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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K
                                   ---------
           [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended September 30, 2001
                                      OR
         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
             For the transition period from ________ to ________.

                          Commission File No. 0-31157


                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                    --------------------------------------
            (Exact name of registrant as specified in its charter)


             PENNSYLVANIA                               23-2507402
   -------------------------------------------------------------------------
   (State or other jurisdiction            (IRS Employer Identification No.)
         of incorporation)


    720 PENNSYLVANIA DRIVE, EXTON, PENNSYLVANIA                    19341
    ----------------------------------------------------------------------
      (Address of principal executive offices)                  (Zip Code)


                                (610) 646-9800
                                --------------
             (Registrant's telephone number, including area code)

       Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock, par
value $.001

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No__
-----------------------------------------------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant as of December 7, 2001 was approximately
$54,250,844. Shares of common stock held by each executive officer and director
and by each person who owns 10% or more of our outstanding common stock have
been excluded since such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes

As of December 7, 2001, there were 13,025,374 outstanding shares of the
Registrant's Common Stock.

                      Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders to be filed prior to January 29, 2002 are incorporated by reference
into Part III of this Report. Such Proxy Statement, except for the parts therein
which have been specifically incorporated by reference, shall not be deemed
"filed" for the purposes of this Report on Form 10-K.

<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC
                        2001 Annual Report on Form 10-K

                               Table of Contents
<TABLE>
<CAPTION>
                                                                                                   Page
<S>         <C>                                                                                    <C>
            Part I

Item 1.     Business                                                                                   3

Item 2.     Properties                                                                                12

Item 3.     Legal Proceedings                                                                         12

Item 4.     Submission of Matters to a Vote of Security Holders                                       12

            Part II

Item 5.     Market for the Registrant's Common Equity and Related Shareholder Matters                 13

Item 6.     Selected Financial Data                                                                   14

Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations  14-22

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                                22

Item 8.     Financial Statements and Supplementary Data                                            23-38

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      38

            Part III

Item 10.    Directors and Executive Officers of the Registrant                                        38

Item 11.    Executive Compensation                                                                    39

Item 12.    Security Ownership of Certain Beneficial Owners and Management                            39

Item 13.    Certain Relationships and Related Transactions                                            39

            Part IV

Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K                        39-41

</TABLE>

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PART I

Item 1.  Business

Overview

Innovative Solutions and Support, Inc. (the "Company", or "IS&S") was founded in
1988. We design, manufacture and sell flight information computers, electronic
displays and advanced monitoring systems to the military and government,
commercial air transport and corporate/general aviation markets. Our strategy is
to leverage the latest technologies developed for the personal computer and
telecommunications industries into advanced, cost-effective solutions for the
aviation industry. We believe that this approach, combined with our industry
experience, enables us to develop high-quality avionics products, substantially
reduce product time to market and achieve cost advantages over the products
offered by our competitors.

Historically, we have focused our efforts on developing and marketing air data
systems that measure, calculate and display critical flight information, such as
airspeed and altitude, and instruments that measure engine and fuel data,
primarily for use in the aircraft retrofit market and also for the Original
Equipment Manufacturer (OEM) market. Since fiscal 1997, a substantial portion of
our revenues has been from the sale of air data systems that bring aircraft into
compliance with government regulations, including the reduced vertical
separation minimum, or RVSM, requirements that are being phased in by regulatory
authorities on certain heavily traveled flight routes. We believe that we are
currently one of three primary suppliers of RVSM products to the U.S. retrofit
market. As a result of our expertise, we were selected as the sole supplier of
RVSM systems and components in connection with the United States Air Force's KC-
135 retrofit program, which we believe to be one of the largest U.S. military
RVSM retrofit programs to date.

Advances in technology are making available to pilots increasing amounts of
information that enhance both the safety and efficiency of flying. However, the
limited amount of space in the cockpit coupled with inefficiencies associated
with currently used displays inhibits the display and integration of this
information in a user friendly manner.

During fiscal 2000, we introduced our flat panel display system, or Cockpit
Information Portal (CIP), which is the first in a series of new products we
intend to develop to enhance the management and integration of cockpit
information. Our CIP has a large, 15 inch diagonal high-resolution screen which
can integrate and replace virtually all of the space-consuming conventional
displays currently used in cockpits. Our CIP is the centerpiece of our cockpit
information management system that organizes and displays a multitude of flight
information that has been mandated by regulation or that is or will become
available to pilots in the future. This information may be generated from a
variety of sources, including our RVSM air data system, our engine and fuel
instrumentation, our cabin surveillance and security system or from third-party
data and information products, such as a predictive weather information system
and airport location awareness programs. In addition, we are in the process of
developing technologies relating to other products to be incorporated with our
CIP, such as a heads up display system designed to project critical flight data
onto cockpit windshields for easy reference by pilots.


Our Industry

A wide range of information, including airspeed, altitude and fuel levels, is
critical for the proper and safe operation of aircraft. With advances in
technology, new types of information to assist pilots, such as weather radar and
ground terrain maps, are becoming available for display in cockpits. We believe
that aircraft cockpits will increasingly become information centers, capable of
delivering additional information that is either mandated by regulation or
demanded by pilots to assist them in the safe and efficient operation of
aircraft.

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There are three general types of flight data: air data, which includes aircraft
speed, altitude and rates of ascent and descent; equipment data, such as fuel
and oil quantity and other engine measurements; and alternative source
information, which is information not originating on the aircraft, including
weather radar and surface terrain maps. Air data calculations are based
primarily on air pressure measurements derived from sensors on the aircraft.
Equipment data are determined by measuring various indices such as temperature,
volume and pressure within an aircraft's engines and other mechanical equipment.
Alternative source information is typically derived from satellites or equipment
located on land and fed by satellite or radio signals to the aircraft. All types
of information are then displayed in the cockpit for reference by pilots.

Traditionally, flight data and other cockpit information were displayed on a
series of separate analog dials. In the early 1980s, digital displays using
cathode ray tubes began to replace some of the individual analog displays.
Recently, the industry has begun to develop color flat panel displays using
liquid crystal displays (LCD) to replace some of the traditional analog or
digital displays. We expect that the ability to display more information in a
space-efficient and customized platform will become increasingly important as
additional information, such as weather radar and surface terrain maps, becomes
mandated by regulation or demanded by pilots. Accordingly, we believe that flat
panel displays, which can integrate and display a ``suite'' of information, will
increasingly replace individual displays as the method for delivering and
ordering the information displayed in the cockpit.

Air Data and Reduced Vertical Separation Minimum (RVSM)

Pilots use air data for a number of important purposes, including maintaining
safe separation from other aircraft. Until recently, aircraft on a similar
flight path at altitudes exceeding 29,000 feet have been required to maintain a
vertical separation of at least 2,000 feet. As air travel has increased over the
past decade, U.S. and international aviation organizations have sought ways to
increase traffic flow on high traffic routes. These organizations have developed
reduced vertical separation minimums, or RVSM, for adoption on certain highly
traveled routes to reduce vertical separation between aircraft from 2,000 feet
to 1,000 feet. RVSM increases available flight routes within a vertical
airspace, thereby increasing the number of aircraft that can fly on high traffic
routes.

Safe travel on RVSM routes requires that an aircraft's altimeter be extremely
accurate, and aircraft flying RVSM routes must have RVSM-certified equipment.
RVSM-certified altimeters must be able to measure altitude to within 25 feet at
an altitude of 30,000 feet. In contrast, non-RVSM systems need only be accurate
within 180 feet at 30,000 feet.

RVSM has been in effect for certain North Atlantic routes since March 1997 and
is currently mandated between the altitudes of 31,000 and 39,000 feet on these
routes. RVSM is scheduled to be mandated between 29,000 and 41,000 feet on these
North Atlantic routes by January 2002. RVSM was phased in on certain Trans-
Pacific air routes beginning in February 2000 and is being phased in on Western
Atlantic air routes beginning in November 2001. Eurocontrol, the organization
that oversees air traffic control throughout Europe, has mandated RVSM
compliance on certain European routes beginning in January 2002 at altitudes
between 29,000 and 41,000 feet.

Flat Panel Displays

Air data and other flight information have traditionally been displayed on
analog instrumentation and, more recently, individual digital displays. Within
the last five years, color flat panel displays have begun to be used in aircraft
cockpits. Flat panel displays are liquid crystal display (LCD) screens that can
replicate the display of one or a suite of analog or digital displays on one
screen. Like other instrumentation, flat panel displays can be installed in new
aircraft or used to replace existing displays in aircraft already in use. LCD's
are also being used for cabin entertainment and security monitoring on-board
aircraft.

Engine and Fuel Displays

Equipment data, such as engine and fuel related data, traditionally have been
displayed on conventional solid state displays. Equipment data displays convey
fuel and oil levels and provide information on engine activity, including oil
and hydraulic pressures, temperature and liquid oxygen levels. This
instrumentation includes individual and multiple displays clustered throughout
an aircraft's cockpit. Engine and fuel displays tend to be replaced more
frequently than other displays due to normal wear-and-tear. As the information
displayed by this instrumentation is vital for safe and efficient flight,
aircraft operators continue to purchase individual conventional engine and fuel
displays to replace older or non- functioning displays.

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Strategy

Our objective is to become a leading supplier and integrator of cockpit
information. We believe that our industry experience and reputation, our
technology and products and our business strategy provide a basis to achieve
this objective. Key elements of our strategy include:

       .  Maintaining our leadership in the air data and RVSM markets. We
          believe that we are one of the largest suppliers of air data and RVSM-
          compliant products to the U.S. retrofit market. As RVSM routes
          continue to be phased in over the next several years, we anticipate
          many aircraft will be retrofitted with RVSM-compliant air data
          systems. The RVSM retrofit market has a limited number of competitors,
          and we intend to capitalize on our position as a leading provider of
          reliable, cost competitive RVSM air data products.

       .  Establishing leadership in the flat panel display market. We expect
          that over the next several years, many aircraft will either be
          retrofitted or newly manufactured with flat panel displays. Given the
          versatility, visual appeal and lower cost of displaying a series of
          instruments and other flight-relevant information on a single flat
          panel, we believe that flat panel displays will increasingly replace
          individual analog and digital instruments. We also believe that our
          CIP has significant benefits over the flat panel displays currently
          offered by our competitors, including its lower cost, larger size and
          enhanced viewing area. Accordingly, we believe that these advantages
          will allow us to generate significant revenues from our CIP and gain
          significant market share within this market.

       .  Continuing our engineering and product development successes. We have
          developed innovative products by combining our avionics, engineering
          and design expertise with commercially available technologies,
          components and products from non-aviation applications, including the
          personal computer and telecommunications industries. We believe our
          processes allow us to bring products to market quickly and to control
          our development costs. Our CIP, which we expect will be larger,
          display more information and cost less than the flat panel displays
          offered by our competitors, is an example of our ability to engineer a
          superior product through the selective application of non-avionic
          technology. We currently are developing technologies relating to other
          products intended to be incorporated with our CIP, such as a heads up
          display system designed to project critical flight data onto cockpit
          windshields for easy reference by pilots.

       .  Increasing our sales to the commercial air transport and
          corporate/general aviation markets. While we currently sell our
          products to commercial and corporate aircraft operators and other
          retrofitters, our products have been predominantly used in the
          government and military end user markets. We intend to strengthen and
          diversify our marketing efforts to include all end user markets of the
          aviation industry, particularly the commercial air transport market,
          including national and regional carriers and other fleet operators,
          the corporate/general aviation market, primarily through aircraft
          modification centers, as well as the OEM market. We have begun
          building a sales and marketing force dedicated to expanding our sales
          efforts to these markets while at the same time maintaining our
          position as a provider of avionics products for the entire United
          States military establishment.

       .  Expanding our international presence. We plan to increase our
          international sales through expanding sales and marketing personnel
          and adding foreign offices. As RVSM and flat panel displays become
          more prevalent throughout the world, we believe that European and
          other international aircraft operators and aircraft modification
          centers will accelerate their retrofitting activities, thereby
          increasing the demand for RVSM products and flat panel displays. We

                                       5
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         have expanded our international presence by establishing a sales office
         in London. We intend to further expand our international sales presence
         in conjunction with the anticipated introduction of RVSM on other air
         routes throughout the world.

     .   Growth through acquisitions. We intend to pursue acquisitions as a
         means of growing our business with respect to both information
         management products and content, and we have identified profiles of the
         types of companies we would like to acquire. We may seek to acquire
         developers or suppliers of complementary products, technology or
         information, or we may acquire suppliers of similar products as a means
         of increasing our product offerings and market share.

Our Products

Our current line of products includes:

Air Data and RVSM Systems and Components

Our air data and RVSM products calculate and display various measures
of air data, such as aircraft speed, altitude and rate of ascent and
descent. These systems consist of a number of components, including
internally-mounted precision pressure sensors, a computer system and a
cockpit display. The sensors collect air pressure data from calibrated
openings in the skin of an aircraft. The computers process the raw data
and convert it, using advanced proprietary algorithms developed by us,
into useful information. Displays in the cockpit then convey the
information to pilots.

