<PAGE>

                      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, 1999
                 [_]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
 INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)

             3205 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 [_]
No [X].

     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   [X]

     The Registrant generated no operating revenues for the fiscal year ended
December 31, 1999.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sales price of its common stock as of
February 3, 2000 on the Nasdaq National Market was $27,123,745.  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 February 3, 2000, the registrant had outstanding 6,999,676 shares of
Class A Common Stock, 1,900,324 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 2000 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
report.

     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, 1999 are incorporated herein by
reference to Registrant's Proxy Statement and appear therein under the section
headings indicated below:


<TABLE>
<CAPTION>

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

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


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



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


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

     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 raise additional capital, 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."


                                     PART I

ITEM 1.   BUSINESS.

OVERVIEW

     The Company is a development stage enterprise organized in 1990 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 is modifying the JETCRUZER 450 to develop a
six-seat (including pilot), pressurized version of such aircraft for commercial
sale (the "JETCRUZER (TM)500") which, the Company anticipates, will takeoff and
land in less than 2,000 feet, be able to fly at 30,000 feet above sea level, and
have a high cruise speed of approximately 345 mph and a capability of flying
from Los Angeles to New York with only one stop.

     The Company began development of the JETCRUZER 450 in 1990 and obtained the
FAA Type Certificate approval 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 FAA 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 decided that it would 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 decided to amend the Type
Certificate to develop the JETCRUZER 500 for commercial sale. The JETCRUZER 500
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.

     The Company has FAA approval to amend its Type Certificate, rather than
obtain a new Type Certificate. The Company currently anticipates that it can
obtain an amendment to its Type Certificate during the last half of 2000 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 or that the Company will not experience unforeseen
expense or delay in certifying and commercializing its proposed aircraft.

     The Company has not generated any operating revenues to date and has
incurred losses from its operating activities including program development
costs of $5.6 million and $6.5 million in 1999 and 1998, respectively. The
Company believes it will continue to experience losses until such time as it
commences the sale of aircraft on a commercial scale. 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 $31,527,000 from inception through December
31, 1999. 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 and the STRATOCRUZER 1250 "See Other Aircraft".

                                       3
<PAGE>

INDUSTRY BACKGROUND

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

     Purchasers of general aviation aircraft include corporations, governments,
the military, the general public and fractional interest entities. A corporation
may purchase a general aviation aircraft for transporting its employees and
property. Many companies use an aircraft in their line of business, including
on-demand air taxi services, air ambulance services and freight and delivery
services. Governments and military organizations may purchase an aircraft for
the transportation of personnel, freight and equipment. Members of the general
public may purchase an aircraft for personal and/or business transportation,
freight, equipment and pleasure use. 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. Aircraft deliveries by United
States manufacturers have increased consistently with sales generating
approximately $3.1 billion in 1996, $4.8 billion in 1997,  $5.9 billion in 1998
and $7.9 billion in 1999.


STRATEGY

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

     The Company believes that aircraft sales are heavily dependent on the
quality and safety of a company's products. Accordingly, the Company intends to
maintain high quality and safety standards in all aspects of the design and
manufacture of its proposed aircraft. For example, the Company believes that
certain design features of the JETCRUZER 500, such as the canard wing, will make
the aircraft spin resistant and that the absence of wing flaps will make the
operation of the aircraft less susceptible to pilot error. In addition, the
Company believes that the reliability of the Company's component suppliers, such
as Pratt & Whitney, the engine manufacturer, 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 aerospace and defense companies who the Company
was able to hire to assist in the certification of the JETCRUZER 450. These
employees provided the Company with an expertise 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 in-house required for the
manufacture of its aircraft. Also, because the Company produces the airframe and
most

                                       4
<PAGE>

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 will be 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, in part, 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.

     Management also believes that the Company's aircraft will provide
performance advantages over competitors' models, including better handling
characteristics and increased speed. 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 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
are constructed of aircraft aluminum skin and spar and rib construction. Flaps
are not required on the JETCRUZER 500 because of 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.

     JETCRUZER500. 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 that were imposed as a result of the aircraft's early stage of
development. For example, the maximum number of occupants was limited to five,
as compared to the six passenger (including pilot) design configuration of the
JETCRUZER 500, and the maximum operating speed was limited to 178 mph, as
compared to the approximately 345 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, and autopilot certification, all of which will be necessary to
produce the JETCRUZER 500 for commercial sale. Two model 500's have already been
produced and flown with the third anticipated to be completed in the second
quarter of 2000. The entire JETCRUZER program has almost a thousand hours of
flight testing. Several hundred additional hours of testing will be required to
obtain the amendment of the Type Certificate. The Company anticipates the
certification amendment will be received in the second half of 2000. There can
be no assurance, however, that obtaining the amendment will not take longer than
anticipated.

                                       5
<PAGE>

     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 345 mph. The Company also
believes that the aircraft should be able to climb at approximately 2,600 feet
per minute, cruise at an altitude of 30,000 feet above sea level and travel from
Los Angeles to New York with only one stop. 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 currently is available
for commercial sale at a base price of $1,495,000.


OTHER AIRCRAFT

     STRATOCRUZER(R)1250. The Company currently intends to further develop a
     -------------------
twin engine jet aircraft called the STRATOCRUZER 1250. The STRATOCRUZER 1250,
will be a canard aircraft with three flying surfaces powered by two
Williams/Rolls Royce FJ44-2 fan jets. 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 41,000 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 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.


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 achieved, 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 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.

     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.

                                       6
<PAGE>

     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. 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

     The Company has developed an in-house sales and marketing organization and
is marketing its aircraft in the United States and abroad through trade
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 has 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
transportation, surveillance, mapping photography, forest fire detection, and
fractional use entities who purchase one or more aircraft and sell interests in
each aircraft to several persons or entities. The Company believes that the
relatively low purchase price, performance, safety and cost of 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.

     Pursuant to FAA regulations effective as of May 4, 1998, single-engine
aircraft may be used for commercial passenger revenue-paying flights (whether
on-demand charter or scheduled) in Instrument Flight Rules (IFR) conditions,
provided the pilot and the aircraft meet certain FAA certification, proficiency,
maintenance and additional equipment and airworthiness requirements. The Company
believes that the affect of this FAA resolution will be to open up new markets
for the JETCRUZER 500.

     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.

     SERVICE. The Company's aircraft will be serviced primarily by fixed base
     -------
operations ("FBOs") authorized by the Company. FBOs 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.

                                       7
<PAGE>

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 contractual rights to engines from Pratt & Whitney. The failure of 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 its aircraft will be differentiated from
its  competition based primarily on the aircraft's price and performance. 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.

     Single engine propjet competition for the JETCRUZER consists of just three
aircraft. The Cessna Caravan is all metal and sells for $1.4 million and has a
high speed of 160 kts, a landing gear that does not retract, no pressurization
and is designed basically for freight use. Cessna delivered 700 Caravans in 7
years and received an order for 100 aircraft from one customer. The Company also
expects competition from the TBM 700. Made in France from metal, it has a
similar passenger capacity and performance to the JETCRUZER, but its $2.6
million price tag is almost double that of the JETCRUZER. The last competitor is
the Pilatus PC-12. Made in Switzerland from metal, it has a lower airspeed of
270 kts and sells for almost double the price of the JETCRUZER at $2.4 million.
All competitive aircraft are based on conventional designs, which are more than
30 years old, and are made from metal. JETCRUZER's prime advantage is its
design, lightweight graphite composites, high performance and is one of the
lowest priced propjets in the world.

