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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF
1934
 Commission file number I-4334 SUNAIR ELECTRONICS, INC.(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 FLORIDA
    
    59-0780772(STATE OR OTHER JURISDICTION OF
    
    (I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)
    
    IDENTIFICATION NO.)
 3005 SW THIRD AVE., FT. LAUDERDALE, FL.
    
    33315(ADDRESS OR PRINCIPAL EXECUTIVE OFFICE)
    
    (ZIP CODE)
 ISSUERS TELEPHONE NUMBER (INCLUDING AREA CODE)
    
    (954) 525-1505
 NONE(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
 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 the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o Registrants common
stock - par value 10 cents, outstanding as of February 14, 2005,
- 9,014,870
shares. Transitional Small Business Disclosure format. Yes o No þ




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SUNAIR ELECTRONICS, INC. AND SUBSIDIARY INDEX  PAGE NO.PART I. FINANCIAL INFORMATION:ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)CONSOLIDATED CONDENSED BALANCE SHEETS  DECEMBER 31, 2004 AND SEPTEMBER 30, 2004
    
    
    1CONSOLIDATED CONDENSED STATEMENTS OF INCOME  THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
    
    
    3CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
    
    
    4NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF THE CONSOLIDATED CONDENSED STATEMENTS
    
    
    12ITEM 3. CONTROLS AND PROCEDURES
    
    
    15PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    16ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    16ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    16ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    16ITEM 5. OTHER INFORMATION
    
    
    16ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    16SIGNATURES
    
    
    18CERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906
  - i -




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PART I. FINANCIAL INFORMATION SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES 
  ASSETS 12/31/04
    
    
    9/30/04CURRENT ASSETS:Cash and cash equivalents
    
    $
    4,452,364
    
    
    $
    3,872,224Accounts receivable, net
    
    
    2,089,945
    
    
    
    3,080,875Interest receivable
    
    
    4,177
    
    
    
    108,013Inventories
    
    
    6,901,200
    
    
    
    7,258,955Investments
    
    
    
    
    
    
    2,913,601Deferred tax asset
    
    
    61,200
    
    
    
    180,725Prepaid and other current assets
    
    
    903,177
    
    
    
    315,469Total Current Assets
    
    
    14,412,063
    
    
    
    17,729,862NOTE RECEIVABLE
    
    
    405,590
    
    
    
    405,590PROPERTY, PLANT, AND EQUIPMENT, net
    
    
    675,982
    
    
    
    703,381OTHER ASSETSSoftware costs, net
    
    
    4,007,235
    
    
    
    3,955,513Goodwill
    
    
    852,683
    
    
    
    852,683Total Other Asset
    
    
    4,859,918
    
    
    
    4,808,196TOTAL ASSETS
    
    $
    20,353,553
    
    
    $
    23,647,029
 The accompanying notes are an integral part of these financial statements - 1 -




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PART I. FINANCIAL INFORMATION SUNAIR ELECTRONICS, INC. AND SUBSIDIARIES 
  LIABILITIES AND STOCKHOLDERS EQUITY 12/31/04
    
    
    9/30/04CURRENT LIABILITIES:Accounts payable
    
    $
    1,236,853
    
    
    $
    1,501,864Accrued expenses
    
    
    1,042,404
    
    
    
    1,186,250Bank lines of credit
    
    
    47,000
    
    
    
    2,047,000Unearned revenues
    
    
    224,197
    
    
    
    115,857Loan from shareholder
    
    
    22,800
    
    
    
    22,800Notes payable
    
    
    28,080
    
    
    
    33,585Income taxes payable
    
    
    243,206
    
    
    
    212,688Payable in connection with
acquisition of Telecom FM
    
    
    0
    
    
    
    1,500,000Total Current Liabilities
    
    
    2,844,540
    
    
    
    6,620,044DEFERRED TAX LIABILITY
    
    
    222,824
    
    
    
    199,000STOCKHOLDERS EQUITY:Preferred stock, no par value,
2,000,000 shares authorized, none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.10 par value,
25,000,000 shares authorized,
4,014,870, and 4,006,620 shares
issued and outstanding at December
31, 2004 and September 30, 2004,
respectively
    
    
    401,487
    
    
    
    400,662Additional paid-in-capital
    
    
    3,869,844
    
    
    
    3,852,106Retained earnings
    
    
    12,947,622
    
    
    
    12,575,217Translation adjustment
    
    
    67,236
    
    
    
    Total Stockholders Equity
    
    
    17,286,189
    
    
    
    16,827,985TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    20,353,553
    
    
    $
    23,647,029
 The accompanying notes are an integral part of these financial statements. - 2 -




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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED) THREE MONTHS ENDED12/31/04
    
    
    12/31/03SALES
    
    $
    5,093,988
    
    
    $
    1,314,574COST OF SALES
    
    
    2,800,799
    
    
    
    698,249GROSS PROFIT
    
    
    2,293,189
    
    
    
    616,325SELLING GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    1,790,515
    
    
    
    486,551INCOME FROM OPERATIONS
    
    
    502,674
    
    
    
    129,774OTHER INCOME:Interest income
    
    
    35,776
    
    
    
    62,432Interest expense
    
    
    (19,882
    )
    
    
    Other expense
    
    
    (6,846
    )
    
    
    (1,167
    )Total Other Income
    
    
    9,048
    
    
    
    61,265INCOME BEFORE (PROVISION)
FOR INCOME TAXES
    
    
    511,722
    
    
    
    191,039(PROVISION) FOR INCOME TAXES
    
    
    (139,317
    )
    
    
    (18,500
    )NET INCOME
    
    $
    372,405
    
    
    $
    172,539NET INCOME PER COMMON SHARE:BASIC
    
    $
    0.09
    
    
    $
    0.05DILUTED
    
    $
    0.09
    
    
    $
    0.04WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    4,008,055
    
    
    
    3,764,966DILUTED
    
    
    4,105,592
    
    
    
    3,857,433
 The accompanying notes are an integral part of these financial statements - 3 -




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CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED) THREE MONTHS ENDED12/31/04
    
    
    12/31/03CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    372,405
    
    
    $
    172,539Adjustments to reconcile net income to
net cash (Used In) provided by operating
activities:Depreciation
    
    
    52,850
    
    
    
    39,465Amortization
    
    
    79,719
    
    
    
    7,168Deferred taxes
    
    
    143,349
    
    
    
    Translation adjustment
    
    
    67,236
    
    
    
    Inventories reserve
    
    
    25,493
    
    
    
    (Increase) decrease in Assets:Accounts receivable
    
    
    990,930
    
    
    
    1,221,360Interest receivable
    
    
    103,836
    
    
    
    (49,158
    )Inventories
    
    
    332,262
    
    
    
    (95,026
    )Prepaid and other current assets
    
    
    (587,708
    )
    
    
    (19,093
    )Increase (decrease) in Liabilities:Accounts payable and accrued expenses
    
    
    (408,857
    )
    
    
    (230,123
    )Unearned revenue
    
    
    108,340
    
    
    
    Income taxes payable
    
    
    30,518
    
    
    
    (289,500
    )Net Cash Provided By Operating Activities
    
    
    1,310,373
    
    
    
