# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-K

# Annual Report Pursuant
to Section 13 or 15(d) of The Securities
Exchange Act of 1934

# For the Fiscal Year
Ended January 31, 2007 Commission File Number
1-11750

# AEROSONIC CORPORATION

# (Exact name of
registrant as specified in its charter)

|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|Delaware                                                       | 74-1668471                          
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)

# 1212 North Hercules
Avenue  Clearwater, Florida 33765 (Address of principal executive
offices and Zip Code)

# Registrants
telephone number, including area code: (727) 461-3000

# Securities registered
pursuant to Section 12(b) of the Act:

|                             |                                          
|---------------------------- | -----------------------------------------
|Title of Each Class          | Name of Each Exchange on Which Registered
|Common Stock, $.40 par value | American Stock Exchange                  

# Securities registered
pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes      No

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Act Yes      No

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. 
Yes      No

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

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, an accelerated filer or
a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act.  (Check one)

Large accelerated filer    Accelerated filer    
Non-accelerated filer

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

---

The aggregate market value of the
voting stock held by non-affiliates of the registrant was approximately $25,695,000 as of
July 31, 2006 based upon the closing price of the Common Stock on the American Stock
Exchange (Amex) on that date, and approximately $27,479,000 as of April
20, 2007, based upon the closing price of the Common Stock on the Amex on that more recent
date.

As of April 20, 2007, the issuer had
3,573,315 shares of Common Stock outstanding, net of treasury shares.

# Documents Incorporated
by Reference:

Portions of the Aerosonic Corporation
Proxy Statement for the 2007 Annual Meeting of Shareholders (the Proxy
Statement) are incorporated by reference into Part III of this Form 10-K. We
expect to file our Proxy Statement with the United States Securities and Exchange
Commission (SEC) and mail it to shareholders on or before May 31,
2007.

2



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# PART I

THIS REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
WHICH ARE INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED THEREUNDER. FORWARD-LOOKING
STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
MAY, WILL, SHOULD, EXPECT,
ANTICIPATE, ESTIMATE, CONTINUE, PLANS,
INTENDS AND WORDS OF SIMILAR IMPORT. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY
OF THE ASSUMPTIONS COULD BE INACCURATE. THEREFORE, THE COMPANYS ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
ADDITIONALLY, ACTUAL RESULTS MIGHT BE AFFECTED BY CERTAIN FACTORS SET FORTH HEREIN IN
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.

# Subsequent Events

On March 9, 2007, Aerosonic
Corporation (Aerosonic or the Company) announced the
consolidation of the manufacturing functions of its Earlysville, Virginia, operation into
its Clearwater, Florida facility. The Earlysville location is home to Avionics
Specialties, Inc., Aerosonics wholly owned subsidiary. The consolidation is a
continuation of the Companys actions to be more responsive to customers
demands while increasing efficiencies. The existing Engineering and Marketing functions
will remain in the Earlysville area but will relocate to a new facility more appropriately
sized for the Companys planned streamlined structure. The Company plans to sell the
Earlysville facility. Avionics Specialties manufactures angle of attack stall warning
systems, integrated multifunction probes, which are integrated air data sensors, and other
aircraft sensors and monitoring systems. The Company will continue the
manufacturing of those products at its Clearwater, Florida facility. The Company will also
execute the consolidation plan in a phased approach to maintain delivery schedules and
product quality.

|ITEM 1. | BUSINESS.
|------- | ---------

# General

Aerosonic is a Delaware corporation
formerly known as Instrument Technology Corporation (ITC). ITC, which
was incorporated in 1968, was the surviving corporation of a merger, in 1970, with
Aerosonic Corp., a Florida corporation (Aerosonic Florida). Aerosonic
Florida, which was incorporated in 1957, ceased to exist as a separate corporation as a
result of the merger. Following the merger, ITC changed its name to Aerosonic Corporation.
In January 1993, the Company acquired Avionics Specialties, Inc., a Virginia corporation
(Avionics), from Teledyne Industries, Inc.
(Teledyne). Prior to the acquisition, Avionics had been a division of
Teledyne. Since the acquisition, Avionics has been maintained as an operating and wholly
owned subsidiary of the Company.

As used herein, unless the context
requires otherwise, references to Aerosonic, the Company,
we or our include Aerosonic Corporation and its operating
subsidiary, Avionics.