Our air data systems are highly accurate with respect to the collection
and interpretation of raw air pressure data from specifically selected
locations on the aircraft. We utilize state-of-the-art, highly
sensitive digital sensors capable of gathering the requisite air
pressure data. The software in our computer systems incorporates
proprietary mathematical algorithms that interpret the air data to
measure altitude, air speed and vertical speed. Our algorithms account
for time, speed and temperature variations as well as the variations
inherent in the diverse profiles of different types of aircraft so that
our products continuously provide accurate data over the requisite
range of altitudes and atmospheric conditions for the type of aircraft
in which the product is installed.

The functionality of our traditional non-RVSM air data systems and our
RVSM systems is similar. However, our RVSM systems use advanced sensors
to gather air pressure data and customized algorithms to interpret the
data, thus allowing the system to more accurately calculate altitude
and to qualify for RVSM certification.

We sell individual components as well as partial and complete air data
systems. Our components and systems include:

   .  digital air data computers, which calculate various air data parameters
      such as altitude, airspeed, vertical speed, angle of attack and other
      information derived from the measure of air pressure;

   .  integrated air data computers and display units, which calculate and
      convey air data information;

   .  altitude displays, which convey aircraft altitude measurements;

   .  airspeed displays, which convey various types of airspeed measurements
      including vertical airspeed and rates of ascent and descent; and

   .  altitude alerters, which allow the pilot to select a desired cruising
      altitude that the aircraft will reach and maintain.

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Flat Panel Display

We have developed a large, high-resolution flat panel display that can replace
virtually all of the conventional analog and digital displays currently used in
a cockpit and can also display additional information that is not now commonly
displayed in the cockpit. Our Cockpit Information Portal (CIP) is capable of
displaying nearly all types of air data, altitude, heading and navigational data
as well as alternative source information. As technology and information
delivery systems further develop, we expect additional information, such as
surface terrain maps, to be commonly displayed in the cockpit. We have designed
our CIP to be capable of displaying information generated from a variety of
sources, including our RVSM air data system, our engine and fuel instrumentation
and third-party data and information products.

Our CIP can interpret, configure and display data from our own products and
other manufacturers' products. The "open architecture" characteristics of the
cockpit instrumentation market enables our CIP products to be adapted to work in
most cockpit instrumentation systems. In addition, we have designed our CIP to
be able to host and integrate a heads up display that we are developing to
project important flight information onto an aircraft's cockpit windshield for
easy reference by pilots.

Our CIP has been demonstrated to pilots and test pilots from major airframe
manufacturers, airlines and the United States Government. The reception has been
outstanding. The large size display allows all flight critical information to be
displayed crisply in a non obstructed presentation which is not currently
available in either Air Transport, Regional or Business Jet aircraft.

Flat panel displays, like other cockpit instrumentation, require FAA approval
before installation in non-military aircraft. We are in the process of seeking
approval of the display pursuant to which we will be permitted to install our
CIP on certain aircraft.


Engine and Fuel Displays

We develop, manufacture and market engine and fuel displays. Our solid state
multifunction displays convey information with respect to fuel and oil levels as
well as engine activity, such as oil and hydraulic pressures, temperature and
liquid oxygen levels. This instrumentation includes individual and multiple
displays clustered throughout an aircraft's cockpit. Our displays can be used in
conjunction with our own engine and fuel data equipment or that of other
manufacturers.

Engine and fuel displays are vital to the safe and proper flight of aircraft and
are found in all aircraft. In addition, the accurate conveyance of engine and
fuel information is critical for the monitoring of engine stress and the
maintenance of engine parts. Engine and fuel displays tend to be replaced more
frequently than other displays and have remained largely unchanged since their
introduction due to their low cost, standard design and universal use.

We believe that our engine and fuel displays are extremely reliable, and we have
designed them to be programmable to adapt easily without major modification to
most modern aircraft. Our products have been installed on Lockheed Martin C-
130H aircraft, Boeing DC-9 and DC-10 aircraft and U.S. Air Force A-10 aircraft.

Customers

Our customers include, among others, the United States government, DME Inc.,
Northwest Airlines Corporation, Air Canada, Inc., DHL Airways, Inc., Emery
Worldwide Airlines, Federal Express Corporation, The Boeing Company, Lockheed
Martin Corporation, Rockwell International Corporation, Raytheon, Bombardier
Aerospace (the manufacturer of Learjet), Pilatus Aircraft Ltd. and Gulfstream
Aerospace Corporation.

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Retrofit Market

Historically, the majority of our sales have come from the retrofit market.
Among other reasons, we have pursued the retrofit market because of its
continued rapid growth in response to the increasing need to support the world's
aging fleet of aircraft.

Updating an individual aircraft's existing electronics equipment has become
increasingly common as new technology makes existing instrumentation outdated
while an aircraft is still structurally and mechanically sound. Retrofitting an
aircraft is generally a substantially less expensive alternative to purchasing a
new aircraft. We expect our main customers in the retrofit market to be:

   .  government and military contractors;

   .  aircraft operators; and

   .  aircraft modification centers.

Government and Military Contractors. Since 1988, we have sold products to
both commercial contractors and military end users in connection with
government aircraft retrofit programs. To date, a majority of our annual
sales have been in connection with these programs. For example, we sell
various products to Boeing and Rockwell International relating to contracts
with government entities, including the United States Air Force, to retrofit
aircraft. In addition, we sell our products directly to government entities.
Government-related projects are generally under either a subcontract with the
prime contractor, such as Boeing, or a direct contract with the appropriate
government agency. The majority of our government project sales are to
commercial contractors pursuant to commercial off-the-shelf equipment
contracts. As defense spending has decreased over the past decade, the
government's desire for cost-effective retrofitting of aircraft has led it to
increasingly purchase commercial off-the-shelf equipment rather than
requiring the development of specially designed products, which are usually
more costly and take a longer time to develop. These contracts tend to be on
commercial terms, although some of the termination and other provisions of
government contracts described below are typically applicable to these
contracts. Each government-related contract includes various federal regulations
that impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
such alteration or termination, we would normally be entitled to an equitable
adjustment to the contract price so that we may receive the purchase price for
already delivered items and reimbursement for allowable costs incurred.

Aircraft Operators.   We also sell our products to aircraft operators,
including commercial airlines, cargo carriers and business and general
aviation. Our products are used mostly in the retrofitting of aircraft owned
or operated by these customers, which generally retrofit and maintain their
aircraft themselves. Our commercial fleet customers include Northwest
Airlines, Air Canada, European Air, Midcoast, MK Airlines, DHL, Emery,
Airborne Express and Federal Express. We sell these customers a range of
products from fuel quantity indicators to RVSM air data systems.

Aircraft Modification Centers. Based on industry data, we believe there are
approximately 12,800 private and corporate aircraft in service in North
America. The primary retrofit market for private and corporate jets is
through aircraft modification centers, which repair and retrofit private
aircraft in a manner similar to the way auto mechanics service a person's
car. We have established relationships with a number of aircraft modification
centers throughout the United States. These modification centers essentially
act as distribution outlets for our RVSM products. We believe that our RVSM
and non-RVSM air data systems and related components are being promoted by
aircraft modification centers to update older or outdated air data systems.

We anticipate that retrofitting of air data systems by aircraft modification
centers, and thus the demand for our RVSM products, will increase
significantly as RVSM is increasingly phased-in on many of the world's most
popular flight routes. Furthermore, we anticipate that as flat panel displays

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gain popularity, aircraft modification centers will become significant customers
of our flat panel product as aircraft owners seek to upgrade their display
systems.

OEM Market

We also market our products to original equipment manufacturers, particularly
manufacturers of corporate and private jets as well as contractors of military
jets. Customers of our products include Bombardier (the manufacturer of
Learjet), Pilatus, Gulfstream, Boeing, Raytheon and Lockheed.

Certain jet manufacturers currently equip their aircraft with traditional non-
RVSM air data systems. However, we believe that most aircraft manufacturers will
begin equipping their aircraft with RVSM-compliant air data systems in
anticipation of the expected increasing use of RVSM throughout the world. In
addition, we expect that as flat panel displays become increasingly popular,
OEMs will begin manufacturing an increasing percentage of their aircraft with
flat panel displays, either as standard or optional equipment.

Backlog

As of September 30, 2001, our backlog was $12.8 million, $12.0 million of which
we expect will be sold in fiscal year 2002. Our backlog consists solely of
orders believed to be firm. In the case of contracts with government entities,
orders are only included in backlog to the extent funding has been obtained for
such orders.

Sales and Marketing

We have generally focused our sales efforts on government and military entities
and contractors, aircraft operators and OEMs, and more recently on aircraft
modification centers. We intend to increase our sales efforts with respect to
the commercial and corporate aviation markets in the future. To date, we have
made substantial use of third-party sales representatives for our sales efforts.
We compensate these third-party sales representatives through commissions.

We believe that our ability to provide prompt and effective repair and upgrade
service is critical to our marketing efforts. As part of our customer service
program, we have implemented a 24-hour hotline that customers can call with
respect to product repair or upgrade concerns. We employ five field service
engineers to service our equipment and, depending on the service required, we
may either dispatch a service crew to make necessary repairs or request that the
customer return the product to us for repairs or upgrades at our main facility.
In the event repairs or upgrades are required to be made at our facility, we
provide spare products for use by our customers during the repair time. Our in-
house turnaround repair times average 15 days and turnaround upgrade times
average 30 days. Before returning our products to customers, all repaired or
upgraded products are retested for airworthiness.

In connection with our customer service program, we typically provide our
customers with a two-year warranty on new products. We also offer our customers
extended warranties of varying terms for additional fees.

Government Regulation

The manufacture and installation of our products in aircraft owned and operated
in the United States is governed by U.S. Federal Aviation Administration (FAA)
regulations. The most significant of these regulations

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focus on Technical Standard Order (TSO) and Type Certificate (TC) or
Supplemental Type Certificate (STC) certifications. The FAA recommends that
avionics products be TSO-certified. A TSO sets forth the minimum general
standards that a certain type of equipment should meet. TSO certification is a
declaration by the FAA that a product meets such consensus standards and
guidelines and that it is certified to be used in aircraft. For example, all
altimeters, including RVSM and non-RVSM versions, have the same TSO, which sets
forth the various general requirements that an altimeter must meet to be TSO-
certified, such as life cycle, software, environmental and other standards. TSO-
certified avionics products are preferred by retrofitters and OEMs because they
act as an industry-wide stamp of approval and streamline the TC/STC approval
process, described below. The TSO certification process typically takes
approximately two to three months and consists of product testing, including
environmental simulation, as well as software and overall system testing.

The FAA requires that all avionics products receive TC or STC certification upon
their installation in aircraft. Without such certification, avionics products
may not be installed in an aircraft. TC certification is required for
installation by an OEM, and STC certification is required for retrofitting
installation. When an avionics product is installed in a certain type of
aircraft, the FAA conducts an inspection and systems tests on a test aircraft
containing such newly installed product. The TC and STC process includes ground
analyses and test flights to determine whether the product is functioning
properly in the aircraft. Upon satisfactory completion of these tests, a product
is TC- or STC-certified, meaning the type of aircraft tested can be flown with
the installed instrumentation. The TC and STC approval procedures typically last
one to four months, depending on the complexity of the equipment being
certified.

With respect to our RVSM air data products, the FAA also requires that these
products be RVSM-certified before they are used in flight. This certification
process may be undertaken in conjunction with the TC/STC certification process.
RVSM certification requires ground and flight tests and an analysis of flight
data to ensure the accuracy, reliability, system safety and mean time between
failure rates of the product. The RVSM certification process typically lasts one
to three months.

Sales of our products to European or other non-U.S. owners of aircraft also
typically require approval of the Joint Aviation Authorities (JAA), the European
counterpart of the FAA, or another appropriate governmental agency. Currently,
18 European countries are members of the JAA. JAA certification requirements for
the manufacturing and installation of our products in European-owned aircraft
mirror the FAA regulations. Much like the FAA certification process, the JAA has
established a process for granting TSOs, TCs and STCs. Certification by the JAA
or other appropriate governmental agencies is generally granted upon
demonstration that the equipment is accurate and able to maintain certain levels
of repeatability over time.

In addition to product-related regulations, we are also subject to the
government's procurement regulations with respect to sales of our products to
government entities or government contractors. These regulations dictate the
manner in which products may be sold to the government and set forth other
requirements which must be met in order to do business with or on behalf of
government entities. For example, pursuant to such regulations, the government
agency or general contractor may alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
such alteration or termination, we would normally be entitled to an equitable
adjustment to the contract price so that we may receive the purchase price for
already delivered items and reimbursement for allowable costs incurred.

