JETCRUZER  500. In addition,  the
Company will be required to obtain a further  amendment to its Type  Certificate
or a new  type  certificate  if and when it  proceeds  with  development  of the
JETCRUZER 650. The Company will be required to obtain a new type  certificate if
and when it proceeds with development of the STRATOCRUZER 1250.

         Obtaining an amended FAA type certificate can be difficult, costly, and
time consuming.  To date, the Company has accomplished,  among other things, (a)
the filing of an  appropriate  application  with the FAA,  (b)  development  and
submission  to the FAA of an  appropriate  design  and  substantiating  data and
receipt of FAA  approval  that such design and data comply with  applicable  FAA
airworthiness standards, (c) development and receipt of FAA approval of a flight
test plan, (d) modification and reassembly of an existing  JETCRUZER 450 for use
in initial flight  testing.  The Company must  accomplish  the following  before
receiving  an  amendment  to its Type  Certificate  for the  JETCRUZER  500: (a)
successful  completion of conformity  inspections requested by the FAA from time
to time  to  ensure  compliance  of the  aircraft  with  the  type  design,  (b)
completion of the JETCRUZER 500 fuselage for static tests and the  completion of
the JETCRUZER 500 for flight tests,  (c)  completion of Company flight tests and
receipt of precertification  approval from the FAA, (d) completion of additional
flight tests under FAA supervision,  (e) development and receipt of FAA approval
of an airplane flight manual, and (f) development and receipt of FAA approval of
maintenance  and  inspection  requirements  for the aircraft.  Although the time
required  to obtain a new or amended  type  certificate  may vary,  the  Company
believes that it can obtain a new or amended  certificate  for the JETCRUZER 500
during the fourth quarter of 1998.

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

                                        9

<PAGE>



be five to six months in the case of the JETCRUZER  500. The Company  expects to
obtain the production certificate during the fourth quarter of 1998.

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

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

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

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

Employees

         As of March 10, 1998 the Company had  eighty-five  full time employees.
The Company believes that its relations with its employees are good. The Company
is not a party to any collective bargaining agreement.

ITEM 2.   PROPERTIES.

         On October 17, 1997 the Company entered into a Lease Agreement with the
City of Long Beach, for approximately 10 acres of land located on the Long Beach
Airport.  The  purpose  of the lease is to  effectuate  the  construction  of an
approximately  200,000 square foot manufacturing and headquarters  facility (the
"New  Facility").  The lease  commenced on January 14, 1998 and has a term of 30
years  with an option  to renew  for an  additional  10  years.  The lease  also
contains options to lease other airport  properties.  The monthly rent under the
lease is $4,500, which escalates to approximately $15,600 after 5 years.


                                       10

<PAGE>



         The Company  entered into an  agreement  with  Commercial  Developments
International/West (Design/Builder) whereby Design/Builder will design and build
the New  Facility.  The  contract sum for this project is "Cost plus Fixed Fees"
with a Guaranteed  Maximum  Price of  $6,300,000,  subject to the cost of change
orders,  if any. Any savings  realized upon completion and acceptance of the New
Facility  will be shared by the  Design/Builder  and the  Company.  The  Company
believes that the New Facility will be completed in the third quarter of 1998.

         The Company  leases its current  office,  manufacturing,  and warehouse
facilities  for $18,351 per month with leases  expiring at various  dates during
1998.


ITEM 3.   LEGAL PROCEEDINGS.

         As of March 10, 1998, there were no material pending legal  proceedings
to which the Company was a party or to which any of its properties were subject.


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

         No matters  were  submitted  to a vote of the  security  holders of the
Company during the fourth quarter of 1997.

                                       11

<PAGE>



                                     PART II

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

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


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

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

Year Ended December 31, 1997
    First Quarter                                    4-3/4            2-1/2
    Second Quarter                                   4-5/16           2-3/8
    Third Quarter                                    5-1/4            2-13/16
    Fourth Quarter                                   5-3/8            2-1/32


         At March 30, 1998, there were approximately 39 holders of record of the
Company's  Class A Common Stock,  4 holders of record of the  Company's  Class B
Common Stock and Class E-1 Common Stock and 5 holders of record of the Company's
Class E-2 Common Stock. The Company  believes that there are significant  number
of  beneficial  owners  of its Class A Common  Stock  whose  shares  are held in
"street name."

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


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS

         Certain statements contained in this report, including, but not limited
to, statements concerning the Company's future cash and financing  requirements,
the Company's ability to obtain market acceptance of its aircraft, the Company's
ability to obtain  regulatory  approval for its  aircraft,  and the  competitive
market  for sales of small  business  aircraft  and other  statements  contained
herein  regarding  matters that are not historical  facts,  are forward  looking
statements;  actual  results may differ  materially  from those set forth in the
forward looking  statements,  which statements  involve risks and uncertainties,
including  without  limitation  those risks and  uncertainties  set forth in the
Company's  Registration  Statement  on Form SB-2  (333-12273)  under the heading
"Risk Factors."

                               PLAN OF OPERATIONS

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

General

         The Company is a  development  stage  enterprise  organized  to design,
develop,  manufacture and market propjet and jet aircraft intended primarily for
business use. Since its inception,  the Company has been engaged  principally in
research and development of its proposed aircraft.  In January 1990, the Company
acquired the assets of  Aerodynamics & Structures,  Inc.  ("ASI"),  a New Jersey
corporation  engaged in the design of an aircraft  prototype,  in  exchange  for
139,407  shares of Class B Common  Stock,  278,815  shares  of Class E-1  Common
Stock,

                                       12

<PAGE>



and 278,815 shares of Class E-2 Common Stock.  In connection with this exchange,
the Company assumed liabilities of ASI in the amount of approximately  $400,000.
In March 1990, the Company made  application  to the FAA for a Type  Certificate
for the JETCRUZER 450, which Certificate was ultimately granted in June 1994. As
a result,  the Company has not generated any operating  revenues to date and has
incurred losses from such  activities.  The Company believes it will continue to
experience  losses  until such time as it  commences  the sale of  aircraft on a
commercial scale.

         Prior to commencing  commercial  sales, the Company will need to, among
other  things,  complete  the  development  of the  JETCRUZER  500,  obtain  the
requisite regulatory approvals, establish an appropriate manufacturing facility,
hire additional engineering and manufacturing personnel and expand its sales and
marketing efforts.  The Company estimates that the cost to complete  development
of the JETCRUZER 500 and obtain an amendment of its FAA Type Certificate will be
approximately  $5,000,000.  This  amount  includes  the  cost of  equipment  and
tooling,  static and flight  testing of the aircraft,  and the employment of the
necessary personnel to build and test the aircraft.

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

         During 1998 the Company  intends to focus its efforts in the  following
areas:

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

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

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

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

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

         The Company  believes  that the net  proceeds  from its  December  1996
initial public offering  ("IPO") of stock will be sufficient to finance its plan
of operations at least through the first quarter of 1999, based upon the current
status of its business  operations,  its current plans and current  economic and
industry conditions. If the Company's estimates prove to be incorrect,  however,
then  during such  period the  Company  may have to seek  additional  sources of
financing, reduce operating costs and/or curtail growth plans.