     An additional competitor to the JETCRUZER 500 could be  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. 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, 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 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.

     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

                                       8
<PAGE>

purchasers who might otherwise acquire a used aircraft by emphasizing the price,
performance and technology, 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.

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.  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, and (d) construction of an initial prototype JETCRUZER 500 for use in
flight testing and construction of a flight test Jetcruzer 500, currently in
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 an amended type certificate may vary, the Company believes
that it can obtain an amended certificate for the JETCRUZER 500 during the last
half of 2000.

     The Company intends 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

                                       9
<PAGE>

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 be five to six
months in the case of the JETCRUZER 500. The Company expects to obtain the
production certificate during the last half of 2000.

     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 is 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. 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 a foreign country 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 9, 2000 the Company had ninety-four full time employees. The
Company believes that its relations with its employees are good. The Company is
not a party to any collective bargaining agreement.


ITEM 2.    PROPERTIES.

     The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1998 and
has a term of 30 years with an option to renew for an additional 10 year term.
The lease also contains options to lease other airport properties. The current
monthly rent under the lease is $7,400.  The lease contains incremental
increases which escalate the monthly rent to approximately $15,600 after 5
years.

     The Company contracted Commercial Developments International/West
(Design/Builder) to design and build their approximately 200,000 square foot
manufacturing and headquarters facility (the "New Facility") on the above
mentioned leased property. The facility was substantially completed during 1998,
and on November 16, 1998, the Company moved into

                                       10
<PAGE>

the New Facility. The total cost for the New Facility, including its design,
construction, licenses, fees and change orders was approximately $9,700,000. The
Company believes the new facility will provide adequate capacity for the
foreseeable future.

     In June, 1999, the Company sold its 200,000 square-foot building and leased
it back. The sales price of the building was $9,800,000 and the term of the
lease is eighteen years plus an option to extend the lease for an additional ten
years.

     Monthly payments under the terms of the leaseback are approximately
$106,000 and will be adjusted annually, after the first year, for changes in the
Consumer Price Index, not to exceed 3% per annum. The rent for periods after the
eighteenth year will be at fair market rental value.



ITEM 3.    LEGAL PROCEEDINGS.

     As of March 15, 2000, 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 1999.

                                       11
<PAGE>

                                    PART II

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




     The Company's Class A Common Stock is listed for trading 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.



     Year Ended December 31, 1998          High                Low
     ----------------------------     --------------------------------
     First Quarter                        5.250               2.563
     Second Quarter                       7.000               4.000
     Third Quarter                        5.563               2.313
     Fourth Quarter                       4.375               2.500


     Year Ended December 31, 1999
     ----------------------------
     First Quarter                        4.625               2.875
     Second Quarter                       4.000               2.750
     Third Quarter                        3.313               2.000
     Fourth Quarter                       3.875               1.531


     At March 15, 2000, there were approximately 40 holders of record of the
Company's Class A Common Stock, 3 holders of record of the Company's Class B
Common Stock and 4 holders of record of the Company's 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.

                                       12
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

     Certain statements concerning the Company's future cash and financing
requirements, the Company's ability to raise additional capital, 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,
corporate and government use and has been engaged principally in research and
development of its proposed aircraft. At inception in January 1990, the Company
acquired the assets of Aerodynamics & Structures, Inc. ("ASI"), a New Jersey
corporation engaged in the design of an aircraft prototype, in exchange for
139,407 shares of Class B Common Stock, 278,815 shares of Class E-1 Common
Stock, and 278,815 shares of Class E-2 Common Stock. In connection with this
exchange, the Company assumed liabilities of ASI in the amount of approximately
$400,000. In March 1990, the Company made application to the FAA for a Type
Certificate for the JETCRUZER 450, which Certificate was ultimately granted in
June 1994. The Company decided to amend the Type Certificate and is in the
process of developing 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.

     The Company has not generated any operating revenues to date and has
incurred losses from its operating activities including program development
costs of $5.6 million and $6.5 million in 1999 and 1998, respectively. 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 deliveries, the Company will need to, among
other things, complete the development of the JETCRUZER 500, obtain the
requisite regulatory approvals, 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.
There can be no assurances, however, that the Company's cost to complete
development of the JETCRUZER 500 will not exceed $5,000,000.

     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 rescheduling, 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 2000 the Company intends to focus its efforts on the following
events:

     -   Passing the FAA pressurization test. One of the major differences
         between the JETCRUZER 500 and the JETCRUZER 450 is that the JETCRUZER
         500 is pressurized. After the JETCRUZER 500 passes the pressurization
         test, the Company believes that the remaining tests are tests that have
         previously been performed

                                       13
<PAGE>

         on the JETCRUZER 450 and, therefore, are more likely to be successful.
         While there can be no assurance, the Company believes that the
         pressurization test can be successfully completed in the first quarter
         of the year 2000.

     -   Completing Company high-speed cruise flight-testing to assure customers
         of the JETCRUZER 500's speed.

     -   The commencement of JETCRUZER 500 production. Upon the successful
         completion of the pressurization and Company speed tests, the Company
         immediately will commence production of the first JETCRUZER 500 planes.
         The Company anticipates that production will start in lots of 4 planes
         per month.

     -   The start of progress payment collections. As the Company starts the
         production process, each customer whose plane is being built will be
         requested to make an initial progress payment, as specified in the
         customer's purchase contract. The Company believes that this event will
         be the start of positive cash flow.

     -   Obtaining Type Inspection Authorization (TIA). This event marks the end
         of Company flight tests and means that the FAA will test the plane,
         using its pilots. The Company believes that this event will occur
         around the middle of year 2000.

     -   Obtaining an amended Type Certificate (TC) for the Jetcruzer 500 from
         the FAA. This means that the Company may deliver planes to its
         customers. The Company believes that this event will occur toward the
         end of year 2000.

     -   Delivering the first JETCRUZER 500. With the delivery of its first
         plane, the Company will record its first sales revenue and cost of
         goods sold.

     -   Obtaining a production certificate from the FAA. This will allow use of
         the Company's specified inspectors during the production and delivery
         processes of the JETCRUZER 500. This certification should quickly
         follow the receipt of the TC.

         The Company entered into a subscription agreement for the sale of up to
$10,000,000 of 5% Cumulative Convertible Series A Preferred Stock, of which the
Company received net proceeds of $4,550,000. Additionally, the Company signed a
letter of intent to sell and leaseback manufacturing equipment. This transaction
will generate an additional $1,000,000.

       The Company's management believes that its current working capital with
the additional funding obtained in March 2000 will be sufficient to finance its
plan of operations through the end of the third quarter, at which time positive
cash flow from customer progress payments is expected to have commenced as well
as receipt of the remaining $5,000,000 of the Preferred Stock funding will have
occurred. However, there can be no assurances that the current timetable for
completion of the development and certification of the aircraft will not be
delayed beyond the current fiscal year. If the Company's estimates prove to be
incorrect, or additional sources of financing prove to be unavailable, if
needed, the Company will have to curtail its development plans.



