Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x**  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|---------------------------------------------------------------------------------------------------------|
|   |                                                                                                    |
|   | **For the  quarterly period ended December 31, 2009**                                              |
|   |                                                                                                    |
|   | **OR**                                                                                                  |
|   |                                                                                                    |
| **o**  | **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**

 

**INNOVATIVESOLUTIONS AND SUPPORT, INC.**

(Exactname of registrant as specified in its charter)

 

| **PENNSYLVANIA**                                | ** ** | **23-2507402**       |
|-------------------------------------------------|------------|----------------------|
| (State  or Other Jurisdiction                   |       | (I.R.S.  Employer    |
| of  Incorporation or Organization)              |       | Identification  No.) |
|                                            |       |                 |
| **720 Pennsylvania Drive, Exton, Pennsylvania** | ** ** | **19341**            |
| (Address  of Principal Executive Offices)       |       | (Zip  Code)          |

 

**(610)646-9800**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 day.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files.  Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| o Large accelerated filer                      |   | x Accelerated filer         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| o Non-accelerated filer                        |   | o Smaller reporting company |
| (Do not check if a  smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of February 2, 2010, there were 16,755,669shares of the Registrant’s Common Stock, with par value of $.001 per share,outstanding.

 

 

 

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**INNOVATIVESOLUTIONS AND SUPPORT, INC.**

### **FORM 10-Q December 31, 2009**

 

**INDEX**

 
| ** **        | ** **                                                                                                 | **Page No.** |
|-------------------|------------------------------------------------------------------------------------------------------------|-------------------|
|              |                                                                                                       |              |
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                 | 1                 |
|              |                                                                                                       |              |
| Item 1.           | Financial  Statements (Unaudited)                                                                          | 1                 |
|              |                                                                                                       |              |
|              | Condensed Consolidated Balance Sheets –  December 31, 2009 and September 30, 2009           | 1                 |
|              |                                                                                                       |              |
|              | Condensed Consolidated Statements of Operations –  Three Months Ended December 31, 2009 and 2008 | 2                 |
|              |                                                                                                       |              |
|              | Condensed Consolidated Statements of Cash Flows –  Three Months Ended December 31, 2009 and 2008 | 3                 |
|              |                                                                                                       |              |
|              | Notes to Condensed Consolidated Financial Statements                                                       | 4 – 12       |
|              |                                                                                                       |              |
| Item 2.           | Managements  Discussion and Analysis of Financial Condition and Results of Operations                      | 13 – 17      |
|              |                                                                                                       |              |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                                | 18                |
|              |                                                                                                       |              |
| Item 4.           | Controls and  Procedures                                                                                   | 18                |
|              |                                                                                                       |              |
| **PART II.** | **OTHER INFORMATION**                                                                                      |              |
|              |                                                                                                       |              |
| Item  1.          | Legal  Proceedings                                                                                         | 19                |
|              |                                                                                                       |              |
| Item  1A          | Risk  Factors                                                                                              | 19                |
|              |                                                                                                       |              |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                               | 19                |
|              |                                                                                                       |              |
| Item 3.           | Defaults upon  Senior Securities                                                                           | 19                |
|              |                                                                                                       |              |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                       | 19                |
|              |                                                                                                       |              |
| Item  5.          | Other  Information                                                                                         | 19                |
|              |                                                                                                       |              |
| Item 6.           | Exhibits                                                                                                   | 19                |
|              |                                                                                                       |              |
| **SIGNATURES**    | 20                                                                                                         |

 

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**PART I—FINANCIALINFORMATION**

**Item 1—Financial Statements**

 

**INNOVATIVE SOLUTIONS AND SUPPORT,INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                          | ** ** | **December 31,** | ** **     | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|----------------|------------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2009**              | ** **     | **2009**               | ** ** |
| **ASSETS**                                                                                                                                                                                                                          |       |                  |           |                   |       |
| **Current Assets**                                                                                                                                                                                                                  |       |                  |           |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                           |       | $                     | 36,490,037     |                   | $          | 35,565,694 |   |
| Accounts receivable, net                                                                                                                                                                                                            |       | 3,529,494             |           | 6,188,706              |       |
| Inventories                                                                                                                                                                                                                         |       | 5,169,416             |           | 5,306,985              |       |
| Deferred income taxes                                                                                                                                                                                                               |       | 495,186               |           | 503,993                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                           |       | 1,256,455             |           | 1,227,413              |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Total current assets                                                                                                                                                                                                                |       | 46,940,588            |           | 48,792,791             |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Property and equipment, net                                                                                                                                                                                                         |       | 8,238,656             |           | 8,343,701              |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Other assets                                                                                                                                                                                                                        |       | 279,860               |           | 399,520                |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **Total Assets**                                                                                                                                                                                                                    | ** ** | **$**                 | **55,459,104** | ** **             | **$**      | **57,536,012** | ** ** |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                       |       |                  |           |                   |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **Current Liabilities**                                                                                                                                                                                                             |       |                  |           |                   |       |
| Current portion of capitalized lease obligations                                                                                                                                                                                    |       | $                     | 9,908          |                   | $          | 9,908 |   |
| Accounts payable                                                                                                                                                                                                                    |       | 842,869               |           | 1,207,990              |       |
| Accrued expenses                                                                                                                                                                                                                    |       | 2,090,115             |           | 2,785,560              |       |
| Deferred revenue                                                                                                                                                                                                                    |       | 170,774               |           | 164,856                |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Total current liabilities                                                                                                                                                                                                           |       | 3,113,666             |           | 4,168,314              |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Long-term portion of capitalized lease obligations                                                                                                                                                                                  |       | 24,208                |           | 26,991                 |       |
| Deferred revenue                                                                                                                                                                                                                    |       | 47,766                |           | 60,792                 |       |
| Deferred income taxes                                                                                                                                                                                                               |       | 630,617               |           | 642,651                |       |
| Other liabilities                                                                                                                                                                                                                   |       | 240,621               |           | 238,522                |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **Total Liabilities**                                                                                                                                                                                                               | ** ** | **4,056,878**         | ** **     | **5,137,270**          | ** ** |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Commitments and contingencies                                                                                                                                                                                                       |       | —                |           | —                 |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **Shareholder’s Equity**                                                                                                                                                                                                       |       |                  |           |                   |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Preferred Stock, 10,000,000 shares authorized,  $.001 par value, of which 200,000 shares are authorized as Class A  Convertible stock. No shares issued and outstanding at December 31, 2009  and September 30, 2009 |       | —                |           | —                 |       |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| Common stock, $.001 par value: 75,000,000 shares  authorized, 18,215,910 and 18,206,839 issued at December 31, 2009 and  September 30, 2009                                                                               |       | 18,216                |           | 18,207                 |       |
| Additional paid-in capital                                                                                                                                                                                                          |       | 46,610,782            |           | 46,462,135             |       |
| Retained earnings                                                                                                                                                                                                                   |       | 24,016,104            |           | 25,161,276             |       |
| Treasury stock, at cost, 1,470,510 shares at  December 31, 2009 and September 30, 2009                                                                                                                                    |       | (19,242,876           | )              | (19,242,876            | )          |
|                                                                                                                                                                                                                                |       |                  |           |                   |       |
| **Total Shareholder’s Equity**                                                                                                                                                                                                 | ** ** | **51,402,226**        | ** **     | **52,398,742**         | ** ** |
| ** **                                                                                                                                                                                                                          | ** ** | ** **            | ** **     | ** **             | ** ** |
| **Total Liabilities and  Shareholder’s Equity**                                                                                                                                                                                | ** ** | **$**                 | **55,459,104** | ** **             | **$**      | **57,536,012** | ** ** |

 

The accompanyingnotes are an integral part of these statements.

