** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

----

** **

**FORM10-Q**

** **
| **ý**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |
| **For the quarterly period ended March 31, 2005** |
|                                              |
| OR                                                |
|                                              |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**[Forthe transition period from _____________________ to___________________________]**

 

 

**CommissionFile No. 0-31157**

** **

**INNOVATIVESOLUTIONS AND SUPPORT, INC.**

(Exactname of registrant as specified in its charter)

 

| **PENNSYLVANIA**                                | ** ** | **23-2507402**                     |
|-------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation) |       | (IRS  Employer Identification No.) |
|                                            |       |                               |
| **720 Pennsylvania Drive, Exton, Pennsylvania** |       | **19341**                          |
| (Address  of principal executive offices)       |       | (Zip  Code)                        |

** **

**(610) 646-9800**

(Registrant’stelephone number, including area code)

** **

Indicateby check mark whether registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes ý    No o

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes ý    No o

Asof April 26, 2005, there were 11,878,745 shares of the Registrant’s CommonStock, with par value of $.001, outstanding.

 

----

 

**INNOVATIVE SOLUTIONS & SUPPORT, INC.**

### **FORM 10-Q March 31, 2005**

**INDEX**

** **
| ** ** | ** **                                                                                                         | ** ** |
|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                                         | ** ** |
| PART I.    | FINANCIAL INFORMATION                                                                                              | 3          |
|       |                                                                                                               |       |
| Item 1.    | FINANCIAL STATEMENTS  (UNAUDITED)                                                                                  | 3          |
|       |                                                                                                               |       |
|       | Condensed Consolidated  Balance Sheets —  September 30, 2004 and March 31, 2005                               | 3          |
|       |                                                                                                               |       |
|       | Condensed  Consolidated Statements of Operations —  Three Months and Six Months Ended March 31, 2004 and 2005 | 4          |
|       |                                                                                                               |       |
|       | Condensed  Consolidated Statements of Cash Flows —  Six Months Ended March 31, 2004 and 2005                  | 5          |
|       |                                                                                                               |       |
|       | Notes  to Condensed Consolidated Financial Statements                                                              | 6-8        |
|       |                                                                                                               |       |
| Item  2.   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 9-13       |
|       |                                                                                                               |       |
| Item  3.   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        | 14         |
|       |                                                                                                               |       |
| Item 4.    | CONTROLS AND PROCEDURES                                                                                            | 14         |
|       |                                                                                                               |       |
| PART II.   | OTHER INFORMATION                                                                                                  | 15         |
|       |                                                                                                               |       |
| Item  4.   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               | 15         |
|       |                                                                                                               |       |
| Item 6.    | EXHIBITS                                                                                                           | 15         |
|       |                                                                                                               |       |
| SIGNATURES |                                                                                                               | 16         |

 

2

----

 

**PART I—FINANCIALINFORMATION**

**Item 1—Financial Statements**

**INNOVATIVE SOLUTIONS AND SUPPORT,INC.**

**CONDENSED CONSOLIDATED BALANCESHEET**

**(unaudited)**

** **
| ** **                                                                                                                                                                                       | ** ** | **As of  September 30,  2004** | ** ** | **As of  March 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                       | ** ** | ** **                          | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **                          | ** ** | ** **                      | ** ** |
| Current Assets:                                                                                                                                                                                  |       |                                |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                                   | 65,867,167 |                            | $          | 76,350,457 |   |
| Accounts receivable, less allowance far doubtful accounts of $100,000  at September 30, 2004 and March 31, 2005                                                                                  |       | 5,003,100                           |       | 6,449,260                       |       |
| Inventories                                                                                                                                                                                      |       | 5,191,628                           |       | 5,320,820                       |       |
| Deferred income taxes                                                                                                                                                                            |       | 984,111                             |       | 984,111                         |       |
| Prepaid expenses                                                                                                                                                                                 |       | 665,276                             |       | 642,840                         |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Total current assets                                                                                                                                                                             |       | 77,711,282                          |       | 89,747,488                      |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Property and Equipment:                                                                                                                                                                          |       |                                |       |                            |       |
| Computers and test equipment                                                                                                                                                                     |       | 3,933,326                           |       | 4,052,409                       |       |
| Corporate airplane                                                                                                                                                                               |       | 2,998,161                           |       | 2,998,161                       |       |
| Furniture and office equipment                                                                                                                                                                   |       | 622,364                             |       | 693,541                         |       |
| Manufacturing facility                                                                                                                                                                           |       | 5,414,986                           |       | 5,420,741                       |       |
| Land                                                                                                                                                                                             |       | 1,021,245                           |       | 1,021,245                       |       |
|                                                                                                                                                                                             |       | 13,990,082                          |       | 14,186,097                      |       |
| Less- Accumulated depreciation and amortization                                                                                                                                                  |       | (4,369,851                          | )          | (4,733,896                      | )          |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Net property and equipment                                                                                                                                                                       |       | 9,620,231                           |       | 9,452,201                       |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Deposits and other assets                                                                                                                                                                        |       | 137,114                             |       | 131,115                         |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Total assets                                                                                                                                                                                     |       | $                                   | 87,468,627 |                            | $          | 99,330,804 |   |
|                                                                                                                                                                                             |       |                                |       |                            |       |   |   |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                                                                                                                                                        | ** ** | ** **                          | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **                          | ** ** | ** **                      | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                             |       |                                |       |                            |       |
| Current portion of notes payable                                                                                                                                                                 |       | $                                   | 100,000    |                            | $          | 100,000 |   |
| Current portion of capitalized lease obligations                                                                                                                                                 |       | 7,257                               |       | 7,257                           |       |
| Accounts payable                                                                                                                                                                                 |       | l,696,247                           |       | 1,192,322                       |       |
| Accrued expenses                                                                                                                                                                                 |       | 4,754,641                           |       | 3,927,561                       |       |
| Deferred revenue                                                                                                                                                                                 |       | 526,023                             |       | 557,219                         |       |
| Total current liabilities                                                                                                                                                                        |       | 7,084,168                           |       | 5,784,359                       |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Note payable                                                                                                                                                                                     |       | 4,235,000                           |       | 4,235,000                       |       |
| Long-teen portion of capitalized lease obligations                                                                                                                                               |       | 20,681                              |       | 16,937                          |       |
| Deferred revenue                                                                                                                                                                                 |       | 261,934                             |       | 226,699                         |       |
| Deferred income taxes                                                                                                                                                                            |       | 411,857                             |       | 411,857                         |       |
| Commitments and contingencies                                                                                                                                                                    |       | —                              |       | —                          |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Shareholders' Equity:                                                                                                                                                                            |       |                                |       |                            |       |
| Preferred stock, 10,000,000 shares authorized-Class A Convertible  stock, $.001 par value; 200,000 shares authorized, no shares issued and  outstanding at September 30, 2004 and March 31, 2005 |       | —                              |       | —                          |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Common stock, $.001 par value: 75,000,000 shares authorized,  13,515,330 and 11,866,995 shares issued and outstanding at September 30, 2004  and March 31, 2005                                  |       | 13,515                              |       | 1l,867                          |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Additional paid-in capital                                                                                                                                                                       |       | 48,712,289                          |       | 38,834,503                      |       |
| Retained earnings                                                                                                                                                                                |       | 37,342,940                          |       | 49,809,582                      |       |
| Treasury stock, at cost, l,690,026 and 0 shares at September 30, 2004  ad March 31, 2005                                                                                                         |       | (10,613,757                         | )          | —                          |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Total shareholders' equity                                                                                                                                                                       |       | 75,454,987                          |       | 88,655,952                      |       |
|                                                                                                                                                                                             |       |                                |       |                            |       |
| Total liabilities and shareholders' equity                                                                                                                                                       |       | $                                   | 87,468,627 |                            | $          | 99,330,804 |   |