The Company is principally engaged in
one business segment, which is the manufacture and sale of aircraft instruments. The
Company has two operating divisions in two locations. The two divisions are (1) the
Clearwater, Florida Instrument Division (Clearwater Instruments), which
primarily manufactures both mechanical and digital altimeters, airspeed indicators, rate
of climb indicators, microprocessor controlled air data test sets, and a variety of other
flight instrumentation, and (2) Avionics in Earlysville, Virginia, which maintains three
major product lines in the aircraft instrument segment: (i) angle of attack stall warning
systems; (ii) integrated multifunction probes, which are integrated air data sensors; and
(iii) other aircraft sensors and monitoring systems.

Until October 31, 2006, the Company
maintained a third division in Wichita, Kansas (Kansas Instruments) to
support the Clearwater Instruments business. Kansas Instruments was the source inspection
location for our Wichita customers and was the primary location for Clearwater
Instruments repair business. During the fourth quarter of fiscal year 2007, all of
the activity at the Wichita location was consolidated with the Companys Clearwater,
Florida location.

3

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In August 1998, the Company formed
Precision Components as a new division to perform high volume precision machining of
mechanical components, which was not significant to operations in the fiscal years ended
January 31, 2007, 2006 or 2005. During the fiscal year ended January 31, 2005, the Company
phased out the Precision Components division, redeploying the assets and employees to the
Clearwater Instruments production.

The Company has a January 31 fiscal
year end. Accordingly, all references in this Annual Report on Form 10-K to a fiscal year
mean the fiscal year ended on January 31 of the referenced year; for example, references
to fiscal year 2007 mean the fiscal year ended January 31, 2007.

# Industry

Aerosonics ability to maintain
and enhance its position in the design, development and supply of primary flight control
system components and instruments will be affected by the rising costs of both
commercial and military aircraft, and the continuing decrease in the number of new
aircraft programs and quantity of aircraft being built. Increasing value to customers has
become extremely important to sustaining Aerosonics market position as well as the
Companys market share.

The military original equipment
manufacturers (OEM), such as BAE Systems LTD, Bell Helicopter Textron
Inc., Korea Aerospace Industries, Lockheed Martin Corporation
(Lockheed), Sikorsky Aircraft Corporation, The Boeing Company
(Boeing) and others, have increased their reliance on their
subcontractors to carry a greater share of the aircraft responsibility, including system
requirements, hardware and software design, and physical and electrical interfaces. This
increased responsibility has allowed Aerosonic to develop a greater technical capability
for serving its customer base. The evolution of this role has taken Aerosonic to a
dominant position in its business segment within the military aircraft market. This
increased technical capability has also positioned the Company to push further into the
commercial aircraft market with new technologies. The Company continues to work with its
customers to identify new product and product application opportunities.

The Company continues as an aerospace
industry leader in the manufacturing of mechanical instruments. These products are used
for both primary flight data as well as standby redundant instruments in cockpits where
electronic displays are used for primary flight data. As cockpit panel space becomes more
valuable in the new age of glass displays, the Company has maintained a strong position
with OEMs as a premier supplier of quality mechanical instruments in both the military and
commercial aircraft marketplace.

Building on its expertise with
mechanical instrumentation, the Company has successfully developed and marketed digital
instrumentation for both primary flight data systems as well as standby redundant systems
to complement its mechanical line of business. Completion of development, testing and
certification of these instruments occurred in September 2005. While the Company initially
began its development of these digital instruments for installation on a new aircraft
being developed by one of its key customers, Cessna Aircraft Company
(Cessna), the new digital products are currently being marketed to a
number of other aircraft manufacturers. The availability of these products allows the
Company to facilitate its customers transition from mechanical systems to electronic
systems. In addition, the Company has also made considerable progress in developing
electronic air data collection instrumentation for military and commercial aircraft.

Aerosonics current market
niches have been and will continue to be the design, development and supply of electronic
and mechanical primary flight control systems components and instruments. These include
altimeters, airspeed indicators, angle of attack indicators, stall prevention systems and
air data measurement systems. All of these products are critical to aircraft operation,
performance and safety.

# Strategy

The Companys goal is to
continue to develop new products and reposition existing products for profitable growth
and maintain dominance within its niche markets, focusing on the development of profitable
long-term relationships with major OEMs in
the aerospace industry. New aircraft cockpits increasingly are being developed through
strategic alliances with market leaders. Due to existing OEM relationships, the Company is
well-positioned to take advantage of such strategic alliances. An increase in sales volume
will depend upon new product introduction and further penetration of existing markets. The
Company is largely vertically integrated in its manufacturing and distribution activities,
and this vertical integration gives Aerosonic a competitive advantage within the aerospace
industry.