    757,632CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant, and equipment
    
    
    (32,619
    )
    
    
    (11,261
    )Proceeds from sale of held-to-maturity investment
    
    
    2,913,601
    
    
    
    Software development costs
    
    
    (124,273
    )
    
    
    Cash paid for acquisition of Telecom FM
    
    
    (1,500,000
    )
    
    
    Purchases of investments
    
    
    
    
    
    
    (499,398
    )Net Cash Provided By (Used In) Investing Activities
    
    
    1,256,709
    
    
    
    (510,659
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    18,563
    
    
    
    140,287Repayment of line of credit
    
    
    (2,000,000
    )
    
    
    Repayment of notes payable
    
    
    (5,505
    )
    
    
    Net Cash (Used In) Provided By Financing Activities
    
    
    (1,986,942
    )
    
    
    140,287NET INCREASE IN CASH
AND CASH EQUIVALENTS
    
    
    580,140
    
    
    
    387,260CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    3,872,224
    
    
    
    1,022,175CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    4,452,364
    
    
    $
    1,409,435SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for income taxes
    
    $
    125,000
    
    
    $
    308,000Cash paid during the year for interest
    
    $
    18,930
    
    
    $
    
 The accompanying notes are an integral part of these financial statements - 4 -




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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  1.
    BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATIONTHE ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED BY THE
COMPANY PURSUANT TO THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION
AND IN ACCORDANCE WITH THE INSTRUCTIONS TO FORM 10-QSB AND DO NOT INCLUDE ALL THE
INFORMATION AND FOOTNOTE DISCLOSURES NORMALLY INCLUDED IN CONSOLIDATED FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES OF AMERICA. THE INFORMATION FURNISHED IN THE INTERIM FINANCIAL STATEMENTS
INCLUDES NORMAL RECURRING ADJUSTMENTS AND REFLECTS ALL ADJUSTMENTS, WHICH, IN THE
OPINION OF MANAGEMENT, ARE NECESSARY FOR A FAIR PRESENTATION OF SUCH FINANCIAL
STATEMENTS. FOR FURTHER INFORMATION REFER TO THE CONSOLIDATED FINANCIAL STATEMENTS AND
FOOTNOTES THERETO INCLUDED IN THE COMPANYS MOST RECENT AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN ITS SEPTEMBER 30, 2004 ANNUAL REPORT ON FORM
10-KSB. OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDING SEPTEMBER
30, 2005.2.
    SIGNIFICANT ACCOUNTING POLICIESUSE OF ESTIMATES
THE PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA REQUIRES MANAGEMENT TO MAKE ESTIMATES
AND ASSUMPTIONS THAT AFFECT THE REPORTED AMOUNTS IN THE CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES. ACTUAL RESULTS COULD DIFFER FROM THOSE ESTIMATES.ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE CONSIST OF BALANCES DUE FROM SALES. THE COMPANY MONITORS ACCOUNTS
RECEIVABLE AND PROVIDES ALLOWANCES WHEN CONSIDERED NECESSARY. AS OF SEPTEMBER 30, 2004,
THE COMPANY ESTABLISHED AN ALLOWANCE OF $48,485. AS OF SEPTEMBER 30, 2003 ACCOUNTS
RECEIVABLE WERE CONSIDERED TO BE FULLY COLLECTIBLE, ACCORDINGLY NO ALLOWANCE FOR
DOUBTFUL ACCOUNTS WAS PROVIDED.INVESTMENTS
CERTAIN INVESTMENTS THAT MANAGEMENT HAS THE INTENT AND ABILITY TO HOLD TO MATURITY ARE
REPORTED AT COST, ADJUSTED FOR AMORTIZATION OF PREMIUMS AND ACCRETION OF DISCOUNTS THAT
ARE RECOGNIZED IN INTEREST INCOME USING THE INTEREST METHOD OVER THE PERIOD TO MATURITY.MARKETABLE AND DEBT SECURITIES WHICH MANAGEMENT HAS CLASSIFIED AS TRADING ARE CARRIED AT
FAIR VALUE WITH NET UNREALIZED GAINS AND LOSSES REPORTED IN OPERATIONS. REALIZED GAINS
AND LOSSES ON MARKETABLE EQUITY AND DEBT SECURITIES ARE RECOGNIZED UPON SALE USING THE
SPECIFIC IDENTIFICATION METHOD.INVENTORIES
INVENTORIES, WHICH CONSIST OF RAW MATERIALS, WORK-IN-PROCESS, AND FINISHED GOODS, ARE
STATED AT THE LOWER OF COST OR MARKET VALUE, COST BEING DETERMINED USING THE FIRST IN,
FIRST OUT METHOD. FIXED AND VARIABLE MANUFACTURING COSTS AND OVERHEAD ARE INCLUDED IN
THE CARRYING VALUES OF FINISHED GOODS AND WORK-IN-PROCESS. THE COMPANY RECORDS RESERVES
FOR INVENTORY SHRINKAGE AND OBSOLESCENCE, WHEN CONSIDERED NECESSARY. FOR THE THREE
MONTHS ENDED DECEMBER 31, 2004 INVENTORY SHRINKAGE AND OBSOLESCENCE RESERVES INCREASED
$25,493. - 5 -




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PROPERTY, PLANT, AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT ARE CARRIED AT COST. DEPRECIATION IS PROVIDED OVER THE
ESTIMATED USEFUL LIVES OF THE ASSETS USING BOTH THE STRAIGHT-LINE AND ACCELERATED
METHODS. THE ESTIMATED USEFUL LIVES USED TO COMPUTE DEPRECIATION ARE AS FOLLOWS:BUILDINGS AND IMPROVEMENTS          10 TO 30 YEARS
                              MACHINERY AND EQUIPMENT                 4 TO 10 YEARSTHE COST OF MAINTENANCE AND REPAIRS IS CHARGED TO EXPENSE AS INCURRED; RENEWALS AND
BETTERMENTS ARE CAPITALIZED. WHEN PROPERTIES ARE RETIRED OR OTHERWISE DISPOSED OF, THE
COST OF SUCH PROPERTIES AND THE RELATED ACCUMULATED DEPRECIATION ARE REMOVED FROM THE
ACCOUNTS. ANY PROFIT OR LOSS IS CREDITED, OR CHARGED TO INCOME.SOFTWARE COSTS
THE COMPANY CAPITALIZES CERTAIN COSTS ASSOCIATED WITH SOFTWARE DEVELOPMENT IN ACCORDANCE
WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARD #86 (FASB #86) ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. THE COMPANY AMORTIZES
COSTS OVER 10 YEARS, THE ESTIMATED USEFUL LIFE OF THE ASSET.IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
THE COMPANY REVIEWS LONG-LIVED ASSETS FOR IMPAIRMENT WHENEVER EVENTS OR CHANGES IN
CIRCUMSTANCES INDICATE THAT THE CARRYING AMOUNT OF AN ASSET MAY NOT BE RECOVERABLE.
RECOVERABILITY OF ASSETS TO BE HELD AND USED IS MEASURED BY A COMPARISON OF THE CARRYING
AMOUNT OF AN ASSET TO FUTURE UNDISCOUNTED CASH FLOWS EXPECTED TO BE GENERATED BY THE
ASSET. IF SUCH ASSETS ARE CONSIDERED TO BE IMPAIRED, THE IMPAIRMENT TO BE RECOGNIZED IS
MEASURED BY THE AMOUNT BY WHICH THE ASSETS EXCEEDS THE FAIR VALUE. ASSETS TO BE
DISPOSED OF ARE REPORTED AT THE LOWER OF THE CARRYING AMOUNT OR FAIR VALUE LESS COSTS TO
SELL. THERE WERE NO ASSETS IMPAIRED DURING THE FIRST QUARTER ENDED DECEMBER 31, 2004.INCOME (LOSS) PER SHARE
BASIC EARNINGS PER SHARE AMOUNTS ARE COMPUTED BY DIVIDING THE NET INCOME BY THE WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING. DILUTED EARNINGS PER SHARE AMOUNTS ARE
COMPUTED BY DIVIDING NET INCOME BY THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK, COMMON STOCK EQUIVALENTS, AND STOCK OPTIONS OUTSTANDING DURING THE PERIOD.REVENUE RECOGNITION
SALES REVENUES ARE RECORDED WHEN PRODUCTS ARE SHIPPED AND TITLE HAS PASSED TO
UNAFFILIATED CUSTOMERS. INSTALLATION REVENUES ARE CONSIDERED EARNED AT THE TIME THE
PROJECT IS COMPLETED. MAINTENANCE CONTRACTS ARE RECORDED AS UNEARNED REVENUES AT THE
TIME OF COLLECTION AND ARE RECOGNIZED AS INCOME MONTHLY OVER THE TERM OF THE CONTRACT.
INTEREST AND DIVIDENDS EARNED ON INVESTMENTS ARE RECORDED WHEN EARNED.ADVERTISING COSTS
THE COMPANY EXPENSES ADVERTISING COSTS AS INCURRED.RESEARCH AND DEVELOPMENT
EXPENDITURES FOR RESEARCH AND DEVELOPMENT ARE CHARGED TO OPERATIONS AS INCURRED. - 6 -