                                       13

<PAGE>



Results of Operations

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

<TABLE>
                                                                              Period from January 26, 1990
                                             Years Ended December 31           (inception) to December 31,
                                       -----------------------------------------------------------------------
                                             1996              1997                       1997
                                       -----------------------------------------------------------------------
<S>                                        <C>                 <C>            <C>
Interest and other Income                    $  133,000         $1,378,000             $ 2,258,000
Research, general and
  administrative, and
  preoperating expenses                       1,927,000          7,457,000              29,526,000
Interest expense                                652,000            161,000               2,001,000
Loss and disposal of assets                          --            385,000                 742,000
Extraordinary Loss                              942,000                 --                 942,000
Net Loss                                      3,388,000          6,625,000              30,953,000
</TABLE>

         The Company has not  generated any revenues  from  operations.  For the
period from inception  (January 26, 1990) through  December 31, 1997 the Company
incurred  a net loss of  $30,953,000,  $3,388,000  and  $6,625,000  of which was
incurred  during the years  ended  December  31,  1996 and  December  31,  1997,
respectively.  These losses have resulted  primarily from  expenditures  made in
connection with the research and development of the Company's  proposed aircraft
and general and administrative  activities.  During 1996 the Company incurred an
extraordinary  loss of $942,000,  resulting  from the  retirement of debt at the
time of its IPO.

         Interest income consisted primarily of earnings derived from the unused
proceeds of the December 1996 IPO.  Interest income  aggregated  $1,443,000 from
inception  through  December 31, 1997,  $110,000  and  $1,273,000  of which were
earned in 1996 and 1997, respectively.

         Research and development expenses have consisted primarily of the costs
of  personnel,  facilities,  materials  and  equipment  required  to conduct the
Company's  development  activities.  Such expenses  aggregated  $18,449,000 from
inception  through December 31, 1997. Such expenses were incurred to develop the
JETCRUZER 450, to obtain a Type Certificate  with respect thereto,  and to begin
the design of the JETCRUZER  500, the JETCRUZER 650 and the  STRATOCRUZER  1250.
Research and development  expenses increased in 1997 as the Company  accelerated
the  development  of the  JETCRUZER  500 and amended its Type  Certificate  with
respect thereto.

         General  and  administrative   expenses  have  consisted  primarily  of
administrative  salaries and benefits,  rent, marketing expenses,  insurance and
other administrative costs. Such expenses aggregated  $10,034,000 from inception
through  December 31, 1997,  $1,927,000 and $2,644,000 of which were incurred in
1996 and 1997, respectively.  General and administrative expenses have increased
since 1996 primarily due to the addition of personnel and other resources needed
to support increased administrative, marketing, and development activities.

         Interest  expense has consisted  primarily of interest  expended by the
Company for bank and private financing.  Interest expense aggregated  $2,001,000
from inception  through  December 31, 1997,  $652,000 and $161,000 of which were
incurred in 1996 and 1997, respectively.

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

         At December  31,  1997,  the Company  had a United  States  federal and
California   state  tax  net  operating  loss   carryforward  of   approximately
$27,000,000  and  $6,000,000,  respectively,  which,  if unused,  will expire in
varying amounts in the years 1998 through 2017.

                                       14

<PAGE>



         At December  31, 1997,  the Company had federal and state  research and
development  ("R&D")  credit  carryforwards  of  approximately   $1,356,000  and
$542,000,  respectively. The federal R&D credit carryforwards will expire in the
years  2004  through  2009.  The state R&D credit  carryforwards  can be carried
forward indefinitely. See Note 4 of Notes to Financial Statements.

Liquidity and Capital Resources

         At December 31, 1997, the Company had working capital of $9,065,000 and
stockholders'  equity of  $21,095,000.  Since its inception in January 1990, the
Company has experienced  continuing  negative cash flow from operations,  which,
prior to the  December  1996 IPO,  resulted in the  Company's  inability  to pay
certain  existing  liabilities in a timely manner.  The Company has financed its
operations  through  private  fundings of equity and debt and its December  1996
IPO.

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

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

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

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

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

                                       15

<PAGE>



representing  the combined  unamortized debt discount and issuance costs arising
from the Bridge Financing, in the quarter in which the Bridge Notes were repaid.

         The Company  expects to continue to incur  losses  until such time,  if
ever,  as it obtains  regulatory  approval  for the  JETCRUZER  500 and  related
production  processes and market acceptance for its proposed aircraft at selling
prices and volumes which provide  adequate gross profit to cover operating costs
and generate positive cash flow. The Company's working capital requirements will
depend upon numerous  factors,  including the level of resources  devoted by the
Company to the  scale-up of  manufacturing  and the  establishment  of sales and
marketing   capabilities  and  the  progress  of  the  Company's   research  and
development program for the JETCRUZER 500 and other proposed aircraft.

         The Company expects that the net proceeds of the December 1996 IPO will
enable it to meet its  liquidity and capital  requirements  at least through the
first quarter of 1999, by which time the Company expects to have received a type
certificate  and a production  certificate  for the  JETCRUZER 500 and commenced
commercial  production and sale of the JETCRUZER 500. Such proceeds will be used
primarily for amendment of the Type  Certificate,  the purchase of equipment and
tooling,  the completion of a manufacturing  facility,  and sales and marketing.
The  Company's  capital  requirements  are  subject  to  numerous  contingencies
associated  with  development  stage  companies.   Specifically  if  delays  are
encountered  in amending  the  current  Type  Certificate,  the time and cost of
obtaining such  certification  may be substantial,  may render it impossible for
the Company to complete  such amended  certification  and may  therefore  have a
material and adverse effect on the Company's operations. Further, if the Company
has not completed the  development of the JETCRUZER  500,  received the required
regulatory  approvals and successfully  commenced  commercial  production of its
aircraft  by the first  quarter of 1999,  the  Company  may  require  additional
funding to fully  implement  its  proposed  business  plan.  The  Company has no
commitments  from any third parties for any future funding,  and there can be no
assurance  that the Company will be able to obtain  financing in the future from
bank borrowings,  debt or equity financings or other sources on terms acceptable
to the Company or at all. In the event  necessary  financing  were not obtained,
the Company would be materially  and adversely  affected and might have to cease
or substantially reduce operations.

         The Company is in the process of constructing an approximately  200,000
square foot  manufacturing and headquarters  facility (the "New Facility").  The
primary  financing  for this project is the  Company's  obligation  under a loan
agreement  related to  proceeds  received  from  $8,500,000  in the  issuance of
industrial  development bonds by the California Economic  Development  Financing
Authority (the "Authority"). The Company was required to provide cash collateral
to the Bank in the amount of $8,500,000 for a stand-by letter of credit in favor
of the  holders  of the IBDs  which  will  expire  on  August  5,  2002,  if not
terminated earlier by the Company or the Bank.

         On October 17, 1997 the Company entered into a Lease Agreement with the
City of Long Beach, for approximately 10 acres of land located on the Long Beach
Airport.  The purpose of the lease is to effectuate the  construction of the New
Facility.  The lease  commenced  on January  14, 1998 and has a term of 30 years
with an option to renew for an  additional  10 years.  The lease  also  contains
options to lease other airport  properties.  The monthly rent under the lease is
$4,500, which escalates to approximately $15,600 after 5 years.

