Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  [ X ]

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act    [   ] Yes  [ X ] No.

The issuer’s revenues for its most recent fiscal year were $3,403,000.

The aggregate market value of the voting stock, consisting solely of common stock, held by non-affiliates of the issuer computed by reference to the closing price of such stock was $20,952,000 as of September 18, 2007.

The number of shares outstanding of the Issuer’s no par value Common Stock as of October 12, 2007 was 154,848,181.

Documents Incorporated by Reference
None



Groen Brothers Aviation, Inc.
Annual Report on Form 10-KSB
Table of Contents



Part I
Page No.
Item 1.
Description of Business
1     
Item 2.
Description of Property
17     
Item 3.
Legal Proceedings
17     
Item 4.
Submission of Matters to a Vote of Security Holders
18     
     
Part II
  
Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
18     
Item 6.
Management’s Discussion and Analysis or Plan of Operation
20     
Item 7.
Financial Statements
36     
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
36     
Item 8A
Controls and Procedures
36     
Item 8B
Other Information
37     
 
    
Part III
  
Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
37     
Item 10.
Executive Compensation
42     
Item 11.
Security Ownership of Certain Beneficial Owners and Management
45     
Item 12.
Certain Relationships and Related Transactions, and Director Independence
46     
     
Part IV
  
Item 13.
Exhibits
47     
Item 14.
Principal Accountant Fees and Services
49     
          
Signatures
50     






PART I

Item 1.
Description of Business

Background

Groen Brothers Aviation, Inc. (the “Company") or (“GBA”) was originally incorporated in the State of Utah on July 28, 1980 as New Wave Energy.  Separately, on March 21, 1986, Sego Tool, Inc. was incorporated by brothers Jay1 and David Groen in order to enter the gyroplane business.  On September 18, 1990, the Groen brothers exchanged 100% of the common stock of Sego Tool, Inc. for 80% of the stock of New Wave Energy, an action that was in effect a reverse acquisition of New Wave by the owners of Sego Tool.  On October 23, 1990, the name of New Wave Energy was changed to Groen Brothers Aviation, Inc., and under this name, the Company became a fully reporting public corporation (stock symbol “GNBA”) to facilitate the raising of capital and to give minority shareholders the flexibility of owning publicly traded stock.  Hereafter, the "Company" refers to the small business issuer, Groen Brothers Aviation, Inc. (“GBA”) and its wholly-owned subsidiaries, Groen Brothers Aviation USA, Inc. (“GBA USA”) and, from December 2002 through November 2004, American Autogyro, Inc. (“AAI”).  Effective November 1, 2004, the Company merged AAI into GBA USA.  Unless otherwise stated, the financial activities described herein are those of GBA USA, which is the sole operating entity of the Company.

The initial objective of the Company, primarily through GBA USA, was to develop and market an easy-to-fly and cost-efficient gyroplane2 that could compete effectively in the general aviation market.  Initially, personal funds of the Groen brothers were used to build a proof-of-concept aircraft incorporating a design for the first collective pitch controlled semi-rigid teetering rotor system for a gyroplane.  This first prototype aircraft flew successfully in 1987, and as a result, the Company was able to obtain the support of private investors to begin the development of its second prototype gyroplane, the one-seat Hawk 1.

Following the successful flight of the Hawk 1 in 1992, the Company proceeded with the design of its third prototype, the two-seat Hawk H2X, which first flew in February 1997, incorporating a unique airfoil design enabling a smooth vertical takeoff at a world record-breaking density altitude for gyroplanes.  At this point, management recognized that the opportunities for gyroplanes, and for the Company, extended well beyond the original general aviation market objective, and had broad potential for commercial, governmental and military applications.  The Company’s focus was thus reoriented to the design of a larger four-seat gyroplane, the Hawk 4, intended for Federal Aviation Administration (“FAA”) certification with a wide range of potential commercial and public use applications.

Between 1997 and 2003 the Company designed and manufactured two prototype Hawk 4 gyroplanes, the first with a piston engine first flight in 1999 and the second, powered by a Rolls-Royce gas turbine, had its first flight in 2000.  Based on the superior operating performance of the aircraft with the gas turbine engine, the Company proceeded with its FAA certification program based on that engine.  While substantial progress was made in the lengthy and expensive certification process in the following two years, the deterioration in the market for technical stocks, particularly aerospace, after 9/11, constrained the Company’s funding capabilities.  Although the Company had been able to demonstrate the unique capabilities of the Hawk 4 through its participation in the official security arrangements for the 2002 Winter Olympics,  the Company suspended its flight testing of the Hawk 4 during the first quarter of fiscal 2003 due to lack of financial resources.  Further development toward commercial certification of the Hawk 4 has been deferred pending the obtaining of the funding necessary to complete it.

 



The Company continues to believe that there is a substantial and potentially profitable market for the Hawk 4 and its derivatives, both for commercial and for so-called “Public Use” applications that do not require commercial certification.  The latter includes federal, state and local agencies across the nation, particularly Homeland Defense, and also governments of foreign countries.  In this context, the Company has had conversations with representatives of several countries with respect to setting up one or more joint ventures (“JV”) to certificate, manufacture and sell the Hawk series of gyroplanes.  As described below under “Company Products,” considerable progress has been made with certain Spanish entities in this regard.