 

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**INNOVATIVESOLUTIONS AND SUPPORT, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                  | ** ** | **Three Months Ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Net  sales:                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Product                                     |       | $                                        | 3,836,577  |   | $ | 8,889,118 |   |
| Engineering  - modification and development |       | 770,662                                  |       | 1,686,228 |   |
| Total  net sales                            |       | 4,607,239                                |       | 10,575,346 |   |
|                                        |       |                                     |       |   |   |
| Cost  of sales                              |       |                                     |       |   |   |
| Product                                     |       | 2,365,341                                |       | 4,995,094 |   |
| Engineering  - modification and development |       | 471,432                                  |       | 260,079 |   |
|                                        |       |                                     |       |   |   |
| Total  cost of sales                        |       | 2,836,773                                |       | 5,255,173 |   |
|                                        |       |                                     |       |   |   |
| Gross  profit                               |       | 1,770,466                                |       | 5,320,173 |   |
|                                        |       |                                     |       |   |   |
| Operating  expenses:                        |       |                                     |       |   |   |
| Research  and development                   |       | 1,164,705                                |       | 1,280,501 |   |
| Selling,  general and administrative        |       | 2,151,139                                |       | 2,359,307 |   |
| Total  operating expenses                   |       | 3,315,844                                |       | 3,639,808 |   |
|                                        |       |                                     |       |   |   |
| Operating  (loss) income                    |       | (1,545,378                               | )          | 1,680,365 |   |
|                                        |       |                                     |       |   |   |
| Interest  income                            |       | 22,974                                   |       | 201,086 |   |
| Interest  expense                           |       | (664                                     | )          | (35,474 | ) |
| Other  income                               |       | 50,000                                   |       | 50,073 |   |
|                                        |       |                                     |       |   |   |
| (Loss)  income before income taxes          |       | (1,473,068                               | )          | 1,896,050 |   |
|                                        |       |                                     |       |   |   |
| Income  tax (benefit) expense               |       | (327,895                                 | )          | 72,664 |   |
|                                        |       |                                     |       |   |   |
| Net  (loss) income                          |       | $                                        | (1,145,173 | ) | $ | 1,823,386 |   |
|                                        |       |                                     |       |   |   |
| Net  (loss) income per common share:        |       |                                     |       |   |   |
| Basic                                       |       | $                                        | (0.07      | ) | $ | 0.11 |   |
| Diluted                                     |       | $                                        | (0.07      | ) | $ | 0.11 |   |
|                                        |       |                                     |       |   |   |
| Weighted  Average Shares Outstanding:       |       |                                     |       |   |   |
| Basic                                       |       | 16,745,379                               |       | 16,734,149 |   |
| Diluted                                     |       | 16,745,379                               |       | 16,769,933 |   |

 

The accompanying notesare an integral part of these statements.

 

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**INNOVATIVE SOLUTIONS AND SUPPORT,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                              | ** ** | **For the Three**     | ** ** | **For the Three**     | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **Months Ended**      | ** ** | **Months Ended**      | ** ** |
| ** **                                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                              | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **CASH FLOW FROM OPERATING ACTIVITIES:**                |       |                  |       |                  |       |
| Net  (Loss) income                                      |       | $                     | (1,145,173 | )                     | $          | 1,823,386 |   |
| Adjustments  to reconcile net income (loss) to net cash |       |                  |       |                  |       |
| provided  by (used in) operating activities:            |       |                  |       |                  |       |
| Depreciation  and amortization                          |       | 192,568               |       | 259,530               |       |
| Deposit  forfeiture, installation kits                  |       | 118,660               |       | —                |       |
| Share-based  compensation expense:                      |       |                  |       |                  |       |
| Stock  Options                                          |       | 100,719               |       | 143,644               |       |
| Nonvested  stock awards                                 |       | 49,955                |       | 50,089                |       |
| Tax  benefit from share-based arrangements:             |       |                  |       |                  |       |
| Nonvested  stock awards                                 |       | (2,018                | )          | 17,019                |       |
| Loss  on disposal of property and equipment             |       | 2,888                 |       | 260                   |       |
| Excess  and obsolete inventory expense                  |       | —                |       | 557,312               |       |
| Deferred  income tax benefit                            |       | (3,227                | )          | —                |       |
| (Increase)  decrease in:                                |       |                  |       |                  |       |
| Accounts  receivable                                    |       | 2,659,212             |       | (2,653,524            | )          |
| Inventories                                             |       | 137,569               |       | 1,135,704             |       |
| Prepaid  expenses and other current assets              |       | 297,999               |       | 155,866               |       |
| Other  non current assets                               |       | 1,000                 |       | 3,000                 |       |
| Increase  (decrease) in:                                |       |                  |       |                  |       |
| Accounts  Payable                                       |       | (365,121              | )          | (340,326              | )          |
| Accrued  expenses                                       |       | (695,445              | )          | (1,654,208            | )          |
| Income  taxes payable                                   |       | (324,941              | )          | (635,296              | )          |
| Deferred  revenue                                       |       | (7,108                | )          | (91,095               | )          |
| Net  cash provided by (used in) operating activities    |       | 1,017,537             |       | (1,228,639            | )          |
|                                                    |       |                  |       |                  |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**               |       |                  |       |                  |       |
| Purchases  of property and equipment                    |       | (90,411               | )          | (75,031               | )          |
| Net  cash used in investing activities                  |       | (90,411               | )          | (75,031               | )          |
|                                                    |       |                  |       |                  |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**               |       |                  |       |                  |       |
| Repayment  of capitalized lease obligations             |       | (2,783                | )          | (2,592                | )          |
| Net  cash used in financing activities                  |       | (2,783                | )          | (2,592                | )          |
|                                                    |       |                  |       |                  |       |
| Net  increase (decrease) in cash and cash equivalents   |       | 924,343               |       | (1,306,262            | )          |
| Cash  and cash equivalents, beginning of year           |       | 35,565,694            |       | 35,031,932            |       |
|                                                    |       |                  |       |                  |       |
| Cash  and cash equivalents, end of year                 |       | $                     | 36,490,037 |                  | $          | 33,725,670 |   |
|                                                    |       |                  |       |                  |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**    |       |                  |       |                  |       |
| Cash  paid for interest                                 |       | $                     | 664        |                  | $          | 25,374 |   |
| Cash  paid for income tax                               |       | $                     | 97,667     |                  | $          | 690,942 |   |

 

The accompanying notes arean integral part of these statements.

 

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**Innovative Solutions and SupportInc.**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****Summary of Significant AccountingPolicies**

 

***Descriptionof the Company***

 

Innovative Solutions and Support, Inc. (the “Company”) wasincorporated in Pennsylvania on February 12, 1988. The Company’s primarybusiness is the design, manufacture and sale of flat panel display systems,flight information computers and advanced monitoring systems for military,government, commercial air transport and corporate aviation markets.

 

***Basisof Presentation***

 

The accompanyingunaudited condensed consolidated financial statements are presented pursuant tothe rules and regulations of the United States Securities and ExchangeCommission in accordance with the disclosure requirements for the quarterlyreport on Form 10-Q and therefore do not include all of the informationand footnotes required by generally accepted accounting principles for completeannual financial statements. In the opinion of Company management, theunaudited condensed consolidated financial statements reflect all adjustments(consisting of normal recurring adjustments) necessary to fairly state theresults for the interim periods presented. The condensed consolidated balancesheet as of September 30, 2009 is derived from audited financialstatements. Operating results for the three months ended December 31, 2009are not necessarily indicative of the results that may be expected for thefiscal year ending September 30, 2010. These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes of the Company included inthe Company’s Annual Report on Form 10-K for the fiscal year ended September 30,2009.

 

Our condensedconsolidated financial statements include the accounts of our wholly-ownedsubsidiaries. All intercompany balances and transactions have been eliminatedin consolidation.

 

***Use ofEstimates***

 

Preparationof consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect reported amounts of assets andliabilities, and disclosure of contingent assets and liabilities, as of thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Estimates are used in accounting for,among other items, allowance for doubtful accounts, inventory obsolescence,product warranty cost liability, income taxes and contingencies. Actual resultscould differ materially from those estimates.

 

***Cash and CashEquivalents***

 

Highly liquidinvestments purchased with an original maturity of three months or less areclassified as cash equivalents. Cash equivalents at December 31, 2009 and September 30,2009 consist of funds invested in money market accounts with financialinstitutions.

 

***Property andEquipment***

 

Property andequipment is stated at cost. Depreciation is provided using an acceleratedmethod over estimated useful lives of the assets (the lesser of three to sevenyears or over the lease term), except for the airplane and manufacturingfacility, which are depreciated using the straight-line method over estimateduseful lives of ten years and thirty-nine years, respectively. Major additionsand improvements are capitalized, while maintenance and repairs that do notimprove or extend the life of assets are charged to expense as incurred.