Manufacturing, Assembly and Materials Acquisition

Our manufacturing activities consist primarily of assembling and testing
components and subassemblies and integrating them into a finished system. We
believe that this method allows us to achieve relatively flexible manufacturing
capacity while lowering overhead expenses. We generally purchase the components
for our products from third-party vendors and assemble them in a clean room
environment to reduce impurities and improve the performance of our products.
Many of the components we purchase are standard products, although certain parts
are made to our specifications.

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<PAGE>

When appropriate, we enter into long-term supply agreements and use our
relationships with long-term suppliers to improve product quality and
availability and to reduce delivery times and product costs. In addition, we are
continually identifying alternative component suppliers for important component
parts. Using component parts from new suppliers in our products generally
requires FAA certification of the entire finished product if the newly sourced
component varies significantly from our original drawings and specifications. To
date, we have not experienced any significant delays in the delivery of our
products caused by the inability to obtain either component parts or FAA
approval of products incorporating new component parts.

Quality Assurance

Product quality is of vital importance to our customers, and we have taken steps
to enhance the overall quality of our products. We utilize the Six Sigma
program, which is a process evaluation program based on the premise that
efficient companies can reduce to a very low level the number of defects and
inefficient processes. Under this program, we are continuously seeking to
improve our operational efficiencies, including our design and manufacturing
processes and, thus, the general quality of our products. In particular, our Six
Sigma program allows us to analyze our development processes and reduce the
risks inherent in shortening our development cycle times. In effect, Six Sigma
has allowed us to improve our product quality and cycle times. Our employees are
required to attend an in-house training session that teaches them the principles
and application of our Six Sigma program.

In addition, we are ISO 9001 certified. ISO 9001 standards are an international
consensus on effective management practices with the goal of ensuring that a
company can consistently deliver its products and related services in a manner
that meets or exceeds customer quality requirements. ISO 9001 standards set
forth the requirements a company's quality systems must meet to achieve a high
standard of quality. As an ISO 9001-certified manufacturer, we can represent to
our customers that we maintain high quality industry standards in the education
of our employees and the design and manufacture of our products. In addition,
our products undergo extensive quality control testing prior to being delivered
to customers. As part of our quality assurance procedures, we maintain detailed
records of test results and our quality control processes.

Our Competition

The market for our products is highly competitive and characterized by several
industry niches in which a number of manufacturers specialize. Our competitors
vary in size and resources, and substantially all of our competitors are much
larger and have substantially greater resources than we do. With respect to air
data systems and related products, our principal competitors include Kollsman
Inc., Honeywell International Inc., Rockwell Collins, Inc, Meggitt
Avionics Inc. and Smiths PLC. Of these competitors, only Honeywell, Rockwell
Collins and Smiths currently manufacture products which compete with our RVSM
products. With respect to flat panel displays, our principal competitors
currently include Honeywell, Rockwell, Meggitt and Smiths. However, because the
flat panel display industry is a new and evolving market, as the demand for flat
panel displays increases, we may face competition in this area from additional
companies in the future.

We believe that the principal competitive factors in the markets we serve are
cost, development cycle time, responsiveness to customer preferences, product
quality, technology, reliability and breadth of product line. We believe that
our significant and long-standing customer relationships reflect our ability to
compete favorably with respect to these factors.

Intellectual Property and Proprietary Rights

We rely on patents to protect our proprietary technology. We currently hold
six U.S. patents and have nine U.S. patent application pending relating to our
technology. In addition, we have seven international patents and eight
international patent applications pending. Certain of these patents and patent
applications cover technology relating to air data measurement systems and RVSM
calibration techniques while others cover technology relating to flat panel
display systems and other aspects of our CIP solution. While we believe that
these patents have significant value in protecting our technology, we also
believe that the innovative skill, technical expertise and the know-how of our
personnel in applying the technology reflected in our patents would be
difficult, costly and time consuming to reproduce.

                                       11
<PAGE>

While there are no pending lawsuits against us regarding the infringement of any
patents or other intellectual property rights, we cannot be certain that such
infringement claims will not be asserted against us in the future.

Our Employees

As of September 30, 2001, we had 109 employees, 52 of whom were in our
manufacturing and assembly operations, 25 in research and development, 11 in
quality, customer service and field support, 9 in sales and 12 in general
administrative and corporate positions.

Our future success also depends on our ability to attract, train and retain
highly qualified personnel. We plan to hire additional personnel, including in
particular sales and marketing personnel, during the next twelve months.
Competition for such qualified personnel is intense and we may not be able to
attract, train and retain highly qualified personnel in the future.

None of our employees is represented by a labor union, and we consider our
relationship with our employees to be good.

Executive Officers of the Registrant

The following is a list of our executive officers, their ages and their
positions:
<TABLE>
<CAPTION>

Name                                           Age                          Position
-------------------------------------------    ---    ----------------------------------------------------
<S>                                            <C>    <C>
Geoffrey S. M. Hedrick.....................     59    Chairman of the Board and Chief Executive Officer
James J. Reilly............................     61    Chief Financial Officer
David J. Marvin............................     48    Vice President of Marketing and Business Development
Roger E. Mitchell..........................     47    Vice President of Operations
</TABLE>

Geoffrey S. M. Hedrick has been our Chief Executive Officer since he founded
IS&S in February 1988 and our Chairman of the Board since 1997. Prior to
founding IS&S, Mr. Hedrick served as President and Chief Executive Officer of
Smiths Industries North American Aerospace Companies. He also founded Harowe
Systems, Inc. in 1971, which was subsequently acquired by Smiths Industries. Mr.
Hedrick has 36 years of experience in the avionics industry, and he holds a
number of patents in the electronics, optoelectric, electromagnetic, aerospace
and contamination-control fields.

James J. Reilly has been our Chief Financial Officer since February 2000. From
1996 to 1999, Mr. Reilly was employed by B/E Aerospace, Inc., Seating Products
Group, where he served as Vice President and Chief Financial Officer. From 1989
to 1996, Mr. Reilly was employed by E-Systems, Inc. as Vice President and
Principal Accounting Officer. Mr. Reilly holds a Bachelor of Science degree and
a Masters of Business Administration degree from the University of Hartford.

David J. Marvin has been our Vice President of Marketing and Business
Development since August 2000. Until joining us, Mr. Marvin was employed by
Smiths Industries from 1992 as the Director of Marketing. Mr. Marvin has 23
years experience in the Aerospace Industry including nine years in Systems
Engineering with Boeing, and the last twelve years in Director and Vice
President of Marketing roles. Mr. Marvin holds a Bachelor of Science degree from
Kent State University and a Masters of Science degree in Engineering from Drexel
University.

Roger E. Mitchell has been our Vice President of Operations since September
1999. From July 1998 until September 1999, Mr. Mitchell served as our Director
of Operations. Prior to joining us, Mr. Mitchell was employed by AlliedSignal,
where he held various positions, including Operations Manager from 1994 to 1998.
Mr. Mitchell received a Bachelor of Arts degree from Lewis University.

Item 2. Properties.

In fiscal 2001 we purchased 7 and  1/2 acres of land in the Eagleview Corporate
Park located in Exton, Pennsylvania, a suburban Philadelphia location. There we
constructed a 44,800 square foot design, manufacturing and office facility. Land
development approval allows for expansion of up to 20,400 additional square
feet. This would provide for a 65,200 square foot facility. A 45% increase over
the current 44,800 square feet. The construction was funded with a Chester
County Industrial Revenue Bond. The building serves as security for the
Industrial Revenue Bond.

Item 3. Legal Proceedings.

In the ordinary course of our business, we are at times subject to various legal
proceedings.  We do not believe that any current legal proceedings will have a
material adverse effect on our results of operations or financial position.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.







                                       12
<PAGE>

Part II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our common stock has been traded on the Nasdaq National Market under the symbol
"ISSC" since our initial public offering on August 4, 2000. The following table
lists the high and low per share sale prices for our common stock for the
periods indicated:

                                       Fiscal 2001         Fiscal 2000
Period                                 High    Low         High     Low
------                                ------  -----       ------   -----

   First Quarter                      $20.00  $12.50         N/A     N/A
   Second Quarter                     $17.88  $10.50         N/A     N/A
   Third Quarter                      $14.95  $11.45         N/A     N/A
   Fourth Quarter                     $15.29  $ 6.83       $18.50  $10.63

On December 7, 2001, there were 54 holders of record of the shares of
outstanding common stock.


We have not paid cash dividends on our common stock, and we do not expect to
declare cash dividends on our common stock in the near future. We intend to
retain any earnings to finance the growth of our business.

Recent Sales of Unregistered Securities

The Company issued 340,380 shares of common stock in fiscal year 2001 from the
exercise of employee stock options pursuant to Rule 701.

                                       13
<PAGE>

Item 6.  Selected Financial Data.

You should read the data set forth below together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended September 30,
                                                      --------------------------------------------------------------------
                                                         1997           1998         1999          2000           2001
                                                      -----------    -----------  -----------   -----------   ------------
<S>                                                   <C>          <C>            <C>           <C>
Statement of Operations Data:
Net Sales.........................................    $10,594,204    $14,682,313  $22,487,882   $33,273,890   $ 34,384,562
Cost of sales.....................................      7,007,523      8,480,549   10,570,009    14,819,043     14,477,868
                                                      -----------    -----------  -----------   -----------   ------------

  Gross profit....................................      3,586,681      6,201,764   11,917,873    18,454,847     19,906,694
Research and development..........................      1,114,351      1,554,564    1,915,634     3,274,708      4,371,570
Selling, general and
 administrative...................................      1,567,896      2,492,509    3,333,977     4,951,732      5,777,929
                                                      -----------    -----------  -----------   -----------   ------------

  Total operating expenses........................      2,682,247      4,047,073    5,249,611     8,226,440     10,149,499
Operating income .................................        904,434      2,154,691    6,668,262    10,228,407      9,757,195
Interest (income) expense, net....................         63,813        224,121      (30,137)     (564,555)    (2,196,401)
                                                      -----------    -----------  -----------   -----------   ------------

Income before income taxes........................        840,621      1,930,570    6,698,399    10,792,962     11,953,596
Income tax (expense) benefit, net.................             --      2,013,802   (2,517,764)   (4,043,405)    (4,422,831)
                                                      -----------    -----------  -----------   -----------   ------------

Net income........................................    $   840,621    $ 3,944,372  $ 4,180,635   $ 6,749,557   $  7,530,765
                                                      ===========    ===========  ===========   ===========   ============

Net income per common share:
 Basic............................................          $0.13          $0.59        $0.62         $0.86          $0.59
 Diluted..........................................          $0.10          $0.46        $0.45         $0.66          $0.57
Weighted average shares outstanding:
 Basic............................................      6,612,739      6,670,134    6,746,976     7,893,630     12,731,395
 Diluted..........................................      8,554,092      8,611,487    9,204,344    10,231,931     13,284,484

<CAPTION>
                                                                                September 30,
                                                    ----------------------------------------------------------------------
                                                         1997           1998         1999          2000            2001
                                                      -----------    -----------  -----------   -----------   ------------
<S>                                                   <C>            <C>          <C>           <C>           <C>
Balance Sheet Data:
Cash and cash equivalents.........................    $   484,281    $   102,150  $ 4,638,607   $38,657,433     $ 42,769,837
Working capital...................................        140,212      3,387,163    8,557,052    50,944,599       56,254,288
Total assets......................................      4,839,520      9,029,168   12,612,189    60,746,527       68,051,426
Debt and capital lease obligations, less current
 portion..........................................         27,845         46,379       45,764     4,265,447        4,252,635
Total shareholders' equity........................        368,265      4,564,637    8,935,272    50,822,496       60,378,704

</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act, subject to the safe
harbor of such Act. Those statements involve known and unknown risks,
uncertainties and other factors that may cause actual results and the course of
events of IS&S to differ materially from those forward-looking statements
discussed here. Additional information concerning factors that could cause such
a difference can be found herein under "Risk Factors".

Overview

Innovative Solutions and Support was founded in 1988. We design, develop,
manufacture and market flight information computers, electronic displays and
advanced monitoring systems that measure and display critical flight
information, including data relative to aircraft separation (RVSM, Reduced
Vertical Separation Minimum), airspeed and altitude as well as engine and fuel
data measurements.

                                       14
<PAGE>

Our net sales are derived from the sale of our products to the retrofit market
and, to a lesser extent, original equipment manufacturers (OEMs). Our customers
include government and military entities and their commercial contractors,
aircraft operators, aircraft modification centers and various OEMs. Although we
occasionally sell our products directly to government entities, we primarily
have sold our products to commercial customers for end use in government and
military programs. These sales to commercial contractors are on commercial
terms, although some of the termination and other provisions of government
contracts are applicable to these contracts.