While recognizing in fiscal year 2003 the infeasibility of continuing at that time with FAA certification of the Hawk 4, the Company also noted that the general aviation kit-plane market, which does not require the costly certification process of the Hawk 4, still lacked the safe, economical, easy-to-fly gyroplane that the Company originally intended to produce.  In the opinion of management, the kit-plane market could expand significantly as a result of new less restrictive FAA regulations.  Although thousands of kit-built small gyroplanes have been produced by a variety of manufacturers over many years, for the most part, the Company believed these gyroplanes did not incorporate a full understanding of gyroplane dynamics and that this contributed to the fact that fatality statistics of kit gyroplanes did not reflect the inherent safety of the gyroplane.  Because the Company has an important vested interest in the reputation for safety of gyroplanes in general, management believed that both to protect the reputation of the gyroplane and to take full advantage of an underserved market, the Company should enter this market.

To take advantage of these opportunities through utilization of its very considerable knowledge of gyroplane dynamics and aerodynamics built up over the years, the Company established American Autogyro, Inc. (“AAI”) in December 2002.   AAI started with the design and manufacture of a modification kit to enhance flight stability for another manufacturer’s home-built gyroplane and initiated delivery of such a kit in April 2003.  The Company reported its first revenues in the fiscal year ended June 30, 2003, largely from AAI flight training and the sales of these modification kits.  AAI was then tasked with developing a new small gyroplane, designed to aerospace standards, that would set a new standard for safety in that class of aircraft. The Company’s activities with this aircraft, later called the ‘SparrowHawk,’ and its derivatives are described under “Company Products.” Effective November 1, 2004, the Company merged AAI into GBA USA.  GBA USA is continuing the manufacturing, sales and marketing, and customer support functions of the SparrowHawk.

The Company also recognized that the knowledge and experience that it had gained from its work with the Hawk 4 had made it the preeminent authority on gyroplane technology and that that in the post  9/11 defense environment this technology had substantial military potential.  It could serve in a wide variety of roles ranging from gyroplanes as unmanned air vehicles (“UAV”s) and to gyrodynes as heavy lift Vertical Take-off and Landing (“VTOL”) transports and as high speed helicopters.  Furthermore, the technology could be further developed to enable the design of runway independent commercial aircraft.



Starting in fiscal 2003, the Company made presentations to the U.S. Defense Advanced Research Projects Agency (“DARPA”) and to other military agencies and also to public aerospace companies.  Emerging from these efforts, on November 7, 2005, the Company announced that DARPA had selected a Company-led team to design a proof of concept high-speed, long range, VTOL aircraft.  This modern rotorcraft, named the “Heliplane” by DARPA, is intended as a demonstrator aircraft for potential use in combat search and rescue roles and is designed to fly at a forward speed of 400 mph with a 1,150 mile range, a speed twice as fast as a helicopter, to offer the VTOL capability of a helicopter, the fast forward flight of an airplane, and the safety, simplicity and reliability of a GBA gyroplane, and is designed to exploit the Company’s gyrodyne technology.  On August 31, 2007, the DARPA contract was modified to extend the term of Phase One thereunder from a period of 15 to 23 months and to increase the total funding in Phase One from $6.4 to $10.4 million.  The Company is nearing the end of Phase One of the four Phase program, and anticipates a Phase Two award by mid fiscal year 2008.  There can be no guarantee, however, that Phase Two will be awarded.

DARPA is the central research and development organization for the US Department of Defense (“DoD”).  It manages and directs select basic and applied research for DoD, emphasizing technology development projects where payoff is high and where success may provide dramatic advances in the capabilities of this country’s combat forces.  Under its DARPA contract, the Company retains the rights for both military and commercial use of the technology emerging from the Heliplane contract and continues to pursue potential opportunities for this and other of its technologies in the UAV and VTOL fields.  Under this contract, DARPA retains a “paid up for life” license to the military use of this technology.
 
Gyroplane and Gyrodyne Technology

Autorotative flight was developed in 1919 by Spanish aviator, Juan de la Cierva, with the objective of eliminating the risk of stalling inherent in all fixed wing aircraft when forward speed drops below a critical speed.  De la Cierva named and trademarked his invention as the “autogiro,” which means “self turning” or “autorotation.”  The rotary wing of a gyroplane3, however, powered in flight only by the onrushing air, much like a windmill, will not stall because a reduction in forward speed with the rotor blades in autorotation, will not result in any sudden loss of lift.  As speed decreases, a gyroplane will begin to descend, right side up and controllable, as its rotating wing continues to provide lift with the upward flow of air driving the rotor.  This provides the gyroplane with an important inherent safety advantage over a conventional airplane for activities requiring low altitude and low speed operations.

For such low, slow flying missions, a gyroplane has a similar safety advantage over a helicopter.  The helicopter obtains its lift from its engine-powered rotor blades pulling the air downwards, creating an upward force on the rotor, enabling the helicopter to hover.  This, however, also makes the aircraft unstable, and difficult to fly, since a loss of power to a helicopter rotor will cause an immediate loss of lift.  Only with sufficient forward speed or altitude will a skilled pilot have sufficient time to put a helicopter into autorotation, and thus make a controlled landing while operating as a gyroplane, although without the benefit of rotor blades optimized for gyroplane flight.  A helicopter is also more mechanically complex than a gyroplane, requiring additional safety-critical systems, notably a transmission between engine and main rotor, and a tail rotor with its transmission needed to offset the torque in the system created by the powering of the rotor in flight.  For these reasons, a gyroplane, not requiring a tail rotor or complex transmission because its rotor is not driven by its engine, is inherently safer, simpler, quieter and  easier to operate while much less expensive to maintain than a helicopter.