                                       14
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                    Period from January 26, 1990
                                                         Years Ended December 31     (inception) to December 31,
                                                       ---------------------------   ---------------------------
                                                          1998                 1999                      1999
                                                       ---------------------------------------------------------
<S>                                                    <C>                  <C>                      <C>
Interest and other income                               $ 1,374,000         $  433,000               $ 4,065,000
Research and development, general and
  Administrative expenses                                11,127,000          8,752,000                49,405,000
Interest expense                                            352,000            992,000                 3,345,000
Loss on disposal of assets                                   13,000                 --                   755,000

Realized Loss on sale of investments                             --             30,000                    30,000
Extraordinary Loss                                               --                 --                   942,000
                                                       ---------------------------------------------------------
Net Loss                                               ($ 10,118,000)      ($9,341,000)             ($50,412,000)
                                                       =========================================================
</TABLE>

     The Company has not generated any revenues from operations.. The Company's
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
December 1996 IPO.

     Interest income consisted primarily of earnings derived from the unused
proceeds of the 1999 sale and leaseback of the Company's 200,000 square foot
building.  Interest income aggregated $2,743,000 from inception through December
31, 1999, $927,000 and $373,000 of which was earned in 1998 and 1999,
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 $31,527,000 from inception
through December 31, 1999. 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, and the STRATOCRUZER 1250.

     General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $17,878,000 from inception
through December 31, 1999, $4,658,000 and $3,186,000 of which were incurred in
1998 and 1999, respectively. General and administrative expenses have increased
since 1997 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 $3,345,000
from inception through December 31, 1999, $352,000 and $992,000 of which were
incurred in 1998 and 1999, 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, 1999, the Company has a United States federal and
California state tax net operating loss carryforwards of approximately
$47,900,000 and $15,200,000, respectively, which, if unused, will expire in
varying amounts in the years 1999 through 2018.

     At December 31, 1999, 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 5 of Notes to Financial Statements.

                                       15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1999, the Company had working capital of $1,731,000 and
stockholders' equity of $1,604,000. 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 funding of equity and debt and through the proceeds
generated from its December 1996 initial public offering.

     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's management team has developed a financial plan to address its
working capital requirements. The Company entered into a subscription agreement
for the sale of up to $10,000,000 of 5% Cumulative Convertible Series A
Preferred Stock, of which the Company received net proceeds of $4,550,000.
Additionally, the Company signed a letter of intent to sell and leaseback
manufacturing equipment. This transaction will generate an additional
$1,000,000.

     The remaining $5,000,000 in Preferred Stock funding will not occur until
certain criteria have been met, including passing the pressurization test for
the fuselage structure and completion of the registration of 200% of the Common
Stock underlying the convertible Preferred Stock subscription. It is anticipated
that the remaining proceeds will be received in two installments; $2 million in
the second quarter and the final $3 million in the third quarter, upon the
commencement of production of the aircraft.

     While there is no assurance that additional financing will be available,
the Company's management believes that it has developed a financial plan that,
if executed successfully, will substantially improve the Company's ability to
meet its working capital requirements. This financial plan includes the
commencement of production and the collection of progress payments to assist
with the working capital requirements. However, there can be no assurances that
the current timetable for completion of the development and certification of the
aircraft and commencement of production will not be delayed beyond the current
fiscal year. If the Company's estimates prove to be incorrect, or additional
sources of financing prove to be unavailable, if needed, the Company will have
to curtail its development plans.

     In November 1998 the Company moved into its manufacturing and headquarters
facility. The primary financing for this project was the Company's obligation
under a loan agreement related to proceeds received from $8,500,000 in the
issuance of Industrial Development Bonds (IDB) by the California Economic
Development Financing Authority (the "Authority"). The Company was required to
provide cash collateral to The Sumitomo Bank, Limited (the "Bank") in the amount
of $8,500,000 for a stand-by letter of credit in favor of the holders of the
IDBs which was to expire on August 5, 2002, if not terminated earlier by the
Company or the Bank. The IDBs were retired in 1999 and the stand-by letter of
credit in favor of the holders of the IDBs was terminated by the Company.

     In June, 1999, the Company sold its 200,000 square-foot building to The
Abbey Company and leases it back. The purchase price of the building was
$9,800,000 and the term of the lease is eighteen years plus an option to extend
the lease for an additional ten years. Monthly payments under the terms of the
leaseback are approximately $106,000 and will be adjusted annually, after the
first year, for changes in the Consumer Price Index, not to exceed 3% per annum.
The rent for periods after the eighteenth year would be at fair market rental
value.

     The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1999 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. An escalation
clause in the lease increases the monthly rent to $7,400 beginning July 1999.
The lease contains incremental increases that escalate the monthly rent to
approximately $15,600 after 5 years.

                                       16
<PAGE>

     The Company had no material capital commitments at December 31, 1999, other
than discussed elsewhere in this report. The Company intends to hire a number of
additional employees, 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.

SEASONALITY

The Company believes its business is not seasonal.

IMPACT OF YEAR 2000

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed it remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. Amounts expensed by
the Company during 1999 in connection with remediating its systems were
immaterial. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.


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                       18
     Balance Sheet                                        19
     Statement of Operations                              20
     Statement of Stockholders' Equity                    21
     Statement of Cash Flows                              23
     Notes to Financial Statements                        25

                                       18
<PAGE>

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, 1999, and
the related statements of operations, stockholders' equity, and cash flows for
the two years then ended, and for the period from January 26, 1990 (inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Aerodynamics &
Structures, Inc., at December 31, 1999, and the results of its operations and
its cash flows for each of the two years then ended and the period from January
26, 1990 (inception) through December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

     The accompanying financial statements have been prepared assuming Advanced
Aerodynamics & Structures, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring losses and its working
capital at December 31, 1999 has been substantially depleted. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

                                                     Ernst & Young LLP


Long Beach, California
March 6, 2000

                                       19
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                       December 31,1999
                                                                                       ----------------
                                                ASSETS
<S>                                                                                    <C>
Current Assets:
  Cash and cash equivalents                                                               $    498,000
  Short term investments                                                                     2,328,000
  Prepaid expenses and other current assets                                                     76,000
                                                                                          ------------
          Total current assets                                                               2,902,000

Property, Plant and equipment, net                                                          11,035,000
Other assets                                                                                   194,000
                                                                                          ------------
          Total assets                                                                    $ 14,131,000
                                                                                          ============
                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                                                        $    391,000
  Capital lease obligation, current portion                                                    241,000
  Other accrued liabilities                                                                    539,000
                                                                                          ------------
          Total current liabilities                                                          1,171,000

Capital lease obligation, long term                                                          9,629,000
Deferred revenue                                                                             1,727,000
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;                      1,000
     6,999,676 shares issued and outstanding
  Class B Common Stock, par value $.0001 per share; 10,000,000 shares authorized;                   --
     1,900,324 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
Accumulated other comprehensive loss                                                           (32,000)
                                                                                          ------------
Deficit accumulated during the development stage                                           (50,412,000)
                                                                                          ------------
     Total stockholders' equity                                                              1,604,000
                                                                                          ------------
Total liabilities and stockholders' equity                                                $ 14,131,000
                                                                                          ============
</TABLE>