We record net sales when our products are shipped. Since fiscal year 1998, the
majority of our sales have come from the sale of RVSM-compliant air data
systems, including sales to commercial contractors in connection with the United
States Air Force KC-135 retrofit program. We are the sole supplier of these
systems and components under subcontracts with various commercial contractors
for the retrofit program, which covers the approximately 600 KC-135 aircraft
currently in use. As of September 30, 2001, we have delivered 509 KC-135 ship
sets for retrofit installation. Net sales under the KC-135 retrofit program
represent 0%, 44% and 64% of our net sales in fiscal 1999, 2000 and 2001,
respectively. Subsequent to September 30, 2001, we expect that the government
will exercise the final option for the remaining aircraft, which continues the
program through March 2002. Remaining net sales under this contract will be
approximately $8.8 million in fiscal 2002. Should a new supply arrangement not
be obtained prior to or shortly after the expiration of this contract, we may
experience a significant reduction in net sales. This may have a material effect
on our operating results and financial condition.

We are marketing our flat panel display system, or Cockpit Information Portal
(CIP), and are in the process of obtaining the required certifications. We
expect to receive net sales from our flat panel display during the second half
of fiscal 2002.

Our cost of sales are comprised of material components purchased through our
supplier base and direct in-house assembly labor and overhead costs. Many of the
components we use in assembling our products are standard, although certain
parts are manufactured to meet our specifications. The overhead portion of cost
of sales is primarily comprised of salaries and benefits, building occupancy,
supplies, and outside service costs related to our production, purchasing,
material control and quality departments as well as warranty costs.

We intend to continue investing in the development of new products that
complement our current product offering and will charge to expense associated
research and development costs as they are incurred.

Our selling, general and administrative expenses consist of marketing and
business development expenses, professional expenses, salaries and benefits for
executive and administrative personnel, facility costs, and recruiting, legal,
accounting and other general corporate expenses.

Results of Operations

Fiscal year ended September 30, 2001 Compared to Fiscal Year Ended September 30,
2000.

Net Sales. Net sales increased $1.1 million or 3% to $34.4 million for the
fiscal year ended September 30, 2001 from $33.3 million for the prior fiscal
year ended September 30, 2000. The increase was primarily attributable to RVSM
product shipments for the KC-135 program, which was partially offset by
decreases in net sales to other RVSM customers. We recognized $22.2 million in
revenues related to this program in fiscal 2001 and $14.7 million in fiscal
2000.

Cost of Sales. Cost of sales decreased $0.3 million or 2% to $14.5 million, or
42.1% of net sales, for fiscal 2001 from $14.8 million, or 44.5% of net sales,
for fiscal 2000. The decline in both dollar amount and percent of net sales was
primarily related to cost containment resulting from our Six Sigma program, a
process evaluation program designed to increase efficiency.

Research and development. Research and development expenses increased $1.1
million, or 33.5%, to $4.4 million, or 12.7% of net sales, for fiscal 2001 from
$3.3 million, or 9.8% of net sales, for fiscal 2000. The increase in both dollar
amount and as a percent of revenue was primarily due to engineering efforts
related to the introduction of new products, including our flat panel display,
cockpit security, an enhanced analog interface unit and ongoing enhancements and
improvements to existing products.

Selling, general and administrative. Selling, general and administrative
expenses increased $0.8 million, or 16.7%, to $5.8 million, or 16.8% of net
sales, for fiscal 2001 from $5.0 million, or 14.9% of net sales, for fiscal
2000. The increased spending and percent to sales ratio increase reflect our
investment in personnel and infrastructure to support our continued growth.

Interest (income) expense, net. Net interest income increased $1.6 million to
$2.2 million in fiscal 2001 as compared to net interest income of $0.6 million
in fiscal 2000. Net interest income for fiscal 2001 was due to substantially
higher average cash balances during the period resulting mainly from the
proceeds of our initial public offering in August 2000.

Income tax. Income tax expense was $4.4 million for fiscal 2001 compared to $4.0
million for fiscal 2000. The increased amount was the result of higher income
before tax partially offset with a  1/2 % reduction in the effective tax rate
from 37.5% to 37.0%.

                                       15
<PAGE>

Net income. As a result of the factors described above, our net income increased
$0.8 million, or 11.6%, to $7.5 million, or 21.9% of net sales, for fiscal 2001
from $6.7 million, or 20.3% of net sales, for fiscal 2000. On a fully diluted
basis, earnings per share (EPS) decreased $0.09, or 13.6%, to $0.57 for fiscal
2001 from $0.66 in fiscal 2000. While net income increased in absolute dollars
by 11.6%, EPS declined by 13.6% as a result of  the average dilutive impact of
additional shares associated with the Company's initial public offering (IPO) of
3,450,000 shares in August 2000.

Fiscal year ended September 30, 2000 compared to Fiscal Year Ended September 30,
1999.

Net Sales. Net sales increased $10.8 million, or 48.0%, to $33.3 million in
fiscal 2000 from $22.5 million in the fiscal year ended September 30, 1999. The
increase was principally due to shipments of RVSM air data systems for the KC-
135 aircraft, which contributed $14.7 million of revenue during fiscal 2000
compared to none in fiscal 1999.

Cost of Sales. Cost of sales increased $4.2 million, or 40.2%, to $14.8 million,
or 44.5% of net sales, in fiscal 2000 from $10.6 million, or 47.0% of net sales,
in fiscal 1999. The increase in dollar amount of cost of sales was related to
our increase in net sales and the decrease as a percent of net sales was
primarily related to cost containment resulting from our Six Sigma program.

Research and development. Research and development expense increased $1.4
million, or 71.0%, to $3.3 million, or 9.8% of net sales, in fiscal 2000 from
$1.9 million, or 8.5% of net sales, in fiscal 1999. Both the dollar and percent
to net sales increase in research and development expense was primarily due to
engineering efforts related to the introduction of new products including our
flat panel display, an engine pressure ratio transmitter, a low cost altimeter
and ongoing enhancements and improvements to existing products in fiscal 2000.

Selling, general and administrative. Selling, general and administrative
expenses increased $1.6 million, or 48.5%, to $5.0 million, or 14.9% of net
sales, in fiscal 2000 from $3.3 million, or 14.8% of net sales, in fiscal 1999.
The dollar increase was primarily related to the hiring of management, sales and
marketing people while the percent to net sales amount was essentially
unchanged.

Interest (income) expense, net. Net interest income was $560,000 in fiscal 2000
as compared to net interest income of $30,000 in fiscal 1999. The interest
income in fiscal 2000 was the result of higher cash balances in August and
September of that year as a result of our initial public offering that raised
approximately $34 million net of expenses.

Income tax. Income tax expense grew by $1.5 million, or 60.6%, to $4.0 million,
or a tax rate of  37.5%, in fiscal 2000. This compares to an income tax expense
of $2.5 million, or a tax rate of  37.6%, in fiscal 1999. The increased taxes
were related to increased income before tax.

Net income. As a result of the factors described above, our net income increased
$2.6 million, or 61.4%, to $6.7 million, or 20.3% of net sales, in fiscal 2000
from net income of $4.2 million, for fiscal 1999, or 18.6% of net sales. On a
fully diluted basis, earnings per share increased $0.21, or 46.7%, to $0.66 in
fiscal 2000 from $0.45 in fiscal 1999.

Liquidity and Capital Resources

Prior to our initial public offering in August 2000, our primary sources of
liquidity were cash flows from operations and borrowings. We require cash
principally to finance inventory, accounts receivable and payroll.

Our cash flow provided from operating activities was $3.6 million in fiscal 2001
as compared to $2.5 million in fiscal 2000. The increase was primarily the
result of higher net income with offsetting differences in inventories, prepaid
expenses and other, accounts payable and accrued expenses.

Cash flow provided by operating activities for fiscal 2000 was $2.5 million as
compared to $6.0 million in cash provided in fiscal 1999. The decrease was
mainly due to an increase in accounts receivable and inventory that more than
offset an increase in net income in fiscal 2000.

Our cash used in investing activities was $0.7 million in fiscal 2001 as
compared to $7.9 million used in fiscal 2000. The $7.2 million reduction was
principally the reduction of restricted cash associated with the industrial
development bond that financed, in part, our new building.

Our cash used in investing activities was $7.9 million in fiscal 2000 as
compared to $0.6 million used in fiscal 1999. The year over year increase
primarily was related to our new building and the acquisition of our corporate
aircraft.

Cash flow provided by financing activities was $ 1.2 million in fiscal 2001 as
opposed to $39.5 million provided in fiscal 2000. Approximately $34.0 million of
the decrease was the result of having sold stock in the prior year as part of
our initial public offering in August 2000. Also, in the prior year the Company
received $4.3 million of proceeds from the sale of notes.

                                       16
<PAGE>

Our cash provided by financing activities in fiscal 2000 was $39.5 million as
opposed to cash used in fiscal 1999 of $0.8 million. The increase in cash
provided was a direct result of the following: the Company received a net amount
of  $34.1 million in proceeds as a result of our IPO in August 2000; the Company
borrowed $4.3 million of Industrial Development Bonds (IDB) to fund our new
building; and, $1.0 million worth of warrants were exercised in fiscal 2000. In
contrast, the use of funds in fiscal 1999 was attributable to repayment of loans
and capital lease obligations.

We allowed our credit facility to lapse in August 2000 as a result of the strong
cash balance we have from the net proceeds of our IPO. We are in discussions
with a number of financial institutions regarding the establishment of a new
credit facility.

To accommodate our future growth we have purchased 7 1/2 acres of land in the
Eagleview Corporate Park, Pennsylvania and have constructed a 44,800 square foot
facility which is expandable to 65,200 square feet. The cost of land and
building will approximate $6.6 million. Of this amount, $4.3 million will be
funded through an Industrial Development Bond (IDB) and the remainder from cash
flow from operations.

Our future capital requirements depend on numerous factors, including market
acceptance of our products, the timing and rate of expansion of our business and
other factors. We have experienced increases in our expenditures since our
inception consistent with growth in our operations, personnel, and product line
and we anticipate that our expenditures will continue to increase in the
foreseeable future. We believe that our cash and cash equivalents, together with
net proceeds from any new credit facility we may enter into, will provide
sufficient capital to fund our operations for at least the next twelve months.
However, we may need to raise additional funds through public or private
financing or other arrangements in order to support more rapid expansion of our
business than we currently anticipate. Further, we may develop and introduce new
or enhanced products, respond to competitive pressures, invest in or acquire
businesses or technologies or respond to unanticipated requirements or
developments.

Inflation

We do not believe that inflation has had a material effect on our financial
position or results of operations during the past three years. However, we
cannot predict the future effects of inflation.


Risk Factors
-------------

Risks Related to Our Business

Most of our sales are of air data systems products, and we cannot be certain
that the market will continue to accept these or our other products.

During fiscal 2000 and 2001, we derived 99% of our revenues from the sale of air
data systems and related products. We expect that revenues from our air data
products will continue to account for a significant portion of our revenues in
the future. Accordingly, our revenues will decrease if such products do not
continue to receive market acceptance or if our existing customers do not
continue to incorporate our products in their retrofitting or manufacturing of
aircraft. In seeking new customers, it may be difficult for our products to
displace competing air data products. Accordingly, we cannot assure you that
potential customers will accept our products or that existing customers will not
abandon them.

We currently have a limited number of customers that use our products, primarily
for government-related contracts, making us reliant on these customers and
government needs.

A substantial portion of our sales have been, and we expect will continue to be,
to prime contractors or government agencies in connection with government
aircraft retrofit or original manufacturing contracts. Sales to government
contractors and government agencies accounted for approximately 80% of our
revenues during fiscal 2000 and 2001. Accordingly, our revenues could decline as
a result of government spending cuts, general budgetary constraints and the
complex and competitive government procurement processes.

                                       17
<PAGE>

Additionally, a substantial portion of our revenues have been from a relatively
limited number of government contractors, fleet operators and aircraft
manufacturers. We derived 71% of our revenues during fiscal year 2001 from three
customers, DME Inc., Bombardier, and Garrett and 69% of our revenues during
fiscal 2000 from DME, Inc., Rockwell Collins Inc. and Lockheed Martin. We expect
a relatively small number of customers to account for a majority of our revenues
for the foreseeable future. As a result of our concentrated customer base, a
loss of one or more of these customers could adversely affect our revenues and
results of operations.

Our business currently derives a large portion of its revenues from one military
retrofit program, the loss of which could reduce our revenues.

During fiscal 2000 and 2001, 44% and 64% of our revenues resulted from sales in
connection with the United States Air Force KC-135 retrofit program in which we
are a supplier of certain avionics products. Governmental spending cuts with
respect to this program or our loss of business under this program would reduce
our revenues and harm our financial condition. At September 30, 2001, the KC-135
program backlog was $5.4 million. We expect to receive the final program option
award of $3.4 million in our first quarter of fiscal 2002. The entire backlog
and final option will total $8.8 million and we expect to deliver that amount in
the first half of fiscal 2002.

The growth of our customer base could be limited by delays or difficulties in
completing the development and introduction of our planned products or product
enhancements.