3  Gyroplane is an official term now designated by the FAA to describe an aircraft that gets its lift from rotor blades and its thrust from an engine-driven propeller either in front, the tractor configuration, or at the rear, the pusher configuration.


The one material advantage of a helicopter over a gyroplane is its ability to hover, which is necessary in some situations such as sea rescue, sling-load work, or landing in uneven terrain.  For air surveillance and point-to-point flying, the inability to hover is not a disadvantage.  Helicopters at low altitude, out of ground effect, whenever possible, will avoid hovering because of the danger inherent in doing so.  In a low level surveillance roll, such as law enforcement, border patrol, traffic control, etc., proper procedure for all rotorcraft is to circle in a slow orbit, something the Hawk 4 and SparrowHawk can do efficiently and safely.

In summary, gyroplanes in flight, being in constant autorotation, are much safer in low and slow flight than either airplanes or helicopters.  Airplanes flying low and slow risk a stall/spin crash, which cannot happen in a gyroplane.  If power fails in a gyroplane, the autorotation continues and the aircraft can be guided softly to the ground from any altitude.  When power fails in a helicopter, the pilot must convert from powered flight to autorotative flight to keep the rotor blades turning.  This is an unforgiving process, requiring a skilled, practiced, accurate, and rapid reaction by the pilot, and it requires a minimum altitude and/or airspeed to be performed safely.  If a power failure occurs when a helicopter is operating with insufficient altitude or speed, specifically if operating within the “height-velocity” curve shown on graphs in the helicopter’s flight manual (informally known as the “dead man’s curve”), the pilot will not be able to avoid a crash landing.

The gyrodyne is a derivative of the gyroplane that, as the name implies, has a powered rotor that enables the gyrodyne to hover and to takeoff and land vertically.  Gyrodynes differ from helicopters in that their rotors are powered, not by the main engine, but by tipjets normally used only for takeoff, landing and hovering.  In forward flight the tipjets are turned off and the aircraft operates as a gyroplane with the attendant advantages of safety, reliability and economy.  Since the rotor is not driven mechanically by torque from the main engine located in the aircraft fuselage, a gyrodyne, like a gyroplane does not require a tail rotor with its complexity and maintenance requirements.

Interrupted History of the Gyroplane

 In the 1920s and 1930s, following the successful flights of the Spaniard, Juan de la Cierva, the originator of the autogiro or gyroplane,  Harold Pitcairn and his colleague Walter Kellett, under license from Cierva, designed and built a series of gyroplanes in America, which eventually made vertical takeoffs and landings.  Their efforts resulted in the autogiro concept proving commercially successful in many applications during the 1930s and early 1940s.  An outstanding example was its use by the U.S. Postal Service for nearly ten years to deliver mail from the roofs of post offices.  Thousands of flights carrying mail were performed by Kellett and Pitcairn gyroplanes flying in Camden, Philadelphia, Chicago, New Orleans, Washington, D.C., and other cities.

Funding for development of aircraft for the private market had collapsed in the years of the Great Depression and in the build up toward Word War II, the main source of investment in aviation came from the U.S. military.  At the time, Igor Sikorsky, who was an important designer of transport airplanes for the government, recognized the potential of a helicopter to the military.  After licensing rotor technology from Pitcairn, he convinced the U.S. military to invest in the helicopter as the next logical step in the evolution of rotorcraft, promising more versatility for military purposes than the gyroplane.  This commitment to the helicopter effectively ended government funding for technical development of the gyroplane.



After World War II, there was a brief and modest resurgence as investors enabled three private companies to develop two-seat commercial gyroplanes that were certified by the FAA:  the Umbaugh (later the Air & Space 18A), the Avian (a Canadian design of that same period that reached FAA certification, but was never produced), and the McCulloch J-2.  In each case, as an expedient to FAA certification, the designers adapted helicopter rotors and blades, and thus did not fully use the gyroplane technology created by their 1930s predecessors.  As a result, none of these civilian gyroplanes performed well and their companies failed.

More significantly, during the 1950s, Igor Bensen, who had been a principal in General Electric’s rotary wing program after World War II, developed a home-built open-frame gyroplane kit for amateurs, which he called the “gyrocopter.”  Stemming from this initiative, home-built kits, mostly seating one person, became popular with enthusiasts and more than a dozen small manufacturers have produced and sold several thousand kits.

The technical development of the helicopter necessary to achieve the potential of helicopter flight was, however, much more difficult and took far longer than the military expected.  Real utility was not fully attained until the middle of the Vietnam War, and then only after billions of dollars had been spent developing turbine-powered helicopters with sufficient payload to move large numbers of troops and equipment into and out of the jungle.

While the Vietnam War clearly demonstrated the versatility of vertical flight, it also demonstrated that the helicopter was too expensive, both to purchase and to operate, for widespread civilian use.  Large helicopter manufacturers have thus found that the civilian side of helicopter with current production technology has not been sufficiently profitable to encourage major investment. Nevertheless, companies such as Boeing and Bell, that have committed large capital outlays toward helicopter and tilt-rotor technology for military applications, recognize vertical takeoff and landing has substantial commercial potential.  These companies continue to look for civilian use of that technology as evidenced by their investment into the development of aircraft targeted for commercial use, including a civilian tilt-rotor.  This indicates to the Company the correctness of its opinion that with the right technology there is a substantial civilian market for a VTOL aircraft.


