Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - MOLLER INTERNATIONAL INCa6070291ex311.htm
EX-32.2 - EXHIBIT 32.2 - MOLLER INTERNATIONAL INCa6070291ex322.htm
EX-32.1 - EXHIBIT 32.1 - MOLLER INTERNATIONAL INCa6070291ex321.htm
EX-31.2 - EXHIBIT 31.2 - MOLLER INTERNATIONAL INCa6070291ex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

R ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2009

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to________________

Commission file number 000-33173

Moller International, Inc.

California
68-0006075
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1222 Research Park Drive, Davis, CA 95618
(530) 756-5086

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

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No R

The issuer’s revenues for its most recent fiscal year ended June 30, 2009 are $542,904.

The aggregate market value of the voting and non-voting common equity held by non-affiliates is $5,332,578 with a total of 21,330,314 shares owned by non-affiliates as of September 18, 2009 and the closing price of such common equity of $0.25 per share on the OTC Bulletin Board on such date.
 
As of October 12, 2009, the Company had 47,623,450 common shares issued and outstanding.

Transitional Small Business Disclosure Format: Yes þ No o
 
-i-

 
 
PART I
   
Item 1
  Business
1
Item 2
  Properties
23
Item 3
  Legal Proceedings
24
Item 4
  Submission of Matters to a Vote of Security Holders
24
     
PART II
   
Item 5
  Market for Registrant’s Common Equity and Related Stockholder Matters
25
Item 6
  Selected Financial Data
26
Item 7
  Management’s Discussion and Analysis of Financial Condition and Results of Operation
26
Item 8
  Financial Statements and Supplementary Data
  All Financials
  Balance Sheet
  Income Statement
  Notes to Financial Statements
  29
Item 9
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
41
Item 9A
  Controls and Procedures
41
Item 9B
  Other Information
41
     
PART III
   
Item 10
  Directors and Executive Officers of the Registrant
43
Item 11
  Executive Compensation
44
Item 12
  Security Ownership of Certain Beneficial Owners and Management
45
Item 13
  Certain Relationships and Related Transactions
46
Item 14
  Principle Accounting Fees and Services
46
     
PART IV
   
Item 15
  Exhibits and Financial Statement Schedules
46
Exhibits
   
 
  Signatures
47
 
    31.1
48
 
    31.2
49
 
    32.1
50
 
    32.2
51
 
-ii-

 
PART I

Item 1. BUSINESS
 
OUR COMPANY

Moller International, Inc. was incorporated April 19, 1983 in California for the purpose of designing, developing, manufacturing and marketing a line of Vertical Take-off and Landing ("VTOL") aircraft. Our flagship model, the M400 Skycar(R) is currently under development and testing and is projected to be a 4-passenger aircraft that will combine the cruise performance of an airplane with the vertical-flight capabilities of a helicopter. It is designated the "M400 Skycar(R)." A related product we are developing is the Aerobot(R) line of unmanned aerial vehicles. While certain engineering problems remain to be solved before we can deliver a production aircraft meeting our design performance specifications, we have been able to conduct flight tests on a production prototype since 2002, including approximately 30 unmanned, tethered tests of the vehicle’s vertical takeoff and landing capabilities.

The M200X, a vehicle that was developed in the 1970s and demonstrated in approximately 150 manned flights up until the early 1990s, is now being readied for market. Funding constraints have forced us to reschedule those vehicles scheduled for completion this calendar year into next year’s goal of 12 to 40 units, but the Company continues to move forward and anticipates that the M200-based products, now referred to as the “Neuera” (pronounced “new era”), will be the first vehicles that the company brings to market.

Since our inception, we have not been subject to a receivership, bankruptcy or similar proceeding, nor have we been involved in any material reclassification, merger, acquisition, or purchase or sale of a significant amount of our assets.

OUR PRODUCTS

We currently have no products that are ready to go to market, although we anticipate availability of M200-based products within the next 6-to-12 months. We are in the latter stages of development of a number of other innovative aviation products that we hope to launch in the coming years. Our founder, Dr. Paul S. Moller, has for more than thirty-five years been engaged in research and development activities aimed at designing and producing an aircraft that combines the speed and efficiency advantages of the fixed-wing airplane with the vertical take-off and landing and hovering capabilities of the helicopter. We believe that such an innovation will deliver to a wide range of conventional aircraft operators a new level of utility and economy for a variety of aerial applications. By-products of our aircraft development activities, in particular the Moller Rotary Engine and the Aerobot remotely-flown air-borne vehicle, should become important products in their own right and could account for an important segment of our overall sales once production commences. Except as noted above it remains uncertain when, if ever, we will enter commercial production of any of our other products.

The Skycar, Neuera and Aerobot are products we plan to offer in the future. They are based upon fundamental research and on earlier prototypes developed by Moller International. The Skycar concept is through the detail design stage and we have a prototype undergoing testing at this point. There are significant technical issues that remain unproven and may preclude us from meeting the design objectives for the Skycar. The Aerobot is a limited-production vehicle, with twelve prototypes built, tested and delivered to end-users. Neither vehicle is ready for volume production at this time, nor is there any guarantee that they will ever reach a point where they are viable products.

M400 Skycar

Our principal product will be the M400 Skycar vertical take-off and landing (“VTOL”) aircraft. The concept of the Skycar as a personal transportation vehicle is that it would be so practical and affordable that it could become a preferred mode of transport, replacing at once the automobile and the private or commercial airplane for many trips. Should we succeed in achieving a production aircraft design meeting our target specifications, we believe the M400 will support such a degree of usefulness.
-1-

 
Page 2 image
 
Moller M400 “Skycar” prototype
 
Following are our current target design and performance specifications for the M400 4-passenger (including pilot) aircraft:

 
Passengers
4
 
Dimensions (LxWxH)  19.5'x 8.5'x 7.5'
 
 
Cruise speed @ 20,000’
275 mph
 
Takeoff and landing area
35-ft dia
 
Top speed @ 13,200’
375 mph
 
Noise level at 500 ft (goal)
65 dba
 
Maximum rate of climb
6,000 fpm
 
Critical failure components
none
 
Maximum range
750 mi
 
Complex moving parts
few
 
Payload excluding fuel
750 lbs
 
Piloting difficulty
low
 
Fuel consumption
20 mpg
 
Vertical takeoff and landing
yes
 
Operational ceiling
36,000 ft
 
Garage parking/roadability
yes
 
Gross weight
2,400 lbs
 
Uses non-fossil fuel (ethanol)
yes
 
Engine power (2 min rating)
1200 hp
 
Emergency parachutes
yes
 
Earlier performance numbers vary somewhat from the number shown above. We continuously revise the performance projections to reflect the results of ongoing analysis and changes to the design characteristics of various components. Recent decreases in projected range were the result of a change to ethanol fuel. Installed horsepower has changed due the projected use of a multi-stage, compound rotary engines of our design, and the on-board stabilization electronics have been redesigned to be faster and more reliable.

We believe that if we succeed in achieving the above cruising speeds, altitudes, payloads, and fuel economy per passenger mile in a production model aircraft, the Skycar will compare favorably with today’s light twin-engine and turbo-prop airplanes. But the M400 should offer the additional advantage of needing no runway for take-off and landing, since it will be able to hover and take-off vertically like a helicopter. But because the M400’s VTOL capability will be provided by our proprietary “ducted fan” technology rather than a helicopter-type system of main and anti-torque rotors, maintenance and repair costs should be significantly less and safety should be considerably enhanced.

It is important to recognize that the above design specifications are theoretical, based on research, engineering, and flight- and wind tunnel testing of various components. They have not yet been demonstrated to be achievable in a production model aircraft.
-2-

 
The following table compares certain of the target performance specifications of the M400 to a current production model helicopter and fixed-wing airplane that we believe might be potential competitors for production model M400 customers:
 
 
Powered-Lift
Helicopter
Airplane
 
Moller International
M400 Skycar®
McDonnell Douglas
MD 520 N
Socata TMB S.A.
TBM 700
Performance
     
       
High Speed Cruise
Maximum Speed
Operational Ceiling (ft)
Maximum range
Rate of Climb
Vertical takeoff
   and landing
330 mph
375 mph
35,000
750 mi
4,900 fpm
yes
155 mph
175 mph
16,300
267 mi
2,069 fpm
yes
335 mph
345 mph
30,000
1,796 mi
2,380 fpm
no
       
Payload and Capacity
     
       
Passengers
Gross Weight
Maximum Net Payload
4
2,400 lbs
750 lbs
3 to 4
1,591 lbs
1,106 lbs
6
4,685 lbs
805 lbs
       
Safety
     
       
Critical failure
   components
Complex moving components
None

Few
Several

Many
One

Few
       
Other
     
       
Maintenance costs
Piloting difficulty
Garage parking / roadability
Low
Low
Yes
Very high
Very high
No
Moderate
High
No
       
Price
$995,000
$1,010,000
$2,697,000
       

 
The above figures represent the actual manufacturers’ performance specifications for the helicopter and airplane models listed, and our theoretical specifications for the Skycar M400. They are presented here to illustrate the comparative utility of the three types of aircraft. However, it is not yet certain that we will indeed achieve our target specifications, nor will we know the actual values for the Skycar until we have completed further development. Also, the $995,000 selling price for the Skycar is estimated, based on numerous assumptions that may or may not bear out over time. The actual selling price may be more or less than $995,000.
 
We believe that certain specific design features of the Skycar® will further facilitate its eventual acceptance as an alternative vehicle of mass transportation. These features will include:

•  
  Computer-augmented flight stabilization system
 
•  
  Fly-by-wire control systems (electrical wires take the place of mechanical cables) and on-board computers which can interface with and be controlled by remote ATC system computer and navigation resources
 
•  
  High-speed capability, which maximizes the benefits of personalized air travel.
 
-3-

 
 
•  
  Hover or low speed capability, which provides the ability to cue up for entry to or exit from highly controlled air planes.
 
•  
  Ability to climb, descend, accelerate and decelerate rapidly to enter and exit air-lanes quickly
 
•  
  Relative insensitivity to gusts and wind shear that makes tightly constrained flight possible
 
•  
  VTOL ability to land anywhere which allows emergency exit from air-lanes
 
•  
  Small size which reduces required vertiport infrastructure dimensions
 
Notwithstanding these design features, the utility of the Skycar in mass transportation will be limited by existing laws and regulations. For example, Federal Aviation Regulations (“FARs”) prohibit operation of civil aircraft within certain airspace, and require minimum altitudes above, and horizontal separation from, obstacles on the ground and in other airspace. In addition, much of the airspace in and around major metropolitan areas requires that pilots operating in such areas hold special qualifications. And although we intend that the Skycar have the capability to travel from “garage to garage,” in urban and suburban areas existing laws and regulations will preclude most such “off-airport” operations.

Moreover, mass transportation using the Skycar would likely have to rely on some future navigation system such as NASA’s (National Aeronautics and Space Administration, an agency of the federal government) proposed Small Aircraft Transportation System (“SATS”), which is funded with public funds. Demonstrations of a “Highway in the Sky” technologies have been emerging for the past several years and the Company continues to believe it can rely on these technologies for many of the navigational requirements of the Skycar.

Environmental Noise Issues

The theoretically achievable noise level of the M400 Skycar with conventional muffling and noise abatement technologies would allow it to fly with somewhat lower noise levels than present fixed-wing aircraft. It should be considerably quieter than a helicopter because of the enclosed fans instead of the open rotor blades. Use of urban area vertiports is unlikely due to city noise abatement laws unless the Skycar were to employ some degree of mutual noise cancellation. Tests to date by other researchers suggest that a 15-decibel drop in noise is achievable with mutual noise cancellation. If so, it would be possible for the Skycar to operate from most locations except the user’s home, where a 30-decibel drop in noise may be required by noise abatement laws. To achieve this reduction in noise level as needed for such a flight originating from a residence, three-dimensional mutual noise cancellation would be required. There is no assurance that such a reduced level of noise can be achieved for the noise spectrum generated by the Skycar.

Further Skycar Development Stages

The company is currently preparing the M400 Skycar prototype, now designated the M400X, for an anticipated manned, untethered flight test. The current configuration of the M400X is equipped with experimental single-rotor rotary engines. These single-rotor engines are being replaced with more powerful twin-rotor engines.

Since July 12, 2002, MI has been successfully conducting demonstration hover flights with this Skycar prototype. The aircraft has flown several times and at altitudes up to forty feet above ground level in stable, controlled flight. While an overhead safety line is used during the flights, it has remained slack during the majority of the flight and never used to support or stabilize the vehicle. The aircraft has been flown by remote control from the ground and has flown without an onboard pilot through this stage of the testing. Success at this stage has depended upon demonstration of a controlled hovering flight, which has now been achieved and documented for the four-passenger M400 Skycar model as it was on several occasions for an earlier 2-passenger model. Success at the next stage will be to demonstrate the same level of controlled flight while the aircraft is under the control of an on-board pilot. In addition, payload objectives will be tested with an increasing payload weight, up to the full payload of 750 pounds if possible.
 
-4-

 
The previous unmanned hover tests are complete, and many of the required components for the engine upgrade are already fabricated. The purpose of the engine change is to allow the M400 Skycar to undertake “maneuvering” tests at low speed with the safety of significantly higher reserve power. (“Maneuvering” in this context, means lateral and vertical movement at a modest speed where lift remains entirely dependent upon the thrust from the engines (non-aerodynamic lift.)) The cost for these extended tests is expected to be between $1.5 and $2 million. The risk at this stage centers almost entirely around the reliability of the various aircraft systems. These flights are to be carried out over water at altitudes up to 50 feet to lessen the damage to the Skycar should a system fail and to reduce the risk of fire to the aircraft and injury to the pilot.