Recent advances in technology have led to increased demands for new avionics
products. Our product development efforts may not be successful, and we may
encounter significant delays in bringing our products to market. If our product
development efforts are not successful or are significantly delayed and our
customers decide to purchase competing products, our business may be harmed as a
result of decreased sales and lost market share.

If we fail to enhance existing products or to develop and achieve market
acceptance for flat panel displays and other new products that meet customer
requirements, our business may not grow.

Although a substantial majority of our revenues has come from sales of air data
systems and related products, we expect to spend a large portion of our research
and development efforts in developing and marketing our CIP and complementary
products. Our ability to grow and diversify our operations through the
introduction and sale of new products, such as flat panel displays, is dependent
upon our success in continuing product development and engineering activities as
well as our sales and marketing efforts and our ability to obtain requisite
approvals to sell such products. Our sales growth will also depend in part on
the market acceptance of and demand for our CIP and future products. We cannot
be certain that we will be able to develop, introduce or market our CIP or other
new products or product enhancements in a timely or cost-effective manner or
that any new products will receive market acceptance or necessary regulatory
approval.

We rely on third party suppliers for the components of our air data systems
products, and any interruption in the supply of these components could hinder
our ability to deliver our products.

Our manufacturing process consists primarily of assembling components from third
party manufacturers. For fiscal year 2001, our principal suppliers were Sechan
Electronics, Weston, UK, and Polytronix, Inc. These third party components may
not continue to be available to us on commercially reasonable terms or in a
timely fashion. If we are unable to maintain relationships with key third party
suppliers, the development and distribution of our products could be delayed
until equivalent components can be obtained and integrated into our products. In
addition, substitution of certain components from other manufacturers may
require FAA or other approval, which could delay our ability to ship products.
As a result of these uncertainties, the Company invested in surface mount
technology in fiscal 2001 that will lessen our dependence on outside suppliers
for these critical components.

Our government retrofit projects allow the government agency or government
contractor to terminate or modify their contracts with us.

Our government retrofit projects are generally pursuant to either a direct
contract with a government agency or a subcontract with the general contractor
to a government agency. Each contract includes various federal regulations that
impose certain requirements on us, including the ability of the government
agency or general contractor to alter the price, quantity or delivery schedule
of our products. In addition, the government agency or general contractor
retains the right to terminate the contract at any time at its convenience. Upon
alteration or termination of these contracts, we would normally be entitled to
an equitable adjustment to the contract price so that we may receive the
purchase price for items we have delivered and reimbursement for allowable costs
we have incurred. Most of our backlog is from government-related contracts.
Accordingly, because these contracts can be terminated, we cannot assure you
that our backlog will result in sales.

                                       18
<PAGE>

We depend on our key personnel to manage our business effectively, and if we are
unable to retain our key employees, our ability to compete could be harmed.

Our success depends on the efforts, abilities and expertise of our senior
management and other key personnel, including in particular our Chairman and
Chief Executive Officer, Geoffrey Hedrick. We generally do not have employment
agreements with our employees. There can be no assurance that we will be able to
retain such employees, the loss of some of whom could hurt our ability to
execute our business strategy. We intend to continue hiring key management and
sales and marketing personnel. Competition for such personnel is intense, and we
may not be able to attract or retain additional qualified personnel.

If we do not manage our rapid growth, improve existing processes and implement
new systems, procedures and controls, we may use resources inefficiently and our
ability to serve our customers and capitalize on market opportunities may
suffer.

We have grown from 72 employees in 1997 to approximately 109 employees as of
September 30, 2001, and we expect to continue hiring additional employees. Our
future success will depend in part on our ability to implement and improve our
operational, administrative and financial systems and controls and to manage,
train and expand our employee base. We cannot assure you that our current and
planned personnel levels, systems, procedures and controls will be adequate to
support our future operations. If inadequate, we may not be able to exploit
existing and potential market opportunities. Any delays or difficulties we
encounter could impair our ability to attract new customers or enhance our
relationships with existing customers.

Our revenue and operating results may vary significantly from quarter to
quarter, which may cause our stock price to decline.

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including:

   . variations in demand for our products;

   . the timing of the introduction of RVSM requirements on various flight
     routes;

   . the capital expenditure budgets of aircraft owners and operators and the
     appropriation cycles of the U.S. government;

   . changes in the use of our products, including non-RVSM air data systems,
     RVSM systems and flat panel displays;

   . delays in introducing or obtaining government approval for new products;

   . new product introductions by competitors;

   . changes in our pricing policies or the pricing policies of our competitors;

   . costs related to possible acquisitions of technologies or businesses; and

   . our inability to replace the KC-135 RVSM contract.

We plan to increase our operating expenses to expand our sales and marketing
operations and fund greater levels of product development. As a result, a
delay in generating revenues could cause significant variations in our
operating results from quarter to quarter.

Our competition includes other manufacturers of air data systems and flight
information displays against whom we may not be able to compete successfully.

                                       19
<PAGE>

The markets for our products are intensely competitive and subject to rapid
technological change. Our competitors include Kollsman, Inc., Honeywell
International Inc., Rockwell Collins Inc. Smiths Industries plc and Meggitt
Avionics Inc. Substantially all of our competitors have significantly greater
financial, technical and human resources than we do. In addition, our
competitors have much greater experience in and resources for marketing their
products. As a result, our competitors may be able to respond more quickly to
new or emerging technologies and customer preferences or devote greater
resources to the development, promotion and sale of their products than we can.
Our competitors may also have greater name recognition and more extensive
customer bases that they can use to their benefit. This competition could result
in price reductions, fewer customer orders, reduced gross margins and loss of
market share.

We may not be able to identify or complete acquisitions or we may consummate an
acquisition that adversely affects our operating results.

One of our strategies is to acquire businesses or technologies that will
complement our existing operations. We have limited experience in acquiring
businesses or technologies. There can be no assurance that we will be able to
acquire or profitably manage acquisitions or successfully integrate them into
our operations. Furthermore, certain risks are inherent in our acquisition
strategy, such as the diversion of management's time and attention and combining
disparate company cultures and facilities. Acquisitions may have an adverse
effect on our operating results, particularly in quarters immediately following
the consummation of such transactions, as we integrate the operations of the
acquired businesses into our operations. Once integrated, acquisitions may not
achieve levels of net sales or profitability comparable to those achieved by our
existing operations or otherwise perform as expected.

Our success depends on our ability to protect our proprietary rights, and there
is a risk of infringement. If we are unable to protect and enforce our
intellectual property rights, we may be unable to compete effectively.

Our success and ability to compete will depend in part on our ability to obtain
and maintain patent or other protection for our technology and products, both in
the United States and abroad. In addition, we must operate without infringing
the proprietary rights of others.

We currently hold six U.S. patents and have nine U.S. patent application
pending. In addition, we have seven international patents and eight
international patent applications pending. We cannot be certain that patents
will be issued on any of our present or future applications. In addition, our
existing patents or any future patents may not adequately protect our technology
if they are not broad enough, are successfully challenged or other entities are
able to develop competing methods without violating our patents. If we are not
successful in protecting our intellectual property, competitors could begin to
offer products which incorporate our technology. Patent protection involves
complex legal and factual questions and, therefore, is highly uncertain, and
litigation relating to intellectual property is often very time consuming and
expensive. If a successful claim of patent infringement were made against us or
we are unable to develop non-infringing technology or license the infringed or
similar technology on a timely and cost-effective basis, we might not be able to
make some of our products.

Risks Related to Our Industry

If we are unable to respond to rapid technological change, our products could
become obsolete and our reputation could suffer.

Future generations of air data systems, engine and fuel displays and flat panel
displays embodying new technologies or new industry standards could render our
products obsolete. The market for aviation products is subject to rapid
technological change, new product introductions, changes in customer preferences
and evolving industry standards. Our future success will depend on our ability
to:

   . adapt to rapidly changing technologies;

   . adapt our products to evolving industry standards; and

                                       20
<PAGE>

   . develop and introduce a variety of new products and product enhancements to
     address the increasingly sophisticated needs of our customers.

Our future success will also depend on our developing high quality, cost-
effective products and enhancements to our products that satisfy the needs of
our customers and on our introducing these new technologies to the marketplace
in a timely manner. If we fail to modify or improve our products in response to
evolving industry standards, our products could rapidly become obsolete.

Our products must obtain government approval before we can sell them.

Our products are currently subject to direct regulation by the U.S. Federal
Aviation Authority (FAA), its European counterpart, the Joint Aviation
Authorities (JAA), and other comparable organizations. Our products and many of
their components must be approved by either the FAA, the JAA or other comparable
organizations before they can be used in an aircraft. To be certified, we must
demonstrate that our products are accurate and able to maintain certain levels
of repeatability over time. Although the certification requirements of the FAA
and the JAA are substantially similar, there is no formal reciprocity between
the two systems. Accordingly, even though some of our products are FAA-approved,
we may need to obtain approval from the JAA or other appropriate organizations
to have them certified for installation outside the United States.

Significant delay in receiving certification for newly developed products or
enhancements to our products or losing certification for our existing products
could result in lost sales or delays in sales. Furthermore, the adoption of
additional regulations or product standards, as well as changes to the existing
product standards, could require us to change our products and underlying
technology. Some products from which we expect to generate significant future
revenues, including our CIP, have not received regulatory approval. We cannot
assure you that we will receive regulatory approval on a timely basis or at all.
For a more detailed description, see "Business-- Government Regulation."

Because our products utilize sophisticated technology and are deployed in
complex aircraft cockpit environments, problems with these products may arise
that could seriously harm our reputation for quality assurance and our business.

Our products use complex system designs and components that may contain errors,
omissions or defects, particularly when we incorporate new technologies into our
products or we release new versions or enhancements of our products. Despite our
quality assurance process, errors, omissions or defects could occur in our
current products, in new products or in new versions or enhancements of existing
products after commercial shipment has begun. We may be required to redesign or
recall those products or pay damages. Such an event could result in the
following:

   . the delay or loss of revenues;

   . the cancellation of customer contracts;

   . the diversion of development resources;

   . damage to our reputation;

   . increased service and warranty costs; or

   . litigation costs.

Although we currently carry product liability insurance, this insurance may
not be adequate to cover our losses in the event of a product liability
claim. Moreover, we may not be able to maintain such insurance in the future.

We face risks associated with international operations that could cause our
financial results to suffer or make

                                       21
<PAGE>

it difficult to market our products outside of the United States.

We expect to derive an increasing amount of our revenues from sales outside the
United States, particularly in Europe. We have limited experience in marketing
and distributing our products internationally. In addition, there are certain
risks inherent in doing business on an international basis, such as:

       . differing regulatory requirements for products being installed in
         aircraft;

       . legal uncertainty regarding liability;

       . tariffs, trade barriers and other regulatory barriers;

       . political and economic instability;

       . changes in diplomatic and trade relationships;

       . potentially adverse tax consequences;

       . the impact of recessions in economies outside the United States; and

       . variance and unexpected changes in local laws and regulations.

Currently, all of our international sales are denominated in U.S. dollars. An
increase in the value of the dollar compared to other currencies could make
our products less competitive in foreign markets. In the future, we may
conduct sales in local currencies, exposing us to changes in exchange rates
that could adversely affect our results of operations.

Item 7A. Quantitative and qualitative disclosures about market risk.

The Company's operations are exposed to market risks primarily as a result of
changes in interest rates. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company's exposure to
market risk for changes in interest rates relates to its cash equivalents and an
industrial revenue bond. The Company's cash equivalents consist of funds
invested in money market accounts, which bear interest at a variable rate, while
the industrial revenue bond carries an interest rate that is consistent with 30-
day tax-exempt commercial paper. As the interest rates are variable, a change in
interest rates earned on the cash equivalents or paid on the industrial revenue
bond, would impact interest income and expense along with cash flows, but would
not impact the fair market value of the related underlying instruments.

Item 8. Financial statements and supplementary data.

The financial statements of Innovative Solutions and Support, Inc. listed in
the index appearing under Item 14 herein are filed as part of this Report.























                                       22
<PAGE>

                    Innovative Solutions and Support, Inc.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----
<S>                                                                  <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                              24

CONSOLIDATED BALANCE SHEETS                                           25

CONSOLIDATED STATEMENTS OF OPERATIONS                                 26

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                       27

CONSOLIDATED STATEMENTS OF CASH FLOWS                                 28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         29-38
</TABLE>

                                      23

<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Innovative Solutions and Support, Inc.:

     We have audited the accompanying consolidated balance sheets of Innovative
Solutions and Support, Inc. (a Pennsylvania corporation) and subsidiaries
as of September 30, 2000 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Innovative
Solutions and Support, Inc. and subsidiaries as of September 30, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2001 in conformity with accounting
principles generally accepted in the United States.