 

***Long-Lived Assets***

 

The Companyassesses the impairment of long-lived assets in accordance with FinancialAccounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic360-10, *“Property, Plant and Equipment”* (ASCTopic 360-10)*.* This statement requires thatlong-lived assets be reviewed for impairment whenever events or changes incircumstances indicate the carrying amount of an asset may not be recoverable.In addition, long-lived assets to be disposed of should be reported at thelower of the carrying amount or fair value less cost to sell. The Companyconsiders historical performance and future estimated results in its evaluationof potential impairment and then compares the carrying amount of the asset toestimated future cash flows expected to result from use of the asset. If thecarrying amount of the asset exceeds the estimated expected undiscounted futurecash flows, the Company measures the amount of the impairment by comparing thecarrying amount of the asset to its fair value. The estimation of fair value isgenerally 

 

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measured bydiscounting expected future cash flows. No impairment charges were recorded during the quarters ended December 31,2009 or 2008.

 

***RevenueRecognition***

 

The Company enters into sales arrangements with customers that, ingeneral, provide for the Company  to design, develop, manufacture and deliver flight information computers, large flat-panel displays, andadvanced monitoring systems that measure and display critical flightinformation, including data relative to aircraft separation, airspeed, andaltitude, as well as engine and fuel data measurements.  The Company’ssales arrangements may include multiple deliverables as defined in FASB ASCTopic 605-25, *“Multiple-Element Arrangements”*(ASC Topic 605-25) which typically include design and engineering services andthe production and delivery of the flat panel display and related components.

 

Multiple Element Arrangements -

 

The Company identifies all goods and/or services that are to bedelivered separately under such a sales arrangement and allocates revenue toeach deliverable (if more than one) based on that deliverable’s fairvalue.  The Company then considers the appropriate recognition method foreach deliverable; deliverables under multiple element arrangements aretypically purchased engineering and design services and product sales.  To the extent that an arrangement containsdefined design and development activities as an identified deliverable inaddition to products (resulting in a multiple element arrangement), the Companyrecognizes as Engineering — Modification and Development (EMD) revenue amountsearned during the design and development phase of the contract following theguidance included in FASB ASC Topic 605-35, *“Construction-Type andProduction-Type Contracts”*(ASC Topic 605-35). To the extentthat multiple element arrangements include product sales, revenue is generallyrecognized once revenue recognition criteria for the product deliverable hasbeen met based on the provisions of FASB ASC Topic 605, *“RevenueRecognition”*(ASC Topic 605).

 

Single Element Arrangements –

 

*Products -*

 

To the extent that a single element arrangement provides for productsales and repairs, revenue is generally recognized once revenue recognitioncriteria for the product deliverable has been met based on the provisions ofASC Topic 605.  The Company also receives orders for existing equipmentand parts.  Revenue from the sale of such products is generally recognizedupon shipment to the customer.

 

The Company offers its customers extended warranties for additionalfees. These warranty sales are recorded as deferred revenue and recognized assales on a straight-line basis over the warranty period.

 

*EngineeringServices -*

 

The Company also may enter into service arrangements to performspecified design and development services related to its products.  TheCompany recognizes revenue from these arrangements as EMD revenue, followingthe guidance included in ASC Topic 605-35. The Company considers the nature ofthese service arrangements (including term, size of contract and level ofeffort) when determining the appropriate accounting treatment for a particularcontract. The Company recognizes the revenue from these contracts using eitherthe percentage-of-completion method or completed contract method of accounting.

 

The Companyrecords revenue relating to these contracts using the percentage-of-completionmethod when the Company determines that progress toward completion isreasonable and reliably estimable and the contract is long-term in nature; theCompany uses the completed contract method for all others.

 

***Income Taxes***

 

Income taxes are recorded in accordance with FASB ASCTopic 740, *“Income Taxes”*(ASC Topic 740), whichprincipally utilizes a balance sheet approach to provide for income taxes.  Under this method, the Company recognizesdeferred tax assets and liabilities for temporary differences between thefinancial reporting basis and the tax basis of the Company’s assets andliabilities and expected benefits of utilizing net operating loss and taxcredit carryforwards.  The impact ondeferred taxes of changes in tax rates and laws, if any, applied to the yearsduring which temporary differences are expected to be settled, are reflected inthe consolidated financial statements in the period of enactment.  The Company files a consolidated UnitedStates federal income tax return (see Note 3).

 

Effective October 1, 2007 (the first day of fiscal 2008), incometax contingencies are accounted for in accordance with ASC Topic 740, whichprescribes a comprehensive model for how a company should recognize, measure,present and disclose in its financial 

 

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statements uncertain tax positions that the company has taken orexpects to take on a tax return. Significant judgment is required in determining our provision for incometaxes and recording the related assets and liabilities.  In the normal course of our business, thereare transactions and calculations where the ultimate tax determination is lessthan certain.  The Company and itssubsidiaries are subject to examination by Federal and State taxauthorities.  The Company regularlyassesses the potential outcomes of these examinations and any futureexaminations for the current or prior years in determining the adequacy of theprovision for income taxes.  The Companycontinually assesses the likelihood and amount of potential adjustments andrecords any necessary adjustments in the period in which the facts that giverise to a revision become known.  Avaluation allowance is established when it is more likely than not that all ora portion of the net deferred tax asset will not be realized.  The Company has elected to record anyinterest or penalties from the uncertain tax position as income tax expense.

 

The Company continues to maintain a full valuation allowance againstits net deferred tax assets, as of the quarter ended December 31,2009.  In accordance with Statement ASCTopic 740, the Company will continue to evaluate the need for a full or partialvaluation allowance in future periods.

 

***Research andDevelopment***

 

Research anddevelopment charges incurred for product design, product enhancements andfuture product development are expensed as incurred. Product development and designcharges incurred related to a specific customer agreement that are billable arecapitalized and then charged to cost of sales — engineering modification anddevelopment as the revenue related to the agreements is recognized.

 

***ComprehensiveIncome***

 

Pursuant to FASBASC Topic 220, *“Comprehensive Income”* (ASC Topic220) the Company is required to classify items of other comprehensive income bytheir nature in a financial statement and display the accumulated balance ofother comprehensive income separately from retained earnings and additionalpaid-in capital in the equity section of our condensed consolidated balancesheets.  For the three months ending December 31,2009 and 2008, comprehensive income consists of net income and there were noitems of other comprehensive income for any of the periods presented.

 

***Fair Value ofFinancial Instruments***

 

The Companyadopted FASB ASC Topic 820, *“Fair Value Measurementsand Disclosures”* (ASC Topic 820) in the first quarter of fiscal 2009for financial assets and liabilities. This standard defines fair value as the price at which an asset could beexchanged in a current transaction between knowledgeable willing parties.  A liability’s fair value is defined as theamount that would be paid to transfer the liability to a new obligor, not theamount that would be paid to settle the liability with the creditor.

 

Assets and liabilities measured at fair value are categorized basedupon the level of judgment associated with the inputs used to measure theirfair value. Hierarchical levels, defined by ASC Topic 820 and directly relatedto the amount of subjectivity associated with the inputs to fair valuation ofthese assets and liabilities, are as follows:

 

Level 1 — Unadjusted quoted prices that are availablein active markets for the identical assets or liabilities at the measurementdate.

 

Level 2 — Other observable inputs available at themeasurement date, other than quoted prices included in Level 1, either directlyor indirectly, including:

 

·        Quoted prices for similar assets or liabilities inactive markets;

·        Quoted prices for identical or similar assets innon-active markets;

·        Inputs other than quoted prices that are observablefor the asset or liability; and

·        Inputs that are derived principally from orcorroborated by other observable market data.

 

Level 3 — Unobservable inputs that cannot becorroborated by observable market data and reflect the use of significantmanagement judgment.  These values are generally determined using pricing modelsfor which the assumptions utilize management’s estimates of market participantassumptions.

 

The following table sets forth by level within the fair value hierarchythe Company’s financial assets and liabilities that were accounted for at fairvalue on a recurring basis as of December 31, 2009 and September 30,2009, according to the valuation techniques the Company used to determine theirfair values.