The third phase of the Skycar test program involves flight speeds sufficiently high so that direct lift from the ducts is replaced by aerodynamic lift generated on the wing surfaces, referred to as “transition” testing. This segment of the flight where the aircraft transitions from one mode of flight to the other is considered the most technically challenging, and historically is the most dangerous. Wind-tunnel tests indicate that the Skycar is capable of completing this transition, however a number of factors are present in free flight that cannot be accounted for in a wind tunnel. Therefore there is no assurance that these tests will be successful without incidents that risk both the aircraft and the pilot. Achieving even one successful transitioning flight would establish the overall viability of the Skycar approach to this historically difficult aspect of VTOL aircraft design.

Near-term Objectives

With over 150 manned and unmanned flight demonstrations of the M200X volantor since 1989 we recognize that these successful and extensive test flights of the Neuera may provide the Company with a more easily achieved, nearer term product. We also see an opportunity to offer derivatives of this basic aircraft design for various utilitarian and recreational applications. While the Skycar is designed for much higher speed it is also expected to require a lengthy and expensive FAA certification program. The M200-based products may provide a less expensive and shorter time to market opportunity. Since the Company is experiencing shortfalls in available funding which have slowed production plans for the Skycar, we are now looking to other potential Moller products and their potential ability to generate near-term revenue.

The Company feels that the initial market for M200-based products will be for derivatives that appear exempt from FAA certification requirements. FAA certification is a detailed analysis, documentation and test process that applies to most aircraft that operate in the US National air space. It can require over two years to complete. However there are a number of exceptions to this requirement. For example, if the user completes 50% of the construction, the aircraft falls into a category of a “home built” and other rules apply. The Company estimates there are presently over 35,000 aircraft under construction nationwide in this category.

Building aircraft for the “home built” market has been a milestone on the path to a manufacturer’s FAA certified aircraft production while mitigating some of the legal liabilities to the manufacturer during this startup period. In the case of the M200E Neuera volantor we anticipate that the builder will not be required to participate in the construction of the vehicle’s powerplants or computer controls, and since the airframe is composed of two halves bolted together, the user’s assembly time is estimated at less than 50 hours and will require only rudimentary technical skills. From the Company’s perspective the lower product liability and minimal assembly labor requirements make the M200E Neuera an attractive and achievable product to bring to market.

Another variation to the basic M200 series is the M200G. The M200G Neuera is intended to operate within ground effect, and thereby may also be exempt from FAA certification requirements. This low-level of flight allows the craft to operate below what is commonly considered to be the National Air Space and therefore appears to not to fall under the jurisdiction of the FAA.
 
The following is a list of potential models that could be derived from the M200-class volantor:
 
• As demonstrators for marketing purposes and use over one’s own property (M200D)
 
• For operation within ground effect (up to 10 ft altitude) (M200G)
 
• As a rescue vehicle from side of skyscrapers (Firefly)
 
-5-

 
• As a military aircraft (M200M, M200R)
 
• Under the EAA category (home built) (M200E)
 
The Company has extensive hard tooling in place to rapidly produce the airframe and engines for M200-class vehicles. We intend to replace the analog artificial stability system used in the original M200X with the latest digital system originally developed for the M400 Skycar. The most significant differences between various models involve engine horsepower and seating arrangement.
 
The various models will emphasize safety as the number one design criteria. The following design elements will be incorporated in the vehicles to achieve this:
 
• Fueled by a mixture of 70% ethanol – 30% water. This combination will barely ignite outside the engine. It then burns very slowly for a short time before extinguishing itself as the ethanol reduces and the water remains.
 
• Air-bags will be used extensively throughout the cockpit.
 
• The artificial stability system will be highly redundant with at least four identical computers providing stability control.
 
• Able to tolerate one engine failure during hover. A second failure will lead to a survivable hard landing.
 
• Racecar impact-resistant fuel tanks will be used.
 
• Redundant fuel level warning system will be incorporated.
 
• Vehicle parachutes will be available on all models.
 
• Damage resistant composite fan blades will be used based on the Company’s proven experience.
 
Vehicle prices will vary depending on the model and use. The goal is to take orders for a sufficient number that economy of scale can apply. The minimum quantity sought is 1,000 vehicles to be delivered over a three-year period. Beyond the first 40 M200G models sold, the Company believes the prices will vary from approx. $95,000 for a single passenger M200G model to approximately $350,000 for the Firefly 3, a high-performance model intended for missions requiring a payload of three people or less.
 
Our goal is to complete the construction of a minimum of a up to 6 demonstrators, followed by 40 vehicles in the first year of production, 270 in the second year, and 650 in the third year. The plan requires that sufficient capital be raised and the foregoing projections are dependent on this funding being available, demand for the product develops as expected and that the anticipated production schedule can be kept.
 
The Company has not sought a legal opinion nor obtained a preliminary ruling from the FAA regarding the feasibility of any exemption from the FAA certification requirements for the M200G. Therefore, the ability to successfully market the M200 and any variants may or may not be achieved due to such uncertainty.
 
There is a continuing potential market for other products that have been designed, developed and tested by the Company but these are not being immediately pursued due to the focus on the M200 Neuera volantor and variations on that design.
 
The Company believes the M400 Skycar and their derivative are capable of much higher speed and range and anticipates that they will enter the civilian market following a successful FAA certification effort. As stated earlier, the funding required for this effort is significant and while it remains the long-term objective of the Company, we do not expect to enter into this program before 2011 at the earliest.
 
Aerobot Remotely-operated Aerial Vehicles

Aerobot® is our design for a line of remotely piloted VTOL vehicles. The principal advantage of these craft is the ability to hover at a fixed point in space, which we believe makes them suitable for payloads such as video cameras and other sensors for data acquisition and inspection. The Aerobot is intended to carry a wide variety of customer supplied mission specific payload packages. Payload requirements are model-specific and there are restrictions on weight, size and location. We have incorporated video camera technology, and believe other technologies such as sensors and transmitters are within the Aerobot’s payload capabilities, although we cannot guarantee that any payload within weight and size limitations will perform as desired or allow the Aerobot to function properly. Moller has developed and demonstrated both electric- and fuel-powered Aerobots® for commercial and military applications, although we have not commenced commercial marketing of them.
 
-6-

 
The electric-powered Aerobot®, which employs an umbilical cord to transmit power, data and control signals, can stay aloft for extended periods (8-12 hours or to the limitation of ground-supplied electrical power) at heights of up to 250 feet. The fuel-powered Aerobot® utilizes Moller’s rotary engines, which produce greater than 2 horsepower per pound of engine weight. A high power-to-weight ratio, a lightweight airframe, and a patented system for automatic stabilization and control are key design elements of both types of Aerobot®.

The demonstrated performance specifications for the two Aerobot models are set forth in the following table:
 
 
 
Electric-Powered
ES20-9
Fuel-Powered
FS24-50
Payload (including fuel)
15 lbs
65 lbs
Empty weight
40 lbs
90 lbs
Hover time
8-12 hours*
1.5 hrs
Hover ceiling
250 ft
2,500 ft
Forward speed
50 mph
Size
26”L x 26” W x 14” H
30”L x 30”W x 16”H
* Flight duration is calculated based on estimated run-time of ground-based electrical generator.
 
We expect to continue to solicit and execute contracts for government use of our Aerobots. As in the past and for the next 18 months, these contracts are expected to be for one-off demonstration vehicles. The $200,000 to $300,000 price of these one-off Aerobots will remain 200-to-300% higher than the desired target price of approximately $100,000 as long as volume is insufficient to establish quantity discounts for its components. This may restrict initial sales to those clients, if any, to whom price is less important than the functional characteristics of the Aerobot. However, if expressed interest translates into increased sales, the production price could reduce to a point where civilian, paramilitary and military use could be broadened, resulting in increased sales. However at this time there is no assurance that volume sales of the company’s Aerobots can be achieved.
 
Moller Rotary Engine

Moller has acquired and developed proprietary technology enabling the Company to manufacture a high performance, low-cost rotary engine that produces more than 2 horsepower per pound of engine weight. Key design characteristics and the resulting attributes of Moller’s engines are outlined below and are applied to its intended use as a ducted fan power plant:
 
-7-

 
 
Design Feature
Attributes
   
Air-cooled or charge-cooled rotor
Light Weight
Aluminum housings
 
Simplified Lubrication System
 
   
Few moving parts
Low cost + Reliability
   
Perfect dynamic balance
High propulsive
  Low vibration
  efficiency
  Solid engine mounts
 
  Small fan tip clearance
 
   
Four-stroke combustion cycle
Good fuel economy + Low emissions +
    Low noise
 
 
We believe that Moller’s rotary engine, called the Rotapower engine, will be advantageous for ducted fan VTOL applications such as those required by the Skycar® and Aerobot® product lines. The engine’s round shape and small size will allow it to be hidden in the center of the duct behind the fan hub. Furthermore, the engine’s power-to-weight ratio should enhance performance in VTOL applications, where all of the required lift must be provided by the engine/fan unit without benefit of a wing surface as in a rolling take-off or landing.

Moller International granted Freedom Motors a license to manufacture, market and distribute the Rotapower engine for all applications except for aviation and use in ducted fans. In return for this license, Freedom Motors agreed to pay Moller International a 5% royalty on all sales of the Rotapower engine. See Note G and Note K for additional details.

Moller’s unique engine design is based on a rotary engine that was mass-produced by Outboard Marine Corporation (“OMC”) from 1972 to 1976. In 1985, Moller purchased the OMC drawings, production routing sheets and engineering support man-hours. The Company subsequently hired the key OMC engineers who had developed the engine, participated in the production engineering process and contributed to the establishment of the service organization.

Using the OMC single-rotor engine as a starting point, Moller created a high-performance, modular design engine. The Company added electronic fuel injection and thermal barrier coatings, and introduced unique seal, lubrication and cooling systems. In all, Moller has made more than 25 major engine design improvements, of which eight are deemed patentable and two are patented and one is patent pending. Prior to entering production, Moller expects to have applied for patents on all key elements.
 
 
-8-

 
 
Page 9 graphic
 
Specifications of Moller’s high-performance engines are as follows:
 
 
High Performance
 
Single-Rotor
Two-Rotor
     
Specifications
Weight
Dimensions (L, Diameter)
Displacement
 
55 lb
14 in, 11 in
530cc
 
85 lb
19 in, 11 in
1060cc
     
     
Performance
Rated Power
Rated Speed
Maximum Speed
Idle Speed
Porting

80 hp
7000 RPM
7500 RPM
1800 RPM
Radial
 
160 hp
7000 RPM
7500 RPM
1800 RPM
Radial
     
     
General
All engines can operate on regular grade gasoline
     
 
 
To demonstrate the significance of Moller’s rotary engine technology for aircraft applications, the following table and graphs compare the high performance two-rotor engine to a standard piston engine of similar horsepower.
 
-9-

 
 
 
 
MOLLER ROTARY(1)
STANDARD PISTON(2)
POWER
160 hp
180 hp
WEIGHT
85 lbs
260 lbs
VOLUME
1.0 ft3
8.6 ft3
FRONTAL AREA
0.8 ft2
3 ft2
 
 
 
 
Horsepower per Pound
of Engine Weight
 
Horsepower per Cubic Foot
of Engine Volume
 
Horsepower per Square Foot
of Engine Frontal Area
 
                 
 
                 
                           
200
       
                                     
               
160
                   
   
2.0
                               
                                     
                                     
                                     
       
0.7
                           
                               
40
   
                   
15
               
                                     
   
Moller
Rotary(1)
 
Standard Piston(2)
     
Moller Rotary(1)
 
Standard Piston(2)
     
Moller Rotary(1)
 
Standard Piston(2)
   
 
           Moller Advantage:  3:1   Moller Advantage:  11:1   Moller Advantage:  5:1


(1) Two rotor, 530cc/rotor
(2) Avco Lycoming 0-360-A
 
 
Comparison of Moller rotary and Standard Piston Engines

Our Rotapower engine is in very limited production. It has been installed in a number of non-aircraft products for field-testing. The company is presently under contract to develop a diesel-fueled version of its engine. To date the company has demonstrated the ability to operate its engine on diesel fuel at about 60% of the power it can generate on gasoline.
 
Because of the military’s interest in lightweight engine running on diesel or jet fuel the company has previously received government support to achieve its present level of success. Presently the company is testing its engine for long-term durability that means establishing a time between overhauls of at least 1000 hours. It has successfully completed an FAA-type engine durability test of running the engine on gasoline for 150 hours at maximum power. If a 1000-hour-plus test can be achieved with diesel fuel the potential for military and civilian sales of an aircraft Rotapower engine is likely to increase. There is no assurance at this time that this endurance test will be successful. The company intends to license the production of the engines to a firm with the resources it believes will be adequate for the task. As part of these negotiations, the company hopes to retain a favorable position for the procurement of these engines for its own incorporation into potential products as well as continued testing and development.
 
-10-

 
Liability Insurance
 
Frank Crystal & Co. has provided us with a comprehensive insurance plan dated July 20, 2000. This plan outlines a Product Liability Proposal for an estimated initial product exposure of $6,250,000 in annual engine sales. (We estimated our annual sales for the purpose of obtaining the insurance quote and planning our operating costs – we have no particular basis for projecting such volume of sales as of any specific date in the future.) The cost identified in this proposal was an initial deposit of $25,000 per annum with an audit adjustable rate of $4.00 per $1,000 of sales below $6,250,000 and $3.00 per $1,000 of sales above $6,250,000. We did not accept the insurance proposal, but believe the premiums quoted (adjusted for inflation) to be representative of our costs to insure ourselves against product liability issued in the near-term. There is no guarantee that these rates will remain effective or apply to the Rotapower engine when actually needed. Higher costs could adversely impact our ability to produce and market an economically competitive engine.
 