Company Products

GBA Hawk 4 Gyroplane

The first pre-production piston-engine version of the four-seat Hawk 4 flew in September 1999, followed by the turbine-engine version in July 20004.  This latter aircraft, powered by a Rolls-Royce Model 250 420shp turboprop engine, was developed to become the Company’s first major production aircraft.  It incorporates rotor blades optimized for autorotative flight and the Company’s patented rotor head with infinitely variable collective pitch control.  This enables the pilot to optimize the rotor blade pitch to the existing conditions and attain a smoothly controlled ultra-short ground roll for both take-off and landing.  The turbine engine further contributes to the reliability, maintainability, payload and low operating cost characteristics of the aircraft.  The Company has flown the Hawk 4 in several hundred incident-free sorties and hundreds of hours of flight time in its pre-certification flight-test program.
 

4 The piston-powered Hawk 4, although with space for a pilot and four passengers, was limited by payload to four occupants.  The more powerful turbine version can carry a pilot and four passengers.


The Company believes that the safety, reliability, maneuverability and low operating cost of the Hawk 4 will permit it to perform competitively with helicopters (and airplanes) for many missions requiring low, slow flight, and the absence of a requirement for a runway for take-off or landing is a critical advantage.  Potential customers include the following:
 
 
1.
Law enforcement (police, sheriff, border patrol, customs, and drug interdiction).
 
2.
Public service agencies (fire patrol, medical transport, wildlife and land management).
 
3.
Military (courier, armed surveillance, VIP transport, forward artillery control, ground attack, unmanned aerial vehicle).
 
4.
Commercial (oil, gas, and power line patrol and inspection, land survey, aerial photography, crop spraying, herd management, air taxi service, corporate transport, and flight training).
 
5.
Private (commuting, sport flying, training).

Although certification of the Hawk 4 has not been completed, it has required significant capital and will continue to require significant capital to complete it.  In consequence of the adverse affects on the venture capital market of the spring 2000 decline of the stock market and the September 11, 2001 terrorist attacks, the Company cut back its operations very substantially in October 2001, and reoriented its immediate priorities toward offering the Hawk 4 Gyroplane in its already well-tested form to the US government in roles similar to those outlined above that would not require commercial certification.

As operation in the United States by Federal, State or Local Government agencies is exempted from commercial certification requirements under Public Use laws, each of these opportunities would give the Company the opportunity to begin receiving revenues ahead of FAA certification.  This would, as a result, reduce the need for funding to permit the start of production of the Hawk 4.  Consistent with this objective, the Company has continued to present the case for the Hawk 4's utility in this role to members of Congress, appropriate Federal Agencies, and to State and local agencies across the nation, and, importantly, with similar agencies of friendly foreign governments. In this context, the Company has had conversations with representatives of several countries with respect to setting up a joint venture to certificate, manufacture and sell the Hawk series of gyroplanes.

From an early stage of such discussions, it was recognized that the most serious interest in this project was coming from Spain and that that country presented an attractive combination of market potential, available skills and funding sources, and favorable legal and political environment.  As a result, the Company has been diligently seeking to set up a JV through which the Hawk 4 could be certified under FAA and European regulations.  The objective, in broad terms, is for GBA to provide the JV with its Hawk 4 technology and oversee and participate in the certification program (on commercial terms), while the other partners, governmental and industrial, would provide funding, manufacturing, and other resources.  GBA would be a significant minority shareholder and the recipient of royalties on aircraft sales.

As early as fiscal 2004, after favorable technical recommendations from a Spanish due diligence team, the Company believed that such an agreement with a mid-size Spanish aerospace company as the industrial partner was close at hand.  At a late stage, however, that company decided that in the very poor economic climate in the aerospace industry at that time, it would cease investing in aerospace in favor of its more profitable non-aerospace activities.



In fiscal 2007, however, the Company obtained renewed interest from the government of Aragon, an Autonomous Community within Spain, and in December 2006 entered into a Memorandum of Understanding with Aragon to set up such a JV.  Since that time, the investment advisors for Aragon have been undertaking due diligence on the project, presenting the project to potential industrial partners and undertaking preliminary discussions with regard to funding with the Spanish government authorities.  In early fiscal year 2008, representatives of GBA and Aragon met with representatives of CDTI5, the investment arm of the central Spanish government’s Ministry of Industry, Tourism and Commerce.  The Company has been advised that the results of this meeting were favorable and that CDTI has asked Aragon and other potential partners to enter into the formal process for funding requests.  While the Company can give no assurance that the JV will be established, or that if established it will be successful, the Company believes that the potential investors in the JV have the capability to fund such a project and, in the opinion of management, that they are likely to have access to a significant market for the Hawk 4.  The Company believes that the proposed JV offers a viable prospect for the Company to profit from its considerable investment in the Hawk 4 and gyroplane technology.