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FOREIGN CURRENCY TRANSLATION
TELECOMS FUNCTIONAL CURRENCY IS THE BRITISH POUND STERLING, ITS LOCAL CURRENCY.
ACCORDINGLY, BALANCE SHEET ACCOUNTS ARE TRANSLATED AT EXCHANGE RATES IN EFFECT AT THE
END OF THE YEAR AND INCOME STATEMENT ACCOUNTS ARE TRANSLATED AT AVERAGE EXCHANGE RATES
FOR THE YEAR. TRANSLATION GAINS AND LOSSES ARE INCLUDED AS A SEPARATE COMPONENT OF
STOCKHOLDERS EQUITY AS CUMULATIVE TRANSLATION ADJUSTMENTS. FOREIGN CURRENCY
TRANSACTION GAINS AND LOSSES ARE INCLUDED IN OTHER INCOME AND EXPENSES.COMPREHENSIVE INCOME
COMPREHENSIVE INCOME IS COMPRISED OF NET INCOME AND OTHER COMPREHENSIVE INCOME. OTHER
COMPREHENSIVE INCOME INCLUDES CERTAIN CHANGES IN EQUITY THAT ARE EXCLUDED FROM NET
INCOME. AT SEPTEMBER 30, 2004, ACCUMULATED OTHER COMPREHENSIVE INCOME WAS COMPRISED OF
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS WHICH WAS IMMATERIAL.3.
    ACQUISITIONSACQUISITION OF PERCIPIA, INC. AND SUBSIDIARYFOR PURPOSES OF EXPANDING INTO THE TELECOMMUNICATION MARKET, THE COMPANY COMPLETED ITS
ACQUISITION OF ALL THE ISSUED AND OUTSTANDING COMMON STOCK OF PERCIPIA, INC.
(PERCIPIA), AND ITS WHOLLY OWNED SUBSIDIARY, PERCIPIA NETWORKS, INC ON AUGUST 6, 2004.
THE CONSIDERATION PAID BY THE COMPANY CONSISTED OF CASH OF $841,510 (INCLUDING $53,550
PAID TO RETIRE ALL OUTSTANDING STOCK OPTIONS OF PERCIPIA AND $127,960 PAID FOR
ACQUISITION COSTS) AND 190,000 SHARES OF ITS COMMON STOCK VALUED AT $997,500 BASED ON AN
AVERAGE PRICE OF $5.25 OVER THE THIRTY DAYS PRIOR TO THE ACQUISITION FOR A TOTAL
PURCHASE PRICE OF $1,839,010. AS A RESULT, PERCIPIA BECAME A WHOLLY OWNED SUBSIDIARY OF
THE COMPANY. FOR ACCOUNTING PURPOSES, THE EFFECTIVE DATE OF THE ACQUISITION WAS JUNE
30, 2004.THE FOLLOWING TABLE SETS FORTH THE PRELIMINARY ALLOCATION OF THE PURCHASE PRICE TO
PERCIPIAS TANGIBLE AND INTANGIBLE ASSETS ACQUIRED AND LIABILITIES ASSUMED AS OF JULY 1,
2004: CASH
    