Regulation of Aerobots and Engines
 
The Aerobot’s use is controlled by the FAA if it is untethered, except for military use. No federal, state or local approval is required at this time regarding the design or construction of either the engine or the Aerobot. However there is no assurance that such regulations will not come into existence in the future.
 
-11-

PATENTS
 
The current Moller International’s U.S. and Foreign Patents and Trademarks are listed below:
 
Name
Patent/Application Number
Country
Trademark Aerobot
326,708
Canada
Trademark Aerobot
1,367,510
US
Trademark Rotapower
2,101,936
US
Trademark Skycar
76,066,387
US
Trademark Skycar
1,739,687
US
Trademark Skycar
1,964,355
US
Trademark Skycar
2000/14455
South Africa
Trademark Skycar
2000/14454
South Africa
Robotic or Remotely
0279391
Europe
Robotic or Remotely
4795111
US
Stabilizing Control
1144249
Europe
Stabilizing Control
99/30392
International
Stabilizing Control
6,450,445
US
Rotary Engine Having
9827045
International
Rotary Engine Having
6325603
US
Rotary Engine Having
99/29821
International
Rotary Engine Having
6164942
US
Diesel/Otto Cycle Multi-Fuel
60/874,398
US
Diesel/Otto Cycle Multi-Fuel
60/918,130
US
VTOL Aircraft
5115996
US
VTOL Aircraft
0512345
Europe
VTOL Aircraft
91/00247
International
Improved Vertical Takeoff & Landing
6808140
US
Improved Vertical Takeoff & Landing
0303730
International
Improved Vertical Takeoff & Landing
2004/002796
International
Improved Vertical Takeoff & Landing
2004/254553
Australia
Improved Vertical Takeoff & Landing
2006/532279
Japan
Improved Vertical Takeoff & Landing
2514777
Canada
Vertical Takeoff & Landing
D498201
US
Vertical Takeoff & Landing
266,288
France
Vertical Takeoff & Landing
000243464-0001/0004
Europe
Vertical Takeoff & Landing
03709001.6
Europe
 
-12-

 
OUR MARKETS

Due to the innovative nature of the Moller Skycar, we cannot be certain of any level of market acceptance for the product. The following discussion of potential markets for our Skycar, Neuera and Aerobot products is based upon: 1) our observations and understanding of the ways various owners and operators of conventional fixed-wing and rotary-wing aircraft have used those vehicles; 2) our assumptions as to how the proposed design capabilities of our products may prove more efficient, utilitarian, or cost-effective features in those same or similar applications; and 3) anecdotal data from a small number of potential customers who have visited our facilities and expressed interest in the Skycar. However, until we can manufacture and deliver production model aircraft, we cannot be certain that operators will indeed realize benefits by employing our products in place of conventional aircraft employing significantly dissimilar technologies. Our ability to successfully market our Skycar and Aerobot products will depend in large part on the ability of those products to deliver a realizable benefit to users.

Skycar

Prior to full FAA certification (See “Regulation – Airworthiness Certificate Requirements” below), we hope to be able to sell our products to certain operators who are exempt from the civil aviation certification requirements. These may include:

•  
  military and para-military (rescue, drug enforcement, and border patrol)
•  
  wealthy individuals, for use within their own property in the U.S., Australia, Canada, etc.
•  
  foreign countries where FAA certification is not mandatory

No such customers have made any binding commitments with regard to our products.
 
Market Segments

Although there is no assurance we will be successful, we will attempt to develop markets for the Skycar® within the following aircraft operator segments:
 
 
General Aviation
Military
     
 
Private Individuals
Surveillance
 
Corporations
Air utility vehicle
 
Charter and Rental Services
Rescue
 
Aviation Schools
Medical Evacuation
 
Utilities
 
 
News Gathering
 
 
Police/Fire/Rescue/Ambulance
 
 
Drug Enforcement
 
 
Express Delivery
 
 
Border Patrol
 
 
We have relied upon our own research and anecdotal data from a small number of potential customers who have visited our facilities and expressed interest in the Skycar to support our belief that operators in the above categories will be interested in purchasing Skycars. Individual fixed- and winged-aircraft owners, charter and rental service owners, corporate officers, and a variety of other interested parties have given us their input on the suitability and desirability of the aircraft within these fields of use. However, such subjective input does not necessarily indicate that an economically viable market exists for the Skycar. Further, the above listing of potential market segments does not imply that Moller has contacted or received an expression of interest from each such market segment.
 
-13-

 
Competition

Today, there is no company that we are aware of offering a vehicle that is substantially similar to the Skycar®. Companies periodically emerge with preliminary designs, but to date none has succeeded in demonstrating a working model, owing presumably to the high cost of developing the required technologies. Moller has test-flown an experimental vehicle and is completing the construction of a production prototype. Moreover, we have applied for and obtained patents on many key aspects of the Skycar, which we expect will stave off direct competition to some extent, although there can be no assurance of our ability to successfully defend our patents against infringement. The nearest competition, insofar as we are aware, appears to be the six to nine passenger tilt-rotor BA 609 (Bell-Augusta) which is in development. Its announced price of $10 million, however, will likely constrain it to a different market than the target market for the Skycar®.

If we are able to successfully demonstrate the Skycar’s flight characteristics, we expect that such success will generate renewed competitive interest. Primary competition is expected to come from large aircraft manufacturers because they have the resources necessary to enter the personal VTOL market. Given adequate financing, however, any of a number of existing small and large aircraft manufacturers could develop competitive products. We believe we have one advantage that will prove difficult for potential competitors to overcome, however, and that is our rotary engine and ducted fan propulsion technology. The advantage, however, may depend upon our future ability to successfully defend our intellectual property rights against infringement, of which we cannot be certain.

It is difficult for us to predict the precise sources of competition for our products, or our competitive position in the marketplace, owing to the fundamental dissimilarities between our products and the products that historically have been used in the roles for which our products are intended. Although we may surmise significant benefits to customers in switching to our products, because they represent a unique and innovative technology there is no historical basis for believing that customers will in fact switch.

In marketing the Skycar as a vehicle for personal transportation, we will have to compete against the sundry existing forms of transportation with which people are already familiar and comfortable. These include the automobile, railroads, buses, commercial aviation, and general aviation, among others. Each mode of transportation offers a unique set of advantages and disadvantages, relating to cost, convenience, comfort, safety, and perhaps other considerations. In order for the Skycar to gain acceptance as a mode of personal transportation, prospective users will have to conclude that its particular advantages justify its cost. There is no assurance that sufficient numbers of people will perceive such advantages as to create a viable market for Skycar.

NEUERA™

Based on the M200X, the Neuera is both old and new. Originally conceived as a stepping-stone on the path to the development of the M400 Skycar®, the Neuera™ is now seen as a potential product that can stand on its own merits. Potentially a low cost, easy to operate and uniquely agile aircraft, the Company views the Neuera as a product that it can produce in the near-term that might gain wide acceptance as a recreational and/or utility vehicle. With the anticipated software and computer hardware implementations the Company also believes it can constrain specific versions of the M200-class vehicle to operational speeds and altitudes that would exclude it from the necessity of obtaining FAA approvals and inspections as well as allow it to be operated by persons with little to no formal flight training. The Company feels that under these conditions, the cost to produce and operate a Neuera would be significantly less than other types of aircraft, and make it even more attractive to own.

AEROBOTS®

Many of the potential markets for air-borne remotely flown vehicles (Aerobot®) are currently addressed by manned helicopters and airplanes, both of which in our opinion represent significantly less economical solutions. In addition, the unmanned Aerobot® can operate in areas that are prohibitively dangerous for manned aircraft. Furthermore, the Aerobot®’s ducted fan design is well suited for operation in confined quarters where the exposed propeller or rotor blades of alternative solutions (both manned and unmanned) pose significant risks to people nearby and to the aircraft itself.
 
-14-

 
Market Segments

We believe the Aerobot® is suitable for a variety of commercial and military applications:
 
 
Commercial
Military
     
 
Bridge and utility line inspection
Battle damage assessment
 
Building heat loss detection
Electronic counter measures
 
Smoke stack air quality testing
Target acquisition
 
Electronic news gathering
Surveillance
 
Sports event reporting
Communications relay
 
Hazardous waste detection
Decoy operations
 
Natural disaster damage assessment
 
 
Law enforcement
 
 
Fire surveillance
 
 

COMPETITION

To date there are three fundamentally different aircraft design approaches to providing this vertical takeoff and landing (VTOL) capability:
·
Helicopters
·
Tilt-rotor aircraft
·
Ducted fan aircraft

Helicopters
Capable of lifting heavy loads with modest horsepower, the helicopter is capable of hovering for extended periods and its top speed is low, but adequate in most paramilitary roles. However, the helicopter is very complicated with over 100 critical drive train moving parts and over 40 engine moving parts even when powered by a single engine. Failure of any one of the critical drive train or engine’s moving parts while hovering below 200 feet of altitude above the ground is likely to be fatal for all aboard. Above 200 feet the failure of any one of these moving components could be fatal. As a result of the helicopter’s complexity and potential consequences of a component failure the operating maintenance and insurance costs are very high.
 
 
Tilt-rotor Aircraft
The tilt-rotor configuration is in reality a helicopter with added capability, which makes it more complicated and expensive to operate.  By rotating the helicopter’s rotors into a vertical rotating plane, the tilt-rotor aircraft is able to translate at approximately twice the speed of the high performance light helicopter.  The purchase price of the Bell Augusta BA-609 tilt-rotor is approximately $1 million per passenger seat versus $200,000 for a high performance light helicopter like those made by Hughes.
   page 16a graphic
 
 
Ducted Fan Aircraft
There are two design directions to duct fan aircraft:
·
Enclose the twin rotors of a helicopter-like aircraft within protective ducts. The aircraft is often referred to as an “aerial jeep.”
 
·
Use many ducted fans with each fan driven directly by an engine, generally referred to as a volantor.
 
-15-

 
Aerial Jeep Approach

There have been a number of vehicles developed beginning in the 1950’s that attempted to use two large ducted fans driven by a central powerplant. A few of these are shown below along with the date of their introduction.
 
 
 page 16b graphic
 
Upper left:  Piasecki VZ-8 (1958), Upper right: Chrysler VZ-6 (1959), Lower left: Piasecki 59H (1962); Lower right:  X-Hawk (2006)
 
The limitations of this design (and that ultimately led to its termination after one or two prototypes) are as follows:
·  
The design involved a large number of critical components in which the failure of any one and at any altitude was likely to be fatal.
·  
Large ducted fans have inherently adverse reactions to airflow over the duct’s leading edge as they begin to translate. The instabilities created greatly limit the forward speed since the airflow can stall at the leading edge of the duct. Once this occurs the aircraft is lost. The Chrysler VZ-6 and Piasecki VZ-8 never attempted to exceed 50 mph in forward speed.
·  
The large fans made it difficult to locate a significant and/or bulky payload in a practical location.
·  
Their complex drive train with many of the elements of the helicopter meant that the vehicle’s initial cost would be high, and it would have result in maintenance and insurance costs.

Clearly if this approach had any merit further development would have occurred. It would seem that the recent X-Hawk, which is very similar to the previous “aerial jeep” concepts is relying on the adage “we repeat what we choose to forget.”

Volantors
The volantor uses enough ducted fans driven directly by individual engines to ensure that it can continue to hover on a hot day at altitude following the failure of an engine. This requires a minimum of five engines with eight chosen to minimize installed power.
 
-16-

 
Since hover stability and control are achieved only through engine control no added mechanical complexity is needed. This reduces cost and does not compromise the inherent statistical reliability of the volantor. Since the engines directly drive the fans a drive train is also eliminated.

The Company believes the volantor’s simplicity will allow it to achieve the lowest cost per seat for an aircraft with both VTOL-capability and a reasonably fail-safe design.

REGULATION

Airworthiness Certification Requirements

The Federal Aviation Act of 1958, as amended, vests in the Federal Aviation Administration (commonly, the “FAA”) the authority to regulate virtually all aspects of civil (i.e., non-military) aviation within the United States, including pilot certification, airspace usage, and the certification of aircraft. The FAA exercises its authority primarily through the issue and enforcement of regulations, known as the Federal Aviation Regulations (or “FAR”s), which are codified in Title 14 of the Code of Federal Regulations. Among other things, the FARs set forth the type certification requirements (known as “airworthiness standards”) for aircraft designs, the requirements for manufacturers’ production quality control systems, the requirements for airworthiness certification of individual aircraft, and the operations and maintenance rules for air carriers and repair facilities.

The Aircraft Certification Service (designated “AIR” by FAA) is the department within the FAA that develops and administers safety standards for aircraft and related products that are manufactured in the United States or are used by operators of aircraft registered in the United States. Related products include engines, propellers, equipment, and replacement parts. As a regulatory function, AIR’s mission priorities are:

1.  
Continued airworthiness and other activities related to continued operational safety;
2.  
Rulemaking and policy development; and
3.  
Certification.

Continued airworthiness is given the highest priority because these activities have the greatest impact on the safety of operating aircraft and because they promote the continued satisfactory performance of approved systems, such as manufacturers’ approved quality control systems. Rulemaking and policy development are considered to be a higher priority than issuing new certificates because the integrity of the certification program depends on the currency of applicable rules and policies.

One of the key goals of the certification and continued airworthiness standards is that each safety-critical system have a reliability of at least 0.999999999 per flight hour, which is another way of saying that a particular safety-critical component or system should have no more than a one-in-one-billion chance of failure for each flight hour. In pursuit of this goal, the regulations address a combination of requirements for design, analysis, test, inspection, maintenance, and operations. To permit design innovation, the regulations for the most part avoid specifying details such as materials, structural concepts, etc.; instead, designers are given a free hand as long as they accept the responsibility for showing that systems with innovative design features meet the FAA’s stringent reliability standards.