** **

The accompanyingnotes are an integral part of these statements.

 

 

3

----

 

**INNOVATIVE SOLUTIONS AND SUPPORT, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS********(unaudited)**

 
| ** **                           | ** ** | **Three Months  Ended  March 31, 2004** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Six Months  Ended  March 31, 2004** | ** ** | **Six Months  Ended  March 31, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Net sales                            |       | $                                       | 10,895,287 |                                    | $          | 19,001,021                            |       | $                                     | 19,418,623 |   | $ | 37,979,825 |   |
| Cost of sales                        |       | 3,662,841                               |       | 5,777,273                               |       | 7,144,252                             |       | 11,959,415                            |       |
| Gross profit                         |       | 7,232,446                               |       | 13,223,748                              |       | 12,274,371                            |       | 26,020,410                            |       |
| Operating expenses:                  |       |                                    |       |                                    |       |                                  |       |                                  |       |
| Research and development             |       | 1,488,893                               |       | 1,548,468                               |       | 2,498,169                             |       | 2,819,999                             |       |
| Selling, general and administrative  |       | 1,869,484                               |       | 2,303,928                               |       | 3,510,103                             |       | 4,332,395                             |       |
|                                 |       | 3,358,377                               |       | 3,852,396                               |       | 6,008,272                             |       | 7,152,394                             |       |
| Operating income                     |       | 3,874,069                               |       | 9,371,352                               |       | 6,266,099                             |       | 18,868,016                            |       |
| Interest income                      |       | (117,204                                | )          | (428,325                                | )          | (229,875                              | )          | (711,575                              | )          |
| Interest expense                     |       | 31,148                                  |       | 39,395                                  |       | 63,003                                |       | 79,134                                |       |
| Income before income taxes           |       | 3,960,125                               |       | 9,760,282                               |       | 6,432,971                             |       | 19,500,457                            |       |
| Income taxes                         |       | (1,386,044                              | )          | (3,486,443                              | )          | (2,251,540                            | )          | (7,033,815                            | )          |
| Net income                           |       | $                                       | 2,574,081  |                                    | $          | 6,273,839                             |       | $                                     | 4,181,431  |   | $ | 12,466,642 |   |
| Net Income Per Common Share:         |       |                                    |       |                                    |       |                                  |       |                                  |       |
| Basic                                |       | $                                       | 0.22       |                                    | $          | 0.53                                  |       | $                                     | 0.36       |   | $ | 1.05 |   |
| Diluted                              |       | $                                       | 0.22       |                                    | $          | 0.51                                  |       | $                                     | 0.35       |   | $ | 1.02 |   |
|                                 |       |                                    |       |                                    |       |                                  |       |                                  |       |
| Weighted Average Shares Outstanding: |       |                                    |       |                                    |       |                                  |       |                                  |       |
| Basic                                |       | 11,513,478                              |       | 11,854,638                              |       | 11,462,771                            |       | 11,844,  643                          |       |
| Diluted                              |       | 11,862,085                              |       | 12,210,986                              |       | 11,819,584                            |       | 12,195,386                            |       |

 

 

The accompanying notesare an integral part of these statements.