 

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| ** **                 | ** ** | **Fair Value Measurement on December 31, 2009** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **Quoted Price in**                                  | ** ** | **Significant Other** | ** ** | **Significant** | ** ** |
| ** **                 | ** ** | **Active Markets for**                               | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                 | ** ** | **Identical Assets**                                 | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                 | ** ** | **(Level 1)**                                        | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Assets                     |       |                                                 |       |   |   |   |   |
| Cash and cash equivalents: |       |                                                 |       |   |   |   |   |
| Money market funds         |       | $                                                    | 35,455,031 |   | $ | — |   | $ | — |   |
|                            |            |                                                      |            |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Fair  Value Measurement on September 30, 2009** | ** ** |
|----------------------------|------------|--------------------------------------------------------|------------|
| ** **                 | ** ** | **Quoted  Price in**                                   | ** ** | **Significant  Other** | ** ** | **Significant** | ** ** |
| ** **                 | ** ** | **Active  Markets for**                                | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                 | ** ** | **Identical  Assets**                                  | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                 | ** ** | **(Level  1)**                                         | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| Assets                     |       |                                                   |       |   |   |   |   |
| Cash and cash equivalents: |       |                                                   |       |   |   |   |   |
| Money market funds         |       | $                                                      | 34,793,543 |   | $ | — |   | $ | — |   |
|                            |            |                                                        |            |  |  |  |  |  |  |  |

 

***Stock-BasedCompensation***

 

The Company accounts for stock-based compensationunder FASB ASC Topic 505-50, *“Equity-Based Payments toNon-Employees*(ASC Topic 505-50) and FASB ASC Topic 718, *“Stock Compensation”* (ASC Topic 718), which require theCompany to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the awardusing an option pricing model.  This costis recognized over the period during which an employee is required to provideservice in exchange for the award.

 

***Warranty***

 

We offerwarranties on some products of various lengths. At the time of shipment, weestablish a reserve for estimated costs of warranties based on our bestestimate of the amounts necessary to settle future and existing claims usinghistorical data on products sold as of the balance sheet date. The length ofthe warranty period, the product’s failure rates and the customer’s usageaffects warranty cost. If actual warranty costs differ from our estimatedamounts, future results of operations could be adversely affected.

 

***Concentrations***

 

*MajorCustomers and Products*

 

For the three months ended December 31, 2009, four of the Company’scustomers, BAE Systems, Cessna, Lockheed Martin and L3 Communications,accounted for 17%, 16%, 14% and 14% of net sales, respectively.  For the three months ended December 31,2008, four of the Company’s customers, American Airlines, Boeing, FedEx andMarshall of Cambridge, accounted for 30%, 12%, 12% and 12% of net sales,respectively.

 

*MajorSuppliers*

 

TheCompany currently buys several components from sole source suppliers. Althoughthere are a limited number of manufacturers of particular components,management believes other suppliers could provide similar components oncomparable terms.

 

Forthe three months ended December 31, 2009 two of the Company’s suppliers,AMES and International Display Corporation accounted for 40% and 13% of theCompany’s total inventory related purchases, respectively.

 

*Concentrationof Credit Risk*

 

Financialinstruments that potentially subject the Company to concentration of creditrisk consist principally of cash balances and accounts receivable. The Companyinvests its excess cash where preservation of principal is the majorconsideration. The Company’s 

 

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customer baseprincipally consists of companies within the aviation industry. The Companyroutinely requests advance payments and/or letters of credit from newcustomers.

 

The Company has maintaineda reserve for doubtful accounts in the amount of $0.2 million and $0.2 million,as of December 31, 2009 and September 30, 2009, respectively.

 

***Recent Accounting Pronouncements***

 

In May 2009, the FASB issued Accounting StandardsCodification Topic 855 (ASC Topic 855), *Subsequent Events*which establishes general accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued oravailable to be issued. This statement also outlines the circumstances underwhich an entity would need to record transactions occurring after the balancesheet date in the financial statements. These new disclosures identify the datethrough which the entity has evaluated subsequent events. ASC Topic 855 iseffective for interim or annual financial periods ending after June 15,2009.  The Company adopted ASC Topic 855on April 1, 2009 and the adoption had no impact on the consolidatedfinancial statements.

 

In October 2009, the FASB issued AccountingStandards Update No. 2009-13 (ASU 2009-13), *Multiple-DeliverableRevenue Arrangements*which updates ASC Topic 605-25, *Multiple Elements Arrangements*, of the FASBcodification.   ASU 2009-13 provides newguidance on how to determine if an arrangement involving multiple deliverablescontains more than one unit of accounting, and if so allows companies toallocate arrangement considerations in a manner more consistent with theeconomics of the transaction.  ASU2009-13 is effective for the Company, prospectively, for revenue arrangementsentered into or materially modified in fiscal years beginning on or after June 15,2010 (the Company’s fiscal year 2011); early application is permitted.  The Company is currently evaluating theimpact of adopting ASU 2009-13 on its financial statements.

 

In October 2009, the FASB issued AccountingStandards Update No. 2009-14 (ASU 2009-14), *RevenueArrangements That include Software Elements* which amends ASC Topic985-605, *Software — Revenue Recognition* in regardto the scope of software guidance.  ASU2009-14 excludes software components of tangible products that functiontogether to provide the tangible product’s essential functionality.  While ASU 2009-14 does not create any newmethods of revenue recognition, it could significantly affect the Company’srecognition of revenue from period to period. ASU 2009-14 is effective for the Company, prospectively, for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010 (the Company’s fiscal year 2011); early applicationis permitted as long as the guidance from ASU 2009-13 is applied.  The Company is currently evaluating theimpact of adopting ASU 2009-14 on its financial statements.

 

In January 2010, the FASB issued AccountingStandards Update No. 2010-06 (ASU 2010-06), *Fair ValueMeasurements and Disclosures* which amends ASC Topic 820, adding newrequirements for disclosures for Levels 1 and 2, separate disclosures ofpurchases, sales, issuances, and settlements relating to Level 3 measurementsand clarification of existing fair value disclosures.  ASU 2010-06 is effective for interim andannual periods beginning after December 15, 2009, except for therequirement to provide Level 3 activity of purchases, sales, issuances, andsettlements on a gross basis, which will be effective for fiscal yearsbeginning after December 15, 2010 (the Company’s fiscal year 2012); earlyadoption is permitted.  The Company iscurrently evaluating the impact of adopting ASU 2009-14 on its financialstatements.

 

***Subsequent Events***

 

TheCompany has evaluated subsequent events that have occurred through February 3,2010, the issuance date of the Company’s financial statements and has concludedthat no events or transactions have occurred that would require adjustments to,or disclosure in, the financial statements.

 

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**2.****Detail of CertainBalance Sheet Accounts**

 

***Inventories***

 

Inventories are stated at the lower of cost (first-in, first-out) ormarket, net of reserve for excess and obsolete, and consist of the following:

 
| ** **      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------|------------|-----------------------|------------|------------------------|------------|
| ** **      | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| Raw  materials  |       | $                     | 3,295,338  |                   | $          | 3,535,109 |   |
| Work-in-process |       | 457,068               |       | 315,179                |       |
| Finished  goods |       | 1,417,010             |       | 1,456,697              |       |
|            |       | $                     | 5,169,416  |                   | $          | 5,306,985 |   |

 

***Prepaid expenses and othercurrent assets***

 

Prepaid expenses and other current assets consist ofthe following:

 
| ** **                           | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2009**               | ** ** |
|                                 |       |                  |       |                   |       |
| Revenue  recognized not yet invoiced |       | $                     | 454,738    |                   | $          | 491,417 |   |
| Prepaid  insurance                   |       | 251,151               |       | 307,477                |       |
| Deferred  engineering costs          |       | 14,014                |       | 81,957                 |       |
| Income  tax asset                    |       | 327,040               |       | —                 |       |
| Other                                |       | 209,512               |       | 346,562                |       |
|                                 |       | $                     | 1,256,455  |                   | $          | 1,227,413 |   |

 

***Property and equipment***

 

Property and equipment, net consists of the followingbalances:

 
| ** **                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2009**              | ** ** | **2009**               | ** ** |
|                                             |       |                  |       |                   |       |
| Computer  equipment                              |       | $                     | 2,028,117  |                   | $          | 1,986,028 |   |
| Corporate  airplane                              |       | 3,082,186             |       | 3,082,186              |       |
| Furniture  and office equipment                  |       | 1,078,381             |       | 1,074,031              |       |
| Manufacturing  facility                          |       | 5,576,466             |       | 5,558,553              |       |
| Equipment                                        |       | 4,061,960             |       | 4,037,689              |       |
| Land                                             |       | 1,021,245             |       | 1,021,245              |       |
|                                             |       | 16,848,355            |       | 16,759,732             |       |
| Less:  Accumulated depreciation and amortization |       | (8,609,699            | )          | (8,416,031             | )          |
|                                             |       | $                     | 8,238,656  |                   | $          | 8,343,701 |   |

 

Depreciation and amortization related to property andequipment was approximately $193,000 and $217,000 for the three months ended December 31,2009 and 2008, respectively.  TheCorporate Airplane is primarily utilized in product development efforts.