The cornerstone of AIR’s certification process is the “airworthiness certificate,” issued for each individual aircraft. Generally, regulations prohibit operating an aircraft without an airworthiness certificate, or in violation of any limitation or restriction of its airworthiness certificate. Certificates may be issued as either “standard” or “special.” Aircraft certificated in the Standard category are subject only to the same operating restrictions as most other production aircraft, that is, that they be operated within the manufacturers’ approved design limitations for the particular type. “Special” category aircraft might include experimental designs or homebuilt aircraft, for example, and may be subject to various operational restrictions, such as a prohibition against carrying non-crewmember passengers, or operating over densely populated areas.
 
-17-

 
For a civil aircraft to receive an airworthiness certificate, the FAA must determine that the aircraft conforms in detail to an FAA-approved type design and is in safe operating condition. Similar requirements exist for engines, propellers, and certain materials, parts and equipment installed on certificated aircraft. The first step in the certification of a new design is to establish which body of standards will apply. Because the original aircraft classifications of “airplane,” “airship,” “rotorcraft,” etc. would not accommodate the radical design of the Moller 400 Skycar® (and a couple of other VTOL designs in development by other companies), the FAA in the early 1990s established a new category and class of aircraft: “Powered-lift -- Normal Category,” and set about developing an airworthiness criteria manual that would serve as the basis for certification. As of this filing, the manual has not been finalized, but we expect that the draft will suffice for us to proceed with initial testing toward certification. In fact, the FAA has indicated to us that because of the uniqueness of the Skycar®, they expect to develop the final airworthiness criteria as we progress through the test program.

Once the company has been issued a “Type Certificate” for a particular design, each production aircraft we manufacture to those same specifications will be entitled to a “standard” airworthiness certificate. Even after the Type Certificate is issued, however, AIR has the authority to order us to make design changes if it determines that safety so requires.

Effect of Certification Requirements On Our Operations

An aircraft’s airworthiness certification bears on its usefulness to its owner or operator. In particular, the value to a prospective purchaser of an un-certificated or “special” certificated aircraft may be affected to some extent by the corresponding operational restrictions, which can prevent them from taking full advantage of the aircraft’s design capabilities. Certain operators, however, are exempt from the airworthiness requirements to varying degrees, and we expect that such operators may provide a market for our products prior to final FAA certification. See “Marketing Strategy” below.

Certification testing will be a recurring expense for us as we bring our products to market, and incorporate design improvements into previously certificated models. The initial type certification testing on each aircraft design will encompass design approvals for materials, spare parts, and other equipment to be installed. Therefore, if we or any of our potential strategic partners should choose to make a major modification in a model, such as an airframe re-design or changing a safety-related onboard system, the change may have to undergo additional testing to prove the new system’s reliability.

As a future aircraft manufacturer, we will undertake an ongoing obligation to monitor the serviceability and safety of the aircraft we expect to build and sell. We intend to establish and maintain, at our expense, a system of feedback and reporting whereby maintenance mechanics and inspectors can report back to us any and all failures, excessive or unpredicted wear, malfunctions, and flight safety issues of any kind that arise or are detected during maintenance and repair activities. Where appropriate, we will issue “service bulletins” to owners and operators of the affected model, detailing the problem and our recommendation for correction. Where the problem may potentially affect the safety of flight operations, we may recommend to the FAA that they issue an Airworthiness Directive (commonly called an “AD”) making the correction mandatory for every operator.

It is impossible to predict the future costs to us of ongoing compliance with federal airworthiness regulations; however, we expect that the costs will be manageable and that we will be able to absorb them in our pricing structure.

Pre-production Test Flight Program

Tethered flight tests have been conducted with the M200X aircraft using the same number of rotary engines (eight) and a forerunner of the type of electronic control and stabilization system as is employed on the M400 Skycar®. We have conducted extensive ground tests of all of the M400’s systems and have now completed the initial tethered flight tests and hover demonstration.

We began test flying the pre-production model of the M400 in late 2002. The aircraft was flown tethered so we could test and de-bug the stabilization and control electronics. These flight tests first explored systems functions in the safest portions of the flight envelope then expanded the envelope. We expect the entire test program, involving many hours of powered tests on the ground and in tethered flight, and several hundred hours of free flight tests, to extend until we achieve FAA “Experimental” certification, hopefully within the next 12 months. However, this forecast is based upon the assumptions that (a) the Company will succeed in raising sufficient capital to cover the costs of flight testing, (b) a number of remaining engineering problems will be resolved through further development, and (c) that the FAA will establish certification criteria for the Skycar that are within our technical capabilities. All of these assumptions remain highly uncertain as of the date of filing of this registration statement.
 
-18-

 
Pilot Requirements
 
Initially, a private pilot’s license will be required to pilot the Skycar®, primarily to ensure adequate flight management and navigational skills. To obtain a license, the prospective pilot must pass a flight test administered by a licensed flight instructor in order to demonstrate familiarity with its simplified controls. The Skycar® is not piloted like a traditional fixed-wing airplane and has only two hand control sticks that the pilot uses to inform the redundant computer control systems of his or her desired flight maneuvers. The Company plans to have its own pilot training program until the Skycar® is FAA certified. Once the Skycar® is certified, it is expected that all training programs will be provided by private and/or military aircraft flight training schools. The FAA has begun awarding “Powered Lift” pilot’s licenses.
 
MARKETING STRATEGY
 
In the early stages of sales development, we plan to market primarily through direct selling by Company sales specialists to individual customers within our target markets. Brand exposure may be accomplished through displays at trade shows and industry exhibitions, direct mail, advertisements in aviation publications, and cooperation with the news media. For at least three decades the news media has followed the progress of Paul Moller’s VTOL research and experimentation, underscoring the public’s perennial fascination with the promise of convenient and affordable air travel made as personal and individualized as automobile travel has been. We expect, but cannot be certain, that the Skycar will continue to receive periodic media coverage as we approach our first delivery schedules.
 
M400 Skycar®
 
Although sales of the Skycar® into most civilian markets will require that we be able to deliver an FAA certificated aircraft, the regulations permit certain types of operations by certain defined operators to be conducted without the standard airworthiness certification requirement. These markets include:
 
Government -- domestic and foreign agencies including:
 
Police departments
Border Patrol
Forest Service
Drug Enforcement agencies
Medical services
 
Initially, we anticipate that most sales to this segment will consist of Skycars® for test and evaluation. The craft’s capabilities should make drug enforcement agencies and Border Patrol viable candidates for early purchases. However, we have not received any commitments from those agencies to make any such purchases.
 
 
Military -- Initial sales to domestic and foreign military organizations will likely be for test and evaluation purposes. We anticipate that military organizations will utilize the Skycar® in critical applications for which competing aircraft are ill suited. For example, the Skycar® is expected to have superior speed, range and VTOL capability for the rescue of crews of downed aircraft with minimal risks. In addition, military subcontractors may wish to use the Skycar® as a platform for autonomous aircraft programs, one of the fastest growing areas of military spending. Autonomous aircraft applications currently utilize un-manned aircraft piloted by infrequent remote control commands or under the control of a monitoring computer. Such aircraft are currently in use by the military as remote data gathering platforms that feed information via radio or other communication links back to a flight control center. Moller expects that military organizations will wish to use Skycars® in a broader range of applications if volume production reduces manufacturing costs and overall pricing. Eventually, we believe the Skycar® has the potential to become the aerial counterpart of the “HMMWV,” the military’s current ground utility vehicle.
 
-19-

 
Corporations — Moller intends to sell the M400 Skycar® to corporations for use in the airspace above their property and we plan to specifically target companies in industries such as timber and oil that have survey and exploration needs. The Company also expects that it will be able to address a broader range of commercial applications in some foreign markets due to fewer legal restrictions than in the United States.
 
Assuming that the Skycar eventually receives full airworthiness certification, we will consider augmenting our sales efforts with retail dealerships, either existing or newly-franchised. Further, we intend to establish a network of regional maintenance and repair facilities, either Company-owned or partnered with existing service facilities, to handle routine maintenance and repair services for non-military Skycars.
 
Neuera™
 
The Neuera is a directed-thrust vertical takeoff and landing aircraft in the late stages of production design. The design relies on thrust generated by the eight ducted fans to lift the vehicle, as well as provide for forward movement up to about 100 miles per hour. The eight ducted fans are located in a circular pattern around the vehicle and embedded into the saucer-like fuselage. Four of the ducted fans have moving vanes at the exit of the duct, which are designed to deflect the thrust to provide forward movement and directional control. Each of the individual engines directly drives a fan, with engine speed being the determining factor for the amount of thrust produced. The Company has developed a flight control system that maintains stability through the use of precise throttle commands to each engine. Any un-commanded change in the attitude of the aircraft will be detected and the system will issue multiple commands per second until it is corrected.
 
The Neuera volantors are intended for use "off-road" somewhat like an ATV or hovercraft would be used. The Neuera is meant as an alternative to a trail bike, boat, jeep, airboat or other off-road vehicle to access remote areas that would otherwise not be open for travel. It is not intended for use above roads, trails, walkways, etc. and especially not within an urban area where there are lots of other alternatives. The exception to this would be for emergency services like fire fighting, search and rescue, and emergency medical evacuation from high-rise buildings and such.
 
It is the Company’s intent to directly market the Neuera to end-users initially, and then if demand is sufficient, solicit distributors from the among existing high-end recreational product distributors such as boat, snowmobile and ATV dealers.
 
MANUFACTURING
 
Skycars®
 
We believe that the long-term success of any aircraft manufacturer is dependent on the quality of the vehicle produced. The quality of both the design and manufacturing processes is important. Moller expects to purchase or contract out the major Skycar® components that require capital intensive equipment, subject to Moller’s rigid specifications and stringent quality assurances and testing requirements. We expect that some components and parts will be finish-machined in Moller' s facilities when they have proprietary technological content, require special finishing, or are small custom parts with little tooling required. Moller plans to perform quality control, assembly and final test work at its own facilities. During 2011 and 2012 any manufacturing work will necessarily be executed using low volume techniques. Special tooling and manufacturing processes are expected to be developed for higher volume production in the future.
 
Airframe manufacture encompasses the assembly of the major airframe components (fuselage, wing and nacelles) and installation of fuel and oil tanks, parachutes, seats, canopy, landing gear, and the vertical thrust vane system. Moller anticipates that a key strategic partner will be required in order to complete composite airframe construction. Moller will require a complete test of all systems through an extensive flight test program before final release.
 
-20-

 
Important electronic systems include computer stabilization, pilot controls, display, power regulation and engine controls. Electronics manufacture will include the following activities:
 
Assembly of electronic sub-systems
Burn-in of electronic components
Mounting of printed circuit boards
Fabrication of electronic enclosures
Interconnection of components and wiring
Installation of equipment in airframe
 
While no specific firm has been identified at this point, we expect to work with one or two key strategic partners to provide electronics and avionics systems for the Skycar®.
 
The quality control department will be an autonomous organization carefully integrated into every aspect of the production operation. Every employee will play a part in assuring the highest possible level of quality and performance.
 
Neuera™
 
The Neuera is remarkably simple to manufacture. The complete airframe is composed of two halves with tooling in place for their manufacture. This allows the production of approximately one airframe per workday with the existing molds. The Company believes this is sufficient to address the near-term production requirements through our third year of production. With present facilities of only 35,000 square feet, high-volume airframe production would have to occur elsewhere and we have not evaluated the cost associated with expanding production capacity. All electronics will be subcontracted, as will the engines and their support structure. Assembly of the first year’s production is projected to be accomplished within the present facility but lower cost facilities may be available or, if necessary, our operations might be cost-effectively expanded (space available for additional 50,000 square feet). Alternatively assembly could be moved to facilities nearby. Engine components may be subcontracted with assembly and inspection occurring within the present facility, but the simplicity of the Rotapower engine makes its assembly and test operations elsewhere feasible.
 
In the simplest of terms, the volantor is basically made up of a number of computers coupled through algorithms to a number of engines. Both of these components lend themselves to volume production in which economy of scale can have a dramatic effect on cost.
 
Aerobots®
 
Both electric-powered and fuel-powered Aerobots can be produced in the present Moller facility in volumes of up to four per week, which is sufficient for currently projected production. The electric-powered Aerobots consists of off-the-shelf components and high performance motors, electronic control boards, and a composite frame manufactured by Moller. Both individual components and final assembly are inspected to assure product quality. The fuel-powered Aerobots utilizes the Moller rotary engine (single-rotor) and thus requires more extensive facilities. The frame of the fuel-powered Aerobots is of welded construction; the fuel tank, duct and cowling are composites. Some component and subassembly tests will supplement the basic assembly quality control. Costs of manufacture are expected to decrease for both Aerobots as production volumes increase. However, no specific amount or rate of decrease can be projected at this time.
 
In most cases, customers require a complete operating system, not just a vehicle. Moller plans to supply the radio control system and, in some cases, install the interface for the payload sensor system.
 
Engines
 
We expect that our Freedom Motors affiliate will supply most of the primary engine components necessary to generate a FAA certified Rotapower® engine. For that reason various elements are already incorporated into the basic engine design to satisfy future requirement for FAA certification. For example, dual spark plugs and an appropriate thrust load carrying bearing are already part of the basic design. Moller will inspect, assemble, and test completed engines prior to their sale or incorporation in Skycars® and Aerobots®.
-21-

 
EMPLOYEES

We currently have 3 full-time management and executive management personnel and 3 part-time employees. We have no specific plans for a significant increase or decrease in the number of our employees. Future staffing needs will depend in large part on any partnering or out-sourcing arrangements we may make for manufacturing of components and sub-systems.
 