 

 

 

4

----

** **

**INNOVATIVESOLUTIONS AND SUPPORT, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(unaudited)**

 

 
| ** **                                                                                   | ** ** | **For the  Six Months Ended  March 31, 2004** | ** ** | **For the  Six Months Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                                          |       |                                          |       |
| Net income (loss)                                                                            |       | $                                             | 4,181,431  |                                          | $          | 12,466,642 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |                                          |       |                                          |       |
| Depreciation and amortization                                                                |       | 347,694                                       |       | 370,045                                       |       |
| Loss on Disposal of Fixed Assets                                                             |       | 1,037                                         |       | —                                        |       |
| Excess and obsolete inventory expense                                                        |       | 42,194                                        |       | 26,908                                        |       |
| Compensation expense for stock issued to directors                                           |       | 102,073                                       |       | 101,740                                       |       |
| Tax benefit from exercise of stock options                                                   |       | 48,716                                        |       | 247,041                                       |       |
| (Increase) decrease in:                                                                      |       |                                          |       |                                          |       |
| Accounts receivable                                                                          |       | 321,441                                       |       | (1,446,160                                    | )          |
| Inventories                                                                                  |       | (1,264,075                                    | )          | (156,101                                      | )          |
| Prepaid expenses and other                                                                   |       | 277,775                                       |       | 22,436                                        |       |
| Increase (decrease) in:                                                                      |       |                                          |       |                                          |       |
| Accounts payable                                                                             |       | 523,607                                       |       | (503,925                                      | )          |
| Accrued expenses                                                                             |       | (297,844                                      | )          | (746,158                                      | )          |
| Deferred revenue                                                                             |       | 49,575                                        |       | (4,040                                        | )          |
| Net cash provided by operating activities                                                    |       | $                                             | 4,333,624  |                                          | $          | 10,378,428 |   |
|                                                                                         |       |                                          |       |                                          |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                                          |       |                                          |       |
| Purchases of property and equipment                                                          |       | (501,745                                      | )          | (196,015                                      | )          |
| Net cash used in investing activities                                                        |       | $                                             | (501,745   | )                                             | $          | (196,015 | ) |
|                                                                                         |       |                                          |       |                                          |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                                          |       |                                          |       |
| Proceeds from exercise of stock options                                                      |       | 128,425                                       |       | 304,621                                       |       |
| Proceeds from exercise of warrants                                                           |       | 288,095                                       |       | —                                        |       |
| Capital lease obligations                                                                    |       | 39,119                                        |       | —                                        |       |
| Repayments of capital lease obligations                                                      |       | (7,514                                        | )          | (3,744                                        | )          |
| Net cash provided by financing activities                                                    |       | 448,125                                       |       | 300,877                                       |       |
|                                                                                         |       |                                          |       |                                          |       |
| Net increase in cash and cash equivalents                                                    |       | $                                             | 4,280,004  |                                          | $          | 10,483,290 |   |
|                                                                                         |       |                                          |       |                                          |       |
| Cash and cash equivalents, beginning of year                                                 |       | $                                             | 48,789,744 |                                          | $          | 65,867,167 |   |
|                                                                                         |       |                                          |       |                                          |       |   |   |
| Cash and cash equivalents, end of period                                                     |       | $                                             | 53,069,748 |                                          | $          | 76,350,457 |   |
|                                                                                              |            |                                               |            |                                               |            |  |  |  |  |  |

** **

 

The accompanying notesare an integral part of these statements.

 

 

 

 

5

----

 

 

**Innovative Solutions & Support Inc.Notes to CondensedConsolidated Financial Statements**

** **

 

**1. Basis of Presentation:**

 

Innovative Solutions and Support, Inc. (the “Company”) was incorporatedin Pennsylvania on February 12, 1988. The Company’s primary business is thedesign, manufacture and sale of flight information computers, flat paneldisplays and advanced monitoring systems for the military, government,commercial air transport and corporate aviation markets.

 

The balance sheet as of March 31, 2005, the statement of operations forthe three months and six months ended March 31, 2004 and 2005 and thestatements of cash flows for the six months ended March 31, 2004 and 2005 havebeen prepared by the Company without audit. In the opinion of management, alladjustments, consisting of normal and recurring adjustments, necessary topresent fairly the financial position, results of operations and cash flows atMarch 31, 2005 and for all periods presented have been made.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted. It is suggested that these financial statements be read in conjunctionwith the financial statements and notes thereto included in the Company’s Form10K for the year ended September 30, 2004 as filed with the Securities andExchange Commission. The results of operations for the three months and sixmonths ended March 31, 2005 are not necessarily indicative of the operatingresults for the full year.

 

** **

**2. Net income per Share**

 

Net income per share (“EPS”) is calculated using the principles of SFASNo. 128, “Earnings Per Share”.

 

A reconciliation of weighted average shares outstanding appears below:

 
| ** **                                | ** ** | **Three Months  Ended  March 31, 2004** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Six Months  Ended  March 31, 2004** | ** ** | **Six Month  Ended  March 31, 2005** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| Weighted average number of shares-basic   |       | 11,513,478                                   |       | 11,854,638                              |       | 11,462,  771                          |       | 11,844,643                           |       |
| Effect of dilutive securities:            |       |                                         |       |                                    |       |                                  |       |                                 |       |
| Employee stock options                    |       | 222,537                                      |       | 356,348                                 |       | 210,100                               |       | 350,743                              |       |
| Warrants                                  |       | 126,070                                      |       | 0                                       |       | 146,713                               |       | 0                                    |       |
| Weighted average number of shares-diluted |       | 11,862,085                                   |       | 12,210,986                              |       | 11,819,584                            |       | 12,195,386                           |       |

 

 

For the six-month period ended March 31, 2005, there were 9,011 optionsoutstanding that were excluded from the computation of diluted earnings pershare as the effect would be antidilutive.