    $
    17,690A/R
    
    
    425,417INVENTORY
    
    
    380,750DEFERRED TAX ASSETS
    
    
    653,000FIXED ASSETS
    
    
    95,453SOFTWARE
    
    
    2,700,000NOTE RECEIVABLE AND OTHER ASSETS
    
    
    80,362GOODWILL
    
    
    852,683ACCOUNTS PAYABLE
    
    
    (239,098
    )ACCRUED LIABILITIES
    
    
    (555,877
    )DEFERRED TAX LIABILITY
    
    
    (860,000
    )UNEARNED REVENUES
    
    
    (145,106
    )LINE OF CREDIT
    
    
    (99,300
    )NOTES PAYABLE
    
    
    (1,428,089
    )CAPITAL LEASES
    
    
    (38,875
    )TOTAL
    
    $
    1,839,010
 - 7 -




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THE GOODWILL RESULTING FROM THIS ACQUISITION IS EXPECTED TO BE AMORTIZED OVER FIFTEEN
YEARS FOR TAX PURPOSES.ACQUISITION OF CPM FM LIMITED (FORMERLY KNOWN AS TELECOM FM LIMITED)ON OCTOBER 5, 2004, THE COMPANY, THROUGH A WHOLLY OWNED SUBSIDIARY, SUNAIR
COMMUNICATIONS, LIMITED, A PRIVATE LIMITED COMPANY INCORPORATED IN ENGLAND (SCL),
ENTERED INTO A DEFINITIVE ASSET PURCHASE AGREEMENT BY AND AMONG SCL, CPM FM LIMITED
(FORMERLY KNOWN AS TELECOM FM LIMITED) (TELECOM), A PRIVATE LIMITED COMPANY
INCORPORATED IN ENGLAND, AND TFM GROUP LIMITED, A PRIVATE LIMITED COMPANY INCORPORATED
IN ENGLAND AND THE SOLE SHAREHOLDER OF TELECOM, PURSUANT TO WHICH THE COMPANY ACQUIRED
SUBSTANTIALLY ALL OF THE ASSETS AND ASSUMED CERTAIN LIABILITIES OF TELECOM FOR
$1,500,000 CASH. THE PURPOSE OF THIS ACQUISITION WAS TO EXPAND INTO THE
TELECOMMUNICATION MARKET.THE COMPANY DEFERRED PAYMENT OF $250,000 OF THE PURCHASE PRICE, WHICH IT MAY SET OFF
AGAINST ANY INDEMNIFIABLE DAMAGES PURSUANT TO THE ASSET PURCHASE AGREEMENT. THE COMPANY
AGREED TO DELIVER THE DEFERRED PAYMENT AMOUNT TO TELECOM NO LATER THAN TEN BUSINESS DAYS
FOLLOWING THE ONE HUNDRED EIGHTIETH DAY AFTER CLOSING, UNLESS ANY INDEMNIFIABLE CLAIMS
REMAIN UNRESOLVED AT SUCH TIME.IN ADDITION, THE COMPANY INCURRED $340,913 OF TRANSACTION COSTS CONSISTING PRINCIPALLY
OF LEGAL AND ACCOUNTING FEES.THE TRANSACTION WAS CLOSED ON OCTOBER 11, 2004 AND, AS STATED IN THE ASSET PURCHASE
AGREEMENT, BECAME EFFECTIVE ON SEPTEMBER 1, 2004.THE FOLLOWING TABLE SETS FORTH THE ALLOCATION OF THE PURCHASE PRICE TO TELECOMS
TANGIBLE ASSETS ACQUIRED AND LIABILITIES ASSUMED AS OF SEPTEMBER 1, 2004: INVENTORIES
    
    $
    910,282ACCOUNTS RECEIVABLE
    
    
    1,303,570PREPAID EXPENSES AND OTHER CURRENT ASSETS
    
    
    171,103FIXED ASSETS
    
    
    22,763SOFTWARE COSTS
    
    
    1,164,699ACCOUNTS PAYABLE
    
    
    (991,475
    )BANK OVERDRAFT
    
    
    (411,773
    )ACCRUED EXPENSES
    
    
    (238,136
    )LOAN PAYABLE
    
    
    (90,120
    )TOTAL
    
    $
    1,840,913
  THE $1,500,000 DUE TO THE PRINCIPLES OF TELECOM WERE ACCRUED AS PAYABLE AS OF SEPTEMBER
30, 2004. OF THIS AMOUNT, $1,250,000 WAS PAID IN OCTOBER OF 2004. COSTS ACCRUED IN
CONNECTION WITH THE ACQUISITION OF $249,312 ARE INCLUDED IN ACCRUED EXPENSES AS OF
SEPTEMBER 30, 2004. - 8 -




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PRO-FORMA RESULTS OF OPERATIONSTHE FOLLOWING SETS FORTH THE COMPANYS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 2004 AS IF THE ACQUISITIONS HAD TAKEN PLACE ON OCTOBER 1, 2003. THREE MONTHS ENDED DECEMBER 31,2004
    
    
    2003REVENUES
    
    $
    5,093,988
    
    
    $
    2,776,462NET INCOME
    
    $
    372,405
    
    
    $
    ( 92,522
    )EARNINGS PER SHAREBASIC
    
    $
    0.09
    
    
    $
    ( 0.02
    )DILUTED
    
    $
    0.09
    
    
    $
    ( 0.02
    )
  4.
    INVENTORIESINVENTORIES CONSIST OF THE FOLLOWING 12/31/04
    
    
    9/30/04MATERIALS
    
    $
    1,882,287
    
    
    $
    1,565,463WORK IN PROGRESS
    
    
    3,485,251
    
    
    
    4,117,503FINISHED GOODS
    
    
    1,533,662
    
    
    
    1,575,989$
    6,901,200
    
    
    $
    7,258,955
  5.
    EARNINGS PER COMMON SHARE BASIC EARNINGS PER SHARE AMOUNTS ARE COMPUTED BY DIVIDING THE NET INCOME BY THE WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING. DILUTED EARNINGS PER SHARE AMOUNTS ARE
COMPUTED BY DIVIDING NET INCOME BY THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK, COMMON STOCK EQUIVALENTS, AND STOCK OPTIONS OUTSTANDING DURING THE PERIOD.6.
    PREFERRED STOCK:AT DECEMBER 31, 2004, THE COMPANY HAD 800,000 AUTHORIZED SHARES OF PREFERRED STOCK,
NO PAR VALUE, THAT MAY BE ISSUED AT SUCH TERMS AND PROVISIONS AS DETERMINED BY THE BOARD
OF DIRECTORS. NONE ARE OUTSTANDING.7.
    STOCK OPTIONS:AT THE FISCAL YEAR ENDED SEPTEMBER 30, 2004, OPTIONS TO PURCHASE 270,000 SHARES AT
$2.25 PER SHARE HAD BEEN ISSUED TO KEY EMPLOYEES OF THE COMPANY. ON NOVEMBER 6, 2003,
THE COMPANYS MAJORITY SHAREHOLDER SOLD 1,994,000 COMMON SHARES TO AN UNRELATED THIRD
PARTY, WHEREBY THE NEW SHAREHOLDER OWNED APPROXIMATELY 53% OF THE COMPANY. DUE TO THE
MAJORITY CHANGE IN OWNERSHIP, ALL OF THE COMPANYS OUTSTANDING STOCK OPTIONS BECAME
FULLY VESTED AND EXERCISABLE ON NOVEMBER 6, 2003. 45,600 STOCK OPTIONS WERE EXERCISED
IN FISCAL 2003 AND 78,450 STOCK OPTIONS WERE EXERCISED IN FISCAL 2004. 8,250 STOCK
OPTIONS WERE EXERCISED IN THE FIRST QUARTER OF 2005. 137,700 STOCK OPTIONS ARE
CURRENTLY EXERCISABLE. THE OPTIONS GRANTED SHALL BE EXERCISABLE UP TO AND INCLUDING
FIVE YEARS FROM THE DATE OF GRANT. - 9 -