         The Company  entered into an  agreement  with  Commercial  Developments
International/West (Design/Builder) whereby Design/Builder will design and build
the New  Facility.  The  contract sum for this project is "Cost plus Fixed Fees"
with a Guaranteed  Maximum  Price of  $6,300,000,  subject to the cost of change
orders,  if any. Any savings  realized upon completion and acceptance of the New
Facility  will be shared by the  Design/Builder  and the  Company.  The  Company
believes that the New Facility will be completed in the third quarter of 1998.

         The  Company  is  in  the   process  of   purchasing   new   integrated
manufacturing,  production  and cost  control  computer  systems to replace  its
existing  systems to achieve and support  future  Company  growth and production
requirements.  Systems  being  considered  have all been  certified as year 2000
compliant.  Management  expects to have the new system  installed and running by
the end of fiscal 1998 and estimates the associated costs to be

                                       16

<PAGE>



immaterial to the  Company's  operations.  While the Company is  addressing  and
solving  such  issues,  it is unaware of any  problems  which its  suppliers  or
customers may be addressing.

         The Company had no material  capital  commitments  at December 31, 1997
other than  discussed  in this report.  The Company  intends to hire a number of
additional  employees  and to  complete  the New  Facility,  both of which  will
require substantial capital resources. The Company anticipates that it will hire
up to 200  employees  over the  next  twelve  months.  including  engineers  and
manufacturing technicians necessary to produce its aircraft.

Charge to Income in the Event of Conversion of Performance Shares

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


                                       17

<PAGE>



ITEM 7.    FINANCIAL STATEMENTS.

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

                          INDEX TO FINANCIAL STATEMENTS


                                                                         Page
                                                                        Number

Report of Independent Auditors                                            19
Report of Independent Accountants                                         20
Balance Sheet                                                             21
Statement of Operations                                                   22
Statement of Stockholders' Equity                                         23
Statement of Cash Flows                                                   25
Notes to Financial Statements                                             26


                                       18

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors
Advanced Aerodynamics & Structures, Inc.

We have  audited  the  accompanying  balance  sheet of Advanced  Aerodynamics  &
Structures,  Inc. (a development  stage enterprise) as of December 31, 1997, and
the related statements of operations,  shareholders'  equity, and cash flows for
the year then ended,  and for the period  January 26, 1990  (inception)  through
December 31, 1997.  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.  The  financial  statements  as of
December  31,  1996,  and for the period  January 26, 1990  (inception)  through
December 31, 1996,  were audited by other  auditors whose report dated March 26,
1997  expressed  an  unqualified  opinion  on those  statements.  The  financial
statements for the period January 26, 1990 (inception) through December 31, 1996
include total income and net loss of $880,000 and $24,328,000, respectively. Our
opinion on the statements of operations,  shareholders'  equity,  and cash flows
for the period January 26, 1990 (inception)  through December 31, 1997,  insofar
as it relates to amounts for prior periods  through  December 31, 1996, is based
solely on the report of other auditors.

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

In our  opinion  based  on our  audit  and the  report  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the financial position of Advanced Aerodynamics & Structures,  Inc., at December
31, 1997, and the results of its operations and its cash flows for the year then
ended and the period from  January 26, 1990  (inception)  through  December  31,
1997, in conformity with generally accepted accounting principles.


                                                              ERNST & YOUNG LLP
Long Beach, California
March 3, 1998

                                       19

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



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

In our opinion,  the  accompanying  statements of  operations, of  stockholders'
equity  and of cash  flows  of  Advanced  Aerodynamics  &  Structures,  Inc.  (a
Development Stage  Enterprise)  present fairly,  in all material  respects,  the
results of its  operations  and its cash flows for the year ended  December  31,
1996 and for the period from January 26, 1990  (inception) to December 31, 1996,
in conformity  with generally  accepted  accounting  princples.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements  are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

PRICE WATERHOUSE LLP

Los Angeles, California
March 26, 1997



                                       20

<PAGE>



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

                                  Balance Sheet

<TABLE>
                                                          December 31, 1997
                                                        --------------------
<S>                                                      <C>
Assets
Current Assets:
     Cash and cash equivalents                                    $5,277,000
     Short term investments                                        4,156,000
     Prepaid expenses and other current assets                       432,000
                                                                 ------------
         Total current assets                                      9,865,000
Certificate of deposit                                             1,061,000
Long-term investments                                                357,000
Restricted cash                                                   16,963,000
Property and equipment, net                                        1,716,000
Construction in progress                                             446,000
Other assets                                                         417,000
                                                                 -------------
         Total assets                                             $30,825,000
                                                                 -------------

Liabilities and Stockholders' Equity
Current Liabilities:
     Accounts payable                                                $535,000
     Accrued liabilities                                              265,000
                                                                 -------------
         Total current liabilities                                    800,000
Long-term debt                                                      8,500,000
Deferred revenue                                                      430,000
                                                                 --------------
         Total liabilities                                          9,730,000
Stockholders' equity
     Preferred Stock, par value $.0001 per share;
       5,000,000 shares authorized; no shares issued and outstanding       --
     Class A common, par value $.0001 per share; 60,000,000
       shares authorized; 6,900,000 shares issued and outstanding       1,000
     Class B Common Stock, par value $.0001 per share;
       10,000,000 shares authorized; 2,000,000 shares issued and
       outstanding                                                         --
     Class E-1 Common Stock; par value $.0001 per share;
       4,000,000 shares authorized; 4,000,000 shares issued and
       outstanding                                                         --
     Class E-2 Common Stock; par value $.0001 per share;
       4,000,000 shares authorized; 4,000,000 shares issued and
       outstanding                                                         --
     Warrants to purchase common stock
       Public Warrants                                                473,000
       Class A Warrants                                            11,290,000
       Class B Warrants                                             4,632,000
     Additional paid-in capital                                   35 ,652,000
     Deficit accumulated during the development stage             (30,953,000)
                                                                 -------------
          Total stockholders' equity                               21,095,000
                                                                 -------------
          Total liabilities and stockholder's equity              $30,825,000
                                                                 -------------
</TABLE>


                 See accompanying notes to financial statements

                                       21

<PAGE>



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

                             Statement of Operations

<TABLE>
                                                                                  Period from
                                                                                January 26, 1990
                                                        Year Ended               (inception) to
                                                       December 31,               December 31,
                                             ---------------------------------------------------------
                                                  1996             1997               1997
                                             ---------------------------------------------------------
<S>                                           <C>                  <C>            <C>
Interest income                                    $110,000        $1,273,000           $1,443,000
Other income                                         23,000           105,000              815,000
                                             ---------------------------------------------------------
                                                    133,000         1,378,000            2,258,000
Cost and expenses:
     Research and development costs                      --         4,813,000           18,449,000
     Preoperating costs                                  --                --              282,000
     General and administrative
         expenses                                 1,927,000         2,644,000           10,034,000
     Loss on disposal of assets                          --           385,000              742,000
     Interest expense                               652,000           161,000            2,001,000
     In-process research and development
         acquired                                        --                --              761,000
                                             ---------------------------------------------------------
                                                  2,579,000         8,003,000           32,269,000
                                             ---------------------------------------------------------
Loss before extraordinary item                   (2,446,000)       (6,625,000)         (30,011,000)
Extraordinary loss on retirement of
     Bridge Notes                                  (942,000)               --             (942,000)
                                             ---------------------------------------------------------
Net Loss                                        $(3,388,000)      $(6,625,000)        $(30,953,000)
                                             ---------------------------------------------------------
Loss per share before extraodinary item              $(.98)            $(.74)
Extraordinary loss per share on
  retirement of Bridge Notes                          (.38)                --
                                             -----------------------------------
Net loss per share                                  $(1.36)            $(.74)
                                             -----------------------------------
Weighted average number of shares
     outstanding                                  2,499,000         8,900,000
                                             -----------------------------------
</TABLE>





                 See accompanying notes to financial statements.