 

 

**3. Concentrations**

 

For the three months ended March 31, 2005, two customers accounted for17% and 15% of net sales or 32% on a combined basis.  For the three months ended March 31, 2004,four customers accounted for 13%, 12%, 11% and 10% of net sales or 46% on acombined basis.  For the six months endedMarch 31, 2005, one customer accounted for 14% of net sales.  No other customer accounted for 10% or moreof net sales for the six months ended March 31, 2005.  For the six months ended March 31, 2004,three customers accounted for 20%, 14% and 10% of net sales or 44% on acombined basis.

 

 

 

6

----

 

**4. Inventories**

 

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

 
| ** **      | ** ** | **September 30, 2004** | ** ** | **March 31 , 2005** | ** ** |
|-----------------|------------|------------------------|------------|---------------------|------------|
| Raw materials   |       | $                      | 1,928,005  |                | $          | 2,415,101 |   |
| Work-in-process |       | 2,573,932              |       | 2,414,090           |       |
| Finished goods  |       | 689,691                |       | 491,629             |       |
|            |       | $                      | 5,191,628  |                | $          | 5,320,820 |   |
|                 |            |                        |            |                     |            |  |  |  |

** **

 

**5.Warranty**

 

The Company provides for the estimated cost of product warranties atthe time revenue is recognized. Warranty cost is recorded as cost of sales inthe financial statements. While the Company engages in extensive productquality programs and processes, the Company’s warranty obligation is affectedby product failure rates and the related material, labor and delivery costsincurred in correcting a product failure. Should actual product failure rates,material or labor costs differ from the Company’s estimates, further revisionsto the estimated warranty liability would be required.

 

Warranty cost and accrual information for the three months ended March31, 2005 is highlighted below:

 

| Warranty accrual at December 31, 2004                |   | $       | 767,188 |   |
|------------------------------------------------------|--------|---------|---------|--------|
| Accrued expense for the quarter ended March 31, 2005 |   | 54,604  |    |
| Warranty costs for the quarter ended March 31, 2005  |   | (31,041 | )       |
| Warranty accrual at March 31, 2005                   |   | $       | 790,751 |   |

 

Warranty cost and accrual information for thesix months ended March 31, 2005 is highlighted below:

 

| Warranty accrual at September 30, 2004                  |   | $       | 757,476 |   |
|---------------------------------------------------------|--------|---------|---------|--------|
| Accrued expense for the six months ended March 31, 2005 |   | 114,610 |    |
| Warranty costs for the six months ended March 31, 2005  |   | (81,335 | )       |
| Warranty accrual at March 31, 2005                      |   | $       | 790,751 |   |

 

**6. Stock Options**

 

The Company’s 1998 Stock Option Plan (the “Plan”) provides for thegranting of incentive and nonqualified stock options to employees, officers,directors and independent contractors and consultants.

 

Incentive stock options granted under the Plan must be at least equalto the fair value of the common stock on the date of grant. Nonqualified stockoptions granted under the Plan may be less than, equal to or greater than thefair value of the common stock on the date of grant. The Company has reserved2,259,350 shares of Common Stock for awards under the Plan.

 

Stock-based employee compensation is recognized using the intrinsicvalue method in accordance with Accounting Principles Board Opinion (“APB”) No.25, “Accounting for Stock Issued to Employees.” For disclosure purposes, proforma net income and net income per share data are provided in accordance withSFAS No. 123, “Accounting for Stock-Based Compensation,” as if the fair valuemethod had been applied. Under SFAS No. 123, compensation cost related to stockoptions granted to employees is computed based on the fair value of the stockoption at the date of grant using the Black-Scholes option pricing model. Hadthe Company recognized compensation cost for its stock option plans consistentwith the provisions of SFAS No. 123, the Company’s pro forma net income for thethree-month and six-month periods ended March 31, 2004 and 2005 would have beenas follows:

 

 

7

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| ** **                                                                                                                                       | ** ** | **Three Months  Ended  March 31, 2004** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** | **Six Months  Ended  March 31, 2004** | ** ** | **Six Months  Ended  March 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Net Income:                                                                                                                                      |       |                                    |       |                                    |       |                                  |       |                                  |       |
| As reported                                                                                                                                      |       | $                                       | 2,574,081  |                                    | $          | 6,273,839                             |       | $                                     | 4,181,431  |   | $ | 12,466,642 |   |
| Deduct: Total stock based employee compensation expense determined  under the fair value based method for all awards, net of related tax effects |       | $                                       | (193,044   | )                                       | $          | (203,199                              | )     | $                                     | (386,088   | ) | $ | (406,398 | ) |
| Pro forma                                                                                                                                        |       | $                                       | 2,381,037  |                                    | $          | 6,070,640                             |       | $                                     | 3,795,343  |   | $ | 12,060,244 |   |
|                                                                                                                                             |       |                                    |       |                                    |       |                                  |       |                                  |       |   |   |   |   |
| Basic EPS:                                                                                                                                       |       |                                    |       |                                    |       |                                  |       |                                  |       |
| As reported                                                                                                                                      |       | $                                       | 0.22       |                                    | $          | 0.53                                  |       | $                                     | 0.36       |   | $ | 1.05 |   |
| Pro forma                                                                                                                                        |       | $                                       | 0.21       |                                    | $          | 0.51                                  |       | $                                     | 0.33       |   | $ | 1.02 |   |
|                                                                                                                                             |       |                                    |       |                                    |       |                                  |       |                                  |       |   |   |   |   |
| Diluted EPS:                                                                                                                                     |       |                                    |       |                                    |       |                                  |       |                                  |       |
| As reported                                                                                                                                      |       | $                                       | 0.22       |                                    | $          | 0.51                                  |       | $                                     | 0.35       |   | $ | 1.02 |   |
| Pro forma                                                                                                                                        |       | $                                       | 0.20       |                                    | $          | 0.50                                  |       | $                                     | 0.32       |   | $ | 0.99 |   |

 

**NewAccounting Pronouncements**

 

In November 2004, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) 151, “Inventory Costs”.This Statement amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,Chapter 4 previously stated that “... under some circumstances, items such asidle facility expense, excessive spoilage, double freight, and rehandling costsmay be so abnormal as to require treatment as current period charges...”. ThisStatement requires that those items be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal”. In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. This statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The Company does not expect theadoption of this statement will have a material impact on its consolidatedfinancial position or results of operations.