NEED TO RAISE ADDITIONAL CAPITAL TO COMPLETE DEVELOPMENT AND FLIGHT TESTING

We estimate a cost of $26 million to demonstrate a flight worthy pre-production model of the M400 Skycar. Likewise, $24 million is the estimated start up cost for the production of the Neuera volantor. The Company’s current plan assumes that the required funds will be raised through the sale of equity, although no offer has been made nor are talks underway with any potential purchasers.

RISK FACTORS

Business Viability

We are still in the process of developing our products, and have yet to produce any meaningful level of sales or any profits from these products. There is no clear basis for judging our viability as a business enterprise, or our management’s ability to develop the company to profitability.
 
Limited Experience

Our management has limited experience in aircraft manufacturing. While our management has considerable general business and management experience, and some specialized knowledge and experience in the in the aircraft industry, none of our current management has significant experience managing a business that manufactures and markets aircraft. Accordingly, our success will depend in large part on our ability to recruit or to contract individuals with specialized skills and knowledge relating to aircraft manufacturing and marketing without adversely impacting the overall budget for employee compensation. There is no assurance that we will be successful in retaining such specialists.

Need for Additional Capital

We will have to raise substantial amounts of capital before we can produce meaningful revenues from sales of our products with no assurance as to when or at what level revenues will commence. We estimate that we will need $26 million to demonstrate a fully-functional, pre-production prototype Skycar, and an additional $40 - $90 million to complete FAA certification and begin initial production of certified aircraft. Alternatively we believe we would require $24 million to fund the production startup of the Neuera. Should we be unsuccessful in raising the needed capital, we may never develop into a viable business enterprise. At this time, we have no specific arrangements with any underwriters for the placement of our shares, nor any binding commitments from any person to invest in the Company.

Dilution of Share Value

We will likely sell shares of our stock to raise capital needed to fund future operations. Any such sales will have the effect of reducing the proportionate ownership of existing shareholders.
 
-22-

 
Impact of Emerging Technologies

Evolving technologies may force us to alter or even abandon our product designs, or may render our proprietary technologies obsolete or non-competitive. Although we believe strongly in the existence of a substantial market for our products, new technologies are being developed and deployed at a rapid rate. It is possible that as time goes on, technological advances in such areas as power plants, propulsion systems, airframe materials, manufacturing systems, and perhaps others, will require us to make costly changes in our strategy or additional investments in equipment and in research and development in order to become or remain competitive.

Impact of Potential Product Liability Claims

The Company may expend an inordinate amount of its resources in litigating product liability claims. Historically, manufacturers of aircraft have been held by the courts to be liable for injuries suffered by crewmembers, passengers, and others where some design deficiency or manufacturing defect was found to have contributed to the injury. Although we intend to take all reasonable precautions in the design and manufacture of our products to ensure that they can be operated safely and without undue risk to life, health, or property, and we intend to purchase insurance against potential product liability claims, it is nevertheless possible that our operations could be adversely affected by the costs and disruptions of answering such claims.

Impacts related to Sarbanes-Oxley Act of 2002

We may be exposed to potential risks relating to our disclosure controls including our internal controls over financial reporting. Section 404a of the Sarbanes-Oxley Act of 2002 (“SOX 404”) requires public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K.

Effective with this annual report for the fiscal year ended June 30, 2008, we have been required to evaluate our internal control systems in order to allow our management to report on our internal controls.

In the event we have identified significant deficiencies or material weaknesses in our internal controls that we cannot correct in a timely manner with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could suffer.

Impacts related to M200 sales projections

The Company’s ability to obtain an exemption from the FAA for the use of the M200G without a pilot’s license may impact its potential marketability and/or use and therefore has an undetermined impact on potential sales.

Impact related to majority shareholder’s financial status

Moller International’s President and majority shareholder, Paul S. Moller (“Dr. Moller”), has filed for protection under the Chapter 11 reorganization provisions of the federal bankruptcy law. The application was filed on 18 May 2009 in U.S. Bankruptcy Court for the Eastern District of California in Sacramento. With the outcome of these proceedings as yet undetermined there is uncertainty over the potential impact on the Company, if any. The impact of this action on the Company’s ability to raise needed capital as well as the possibility that Dr. Moller could lose some or all of his holdings in the Company to third party creditors has not been determined.

Item 2. PROPERTY

We currently lease and occupy a 34,500 square foot building located in Davis, California, which is owned by Dr. Paul S. Moller, the majority shareholder of Moller International. (see Note I to the financial statements)
 
-23-

 
Item 3. LEGAL PROCEEDINGS
 
J.F. Wilson & Associates Ltd. V. Estate of Percy Symens, et al.
 
Moller International (MI) is named as a defendant in a lawsuit pending in Yolo County, California Superior Court – J.F. Wilson & Associates Ltd. V. Estate of Percy Symens, et al. The complaint, filed in April 2005, alleges that MI unlawfully discharged solvents into the environment while doing business at 203 J Street and 920 Third Street in Davis, California during 1968 to 1980. The complaint seeks injunctive relief and damages of an unspecified amount. The Company’s Answer, which denies the allegations in the complaint, was filed in June of 2005, and initial discovery commenced in August of 2005. The case has not been set for trial. On December 20, 2006, defendant and cross-complainant Donald M. Miller died; and on January 7, 2008, the court ordered a stay of proceedings until the court’s Probate Department rules on an application for letters of instruction in connection with Mr. Miller’s estate. The court’s Probate Department has not yet issued a ruling, and the stay remains in place.
 
In a related administrative proceeding initiated on September 26, 2006, the California Central Valley Regional Water Quality Control Board (RWQCB) issued a draft Cleanup and Abatement Order (CAO) in connection with the property at 920 Third Street. MI was named as one of the responsible parties in the draft CAO, and intends to challenge the characterization of MI as a discharger of environmental contaminants, while also complying with the orders of the RWQCB. MI and other parties have submitted comments regarding the draft cleanup and abatement order. The draft CAO has not been finalized. The property owner is proceeding with work to investigate, characterize and remediate the soil and groundwater contamination at this property, with RWQCB oversight. 
 
MI’s probable loss has been estimated at this time in the range of $200,000 to $1,000,000 and has accrued $200,000. It is reasonably possible that these estimates may be significantly revised as the site investigation and other research and analysis proceeds. MI will continue to assess its potential loss in the future as more information is available. 
 
United States Bankruptcy Court: Paul S. Moller/Rosa Maria Moller, Case #09-29936-C-11
 
Moller International’s President and majority shareholder, Paul S. Moller (“Dr. Moller”), has filed for protection under the Chapter 11 reorganization provisions of the federal bankruptcy law. The application was filed on 18 May 2009 in U.S. Bankruptcy Court for the Eastern District of California in Sacramento.
 
The proceedings are underway but no final outcome has yet to be made. MI will continue to assess it potential loss in the future as more information is available.
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
During the 2008 Annual Shareholders meeting held on December 6, 2008, the following individuals were elected to the MI Board of Directors by unanimous vote of shareholders present: Paul S. Moller, Faulkner White, Jim Toreson, Mike Shanley, and Stephan P. Smith.
 
-24-

 
PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Moller International common stock is being publicly traded on the OTC-BB stock market. According to NASDAQ Financial data, the average adjusted closing price has ranged from a low of $0.17 to a high of $0.54 per share during this reporting period with a trading volume of 23,200 shares per trading day.

The following table is a summary of Moller International stock performance by calendar quarter since being listed by the OTC market in August 2002.
 
 
 High
 Low
 
2002-Q3 (28 Aug to 30 Sep 2002)
$7.50
$4.15
 
2002-Q4 (1 Oct 2002 to 31 Dec, 2002)
$6.50
$2.00
 
2003-Q1 (1 Jan 2003 to 31 Mar 2003)
$2.20
$0.70
 
2003-Q2 (1 Apr 2003 to 27 Jun 2003)
$1.00
$0.34
 
2003-Q3 (1 Jul 2003 to 30 Sep 2003)
$0.90
$0.50
 
2003-Q4 (1 Oct 2003 to 30 Dec 2003)
$2.30
$0.65
 
2004-Q1 (1 Jan 2004 to 31 Mar 2004)
$1.50
$0.95
 
2004-Q2 (1 Apr 2004 to 30 Jun 2004)
$1.45
$1.30
 
2004-Q3 (1 July 2004 to 30 Sep 2004)
$2.12
$0.95
 
2004-Q4 (1 Oct 2004 to 31 Dec 2004)
$1.50
$1.25
 
2005-Q1 (1 Jan 2005 to 31 Mar 2005)
$1.30
$0.78
 
2005-Q2 (1 Apr 2005 to 30 Jun 2005)
$1.20
$0.82
 
2005-Q3 (1 July 2005 to 30 Sep 2005)
$1.15
$0.93
 
2005-Q4 (1 Oct 2005 to 30 Dec 2005)
$1.40
$0.60
 
2006-Q1 (1 Jan 2006 to 31 Mar 2006)
$1.01
$0.75
 
2006-Q2 (1 Apr 2006 to 30 Jun 2006)
$1.00
$0.53
 
2006-Q3 (1 Jul 2006 to 30 Sep 2006)
$0.75
$0.38
 
2006-Q4 (1 Oct 2006 to 31 Dec 2006)
$0.65
$0.32
 
2007-Q1 (1 Jan 2007 to 31 Mar 2007)
$0.48
$0.31
 
2007-Q2 (1 Apr 2007 to 30 Jun 2007)
$1.01
$0.37
 
2007-Q3 (1 Jul 2007 to 30 Sep 2007)
$1.25
$0.40
 
2007-Q4 (1 Oct 2007 to 30 Dec 2007)
$1.05
$0.51
 
2008-Q1 (1 Jan 2008 to 31 Mar 2008)
$0.80
$0.46
 
2008-Q2 (1 Apr 2008 to 30 Jun 2008)
$0.76
$0.55
 
2008-Q3 (1 Jul 2007 to 30 Sep 2008)
$0.54
$0.51
 
2008-Q4 (1 Oct 2007 to 30 Dec 2008)
$0.35
$0.32
 
2009-Q1 (1 Jan 2008 to 31 Mar 2009)
$0.21
$0.19
 
2009-Q2 (1 Apr 2008 to 30 Jun 2009)
$0.18
$0.17
 
       
 
Shareholders of Record
 
As of October 12, 2009 there are 601 shareholders of record for common shares of Moller International.

Dividends

The holders of our common stock have equal ratable rights to dividends from funds legally available for dividend payments when, as and if declared by the Board of Directors of the Company.
 
-25-

 
To date we have not paid or declared any dividends and we have no intention of declaring or paying any dividends in the foreseeable future.

If we decide to pay dividends, that decision will be made by our Board of Directors, which will likely consider, among other things, our earnings, our capital requirements and our financial condition, as well as other relevant factors. Our Board of Directors may declare and pay dividends to the Company's shareholders in the form of bonus shares. The shareholders would receive bonus shares in lieu of cash dividends, if any, declared and paid by the Company.

Item 6. SELECTED FINANCIAL DATA
 
Not applicable
 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
 
Year Ended June 30, 2009

Moller International continues its research and development activities on the Skycar project primarily in the area of its flight control system (FCS) and the performance advantages of introducing a hybrid approach to generating the high power required to take off and land. These efforts are an extension of successful flights throughout the previous years and extensive ongoing engine tests, which we believe, will result in incremental improvements to the existing prototype, future prototypes and/or production aircraft, should we continue to operate. Staffing levels declined as the company continues to cut labor costs in an effort to conserve available operating funds. Management was successful in keeping Administrative salaries and wages below last year’s level. Seeking additional funding remains a top priority for the company. The Company continues with its initial stages of low-volume production for a variation of its M200X that would allow it to operate without a pilot’s license and a rescue version capable of extracting three people at a time from the side of a skyscraper. Although there is no assurance that this vehicle will meet with success in the market place, the Company is actively seeking support for the program and, if found, may choose to move more rapidly into the production of these vehicles.

Fiscal 2009 compared to 2008

Results of operations for the 2009 fiscal year varied from 2008. We incurred net losses of $2,672,094 and $2,004,555 in fiscal 2009 and 2008 respectively.

Consolidated loss per share was $.06 and $.04 for the 2009 and 2008 fiscal years, respectively. We generated no significant amount of revenue in either fiscal year. We are currently using cash to fund operations at an approximate rate of $79,000 per month, net of engineering revenue received, the deferral of certain executive salaries at an annual rate of $250,000, the deferral of building rent of $496,800 per year and the recognition of compensation expense related to the fair market value of stock issued for services and stock options granted to our employees of $1,005,079 and $257,406 in fiscal 2009 and 2008, respectively.

Cash salaries and wages, including benefits, remained relatively constant, and representing 32% and 35% of total expenses for the 2009 and 2008 fiscal years, respectively. With the company continuing to conserve cash on hand, some employees voluntarily consented to defer pay, resulting in a total of $239,562 of accumulated short-term deferred payroll excluding accrued interest as of June 30, 2009. Interest expense increased by $31,433 over the prior year. Loans from Dr. Moller are unsecured and carry a 10% annual interest rate. At June 30, 2009, the outstanding principal amount was $3,105,357. Loans from Dr. Moller may be subject to the provisions of Dr. Moller’s Chapter 11 filing and future terms and conditions might vary depending on the party or parties in control of these debts.

As of June 30, 2009, Dr. Moller had a balance of $1,085,414 in deferred wages along with accrued interest.
 
Revenues decreased by $10,938 in 2009. Contract revenues from our affiliated entity, Freedom Motors decreased $10,938. Only the amounts received in cash from this affiliated entity are recognized in revenue. Miscellaneous revenues remained relatively constant. These increases are not indicative of any meaningful revenue trends.
 