                                       22

<PAGE>



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

                        Statement of Stockholders' Equity

<TABLE>
                                                                  Common Stock
                                            -----------------------------------------------------------------------
                           Preferred Stock       Class A          Class B         Class E-1          Class E-2
                           ----------------------------------------------------------------------------------------
                            Shares  Amount   Shares    Amount  Shares   Amount  Shares   Amount   Shares     Amount
                           ----------------------------------------------------------------------------------------
<S>                         <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>        <C>
Common stock issued                 $--                $--     418,094  $--     836,189    $--      836,189  $--
Common stock issued in
   exchange for in-
   process research and
   development                                                 201,494   --     402,988     --      402,988   --
Imputed interest on
   advances from
   stockholder (Note 6)
Net loss from inception
   to December 31, 1995
                           ----------------------------------------------------------------------------------------
Balance at December
   31, 1995                                                    619,588   --     1,239,177   --    1,239,177   --
Conversion of
  stockholder advances
   (Note 6)                                                    598,011   --     1,196,021   --    1,196,021   --
Conversion of officer
   loans (Note 6)                                              187,118   --       374,236   --      374,236   --
Stock issued in
   consideration for
   services in 1994,
   1995, and 1996                                              595,283   --     1,190,566   --    1,190,566   --
   (Note 7)
Imputed interest on
   advances from
   stockholder (Note 6)
Net proceeds from initial
   public offering of
   Units (Note 9)                            6,000,000  1,000
Net proceeds from
   exercise of over-
   allotment option
   (Note 9)                                    900,000     --
Warrants issued in
   connection with
   issuance of Bridge
   Notes (Note 9)
Net loss
                           -----------------------------------------------------------------------------------------
Balance at December
   31, 1996                 --       --      6,900,000  1,000  2,000,000  --    4,000,000    --   4,000,000   --
Adjustment to proceeds
  from initial public
  offering and exercise of
  overallotment option
Net Loss
                           -----------------------------------------------------------------------------------------
Balance at December
31, 1997                   --       $--      6,900,000 $1,000  2,000,000 $--    4,000,000   $--  4,000,000   $--
                           -----------------------------------------------------------------------------------------
</TABLE>


                 See accompanying notes to financial statements.

                                       23

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

                  Statement of Stockholders' Equity (Continued)

<TABLE>
                                                                                 Deficit
                                                                               Accumulated
                                                               Additional       During the
                            Public     Class A     Class B      Paid-In        Development
                            Warrants   Warrants    Warrants     Capital          Stage            Total
                           ----------------------------------------------------------------------------------------
<S>                         <C>        <C>         <C>         <C>              <C>               <C>
Common stock issued         $--        $--         $--         $ 7,500,000      $--               $  7,500,000
Common stock issued in
   exchange for in-
   process research and
   development                                                     361,000                             361,000
Imputed interest on
   advances from
   stockholder (Note 6)                                            799,000                             799,000
Net loss from inception to
   December 31, 1995                                                              (20,940,000)     (20,940,000)
                           ----------------------------------------------------------------------------------------
Balance at December
   31, 1995                                                      8,660,000        (20,940,000)     (12,280,000)
Conversion of
  stockholder advances
   (Note 6)                                                     10,728,000                          10,728,000
Conversion of officer
   loans (Note 6)                                                  336,000                             336,000
Stock issued in
   consideration for
   services in 1994,
   1995, and 1996
   (Note 7)                                                      1,507,000                           1,507,000
Imputed interest on
   advances from
   stockholder (Note 6)                                             11,000                              11,000
Net proceeds from initial
   public offering of
   Units (Note 9)                        9,583,000  4,166,000   12,566,000                          26,316,000
Net proceeds from
   exercise of over-
   allotment option
   (Note 9)                              1,707,000    466,000    1,922,000                           4,095,000
Warrants issued in
   connection with
   issuance of Bridge
   Notes (Note 9)            473,000                                                                   473,000
Net loss                                                                         ( 3,388,000)      ( 3,388,000)
                           -----------------------------------------------------------------------------------------
Balance at December
   31, 1996                  473,000    11,290,000  4,632,000   35,730,000       (24,328,000)       27,798,000
Adjustment to proceeds
   from initial public
   offering and exercise of
   overallotment option                                            (78,000)                        (    78,000)
Net Loss                                                                         ( 6,625,000)      ( 6,625,000)
                           -----------------------------------------------------------------------------------------
Balance at December
31, 1997                     $473,000  $11,290,000 $4,632,000  $35,652,000      $(30,953,000)     $ 21,095,000
                           -----------------------------------------------------------------------------------------
</TABLE>
                                       24
<PAGE>
                    Advanced Aerodynamics & Structures, Inc.
                        (A Development Stage Enterprise)