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8.
    RECENT ACCOUNTING PRONOUNCEMENTS:IN JANUARY 2003, THE FASB ISSUED INTERPRETATIONS NO. 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. FIN NO. 46 ADDRESSES CONSOLIDATION BY BUSINESS ENTERPRISES OF
VARIABLE INTEREST ENTITIES (FORMERLY SPECIAL PURPOSE ENTITIES OR SPES). THE COMPANY
DOES NOT HAVE ANY VARIABLE INTEREST ENTITIES AS DEFINED BY FIN NO. 46 AND THEREFORE THE
INTERPRETATION DID NOT AFFECT THE COMPANYS FINANCIAL POSITION, RESULTS OF OPERATIONS OR
CASH FLOWS.IN APRIL 2003, THE FASB ISSUED STATEMENT NO. 149, AMENDMENT OF STATEMENT NO. 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. THIS STATEMENT AMENDS AND CLARIFIES
FINANCIAL ACCOUNTING AND REPORTING FOR DERIVATIVE INSTRUMENTS, INCLUDING CERTAIN
DERIVATIVE INSTRUMENTS EMBEDDED IN OTHER CONTRACTS AND FOR HEDGING ACTIVITIES UNDER
STATEMENT NO. 133, ACCOUNTING FOR DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES. THE
PROVISIONS OF THIS STATEMENT ARE EFFECTIVE FOR ALL DERIVATIVES AND HEDGING ACTIVITIES
ENTERED INTO AFTER JUNE 30, 2003. THE COMPANY DID NOT HAVE ANY DERIVATIVES OR HEDGING
ACTIVITIES AND THEREFORE THE STANDARD DID NOT AFFECT THE COMPANYS FINANCIAL POSITION,
RESULTS OF OPERATIONS OR CASH FLOWS.IN MAY 2003, THE FASB ISSUED SFAS NO. 150 ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS NO. 150 ESTABLISHES STANDARDS
ON THE CLASSIFICATION AND MEASUREMENT OF CERTAIN INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY. THE PROVISIONS OF SFAS NO. 150 ARE EFFECTIVE FOR FINANCIAL
INSTRUMENTS ENTERED INTO OR MODIFIED AFTER MAY 31, 2002 AND TO ALL OTHER INSTRUMENTS
THAT EXIST AS OF THE BEGINNING OF THE FIRST INTERIM FINANCIAL REPORTING PERIOD BEGINNING
AFTER JUNE 15, 2003. SFAS NO. 150 DID NOT HAVE A MATERIAL EFFECT ON THE COMPANYS
FINANCIAL STATEMENTS.IN DECEMBER 2004, THE FASB ISSUED FASB NO. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
 REVISEDPUBLIC ENTITIES WITH STOCK OPTIONSIN DECEMBER 2004, THE FASB ISSUED SFAS NO. 123R, ACCOUNTING FOR STOCK-BASED
COMPENSATION. THIS STATEMENT IS A REVISION TO SFAS NO. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION AND SUPERSEDES APB OPINION NO. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. THIS STATEMENT REQUIRES A PUBLIC ENTITY TO MEASURE THE COST OF EMPLOYEE
SERVICES RECEIVED IN EXCHANGE FOR AN AWARD OF EQUITY INSTRUMENTS BASED ON THE GRANT-DATE
FAIR VALUE OF THE AWARD (WITH LIMITED EXCEPTIONS). THAT COST WILL BE RECOGNIZED OVER THE
PERIOD DURING WHICH AN EMPLOYEE IS REQUIRED TO PROVIDE SERVICE, THE REQUISITE SERVICE
PERIOD (USUALLY THE VESTING PERIOD). THE GRANT-DATE FAIR VALUE OF EMPLOYEE SHARE OPTIONS
AND SIMILAR INSTRUMENTS WILL BE ESTIMATED USING OPTION-PRICING MODELS.IN ADDITION, A PUBLIC ENTITY IS REQUIRED TO MEASURE THE COST OF EMPLOYEE SERVICES
RECEIVED IN EXCHANGE FOR AN AWARD OF LIABILITY INSTRUMENTS BASED ON ITS CURRENT FAIR
VALUE. THE FAIR VALUE OF THAT AWARD WILL BE REMEASURED SUBSEQUENTLY AT EACH REPORTING
DATE THROUGH THE SETTLEMENT DATE. CHANGES IN FAIR VALUE DURING THE REQUISITE SERVICE
PERIOD WILL BE RECOGNIZED AS COMPENSATION COST OVER THAT PERIOD. - 10 -




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FOR PUBLIC ENTITIES THAT DO NOT FILE AS SMALL BUSINESS ISSUERS, THIS STATEMENT IS
EFFECTIVE AS OF THE BEGINNING OF THE FIRST INTERIM OR ANNUAL REPORTING PERIOD THAT
BEGINS AFTER JUNE 15, 2005.FOR PUBLIC ENTITIES THAT FILE AS SMALL BUSINESS ISSUERS, THIS STATEMENT IS EFFECTIVE AS
OF THE BEGINNING OF THE FIRST INTERIM OR ANNUAL REPORTING PERIOD THAT BEGINS AFTER
DECEMBER 15, 2005.AT THE REQUIRED EFFECTIVE DATE, ALL PUBLIC ENTITIES THAT USED THE FAIR VALUE BASED
METHOD FOR EITHER RECOGNITION OR DISCLOSURE UNDER STATEMENT 123 ARE REQUIRED TO APPLY
THIS STATEMENT USING A MODIFIED VERSION OF PROSPECTIVE APPLICATION. UNDER THAT
TRANSITION METHOD, COMPENSATION COST IS RECOGNIZED ON OR AFTER THE REQUIRED EFFECTIVE
DATE FOR THE PORTION OF OUTSTANDING AWARDS FOR WHICH THE REQUISITE SERVICE HAS NOT YET
BEEN RENDERED, BASED ON THE GRANT-DATE FAIR VALUE OF THOSE AWARDS CALCULATED UNDER
STATEMENT 123 FOR EITHER RECOGNITION OR PRO-FORMA DISCLOSURES. FOR PERIODS BEFORE THE
REQUIRED EFFECTIVE DATE, THOSE ENTITIES MAY ELECT TO APPLY THE MODIFIED VERSION OF
RETROSPECTIVE APPLICATION UNDER WHICH FINANCIAL STATEMENTS FOR PRIOR PERIODS ARE
ADJUSTED ON A BASIS CONSISTENT WITH THE PRO FORMA DISCLOSURES REQUIRED FOR THOSE PERIODS
BY STATEMENT 123. THE COMPANY HAS NOT YET DETERMINED WHICH METHODOLOGY IT WILL ADOPT
BUT BELIEVES THAT THE IMPACT THAT THE ADOPTION OF SFAS NO. 123R WILL HAVE ON ITS
FINANCIAL POSITION OR RESULTS OF OPERATIONS WILL APPROXIMATE THE MAGNITUDE OF THE
STOCK-BASED EMPLOYEE COMPENSATION COST PURSUANT TO THE DISCLOSURE
REQUIREMENTS OF SFAS NO. 148.EITF 03-11, REPORTING GAINS AND LOSSES ON DERIVATIVE INSTRUMENTS THAT ARE SUBJECT TO
FASB STATEMENT NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
AND NOT HELD FOR TRADING PURPOSES.IN JULY 2003, THE EITF REACHED A CONSENSUS THAT ALL GAINS AND LOSSES (REALIZED AND
UNREALIZED) ON DERIVATIVE INSTRUMENTS WITHIN THE SCOPE OF SFAS 133 SHOULD BE SHOWN NET
IN THE INCOME STATEMENT, WHETHER OR NOT SETTLED PHYSICALLY, IF THE DERIVATIVE
INSTRUMENTS ARE HELD FOR TRADING PURPOSES. HOWEVER, THE EITF RECOGNIZED THAT THERE MAY
BE CONTRACTS WITHIN THE SCOPE OF SFAS 133 CONSIDERED NOT HELD FOR TRADING PURPOSES THAT
WARRANT FURTHER CONSIDERATION AS TO THE APPROPRIATE INCOME STATEMENT CLASSIFICATION OF
THE GAINS AND LOSSES. IN EITF 03 11, THE EITF CLARIFIED CERTAIN CRITERIA TO USE IN
DETERMINING WHETHER GAINS AND LOSSES RELATED TO NON-TRADING DERIVATIVE INSTRUMENTS
SHOULD BE SHOWN NET IN THE INCOME STATEMENT. THE ADOPTION OF EITF 03-11 DID NOT HAVE A
MATERIAL EFFECT ON THE COMPANYS FINANCIAL POSITION, RESULTS OF OPERATIONS OR CASH
FLOWS. - 11 -