SparrowHawk Gyroplane and Derivatives

Starting in fiscal 2003, AAI undertook the task of designing its own two-seat piston engine powered gyroplane that it named the SparrowHawk.  This aircraft, incorporating safety features based on aerospace standards, offers performance, stability and comfort standards that AAI believes are superior to any competitive kit-built gyroplane in its class.  AAI finalized the design of the SparrowHawk in the fiscal year ended June 30, 2004, and began deliveries of kits for the home built market in the third quarter of that fiscal year. In addition, the Company developed and continues to sell, modification kits designed to improve in-flight stability and safety for another manufacturer’s kit gyroplane.

In December 2005, the Company announced the introduction of its improved SparrowHawk model, the SparrowHawk II.  SparrowHawk II offered added comfort and robustness, and reduced the time and effort, needed by the customer to build the aircraft.  The Company has continued to design improvements for the SparrowHawk II during fiscal 2007 and in the first half of fiscal 2008 will be introducing new version called the SparrowHawk Quick Build.  As the name implies, the primary objective for the ‘Quick Build’ is a significant further reduction of time and effort on the part of the purchaser in building the aircraft, while maintaining conformity with FAA regulations.  Careful attention has been paid to existing customer input and to the needs of potential customers.  Many of the latter have the financial resources to purchase an aircraft, but have limited time to complete the build process.  Through a thorough assessment of the build process, changes in the design manufacture and product delivery, the time to assemble the kit by a typical purchaser is expected to be in the order of 300 hours, cutting build time in half.  Deliveries of the Quick Build kit begin in October 2007.  All future aircraft will be manufactured to the SparrowHawk QB standard.

The Company began deliveries of SparrowHawk kits during the third quarter of its fiscal year ended June 30, 2004, recording initial revenues from this aircraft in the fourth quarter of fiscal year 2004.  During the years ended June 30, 2007 and 2006, the Company reported revenues from the sale of SparrowHawk kits and parts of $562,000 and $667,000.  The Company has received advance payments from dealers and customers on SparrowHawk gyroplane kit orders during the past several quarters, which have been recorded as deferred revenue.  Additional revenues have also been received from the sale of modification kits, flight training and from contract manufacturing; however, these revenue sources have not been, and are not projected to be, significant to the Company.
 

 
During fiscal year 2005, the FAA announced the establishment of a new category of aircraft, called Light Sport Aircraft (LSA), which permits manufacturers to produce and sell small, non-complex, fully assembled aircraft without the necessity of fulfilling the requirements for an FAA “Type-Certificate.”  While helicopters have been excluded from the LSA category as being too complex, gyroplanes are included, but in view of the limited experience of the FAA with gyroplanes, initially in a sub-category defined as Experimental Light Sport Aircraft (E-LSA).  The E-LSA category for gyroplanes will end in 2008.  The Company has petitioned the FAA for a “deviation” from the regulation that would permit it to produce and sell complete aircraft that meet the LSA standards, with the expectation that the experience gained and demonstrated will justify full LSA authorization for gyroplanes.  The Experimental Aircraft Association (EAA) filed with the FAA a “letter in support” of the Company’s petition for deviation.

Management believes a large market is likely to arise within the United States as a result of this FAA action.  The Company believes that its technology will be well suited to this market and be capable of conforming to the new regulations.  The Company has therefore initiated the design of a new light gyroplane, called the SportHawk that would meet the LSA regulations.

As previously noted, the Company identified an important untapped potential market for the Hawk 4 as a patrol and surveillance aircraft, both in the United States and overseas.   It has now become evident that as a derivative of its SportHawk design, a smaller, professionally designed aircraft with low purchase and operating costs that can operate “off airport” and is easy to maintain and fly, would also have important applications for patrol surveillance.  This is particularly the case in parts of the world where skilled helicopter pilots and maintenance personnel are not readily available.  For this reason, the Company believes the SparrowHawk or its derivatives sold as a fully assembled aircraft could be expected to be popular with law enforcement agencies around the world.

The Company’s discussions with the Office of Domestic Preparedness (“ODP”) on gyroplane usage have emphasized the merits of the SparrowHawk as a readily available, ultra-low cost air surveillance vehicle.  Similarly, discussions have been held with the Department of Defense (“DOD”) for the use of gyroplanes for mine and bomb detection to counter those threats in Iraq and elsewhere, emphasizing again its low cost and early availability in relation to other solutions.  Sales representatives have also been appointed in Korea and India to present the capabilities of small gyroplanes to government agencies in those countries, and the Company has held meetings with several agencies in China in relation to the use of the SparrowHawk in China.

Consistent with the design advances that are being incorporated into the SportHawk for the civilian market, and with the knowledge gained by these discussions with potential customers, as mentioned above, the Company has initiated design of a corresponding SportHawk derivative directed toward government markets, which it is naming the ShadowHawk Gyroplane.

As a result of the new FAA regulations and the opportunities for government acquisition of fully assembled aircraft, the SportHawk and ShadowHawk can be sold as complete aircraft, rather than as kits like the SparrowHawk.  The Company believes that the production of complete aircraft will enable it to maintain quality control over the finished product, eliminate the delay between delivery and in-service dates, and overall enable the product and Company to be more effectively branded.



Unmanned Gyroplane Contract

The relative mechanical simplicity and aerodynamic stability of the gyroplane and gyrodyne in comparison to a helicopter or other vertical lift aircraft allows both aircraft to be potential candidates for unmanned as well as manned applications.  GBA has been approached separately by two aerospace companies with proposals to assist them in the design of unmanned gyroplanes for two different US military applications.