                 See accompanying notes to financial statements

                                       20
<PAGE>

                    ADVANCED AERODYNAMICS & STRUCTURES, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                              Period from
                                                                                               January 26,
                                                                                                  1990
                                                                         Year Ended           (inception) to
                                                                        December 31,           December 31,
                                                                 ---------------------------
                                                                     1998           1999            1999
                                                                 ---------------------------    ------------
<S>                                                              <C>             <C>             <C>
Interest income                                                  $    927,000    $   373,000    $  2,743,000
Other income                                                          447,000         60,000       1,322,000
                                                                                                ------------
                                                                    1,374,000        433,000       4,065,000
Cost and expenses:
Research and development costs                                      6,469,000      5,566,000      30,766,000
General and administrative expenses                                 4,658,000      3,186,000      17,878,000
Loss on disposal of assets                                             13,000              -         755,000
Realized loss on sale of investments                                        -         30,000          30,000
Interest expense                                                      352,000        992,000       3,345,000
In-process research and development acquired                               --             --         761,000
                                                                 ---------------------------    ------------
                                                                   11,492,000      9,774,000      53,535,000
                                                                 ---------------------------    ------------
Loss before extraordinary item                                    (10,118,000)    (9,341,000)    (49,470,000)
Extraordinary loss on retirement of Bridge Notes                           --             --        (942,000)
                                                                                                ------------
Net loss                                                         $(10,118,000)   $(9,341,000)   $(50,412,000)
                                                                 ===========================    ============
Net loss per share                                               $      (1.14)   $     (1.05)
                                                                 ===========================
Weighted average number of shares outstanding                       8,900,000      8,900,000
                                                                 ===========================
</TABLE>


                See accompanying notes to financial statements.

                                       21
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                       Statement of Stockholders' Equity

<TABLE>
<CAPTION>

                                        Preferred Stock             Class A                Class B             Class E-1

                                        Shares     Amount      Shares     Amount       Shares    Amount      Shares     Amount
<S>                                     <C>        <C>       <C>         <C>         <C>         <C>       <C>          <C>
Common stock issued                                $   --                $    --       418,094   $   --      836,189    $   --
Common stock issued in exchange
 for in-process research and
 development                                                                           201,494       --      402,988        --
Imputed interest on advances
 from stockholder
Conversion of stockholder
 advances                                                                              598,011       --    1,196,021        --
Conversion of officer loans                                                            187,118       --      374,236        --
Stock issued in consideration
 for services in 1994, 1995,
 and 1996                                                                              595,283       --    1,190,566        --
Imputed interest on advances
 from stockholder
Net proceeds from initial
 public offering of Units                                     6,000,000    1,000
Net proceeds from exercise of
 over- allotment option                                         900,000       --
Warrants issued in connection
 with issuance of Bridge Notes
Net loss from inception to
 December 31, 1996
-------------------------------         ------     ------     ---------  -------     ---------   ------    ---------    ------
Balance at December 31, 1996                --         --     6,900,000    1,000     2,000,000       --    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        --
Conversion of Class B to A
 Common Stock                                                    99,676                (99,676)
Net Loss
-------------------------------         ------     ------     ---------  -------     ---------   ------    ---------    ------
Balance at December 31, 1998                --     $   --     6,999,676  $ 1,000     1,900,324       --    4,000,000        --
  Net Loss
Unrealized loss on investments
Comprehensive Loss
-------------------------------         ------     ------     ---------  -------     ---------   ------    ---------    ------
Balance at December 31, 1999                --     $   --     6,999,676  $ 1,000     1,900,324       --    4,000,000        --
===============================         ======     ======     =========  =======     =========   ======    =========    ======

<CAPTION>
                                                                                                                       Accumulated
                                            Common Stock                                                Additional        Other
                                             Class E-2          Public      Class A       Class B        Paid-In      Comprehensive
                                         Shares      Amount    Warrants     Warrants      Warrants       Capital         Losses
<S>                                    <C>           <C>      <C>         <C>            <C>            <C>           <C>
Common stock issued                      836,189     $   --   $     --    $        --    $       --     $ 7,500,000    $     --
Common stock issued in exchange
 for in-process research and
 development                             402,988         --                                                 361,000
Imputed interest on advances
 from stockholder                                                                                           799,000
Conversion of stockholder
 advances                              1,196,021         --                                              10,728,000
Conversion of officer loans              374,236         --                                                 336,000
Stock issued in consideration
 for services in 1994, 1995,
 and 1996                              1,190,566         --                                               1,507,000
Imputed interest on advances
 from stockholder                                                                                            11,000
Net proceeds from initial
 public offering of Units                                                   9,583,000     4,166,000      12,566,000
Net proceeds from exercise of
 over- allotment option                                                     1,707,000       466,000       1,922,000
Warrants issued in connection
 with issuance of Bridge Notes                                 473,000
Net loss from inception to
 December 31, 1996
-------------------------------        ---------     ------   --------    -----------    ----------     -----------    --------
Balance at December 31, 1996           4,000,000         --    473,000     11,290,000     4,632,000      35,730,000          --
Adjustment to proceeds from
 initial public offering and
 exercise of overallotment
 option                                                                                                     (78,000)
Net Loss
-------------------------------        ---------     ------   --------    -----------    ----------     -----------    --------
Balance at December 31, 1997           4,000,000         --    473,000     11,290,000     4,632,000      35,652,000          --
Conversion of Class B to A
 Common Stock
Net Loss
-------------------------------        ---------     ------   --------    -----------    ----------     -----------    --------
Balance at December 31, 1998           4,000,000         --    473,000     11,290,000     4,632,000      35,652,000          --
  Net Loss
Unrealized loss on investments                                                                                          (32,000)
Comprehensive Loss
-------------------------------        ---------     ------   --------    -----------    ----------     -----------    --------
Balance at December 31, 1999           4,000,000         --   $473,000    $11,290,000    $4,632,000     $35,652,000    $(32,000)
===============================        =========     ======   ========    ===========    ==========     ===========    ========

<CAPTION>
                                     Deficit Accumulated
                                         During the
                                      Development Stage            Total
<S>                                  <C>                        <C>
Common stock issued                        $         --         $  7,500,000
Common stock issued in exchange
 for in-process research and
 development                                                         361,000
Imputed interest on advances
 from stockholder                                                    799,000
Conversion of stockholder
 advances                                                         10,728,000
Conversion of officer loans                                          336,000
Stock issued in consideration
 for services in 1994, 1995,
 and 1996                                                          1,507,000
Imputed interest on advances
 from stockholder                                                     11,000
Net proceeds from initial
 public offering of Units                                         26,316,000
Net proceeds from exercise of
 over- allotment option                                            4,095,000
Warrants issued in connection
 with issuance of Bridge Notes                                       473,000
Net loss from inception to
 December 31, 1996                           24,328,000           24,328,000
-------------------------------            ------------         ------------
Balance at December 31, 1996                (24,328,000)          27,798,000
Adjustment to proceeds from
 initial public offering and
 exercise of overallotment
 option                                                              (78,000)
Net Loss                                     (6,625,000)          (6,625,000)
-------------------------------            ------------         ------------
Balance at December 31, 1997                (30,953,000)          21,095,000
Conversion of Class B to A
 Common Stock
Net Loss                                    (10,118,000)         (10,118,000)
-------------------------------            ------------         ------------
Balance at December 31, 1998                (41,072,000)          10,977,000
  Net Loss                                   (9,341,000)          (9,341,000)
Unrealized loss on investments                                       (32,000)
                                                                ------------
Comprehensive Loss                                                (9,373,000)
-------------------------------            ------------         ------------
Balance at December 31, 1999               $(50,412,000)        $  1,604,000
============================================================================
</TABLE>