-26-

 
Going Concern

MI has a net loss of $2,672,094 for fiscal 2009 and has an equity deficit of $12,450,072. MI currently has no revenue-producing products and is continuing its development of products in both the Skycar and Rotary engine programs. Successful completion of product development activities for either or both of these programs will require significant additional sources of capital. Continuation as a going concern is dependent upon the Company’s ability to obtain additional financing sufficient to complete product development activities and provide working capital to fund the manufacture and sale of MI’s products. These factors raise substantial doubt as to MI’s ability to continue as a going concern.

Liquidity and Capital Resources

Management is currently pursuing additional sources of capital in quantities sufficient to fund product development and manufacturing and sales activities.

Historically, certain shareholders, including the majority shareholder provided funding in the form of short-term notes payable. In addition, the majority shareholder granted us a deferral on the payment of rent for our building. There is no assurance that we will continue to receive funding from shareholders, particularly our major shareholder given he recently filed for protection under the federal Chapter 11 reorganization provisions. Consequently, we are evaluating several alternatives to raise the additional capital through debt or equity transactions. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The majority shareholder of MI is providing funds received from the refinance of both real property owned by him personally and real property owned by a limited partnership of which he is the general partner, in the form of short-term, interest-bearing demand loans to MI. Due to Dr. Moller Chapter 11 filing, short-term loan terms may require the approval of the bankruptcy court. As of June 30, 2009, a total of $3,105,357 has been loaned to MI from these transactions. In addition, he has deferred payment of current year building rent owed by MI of approximately $496,800. The total deferred rent owing to Dr. Moller at June 30, 2009 is $1,715,690.

There can be no assurance that this majority shareholder will continue to have the ability to continue to make such short-term loans to MI in the future. Dr. Moller is under no legal obligation to provide additional loans to the company. In the event that he cannot continue to make such loans, or that MI does not receive funds from other sources, MI may be unable to continue to operate as a going concern. The impact of Dr. Moller’s recent filing for protection under Chapter 11 reorganization provisions may adversely affect his ability to provide loans to the Company.

There is no assurance that the funds generated from these activities or other sources will be sufficient to provide MI with the capital needed to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
 
 
-27-

 
Revenue Recognition
 
We recognize revenue based on the four principles established in GAAP. Those principles state that revenue generally is realized or realizable and earned when all of the following criteria are met:
 
1.  
Persuasive evidence of an arrangement exists,
 
2.  
Delivery has occurred or services have been rendered,
 
3.  
The seller's price to the buyer is fixed or determinable, and,
 
4.  
Collectability is reasonably assured.
 
Revenue generated from our former subsidiary, Freedom Motors, under the Technology agreement is only recognized to the extent amounts are collected due to collectability concerns.

Stock Based Compensation

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.

MI recognizes stock based compensation for options granted to its employees in accordance with SFAS 123R. MI estimates the fair market value of the awards issued to employees using a Black Scholes pricing model. The model is based on assumptions including (1) fair market value of its common stock on the date of grant; (2) volatility of its common stock at 152.95 (3) discount rate at 1.45 and (3) expected dividend of zero. As a result of these assumptions, MI recognized total stock based compensation of $1,029,403 and $72,867 during the fiscal years ended June 30, 2009 and 2008.
 
Intangible Asset and Impairment

Costs to develop and perfect patents are capitalized and amortized over the lesser of the patent’s economic life or legal life. The carrying value of patents is reviewed periodically to determine whether the patents have continuing value. For the year ended June 30, 2009, we evaluated the fair value of our intangible assets related to patents and based on that analysis, we recorded an impairment charge of $72,529.
 
-28-

 
Item 8. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
Moller International, Inc.
Davis, California
 
We have audited the accompanying consolidated balance sheets of Moller International, Inc. (the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company suffered recurring losses from operations and has a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


MALONE & BAILEY, PC
www.malone-bailey.com
 Houston, Texas

October 13, 2009

 
-29-

 
 
MOLLER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
   
   
June 30, 2009
   
June 30, 2008
 
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 3,276     $ -  
Advances to Employees
    639       362  
Accounts Receivable Trade
    -       9,800  
Accounts Receivable Other
    441       3,401  
Total current assets
    4,356       13,563  
                 
PROPERTY AND EQUIPMENT, net of accumulated depreciation
    11,214       11,933  
                 
OTHER ASSETS
               
Patent costs
    -       72,529  
Others
    353       1,167  
Total other assets
    353       73,696  
                 
    $ 15,923     $ 99,192  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
CURRENT LIABILITIES
               
Accounts payable
  $ 644,099     $ 545,171  
Accrued liabilities
    469,130       433,448  
Accrued liabilities-related parties
    486,984       413,290  
Accrued liabilities-majority shareholder
    2,887,346       2,453,161  
Notes payable-other
    978,182       958,078  
Note payable - majority shareholder
    3,105,357       2,897,399  
Notes payable - minority shareholders
    369,307       348,671  
Notes payable - related parties
    1,735,766       1,737,596  
Deferred wages - employees
    309,643       155,921  
Customer deposits
    394,767       394,767  
Total current liabilities
    11,380,581       10,337,502  
LONG TERM LIABILITIES
               
Deferred wages and interest-majority shareholder
    1,085,414       761,333  
Total long term liabilities
    1,085,414       761,333  
                 
Total liabilities
    12,465,995       11,098,835  
 
Commitments and contingencies (Note I)
               
 
STOCKHOLDERS' DEFICIT
               
Common stock, authorized, 150,000,000 shares, no par value,
               
45,980,565 and 45,736,914 issued and outstanding respectively
    32,712,733       31,491,068  
Accumulated deficit
    (45,162,805 )     (42,490,711 )
Total stockholders' deficit
    (12,450,072 )     (10,999,643 )
                 
    $ 15,923     $ 99,192  

See summary of significant accounting policies and notes to financial statements.
-30-

 
MOLLER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2009 and 2008
 
   
2009
   
2008
 
REVENUE:
           
Revenues - related parties
  $ 519,386     $ 530,324  
Other revenue
    23,518       21,993  
Total revenues
    542,904       552,317  
                 
COST OF REVENUE:
               
Direct project expenses
    126,773       285,922  
Gross Profit
    416,131       266,395  
                 
OPERATING EXPENSES
               
Selling, general and administrative
    1,911,934       1,198,660  
Rent expense - majority shareholder
    528,145       527,389  
Depreciation and amortization
    720       1,437  
Impairment of intangible assets
    72,529       -  
Total expenses
    2,513,328       2,013,408  
                 
Operating Loss
    (2,097,197 )     (1,461,091 )
                 
OTHER EXPENSE
               
   Interest expense
    271,022       264,931  
   Interest expense - majority shareholder
    303,875       278,533  
    Total other expense
    574,897       543,464  
                 
NET LOSS
  $ (2,672,094 )   $ (2,004,555 )
                 
Loss per common share, basic and diluted
  $ (0.06 )   $ (0.04 )
                 
Weighted average common shares outstanding
    45,875,455       45,712,315  

See summary of significant accounting policies and notes to financial statements.
-31-

 
MOLLER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008

   
Common Stock
   
Accumulated
       
   
Shares
   
Amount
   
Deficit
   
Total
 
Balances at June 30, 2007
    45,725,979     $ 31,233,662     $ (40,486,156 )   $ (9,252,494 )
                                 
Shares issued for services
    71,650       46,767       -       46,767  
Fair value of employee stock options
    -       202,105       -       202,105  
Fair value of executive stock options
    -       8,534       -       8,534  
Canceled Shares
    (60,715 )     -       -       -  
Net loss
    -       -       (2,004,555 )     (2,004,555 )
Balance at June 30, 2008
    45,736,914       31,491,068       (42,490,711 )     (10,999,643 )
                                 
Shares issued for Services
    243,651       85,418       -       85,418  
Fair value of employee stock options
    -       63,021       -       63,021  
Fair value of executive stock options
    -       962,410       -       962,410  
Shares issued for services
    -       66,500       -       66,500  
Imputed interest
    -       44,316       -       44,316  
Net loss
    -       -       (2,672,094 )     (2,672,094 )
Balance at June 30, 2009
    45,980,565     $ 32,712,733     $ (45,162,805 )   $ (12,450,072 )
 
See summary of significant accounting policies and notes to financial statements.
-32-

 
MOLLER INTERNATIONAL, INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
For the Years Ended June 30, 2009 and 2008
 
       
   
2009
   
2008
 
Operating activities
           
Net loss
  $ (2,672,094 )   $ (2,004,555 )
Adjustments to reconcile loss
               
to net cash used y operating activities
               
Impairment expense
    72,529       -  
Depreciation and amortization
    719       1,437  
Stock-based compensation
    1,177,349       257,406  
Imputed interest
    44,316       -  
Change in operating assets and liabilities:
               
Accounts receivable
    12,483       52,907  
Accounts payable
    98,928       195,979  
Accrued liabilities – related parties
    507,879       775,954  
Other liabilities
    477,803       -  
Accrued liabilities
    35,682       -  
Customer deposits
    -       (15,000 )
Other assets
    814       (108 )
Net Cash Used in Operating Activities
    (243,592 )     (735,980 )
                 
Investing Activities
               
Purchase of equipment
    -       (1,856 )
Proceeds from sale of equipment
    -       350  
Net Cash Used in investing Activities
    -       (1,506 )
                 
Financing Activities
               
Proceeds from related party note payable
    288,448       521,375  
Payments on related party note payable
    (61,684 )     (214,714 )
Proceeds from note payable
    20,104       433,110  
Payments of notes payable
    -       (8,000 )
Net Cash Provided by Financing Activities
    246,868       731,771  
                 
Net increase (decrease) in cash
    3,276       (5,715 )
Cash, beginning of year
    -       5,715  
Cash, end of year
  $ 3,276     $ -  
                 
Supplemental Disclosures
               
Interest paid
    -       -  
Income taxes paid
    -       -  

See summary of significant accounting policies and notes to financial statements.
-33-

 
MOLLER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Moller International has for the past fifteen years devoted most of its efforts to the design and development of a Vertical Takeoff and Landing (VTOL) vehicle known as the Skycar. One of the enabling technologies for the Skycar is the Rotapower® rotary engine, which has been the focus of our attention for the past two years. The Company is now attempting to attract a suitable manufacturer for its engine technology and is currently in discussions with several potential licensees and /or buyers of this technology although there is no assurance at this stage that the Company will be successful in these efforts.

Moller International Inc., (MI) consolidates the accounts of its wholly owned, inactive subsidiaries, Aerobotics Inc. (AI) and Moller Corporation (MC). All intercompany transactions and balances have been eliminated.

Dr. Paul S. Moller is the majority shareholder of MI.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and include the accounts of MI and its wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Reclassifications

Certain items from the June 30, 2008 consolidated financial statements have been reclassified in the June 30, 2009 financial statements to conform to current year presentation.

Cash and Cash Equivalents

We consider all highly liquid debt instruments with an initial maturity date of 90 days or less to be cash equivalents.

Property and Equipment

Property and equipment is stated at cost net of accumulated depreciation. Depreciation is recorded utilizing the straight-line method over the estimated useful lives, ranging from five to fifteen years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Intangible Asset and Impairment

Costs to develop and perfect patents are capitalized and amortized over the lesser of the patent’s economic life or legal life. The carrying value of patents is reviewed periodically to determine whether the patents have continuing value. For the year ended June 30, 2009, we evaluated the fair value of our intangible assets related to patents and based on that analysis, we recorded an impairment charge of $72,529.
 
-34-

 
Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"), we periodically assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value may not be recoverable. FAS 144 requires impairment losses to be recorded on long-lived assets used in operations when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. As of June 30, 2009 and 2008, there were no impairments to our long-lived assets.

Fair Value of Financial Instruments

The carrying value of short-term financial instruments, including cash, accounts receivables, accounts payable and accrued expenses and notes payable approximate fair value due to the relatively short period to maturity for these instruments.

Revenue Recognition
 
We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured
 
For the years ended June 30, 2009 and 2008, substantially all of our revenue was derived from services provided to Freedom Motors, an affiliated entity and former subsidiary, which shares common ownership with some of the existing shareholders of MI, under the 1998 Technology Development and License Agreement. Under this agreement, we provide engineering services related to the scientific and engineering technical support for the rotary engine. Specifically, we provide personnel and facilities as required to adapt the Rotapower engine to applications where the potential exists for high volume production. In addition, we also provide bookkeeping and other administrative services.

Delivery is considered complete when a specific defined task or milestone is completed, as demonstrated by the issuance of engineering documents (procedures, drawings, models, prototypes, etc.) and provided to Freedom Motors or its assigns. The date the information or material is provided to Freedom Motors is considered the delivery date.

However, because Freedom Motors is a startup company, it has not been in a position to pay until it acquired contracts and received revenue from those contracts. Consequently, collection is not reasonably assured until Freedom Motors actually makes the payment. As a result, the final criterion is met when we receive the payment for services and we then recognize revenue in an amount equal to the fees received.

Because collectability is uncertain, we do not record any accounts receivable related to accumulated revenues billed but not yet collected. As of June 30, 2009 and 2008, the total accumulated and uncollected billings totaled $9,563,587 and $8,068,632, respectively. These amounts have been fully reserved.

Other revenue derived from the sale of t-shirts, model cars, information packets and other items is recognized at the time of sale, which is when the merchandise is delivered.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation

We account for stock-based compensation issued to employees and non-employees as required by SFAS No. 123R Share Based Payments (“SFAS 123R”) and related interpretations. Under the provisions of this statement, stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, usually the vesting period, using the straight-line method. Share-based awards that vest upon grant are expensed immediately.
 