4



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# Products and Distribution

The Companys products are sold
to manufacturers of commercial and private aircraft, both domestic and foreign, and the
United States military services. For the fiscal year ended January 31, 2007, approximately
70% of the Companys total sales were to the private sector and 30% to United States
military services.  For the fiscal year ended January 31, 2006, approximately 52% of
the Companys total sales were to the private sector and 48% to United States
military services. This shift in volume is due to a reduction in core product deliveries
to the United States military as well as a further reduction in revenue producing
engineering development projects.

Domestic sales of the Companys
products are made to many different commercial (non-government) customers, and the Company
anticipates that there will be an increasing movement toward development contracts for
future commercial applications. For the fiscal year ended January 31, 2007, sales related
to development programs accounted for approximately 3% of net sales, or $0.8 million, a
decrease of $1.9 million from the fiscal year ended January 31, 2006, where such sales
represented 8% of net sales. This decrease is due to a reduction in development activity
on the Joint Strike Fighter development contract as the program nears completion. During
fiscal year 2007, there was one commercial customer, Boeing, who represented 11% of total
revenues. A substantial amount of the business related to this customer is related to
contracts it has with the U.S. Government. The loss of this customer would have a material
adverse effect on the Companys results of operations.

In addition, the Company sells its
products to customers outside of the U.S. The aggregate percentage of international sales
to overall sales was 24%, 22%, and 15% for the fiscal years ended January 31, 2007, 2006
and 2005, respectively. The primary driver for the increase in the 2007 fiscal year was
shipments of integrated multifunction probes (IMFP) and related
components to Korea Aerospace Industries Ltd.

Most of the Companys instrument
sales are made directly through Company employees to OEMs or to the United States
military, with the Companys remaining sales being made through distributors and
commissioned sales representatives (who resell to aircraft operators).

The Company produces a full line of
both three-inch and two-inch mechanical and electro-mechanical cockpit instruments. These
instruments require no backup power, as they transfer valuable flight data to the pilot
using only air pressure (from aircraft probes) as a power source.

The Company produces a leading-edge
line of angle of attack (AOA)/stall warning products, including a
self-test AOA sensor for use on the Gulfstream G350/G450 series of aircraft
and the new IAI G150 aircraft stall warning system. The IAI G150 has received its final
certification. Technical Standard Order (TSO) certification for the IAI
G150 was obtained during fiscal year 2006.

The Company also produces IMFPs,
which is a combination of existing technologies, including the angle of attack/air data
sensing probe and pressure sensing electronics. This integrated approach to providing
aircraft air data reduces a customers system complexity with respect to aircraft
troubleshooting and logistics support, increases reliability, and decreases system costs.

The Company also produces digital
cockpit instruments that include microprocessor-based sensors with an analog pointer
displays that have been selected by Cessna to be standby units on its Mustang light jet
program. The microprocessor-based Standby Airspeed indicator and the microprocessor-based
Standby Altimeter indicator have completed the design, testing and TSO certification
processes. These indicators combine the accuracy, robustness and the long term mean time
before failure of electronic sensing presented with a pilot familiar analog
pointer display. The Company has made deliveries to Cessna and other customers.

# Customers

The Company primarily markets its
products to OEMs, particularly manufacturers of corporate and private jets, and to
contractors of military jets. Customers include, among others, the U.S. Government and a
majority of the OEMs throughout the world. The Company also markets its products to
private aircraft owners through its network of authorized distributors.

5



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# Contracts

The Companys contracts are
normally for production or development. The Companys production contracts are
typically fixed-price over a two to five year period, and the aerospace industry trend for
such contracts is moving away from five year contracts and toward contracts of shorter
duration. The Company also secures purchase orders from customers for product sales in the
normal course of its business that are binding contracts upon acceptance of the terms and
conditions of the orders by the Company.

Fixed-price contracts provide for a
firm fixed price on a variety of products and quantities of those products. These
contracts allow the Company to negotiate better overall prices that fit into
customers production programs. These long-term commitments also allow the Company to
capitalize on quantity based price reduction for raw materials.

Under the firm fixed-price contracts,
the Company agrees to perform for an agreed-upon price. Accordingly, the Company derives
benefits from cost savings, but bears the risk of cost overruns.

Development contracts provide
resources for technology advancement necessary for development of various products. The
Company negotiates for and generally receives payments from customers based upon
milestones that correlate with the costs incurred. Early in our fiscal year ended January
31, 2003, we were notified that a variation of the IMFP had been selected for use on the
Joint Strike Fighter. Development of this system continued through fiscal year 2007 and is
expected to conclude in the second quarter of fiscal year 2008.

The Company sold its Engine Vibration
Monitoring System (EVMS) product line inventory to Beran Instruments
Limited, a U.K. company on February 5, 2004. The sale, which also included the
U.S.-registered trademark EVMS, allowed the Company to concentrate on core
technology developments in its other product lines.