                                       22
<PAGE>

                   ADVANCED AERODYNAMICS & STRUCTURES, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                      PERIOD FROM
                                                                                                                      JANUARY 26
                                                                                                                         1990
                                                                                                                      (INCEPTION)
                                                                                                                     TO DECEMBER 31,
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    ------------------------------------------------
                                                                                         1998             1999              1999
                                                                                    ------------------------------------------------
OPERATING ACTIVITIES:
<S>                                                                                 <C>              <C>               <C>
 Net loss                                                                           $(10,118,000)    $ (9,341,000)     $(50,412,000)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Noncash stock compensation expense                                                           -                -         1,207,000
  Noncash interest expense                                                                     -                -           336,000
  Cost of in-process research and development acquired                                         -                -           761,000
  Imputed interest on advances from stockholder                                                                             810,000
  Interest income from restricted cash invested                                         (328,000)         (10,000)         (474,000)
  Extraordinary loss on retirement of Bridge Notes                                             -                -           942,000
  Depreciation and amortization                                                          440,000          985,000         3,625,000
  Loss on disposal of assets                                                              13,000                            755,000
  Realized Loss on sale of investments                                                                     30,000            30,000
  Changes in operating assets and liabilities:
    Increase in prepaid expenses and other current assets                                344,000           12,000            97,000
    Increase (decrease) in other assets                                                  230,000           (7,000)         (194,000)
   Decrease in accounts payable                                                         (272,000)      (1,260,000)         (997,000)
    Increase (decrease) in accrued liabilities                                         1,996,000         (515,000)        1,646,000
    Increase in deferred revenue                                                         910,000          150,000         1,490,000
                                                                                    -----------------------------------------------
Net cash used in operating activities                                                 (6,785,000)      (9,956,000)      (40,378,000)
INVESTING ACTIVITIES:
 Increase in construction in progress                                                          -                -          (446,000)
 Proceeds from insurance claims upon loss of aircraft                                          -                -            30,000
 Proceeds from sales of assets                                                                 -        9,800,000         9,803,000
 Capital expenditures                                                                 (1,081,000)        (111,000)       (5,843,000)
 Purchase of certificate of deposit                                                   (1,049,000)               -        (1,061,000)
 Proceeds from redemption of certificate of deposit                                    1,061,000                -         1,061,000
 Purchase of investments                                                              (3,021,000)     (22,062,000)      (33,720,000)
 Proceeds from maturities of investments in bonds                                              -          828,000           828,000
 Proceeds from sale of investments                                                     6,706,000       19,672,000        30,502,000
 Restricted cash from long term debt                                                           -                -        (8,500,000)
 Decrease in restricted cash                                                                   -          405,000           405,000
                                                                                    -----------------------------------------------
Net cash provided by (used in) investing activities                                    3,665,000        8,532,000        (6,941,000)

FINANCING ACTIVITIES:
 Adjustment to net proceeds from initial public offering and exercise of
  over allotment option                                                                                                     (78,000)
 Proceeds from long term debt                                                                  -       (8,500,000)                -
 Restricted cash collateral for long term debt                                                 -        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
 Net proceeds from bridge financing                                                            -                -         6,195,000
 Net proceeds from loans from officers                                                         -                -           336,000

 Payments on capital lease obligations                                                    (4,000)        (231,000)         (275,000)
 Repayment of bridge financing                                                                 -                -        (7,000,000)
                                                                                     ----------------------------------------------
Net cash (used in) provided by financing activities                                       (4,000)        (231,000)       47,817,000
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                  (3,124,000)      (1,655,000)        2,153,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                       5,277,000        2,153,000                 -
                                                                                    -----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          $  2,153,000     $    498,000      $    498,000
                                                                                    ===============================================
SUPPLEMENTAL CASH FLOW INFORMATION:
 Cash paid for interest                                                             $    316,000     $    805,000      $  1,976,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 Stockholder advances converted to common stock                                                                        $ 10,728,000
</TABLE>

                                       23
<PAGE>

<TABLE>
<S>                                                                                 <C>              <C>               <C>
 Loans from officer converted to common stock                                                                          $     36,000
 Common stock issued for noncash consideration and compensation                                                        $  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                                                             $  9,854,000      $  9,894,000
 Deposit surrendered as payment for rents due                                                                          $     80,000
 Construction in progress acquired with restricted cash                             $  7,845,000     $    287,000      $  8,578,000
</TABLE>

                                       24
<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. In July 1996, the Company
   reincorporated by merging into a newly formed corporation in Delaware. 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. Since its inception, the Company has been engaged primarily
   in research and development of its proposed aircraft the JETCRUZER 500, for
   commercial sale. The Company is in the process of obtaining its Federal
   Aviation Administration ("FAA") Type Certificate for technical revisions to
   its aircraft for commercial sale.

   During 1996 the Company successfully completed its  initial public offering
   of 6,900,000 units, including the exercise of the overallotment option. Each
   unit sold is composed on one share of Class A common stock one class A
   warrant and one class B warrant. The net proceeds of the offering of
   $30,411,000 were  used to  finance the continued development, manufacture and
   marketing of its product to achieve commercial viability.

2. FINANCIAL RESULTS AND LIQUIDITY

   The Company is currently in the process of developing their product and
   obtaining appropriate certification from the Federal Aviation
   Administration. To date, the Company has generated no sales revenue and none
   is projected until the Company can begin commercial production of their
   product and. the certification process is complete Prior to commencing
   commercial sales, the Company will need to, among other things, complete the
   development of the JETCRUZER 500 and obtain the requisite regulatory
   approvals. The Company incurred program development costs to date of
   approximately $30,000,000 and has recorded a cumulative net loss of
   $50,412,000. Based upon the Company's current development spending levels,
   current working capital is insufficient to meet the Company's needs over the
   current year.

   The Company's management team has been developing a financial plan to address
   its working capital requirements. As discussed in Note 4, the Company entered
   into a subscription agreement for the sale of up to $10,000,000 of 5%
   Cumulative Convertible Series A Preferred Stock, of which the Company
   received net proceeds of $4,550,000. Additionally, The Company signed a
   letter of intent to sell and leaseback manufacturing equipment. This
   transaction will generate an additional $1,000,000.

   Going forward, however, significant amounts of additional cash will be needed
   to continue the Company's development activities and ultimately production.
   The remaining $5,000,000 in Preferred Stock funding will not occur until
   certain criteria have been met, including passing the pressurization test for
   the fuselage structure and completion of the registration of 200% of the
   Common Stock underlying the Convertible Preferred Stock. It is anticipated
   that the remaining proceeds will be received in two installments; $2 million
   in the second quarter and the final $3 million in the third quarter.
   Additionally, the commencement of production and the collection of progress
   payments starting in the third quarter is imperative to the success of
   managements' financial plan to meet its working capital requirements.
   There can be no assurances that the current timetable for completion of the
   development and certification of the aircraft will not be delayed beyond the
   current fiscal year.