-35-

 
Interest expense

Certain loans obtained from related parties do not bear interest. As such, we have imputed interest on these related party loans at a rate of $44,316 and $0 for the years ended June 30, 2009 and 2008, respectively, which are based on current market rates for similar type of loans.

Income Taxes

We have adopted the provisions of SFAS 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized.

We have adopted the provisions of FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, we recognize tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. To date, we do not have any unrecognized tax benefits.

Loss Per Share (LPS)

Basic LPS excludes dilution and is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted LPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity. Diluted LPS is the same as basic LPS for all periods presented because all potentially dilutive securities have an anti-dilutive effect on LPS due to the net losses incurred. At June 30, 2009, the total number of shares of common stock relating to outstanding stock options and other potentially dilutive securities that have been excluded from the LPS calculation because their effect would be anti-dilutive approximated 10,029,044 shares.

Recent Accounting Pronouncements

On June 3, 2009, the FASB approved the FASB Accounting Standards Codification (“the Codification”), as the single source of authoritative nongovernmental Generally Accepted Accounting Principles (“GAAP”), in the United States. The Codification will be effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental United States entities. All other accounting literature not included in the Codification will be non-authoritative. We do not expect the adoption of the Codification to have an impact on our financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. FAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which any entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FAS 165 is effective for interim and annual periods ending after June 15, 2009 and applies prospectively. The adoption of this standard did not have a material impact on the financial position, results of operations or cash flows of MI. We evaluated all events and transactions after June 30, 2009 up through October 13, 2009, the date these financial statements were issued. During this period, we did not have any material recognizable subsequent events. We did have non-recognizable subsequent events as indicated in Note K.
 
-36-

 
On January 1, 2009, we adopted SFAS No. 157, Fair Value of Financial Instruments, (“SFAS 157”) as delayed by FSP 157-2-2 for all non-financial assets and non-financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. The adoption of this standard did not have a material impact on our financial statements.

NOTE B – GOING CONCERN

As shown in the accompanying financial statements, we have incurred net losses of $2,672,094 and $2,004,555 for the years ended June 30, 2009 and 2008, respectively. In addition, we have an accumulated deficit of $45,162,805 and a working capital deficit of $11,376,225 as of June 30, 2009. These conditions raise substantial doubt as to our ability to continue as a going concern. Historically, funding was provided by certain shareholders, including the majority shareholder, in the form of short-term notes payable. In addition, the majority shareholder granted us a deferral on the payment of rent for our building. There is no assurance that we will continue to receive funding from shareholders, particularly our major shareholder given he recently filed for protection under the federal Chapter 11 reorganization provisions. Consequently, we are evaluating several alternatives to raise the additional capital through debt or equity transactions. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Moller International’s President and majority shareholder, Paul S. Moller (“Dr. Moller”), has filed for protection under the Chapter 11 reorganization provisions of the federal bankruptcy law. The application was filed on 18 May 2009 in U.S. Bankruptcy Court for the Eastern District of California in Sacramento. With the outcome of these proceedings as yet undetermined there is uncertainty over the potential impact on the Company, if any. The impact of this action on the Company’s ability to raise needed capital as well as the possibility that Dr. Moller could lose some or all of his holdings in the Company to third party creditors has not been determined.

NOTE C - Property and Equipment

Property and Equipment consist of:

   
June 30, 2009
   
June 30, 2008
 
Production and R&D Equipment
  $ 394,664     $ 394,664  
Computer equipment and software
    420,099       420,099  
Furniture and fixtures
    75,650       75,650  
      890,413       890,413  
Less accumulated depreciation
    (879,199 )     (878,480 )
                 
    $ 11,214     $ 11,933  



From time to time, we received advances from customers related to our Skycars product for the purpose of reserving specific delivery positions for Skycars when they become available for sale to the public. Deposits are refundable at any time upon request. At June 30, 2009 and 2008, we have received an aggregate $394,767 of customer deposits.

NOTE E – DEFERRED WAGES

Due to our cash flow constraints, the President, members of management and other employees have agreed to defer all or a portion of their annual salaries. At June 30, 2009 and 2008, members of management and other employees have deferred $239,562 and $110,826 of wages along with accrued interest of $70,081and $45,095.
 
-37-

 
These amounts are reflected as deferred wages, which is reported as a component of current liabilities.

However, the President’s annual salary of $250,000 is being deferred until we reach a consistent level of profitability, which is not expected to occur during the next twelve months. As a result, deferred wages related to the President’s salary is recorded as a component of long-term liabilities. As of June 30, 2009 and 2008, a liability of $875,000 and $625,000, respectively, along with the accrued interest of $210,414 and $136,333, respectively, were recorded as a component of non-current liabilities.

NOTE F – NOTES PAYABLE

Majority Shareholder

At June 30, 2009 and 2008, the outstanding debt owed to our majority shareholder totaled $3,105,357 and $2,897,399, respectively. This debt is evidenced by two notes, one of which is non-interest bearing. Interest is imputed at 10% on this non-interest bearing note. The stated interest rate on the other note is also 10%. Both notes are unsecured and payable upon demand. Aggregate accrued interest on these notes was $1,171,656 and $867,781 at June 30, 2009 and 2008, respectively.

Minority Shareholder

At June 30, 2009 and 2008, the outstanding debt owed to minority shareholders totaled $369,307 and $348,671, respectively. This debt is unsecured, payable upon demand and bears an annual interest rate of 10%.  Aggregate accrued interest on these notes was $172,132 and $134,392 at June 30, 2009 and 2008, respectively.

Related Party

At June 30, 2009 and 2008, the outstanding debt owed to other related parties totaled $1,735,766 and $1,737,596, respectively. This debt is unsecured, payable upon demand and bears an annual interest rate of 5%.  Aggregate accrued interest on these notes was $486,984 and $413,290 at June 30, 2009 and 2008, respectively.

Non-Related Party

At June 30, 2009 and 2008, the outstanding debt owed to other parties totaled $978,182 and $958,078, respectively. This debt primarily consists of $500,000 owed to Pelican Ventures and $453,214 owed to Barry Malizia.

The amount owed to Mr. Malizia relates to non-interest bearing advance made by Mr. Malizia. Under the agreement, Mr. Malizia advanced the Company $453,214, which is payable within 90 days of demand. Mr. Malizia is the Chairman of Rotapower Engine Systems Limited (RES), a potential licensee of the Rotapower engine technology. Paul Moller, our majority shareholder, guaranteed this advance.

The amount owed to Pelican Ventures relates to an advance for the development of a diesel-powered rotary engine. The loan carries interest at 9%, is secured by substantially all assets, and was originally due in 2002. Pelican canceled the agreement in June 2002 and the dispute has not been resolved. MI ceased accruing interest in August 2002.

Aggregate accrued interest on these notes was $14,842 and $13,180 at June 30, 2009 and 2008, respectively.

NOTE G – STOCK BASED COMPENSATION
Shares of stock

During the year ended June 30, 2009 and 2008, MI issued 243,651 and 71,650 shares of common stock to certain individuals in recognition of various services provided. MI recorded compensation expense of $85,418 and $46,767 based on a fair market value per share of $0.18 to $0.42 and $0.53 to $0.93, determined by taking the closing price for the stock at the dates the services were provided.

As of June 30, 2009 and 2008, unamortized compensation expense related to shares granted amounted to $0 and $83,547, respectively.
 
-38-

 
 
Stock options

On January 21, 2004, MI adopted its 2004 Stock, Option and Restricted Stock Benefit Plan. The total shares available for grant under the plan aggregate 7,500,000.

Previously, MI had its 1991 Stock Option Plan that allowed for the granting of Non-qualified Stock Options to employees and consultants and Incentive Stock Options to employees. The total shares available for grant under that plan were 7,500,000.

Our employee directors do not receive any compensation for their services as directors. Non-employee directors are entitled to standardized stock option grants on the first day of a directorship year, which begins on the date of election to the board. It is pro-rated for a new director appointed after a board year has begun. Non-employee directors receive a grant of 5,000 options to purchase common stock at an exercise price equal to the closing price on the date of appointment.

During the years ended June 30, 2009 and 2008, we issued the following stock options:

·  
6,496,040 and 218,311options to employees with contract terms ranging from one to two years
·  
85,000 and 15,000 options to non employee board members.
·  
200,000 options to a consultant for services rendered related to legal matters resulting from lawsuit filed that names the Company as a defendant in an environmental contamination case (see Note I).

Compensation expense of $939,054 and $83,143 was recognized during the years ended June 30, 2009 and 2008, respectively. There were no unamortized compensation amount at June 30, 2009 and 2008.

The fair value of the stock options granted were estimated using the Black Scholes method based on assumptions including (1) risk-free interest rates ranging from 1.45 % to 1.63%, (2) exercise prices ranging from $0.19 to $1.50, (3) an estimated expected term approximately one year based on the “plain vanilla” method allowed under SAB 107 and SFAS 123R, (4) no dividend rate and (5) computed volatility rates ranging from 152.95% to 247.15% on the underlying stock.

Option activity for the years ended June 30, 2009 and 2008 is as follows:
 
                       
Weighted
 
     
Total Granted
   
Range of Option Prices
   
Total Vested
   
Average Exercise Price
 
                           
Balance at June 30, 2007
      13,227,589               13,227,589     $ 2.00  
                                   
                                   
 
Granted
    201,819     $ 0.60 to $0.88       201,819       0.75  
 
Exercised
    -                       -  
 
Forfeited
    -                       -  
                                   
Balance at June 30, 2008
      13,429,408               13,429,408     $ 1.80  
                                   
                                   
 
Granted
    6,781,040     $ 0.19 to $1.50       6,781,040       0.23  
 
Exercised
    -                          
 
Forfeited
    10,181,404     $ 0.38 to $4.51               1.80  
                                   
Balance at June 30, 2009
      10,029,044               10,029,044     $ 0.43  
 
 
-39-

 
Additional option information for the year ended June 30, 2009, is as follows:
 
 
     
 Weighted
     
     
 Average
     
   
 Weighted
 Remaining
 
 Weighted
 
   
Average
 Life in
 
Average
 
Price Range
 Outstanding
 Price
 Years
 Exercisable
 Price
 
$3.82
6,000
$1.50
4.58
6,000
$1.50
 
$0.86
3,194,762
$0.86
1.75
3,194,762
$0.86
 
$0.60
47,242
$0.60
1.66
47,242
$0.60
 
$.19 to $.20
6,781,040
$0.86
4.66
6,781,040
$0.86
 
 
10,029,044
$0.44
 
10,029,044
$0.44
 
 
NOTE H – INCOME TAXES
 
At June 30, 2009, MI had $17,955,845 in net operating loss (NOL) carryforwards to offset future federal taxable income, resulting in a deferred tax asset of $5,872,474. In view of the uncertainty over MI’s ability to generate sufficient taxable income in future years to utilize the NOLs, a full valuation allowance of $5,872,474 has been recorded to offset the deferred tax asset, resulting in no net deferred tax asset or liability. The valuation allowance also results in a difference between the statutory rate of 35% and the effective rate of 0%. The cumulative net operating losses are scheduled to expire through 2029.
 
 
NOTE I – COMMITMENTS AND CONTINGENCIES
 
Lease commitment
 
 
MI’s operations are housed in one 34,500 square foot building, which is leased from Dr. Moller. The term of the current lease is for ten years ending June 30, 2013, at $41,400 per month with a provision for an adjustment in the monthly rent in 2008. MI remains liable for all property taxes and insurance on the leased property. The minimum rental commitment remaining on the leased property is $496,800 per year.
 
The office operating lease agreements require that the Company pays certain operating expenses applicable for the leased premises. Future minimum rental payments required under these operating leases are as follows:
 
Years Ending June 30,
 
Amount
 
2010
  $ 496,800  
2011
    496,800  
2012
    496,800  
2013
    496,800  
2014
    -  
Years thereafter
    -  
Total
  $ 1,987,200  
 
Total rental expense for the twelve months ended June 30, 2009 and 2008 amounted to approximately $496,800 and $496,800, respectively.
 
-40-

 
Rent expense charged to operations under this lease, including property taxes, aggregated $528,145 and $527,389 for fiscal 2009 and 2008, respectively.

Contingencies

J.F. Wilson & Associates Ltd. v. Estate of Percy Symens, et al.

Moller International (MI) is named as a defendant in a lawsuit pending in Yolo County, California Superior Court – J.F. Wilson & Associates Ltd. V. Estate of Percy Symens, et al. The complaint, filed in April 2005, alleges that MI unlawfully discharged solvents into the environment while doing business at 203 J Street and 920 Third Street in Davis, California during 1968 to 1980. The complaint seeks injunctive relief and damages of an unspecified amount. The Company’s Answer, which denies the allegations in the complaint, was filed in June of 2005, and initial discovery commenced in August of 2005. The case has not been set for trial. On December 20, 2006, defendant and cross-complainant Donald M. Miller died; and on January 7, 2008, the court ordered a stay of proceedings until the court’s Probate Department rules on an application for letters of instruction in connection with Mr. Miller’s estate. The court’s Probate Department has not yet issued a ruling, and the stay remains in place.

In a related administrative proceeding initiated on September 26, 2006, the California Central Valley Regional Water Quality Control Board (RWQCB) issued a draft Cleanup and Abatement Order (CAO) in connection with the property at 920 Third Street. MI was named as one of the responsible parties in the draft CAO, and intends to challenge the characterization of MI as a discharger of environmental contaminants, while also complying with the orders of the RWQCB. MI and other parties have submitted comments regarding the draft cleanup and abatement order. The draft CAO has not been finalized. The property owner is proceeding with work to investigate, characterize and remediate the soil and groundwater contamination at this property, with RWQCB oversight. 
 
MI’s probable loss has been estimated at this time in the range of $200,000 to $1,000,000 and has accrued $200,000. It is reasonably possible that these estimates may be significantly revised as the site investigation and other research and analysis proceeds. MI will continue to assess its potential loss in the future as more information is available. 