                                             /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
October 24, 2001

                                      24
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    September 30,     September 30,
                                                                         2000              2001
                                                                    -------------     -------------
                                     ASSETS
<S>                                                                <C>                <C>
Current Assets:
  Cash and cash equivalents.......................................   $38,657,433      $42,769,837
  Cash restricted for capital expenditures .......................     4,141,689          317,465
  Accounts receivable, less allowance for doubtful accounts of
  $75,000 and $100,000 at September 30, 2000 and 2001,
  respectively ...................................................     8,394,304        8,330,126
  Inventories.....................................................     4,265,144        5,701,673
  Deferred income taxes...........................................       464,346          652,535
  Prepaid expenses................................................       136,447        1,386,270
                                                                     -----------      -----------
     Total current assets.........................................    56,059,363       59,157,906
                                                                     -----------      -----------
Property and Equipment:
  Computers and test equipment....................................     2,027,987        2,899,744
  Corporate airplane..............................................     2,989,591        2,998,161
  Furniture and office equipment..................................       405,150          422,288
  Leasehold improvements..........................................        54,299           54,299
  Construction in progress........................................       330,112        3,949,298
                                                                     -----------      -----------
                                                                       5,807,139       10,323,790
  Less--Accumulated depreciation and amortization.................    (1,683,973)      (2,238,916)
                                                                     -----------      -----------
     Net property and equipment...................................     4,123,166        8,084,874
                                                                     -----------      -----------
Deposits and Other Assets.........................................       359,986          808,646
                                                                     -----------      -----------
Deferred Income Taxes.............................................       204,012             ----
                                                                     -----------      -----------
                                                                     $60,746,527      $68,051,426
                                                                     ===========      ===========
                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Current portion of note payable.................................   $   100,000      $   100,000
  Current portion of capitalized lease obligations................        19,794           15,696
  Accounts payable................................................     1,856,048          473,785
  Accrued expenses................................................     2,964,947        2,168,066
  Deferred revenue................................................       173,975          146,071
                                                                     -----------      -----------
     Total current liabilities....................................     5,114,764        2,903,618
                                                                     -----------      -----------
Note Payable .....................................................     4,235,000        4,235,000
                                                                     -----------      -----------
Capitalized Lease Obligations ....................................        30,447           17,635
                                                                     -----------      -----------
Deferred Revenue..................................................       543,820          473,349
                                                                     -----------      -----------
Deferred Income Taxes.............................................          ----           43,120
                                                                     -----------      -----------
Commitments and Contingencies (Note 10)
Shareholders' Equity:
  Preferred stock, 10,000,000 shares authorized--
    Class A Convertible stock, $.001 par value;
    200,000 shares authorized, no shares issued
    and outstanding at September 30, 2000 and 2001................          ----             ----
  Common stock, $.001 par value; 75,000,000 shares authorized,
    12,593,503 and 13,023,629 shares issued and outstanding at
    September 30, 2000 and 2001, respectively.....................        12,594           13,024
  Additional paid-in capital......................................    43,881,392       45,906,405
  Retained earnings...............................................     6,928,510       14,459,275
                                                                     -----------      -----------
     Total shareholders' equity...................................    50,822,496       60,378,704
                                                                     -----------      -----------
                                                                     $60,746,527      $68,051,426
                                                                     ===========      ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      25
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  For the Fiscal Year Ended September 30,
                                                --------------------------------------------
                                                    1999             2000            2001
                                                -----------      -----------     -----------
<S>                                             <C>              <C>             <C>
Net Sales (includes related party
  amounts of $1,226,210, $88,566
  and none, respectively)                       $22,487,882      $33,273,890     $34,384,562
Cost of Sales (includes related party
  amounts of $616,751, $39,444 and none,
  respectively).............................     10,570,009       14,819,043      14,477,868
                                                -----------      -----------     -----------
     Gross profit...........................     11,917,873       18,454,847      19,906,694
                                                -----------      -----------     -----------
Operating Expenses:
     Research and development...............      1,915,634        3,274,708       4,371,570
     Selling, general and administrative....      3,333,977        4,951,732       5,777,929
                                                -----------      -----------     -----------
                                                  5,249,611        8,226,440      10,149,499
                                                -----------      -----------     -----------
Operating income............................      6,668,262       10,228,407       9,757,195
Interest Income.............................        (80,376)        (599,277)     (2,196,401)
Interest Expense............................         50,239           34,722              --
                                                -----------      -----------     -----------
     Income before income taxes.............      6,698,399       10,792,962      11,953,596
Income Taxes ...............................     (2,517,764)      (4,043,405)     (4,422,831)
                                                -----------      -----------     -----------
Net Income..................................    $ 4,180,635      $ 6,749,557     $ 7,530,765
                                                ===========      ===========     ===========
Net Income Per Common Share:
     Basic..................................    $      0.62      $      0.86     $      0.59
                                                ===========      ===========     ===========
     Diluted................................    $      0.45      $      0.66     $      0.57
                                                ===========      ===========     ===========
Weighted Average Shares Outstanding:
    Basic..................................       6,746,976        7,893,630      12,731,395
                                                ===========      ===========     ===========
    Diluted................................       9,204,344       10,231,931      13,284,484
                                                ===========      ===========     ===========
</TABLE>




The accompanying notes are an integral part of these statements.

                                      26

<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                    Retained
                                                                                   Additional       Earnings
                                                            Preferred    Common      Paid-in      (Accumulated
                                                              Stock      Stock       Capital        Deficit)           Total
                                                            ----------  --------  -------------  ---------------  ---------------
<S>                                                         <C>         <C>       <C>            <C>              <C>
BALANCE, SEPTEMBER 30, 1998  ...........................        $ 177    $ 6,728   $ 8,559,414      $(4,001,682)      $ 4,564,637
  Issuance of stock to directors  ......................           --         38       104,962               --           105,000
  Compensation in connection with issuance
    of Common stock options  ...........................           --         --        85,000               --            85,000
  Net income  ..........................................           --         --            --        4,180,635         4,180,635
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 1999  ...........................          177      6,766     8,749,376          178,953         8,935,272
  Exercise of warrants to purchase Common stock   ......           --        425     1,034,008               --         1,034,433
  Exercise of options to purchase Common stock   .......           --         11        11,989               --            12,000
  Initial public offering of Common stock, net..........           --      3,450    34,087,784               --        34,091,234
  Conversion of preferred stock to Common
   stock in connection with initial public offering.....         (177)     1,942        (1,765)              --                --
  Net income   .........................................           --         --            --        6,749,557         6,749,557
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 2000   ..........................           --     12,594    43,881,392        6,928,510        50,822,496
  Exercise of warrants to purchase Common stock.........           --         84       209,499               --           209,583
  Exercise of options to purchase Common stock..........           --        340     1,034,848               --         1,035,188
  Issuance of stock to directors........................           --          6        90,096               --            90,102
  Tax benefit from exercise of stock options............           --         --       690,570               --           690,570
  Net income............................................           --         --            --        7,530,765         7,530,765
                                                                -----    -------   -----------      -----------       -----------
BALANCE, SEPTEMBER 30, 2001.............................        $  --    $13,024   $45,906,405      $14,459,275       $60,378,704
                                                                =====    =======   ===========      ===========       ===========
</TABLE>




The accompanying notes are an integral part of these statements.

                                      27
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 For the Fiscal Year Ended September 30,
                                                              ---------------------------------------------
                                                                 1999            2000              2001
                                                              -----------     -----------       -----------
<S>                                                           <C>             <C>               <C>
Cash Flows From Operating Activities:
  Net income............................................      $ 4,180,635     $ 6,749,557       $ 7,530,765
  Adjustment to reconcile net income to net cash
  provided by (used in) operating activities--
    Depreciation and amortization.......................          264,785         391,257           554,943
    Excess and obsolete inventory expense...............          100,446         318,421           200,000
    Disposal of obsolete inventory......................               --              --           (25,965)
    Bad debt expense....................................               --          75,000            25,000
    Deferred income taxes...............................        1,786,260        (440,816)           58,943
    Compensation expense for stock issued to directors..          105,000              --           120,500
    Compensation expense for common stock options.......           85,000              --                --
    Tax benefit from exercise of stock options..........               --              --           690,570
      (Increase) decrease in--
      Accounts receivable...............................          161,562      (5,055,533)           39,178
      Inventories.......................................         (789,134)     (1,086,792)       (1,610,564)
      Prepaid expenses and other........................           21,706        (406,127)       (1,698,483)
      Increase (decrease) in--
      Accounts payable..................................       (1,363,639)        967,996        (1,382,263)
      Accrued expenses..................................          954,136       1,579,804          (827,279)
      Deferred revenue..................................          454,154        (616,332)          (98,375)
                                                              -----------     -----------       -----------
        Net cash provided by (used in) in operating
        activities......................................        5,960,911       2,476,435         3,576,970
                                                              -----------     -----------       -----------
Cash Flows From Investing Activities:
    Purchases of property and equipment.................         (592,189)     (3,769,233)       (4,516,651)
    Change in restricted cash...........................               --      (4,141,689)        3,824,224
                                                              -----------     -----------       -----------
        Net cash provided by (used in) financing
        activities......................................         (592,189)     (7,910,922)         (692,427)
                                                              -----------     -----------       -----------
Cash Flows From Financing Activities:
    Proceeds from the sale of stock, net................               --      34,091,234                --
    Proceeds from exercise of stock options.............               --          12,000         1,035,188
    Proceeds from exercise of warrants..................               --       1,034,433           209,583
    Proceeds from issuance of notes.....................               --       4,335,000                --
    Repayments of notes.................................         (250,000)             --                --
    Repayments on credit facility.......................         (550,000)             --                --
    Repayments of capitalized lease obligations.........          (32,265)        (19,354)          (16,910)
                                                              -----------     -----------       -----------
        Net cash provided by (used in) financing
        activities......................................         (832,265)     39,453,313         1,227,861
                                                              -----------     -----------       -----------
Net Increase (Decrease) In Cash And Cash Equivalents....        4,536,457      34,018,826         4,112,404
Cash And Cash Equivalents, Beginning Of Year............          102,150       4,638,607        38,657,433
                                                              -----------     -----------       -----------
Cash And Cash Equivalents, End Of Year..................      $ 4,638,607     $38,657,433       $42,769,837
                                                              ===========     ===========       ===========

Supplemental Cash Flow Information:

Cash paid for --
Interest................................................      $    75,206     $    34,722       $   219,782
                                                              ===========     ===========       ===========

Income taxes............................................      $   155,278     $ 3,910,000       $ 5,512,000
                                                              ===========     ===========       ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      28
<PAGE>


                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   Background:

     Innovative Solutions and Support, Inc., (the "Company"), was incorporated
in Pennsylvania on February 12, 1988. The Company's primary business is the
design, manufacture and sale of flight information computers, electronic
displays and advanced monitoring systems to the military and government,
commercial air transport and corporate aviation markets.

     The Company completed an initial public offering of Common stock in August
2000. Upon the closing of the offering, the outstanding shares of Series A
Preferred stock were converted into 1,941,353 shares of Common stock.

     Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cause actual results to
vary materially from expectations include, but are not limited to, dependence on
key personnel, dependence on technological developments, dependence on key
customers and product liability.

2. Concentrations:

 Major Customers and Products

     In fiscal 1999 and 2000, the Company derived 76% and 62% of net sales from
three and two customers, respectively. Accounts receivable from the two
customers total $5,082,366 at September 30, 2000. In fiscal 2001, the Company
derived 64% of net sales from one customer. Accounts receivable from this
customer total $6,241,716 at September 30, 2001. The Company's existing supply
arrangement with this customer will be completely fulfilled by the second
quarter of fiscal 2002 and will provide the Company with approximately $8.8
million of net sales in such fiscal year, which assumes that the Company
receives the final option under this contract for $3.4 million. Should a new
supply arrangement not be obtained prior to or shortly after the expiration of
the existing arrangement, the Company may experience a significant reduction in
net sales. This result may have a material adverse effect on the Company's
operating results and financial condition.

     In addition, sales of air data and RVSM systems and components were 81%,
99% and 100% of total net sales for the years ended September 30, 1999, 2000 and
2001, respectively. Sales of engine and fuel displays were 19%, 1% and none of
total net sales for the years ended September 30, 1999, 2000 and 2001,
respectively. A substantial portion of the Company's sales have been and are
expected to continue to be, to prime contractors or government agencies in
connection with government aircraft retrofit or original manufacturing
contracts. Sales to government contractors and agencies accounted for
approximately 80% of the Company's net sales during fiscal 2000 and 2001.

 Major Suppliers

     The Company currently buys several of its components from sole source
suppliers. Although there are a limited number of manufacturers of the
particular components, management believes that other suppliers could provide
similar components on comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and shipments, a possible loss of sales, and
could cause the Company to fail to fulfill certain performance obligations under
current customer contracts, which would adversely affect operating results.

 Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and accounts receivables.
The Company invests its excess cash with large banks where preservation of
principal is the major consideration. The Company's customer base principally
consists of companies within the aviation industry. The Company does not
currently require collateral from its customers.