   While there is no assurance that additional financing will be available, the
   Company's management believes that it has developed a financial plan that, if
   executed successfully, will substantially improve the Company's ability to
   meet its working capital requirements and ultimate production.

   The Company's Independent Auditors have included a "going concern" emphasis
   paragraph in their audit report accompanying the 1999 financial statements.
   The paragraph states that the recurring losses and working capital depletion
   of Advanced Aerodynamics & Structures, Inc. raises substantial doubt about
   the Company's ability to continue as a going concern and cautions that the
   financial statements do not include any adjustments that might result from
   the outcome of this uncertainty.

                                       25
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   RESEARCH AND DEVELOPMENT COSTS

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

   PREOPERATING COSTS

   Preoperating costs are expensed as incurred.

   ADVERTISING EXPENSE

   Advertising costs are expensed as incurred. Advertising expense was $97,000
   and $75,000 for the years ended December 31, 1999 and 1998, respectively.

   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, 1999.

   CONCENTRATION OF CREDIT RISK

   Financial instruments, which potentially subject the Company to
   concentrations of credit risk, consist principally of cash, cash equivalents
   and short term investments. The Company maintains its financial instruments
   with major financial institutions. At times, cash balances held by financial
   institutions were in excess of federal limits. The Company by policy, limits
   the amount of credit exposure to anyone financial institution, and does not
   consider itself to have any significant concentrations of credit risk.

   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.

   SHORT TERM INVESTMENTS
   The Company's investment strategies consider safety of principal,
   availability of funds and maximum return on investment.

   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.

   Debt securities for which the Company does not have the intent or ability to
   hold to maturity are classified as "available for sale"  and are reported at
   their fair market value as determined by the quoted market  price. During the
   year ended December 31, 1999, the Company incurred $32,000 in gross
   unrealized losses on debt securities classified as "available for sale",
   which has been reported as comprehensive loss in the statement of
   shareholders' equity. The tax effect of these losses is immaterial to the
   financial statements.

                                       26
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

   PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment are stated at cost and are depreciated using
   the straight-line method over their estimated useful lives of 5-10 years  for
   machinery and equipment, 3-5 years for office furniture and equipment and 18
   years for the building acquired under a capital lease. Leasehold improvements
   are amortized over the shorter of their estimated useful lives or the term of
   the lease. Included in depreciation expense is the amortization of assets
   acquired under capital leases.

   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.

   STOCK BASED COMPENSATION

   The Company grants stock options with an exercise price equal to at least the
   fair value of the stock at the date of grant 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 based compensation plans
   which is an inhinsic value based method.  Under APB 25, because the exercise
   price of the Company's employee stock options equals or exceeds the market
   price of the underlying stock on the date of grant, no compensation expense
   is recognized.

   ACCOUNTING  ESTIMATES

   The preparation of financial statements in conformity with generally accepted
   accounting principles requires management to make estimates and assumptions
   that affect the reported amounts of assets and 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.

   ACCOUNTING PRONOUNCEMENTS

   In the current year, the Company adopted the provisions of Statement of
   Position (SOP) 98-1, Accounting For the Costs of Computer Software Developed
   For or Obtained For Internal Use.  SOP 98-1 requires the capitalization and
   amortization of qualified computer software for internal use. There has been
   no impact to the Company's earnings or financial position due to adoption of
   SOP 98-1.

   In April 1999, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
   up Activities," which is effective for fiscal years beginning after December
   15, 1999. SOP 98-5 provides guidance on the financial reporting of start-up
   cost and organization costs and require such costs to be expensed as
   incurred. Management believes that the adoption of SOP 98-5 will not have a
   material effect on the Company's financial statements.

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
   Instruments and Hedging Activities ."As amended, SFAS No. 133 establishes
   accounting and reporting standards for derivative instruments.  The effective
   date of the pronouncement was delayed to fiscal years beginning after June
   18, 2000 and is effective for interim periods in the year of adoption.   The
   statement requires that every derivative instrument be recorded in the
   balance sheet as either an asset or liability measured at its fair value, and
   that changes in the derivative's fair value be recognized currently in
   earnings unless specific hedge accounting criteria are met. Management
   believes that the adoption of SFAS No. 133 will not have

                                       27
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)


   a material effect on the Company's financial statements, because the Company
   does not have any derivative instruments as of December 31, 1999.

4. PREFERRED STOCK SUBSCRIPTION

   On March 6, 2000, the Company  received $4,550,000 in net proceeds related to
   an agreement to issue up to 100,000 shares of  5% Cumulative Convertible
   Series A Preferred Stock with a par value of $.0001 for the aggregated
   purchase price of $10 million and Common Stock Purchase Warrants to purchase
   Class A Common Stock at an above market price. For consideration received in
   the initial funding, the Company issued 50,000 shares of Preferred stock and
   650,000 Warrants and paid $450,000 in commissions and legal fees.
   Additionally, as consideration for the transaction a Special Warrant to
   purchase up to 25,000 shares Class A Common Stock was issued. The remaining
   $5,000,000 in funding will not occur until certain criteria have been met,
   including passing the pressurization test for the fuselage structure and
   completion of the registration of 200% of the Common Stock underlying the
   Convertible Preferred Stock. Terms for the Special Warrant are similar to the
   terms of the Warrants issued with the Preferred Stock.

   Holders of the Preferred Stock are entitled to receive cash dividends,
   payable quarterly and have preferential liquidation rights above all other
   issuances of common stock for an amount equal to the stated value.  The
   Preferred stock and unpaid dividends are convertible into shares of Common
   stock equal to an amount determined by the market value at the date of close
   of the common stock, adjusted for changes in the market price prior to the
   conversion.  The Preferred stockholders do not have voting rights.  The
   Warrants are callable in installments after the registration is effective.
   The Company has reserved 4,000,000 of its Class A Common Stock for the
   conversion of the Preferred Stock.

5. PROPERTY, PLANT AND EQUIPMENT

   Property and equipment consist of the following:


       Building                                               $ 9,800,000
       Office furniture and equipment                           1,158,000
       Machinery and equipment                                  2,756,000
                                                              -----------
       Gross property and equipment                            13,714,000
       Accumulated depreciation and amortization               (2,679,000)
                                                              -----------
       Property, Plant, and equipment                         $11,035,000
                                                              ===========

   As described in note 13, the building is held under a capital lease.  In
   addition, included in office furniture and equipment and machinery and
   equipment are assets acquired under capital leases in the amount of $272,000
   and $33,000 respectively.

6  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, 1999 are as follows:

                                       28
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)


        Deferred tax assets:

        Federal net operating loss                           $ 15,901,000
        State net operating loss                                1,411,000
        Research & development credits                          1,898,000
        Other                                                      90,000
                                                             ------------
        Total deferred tax assets                              19,300,000

        Deferred tax liabilities:
        Tax over book depreciation                               (105,000)
                                                             ------------
        Total net deferred tax assets                          19,195,000
        Valuation allowance                                   (19,195 000)
                                                             ------------
                                                              $        -0-
                                                             ============

   At December 31, 1999, the Company had U.S. Federal and California state net
   operating loss ("NOL") carryforwards of approximately $47,900,000 and
   $15,200,000, respectively, Federal NOLs could, if unused, expire in varying
   amounts in the years 2006 through 2018. California NOLs, if unused, could
   expire in varying amounts from 2000 through 2004.