 

In December 2004, The FASB issued SFAS No. 123(R), “Share Based Payment”.Statement No. 123(R) requires all entities to recognize compensation expense inan amount equal to the fair value of share based payments granted to employees.This statement is effective for the first fiscal year beginning after June 15,2005. The Company will adopt Statement No. 123(R) beginning with the firstquarter of fiscal 2006. Adoption of the statement will require the Company torecord compensation expense relating to the issuance of employee stock options.Currently, the Company follows APB No. 25 which does not require therecognition of compensation expense relating to the issuance of stock optionsso long as the quoted market price of the Company’s stock at the date of grantis less than or equal to the amount an employee must pay to acquire thestock.  The Company is currentlyevaluating the impact the adoption of this statement will have on itsconsolidated financial position or results of operations.

 

In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004”. This FSP provides guidance on the application of Statement 109 to theprovisions within the American Jobs Creation Act of 2005 (the Act), whichprovides tax relief to U.S. domestic manufacturers. The FSP states that amanufacturer’s deduction provided for under the Act should be accounted for asa special deduction in accordance with Statement 109 and not as a tax ratereduction. The FSP also reminds preparers that the special deduction should beconsidered by an enterprise in (a) measuring deferred taxes when the enterpriseis subjected to graduated tax rates, and (b) assessing whether a valuationallowance is necessary as required by Statement 109. This statement iseffective immediately. The Company has adopted this statement and it did nothave a material impact on the Company’s financial position or results ofoperations.

 

 

 

8

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

** **

**Overview**

 

We design, manufacture and sell flight information computers, flatpanel displays and advanced monitoring systems to the Department of Defense(DOD), government agencies, commercial air transport carriers andcorporate/general aviation markets.

 

Our revenues are derived from the sale of our products to the retrofitmarket and, to a lesser extent, original equipment manufacturers (OEMs). Ourcustomers include government and military entities and their commercialcontractors, aircraft operators, aircraft modification centers and various OEMs.Although we occasionally sell our products directly to government entities, weprimarily sell our products to commercial customers for end use in governmentand military programs.

 

Since fiscal 1997, the majority of our revenues have come from the saleof Reduced Vertical Separation Minimum (RVSM) compliant air data systems.

 

We continue to invest in and seek additional opportunities for our FlatPanel Display product line. The Company’s Flat Panel Display receivedcertification from the Federal Aviation Administration (FAA) in the form of aTechnical Standard Order (TSO) on July 2, 2004.To date, we have been selectedby the U.S. Navy for Flat Panel applications on their Landing Craft Air Cushion(LCAC) platforms. The Navy program has multi-year requirements that we believewill provide a solid base for future awards. Further, we were selected byBoeing to provide Flat Panels for the Boeing 767 tanker program. While Boeing’scontract with the US Air Force was recently cancelled, the program is expected tobe re­competed in the future. In the near term, the Company will continue toprovide Boeing with Flat Panels for installation on 767 tanker planes that willbe sold to foreign customers. In addition, Lockheed Martin selected us toprovide Flat Panel Systems for the retrofit of C-130 airplanes.

 

Our “cost of sales” is comprised of material components purchasedthrough our supplier base and direct in-house assembly labor and overheadcosts. Many of the components we use in assembling our products are standard,although certain parts are manufactured to meet our specifications. Theoverhead portion of cost of sales is primarily comprised of salaries andbenefits, building occupancy, supplies, and outside service costs related toour production, purchasing, customer service, material control and qualitydepartments as well as warranty costs.

 

We continue to invest in the development of new products and theenhancement of our existing product line. We expense research and developmentcosts related to future product development as they are incurred.

 

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

 

 

**Three Months Ended March 31, 2005 Compared to theThree Months Ended March 31, 2004**

 

*Net sales.* Net sales increased $8.1 million, or 74%, to $19.0million for the three months ended March 31, 2005 from $10.9 million in thethree months ended March 31, 2004. This increase in net sales was mainly due toincreased RVSM system deliveries to both the commercial air transportation andgeneral aviation market segments. The increase in net sales reflects anindustry wide response to a Federal Aviation Administration (FAA) mandate.Essentially, the mandate requires RVSM equipment installations on aircraftflying between 29,000 and 41,000 feet by January 20, 2005. The Company’sequipment provides RVSM compliance. Equipment deliveries related to the FAA’smandate are increasing as both air transport and general aviation industrysegments begin to meet the new FAA mandate.

 

*Cost of sales.* Cost of sales increased $2.1 million or 58%, to $5.8million, or 30% of net sales in the three months ended March 31, 2005 from $3.7million, or 34 % of net sales in the three months ended March 31, 2004. Theabsolute dollar increase in cost of sales was related to our increase in netsales. As a percentage, the decrease was the result of fixed operating costsbeing absorbed over higher net sales in the current period.