The Company has  been engaged as a subcontractor to one of these companies for a project called PAS (Precision Airdrop System) that is projected to produce an unmanned gyroplane rotorcraft for military supply missions, missions now served with much less accuracy by parachutes.  GBA has been engaged by this major aerospace company to design, and ultimately manufacture, the rotor system and fuselage using their guidance system.  A large-scale model designed and built by GBA was successfully flown on a military test range in July of 2007, demonstrating the effectiveness of this technology.  The project is expected to proceed to full-scale demonstrator development beginning in 2008.  If successful, it is possible that the Company could receive a significant order for full-scale production for these aircraft as early as 2009.

The Company’s DARPA “Heliplane” Gyrodyne Contract

The Company’s technology is fully scalable and readily adaptable to the gyroplane’s derivative form, the gyrodyne.  As detailed earlier, the gyrodyne is a rotary wing aircraft that uses “tipjets” for short duration power permitting pure vertical takeoff and landing, providing the capability to hover.  During the en-route portion of the flight the tipjets are turned off and the gyrodyne flies as a gyroplane in autorotation.  Such an aircraft is capable of both lifting substantial payloads in gyrodyne mode and covering substantial range as a gyroplane.  The British Fairey Rotodyne aircraft demonstrated the technical validity of this concept in the 1960's.  With the application of modern technology developed by the Company, the concept is ready to be turned into a highly utilitarian aircraft platform, with many diverse applications.

In recognition of these capabilities, over the past three years the Company has been assessing military applications of its gyrodyne technology to conceptual designs for a vertical takeoff aircraft with payload and range capabilities that no aerospace manufacturer has been able to offer and that would contribute to the military and security needs of the United States Government.  As a consequence, the Company has been able to respond to requests for proposals from government agencies and military commands.  These submissions have ranged from small UAV gyroplanes to large vertical takeoff and landing (“VTOL”) freighters.  Applications have also been made in partnership with either a major aerospace company or an academic institution with preeminent aerospace credentials.

On November 7, 2005, the Company announced that the U.S. Defense Advanced Research Projects Agency (“DARPA”) had selected a Company-led team to design a proof of concept high-speed, long range VTOL aircraft.  This modern rotorcraft, named the “Heliplane” by DARPA, is intended for use in combat search and rescue roles.  It will offer the VTOL capability of a helicopter, the fast forward flight of an airplane, and the safety, simplicity and reliability of a GBA gyroplane and is designed to exploit the Company’s gyrodyne technology.  DARPA is the central research and development organization for the US Department of Defense (DoD).  It manages and directs select basic and applied research for DoD, emphasizing technology development projects where payoff is high and where success may provide dramatic advances in the capabilities of this country’s combat forces.



Phase One of this potential multi-year $55 million four-phase Heliplane program began with a 15-month $6.4 million award to develop the preliminary design and perform key technology demonstrations.  On September 19, 2007, the DARPA contract was modified, increasing the contract award from $6.4 million to $10.4 million, and extending the term of Phase One from 15 to 23 months.  Substantial portions of Phase One payments are paid by the Company to subcontractors and consultants hired by the Company.  Payments under this contract are conditional upon the Company attaining several milestone objectives during the course of Phase One of the contract.
 
The Company recognizes revenue on this contract as each defined milestone is completed and the requisite meetings are held and technical data submitted and accepted by DARPA.  At that time, DARPA will instruct the Company to submit an invoice for payment for the respective milestone at the amounts specified in the contract.  Through December 31, 2006, contract-related expenses incurred by the Company for each milestone of the contract, including its own labor, travel, supplies and other costs, and the costs of subcontractors and consultants, were deferred and expensed to cost of sales as the contract revenue for the milestone was recognized.  The Company is currently experiencing a negative profit margin on the DARPA contract; therefore, all contract-related costs and expenses incurred subsequent to December 31, 2006 have been expensed as incurred.  Through June 30, 2007, the Company completed the first four milestones and substantially all of the fifth milestone of Phase One of the DARPA contract, and recognized revenues totaling $4,790,000, $2,350,000 recognized in the fiscal year ended June 30, 2006 and $2,440,000 recognized in the current fiscal year ended June 30, 2007.

The Heliplane gyrodyne represents the possible model for the next generation rotor wing aircraft, meeting economy and performance goals not considered achievable by any other type of VTOL aircraft.  As the Company’s gyrodyne technology is scalable to much larger aircraft, it has potential applications for both heavy lift, high speed VTOL military aircraft and for runway independent commercial airliners.  The Company has been actively engaged in discussions with government agencies and potential aerospace strategic partners in this country with respect to military and commercial gyrodyne and gyroplane applications, and in Europe, India, and China with respect to commercial gyroplane applications.

Future Company Gyrodyne Aircraft

The Heliplane gyrodyne represents the possible model for the next generation rotor wing aircraft, meeting economy and performance goals not considered achievable by any other type of VTOL aircraft.  As the Company’s gyrodyne technology is scalable to much larger aircraft, it has potential applications for both heavy lift, high speed VTOL military aircraft. The Company has been actively engaged in discussions with government agencies and potential aerospace strategic partners in this country with respect to military applications, both manned and unmanned.