   At December 31, 1999, 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 is as follows:

                                                 December 31,     December 31,
                                                    1998             1999
                                                    ----             ----
          Deferred:

           Federal                                (3,380,000)     $(3,505,000)

           State                                    (378,000)        (444,000)
                                                  ----------      -----------

           Total deferred                         (3,758,000)      (3,949,000)

          Increase in valuation allowance          3,758,000       3,949,0000
                                                  ----------      -----------
                                                  $       --      $        --
                                                  ==========      ===========

   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 1998 and 1999.


                                       29
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

7  INVESTMENTS

   At December 31, 1999 the following marketable securities were classified as
   available for sale:
<TABLE>
<CAPTION>
                                            Amortized        Gross
                                             Cost or       Unrealized       Fair
                                              Cost          Losses          Value
                                            ----------------------------------------
          <S>                               <C>            <C>              <C>
          Money Market Funds                   52,000              -          52,000
          US Government                       433,000         (2,000)        431,000
          Corporate Bonds                     707,000         (9,000)        698,000
          Mortgage-backed securities        1,167,000        (21,000)      1,146,000
                                            ----------------------------------------
          Total Marketable Securities       2,359,000        (32,000)      2,327,000
                                            ========================================
</TABLE>

     The contractual maturities of debt securities at December 31, 1999 are as
follows:

                                                      Amortized        Fair
                                                         Cost          Value
                                                    --------------------------
               Due in one year or less                  205,000        205,000
               Due after one through five years       1,455,000      1,437,000
               Due five through 10 years                116,000        113,000
               Due after 10 years                       531,000        520,000
                                                    --------------------------
                                                      2,307,000      2,275,000
                                                    ==========================

8.   RELATED PARTY TRANSACTIONS

     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 bridge notes.

     On December 23, 1993, the Company entered into an agreement with a
     stockholder to convert 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.

     In May 1996, the Company entered into an employment agreement with the
     Company's President, which 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. In consideration of the
     termination of a previous employment agreement the Company issued 577,823,
     1,155,647 and 1,155,647 shares of Class B, Class E-1 and Class E-2 common
     stock, respectively, to the Company's President.

     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.

                                       30
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

9.   COMMITMENTS AND CONTINGENCIES

     In the ordinary course of business, the Company is generally subject to
     claims, complaints, and legal actions. At December 31, 1999, 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 leases approximately 10 acres of land located on the Long Beach
     Airport in Long Beach, California. The lease commenced on January 14, 1998
     and has a term of 30 years with an option to renew for an additional 10
     year term. The lease also contains options to lease other airport
     properties. The current monthly rent under the lease is $7,400. The lease
     contains incremental increases which escalate the monthly rent to
     approximately $15,600 after 5 years. The aggregate minimum payments under
     the lease have been included in the table below.

     In addition, as described in Note 13; in May 1999 the Company entered into
     an agreement with a third party to sell its manufacturing and
     administrative facility and lease it back under a capital lease. The lease
     term is for 18 years plus an option to extend the lease for an additional
     10 years. Monthly payments under this lease are approximately $106,000 and
     will be adjusted annually, after the first year, for changes in the
     Consumer Price Index, subject to a maximum of 3%.

     Future minimum lease payments applicable to non-cancelable operating leases
     and capital leases as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                                         CAPITAL            OPERATING
                                                                          LEASES              LEASES
                                                                       ------------------------------
               <S>                                                     <C>                <C>

               2000                                                      1,359,000             94,000

               2001                                                      1,359,000            115,000

               2002                                                      1,353,000            189,000

               2003                                                      1,345,000            190,000

               2004                                                      1,277,000            190,000

               Thereafter                                               15,796,000          4,321,000
                                                                       -----------        ----------
               Net future minimum lease payments                        22,489,000         $5,099,000
                                                                       -----------        ==========
                                                                        12,619,000
               Amount representing interest                            -----------
                                                                       $ 9,870,000
               Present value of minimum lease payments                 ===========
 </TABLE>

     The Company incurred rent expense of $175,000 and $383,000, and for the
     years ended December 31, 1999 and 1998, respectively.

10.  STOCKHOLDERS' EQUITY

     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.

     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;

                                       31
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

     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.

     In February of 1998 a shareholder of the Company converted 99,676 shares of
     Class B common Stock to 99,676 shares of Class A Common Stock. The
     conversion resulted in an increase in Class A Common Stock to 6,999,676 and
     a decrease in the number of outstanding shares of Class B Common Stock to
     1,900,324. This transaction had no impact on losses per common share as
     both classes of shares are included in the calculation of weighted average
     number of common stock outstanding.

     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 $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, $35.6million in 2000, $45.0 million in 2001, $563
     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
     18 months after December 3, 1996 and ending 36 months thereafter, the bid
     price of the Company's Class A Common Stock averages $18.50 per share for
     30 consecutive business days. Class E-2 Common Stock shares may be
     converted if commencing 18 months after December 3, 1996 and ending 36
     months thereafter, the bid price of the Company's Class A Common Stock
     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.

     Upon the closing of the Initial Public Offering, the Company granted to the
     Underwriter Unit Purchase Option to purchase up to 600,000 Units. The Units
     issuable upon exercise of the Unit Purchase Option will, when so issued, be
     identical to the Units. The Unit Purchase Option cannot be transferred,
     sold, assigned or hypothecated for three years, except to any officer of
     the Underwriter or member of the selling group or their officers. The Unit
     Purchase Option is exercisable during the two-year period commencing three
     years from December 6, 1996 at an exercise price of $6.50 per Unit (130% of
     the initial public offering price) subject to adjustment under certain
     circumstances. The holders of the Unit Purchase Option have certain demand
     and piggyback registration rights.

     The Company has reserved approximately 39,400,000 shares of Class A Common
     Stock for future issuance for the following conversions: 1,900,000 shares
     issuable upon the conversion of Class B common stock currently outstanding;
     8,000,000 shares issuable upon the conversion of Class B common stock
     should the 4,000,000 shares of Class E-1 and E-2 common stock, respectively
     be converted into shares of Class B common stock; 27,700,000 shares
     issuable upon the exercise of purchase warrants; and 1,800,000 shares
     issuable upon the exercise of a 600,000 unit purchase option by the
     Company's underwriter. In addition, the Company has reserved 8,000,000
     shares of Class B common stock for future issuance upon the conversion of
     4,000,000 shares of Class E-1 and E-2 common stock respectively.

                                       32
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

11.  WARRANTS

     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 entitles the
     holder to purchase one share of Class A Common Stock. Class A Warrants and
     Class B Warrants may be exercised at an exercise price of $6.50 and $8.75,
     respectively, at anytime until December 3, 2001. Currently 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. Currently Class B 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

     Upon closing of the public offering previously issued bridge warrants were
     converted into one Class A Warrant ("Public Warrant") which is identical in
     all respects to the Class A Warrant. 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.