 

*Research and development.* Research and development expensesincreased $0.1 million or 4% to $1.5 million or 8% of net sales in the threemonths ended March 31, 2005 from $1.5 million or 14% of net sales in the threemonths ended March 31, 2004.  Thedecrease as a percent to sales was due to the increase in net sales in thecurrent period.

* *

*Selling, general, and administrative.* Selling, general, and administrativeexpenses increased $0.4 million, or 23%, to $2.3 million, or 12% of net salesin the three months ended March 31, 2005 from $1.9 million or 17% of net salesin the three months ended March 31, 2004. The increase in the dollar amount wasprimarily the result of higher commissions and compensation expense. Thedecrease as a percent of net sales was the result of higher net sales in theperiod.

 

 

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*Interest income.* Interest income was $428,000 in the three monthsended March 31, 2005 as compared to interest income of $117,000 in the threemonths ended March 31, 2004. The increase in interest income in the threemonths ended March 31, 2005 was primarily the result of higher interest ratesin the current period and an increase in our cash balance over the priorperiod.

 

*Interest expense.* Interest expense was $39,000 in the three monthsended March 31, 2005 as compared to interest expense of $31,000 in the threemonths ended March 31, 2004. The increase in interest expense in the threemonths ended March 31, 2005 was primarily the result of higher interest ratesin the period.

 

*Income tax expense.* Income tax expense for the three months ended March31, 2005 was $3.5 million. The income tax expense for the three months endingMarch 31, 2004 was $1.4 million. The increase in tax expense was primarily dueto higher income in the period. The effective tax rate in the March 31, 2005quarter was 36%. In the March 31, 2004 quarter the effective tax rate was 35%.In each quarter, the effective tax rate differs from the statutory rate due tothe utilization of research and development tax credits. Although the creditsutilized in each period were similar, the effective tax rate was lower in 2004due to lower pre-tax income in the period ended March 31, 2004.

 

*Net income.* As a result of the factors described above, our netincome in the three months ended March 31, 2005 increased $3.7 million or 144%,to $6.3 million, or 33% of net sales, from $2.6 million or 24% of net sales inthe three months ended March 31, 2004.

 

 

**Six Months Ended March 31, 2005 Compared to theSix Months Ended March 31, 2004**

** **

*Net sales*. Net sales increased $18.6 million, or 96%, to $38.0million for the six months ended March 31, 2005 from $19.4 million in the sixmonths ended March 31, 2004. This increase in net sales was mainly due toincreased RVSM system deliveries to both the commercial air transportation andgeneral aviation market segments. The increase in net sales reflects anindustry wide response to a Federal Aviation Administration (FAA) mandate.Essentially, the mandate requires RVSM equipment installations on aircraftflying between 29,000 and 41,000 feet by January 20, 2005. The Company’sequipment provides RVSM compliance. Equipment deliveries related to the FAA’smandate are increasing as both air transport and general aviation industrysegments begin to meet the new FAA mandate.

 

*Cost of sales.* Cost of sales increased $4.8 million or 67%, to $12.0million, or 32% of net sales in the six months ended March 31, 2005 from $7.1million, or 37 % of net sales in the six months ended March 31, 2004. Theabsolute dollar increase in cost of sales was related to our increase in netsales. As a percentage, the decrease was primarily the result of fixedoperating costs being absorbed over higher net sales in the current period.

 

*Research and development.* Research and development expensesincreased $0.3 million or 13% to $2.8 million or 7% of net sales in the sixmonths ended March 31, 2005 from $2.5 million or 13% of net sales in the sixmonths ended March 31, 2004.  Thedecrease as a percent to sales was due to the increase in net sales in thecurrent period.

* *

*Selling, general, and administrative.* Selling, general, and administrativeexpenses increased $0.8 million, or 23%, to $4.3 million, or 11% of net salesin the six months ended March 31, 2005 from $3.5 million or 18% of net sales inthe six months ended March 31, 2004. The increase in the dollar amount wasprimarily the result of higher commissions and compensation expense. As apercentage, the decrease was primarily the result of fixed operating costsbeing absorbed over higher net sales in the current period.

 

*Interest income.* Interest income was $712,000 in the six months endedMarch 31, 2005 as compared to interest income of $230,000 in the six monthsended March 31, 2004. The increase in interest income in the six months endedMarch 31, 2005 was primarily the result of higher interest rates in the currentperiod and an increase in our cash balance over the prior period.

 

*Interest expense.* Interest expense was $79,000 in the six months endedMarch 31, 2005 as compared to interest expense of $63,000 in the six monthsended March 31, 2004. The increase in interest expense in the six months endedMarch 31, 2005 was primarily the result of higher interest rates in the period.

 

*Income tax expense.* Income tax expense for the six months ended March 31,2005 was $7.0 million. The income tax expense for the six months ending March31, 2004 was $2.3 million. The increase in tax expense was primarily due tohigher income in the period. The effective tax rate in the six months endedMarch 31, 2005 was 36%. In the six months ended March 31, 2004, the effectivetax rate was 35%. In each period, the effective tax rate differs from thestatutory rate due to the utilization of research and development tax credits.Although the credits utilized in each period were similar, the effective taxrate was lower in 2004 due to lower pre-tax income in the period ended March 31,2004.

 

*Net income.* As a result of the factors described above, our netincome in the six months ended March 31, 2005 increased $8.3 million or 198%,to $12.5 million, or 33% of net sales, from $4.2 million or 22% of net sales inthe six months ended March 31, 2004.

 

 

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**Liquidity and Capital Resources**

 

Our main sources of liquidity have been cash flows from operations. Werequire cash principally to finance inventory, accounts receivable and payroll.