The gyrodyne technology developed for the Heliplane also has direct application to the design of short-range vertical take off and landing (“VTOL”) commercial airliners that are runway independent.  Growth in the economy can produce heavy demand for aircraft that do not require the use of increasingly congested runways and are not limited by air traffic control constraints, and the Company anticipates an opportunity to develop such an aircraft.  By using the airframe of an existing type-certificated production airplane and adding the Company’s rotor system, gyrodyne airliners can be delivered for substantially less investment and in less time than would normally be required to bring a new airliner to market.  The Company’s longer-range plans have identified opportunities for large (18-60 seat) gyrodynes to provide commercial passenger service in short and medium-range markets.



The proposals that the Company has presented, or participated in presenting, have been well received and helped generate credibility for the value of the Company’s technology among key segments of the aerospace industry.  The Company will continue to seek opportunities to obtain government research and development contracts for use of its technology in both military and civilian agency fields where it believes that it can offer meaningful advantages in performance or cost over competing technologies.


Market

Management believes that it is in the national interest that the Company’s unique gyroplane technology is developed.  The terrorist actions of September 11, 2001 and later, have triggered important new opportunities to use the Company’s technology in new counter-terrorism markets.  The new circumstance of our country, as well as other countries, is requiring sharply increased levels of vigilance by many branches of government to protect critical national assets against terrorist attack.  Public use regulations would permit the Hawk 4 to be utilized as a highly efficient, safe, and inexpensive means of providing needed surveillance by government agencies for such roles. These include border patrol as well as protection of pipelines, nuclear power plants and key transportation infrastructures for which the Hawk 4 is particularly well suited, performing such missions far more effectively, and often at far lower cost, than other air or ground vehicles.

The attempted shooting down of an Israeli commercial aircraft approaching Mombassa airport in Kenya by Al Qaeda terrorists using surface-to-air “SAM” man-portable missiles has made the protection of commercial aircraft from such missile attacks an extremely important issue.  Several proposals have been made to fit military missile defense systems to commercial aircraft, but research undertaken under Homeland Defense contracts has indicated that these approaches are extremely expensive, and would take years to develop and install.  Significantly, however, the Kenya incident precisely fits the scenario presented by the Company as a serious risk to the Salt Lake City 2002 Winter Olympics, which resulted in the Hawk 4 demonstrating its capacity to guard against such an attack.  The subsequent arrest in New York of individuals attempting to import Russian SAM missiles into the United States heightened concerns about this threat.

The Company asserts that the most practical and effective deterrent to missile attacks remains intensive patrolling of airport approach and departure paths by safe Hawk 4 and/or SparrowHawk Gyroplanes, which could perform this role more economically and effectively than fixed-wing airplanes or helicopters.  The Company has therefore approached principal government agencies, including the Transportation Security Administration (TSA) of the Department of Homeland Security, the Office of Domestic Preparedness (ODP) of the Department of Justice (DOJ), as well as representatives of airport authorities, to present the case for both the Hawk 4 and the SparrowHawk in this role.

The Company is also seeking orders from foreign governments with intensive border patrol needs.  The small, ultra low cost SparrowHawk, mechanically very simple, although sophisticated in design, is well suited for areas where substantial coverage is needed, but resources and skills are very limited.  The easy maintainability of the Hawk 4 also enables it to excel in operating where infrastructure is relatively undeveloped and where the cost and complexity of acquiring and operating helicopters in adequate numbers is infeasible.  Given the potential for sales in foreign countries, the Company has evaluated the efficiency of assembling Hawk 4 and SparrowHawk Gyroplanes in strategic overseas locations, and has had discussions with different foreign entities on possible sites.



Government Regulation

The nature of aviation products has resulted in their manufacture being regulated by governments for public safety, national defense, and economic and/or political purposes.  Such regulations vary widely by country, by product type and by usage.  The Company’s products and intended products are principally impacted by United States laws and regulations, but also by requirements in its export markets.  As its products can be used for private, commercial, public agency or military purposes, their sale and operation are governed by regulations appropriate to each category.  Developmental flight testing of the Company’s aircraft is carried out under exemption rules covering experimental aircraft.  The following section reviews the principal regulations applicable to each category of the Company’s activities in the United States.

GBA Hawk 4 Series Gyroplanes

Commercial or Private Use:  FAA certification is the process by which the United States government ensures that aircraft sold into the US civil market meet appropriate standards for all civil users.  FAA certification is not required by military aircraft and by many aircraft in “Public Use,” roles operated by Federal, State or local agencies.  Civil aircraft operated outside the United States are regulated by the authorities of those countries and may be required to obtain additional certification.  The analysis and testing leading to a US certificate is, however, currently acceptable in most foreign countries as the basis for granting certification in those countries.

FAA certification has two related components.  The first, Aircraft Type Certification assesses the integrity of the design and associated engineering through analysis and testing of components and complete aircraft to insure that the aircraft can achieve its performance standards safely.  The second, Aircraft Production Certification, assesses the manufacturing organization to insure that its processes and procedures will result in the production of aircraft that fully conform to the standards of the aircraft type certificate.

The regulations pertaining to aircraft certification are contained in Title 14 of the United States Code, the “Federal Aviation Regulations” (FAR).  Aircraft in the category of the Company’s Hawk 4 aircraft, to be operated commercially or privately, must receive a Type Certificate under Part 27 (normal category rotorcraft weighing less than 6,000 lbs) of the FAR, while the Production Certificate must be obtained under Part 21 of the FAR.