                             Statement of Cash Flows
<TABLE>
                                                                                                       Period from
                                                                                                        January 26,
                                                                                                    1990 (inception) to
                                                                   Year Ended December 31,             December 31,
                                                           --------------------------------------------------------------
                                                                   1996                1997                1997
                                                           --------------------------------------------------------------
<S>                                                           <C>                     <C>                 <C>
Cash flows from operating activities:
   Net loss                                                       $(3,388,000)        $(6,625,000)       $(30,953,000)
   Adjustments to reconcile net loss to net cash
   used in operating activities:
       Noncash stock compensation expense                             590,000                   --          1,207,000
       Noncash interest expense                                       336,000                   --            336,000
       Cost of in-process research and development
           acquired                                                        --                   --            761,000
       Imputed interest on advances from stockholder                   11,000                   --            810,000
       Interest income from restricted cash invested                       --            (136,000)           (136,000)
       Extraordinary loss on retirement of Bridge Notes               942,000                   --            942,000
       Depreciation and amortization                                  327,000             386,000           2,200,000
       Loss on disposal of assets                                          --             385,000             742,000
       Changes in assets and liabilities:
             Increase in prepaid expenses and other current
                 assets                                                (5,000)           (104,000)           (259,000)
             Increase in other assets                                      --            (417,000)           (417,000)
             Increase (decrease) in accounts payable                 (107,000)            390,000             535,000
             Increase (decrease) in accrued liabilities              (403,000)            107,000             165,000
             Increase (decrease) in interest payable                 (235,000)                  --                 --
             Increase in deferred revenue                                  --             430,000             430,000
                                                            ------------------------------------------------------------
         Net cash used in operating activities                     (1,932,000)         (5,584,000)        (23,637,000)
                                                            ------------------------------------------------------------
Cash flows from investing activities:
    Increase in construction in progress                                   --            (446,000)           (446,000)
    Proceeds from insurance claims upon loss of aircraft                   --                   --             30,000
    Proceeds from disposal of assets                                       --               3,000               3,000
    Capital expenditures                                               (6,000)           (804,000)         (4,651,000)
    Purchase of certificate of deposit                                 (2,000)         (1,049,000)         (1,061,000)
    Purchase of investments                                        (2,026,000)         (6,611,000)         (8,637,000)
    Proceeds from sale of investments                                      --           4,124,000           4,124,000
    Restricted cash from long term debt                                    --          (8,500,000)         (8,500,000)
                                                             -----------------------------------------------------------
            Net cash used in investing activities                  (2,034,000)        (13,283,000)        (19,138,000)
                                                             -----------------------------------------------------------
Cash flows from financing activities:
   Adjustment to net proceeds from initial public offering and
     exercise of over-allotment option                                     --             (78,000)            (78,000)
   Proceeds from long term debt                                            --           8,500,000           8,500,000
   Restricted cash collateral for long term debt                           --          (8,500,000)         (8,500,000)
   Advances from stockholder                                               --                   --         10,728,000
   Proceeds from issuance of common stock prior to
       initial public offering                                             --                   --          7,500,000
   Net proceeds from initial public offering and exercise
       of over-allotment option                                    30,411,000                   --         30,411,000
   Net proceeds from bridge financing                               6,195,000                   --          6,195,000
   Repayment of bridge financing                                   (7,000,000)                  --         (7,000,000)
   Repayment of obligation under capital leases                       (19,000)                  --            (40,000)
   Proceeds from loans from officer                                   176,000                   --            336,000
   Repayment of bank notes                                           (900.000)                  --                 --
   Repayment of loans from SIDA Corporation                          (110,000)                  --                 --
   Repayment of other short-term loans                               (565,000)                  --                 --
                                                                 ----------------------------------------------------------
      Net cash provided (used in) by financing activities          28,188,000         (    78,000)         48,052,000
                                                                 ----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents               24,222,000         (18,945,000)          5,277,000
Cash and cash equivalents at beginning of period                           --          24,222,000                  --
                                                                 ----------------------------------------------------------
Cash and cash equivalents at end of period                        $24,222,000        $  5,277,000        $  5,277,000
                                                                 ----------------------------------------------------------
Supplemental cash flow information:
   Cash paid for interest                                             540,000             161,000             855,000
Supplemental disclosure of noncash investing and
financing activities:
   Stockholder advances converted to common stock                  10,728,000                              10,728,000
   Loans from officer converted to common stock                       336,000                                 336,000
   Common stock issued for noncash consideration
       and compensation                                             1,507,000                               1,507,000
   Liabilities assumed from ASI                                                                               400,000
   Common stock issued for in-process research
        and development acquired                                                                              361,000
   Equipment acquired under capital leases                                                                     40,000
   Deposit surrendered as payment for rents due                                                                80,000
</TABLE>
                                       25
<PAGE>



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

                          Notes to Financial Statements


1.       The Company

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

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

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

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

         The Company is a development stage enterprise.  On December 3, 1996 the
         Company  successfully  completed an initial public offering (Note 9) to
         finance the  continued  development,  manufacture  and marketing of its
         product  to  achieve  commercial  viability.  The net  proceeds  of the
         offering  were  and  will  be  used  to  amend  its  Federal   Aviation
         Administration  ("FAA") Type Certificate for technical revisions to its
         product,  to obtain a FAA Production  Certificate  for its product,  to
         repay  borrowings under a bridge loan (Note 9), to expand the Company's
         sales and marketing efforts, to establish a new manufacturing facility,
         and  to  acquire  production   materials  and  additional  tooling  and
         equipment.



                                       26

<PAGE>



2.       Summary of significant accounting policies

         Reclassification

         Certain  previously  reported amounts have been reclassified to conform
         to the 1997 presentation.

         Research and development costs

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

         Preoperating costs

         Preoperating costs are expensed as incurred.

         Advertising expense

         Advertising costs are expensed as incurred

         Cash equivalents

         Cash equivalents represent  short-term,  highly liquid instruments that
         have  original  maturities  of three  months  or less  and are  readily
         convertible  to cash.  Such  investments  consist  primarily of a money
         market account,  short term government funds, and short term commercial
         paper. The cost of such investments approximates fair value at December
         31, 1997.

         Fair Value of Financial Instruments

         The fair  value  of  substantially  all  financial  instruments  of the
         Company approximates their carrying value in the aggregate due to their
         short-term maturity and/or prevailing market interest rates.

         Investments

         Management determines the appropriate classification of debt securities
         at the time of purchase and  reevaluates  such  designation  as of each
         balance sheet date. Debt securities are classified as  held-to-maturity
         when the  Company  has the  positive  intent  and  ability  to hold the
         securities  to  maturity.  Held-to-maturity  securities  are  stated at
         amortized cost,  adjusted for amortization of premiums and accretion of
         discounts  to maturity.  Such  amortization  is included in  investment
         income.  Interest  on  securities  classified  as  held-to-maturity  is
         included in investment income.

         The Company's equity securities are classified as  "available-for-sale"
         and are reported at their fair market value as determined by the quoted
         market price. Any unrealized  holding gains or losses are reported as a
         separate component of stockholders'  equity.  The Company's  investment
         strategies  consider  safety of  principal,  availability  of funds and
         maximum return on investment.

         Due to the  relative  short term nature of the equity  securities,  the
         fair  market  value  approximates  cost  at  December  31,1997  and  no
         unrealized  gains or losses have been reported in stockholders  equity.
         The  cost  of   investments   sold  is   determined   on  the  specific
         identification method.




                                       27

<PAGE>
         Property and equipment

         Property and equipment are stated at cost and are depreciated using the
         straight-line method over their estimated useful lives of ten 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.

         Income taxes

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

         Use of estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

         Per share information

         In February 1997,  the FASB issued  Statement  128,  Disclosures  about
         Earnings per Share,  which  establishes  standards  for  computing  and
         presenting  earnings  per share  (EPS) and  applies  to  entities  with
         publicly held common stock or potential  common stock.  It replaces the
         presentation  of  primary  EPS with a  presentation  of basic EPS which
         excludes  dilution  and is  computed by dividing  income  available  to
         common  stockholders  by the  weighted-average  number of common shares
         outstanding  for the period.  The  statement is effective for financial
         statements   issued  for  periods   ending  after  December  15,  1997.
         Previously  reported  net  losses  per  share  were  reported  based on
         weighted average common stock outstanding and therefore the amounts are
         the same as under FAS No. 128.

         The following table sets forth the computation of basic loss per share:

                                                      1996          1997
                                                 ----------------------------
          Numerator
               Loss before extraordinary item     $(2,446,000)  $(6,625,000)
                                                 ----------------------------

          Denominator
               Weighted average shares of Class
                 B Shares                           2,000,000     2,000,000
               Weighted average shares of Class
                 A shares                             499,000     6,900,000
                                                 ----------------------------
               Denominator for basic loss per
                 share - weighted average shares    2,499,000     8,900,000
                                                 ----------------------------
               Basic loss per share               $     (0.98)   $    (0.74)
                                                 ----------------------------

         Pursuant  to  Securities  and  Exchange   Commission  Staff  Accounting
         Bulletin  No. 98,  loss per share in 1996 has been  restated to exclude
         the effect of Bridge warrants because their inclusion is anti-dilutive.