 

Our cash flow provided from operating activities was $10.4 million forthe six months ended March 31, 2005 as compared to $4.3 million for the sixmonths ended March 31, 2004. The increase was due to higher net income offsetby an increase in accounts receivable in the period.

 

Our cash used in investing activities was $196,000 for the six monthsended March 31, 2005 and primarily consisted of production equipment,laboratory test equipment, computer equipment and office furniture. Cash usedin investing activities was $502,000 for the six months ended March 31, 2004and primarily consisted of production equipment, laboratory test equipment,computer equipment and office furniture.

 

Net cash flow from financing activities was $301,000 for the six monthsended March 31, 2005 as compared to $448,000 in the six months ended March 31,2004. In the six month period ended March 31, 2005, the in-flow of cash was theresult of proceeds from the exercise of stock options. In the period endedMarch 31, 2004, the in-flow was the result of the exercise of both stockoptions and warrants. All remaining warrants were exercised during the fiscalyear ended September 30, 2004.

 

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 that our cashand cash equivalents will provide sufficient capital to fund our operations forat least 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**

 

At March 31, 2005 our backlog was $29.4 million. This represents a $2.4million or 9% increase from the March 31, 2004 backlog of $27.0 million. Ourbacklog consists solely of orders that we believe to be firm. In the case ofcontracts with government entities, orders are only included in backlog to theextent funding has been obtained for such orders.

 

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amount of revenues andexpenses during the reporting period. The Company’s most critical accountingpolicies are revenue recognition, income taxes, allowance for doubtfulaccounts, inventory valuation and warranty reserves.

 

The Company recognizes sales for products when the following revenuerecognition criteria are met: persuasive evidence of an arrangement exists,product delivery and acceptance has occurred, pricing is fixed or determinable,and collection is reasonably assured. The Company recognizes sales uponshipment of products to customers.

 

Sales related to certain long-term contracts requiring development anddelivery of products over several years are accounted for under the AmericanInstitute of Certified Public Accountants (AICPA) Statement of Position (SOP)81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts.*We consider the nature of thesecontracts as well as the types of products and services provided whendetermining the appropriate accounting treatment for a particular contract.Certain long-term contracts are recorded on a percentage of completion basisusing cost-to-cost methodology to measure progress towards completion.

 

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.

 

The Company enters into certain sales arrangements that includemultiple deliverables as defined in Emerging Issues Task Force (EITF) Issue No.00-21, *Accounting for Revenue Arrangements with MultipleDeliverables*. Effective July 1, 2003, the Company identifies allgoods and/or 

 

 

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services that are to be delivered separately under a sales arrangementand allocates revenue to each deliverable based on fair value that isestablished with the customer during contract negotiations. In general,revenues are separated between product sales and non-recurring engineeringservices. The allocated revenue for each deliverable is then recognized usingappropriate revenue recognition methods. Effective for transactions enteredinto after October 1, 2003, the Company accounts for transactions with softwareand non-software components under EITF Issue 03-5, “Applicability of AICPAStatement of Position 97-2, Software Revenue Recognition, to Non-SoftwareDeliverables in an Arrangement Containing More-Than-Incidental Software.”

 

Income taxes are recorded in accordance with SFAS No. 109, Accountingfor Income Taxes. Provisions for federal and state income taxes are calculatedon reported financial statement pre-tax income based on current tax law. TheCompany recognizes deferred tax assets and liabilities for temporarydifferences between the financial reporting basis and the tax basis of theCompany’s assets and liabilities and expected benefits of utilizing netoperating loss carryforwards. The impact on deferred taxes of changes in taxrates and laws, if any, applied to the years during which temporary differencesare expected to be settled, are reflected in the consolidated financialstatements in the period of enactment.

 

We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Theseallowances are determined by analyzing historical data and trends. If actuallosses are greater than estimated amounts or if the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, future results from operations could be adversely affected.

 

Inventories are written down for estimated obsolescence equal to thedifference between the cost of inventory and the estimated net realizable valuebased upon assumptions about future market conditions. If actual future demandor market conditions are less favorable than those projected by management,additional inventory write-downs may be required.

 

We offer warranties on some products of various lengths. At the time ofshipment, we establish a reserve for the estimated cost of warranties based onour best estimate of the amounts necessary to settle future and existing claimsusing historical data on products sold as of the balance sheet date. The lengthof the warranty period, the product’s failure rates and the customer’s usageaffects warranty cost. If the actual cost of warranties differs from ourestimated amounts, future results of operations could be adversely affected.

 

 

**Business Segments**

 

We operate in one principal business segment which designs,manufactures and sells flight information computers, flat panel displays andadvanced monitoring systems to the Department of Defense, government agencies,commercial air transport carriers and corporate/general aviation markets. Wecurrently derive virtually all our net sales from the sale of this equipment.Almost all of the net sales, operating results and identifiable assets are inthe United States.

 

 

**New Accounting Pronouncements**

 

In November 2004, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) 151, “Inventory Costs”.This Statement amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,Chapter 4 previously stated that “... under some circumstances, items such asidle facility expense, excessive spoilage, double freight, and rehandling costsmay be so abnormal as to require treatment as current period charges...”. ThisStatement requires that those items be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal”. In addition,this Statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the production facilities.This statement is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company does not expect the adoption of thisstatement will have a material impact on its consolidated financial position orresults of operations.