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION:   SOME OF THE STATEMENTS IN THIS QUARTERLY REPORT, INCLUDING THOSE THAT CONTAIN THE WORDS
ANTICIPATE, BELIEVE, PLAN, ESTIMATE, EXPECT, SHOULD, INTEND AND OTHER SIMILAR
EXPRESSIONS, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THOSE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OR
THOSE OF OUR INDUSTRY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY THOSE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENT TO DIFFER MATERIALLY FROM THOSE DESCRIBED OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS ARE GENERAL ECONOMIC CONDITIONS, COMPETITION, POTENTIAL
TECHNOLOGY CHANGES, CHANGES IN OR THE LACK OF ANTICIPATED CHANGES IN THE REGULATORY ENVIRONMENT IN
VARIOUS COUNTRIES, THE RISKS INHERENT IN NEW PRODUCT AND SERVICE INTRODUCTIONS AND THE ENTRY INTO
NEW GEOGRAPHIC MARKETS AND OTHER FACTORS INCLUDED IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE SEC). COPIES OF OUR SEC FILINGS ARE AVAILABLE FROM THE SEC OR MAY BE OBTAINED
UPON REQUEST FROM US. WE DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE THE INFORMATION CONTAINED
HEREIN, WHICH SPEAKS ONLY AS OF THIS DATE. GENERAL:  SUNAIR ELECTRONICS, INC. (SUNAIR, THE COMPANY, US, WE OR OUR) IS A FLORIDA CORPORATION
ORGANIZED IN 1956. IT IS ENGAGED IN THE DESIGN, MANUFACTURE AND SALE OF HIGH FREQUENCY SINGLE
SIDEBAND COMMUNICATIONS EQUIPMENT AND THE SOFTWARE DEVELOPMENT, DESIGN, INTEGRATION TESTING AND
DOCUMENTATION OF C4ISR SYSTEMS UTILIZED FOR LONG RANGE VOICE AND DATA COMMUNICATIONS IN
FIXED STATION, MOBILE AND MARINE MILITARY AND GOVERNMENTAL APPLICATIONS. PERCIPIA, INC. AND SUBSIDIARY (PERCIPIA), AN OHIO CORPORATION, IS A WHOLLY OWNED SUBSIDIARY WHICH
PROVIDES INSTALLATION AND MAINTENANCE OF TELEPHONY SYSTEMS, AND DEVELOPS AND CUSTOMIZES SOFTWARE
FOR TELEPHONY SYSTEMS TO VARIOUS INDUSTRIES, MOST NOTABLY HOSPITALITY. TELECOM FM LIMITED (TELECOM), A UNITED KINGDOM CORPORATION, IS A WHOLLY OWNED SUBSIDIARY WHICH
DISTRIBUTES AND INSTALLS TELECOMMUNICATION DEVICES PROVIDING FIXED WIRELESS ACCESS TO NETWORK AND
DATA SERVICE PROVIDERS. SUNAIR PRODUCTS AND ENGINEERING CAPABILITIES ARE MARKETED BOTH DOMESTICALLY AND INTERNATIONALLY AND
ARE PRIMARILY INTENDED FOR STRATEGIC MILITARY AND OTHER GOVERNMENTAL APPLICATIONS. SALES ARE
EXECUTED DIRECT THROUGH SYSTEMS ENGINEERING COMPANIES, WORLDWIDE COMMERCIAL AND FOREIGN
GOVERNMENTAL AGENCIES OR DIRECT TO THE U.S. GOVERNMENT. SUNAIRS LINE OF EQUIPMENT IS COMPOSED OF PROPRIETARY HF/SSB RADIO EQUIPMENT AND ANCILLARY ITEMS
SOLD AS OPERATING UNITS OR COMBINED INTO SOPHISTICATED SYSTEMS THAT MAY INTERFACE WITH
WORKSTATIONS, ANTENNAE, POWER SOURCES, MODEMS, MESSAGE SWITCHING DEVICES, CRYPTOGRAPHIC EQUIPMENT
SOFTWARE AND THE LIKE PROVIDED BY OTHERS. SUNAIR PRODUCTS EMPLOY ADVANCED SOLID STATE DESIGNS WITH
COMPUTER CONTROLLED NETWORKING CAPABILITIES. IN ADDITION, THE COMPANY CUSTOM DESIGNS SYSTEMS
INCORPORATING VARIOUS COMBINATIONS OF EQUIPMENT INTO RACKS AND CONTROL CONSOLES THAT MAY INTERFACE
WITH VALUE ADDED PRODUCTS AND SYSTEMS OF - 12 -