     A reserve for doubtful accounts of $75,000 was established in the year
ended September 30, 2000 to cover potential collection exposure on accounts
receivable. This reserve was increased by $25,000 in fiscal 2001 to $100,000 at
September 30, 2001. The Company had no write-offs of accounts receivable during
these years.

3.   Summary Of Significant Accounting Policies:

 Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.

 Use of Estimates

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

 Cash and Cash Equivalents

     Highly liquid investments purchased with an original maturity of three
months or less are classified as cash equivalents. Cash equivalents at September
30, 2001 consist of funds invested in money market accounts with financial
institutions.

 Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:

                                      29
<PAGE>


                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                                                           September 30,
                                                                   ----------------------------
                                                                       2000             2001
                                                                   -----------      -----------
<S>                                                                <C>                   <C>
     Raw materials and finished components....................     $ 3,145,654      $ 4,344,795
     Work-in-process..........................................       1,119,490        1,356,878
                                                                   -----------      -----------
                                                                   $ 4,265,144      $ 5,701,673
                                                                   ===========      ===========
</TABLE>

 Property and Equipment

     Property and equipment is stated at cost. Depreciation is provided using an
accelerated method over the estimated useful lives of the assets (the lesser of
three to seven years or over the lease term). Major additions and improvements
are capitalized, while maintenance and repairs that do not improve or extend the
life of assets are charged to expense as incurred. During the year ended
September 30, 2000, the Company purchased an aircraft for approximately $3.0
million. This aircraft will serve as a test bed for the Company's new air data
and flat panel products and also as a sales/marketing tool for demonstrating
products to aviation customers.

 Long-Lived Assets

     The Company evaluates the realizability of long-lived assets pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No.121 requires that long-lived assets be reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If changes in circumstances
indicate that the carrying amount of an asset that an entity expects to hold and
use may not be recoverable, future cash flows expected to result from the use of
the asset and its disposition must be estimated. If the undiscounted value of
the future cash flows is less than the carrying amount of the asset, then
impairment is recognized. No material impairments have been recognized for the
periods presented.

 Revenue Recognition

     Sales are recognized upon shipment of product.

     In fiscal 1999, a customer purchased a 10 year extended warranty. Sales
related to this contract have been deferred and are being recognized ratably
over the term of the contract. The Company also began to offer its customers
extended warranties for additional fees. These warranty sales are recorded as
deferred revenue and recognized as sales on a straight-line basis over the
warranty period.

 Warranty

     Estimated cost to repair or replace products under warranty is provided
when sales of product are recorded.

 Income Taxes

     Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes" (see Note 6).

 Research and Development

     Research and development charges incurred for product enhancements and
future product development are recorded as expense as incurred.

 Shipping and Handling Fees and Costs

     The Company does not bill customers for shipping and handling. Shipping and
handling costs, which are included in cost of sales in the accompanying
consolidated statements of operations, include shipping supplies, related labor
costs and third-party shipping costs.

                                      30
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Comprehensive Income

     Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company
would be required to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. There were
no items of other comprehensive income for any of the periods presented.

 Fair Value of Financial Instruments

     The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and debt
instruments. The carrying values of these assets and liabilities are considered
to be representative of the respective fair values.

 Stock Options

     Stock-based employee compensation is recognized using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." For disclosure purposes, pro forma
net income and net income per share data are provided in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," as if the fair value method
had been applied.

 New accounting pronouncement

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of and resolves significant
implementation issues related to SFAS No. 121. SFAS No. 144 superceded SFAS No.
121 and Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of a Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The Company is required to adopt SFAS No. 144 for the fiscal year ending
September 30, 2003, however, early application is permitted. Management does not
believe that the adoption of SFAS No. 144 will have a material impact on its
results of operations.

                                      31
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Net Income Per Share:

     Net income per share is calculated pursuant to SFAS No. 128, "Earnings per
Share" ("EPS"). Basic EPS excludes potentially dilutive securities and is
computed by dividing net income by the weighted-average number of Common shares
outstanding for the period. Diluted EPS is computed assuming the conversion or
exercise of all dilutive securities such as preferred stock, options and
warrants.

     Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of basic
EPS. The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted EPS.

<TABLE>
<CAPTION>
                                                       For the  Fiscal Year Ended September 30,
                                                       ----------------------------------------
                                                            1999           2000            2001
                                                       ---------     ----------      ----------
<S>                                                    <C>           <C>             <C>
Weighted average number of shares - basic..........    6,746,976      7,893,630      12,731,395
 Effect of dilutive securities:
  Stock options....................................      168,671        333,196         289,206
  Warrants.........................................      347,344        371,398         263,883
  Preferred stock..................................    1,941,353      1,633,707              --
                                                       ---------     ----------      ----------
Weighted average number of shares - diluted......      9,204,344     10,231,931      13,284,484
                                                       =========     ==========      ==========
</TABLE>

  The number of incremental shares from the assumed exercise of stock options
and warrants is calculated by using the treasury stock method. For the fiscal
years ended September 30, 2000 and 2001, there were 1000 and 56,000 options
outstanding, respectively, that were excluded from the computation of diluted
earnings per share as the effect would be antidilutive.

5. Accrued Expenses:

  Accrued expenses consist of the following:

                                                             September 30,
                                                       -------------------------
                                                          2000           2001
                                                       ----------     ----------

Salary, benefits and payroll taxes                     $  385,180     $  939,116
Warranty                                                  410,935        571,748
Income taxes payable                                      765,350              -
Other                                                   1,403,482        657,202
                                                       ----------     ----------
                                                       $2,964,947     $2,168,066
                                                       ==========     ==========

                                      32
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Income Taxes:

     The components of income taxes are as follows:

<TABLE>
<CAPTION>
                                                 For the Fiscal Year Ended September 30,
                                               ------------------------------------------
                                                   1999             2000          2001
                                               -----------       ----------    ----------
     <S>                                       <C>               <C>           <C>
  Current Provision:
  Federal......................                   $534,497       $4,064,517    $3,831,260
  State........................                    197,007          419,704       532,628
                                               -----------       ----------    ----------
                                                   731,504        4,484,221     4,363,888
                                               -----------       ----------    ----------
  Deferred Provision (Benefit):
  Federal......................                  1,780,359         (399,041)       51,774
  State........................                      5,901          (41,775)        7,169
                                               -----------       ----------    ----------
                                                 1,786,260         (440,816)       58,943
                                               -----------       ----------    ----------
                                                $2,517,764       $4,043,405    $4,422,831
                                               ===========       ==========    ==========
</TABLE>

     The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows:

<TABLE>
<CAPTION>
                                                  For the Fiscal Year Ended September 30,
                                                   -------------------------------------
                                                        1999          2000        2001
                                                   -----------    ---------- -----------
<S>                                                <C>             <C>          <C>
Federal statutory tax rate....................            34.0%         34.0%       34.0%
State income taxes, net of federal benefit....             3.6           2.6         3.0%
Other.........................................              --           0.9          --
                                                      --------          ----        ----
                                                          37.6%         37.5%       37.0%
                                                      ========          ====        ====
</TABLE>

     The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets and liabilities consists of the following
components:

<TABLE>
<CAPTION>
                                                            September 30,   September 30,
                                                               2000            2001
                                                            -------------   -------------
<S>                                                         <C>             <C>
Deferred tax assets --
     Deferred revenue                                           $ 227,542      $  201,214
     Reserves and accruals                                        729,836         845,216
                                                                ---------      ----------
                                                                  957,378       1,046,430
                                                                ---------      ----------

Deferred tax liabilities--
     Depreciation                                                       -        (244,335)
     Other                                                       (289,020)       (192,680)
                                                                ---------      ----------
                                                                 (289,020)       (437,015)
                                                                ---------      ----------
                                                                $ 668,358      $  609,415
                                                                =========      ==========
</TABLE>

     Payments received for extended warranty service are recorded as taxable
income in the year received and, therefore, generate deferred tax assets.

7. Notes Payable:

  In prior years, the Company had outstanding $837,600 of subordinated notes
bearing annual interest at 10%. In fiscal 1998, $587,600 of these notes was
repaid and the remaining $250,000 was repaid during fiscal 1999.

  Warrants to purchase 734,570 shares of Common stock at $2.19 per share were
issued to the noteholders in conjunction with the issuance of the notes. The
warrants expire in June 2004. The subordinated notes were recorded net of
$125,000 of the

                                      33
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

estimated fair value of the warrants. The fair value was determined using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.50%; an expected life of seven years; dividend yield of zero;
and a volatility of 30%.

     The Company entered into a $4,335,000 loan agreement dated August 1, 2000
with the Chester County, Pennsylvania Industrial Development Authority. The
purpose of the loan is to fund the construction of the Company's new office and
manufacturing facility. The loan matures in 2015 and carries an interest rate
set by the remarketing agent that is consistent with 30-day tax-exempt
commercial paper. The future maturities of this note payable are as follows as
of September 30, 2001:    2002 -  $  100,000
                          2003 -  $  150,000
                          2004 -  $  200,000
                          2005 -  $  250,000
                          2006 -  $  250,000
                    thereafter -  $3,385,000

The loan agreement requires the Company to maintain certain financial covenants
including a ratio of liabilities to (EBITDA) earnings before interest, taxes and
depreciation and amortization, fixed charge ratio and a minimum tangible net
worth. The Company was in compliance with the covenants of the loan agreement as
of September 30, 2001. The proceeds from this loan are considered restricted
cash to be used solely for the construction of the new facility.

     The interest cost associated with this debt was $219,782 for fiscal year
2001. The entire amount was capitalized as part of the construction cost of the
new facility.

8. Credit Facility:

     The Company had a revolving credit and equipment line with a bank ("Credit
Facility") which allowed the Company to borrow up to $1,000,000, increasing to
$2,000,000 under certain circumstances. Interest on borrowing was at the higher
of the prime rate plus 1.5% or the bank's cost of funds, as defined, plus 2.5%.
All borrowings under the Credit Facility were repaid in April 1999. The Company
allowed this Credit Facility to expire in August 2000.

9. Shareholders' Equity:

 Preferred Stock

     Holders of Class A Convertible Preferred stock were entitled to certain
rights shared with Common shareholders, as defined, including equal voting
rights and an equal share of dividends, if any. In addition, the Class A
Convertible Preferred stock carried a liquidation right of $24 per share in the
event of any liquidation, as defined. The Preferred stock was automatically
converted into Common stock upon the closing of the Company's initial public
offering on August 4, 2000.

 Common Stock

     The Company issued 38,368 and 5,950 shares of Common stock to non-employee
directors, with fair values of $105,000 and $90,102 for the years ended
September 30, 1999 and 2001, respectively. The fair value of the Common stock
was charged to selling, general and administrative expense in the accompanying
consolidated statements of operations based on the fair market value of the
stock on the commitment date. The Company also accrued $30,398 at September 30,
2001 for director shares earned during the year but not issued until after year
end.

 Stock Options

     The Company's 1988 Stock Incentive Plan provides for the granting of
incentive stock options to employees. The Company's 1998 Stock Option Plan
provides for the granting of incentive and nonqualified stock options to
employees, officers, directors and independent contractors and consultants.
Through September 30, 2001, no stock options have been granted to independent
contractors or consultants under this plan.

                                      34
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Incentive stock options granted under the 1988 Stock Incentive Plan and the
1998 Stock Option Plan (the "Plans") must be at least equal to the fair value of
the Common stock on the date of grant. Nonqualified stock options granted under
the 1998 Plan may be less than, equal to or greater than the fair value of the
Common stock on the date of grant. Required disclosure information regarding the
Plans has been combined due to the similarities in the Plans. The Company has
reserved 1,360,228 shares of Common stock for awards under the Plans.

     During the year ended September 30, 1999, the Company granted performance
based stock options to an employee and the Company recorded $85,000 in
compensation expense related to these options as the applicable performance
measures that determined vesting had been achieved.