 

In December 2004, The FASB issued SFAS No. 123(R), “Share Based Payment”.Statement No. 123(R) requires all entities to recognize compensation expense inan amount equal to the fair value of share based payments granted to employees.This statement is effective for the first fiscal year beginning after June 15,2005. The Company will adopt Statement No. 123(R) beginning with the firstquarter of fiscal 2006. Adoption of the statement will require the Company torecord compensation expense relating to the issuance of employee stock options.Currently, the Company follows APB No. 25 which does not require therecognition of compensation expense relating to the issuance of stock optionsso long as the quoted market price of the Company’s stock at the date of grantis less than or equal to the amount an employee must pay to acquire thestock.  The Company is currentlyevaluating the impact the adoption of this statement will have on itsconsolidated financial position or results of operations.

 

In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income 

 

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Taxes, to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004”. This FSP provides guidance on theapplication of Statement 109 to the provisions within the American JobsCreation Act of 2005 (the Act), which provides tax relief to U.S. domesticmanufacturers. The FSP states that a manufacturer’s deduction provided forunder the Act should be accounted for as a special deduction in accordance withStatement 109 and not as a tax rate reduction. The FSP also reminds preparersthat the special deduction should be considered by an enterprise in (a)measuring deferred taxes when the enterprise is subjected to graduated taxrates, and (b) assessing whether a valuation allowance is necessary as requiredby Statement 109. This statement is effective immediately.

 

The Company has adopted this statement and it did not have a materialimpact on the Company’s financial position or results of operations.

 

 

**FORWARD-LOOKING STATEMENTS**

 

This Form 10-Q contains statements, which, to the extent that they arenot recitations of historical fact, constitute forward-looking statementswithin the meaning of the Securities Act of 1933 and the Securities ExchangeAct of 1934. The words “believe,” “estimate,” “anticipate,” “project,” “intend,”“expect,” “plan,” “outlook,” “forecast” and similar expressions are intended toidentify forward-looking statements. Numerous factors, including potentiallythe following factors, could affect the Company’s forward-looking statementsand actual performance:

 

•                  continued market acceptance of our air data systems products;

 

•                  the ability to obtain or the timing of obtaining future governmentawards;

 

•                  the availability of government funding and customer requirements;

 

•                  difficulties in developing and producing our flat panel display systems(CIP) or other planned products or product enhancements;

 

•                  market acceptance of our CIP system or other planned products orproduct enhancements;

 

•                  our ability to gain regulatory approval of our products in a timelymanner;

 

•                  delays in receiving components from third party suppliers;

 

•                  the competitive environment;

 

•                  the timing and customer acceptance of product deliveries and launches;

 

•                  the termination of programs or contracts for convenience by customers;

 

•                  failure to retain key personnel;

 

•                  new product offerings from competitors;

 

•                  potential future acquisitions;

 

•                  protection of intellectual property rights;

 

•                  our ability to service the international market, and

 

•                  other factors disclosed from time to time in our filings with theSecurities and Exchange Commission.

 

Readers are cautioned not to place undue reliance on theseforward-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 the occurrenceof unanticipated events. The forward-looking statements in this document areintended to be subject to the safe harbor protection provided by Sections 27Aof the Securities Act and 21E of the Exchange Act.

 

For a discussion identifying some important factors that could causeactual results to vary materially from those anticipated in the forward­lookingstatements, see the Company’s Securities and Exchange Commission filingsincluding, but not limited to, the discussions of “Risk Factors” contained inthe Company’s Annual Report on Form 10-K for the fiscal year ended September30, 2004.

 

 

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**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 and an industrial revenue bond. The Company’s cash equivalentsconsist of funds invested in money market accounts, which bear interest at avariable rate, while the industrial revenue bond carries an interest rate thatis consistent with 30-day, tax-exempt commercial paper. As the interest ratesare variable, and we do not engage in hedging activities, a change in interestrates earned on the cash equivalents or paid on the industrial revenue bondwould impact interest income and expense along with cash flows, but would notimpact the fair market value of the related underlying instruments.

 

 

**Item 4. Controls and Procedures**

 

An evaluation was performed under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness ofthe Company’s disclosure controls and procedures, as such term is defined underRule 13a-15e under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) as of March 31, 2005. Based on that evaluation, the Company’s management,including the CEO and CFO, concluded that the Company’s disclosure controls andprocedures provide reasonable assurance that information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct, is recorded, processed, summarized and reported as specified in Securitiesand Exchange Commission rules and forms. There were no significant changes inthe Company’s internal control over financial reporting that occurred duringthe Company’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

 

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**PART II—OTHER INFORMATION**

** **

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

** **

On March 31, 2005, the Company held its Annual Meeting ofStockholders.  At this meeting thestockholders voted in favor of the following items listed and described in theCompany’s Proxy Statement dated February 28, 2005.

 

1)              Election of Directors

 

| ** **                  | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-----------------------------|------------|-----------|------------|--------------|------------|
| Glen R. Bressner            |       | 9,154,253 |       | 171,575      |       |
| Robert E. Mittelstaedt, Jr. |       | 9,149,353 |       | 176,475      |       |

 

        The following directors’ term of office as directorscontinued after this meeting

 

                Ivan M. Marks

                Robert H. Rau

                Geoffrey S.M. Hedrick

                Winston J. Churchill

                Benjamin A. Cosgrove

 

2)              Approval of the adoption of increasing the number ofshares authorized for issuance under the Company’s 1998 Stock Option Plan:

 

| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 6,481,844 |       | 707,345     |       | 11,253      |       | 2,125,386            |       |

** **

**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, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

 

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**SIGNATURES**

 

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 & SUPPORT, INC.** |
|----------------------|----------------------------------------------|
| ** **           | ** **                                   | ** ** |
| ** **           | ** **                                   | ** ** |
| Date: April 29, 2005 | By:                                          | /s/ JAMES J. REILLY |
| ** **           | ** **                                   | **James J. Reilly Chief Financial Officer** |

 

 

 

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