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OTHER MANUFACTURERS. WITH THE ACQUISITIONS OF PERCIPIA
AND TELECOM, THE COMPANY NOW INSTALLS AND MAINTAINS TELEPHONY AND FIXED WIRELESS SYSTEMS. PURSUANT TO THE PREVIOUSLY ANNOUNCED PURCHASE AGREEMENT DATED AS OF NOVEMBER 17, 2004 (THE
PURCHASE AGREEMENT) BY AND BETWEEN THE COMPANY AND COCONUT
PALM CAPITAL INVESTORS II, LTD., A FLORIDA LIMITED PARTNERSHIP (COCONUT PALM), ON FEBRUARY 9,
2005, COCONUT PALM COMPLETED ITS PURCHASE OF 5 MILLION UNITS. THE UNITS CONSIST OF 5 MILLION NEWLY
ISSUED SHARES OF COMMON STOCK OF THE COMPANY AND WARRANTS TO PURCHASE AN ADDITIONAL 10 MILLION
SHARES OF COMMON STOCK AT EXERCISE PRICES RANGING FROM $6.00 PER SHARE TO $7.00 PER SHARE. THE
WARRANTS ARE IMMEDIATELY EXERCISABLE AND WILL EXPIRE AT TIMES OF THREE AND FIVE YEARS FROM CLOSING.
THE AGGREGATE PURCHASE PRICE FOR THE UNITS WAS $25 MILLION. FOLLOWING THE CLOSING OF THE
TRANSACTION, COCONUT PALM BENEFICIALLY OWNS 15 MILLION SHARES, OR 78.9%, OF THE COMMON STOCK OF THE
COMPANY. THE COMPANY INTENDS TO USE THE PROCEEDS FROM THE SALE OF THE UNITS TO FUND INITIAL ACQUISITIONS
THAT HAVE OPERATIONS IN THE PEST AND TERMITE CONTROL SERVICES SECTOR AND TO FORM A NEW PEST AND
TERMITE CONTROL SERVICES DIVISION. ULTIMATELY, THE COMPANY ANTICIPATES THAT WITH THE SALE OF THE
UNITS AND THE FORMATION OF ITS NEW PEST AND TERMITE CONTROL SERVICES DIVISION, IT WILL NO LONGER
OPERATE SOLELY THROUGH ITS TRADITIONAL BUSINESS SEGMENTS. FURTHERMORE, AS THE COMPANY IS ABLE TO
GROW ITS NEW PEST AND TERMITE CONTROL SERVICES DIVISION THROUGH ACQUISITIONS AND, EVENTUALLY
THROUGH INTERNAL ORGANIC GROWTH, IT IS CONTEMPLATED THAT THIS NEW SEGMENT WILL BECOME THE COMPANYS
DOMINANT OPERATION. ACCORDINGLY, IF THE COMPANY IS SUCCESSFUL IN IMPLEMENTING THIS STRATEGY, IT
WILL REPRESENT A FUNDAMENTAL SHIFT IN THE NATURE OF THE COMPANYS BUSINESS. IN CONNECTION WITH THIS CHANGE IN BUSINESS STRATEGY, AND IN ACCORDANCE WITH THE PURCHASE AGREEMENT,
THE COMPANY ALSO AGREED TO USE ITS BEST EFFORTS TO ENTER INTO A DEFINITIVE AGREEMENT AS SOON AS
PRACTICABLE TO DIVEST ITSELF OF CERTAIN NON-CORE ASSETS ACQUIRED IN CONNECTION WITH THE COMPANYS
PURCHASE OF: (I) PERCIPIA; AND (II) THE ASSETS OF TELECOM, AT A PURCHASE PRICE EQUAL TO THE AMOUNT
THE COMPANY PAID FOR SUCH ASSETS PLUS THE AMOUNT OF ANY INTERCOMPANY DEBT INCURRED AND ADVANCES
MADE IN CONNECTION WITH SUCH PURCHASES. LIQUIDITY:  FOR THE QUARTER ENDED DECEMBER 31, 2004, THE COMPANY HAD POSITIVE CASH FLOW FROM OPERATIONS OF
$1,310,373 DUE TO REDUCTIONS IN ACCOUNTS RECEIVABLE AND REDUCTIONS IN INVENTORIES FOR SHIPMENTS
MADE FROM INVENTORY PURCHASED IN PRIOR PERIODS. ACCOUNTS RECEIVABLE DECREASED ON PAYMENTS AGAINST
LARGE SHIPMENTS MADE TOWARD 2004 FISCAL YEAR END. CASH FLOWS USED BY INVESTING ACTIVITIES FOR THE QUARTER ENDED DECEMBER 31, 2004 WERE $1,256,709
PROVIDED BY PROCEEDS FROM SALE OF HELD-TO-MATURITY INVESTMENTS LESS AMOUNTS PAID FOR PURCHASE OF
PROPERTY, PLANT, AND EQUIPMENT, SOFTWARE DEVELOPMENT AND CASH PAID FOR THE ACQUISITION OF THE
ASSETS OF TELECOM FM. CASH FLOWS USED IN FINANCING ACTIVITIES FOR THE QUARTER ENDED DECEMBER 31, 2004 WERE $1,986,942
WHICH CONSISTED OF REPAYMENT OF THE LINE OF CREDIT AND PAYDOWN OF NOTES PAYABLE, LESS PROCEEDS FROM
EXERCISE OF STOCK OPTIONS. DURING THE FIRST QUARTER OF FISCAL 2005, THE COMPANY HAD SHORT TERM INVESTMENTS AND CASH OR CASH
EQUIVALENTS MORE THAN ADEQUATE TO COVER KNOWN REQUIREMENTS, UNFORESEEN EVENTS OR UNCERTAINTIES THAT
MIGHT OCCUR. THE COMPANYS KNOWN REQUIREMENTS CONSIST OF NORMAL OPERATING EXPENSES. DURING THIS
THREE MONTH PERIOD, CASH AND CASH EQUIVALENTS HAD AN AVERAGE BALANCE OF - 13 -




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$4,089,732 AS OPPOSED TO AN
AVERAGE BALANCE OF $1,788,000 FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2004. CASH EQUIVALENTS ARE
MONEY MARKET FUNDS THAT ARE READILY AVAILABLE FOR IMMEDIATE USE SHOULD THE OCCASION ARISE. IT IS
ANTICIPATED THAT THE COMPANY WILL REMAIN AS LIQUID DURING 2005. THE CURRENT RATIO OF THE COMPANY
AS OF DECEMBER 31, 2004 WAS 5.1 COMPARED TO 2.6 AS OF SEPTEMBER 30, 2004. THE COMPANY RECORDS RESERVES FOR INVENTORY SHRINKAGE AND OBSOLENSCENCE, WHEN CONSIDERED NECESSARY.
FOR THE QUARTER JUST ENDED, INVENTORY SHRINKAGE AND OBSOLENSCENCE RESERVES INCREASED $25,493 DUE TO
EXPECTED INVENTORY SHRINKAGE.
ACCOUNTS RECEIVABLE CONSIST OF BALANCES DUE FROM SALES. THE COMPANY MONITORS ACCOUNTS RECEIVABLES
AND PROVIDES ALLOWANCES WHEN CONSIDERED NECESSARY. AS OF DECEMBER 31, 2004, THE COMPANY HAD AN
ALLOWANCE OF $48,485. NON CASH INTERIM RESERVES ARE MAINTAINED TO COVER ITEMS SUCH AS WARRANTY REPAIRS IN PROCESS AND
OTHER CHARGES THAT MAY BE IN DISPUTE. CAPITAL RESOURCES:
__________________ DURING THE FIRST THREE MONTHS OF FISCAL 2005, $32,619 WAS SPENT FOR CAPITAL ASSETS. THESE FUNDS
WERE PRIMARILY USED FOR NEW COMPUTER HARDWARE. $124,273 WAS SPENT FOR SOFTWARE DEVELOPMENT COSTS.
NO EXPENDITURES ARE COMTEMPLATED FOR PLANT EXPANSION OR EXTENSIVE MAINTENANCE IN FISCAL 2005. THE
COMPANY HAS NO LONG TERM DEBT AND NONE IS CONTEMPLATED, EXCEPT THE COMPANY MAY INCUR DEBT TO
FINANCE ACQUISITIONS ALTHOUGH THERE ARE CURRENTLY NO AGREEMENTS OR PROPOSALS IN CONNECTION WITH ANY
ACQUISITIONS. LIABILITIES CONSIST OF CURRENT ACCOUNTS PAYABLE, ACCRUED EXPENSES RELATED TO THE
CURRENT ACCOUNTING PERIOD, AND THE CURRENT AND LONG TERM PORTION OF INCOME TAXES PAYABLE. RESULTS OF OPERATIONS:
______________________ FIRST QUARTER OF FISCAL YEAR ENDED 2005 COMPARED TO FIRST QUARTER OF FISCAL YEAR ENDED 2004. DURING THE FIRST QUARTER ENDED DECEMBER 31, 2004 OF THE CURRENT FISCAL YEAR, SALES OF $5,093,988 WERE UP 287.5% OR $3,779,414 FROM THE SAME QUARTER ONE YEAR AGO DUE TO INCREASED SHIPMENTS ON ORDERS RECEIVED FROM ONE OEM CUSTOMER IN THE FOURTH QUARTER OF FISCAL 2004 AND THE ADDED REVENUES PRODUCED BY THE TWO SUBSIDIARIES ACQUIRED IN THE FOURTH QUARTER OF FISCAL YEAR ENDED SEPTEMBER 30, 2004. BACKLOG OF $6,537,000 OF HF RADIO PRODUCTS WAS HIGHER AT DECEMBER 31, 2004 COMPARED TO $5,132,000 AT DECEMBER 31, 2003. COST OF SALES WAS SLIGHTLY HIGHER AT 55.0% OF SALES IN THE FIRST QUARTER OF FISCAL 2005 AS COMPARED TO 53.1% OF SALES FOR THE SAME PERIOD ONE YEAR AGO DUE TO THE PRODUCT MIX. INVENTORIES DECREASED 4.9% OR $357,755 FOR THE FIRST QUARTER OF FISCAL 2005 DUE TO INCREASED SHIPMENTS AGAINST ORDERS RECEIVED IN THE FOURTH QUARTER OF FISCAL 2004. THE COMPANY CONTINUES ITS EFFORTS TO REDUCE INVENTORIES TO LOWER LEVELS. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES INCREASED 268.0% OR $1,303,964 DUE TO INCREASED OVERHEADS ASSOCIATED WITH THE ACQUISITION OF PERCIPIA AND TELECOM FM. EXPENSES CONTINUE TO BE INCURRED FOR EXPANDED MARKET EXPOSURE. INTEREST INCOME DECREASED $26,656 DUE TO THE REDEMPTION OF THE PEFCO NOTES IN THE FIRST QUARTER OF FISCAL 2005. INTEREST EXPENSE WAS INCURRED ON A $2,000,000 BANK LINE OF CREDIT. OTHER EXPENSES INCURRED DUE TO A LOSS ON THE REDEMPTION OF THE PEFCO NOTE. MARKETING EFFORT CONTINUES TO FOLLOW UP ON OPPORTUNITIES IN THE MIDDLE EAST, ASIA, NORTH AFRICA, AND INDIA. MAJOR SYSTEMS PROJECTS ARE BEING PURSUED AND PROGRESS IS SHOWING STRONG ORDER CHANCES IN INDIA AND A PERSIAN GULF COUNTRY. BOTH OF THESE MAJOR OPPORTUNITIES BRING SYSTEM INTEGRATION REQUIREMENTS WHICH MATCH OUR FOCUSED GROWTH AREA OF THE RADIO COMMUNICATIONS GROUP. FORECASTS ARE PROMISING IN THE NEW SOFTWARE AND WIRELESS TELECOMMUNICATIONS AREAS AS WELL. SUNAIR ELECTRONICS HAS RECEIVED ORDERS FOR HF RADIO SYSTEMS TO BE INSTALLED ON SIX NEW CONSTRUCTION PATROL BOATS BEING BUILT UNDER A U.S. FOREIGN MILITARY SALES (FMS) CONTRACT. ANOTHER SIX PATROL BOAT OPTIONS ARE SCHEDULED IN THE FUTURE. DELIVERIES UNDER THE PREVIOUSLY ANNOUNCED U.S. COAST GUARD ORDERS ARE EXPECTED TO CONTINUE THROUGH MOST OF FISCAL YEAR 2005. - 14 -