 
NOTE J – SUBSEQUENT EVENTS

The following events occurred subsequent to June 30, 2009:

a.)  
On July 06, 2009 MI has issued 1,602,941 shares of stock for debt extinguishment of $272,500 notes payable. These shares were issued under the Moller International Stock, Restricted Stock, Options Benefit Plan of 2004 until the plan expired on 28 January 2009, and under the Moller International Stock, Restricted Stock, and Options Benefit Plan of 2009 as of its effective start date in March 2009.
b.)  
On July 29, 2009, MI entered into an investor relation service agreement and as of September 02, 2009, 18,667 shares of common stock options from 2009 stock benefit plan had been granted to the consultant of the company.
c.)  
On October 1, 2009 the Company issued 21,277 shares of its common stock in accordance with an ongoing agreement for services to a consultant of the Company. Cost basis was $0.235 per share determined from the closing price of the Company's stock on 9/30/2009.
 
 
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.

Item 9A(T). Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the six-month period covered by this Transition Report, we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer who also acts as our Chief Financial Officer. This study examined the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our President/CEO/CFO concluded that our disclosure controls and procedures are not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.
 
Management's Annual Report on Internal Controls over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management team carried out an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. Based on that assessment, management concluded that our internal control over financial reporting was not effective as of December 31, 2008. This conclusion results from the continued existence of material weaknesses in our internal control over financial reporting including a lack of segregation of duties in financial reporting, a lack of accounting expertise at the Chief Executive Officer level, a general lack of entity level controls and an over reliance on consultants in the financial reporting process. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
 
These weaknesses stem primarily from the early stage of our business operations and related lack of working capital to hire additional staff during the periods covered by this Transition Report and our last report on Form 10-K filed in October 2008.

In light of the foregoing, and as we move forward with the development of our aircraft and engine product lines, we intend to implement a number of measures to remediate such ineffectiveness and strengthen our internal controls environment. Planned action includes our retention of an outside consulting firm to assist us in the evaluation and testing of our internal control system and the identification of opportunities to improve the efficacy of our accounting and financial reporting processes. Additional anticipated remedial action will involve organizational and process changes to address the identified deficiencies, including (i) hiring additional personnel to assist with financial reporting and business operations as soon as our finances will allow, (ii) establishing and complying with delegation of authority guidelines to be prepared for approval by the Board of Directors, (iii) modifying analytical procedures to ensure the accurate, timely and complete reconciliation of all major accounts; (iv) ensuring proper segregation of duty controls throughout the Company, and (v) implementing formal processes requiring periodic self-assessments and independent tests.
 
-41-

 
Along these lines, we approached potential candidates to serve as additional members to our Board of Directors, including candidates having accounting backgrounds to participate on our audit committee. We are pleased to report that Stephen P. Smith has joined the Board of Directors. After graduating with a Bachelor's degree in accounting from Fairfield University in Fairfield, CT, Steve started his professional career at Deloitte & Touche, LLP, in the Stamford office where he achieved senior accountant status and earned his CPA. Subsequent to his tenure with D&T, Steve accepted the Manager of Accounting position at Universal Studios Hollywood. After completing his MBA with an emphasis in Finance at Pepperdine University in December 2004, Steve was hired as the Global Financial Reporting Manager at CB Richard Ellis Investors Group located in downtown Los Angeles. Ultimately, after nearly 10 years of technical accounting and financial reporting experience, Steve joined his current employer, Vaco, in March 2006.

At this time, our management recognizes that many of the intended actions and enhancements will require continual monitoring and evaluation for effectiveness, and will necessarily evolve as we continue to evaluate and improve our internal controls over financial reporting. Management will accordingly review progress on activities taken on a consistent and ongoing basis at the CEO and senior management level in conjunction with our Board of Directors.
 
This Transition Report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to the attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.
 
Changes in Internal Controls over Financial Reporting
 
There have been no changes in our internal controls over financial reporting as defined in Rule 139-15(f) of the Act, in the quarter period ended Decemeber 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
-42-

 
 
PART III
 
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following information is provided for current members of the Board of Directors who served during this reporting period:
 
Director
Age
Current Term
of Office
Director/Officer in any
other SEC-reporting
Company
 
Paul Moller
72
12/2008 – 12/2009
No
 
Faulkner White
58
12/2008 – 12/2009
No
 
Jim Toreson
67
12/2008 – 12/2009
No
 
Mike Shanley
60
12/2008 – 12/2009
No
 
Stephen Smith
35
12/2008 – 12/2009
No
 

Resumes of Board of Directors

Paul Moller, Chairman of the Board--Dr. Moller founded the Company and has served as the company's President since its formation. He holds a Masters in Engineering and Ph.D. from McGill University. Dr. Moller was a professor of Mechanical and Aeronautical Engineering at the University of California, Davis, from 1963 to 1975, where he developed the Aeronautical Engineering program. In 1972 he founded SuperTrapp Industries and was Chief Executive Officer as SuperTrapp became the most recognized international name in high-performance engine silencing systems. SuperTrapp Industries was sold in 1988. In 1983 he founded Moller International to develop powered lift aircraft. Under his direction Moller International completed contracts with NASA, NOSC, DARPA, NRL, Harry Diamond Labs, Hughes Aircraft Company, California Department of Transportation and the U.S. Army, Navy, and Air force. These contracts included the development and deployment of numerous unmanned aerial vehicles and Wankel based engines. Dr. Moller has received 43 patents including the first U.S. patent on a fundamentally new form of powered lift aircraft. In 1980 he developed the Davis Research Park, a 38-acre industrial-research complex within the city of Davis, CA in which Moller International is located.

Faulkner White, Director--Mr. White received his B.A. in Psychology (Distinction) with a minor in Computer Science from Dartmouth College in 1972. He has consulted for Apple Computer, Motorola and McDonnell Douglas. In 1995 Mr. White collaborated in the development of a new type of breast biopsy gun for Biopsys Medical Inc., developing software to track the efficacy of the new design for the FDA, and subsequently for the customers themselves. He is currently developing Customer Relationship Management software for the laser eye surgery and cosmetic surgery markets. Mr. White is also a certified DBA in Oracle database technology.

Jim Toreson, Director--Dr. Toreson has over 16 years experience as a chief executive, and over 20 years experience in manufacturing, including quality control, materials management, JIT production, process control, and manufacturing engineering. Eight years of experience in flexible automation, statistical process control (SPC), and quality system including ISO 9000 and Six Sigma programs. More recently as the founder of ONSHORE, a management consulting firm specializing in technology-intensive products and services he has acted as the CEO of Chineseinvestors.com, an Internet portal serving the world-wide ethnic Chinese marketplace for financial services; VP of Marketing and Sales of APPIANT Technology, Inc., a NASDAQ company providing ASP services for speech recognition; and VP of Business Development for eSpaces, a company providing physically secure and cyber-secure work spaces. Dr. Toreson has a BSEE and MSEE from the University of Michigan, a Dr. of Science from the University of Nevada, and has completed coursework for his PhD EE at the University of Pennsylvania.

Mike Shanley, Director—Mr. Shanley has been a pilot since 1969, serving with the Royal Australian Air Force in Vietnam in 1971 and has been an enthusiastic supporter of the Skycar project since 1987. Mr. Shanley has a BA in English Literature from the University of Queensland, Australia, is the author of the novel “Strela” and was a magazine publisher and editor from 1987 to 1996. He is presently co-director of a security company based in the United Kingdom providing security at Heathrow, Gatwick, Manchester and Stansted airports, with company revenue in excess of $3m US. Mr. Shanley is also Chairman of Shanley International Ltd., a company set up specifically to facilitate trade with China.
 
-43-

 
Stephen Smith, Director—After graduating with a Bachelor's degree in Accounting from Fairfield University in Fairfield, CT, Steve started his professional career at Deloitte & Touche, LLP, in the Stamford office where he achieved senior accountant status and earned his CPA. Subsequent to his tenure with D&T, Steve accepted the Manager of Accounting position at Universal Studios Hollywood. After completing his MBA with an emphasis in Finance at Pepperdine University in December 2004, Steve was hired as the Global Financial Reporting Manager at CB Richard Ellis Investors Group located in downtown Los Angeles. Ultimately, after nearly 10 years of technical accounting and financial reporting experience, Steve joined Vaco in March 2006.
 
Item 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of compensation received by each of our officers and directors who received compensation from the Company during the past fiscal year.
 
Name &
Principal
Position
Year
Salary ($)
Bonus ($)
Stock
Awards ($)
Option
Awards ($)
Non-equity
Incentive Plan
Compensation ($)
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
All Other
Compensation ($)
Total ($)
Paul Moller, President
2009
$250,000(1)
$0
$0
$0
$0
 
$0
$250,000(1)
Faulkner White
2009
$0
$0
$0
$6,000
$0
 
$0
$6,000
Jim Toreson
2009
$0
$0
$0
$9,000
$0
 
$0
$9,000
Mike Shanley
2009
$0
$0
$0
$2,000
$0
 
$0
$2,000
Stephen Smith
2009
$0
$0
$0
$0
$0
 
$0
$0

(1)$250,000 of this amount shown is deferred at the election of the Executive, not as part of any plan.
(2) Each member of the Board of Directors (with the exclusion of Paul Moller) was issued options for 5,000 shares of Moller International stock as compensation for service on the Board for the 12-month term of office.
 
-44-

 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following are all of the individuals or groups known by the company to be the beneficial owner of more than five (5) percent of any class of the issuer's securities as of September 1, 2008:

     Name and Address of Amount & Nature of Percent
 Title of Class Beneficial Owner  Beneficial Ownership of Class
-------------------------------------------------------------------------------

 Common Stock(1) Paul S. Moller (1) (2) 33,092,025  56.08% (3)
     9350 Currey Rd
     Dixon, CA 95620

(1)  
Has options to purchase 9,194,762 shares.
(2)  
Total includes 4,900,000 shares beneficially owned by Moller Corp., a California corporation controlled by Paul S. Moller.
(3)  
57.74% of class if all existing options are exercised.


Paul S. Moller, President, Director and Chairman of the Board of Directors is the sole shareholder of Moller Corp. Moller Corporation holds legal title to 25,319,909 of the shares of Common stock listed above as beneficially owned by Paul S. Moller. Rosa Maria Moller, the spouse of Paul S. Moller, owns 547,848 shares of Common stock, which are included in the figure above, although she holds them as separate property in her name alone.

The following are all of our officers and directors who held office during the fiscal year ending September 30, 2009 and who are beneficial owners of our securities:

Title of Class
Name and Address of Beneficial Owner
Amount & Nature of
Beneficial Ownership
Percent of Class (3)
       
Common Stock
Paul S. Moller (1) (2)
 23,897,263 (D,I)
51.9%
 
9350 Currey Rd
   
 
Dixon, CA 95620
   
       
Common Stock
Faulkner White
 187,280 (D)
00.003%
 
51 Pinewood
   
 
Irvine, CA 92604
   
       
Common Stock
Jim Toreson
 25,000 (D)
00.00%
 
HCR61 Box 51
   
 
Alamo, NV 89001
   
       
Common Stock
Mike Shanley
7,583 (D)
 00.00%
 
Bradfield Close Working
   
 
Surrey GU22 7RE, UK
   
       
Common Stock
Stephen Smith
0 (D)
 00.00%
 
724 Vallombrosa Drive
Pasadena, CA 91107
   
 
(1)  
Total include options to purchase 9,194,762 shares.
(2)  
Total includes 4,900,000 shares beneficially owned by Moller Corp., a California corporation controlled by Paul S. Moller
(3)  
Percentage of class based on 59,009,609 potential shares outstanding.
 
 
-45-

 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

We currently lease and occupy a 34,500 square foot building located in Davis, California, which is owned by Dr. Paul S. Moller, the majority shareholder of Moller International. (see Note I to the financial statements)

Notes payable to the majority shareholder, Dr. Paul S. Moller (Moller) are unsecured, and due on demand. There are two separate notes, one for $2,616,599 which bears interest at $10% per annum, and another note for $280,800 that is non-interest bearing. (see Note E to the financial statements)

During the year ended June 30, 2009, the Company repaid $21,243.49 in loans and had a $1,735,766 balance owed to the Milk Farm Associates (Milk Farm), a limited partnership, and a related entity. Dr. Moller is the general partner in Milk Farm and has a 32% ownership interest. (see Note G to the financial statements)
 
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

   
Year ended June 30,
 
   
2009
   
2008
 
Audit and Quarterly Review Fees
  $ 61,903     $ 79,619  
Audit-related Fees
            0  
Tax Fees
    0       0  
All Other Fees
    0       0  
Total Fees
  $ 61,903     $ 79,619  
 
 
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K.

(a.)  
Exhibits

Exhibit No.   Description
Exhibit 31.1           Certification of CEO / CFO

Exhibit 32.1           Certification of CEO / CFO

(b.)  
Reports on Form 8-K

The following reports were filed on Form 8-K during the period ending 30 June 2009:

Not applicable
 
 
-46-

 
SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

           MOLLER INTERNATIONAL, INC.

10/13/2009     /s/ Dr. Paul S. Moller
Date                  President, Director


Pursuant to the requirements of the Securities Exchange Act of 1934 this report is signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

SIGNATURE
TITLE
DATE
 
       
/s/ Dr. Paul S. Moller
CEO, President, Director
10/13/2009  
       
/s/ Faulkner White
Director
10/13/2009
 
       
/s/ Jim Toreson
Director
10/13/2009
 
       
/s/ Mike Shanley
Director
10/13/2009
 
       
/s/ Stephen Smith
Director
10/13/2009
 
 
 
 





-47-