 

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***Otherassets***

 

Other assets consist of the following:

 
| ** **                                                                                                                          | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                          | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| Intangible  assets, net of accumulated amortization of $199,140 and $198,140 at  December 31, 2009 and September 30, 2009 |       | $                     | 279,860    |                   | $          | 280,860 |   |
| Installation  kits, deposit forfeiture                                                                                              |       | —                |       | 118,660                |       |
|                                                                                                                                |       | $                     | 279,860    |                   | $          | 399,520 |   |

 

Intangible assets consist of licensing andcertification rights which are amortized over a defined number of units.  No impairment charge was recorded in thethree months ended December 31, 2009.

 

Total amortizationexpense was approximately $1,000 and $43,000 for the three months ended December 31,2009 and 2008, respectively. Because the intangible assets are being amortizedover a defined number of units, the future amortization expense over the nextfive years cannot be determined at this time.

 

***Accrued expenses***

 

Accrued expenses consist of the following:

 
| ** **                              | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2009**               | ** ** |
|                                    |       |                  |       |                   |       |
| Warranty  (a)                           |       | $                     | 779,263    |                   | $          | 808,544 |   |
| Salary,  benefits and payroll taxes     |       | 281,144               |       | 617,224                |       |
| Reduction  in workforce / Severance (b) |       | 57,199                |       | 166,453                |       |
| Professional  fees                      |       | 238,813               |       | 188,349                |       |
| Income  taxes payable                   |       | —                |       | 112,449                |       |
| Materials  on order                     |       | 25,277                |       | 108,210                |       |
| Other                                   |       | 708,419               |       | 784,331                |       |
|                                    |       |                  |       |                   |       |
|                                    |       | $                     | 2,090,115  |                   | $          | 2,785,560 |   |

 

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(a)          The Company provides for theestimated cost of product warranties at the time revenue is recognized.  Warranty cost is recorded as cost of salesand the reserve balance recorded as an accrued expense in the financialstatements.  While the Company engages inextensive product quality programs and processes, the Company’s warrantyobligation is affected by product failure rates and the related material, laborand delivery costs incurred in correcting a product failure.  Should actual product failure rates, materialor labor costs differ from the Company’s estimates, further revisions to theestimated warranty liability would be required.

 

Warranty cost and accrualinformation for the three months ended December 31, 2009 is highlightedbelow:

 
| Warranty  Accrual at September 30, 2009                       |   | $       | 808,544 |   |
|--------------------------------------------------------------------|--------|---------|---------|--------|
| Accrued  expense for the three months ended December 31, 2009 |   | 50,139  |    |
| Warranty  cost for the three months ended December 31, 2009   |   | (79,420 | )       |
| Warranty  Accrual at December 31, 2009                        |   | $       | 779,263 |   |

 

(b)         The amount included inReduction in workforce / Severance as of December 31, 2009 is severancerelating to the former Chief Executive Officer which is payable under the termsof the Release Agreement dated November 10, 2008.  The amount paid for the three months ended December 31,2009 was $47,000.

 

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***Notespayable***

 

The Companyentered into a $4,335,000 loan agreement dated August 1, 2000 with theChester County, Pennsylvania Industrial Development Authority. The purpose ofthe loan was to fund the construction of the Company’s new office and manufacturingfacility. The loan was scheduled to mature in 2015 and carried an interest rateset by the remarketing agent that was consistent with 30-day tax-exemptcommercial paper. The Company exercised its option to pay-down the outstandingbalance during August, 2009.

 

The interest costrelated to this debt for three months ending December 31, 2009 and 2008was $0 and $25,000 respectively. The Company was required to maintain a letterof credit in the amount of $5,000,000 covering the debt, prior to the August,2009 redemption.

 

**3. Income Taxes**

 

The income tax benefit for the three months ended December 31,2009 was $328,000 as compared to an expense of $73,000 for the three monthsended December 31, 2008.  The incometax benefit for the three months ended December 31, 2009 was the result ofthe actual pre-tax loss for the quarter as compared to the actual pre-taxincome from the same period in the prior year.

 

The effective tax rate for the three months ended December 31,2009 was 22%. The effective tax rate for the three months ended December 31,2008 was 4%.  The effective tax ratediffers from the statutory rate for the three months ended December 31,2009 primarily due to the forecasted benefits from the domestic productionactivities deduction and the forecasted utilization of research andexperimentation tax credit carryforwards. The effective tax rate differs from the statutory rate for the threemonths ended December 31, 2008 due to the reversal of certain deductibletemporary differences, which were fully offset by a valuation allowance, thatwere deductible for income tax purposes in the fiscal year ended September 30,2009.

 

As of December 31, 2009, the Company recognized a $327,000 currentincome tax asset resulting from current taxable losses that can be carried backto prior years to offset federal income tax paid. The Company maintains a fullvaluation allowance against its net deferred tax assets, which may not becarried back to prior taxable years, and consist primarily of deductibletemporary differences and other carryforward items.  The Company will continue to maintain thisvaluation allowance until an appropriate level of profitability is sustained toconclude that it is more likely than not that a portion of these net deferredtax assets would be realized in future periods.  As such,improvements in pre-tax income in the future within the jurisdictions where theCompany maintains a valuation allowance may result in these tax benefitsultimately being realized.  However, there is no assurance that suchimprovements will be achieved.

 

**4. Capital Stock**

 

At December 31,2009, the Company’s Articles of Incorporation provides the Company authority toissue 75,000,000 shares of Common Stock and 10,000,000 shares of blank checkPreferred Stock.

 

***Share-basedcompensation***

 

The Company accounts for share-based compensation under the provisionsof ASC Topic 505-50 and ASC Topic 718, using the modified prospective approachand accounts for share-based compensation applying the fair value method forexpensing stock options and non-vested stock awards.

 

Total share-based compensation expense was $151,000 and $194,000 forthe three months ended December 31, 2009 and 2008, respectively.  The total income tax impact is recognized asa (charge) credit to additional paid-in capital in the statement ofshareholders’ equity related to share-based compensation arrangements was$(2,000) and $17,000 for the three months ended December 31, 2009 and2008, respectively.  Compensation expenserelated to share-based awards is recorded as a component of general andadministrative expense.

 

The Companymaintains the 1998 Stock Option Plan (the “1998 Plan”), the 2003 RestrictedStock Plan (the “Restricted Plan”) and the 2009 Stock-Based IncentiveCompensation Plan (the “2009 Plan”). These plans were approved by the Company’sshareholders. The 1998 Plan expired on November 13, 2008.

 

***1998 Stock Option Plan***

 

The 1998 Planallowed the granting of incentive and nonqualified stock options to employees,officers, directors, and independent contractors and consultants.  No stock options were granted to independentcontractors or consultants under this Plan. Total compensation expense was $101,000 and $144,000 for the threemonths ended December 31, 2009 and 2008, respectively.

 

Incentive stockoptions granted under the 1998 Plan have exercise prices that must be at leastequal to fair value of the common stock on grant date.  Nonqualified stock options granted under the1998 Plan have exercise prices that may be less than, equal to or greater thanthe fair value of the common stock on the date of grant.  The Company reserved 3,389,000 shares ofCommon Stock for awards 

 

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under the 1998Plan.  On November 13, 2008, the1998 Plan expired and no additional shares were granted under the Plan afterthat date.

 

***Restricted Plan***

 

Total compensationexpense under the Restricted Plan was $50,000 for both the three months ended December 31,2009 and 2008.  The expense relates toshares that are issued to non-employee members of the Board of Directors on aquarterly basis as part of their compensation.

 

***2009 Stock Option Plan***

 

The 2009 Planauthorizes the grant of Stock Appreciation Rights (“SARs”), Restricted Stock,Options and other equity-based awards under the 2009 Plan (collectivelyreferred to as “Awards”). Options granted under the 2009 Plan may be either “incentivestock options” as defined in section 422 of the Internal Revenue Code (the“Code”), or nonqualified stock options, as determined by the CompensationCommittee of the Company’s Board of Directors (the “Committee”).

 

Subject to anadjustment necessary upon a stock dividend, recapitalization, forward split orreverse split, reorganization, merger, consolidation, spin-off, combination,repurchase or share exchange, extraordinary or unusual cash distribution orother similar corporate transaction or event, the maximum number of shares ofCommon Stock available for Awards under the 2009 Plan shall be 1,200,000, allof which may be issued pursuant to Awards of incentive stock options.  In addition, the Plan provides that no morethan 300,000 shares may be awarded to any employee as a performance-based Awardunder Section 162(m) of the Code. At December 31, 2009 there were 1,150,000 shares of Common Stockavailable for awards under the plan.