     Under SFAS No. 123, compensation cost related to stock options granted to
employees is computed based on the fair value of the stock option at the date of
grant using the Black-Scholes option pricing model. The Company has elected the
disclosure method of SFAS No. 123. Had the Company recognized compensation cost
for its stock option plans consistent with the provisions of SFAS 123, the
Company's pro forma net income for fiscal 1999, 2000 and 2001 would have been as
follows:

                                           Fiscal Year Ended September 30,
                                        -------------------------------------
                                           1999          2000         2001
                                        ----------    ----------   ----------
          Net income:
             As reported........        $4,180,635    $6,749,557   $7,530,765
             Pro forma..........        $4,114,312    $6,338,894   $6,821,064
          Basic EPS:
             As reported........        $     0.62    $     0.86   $     0.59
             Pro forma..........        $     0.61    $     0.80   $     0.54
          Diluted EPS:
             As reported........        $     0.45    $     0.66   $     0.57
             Pro forma..........        $     0.45    $     0.62   $     0.51


     The weighted average fair value of the stock options granted during the
fiscal years ended September 30, 1999, 2000 and 2001 were $2.21, $10.09 and
$9.04, respectively. The fair value of each option grant is estimated on the
grant date using the Black-Scholes option pricing model with the following
assumptions:

<TABLE>
<CAPTION>
                                                          Fiscal Year Ended September 30,
                                                          ------------------------------
                                                               1999    2000   2001
                                                               ----    ----   ----
          <S>                                                  <C>     <C>    <C>
          Expected dividend rate.......................          --     --     --
          Expected volatility..........................          70%   126%     72%
          Weighted average risk-free interest rate.....         5.7%   5.9%    5.3%
          Expected lives (years).......................           5      5       7
</TABLE>

                                      35
<PAGE>

               INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Information relative to the Plans is as follows:

<TABLE>
<CAPTION>
                                                                   Range of         Weighted
                                                                   Exercise          Average
                                                     Options       Prices       Exercise Price
                                                   ------------   ------------  --------------
<S>                                                <C>           <C>            <C>
  Outstanding at September 30, 1998...........         308,043    $ 0.91- 3.28     $     2.33
     Granted..................................         356,278      3.28- 6.39           3.52
     Terminated...............................         (54,812)           2.19           2.19
                                                       --------    ------------    ----------
  Outstanding at September 30, 1999...........         609,509      0.91- 6.39           3.28
     Granted..................................         359,323     10.03-17.13          11.28
     Exercised................................         (10,962)           1.09           1.09
     Terminated...............................         (82,218)     0.91-10.03           6.20
                                                      --------    ------------     ----------
  Outstanding at September 30, 2000...........         875,652       .91-17.13           6.10
     Granted..................................         139,000      9.25-15.00          13.00
     Exercised................................        (340,380)      .91-10.03           3.04
     Terminated...............................        (177,388)     2.19-11.86           5.52
                                                      --------    ------------     ----------
  Options outstanding at September 30, 2001...         496,884    $ 2.19-17.13     $    10.36
                                                      ========    ============     ==========

  Options exerciseable at September 30, 2001..         100,141    $ 2.19-17.13     $     8.08
                                                      ========    ============     ==========
</TABLE>

     Options may no longer be granted under the 1988 Stock Incentive Plan. At
September 30, 2001, 191,349 shares were available for grant under the 1998 stock
option plan.

     The following table summarizes information concerning outstanding and
exerciseable options at September 30, 2001:

<TABLE>
<CAPTION>
  /--------------------------- OPTIONS OUTSTANDING--------------------------/      /------OPTIONS EXERCISEABLE------/
  Range of         Outstanding         Weighted Average
  Exercise            As of               Remaining         Weighted Average           As of           Weighted Average
   Prices       September 30, 2001     Contractual Life      Exercise Price      September 30, 2001     Exercise Price
   ------       ------------------     ----------------      --------------      ------------------     --------------
<S>            <C>                   <C>                   <C>                  <C>                  <C>
$0.0-5.00                 73,448                   6.4               $ 2.80               35,078                $ 3.06
$5.01-7.50                27,406                   7.7               $ 6.39               10,962                $ 6.39
$7.51-10.00               10,000                   9.9               $ 9.25                    0                $  0.0
$10.01-12.50             289,030                   8.7               $11.54               53,901                $11.66
$12.51-15.00              96,000                   9.5               $13.77                    0                $  0.0
$15.01-17.50               1,000                   9.0               $17.13                  200                $17.13
                         -------                  ----               ------              -------                ------
                         496,884                   8.5               $10.36              100,141                $ 8.08
                         -------                  ----               ------              -------                ------
</TABLE>


 Warrants

     In connection with the issuance of subordinated notes, the Company issued
warrants to purchase 734,570 shares of Common stock at an exercise price of
$2.19 per share (see Note 7). The remaining unexercised warrants are fully
vested and are exercisable through June 2004.

                                      36
<PAGE>

                     INNOVATIVE SOLUTIONS AND SUPPORT, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)


     In addition, there are outstanding warrants to purchase 280,637 shares of
Common stock at an exercise price of $2.19 per share at September 30, 2001.

     During the year ended September 30, 2001, warrants to purchase 83,796
shares of Common stock were exercised for an aggregate purchase price of
$209,583.

10. Commitments and Contingencies:

 Capital Leases

     The Company leases certain equipment under capital leases, with terms
ranging from three to five years. Implicit interest rates under these leases
range from 9% to 9.1%. The capitalized cost of $94,291 and $95,943 and the
related accumulated amortization of $68,768 and $79,661 has been included in
property and equipment at September 30, 2000 and 2001, respectively.

Future minimum payments on capital leases at September 30, 2001 are as follows:


      Fiscal 2002..............................................    $ 19,328
      Fiscal 2003..............................................      16,906
                                                                   --------
      Total minimum lease payments.............................      36,234
      Less-Amount representing interest........................      (2,903)
                                                                   --------
      Present value of future minimum lease payments...........      33,331
      Less--Current portion....................................      15,696
                                                                   --------
                                                                   $ 17,635
                                                                   ========
 Operating Leases

     Rent expense under operating leases totaled $427,410, $429,355 and $509,436
for the years ended September 30, 1999, 2000 and 2001, respectively. Future
minimum payments related to all noncancelable leases are $38,556 in fiscal 2002.

 Product Liability

     The Company currently has product liability insurance of $20,000,000, which
management believes is adequate to cover potential liabilities that may arise.

 Land Purchase

     During the year ended September 30, 2001, the Company purchased a tract of
land for $1.0 million. The Company constructed a new manufacturing and office
facility on the land. Included in the accompanying consolidated balance sheet as
of September 30, 2001, is construction in progress of $3,949,298, which
represents the land and related facility. The facility will be completed in the
first quarter of fiscal 2002.

                                      37
<PAGE>

                    INNOVATIVE SOLUTIONS AND SUPPORT, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Employment Agreement

  In May 1999, the Company entered into an employment agreement with an employee
for an annual salary of $225,000. The Company entered into a separation
agreement with this employee in June 2001 under which the employee resigned from
his position.

  Legal Proceedings

  From time to time, the Company is subject to various legal proceedings in the
ordinary course of business. Management does not believe that any of the current
legal proceedings will have a material adverse effect on the Company's
operations or financial condition.

  11.   Related-party Transactions:

  The Company incurred legal fees of $76,924, $42,364 and $65,588 with a law
firm which is a shareholder of the Company for the years ended September 30,
1999, 2000 and 2001, respectively. Management believes the fees paid were on an
arm's length basis and were consistent with the fees paid prior to the law
firm's investment in the Company.

  The Company derived net sales of $1,226,210, $88,566 and none for the years
ended September 30, 1999, 2000 and 2001, respectively, from an entity which is a
shareholder, and purchased $616,751, $39,444 and none of component parts used in
the manufacturing process from this related party during such years.

  12. Quarterly Financial Data (unaudited):

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                  First Quarter           Second Quarter           Third Quarter           Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------
                               2000         2001        2000        2001         2000         2001        2000        2001
--------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>         <C>         <C>         <C>         <C>          <C>         <C>         <C>
Net Sales                     $6,337,442  $9,519,682  $7,221,345  $9,697,298  $10,091,429  $7,497,395  $9,623,674  $7,670,187
--------------------------------------------------------------------------------------------------------------------------------
Cost of Sales                  2,833,463   3,971,920   3,566,416   4,099,759    4,361,126   3,205,778   4,058,038   3,200,411
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit                   3,503,979   5,547,762   3,654,929   5,597,539    5,730,303   4,291,617   5,565,636   4,469,776
--------------------------------------------------------------------------------------------------------------------------------
Operating Income               2,019,000   2,583,753   1,732,391   2,968,214    3,427,678   1,923,255   3,049,338   2,281,973
--------------------------------------------------------------------------------------------------------------------------------
Net Income                     1,301,000   2,050,430   1,165,174   2,209,662    2,156,523   1,584,740   2,126,860   1,685,933
--------------------------------------------------------------------------------------------------------------------------------
Net Income per Share - Basic        0.19        0.16        0.17        0.17         0.30        0.12         .20         .14
--------------------------------------------------------------------------------------------------------------------------------
Net Income per Share - Diluted      0.13        0.15        0.12        0.17         0.22        0.12         .19         .13
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

In both the first and second quarters of fiscal 2001 the Company accrued
$250,000 for discretionary bonuses for the year. In the fourth quarter of fiscal
2001, management determined that the bonus would not paid and, therefore the
$500,000 previously accrued was reversed in the fourth quarter. There was no
discretionary bonus in fiscal 2000.

Item 9.  Changes in and disagreements with accountants on accounting and
financial disclosure.

     None


Part III

Item 10. Directors and executive officers of the registrant.

     This information (other than the information relating to executive officers
included in Part I Item 1.) will be included in our Proxy Statement relating to
our Annual Meeting of Shareholders, which will be filed within 120 days after
the close of our fiscal year covered by this Report, and is hereby incorporated
by reference to such Proxy Statement.

                                      38
<PAGE>

Item 11.  Executive compensation.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.

Item 12.  Security ownership of certain beneficial owners and management.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.

Item 13.  Certain relationships and related transactions.

     This information will be included in our Proxy Statement relating to our
Annual Meeting of Shareholders, which will be filed within 120 days after the
close of our fiscal year covered by this Report, and is hereby incorporated by
reference to such Proxy Statement.



Part IV

Item 14.  Exhibits, financial statement schedules and reports on Form 8-K.

    (a)  The following documents are filed as part of this report:

         (1)  Financial Statements
              See index to Financial Statements at Item 8 on page 23 of this
              report.
         (2)  Financial Statement Schedules.

              Schedules have been omitted because they are not applicable or are
              not required or the information required to be set forth therein
              is included in the financial statements or notes thereto.

                                      39
<PAGE>

(2)  The following exhibits are filed as part of, or incorporated by reference
     into this report:

<TABLE>
<CAPTION>
     Exhibit
     Number  Exhibit Title
     <S>     <C>
     3.1#    Articles of Incorporation of IS&S.
     3.2#    Bylaws of IS&S.
     10.1*#  IS&S 1988 Incentive Stock Option Plan
     10.2*#  IS&S 1998 Stock Option Plan
     10.3*#  Employment Agreement by and between Robert J. Ewy and IS&S dated
             May 3, 1999.
     10.4*#  Employment Agreement by and between Roger E. Mitchell and IS&S
             dated July 7, 1998.
     10.5#   Stock Purchase Agreement by and between IS&S and Parker Hannifin
             Corporation dated July 11, 1991.
     10.6#   Securities Purchase Agreement by and among IS&S, Geoffrey S. M.
             Hedrick, The P/A Fund and Parker Hannifin Corporation dated May 8,
             1995.
     10.7#   Form of Warrant Agreement
     10.8@   Bond purchase Agreement
     10.9@   Reimbursement, credit and Security Agreement
     10.10@  Loan Agreement
     10.11@  Trust Indenture
     21      Subsidiaries of IS&S.
     23      Consent of Arthur Andersen LLP.
</TABLE>

     *       Constitutes a management contract or compensatory plan or
             arrangement required to be filed as an exhibit to this form.
     #       Incorporated by reference from the Registrant's Registration
             Statement on Form S-1 (File No. 333-96584) filed with the
             Commission on May 9, 2000, as amended.
     @       Incorporated by reference from the Registrant's Form 10-K filed
             with the Commission for fiscal year 2000.

(b)  Reports on Form 8-K.

          None

                                      40
<PAGE>

                                   SIGNATURES

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

                                        Innovative Solutions and Support, Inc.


                                        By: /s/  Geoffrey S. M. Hedrick
                                            ---------------------------
                                                 Geoffrey S. M. Hedrick
                                                 Chairman of the Board and
                                                 Chief Executive Officer

                                        Dated:  December 14, 2001

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
          Signature                                         Title                        Date
          ---------                                         -----                        ----
<S>                                                <C>                             <C>
/s/ Geoffrey S. M. Hedrick
--------------------------
Geoffrey  S. M. Hedrick                            Chairman of the Board and       December 14, 2001
(Principal Executive Officer)                      Chief Executive Officer

/s/ James J. Reilly
-------------------
James J. Reilly                                    Chief Financial Officer         December 14, 2001
(Principal Financial and Accounting  Officer)

/s/ Glen R. Bressner
--------------------
Glen R. Bressner                                   Director                        December 14, 2001

/s/ Winston J. Churchill
------------------------
Winston J. Churchill                               Director                        December 14, 2001

/s/ Benjamin A. Cosgrove
------------------------
Benjamin A. Cosgrove                               Director                        December 14, 2001

/s/ Ivan M. Marks
-----------------
Ivan M. Marks                                      Director                        December 14, 2001

/s/ Robert E. Mittelstaedt, Jr
------------------------------
Robert E. Mittelstaedt                             Director                        December 14, 2001

/s/ Robert H. Rau
-----------------
Robert H. Rau                                      Director                        December 14, 2001
</TABLE>

                                      41