         Accounting  Pronouncements.

         The  financial  Accounting  Standards  Board has  issued  Statement  of
         Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
         Income," which is effective for fiscal years  begninning after December
         15,  1997;  and  SFAS  No.  131,  "Disclosures  About  Segments  of  an
         Enterprise  and Related  Information,"  which is  effective  for fiscal
         years beginning after December 15, 1997.



                                       28

<PAGE>


         SFAS  No.  130  requirest  that  all  items  that  are  requried  to be
         recognized  under  accounting  standards as components of comprehensive
         income be reported in a financial  statement that is displayed with the
         same prominence as other financial statements.  Currently,  the changes
         in unrealized gains and losses from investments  would be the Company's
         only component of comprehensive  income. The Company currently plans to
         adopt this standard in fiscal 1998.

         SFAS No.  131  requires a public  enterprise  to report  financial  and
         descriptive  information about its reportable  operating segments based
         upon the way management  organizes  segments  within the enterprise for
         making operating decisions and assessing performances.  The Company has
         only one segment and plans to adopt the standard in fiscal 1998.

         In March 1998,  the AICPA issued SOP 98-1,  Accounting For the Costs of
         Computer Software  Developed For or Obtained For Internal-Use.  The SOP
         is effective for the Company beginning on January 1, 1999. The SOP will
         require the  capitalization of certain costs incurred after the date of
         adoption in  connection  with  developing  or  obtaining  software  for
         internal-use.  The Company  currently  expenses such costs as incurred.
         The Company has not yet assessed  what the impact of the SOP will be on
         the Company's future earnings or financial position.

3.       Property and equipment

         Property and equipment consist of the following:


                                                            December 31, 1997
                                                            -----------------

             Office furniture and equipment                      $571,000
             Machinery and equipment                            2,556,000
                                                             ----------------
             Gross property and equipment                       3,127,000
             Accumulated depreciation and amortization         (1,411,000)
                                                             -----------------
             Property and equipment, net                       $1,716,000
                                                             -----------------

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

4.       Income taxes

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
         differences  between the carrying amounts of assets and liabilities for
         financial  statements  purposes  and the  amounts  used for  income tax
         purposes.

         Significant  components of the Company's  deferred tax  liabilities and
         assets as of December 31, 1997 are as follows:


          Deferred tax assets:
          Federal net operating loss                       $9,320,000
          State net operating loss                            643,000
          Research & Development Credits                    1,898,000
          Other                                                16,000
                                                          -----------
          Total deferred tax assets                        11,877,000

          Deferred tax liabilities:
          Tax over book depreciation                          388,000
                                                          -----------
          Total net deferred tax assets                    11,489,000
          Valuation allowance                             (11,489,000)
                                                          -----------
                                                          $        --
                                                          -----------




                                       29

<PAGE>


         At December 31, 1997, the Company had U.S. Federal and California state
         net operating loss ("NOL")  carryforwards of approximately  $27 million
         and $6 million,  respectively.  Federal NOLs will, if unused, expire in
         varying  amounts in the years  1998through  2017.  California  NOLs, if
         unused, will expire in varying amounts from 1998 through 2002.

         At December 31, 1997, the Company had Federal and  California  research
         and  development   ("R&D")  credit   carryforwards   of   approximately
         $1,356,000   and  $542,000,   respectively.   The  Federal  R&D  credit
         carryforwards   will  expire  in  the  years  2004  through  2009.  The
         California   R&D   credit   carryforwards   can  be   carried   forward
         indefinitely.

         The provision for income taxes are as follows:


                                                         December 31,
                                                      ----------------
                                                            1997
                                                      ----------------
         Deferred:
              Federal                                   (2,199,000)

              State                                        177,000
                                                      ----------------
              Total deferred                            (2,022,000)
         Change in valuation allowance                  (2,022,000)
                                                      ----------------
                                                           $  --
                                                      -----------------

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

         As a result of the Company's  operating losses, no income tax provision
         has been recorded in 1996.

5.       Investments

         The   contractual   maturities   of  debt   securities   classified  as
         held-to-maturity,  which consist of United States corporation bonds, as
         of December 31, 1997 are as follows:

                  Maturities                           Fair Value

                  Within one year                      $4,156,000
                  After one year through five years       357,000
                                                       ----------
                                                       $4,513,000
                                                       ----------

         Debt  and  equity  securities  classified  as  cash  equivalents  as of
         December 31, 1997 are as follows:

                  Short Term Government Fund           $2,999,000
                  Commercial Paper                      1,506,000
                                                       ----------
                                                        4,505,000
                                                       ----------

6.       Debt and related party transactions

         In 1993 and 1994,  the  Company  obtained  loans from SIDA  Corporation
         (Note  7) in  the  aggregate  principal  amount  of  $110,000,  bearing
         interest at 12% per annum. These loans,  together with accrued interest
         of $31,000, were repaid from the proceeds of the Bridge Notes (Note 9).

         In 1994, the Company  received loans in the aggregate  principal amount
         of $565,000,  bearing interest at 12% per annum,  from four individuals
         who  were at the  time  not  affiliated  with  the  Company.  One  such
         individual  became a director of the Company in June 1996. These loans,
         together  with  accrued  interest  of  $161,000,  were  repaid with the
         proceeds of the Bridge Notes (Note 9).



                                       30

<PAGE>


         In  1994  and  1995,  the  Company  obtained  loans  from a bank in the
         aggregate  principal amount of $900,000,  bearing interest at the prime
         rate plus 1.5%. These loans, together with accrued interest of $15,000,
         were repaid with the proceeds of the Bridge Notes (Note 9).

         In 1995 and through  August 1996,  an officer of the Company made loans
         to the Company in the aggregate  principal  amount of $562,000  bearing
         interest  at 12% per annum.  In May 1996,  $336,000  of such loans were
         converted  into  187,118  shares of Class B Common  Stock  and  374,236
         shares  each of Class E-1 and Class E-2  Common  Stock.  The  remaining
         $226,000  principal  amount  of  these  loans,  together  with  accrued
         interest of $36,000,  was repaid with the  proceeds of the Bridge Notes
         (Note 9).

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

         The Company is in the process of  constructing  it's new  manufacturing
         and administrative  facility in Long Beach,  California.  The financing
         for this project is the Company's  obligation under a loan agreement in
         connection with industrial  development  bonds issued by the California
         Economic  Development   Financing  Authority.   The  principal  balance
         outstanding at December 31, 1997 is $8,500,000. The loan bears interest
         at a floating  rate (4.25% at December 31, 1997) with a maximum rate of
         12%, set weekly, until conversion to a fixed rate, at the option of the
         Company for the  remaining  term of the  agreement.  As of December 31,
         1997, the Company has not exercised  that option.  The Company also has
         an option to redeem the bonds prior to maturity at the redemption price
         of 100% of the principal amount plus any accrued interest  outstanding.
         At December  31, 1997,  the Company has  established  in the  trustee's
         favor a bank letter of credit for the principal  amount of  $8,500,000,
         plus 45 days  accrued  interest  on the  bonds,  which  is  secured  by
         $8,500,000 of Company  restricted  cash.  The portion of the borrowings
         not yet expended for construction at December 31, 1997 ($8,327,000) and
         accrued interest on the unused borrowings  ($136,000) was held in trust
         and  classified  as  restricted  cash on the balance  sheet.  The bonds
         mature August 1, 2027 at which time all outstanding  amounts become due
         and payable.