 

If any Award isforfeited, or if any Option terminates, expires or lapses without beingexercised, shares of Common Stock subject to such Award will again be availablefor future grant. Any shares tendered by a participant in payment of theexercise price of an Option or the tax liability with respect to an Award(including, in any case, shares withheld from any such Award) will not beavailable for future grant under the 2009 Plan. If there is any change in the Company’s corporate capitalization, theCommittee shall proportionately and equitably adjust the number and kind ofshares of Common Stock which may be issued in connection with future Awards,the number and kind of shares of Common Stock covered by Awards thenoutstanding under the 2009 Plan, the number and kind of shares of Common Stockavailable under the 2009 Plan, the exercise or grant price of any Award, or ifdeemed appropriate, make provision for a cash payment with respect to anyoutstanding Award, provided that no adjustment may be made that would adverselyaffect the status of any Award that is intended to be a performance-based Awardunder Section 162(m) of the Code, unless otherwise determined by theCommittee. In addition, the Committee may make adjustments in the terms andconditions of any Awards, including any performance goals, in recognition ofunusual or nonrecurring events affecting the Company or any subsidiary, or inresponse to changes in applicable laws, regulations or accounting principles,provided that no adjustment may be made that would adversely affect the statusof any Award that is intended to be a performance-based Award under Section 162(m) ofthe Code, unless otherwise determined by the Committee.

 

At December 31, 2009, there was no recognizedcompensation cost related to the 2009 Plan.

 

***Stockrepurchase program***

 

On February 23,2009, the Company’s Board of Directors approved a common stock repurchaseprogram to acquire up to 1,000,000 shares of the Company’s outstanding CommonStock. Purchases of the stock were to be made from time to time, subject tomarket conditions and at prevailing market prices. There were no shares purchasedunder this plan during the three months ended December 31, 2009.  The program is scheduled to expire on February 22,2010.

 

**5. Income(Loss) per Share**

 

Income (loss) per share (“EPS”) is calculated using the principles ofFASB Accounting Standards Topic 260 (ASC 260), *Earnings PerShare.*

 

For the three month periods ended December 31, 2009 and 2008,there were 240,000 and 440,000 options to purchase Common Stock outstanding,respectively, excluded from the computations of diluted earnings per share as theeffect would be anti-dilutive.

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**CAUTIONARYSTATEMENT REGARDING****FORWARD-LOOKING STATEMENTS**

 

*Thisreport contains forward looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934. We have based these forward lookingstatements largely on our current expectations and projections about futureevents and trends affecting our business. In this report, the words “believe,” “may,”“will,” “estimate,” “continue,” “anticipate,” “intend,” “forecast,” “expect,” “plan,”“should,” “is likely” and similar expressions, as they relate to our businessor our management, are intended to identify forward looking statements, butthey are not exclusive means of identifying them.*

 

*Theforward looking statements in this report are only predictions and actual eventsor results may differ materially. In evaluating such statements, a number ofrisks, uncertainties and other factors could cause our actual results,performance, financial condition, cash flows, prospects, and opportunities todiffer materially from those expressed in, or implied by, the forward lookingstatements. These risks, uncertainties and other factors include the followingfactors:*

 

·                 *the impact of generaleconomic trends on our business;*

 

·                 *the deferral ortermination of programs or contracts for convenience by customers;*

 

·                 *difficulties indeveloping and producing our COCKPIT/IPTM system or other planned products forproduct enhancements;*

 

·                 *market acceptance ofour flat panel display systems, or COCKPIT/IPTM system or other planned productsfor product enhancements;*

 

·              *our ability to gainregulatory approval of our products in a timely manner;*

 

·                 *failure toretain/recruit key personnel;*

 

·                 *continued marketacceptance of our air data systems and products;*

 

·                 *the availability ofgovernment funding;*

 

·                 *delays in receivingcomponents from third party suppliers;*

 

·                 *the competitiveenvironment;*

 

·                 *the bankruptcy orinsolvency of one or more key customers;*

 

·                 *new product offeringsfrom competitors;*

 

·                 *protection ofintellectual property rights;*

 

·                 *our ability to servicethe international market;*

 

·                 *potential futureacquisitions; and*

 

·                 *other factors disclosedfrom time to time in our filings with the Securities and Exchange Commission.*

 

*Exceptas expressly required by the federal securities laws, we undertake noobligation to publicly update or revise any forward looking statements, whetheras a result of new information, future events or otherwise after the date ofthis report. Our results of operations in any past period should not beconsidered indicative of the results to be expected for future periods.Fluctuations in operating results may also result in fluctuations in the priceof our common stock.*

 

*Readers are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date of this Form 10-Q.The Company does not undertake any obligation to publicly release any revisionsto these forward-looking statements to reflect events, circumstances or changesin expectations after the date of this Form 10-Q, or to reflect theoccurrence of unanticipated events. The forward-looking statements in thisdocument are intended to be subject to the safe harbor protection provided bySections 27A of the Securities Act and 21E of the Exchange Act. For adiscussion identifying some important factors that could cause actual resultsto vary materially from those anticipated in the forward-looking statements,see the Company’s Securities and Exchange Commission filings including, but notlimited to, the discussions of “Risk Factors” contained in the Company’s AnnualReport on Form 10-K for the fiscal year ended September 30, 2009.*

 

*Investorsshould also be aware that while we do, from time to time, communicate withsecurities analysts, it is against our policy to disclose any materialnon-public information or other confidential commercial information.Accordingly, shareholders should not assume that we agree with any statement orreport issued by any analyst irrespective of the content of the statement orreport. Furthermore, we have a policy against issuing or confirming financialforecasts or projections issued by others. Thus, to the extent that reportsissued by securities analysts contain any projections, forecasts or opinions,such reports are not the responsibility of Innovative Solutions and Support, Inc.*

 

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**Company Overview**

 

InnovativeSolutions and Support, Inc. (The “Company,” “IS&S” or “we”) wasfounded in 1988. The Company designs, develops, manufactures and sells FlightInformation Computers, Flat-Panel Display Systems, and advanced monitoringsystems that measure and display critical flight information, including datarelative to aircraft separation, airspeed, and altitude, as well as engine andfuel data measurements.

 

Our sales arederived from the sale of our products to the retrofit market and, to a lesserextent, original equipment manufacturers (OEMs). Our customers include theUnited States Department of Defense (DoD) and their commercial contractors,aircraft operators, aircraft modification centers and various OEMs. Althoughwe occasionally sell our products directly to the DoD, we primarily have soldour products to commercial customers for end use in DoD programs. Sales todefense contractors are on commercial terms, although some of the terminationand other provisions of government contracts are applicable to these contracts.

 

Our cost-of-salesrelated to product sales is comprised of material components purchased throughour supplier base and direct in-house assembly labor and overhead costs. Manyof the components we use in assembling our products are standard, althoughcertain parts are manufactured to meet our specifications. The overhead portionof cost of sales is primarily comprised of salaries and benefits, buildingoccupancy, supplies, and outside service costs related to our production,purchasing, material control and quality departments, and warranty costs.

 

Our cost of salesrelated to Engineering—modification and development (EMD) is comprised ofengineering labor, consulting services, and other cost associated with specificdesign and development projects.

 

We intend tocontinue investing in the development of new products that complement ourcurrent product offerings and will expense associated research and developmentcosts as they are incurred.

 

Our selling,general and administrative expenses consist of sales, marketing, businessdevelopment, professional services, and salaries and benefits for executive andadministrative personnel as well as facility costs, recruiting, legal,accounting, and other general corporate expenses.

 

We sell our products to agencies of the United States and foreigngovernments, aircraft operators, aircraft modification centers and originalequipment manufacturers.  Our customers have been and may continue to beaffected by the ongoing adverse economic conditions that currently exist bothin the United States and abroad.  Such conditions may cause ourcustomers to curtail or delay their spending on both new and existingaircraft.  Factors that can impact general economic conditions and thelevel of spending by our customers include, but are not limited to,general levels of consumer spending, increases in fuel and energy costs,conditions in the real estate and mortgage markets, labor and healthcare costs,access to credit, consumer confidence and other macroeconomic factors affectingspending behavior.  In addition, spending by government agencies may inthe future be further reduced due to declining tax revenues associated withthis economic downturn.  If our customers curtail or delay their spendingor are forced to declare bankruptcy or liquidate their operations due tocontinuing adverse economic conditions, our revenues and results of operationswill be adversely affected.  However, we believe that in a decliningeconomic environment a customer that may have otherwise elected to purchasenewly manufactured aircraft will instead be interested in retrofitting existingaircraft as a cost effective alternative, which will create a marketopportunity for our products.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and consolidated results of operations arebased upon our condensed consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles in theUnited States. The preparation of our condensed consolidated financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenue and expenses and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate ourestimates based upon historical experience and various other assumptions thatwe believe to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Our actualresults may differ from these estimates.