Public Use: The Company’s efforts to sell its Hawk 4 to government agencies in the United States is based on the specific exemption for operation of aircraft used by government agencies as authorized by Federal Public Law 103-411, which defines what is a “public aircraft operation.”  This law permits training and flights in “public aircraft” for performance of the following governmental functions:
 
Flights in response to fire fighting;
Flights in response to search and rescue;
Flights in response to law enforcement activities; and
Flights in support of aeronautical research or biological or geological resource management.



In this context, ''public aircraft'' means an aircraft:

(i) used only for the United States Government;
(ii) owned by the United States Government and operated by any person for purposes related to crew training, equipment development, or demonstration; or
(iii) owned and operated (except for commercial purposes), or exclusively leased for at least 90 continuous days, by a government (except the United States Government), including a State, the District of Columbia, or a territory or possession of the United States, or political subdivision of that government;

It does not include a government-owned aircraft:

(i) transporting property for commercial purposes; or
(ii) transporting passengers other than –

 
(I)
transporting (for other than commercial purposes) crewmembers or other persons aboard the aircraft whose presence is required to perform, or is associated with the performance of, a governmental function such as firefighting, search and rescue, law enforcement, aeronautical research, or biological or geological resource management; or
 
(II)
transporting (for other than commercial purposes) persons aboard the aircraft if the aircraft is operated by the Armed Forces or an intelligence agency of the United States.

An aircraft described in the preceding sentence shall, notwithstanding any limitation relating to use of the aircraft for commercial purposes, be considered to be a public aircraft for the purposes of this part without regard to whether the aircraft is operated by a unit of government on behalf of another unit of government, pursuant to a cost reimbursement agreement between such units of government, if the unit of government on whose behalf the operation is conducted certifies to the Administrator of the Federal Aviation Administration that the operation was necessary to respond to a significant and imminent threat to life or property (including natural resources) and that no service by a private operator was reasonably available to meet the threat.

Military Use: Aircraft sold to the US military are not required to meet FAA regulations, but must conform to military specifications that serve a similar purpose.  The Company has not attempted to sell its Hawk 4 to the United States Armed Forces and is thus not familiar with the detailed requirements that would have to be met.  It believes, however, that should a military application for the Hawk 4 be needed by the US Armed Forces, a version of the Hawk 4 could be designed to meet military specifications.

GBA SparrowHawk Gyroplanes

Homebuilt Kit Aircraft:  While it might be possible to design and manufacture a gyroplane in the size and performance class of the SparrowHawk to meet the FAA FAR Parts 21 and 27 regulations that the Hawk 4 is designed to meet, the Company has not chosen to do this.  The Company’s entry to the SparrowHawk market has been through the alternative path of producing homebuilt aircraft kits for which there is an established market.  Homebuilt aircraft kits are permitted by the FAA under its FAR Part 21 regulations governing the certification and operation of amateur-built aircraft.  Such kits, however, require that the majority portion of the kit be built by an amateur (the “51% rule”), limiting the manufacturer’s portion to 49%.



Light Sport Aircraft:  The FAA issued new regulations in 2004 defining a new classification of aircraft called Light Sport Aircraft (“LSA”) and regulated in two categories, namely Special Light Sport Aircraft (“SLSA”) and Experimental Light Sport Aircraft (“E-LSA”).  These regulations define an LSA by specific detailed limits upon size, weight, speed, and complexity.  The LSA regulations specifically exclude helicopters and other aircraft types considered to be overly complex for the LSA classification.  Such aircraft are not limited by the 51% rule, with the manufacturer permitted to fully build the aircraft.
 
Aircraft conforming to the SLSA category, must in addition to the basic LSA limitations, be designed and manufactured to certain defined standards that include requirements such as, for example, the need for engines that are either FAA-certified or have parts traceability.

Unlike helicopters, gyroplanes are not specifically excluded from the LSA classification, but in view of the FAA’s relative unfamiliarity with the type, are eligible for a subcategory defined as Experimental or E-LSA.  E-LSA aircraft must meet the LSA size, weight and other limits and can be sold as fully assembled aircraft, but are not required to meet the SLSA manufacturing standards.  Manufacture of E-LSA aircraft is, however, limited to the period ending January 31, 2008.

Public Use Aircraft: The Company is offering SparrowHawk aircraft fully built to US government agencies for Public Use, for which the regulations and limitations are covered by the same regulation, Public Law 103-411, that governs Public use for the Hawk 4, as described above.

Research and Development Aircraft Flown under Government Contract

Any aircraft developed and flown under government contracts that the Company may be granted, such as the DARPA Heliplane contract, will be tested and flown under FAA regulations governing experimental aircraft.


Distribution and Marketing

It has been the Company’s plan to market the Hawk 4 through a dealer network, both in the United States and the rest of the world. A GBA Authorized Dealer network with 14 United States dealers, 3 International dealers and over 60 national sales representatives was established and these dealers placed firm orders with deposits for 145 Hawk 4 gyroplanes.  As of June 30, 2007, dealer deposits totaled $2,145,000, which amount has been reported as a long-term liability in the accompanying consolidated financial statements.  The deposit guarantees a delivery sequence number and represents a percentage of the total estimated purchase price.  The Company has also issued common stock to dealers as partial consideration for the delay in the certification of the Hawk 4 Gyroplane.  These costs have been c