7.       Commitments, contingencies and employment agreements

         In January  1990,  the  Company  entered  into a  five-year  management
         services  agreement (the "1990 Agreement") with SIDA  Corporation,  the
         stockholders  of which were also minority  stockholders of the Company.
         During the period from  January 26, 1990  (inception)  to December  31,
         1996, the Company incurred $700,000 of service fees (including  $12,000
         in 1995) pursuant to this  agreement.  Unpaid service fees of $259,000,
         together  with  accrued  interest  of  $64,000,  were  repaid  from the
         proceeds of the Bridge Notes (Note 9).

         In January 1995, the 1990  Agreement  expired and was replaced by a new
         management  services agreement (the "1995 Agreement") entered into with
         the  Company's  President on December 29, 1994 for an original  term of
         ten years. The 1995 Agreement  provided for an annual base compensation
         of $350,000 to be paid to the Company's  President,  a $250,000 signing
         incentive payable in shares of common stock and additional common stock
         to be earned for services performed.  Base compensation of $300,000 and
         the signing incentive of $250,000 were subsequently converted to shares
         of Class B, Class E-1 and Class E-2 Common Stock as discussed below.




                                       31

<PAGE>



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


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

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

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

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

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

         On October 17, 1997 the Company entered into a Lease Agreement with the
         City of Long Beach,  for  approximately 10 acres of land located on the
         Long  Beach  Airport.  The  purpose of the lease is to  effectuate  the
         construction of an approximately  200,000 square foot manufacturing and
         headquarters  facility. The lease commenced on January 14, 1998 and has
         a term of 30 years with an option to renew for an  additional 10 years.
         The lease also contains options to lease other airport properties.  The
         monthly   rent  under  the  lease  is  $4,500,   which   escalates   to
         approximately  $15,600 after 5 years.  The aggregate  minimum  payments
         under the lease have been included in the table below.

         The Company  leases its current  office,  manufacturing,  and warehouse
         facilities for $18,351 on a monthly renewal basis.

         Future minimum rental payments  applicable to non-cancelable  operating
         leases as of December 31, 1997, are as follows:


         1998                                                   $   199,000
         1999                                                        71,000
         2000                                                        89,000
         2001                                                       109,000
         2002                                                       187,000
         Thereafter                                               4,669,000
                                                             --------------
         Net future minimum lease payments                       $5,324,000
                                                             --------------

         In the ordinary course of business, the Company is generally subject to
         claims,  complaints,  and legal  actions.  At December  31,  1997,  the
         Company is not a party to any action which would have a material impact
         on its financial condition, operations or cash flows.

         The Company  entered into an  agreement  with  Commercial  Developments
         International/West (Design/Builder) whereby Design/Builder shall design
         and  build an  approximately  200,000  square  foot  manufacturing  and
         headquarters  facility. The contract sum for this project is "Cost plus
         Fixed Fees" with a Guaranteed  Maximum Price of $6,300,000,  subject to
         the cost of change orders, if any. Any savings realized upon completion
         and acceptance of the project will be shared by the  Design/Builder and
         the Company. The Company believes that the project will be completed in
         the third quarter of 1998.


                                       32

<PAGE>


8.       Stockholders' equity

         Common stock

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

         Class E-1 and E-2 Common Stock

         All  shares  of Class  E-1 and Class  E-2  Common  Stock  ("Performance
         Shares") are not  transferable  or assignable and may be converted into
         shares of Class B Common Stock in the event income before provision for
         income  taxes,  exclusive  of any  extraordinary  earnings  or  losses,
         reaches  certain  targets over the next seven  years,  or if the market
         price of the Class A Common  Stock  reaches  specified  levels over the
         next three years. With respect to targeted  earnings,  Class E-1 Common
         Stock shares may be converted if pretax income exceeds $17.5 million in
         1998,  $22.5 million in 1999,  $28.5 million in 2000,  $36.0 million in
         2001,  $45.00  million  in 2002 and $56.0  million  in 2003.  Class E-2
         Common Stock shares may be converted if pretax income  exceeds  $21.875
         million  in 1998,  $28.125  million in 1999,  $35.625  million in 2000,
         $45.0 million in 2001, $56.25 million in 2002 or $69.5 million in 2003.
         With respect to market price levels,  the Class E-1 Common Stock shares
         may be  converted  if,  commencing  on  December  3, 1996 and ending 18
         months thereafter,  the bid price of the Company's Class A Common Stock
         averages  in  excess of $14.00  per share for 30  consecutive  business
         days,  or  commencing  18 months after  December 33, 1996 and ending 36
         months  thereafter,  the bid  price  averages  $18.50  per share for 30
         consecutive  business  days.  Class  E-2  Common  Stock  shares  may be
         converted  if  commencing  at  December  3,  1996 and  ending 18 months
         thereafter,  the  bid  price  of the  Company's  Class A  Common  Stock
         averages in excess of $18.00 per share for 30 consecutive business days
         or  commencing  18 months  after  December 3, 1996 and ending 36 months
         thereafter,  the  bid  price  averages  in  excess  of  $23.00  for  30
         consecutive business days.

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

         Stock options

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

         The Company has elected to follow  Accounting  Principles Board Opinion
         No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
         Interpretations  in accounting for its employee stock options  because,
         as discussed below, the alternative fair value accounting  provided for
         under FASB Statement No. 123  (Statement  123),  "Accounting  for Stock
         Based  Compensation",  requires the use of option valuation models that
         were not developed for use in valuing employee stock options. Under APB
         25, because the exercise  price of the Company's  employee stock opions
         equals or exceeds the market price of the underlying  stock on the date
         of grant, no compensation expense is recognized.



                                       33

<PAGE>


         Pro forma  information  regarding  net income and earnings per share is
         required by Statement  123, and has been  determined  as if the Company
         had  accounted  for its  employee  stock  options  under the fair value
         method  of that  Statement.  The  fair  value  for  these  options  was
         estimated  at the date of grant using a  Black-Scholes  option  pricing
         model  with  the  following  weighted-average  assumptions:   risk-free
         interest  rates of 6.5% and  6.8%  for  1997  and  1996,  respectively;
         dividend  yields of 0% for 1997 and  1996;  volatility  factors  of the
         expected market price of the Company's common stock of .88 and .001 for
         1997 and 1996,  respectively;  and a weighted  average expected life of
         the option of 10 years and 5 years, for 1997 and 1996, respectively.