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ITEM 3. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. THE TERM DISCLOSURE CONTROLS AND PROCEDURES
IS DEFINED IN RULE 13a  15(e) OF THE SECURITIES EXCHANGE ACT OF 1934, OR THE EXCHANGE ACT. THIS
TERM REFERS TO THE CONTROLS AND PROCEDURES OF A COMPANY THAT ARE DESIGNED TO ENSURE THAT
INFORMATION REQUIRED TO BE DISCLOSED BY A COMPANY IN THE REPORTS THAT IT FILES UNDER THE EXCHANGE
ACT IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN REQUIRED TIME PERIODS. OUR CHIEF
EXECUTIVE OFFICER AND OUR CHIEF FINANCIAL OFFICER HAVE
CONCLUDED, BASED ON THEIR EVALUATION AS OF DECEMBER 31, 2004, THAT OUR DISCLOSURE CONTROLS AND
PROCEDURES ARE EFFECTIVE FOR RECORDING, PROCESSING, SUMMARIZING AND TIMELY REPORTING THE
INFORMATION WE ARE REQUIRED TO DISCLOSE IN OUR REPORTS FILED UNDER THE EXCHANGE ACT. (B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. THERE HAVE BEEN NO CHANGES IN OUR
INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THE QUARTER ENDED DECEMBER 31, 2004 THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING. - 15 -




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PART II
    
    OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGSNONE
 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNONE
 
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIESNONE
 
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNONE
 
 ITEM 5.
    
    OTHER INFORMATIONNONE
 
 ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
  (A)
    EXHIBITS  2.1
    PURCHASE AGREEMENT, DATED NOVEMBER 17, 2004, BY AND
BETWEEN SUNAIR ELECTRONICS, INC., A FLORIDA CORPORATION, AND COCONUT PALM
CAPITAL INVESTORS II, LTD., A FLORIDA LIMITED PARTNERSHIP (INCORPORATED BY
REFERENCE TO THE FORM 8-K FILED WITH THE SEC ON NOVEMBER 17, 2004).2.2
    ASSET PURCHASE AGREEMENT BY AND AMONG SUNAIR
COMMUNICATIONS, LIMITED, A PRIVATE LIMITED COMPANY INCORPORATED IN ENGLAND;
TELECOM FM, LIMITED, A PRIVATE LIMITED COMPANY INCORPORATED IN ENGLAND; AND
TFM GROUP LIMITED, A PRIVATE LIMITED COMPANY INCORPORATED IN ENGLAND AND THE
SOLE SHAREHOLDER OF TELECOM FM, LIMITED (INCORPORATED BY REFERENCE TO THE
FORM 8-K FILED WITH THE SEC ON OCTOBER 12, 2004).31.1
    CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.31.2
    CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.32.1
    CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.32.2
    CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - 16 -




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(B)
    REPORTS ON FORM 8-KON OCTOBER 12, 2004, THE COMPANY FILED A FORM 8-K DISCLOSING INFORMATION UNDER
ITEMS 1.01, 2.01 AND 9.01.ON OCTOBER 20, 2004, THE COMPANY FILED A FORM 8-K/A AMENDING INFORMATION UNDER
ITEM 9.01.ON NOVEMBER 17, 2004, THE COMPANY FILED A FORM 8-K DISCLOSING INFORMATION UNDER
ITEMS 1.01, 3.02, 8.01 AND 9.01.ON DECEMBER 16, 2004, THE COMPANY FILED A FORM 8-K DISCLOSING INFORMATION UNDER
ITEM 8.01.ON DECEMBER 20, 2004, THE COMPANY FILED A FORM 8-K/A AMENDING INFORMATION UNDER
ITEM 9.01. - 17 -




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SIGNATURES    PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED.  SUNAIR ELECTRONICS, INC.DATE      FEBRUARY 14, 2005
    
    /S/ JAMES E. LAURENTJAMES E. LAURENT, PRESIDENTAND CHIEF EXECUTIVE OFFICERDATE     FEBRUARY 14, 2005
    
    /S/ SYNNOTT B. DURHAMSYNNOTT B. DURHAM,CHIEF FINANCIAL OFFICER
 - 18 -