 

We believe thatour critical accounting policies affect our more significant estimates andjudgments used in the preparation of our consolidated financial statements. OurAnnual Report on Form 10-K for the year ended September 30, 2009contains a discussion of these critical accounting policies. There have been nosignificant changes in our critical accounting policies since September 30,2009. See also Note 1 to our unaudited condensed consolidated financialstatements for the three month period ending December 31, 2009 as setforth herein.

 

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**RESULTSOF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008**

 

The followingtable sets forth statement of operations data expressed as a percentage oftotal revenues for the periods indicated (some items may not add due torounding):

 
| ** **                                  | ** ** | **Three Months Ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Net  sales:                                 |       |                                     |       |   |   |
| Product                                     |       | 83.3                                     | %          | 84.1 | % |
| Engineering  - modification and development |       | 16.7                                     | %          | 15.9 | % |
| Total  net sales                            |       | 100.0                                    | %          | 100.0 | % |
|                                        |       |                                     |       |   |   |
| Cost  of sales                              |       |                                     |       |   |   |
| Product                                     |       | 51.3                                     | %          | 47.2 | % |
| Engineering  - modification and development |       | 10.2                                     | %          | 2.5 | % |
|                                        |       |                                     |       |   |   |
| Total  cost of sales                        |       | 61.6                                     | %          | 49.7 | % |
|                                        |       |                                     |       |   |   |
| Gross  profit                               |       | 38.4                                     | %          | 50.3 | % |
|                                        |       |                                     |       |   |   |
| Operating  expenses:                        |       |                                     |       |   |   |
| Research  and development                   |       | 25.3                                     | %          | 12.1 | % |
| Selling,  general and administrative        |       | 46.7                                     | %          | 22.3 | % |
| Total  operating expenses                   |       | 72.0                                     | %          | 34.4 | % |
|                                        |       |                                     |       |   |   |
| Operating  (loss) income                    |       | (33.5                                    | )%         | 15.9 | % |
|                                        |       |                                     |       |   |   |
| Interest  income                            |       | 0.5                                      | %          | 1.9 | % |
| Interest  expense                           |       | (0.0                                     | )%         | (0.3 | )% |
| Other  income                               |       | 1.1                                      | %          | 0.5 | % |
|                                        |       |                                     |       |   |   |
| (Loss)  income before income taxes          |       | (32.0                                    | )%         | 17.9 | % |
|                                        |       |                                     |       |   |   |
| Income  tax (benefit) expense               |       | (7.1                                     | )%         | 0.7 | % |
|                                        |       |                                     |       |   |   |
| Net  (loss) income                          |       | (24.9                                    | )%         | 17.2 | % |

 

**Three Months Ended December 31, 2009 Comparedto the Three Months Ended December 31, 2008**

 

*Net sales.* Net sales decreased $6.0 million, or 56%, to $4.6million for the three months ended December 31, 2009 from $10.6 million inthe three months ended December 31, 2008. For the three months ended December 31,2009, product sales decreased $5.1 million and EMD sales decreased $0.9 millionfrom the same period in the prior year. The decrease in both product and EMDsales was primarily driven by customer delays in delivery schedules for backlogorders.

 

*Cost of sales.* Cost of sales decreased $2.4 million or 46%, to $2.8million, or 62% of net sales in the three months ended December 31, 2009from $5.3 million, or 50 % of net sales in the three months ended December 31,2008. The decrease was primarily the result of the decrease in variableproduction costs during the quarter which account for $2.4 million of thedecrease and was offset by a $0.2 million increase in EMD related costs.  The reduced sales volume for the three monthsended December 31, 2009 had a negative impact on gross margin as comparedto the prior year period.

 

*Research and development.* Research and development expensedecreased $0.1 million or 9% to $1.2 million or 25% of net sales in the threemonths ended December 31, 2009 from $1.3 million or 12% of net sales inthe three months ended December 31, 2008. The decrease in research and development expense in the quarter wasprimarily due to the change in indirect project costs.

 

*Selling, general, and administrative.* Selling, general and administrativeexpenses decreased $0.2 million or 9%, to $2.2 million, or 47% of net sales inthe three months ended December 31, 2009 from $2.4 million or 22% of netsales in the three months ended December 31, 2008. The decrease in Selling,general, and administrative expense in the quarter was primarily due tocontinued cost containment efforts.

 

*Interest income.* Interest income was $23,000 in the three months endedDecember 31, 2009 as compared to $201,000 in the three months ended December 31,2008. The decrease in interest income was primarily the result of lowerinterest rates in the quarter as

 

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compared to the prior year period.

 

*Interest expense.* Interest expense was $1,000 in the three months endedDecember 31, 2009 as compared to $35,000 in the three months ended December 31,2008. The reduction was primarily due to the redemption of the IndustrialDevelopment Bond during August, 2009.

 

*Income tax expense (benefit).* The income tax benefit for the threemonths ended December 31, 2009 was $328,000 as compared to an expense of$73,000 for the three months ended December 31, 2008.  The income tax benefit for the three monthsended December 31, 2009 was the result of the actual pre-tax loss for thequarter as compared to the actual pre-tax income from the same period in theprior year.

 

The effective tax rate for the three months ended December 31,2009 was 22%. The effective tax rate for the three months ended December 31,2008 was 4%.  The effective tax ratediffers from the statutory rate for the three months ended December 31,2009 primarily due to the forecasted benefits from the domestic productionactivities deduction and the forecasted utilization of research andexperimentation tax credit carryforwards. The effective tax rate differs from the statutory rate for the threemonths ended December 31, 2008 due to the reversal of certain deductibletemporary differences, which were fully offset by a valuation allowance, thatwere deductible for income tax purposes in the fiscal year ended September 30,2009.

 

As of December 31, 2009, the Company recognized a $327,000 currentincome tax asset resulting from current taxable losses that can be carried backto prior years to offset federal income tax paid. The Company maintains a fullvaluation allowance against its net deferred tax assets, which may not becarried back to prior taxable years, and consist primarily of deductibletemporary differences and other carryforward items.  The Company will continue to maintain thisvaluation allowance until an appropriate level of profitability is sustained toconclude that it is more likely than not that a portion of these net deferredtax assets would be realized in future periods.  As such,improvements in pre-tax income in the future within the jurisdictions where theCompany maintains a valuation allowance may result in these tax benefitsultimately being realized.  However, there is no assurance that suchimprovements will be achieved.

 

*Net (Loss) income.*  As a result ofthe factors described above, our net loss for the three months ended December 31,2009 was ($1.1 million).  Net income forthe three months ended December 31, 2008 was $1.9 million.  On a fully diluted basis, the loss per shareof ($0.07) for the three months ended December 31, 2009 compares to incomeper share of $0.11 for the three months ended December 31, 2008.

 

**Liquidity and Capital Resources**

 

The following table highlights key financial measurements of theCompany:

 
| ** **                                        | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| Cash  and cash equivalents                        |       | $                     | 36,490,037 |                   | $          | 35,565,694 |   |
| Accounts  receivable, net                         |       | 3,529,494             |       | 6,188,706              |       |
| Current  Assets                                   |       | 46,940,588            |       | 48,792,791             |       |
| Current  Liabilities                              |       | 3,113,666             |       | 4,168,314              |       |
| Deferred  revenue                                 |       | 218,540               |       | 225,648                |       |
| Total  debt and other non-current liabilities (1) |       | 905,354               |       | 918,072                |       |
| Quick  ratio (2)                                  |       | 12.85                 |       | 10.02                  |       |
| Current  ratio (3)                                |       | 15.08                 |       | 11.71                  |       |
|                                                   |            |                       |            |                        |            |  |  |

 
| ** **                                | ** ** | **Threee Months Ending December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Cash  flow activites:                     |       |                                       |       |   |   |
| Net  cash provided by operating activites |       | $                                          | 1,017,537  |   | $ | (1,228,639 | ) |
| Net  cash (used in) investing activites   |       | (90,411                                    | )          | (75,031 | ) |
| Net  cash (used in) financing activites   |       | (2,783                                     | )          | (2,592 | ) |
|                                           |            |                                            |            |  |  |  |  |

 

----

(1)          Excludes deferred revenue

(2)          Calculated as: (Cash and cash equivalents and Accounts receivable, net) divided byCurrent Liabilities

(3)          Calculated as: Current Assets divided by Current Liabilities

 

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Our main source of liquidity has been from operating cash flows generatedin prior years. We require cash principally to finance inventory, accountsreceivable and payroll.