12.  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. In March 1998, the Board of
     Directors amended the Plan by authorizing the Company the ability to grant
     additional options for up to 500,000 shares of Class A Common Stock. Under
     the Plan, the Company may grant options with respect to a total of
     1,000,000 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.

     Had the Company accounted for stock options granted in 1998 and 1999 using
     the fair value method at the date of grant as prescribed by Statement of
     financial Accounting Standards No. 123, additional compensation expense
     would have been recorded and the pro form effects would have been as
     follows:

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                             ----------------------

                                                           1998                1999
                                                           ----                ----
             <S>                                    <C>                      <C>
             Pro forma net loss                     $  (10,356,000)           $ (9,712,000)
             Pro forma net loss per share:          $        (1.16)           $      (1.09)
</TABLE>

     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 5.02% and 6.81% for 1998 and 1999,
     respectively; dividend yields of 0% for 1998 and 1999; volatility factors
     of the expected market price of the Company's common stock of .878 and .863
     for 1998 and 1999, respectively; and a weighted average expected life of
     the option of 10 years for both 1998 and 1999, respectively.

                                       33
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

     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.

     The weighted average fair value of options granted during 1998 and 1999 was
     $.73 and $2.22, per option, respectively. The weighted average exercise
     price for 1997 and 1999 was $5.00. The weighted average remaining
     contractual life of options outstanding is 8.75 years and 8.06 years for
     1998 and 1999, respectively.

     At December 31, 1999, options to purchase 175,000 shares of Class A Common
     Stock were available for future grants and 588,000 shares of Class A Common
     Stock were reserved for the exercise of options. Transactions under the
     Plan during the year ended December 31, 1998 and 1999 are summarized as
     follows:

<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                                                AVERAGE EXERCISE
                                                              SHARES                  PRICE
                                                             -------                  -----
               <S>                                           <C>                <C>
               Outstanding at December 31, 1997                  420,000              $5.00
                  Granted                                        268,000              $5.00
                  Exercised                                           --                 --
                  Canceled                                       (95,000)             $5.00
                Outstanding at December 31, 1998                 593,000              $5.00
                  Granted                                        132,000              $5.00
                  Exercised                                           --                 --
                  Canceled                                      (137,000)             $5.00
                Outstanding at December 31, 1999                 588,000              $5.00
</TABLE>

     As of December 31, 1998 and 1999 87,000 and 185,800 options, respectively,
     were exercisable at a weighted average exercise price of $5.00 per option.

13.  INDUSTRIAL DEVELOPMENT BONDS

     On August 5, 1997, the Company entered into a loan agreement in connection
     with industrial development bonds (IDB) issued by the California Economic
     Development financing Authority. The Company has established in the
     trustee's favor a bank letter of credit for the principle 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 bonds mature August 1, 2027 at
     which time all outstanding amounts become due and payable. The Company has
     used the proceeds for the IDBs to finance the construction and installation
     of the 200,000 square foot manufacturing facility and related manufacturing
     equipment which the Company moved into on November 16, 1998. On June 1,
     1999, the Company retired all the industrial development bonds using the
     restricted cash previously held as security for the IDB.

                                       34
<PAGE>

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

                   NOTES TO FINANCIAL STATEMENTS (Continued)

14.  SALE AND LEASEBACK TRANSACTION

     Pursuant to an Agreement dated May 19, 1999, the Company sold to AP-Long
     Beach Airport LLC its leasehold interest in real property located at 3205
     Lakewood Boulevard, Long Beach, California, together with the manufacturing
     hangar facility (approximately 205,000 square feet) and finished office
     space (approximately 22,000 square feet) owned by the company
     (collectively, the "Property". The cash sales price was $9,800,000.

     As part of this transaction, the Company and AP-Long Beach Airport LLC
     entered into an agreement to sublease the land to the Company subject to
     the terms at the original land lease agreement which was assigned to AP
     Long Beach Airport LLC, and lease the manufacturing hangar facility and
     finished office space to the Company for term of 18 years. The $246,000
     deferred gain on the sale of the facility is being amortized over the 18
     year lease term.

15.  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.

16.  PER SHARE INFORMATION

     In February 1997, the FASB issued Statement 128, talks "Earnings per
     Share", It replaces the presentation of primary Earnings per share with a
     presentation of basic earnings per share which excludes any dilutive
     effects of options, warrants and convertible securities, and is computed by
     dividing income available to common stockholders by the weighted-average
     number of common shares outstanding for the period. The 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:

<TABLE>
<CAPTION>
                                                               1998               1999
                                                           -------------------------------
       <S>                                                 <C>                 <C>
       Numerator

         Loss before extraordinary item                    $(10,118,000)       $(9,341,000)
                                                           -------------------------------
       Denominator
         Weighted average shares of Class B Shares            1,924,629          1,900,324
         Weighted average shares of Class A Shares            6,975,371          6,999,676
                                                           -------------------------------
       Denominator for basic loss per share-weighted
        average shares                                        8,900,000          8,900,000
                                                           -------------------------------
       Basic loss per share                                $      (1.14)       $     (1.05)
                                                           ===============================
</TABLE>

                                       35
<PAGE>

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

            NONE

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

                  4.4       Form of Subscription Agreement between the
                            Registrant and the Series A 5% Cumulative
                            Convertible Preferred Stock Subscribers

                  4.5       Form of Common Stock Purchase Warrant to be issued
                            to the Series A 5% Cumulative Convertible Preferred
                            Stock Subscribers and Placement Agents

                  4.6       Form of Special Common Stock Purchase Warrant to be
                            issued to the Series A 5% Cumulative Convertible
                            Preferred Placement Agent

                  4.7       Form of Funds Escrow Agreement

          *      10.1       Form of Indemnification Agreement

          **     10.2       Amended 1996 Stock Option File


                                       36
<PAGE>

         *       10.3    Employment Agreement dated as of May 1, 1996 between
                         the Company and Dr. Carl L. Chen

         *       10.4    Agreement of Merger dated July 16, 1996 between
                         Advanced Aerodynamics and Structures, Inc., California
                         corporation, and Advanced Aerodynamics & Structures,
                         Inc., a Delaware corporation

         **      10.5    Lease dated December 19, 1996 between Olen Properties
                         Corp., a Florida corporation, and the Company

         ***     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

         *****   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

                                       37
<PAGE>

*     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, 1999, the Company did not file any
reports on Form 8-K.

                                       38
<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 29, 2000                ADVANCED AERODYNAMICS & STRUCTURES, INC.


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

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


Signature                             Title                       Date
---------                             -----                       ----

/s/ CARL L. CHEN             President, Chief Executive       March 29, 2000
----------------------       Officer, and Chairman of the
Carl L. Chen                 Board


/s/ GENE COMFORT             Executive Vice President,        March 29, 2000
----------------------       Secretary and Director
Gene Comfort

/s/ DAVID M. TURNER          Vice President - Finance and     March 29, 2000
----------------------       Chief Financial Officer
Dave Turner


/s/ C.M. CHENG               Director                         March 29, 2000
----------------------
C.M. Cheng

/s/ STEVE GORLIN             Director                         March 29, 2000
----------------------
Steve Gorlin

/s/ JIM LOVELL               Director                         March 29, 2000
----------------------
Jim Lovell

/s/ S.B. LAI                 Director                         March 29, 2000
----------------------
S.B. Lai

                                       39