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

         Had the Company  accounted for stock options  granted in 1997 and 1996,
         using  the  fair  value  method  at  the  date  of  grant,   additional
         compensation  expense would have been recorded and the pro forma effect
         would have been as follows:

                                                  Years Ended December 31,
                                                  1997                1996
                                             ---------------------------------
         Pro forma net loss                  $   6,748,000       $   3,393,000
         Pro forma net loss per share:       $         .76       $        1.36

         The weighted average fair value of options granted during 1996 and 1997
         was $.73 and $2.57,  per option,  respectively.  The  weighted  average
         exercise  price  for  1996 and 1997 was  $5.00.  The  weighted  average
         remaining  contractual  life of options  outstanding  is 9.20 years and
         9.67 years for 1997 and 1996, respectively.

         At December  31,  1997,  options to purchase  80,000  shares of Class A
         Common Stock were  available  for future  grants and 420,000  shares of
         Class A  Common  Stock  were  reserved  for the  exercise  of  options.
         Transactions under the Plan during the year ended December 31, 1996 and
         December 31, 1997 are summarized as follows:

                                                                 Weighted
                                              Shares         Average Exercise
                                                                  Price

          Outstanding at December 31, 1995     ---                 ---

                  Granted                      110,000             $5.00

                  Exercised                    ---                 ---

                  Canceled                     ---                 ---

          Outstanding at December 31, 1996     110,000             $5.00

                  Granted                      315,000             $5.00

                  Exercised                    ---                 ---

                  Canceled                      (5,000)            $5.00

          Outstanding at December 31, 1997     420,000             $5.00

         As of December 31, 1997 and 1996 21,000 and 0 options were  exercisable
         at a  weighted  average  exercise  price of $5.00 per option.

8.       Initial public offering

         On December 3, 1996, the Company  completed an initial public  offering
         of 6,000,000  units (the "Units) at an initial public offering price of
         $5 per Unit.  Each Unit is composed of one share of the Company's Class
         A Common

                                       34

<PAGE>



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

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

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

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

10.      Employee Benefit Plan

         The  Company  has a 401(k)  savings  plan and a  profit  sharing  plan,
         covering  substantially  all full time employees.  The Company may make
         discretionary   contributions,   under  the  profit  sharing  plan,  as
         authorized  by the Board of  Directors.  The  Company  has not made any
         profit sharing contributions to the Plan.

                                       35

<PAGE>



                                    PART III

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

         During the quarter ended  December 31, 1997, the Company filed a report
on Form 8-K relating to the change of the Company's independent accountants.


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

         Information  regarding  directors and executive officers of the Company
will appear in the Proxy Statement of the Annual Meeting of Stockholders  and is
incorporated  herein by this  reference.  The Proxy Statement will be filed with
the SEC within 120 days following December 31, 1999.

ITEM 10.    EXECUTIVE COMPENSATION

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

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

        Exhibit No.           Description

        *      3.1            Certificate of Incorporation
        **     3.2            Bylaws
        *      3.3            Amendment to Certificate of Incorporation
        *      4.1            Specimen Certificate of Class A Common Stock
        *      4.2            Warrant Agreement (including form of Class A and
                              Class B Warrant Certificates
        *      4.3            Form of Underwriter's Unit Purchase Option
        *      10.1           Form of Indemnification Agreement
        **     10.2           Amended 1996 Stock Option File
        *      10.3           Employment Agreement dated as of May 1, 1996
                              between the Company and Dr. Carl L. Chen
        *      10.4           Agreement of Merger dated July 16, 1996 between
                              Advanced Aerodynamics and Structures, Inc., a
                              California corporation, and Advanced Aerodynamics
                              & Structures, Inc., a Delaware corporation
        **     10.5           Lease dated December 19, 1996 between Olen
                              Properties Corp., a Florida corporation, and
                              the Company
        ***    10.6           Standard Sublease dated June 27, 1997 with Budget
                              Rent-a-Car of Southern California
        ***    10.7           Standard Sublease dated July 16, 1997 with Budget
                              Rent-a-Car of Southern California
        ***    10.8           Standard Industrial/Commercial Multi-Tenant Lease-
                              Gross dated March 12, 1997 with the Golgolab
                              Family Trust
        *****  10.9           Loan Agreement dated as of August 1, 1997 between
                              the Company and the California Economic
                              Development Authority
        *****  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
        ****   10.11          Official Statement dated August 5, 1997
        *****  10.12          Letter of Credit issued by The Sumitomo Bank,
                              Limited

                                       36

<PAGE>



        *****  10.13          Reimbursement Agreement dated as of August 1, 1997
                              between the Company and the Sumitomo Bank, Limited
        *****  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
        *****  10.15          Remarketing Agreement dated as of August 1, 1997
                              between the Company and Rauscher Pierce Refnes,
                              Inc.
        *****  10.16          Blanket Letters of Representations of the
                              California Economic Development Authority and
                              First Trust of California, National Association
        *****  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
        *****  10.18          Custody, Pledge and Security Agreement dated as of
                              August 1, 1997 between the Company and The
                              Sumitomo Bank, Limited
        *****  10.19          Investment Agreement dated August 5, 1997 by and
                              between the Company and the Sumitomo Bank, Limited
        *****  10.20          Specimen Direct  Obligation Note between the
                              Company and the Sumitomo Bank, Limited
        ****   10.21          Lease Agreement dated October 17, 1997 between the
                              Company and the City of Long Beach
        ****   10.22          Construction Agreement dated October 29, 1997
                              between the Company and Commercial Developments
                              International/West
               27.            Financial Data Schedule

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

        **     Incorporated by reference to the Company's  Report on Form 10-KSB
               filed with the  Securities  and Exchange  Commission on March 31,
               1997.

        ***    Incorporated   by  reference  by  the  Company's   Post-Effective
               Amendment No. 1 to Form SB-2  Registration  Statement  filed with
               the Securities and Exchange Commission on August 5, 1997.

        ****   Filed by paper pursuant to the Company's  request for a temporary
               hardship exemption relating to this report.

        *****  Incorporated by reference to the Company's  Report on Form 10-QSB
               filed with the Securities and Exchange Commission on November 14,
               1997

        Reports on Form 8-K:

        During the quarter ended  December 31, 1997,  the Company filed a report
        on  Form  8-K  relating  to  the  change  of the  Company's  independent
        accountants.







                                       37

<PAGE>



                                   SIGNATURES

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

Dated:  March 31, 1998                 ADVANCED AERODYNAMICS & STRUCTURES, INC.


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


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


Signature                            Title                          Date


/s/ Carl L. Chen         President, Chief Executive Officer,   March 31, 1998
-----------------------  and Chairman of the Board
Carl L. Chen

/s/ Gene Comfort         Executive Vice President,             March 31, 1998
-----------------------  Secretary and Director
Gene Comfort

/s/ Dave Turner          Vice President - Finance and Chief    March 31, 1998
-----------------------  Financial Officer
Dave Turner

/s/ C.M. Cheng           Director                              March 31, 1998
-----------------------
C.M. Cheng

/s/ Steve Gorlin         Director                              March 31, 1998
-----------------------
Steve Gorlin

/s/ Jim Lovell           Director                              March 31, 1998
-----------------------
Jim Lovell

/s/ S.B. Lai             Director                              March 31, 1998
-----------------------
S.B. Lai



                                       38