 

***Operating activities***

 

Cash provided by operating activities was $1.0 million for the threemonths ended December 31, 2009 as compared to cash used in operatingactivities of $1.2 million for the three months ended December 31, 2008.The improvement was due to strong working capital management, despite theCompany experiencing a net loss of $1.1 million for the three months ended December 31,2009 versus net income of $1.8 million for comparable period in the prioryear.  The cash provided by operatingactivities during the three months ended December 31, 2009 was primarilydue to a decrease in accounts receivable, decrease in prepaid expenses, anddecrease in inventories of $2.7 million, $0.4 million and $0.1 million,respectively. This was partially offset by the net loss experienced for theperiod, a decrease in accrued expenses and decrease in accounts payable of $1.1million, $0.6 million and $0.4 million, respectively.

 

***Investing activities***

 

Our cash used in investing activities of $90,000 for the three monthsended December 31, 2009 and $75,000 for the three months ended December 31,2008 primarily consisted of the purchase of production and laboratory testequipment.

 

***Financing activities***

 

Net cash flow used in financing activities was $3,000 for each of thethree months ended December 31, 2009 and 2008; which consisted exclusivelyof repayments for capitalized lease obligations in both periods.

 

The Companyentered into a $4,335,000 loan agreement dated August 1, 2000 with theChester County, Pennsylvania Industrial Development Authority. The purpose ofthe loan was to fund construction of the Company’s new office and manufacturingfacility. The loan was scheduled to mature in 2015 and carried an interest rateset by the remarketing agent that is consistent with 30-day tax-exemptcommercial paper. The Company exercised its option to pay-down the outstandingbalance during August, 2009.

 

Our future capital requirements depend on numerous factors, includingmarket acceptance of our products, the timing and rate of expansion of ourbusiness, acquisitions, joint ventures and other factors. We have experiencedincreases in our expenditures since our inception consistent with growth in ouroperations, personnel and product line, and we anticipate that our expenditureswill continue to increase in the foreseeable future. We believe our cash andcash equivalents will provide sufficient capital to fund our operations for atleast the next twelve months. However, we may need to raise additional fundsthrough public or private financings or other arrangements in order to supportmore rapid expansion of our business than we now anticipate either throughacquisitions or organic growth. Further, we may need to develop and introducenew or enhanced products, respond to competitive pressures, invest in oracquire businesses or technologies or respond to unanticipated requirements ordevelopments. If additional funds are raised through the issuance of equitysecurities, dilution to existing shareholders may result. If insufficient fundsare available, we may not be able to introduce new products or competeeffectively in any of our markets, which could hurt our business.

 

**Backlog**

 

As of December 31, 2009 and September 30,2009, our backlog was $34.3 million and $34.1 million, respectively.  The $0.2 increase in backlog was the resultof $4.8 million in new business offset by $4.6 million of recognized revenue.  Air Data product backlog as of December 31,2009 increased $1.8 million from September 30, 2009; while Flat PanelDisplay Systems backlog as of December 31, 2009 decreased $1.6 millionfrom September 30, 2009.

 

Backlog activity for the three months ended December 31,2009 (in thousands):

 

| **Balance at**         | ** **   | ** **     | ** ** | ** **     | ** ** | **Balance at**        | ** ** |
|------------------------|--------------|----------------|------------|----------------|------------|-----------------------|------------|
| **September 30,** | ** **   | **Additional** | ** ** | **Revenue**    | ** ** | **December 31,** | ** ** |
| **2009**               | ** **   | **Bookings**   | ** ** | **Recognized** | ** ** | **2009**              | ** ** |
|                   |         |           |       |           |       |                  |       |
| $                      |  34,142 |           | $          | 4,786          |       | $                     | 4,607      |   | $ | 34,321 |   |
|                        |              |                |            |                |            |                       |            |  |  |  |  |

 

**Off-BalanceSheet Arrangements**

 

We do notparticipate in transactions that generate relationships with unconsolidatedentities or financial partnerships, such as special purpose entities (“SPEs”)or variable interest entities (“VIEs”), which would have been established forthe purpose of facilitating off-

 

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balance sheetarrangements or other limited purposes. As of December 31, 2009 and September 30,2009, we were not involved with any unconsolidated SPEs or VIEs.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

The Company’s operations are exposed to market risks primarily as aresult of changes in interest rates. The Company does not use derivativefinancial instruments for speculative or trading purposes. The Company’sexposure to market risk for changes in interest rates relates to its cashequivalents. The Company’s cash equivalents consist of funds invested in moneymarket accounts, which bear interest at a variable rate.  As the interest rates are variable, and we donot engage in hedging activities, a change in interest rates earned on the cashequivalents would impact interest income and cash flows, but would not impactthe fair market value of the related underlying instruments.  Assuming that the balances during the threemonths ending December 31, 2009 were to remain constant and no actionswere taken to alter the existing interest rate sensitivity, a hypothetical 1%increase in our variable interest rates would have affected interest income byapproximately $93,000, with a resulting impact on cash flows of approximately$93,000 for the three months ended December 31, 2009

 

**Item 4. Controls and Procedures**

 

(a)          An evaluation was performed under the supervision andwith the participation of the Company’s management, including its ChiefExecutive Officer, or CEO, and Chief Financial Officer, or CFO, of theeffectiveness of the Company’s disclosure controls and procedures, as such termis defined under Rule 13a-15e under the Securities Exchange Act of 1934,as amended (the “Exchange Act”) as of December 31, 2009. Based on thatevaluation, the Company’s management, including the CEO and CFO, concluded thatthe Company’s disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by the Companyin reports that it files or submits under the Exchange Act, is recorded,processed, summarized and reported as specified in Securities and ExchangeCommission rules and forms and that such information is accumulated andcommunicated to the Company’s management, including the CEO and CFO, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

(b)         There were no changes in the Company’s internalcontrol over financial reporting identified in connection with the evaluationof such controls that occurred during the Company’s most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

In the ordinarycourse of business, we are at times subject to various legal proceedings andclaims. We do not believe any such matters that are currently pending will havea material adverse effect on our results of operations or financial position.

 

On January 17,2007 the Company filed suit in the Court of Common Pleas for Delaware County,Pennsylvania against Strathman Associates, a former software consultant forIS&S, alleging that Strathman had improperly used IS&S trade secret andproprietary information in assisting J2 and Kollsman in developing theJ2/Kollsman Air Data Computer. The case is ongoing.

 

**Item 1A.  Risk Factors**

 

There are no material changes to the risk factors described under Item1A of our Form 10-K for the year ended September 30, 2009.

 

I**tem 2.****          ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On October 1, 2009, we awarded 41,150 shares of our restrictedCommon Stock to our non-employee directors. On that date, only 29,950 shares were available to be issued under our2003 Restricted Stock Plan; therefore, 11,200 of the shares will be issuedunder our 2009 Plan.  At that time,issuances of stock under our 2009 Plan had not been registered on From S-8.  Therefore, the awards of restricted CommonStock under the 2009 Plan were made in reliance on the exemption fromregistration pursuant to Section 4(2) of the Securities Act.  The Registration Statement on Form S-8was declared effective on December 14, 2009, and future issuances underthe 2009 Plan will be registered.

 

**Item 3.****          ****Defaults upon Senior Securities**

 

None

 

**Item 4. Submission of Matters toa Vote of Security Holders**

 

None

 

**Item 5.****          ****Other Information**

 

None

 

**Item 6. Exhibits**

 

(a)          Exhibits

 

31.1*                    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

 

31.2*                    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

 

32.1†                     Certification Pursuant to U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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*   Filed herewith

†   Furnished herewith

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                        | **INNOVATIVE SOLUTIONS AND SUPPORT, INC.** |
|-----------------------------|--------------------------------------------|
|                        |                                       |
|                        |                                       |
| Date: February 3, 2010 | By:                                        | /s/ JOHN C. LONG |
|                        |                                       | JOHN C. LONG |
|                        |                                       | CHIEF FINANCIAL OFFICER |

 

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