In accordance with normal practice,
most of our contracts with the U.S. Government and its agencies and departments are
subject to partial or complete termination at any time at the U.S. Governments
convenience. Our government contracts generally contain provisions providing that in the
event of a termination for convenience by the government, the Company shall have the right
to recover allowable costs incurred to the date of termination as well as a proportionate
share of the profit on the work completed, consistent with U.S. Government contract
regulations and procedures.

# Sales and Marketing

The Company has generally focused
sales efforts on government and military entities, OEMs and distributors. The Company has
increased sales efforts with respect to retrofit, modifications and repair programs.

Due to the integration of components
manufactured by the Company with flight management systems, the Companys sales force
is generally involved at a very early stage with the aircraft manufacturers
engineers to integrate the components into the aircraft design. Many of the Companys
component instruments are integrated into the aircraft in order to help maintain the safe
operation of the airplane.

At January 31, 2007, the
Companys backlog of firm orders was approximately $24,220,000, an increase of
approximately $3,217,000 when compared to backlog as of January 31, 2006. The amount of
backlog that is deliverable within twelve months was approximately $17,161,000 at January
31, 2007, a decrease of approximately $988,000 when compared to January 31, 2006. A
reduction in the backlog due to work that was completed on the JSF
development program was more than offset by orders for new business, largely driven by an
agreement with Korea Aerospace Industries to a follow-on order for air data systems of
approximately $7.5 million that was secured in December 2006. The foregoing backlog
amounts represent firm orders only and do not include current contract options. Such
option orders, however, may be subject to rescheduling and/or cancellation.

6



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# Government Regulation

The manufacture and installation of
the Companys products in aircraft owned and operated in the U.S. are governed by
U.S. Federal Aviation Administration (FAA) regulations. The regulations
that have the most significant impact on the Company are the TSO and Type Certificate
(TC) or Supplemental Type Certificate (STC)
certifications. TSO outlines the minimum standards that a certain type of equipment has to
satisfy to be TSO certified. Many OEMs and retrofitters prefer TSO-certified aviation
equipment because it acts as an aerospace industry-wide stamp of approval. The Company
also sells its products to European and other non-U.S. OEMs, which typically require
approval from the Joint Aviation Authorities (JAA).

The Company has received TSO approval
on over 400 different instruments, as well as 70 STCs. Most new instruments qualify for
approval based on similarity. This provides a significant advantage to the Company and its
customers by reducing the time required obtaining TSO approval on new instruments. The
Company also has many instruments with JAA approval.

# Quality Assurance

Product quality is critical in the
aerospace industry. The Company strives to maintain the highest standards within each of
its divisions.

The Company is ISO 9001/AS9100
certified. The certifying organization for Clearwater Instruments was AQA International
LLC, while Avionics was certified by British Standard Institute Management Systems, Inc.
ISO 9001/AS9100 standards are an international consensus on effective management practices
for ensuring that a company can consistently deliver its products and related services in
a manner that meets or exceeds customer quality requirements. ISO 9001/AS9100 standards
outline the minimum requirements a quality system must meet to achieve this certification.

As an ISO 9001/AS9100-certified
manufacturer, the Company can represent to its customers that it maintains high quality
industry standards in the education of employees and the design and manufacture of its
products. In addition, the Companys products undergo extensive quality control
testing prior to being delivered to customers. As part of the Companys quality
assurance procedures, the Company maintains detailed records of test results and quality
control processes.

# Patents and Licenses

The Company has patents on certain
commercial and military products such as air data probes. The Company also has certain
registered trademarks. The intellectual property portfolio, in the aggregate, is valuable
to operations, however the Company does not believe the business, as a whole, is
materially dependent on any single patent, trademark or copyright.

# Research and Development

The Company expended approximately
$458,000, $688,000 and $758,000 in research and development costs for potential new
products and enhancements during the fiscal years ended January 31, 2007, 2006 and 2005,
respectively. The expenditures in 2007 are consistent with the preceding two years and are
due to the continuing development efforts of digital products at the Companys
Clearwater, Florida facility. Additional research and development activity occurs at the
Companys Earlysville, Virginia facility, but since the majority of that activity is
for customer-funded projects, those revenue-producing expenses are classified as cost of
sales instead of research and development. Approximately 25 engineers working at the
Company, on a full-time or part-time basis, are involved in these activities.

The Company continued its various
development efforts during fiscal year 2007 for both military and commercial applications,
the most notable of which is the F-35 Joint Strike Fighter program. In addition, the trend
toward digital instrumentation includes a more networked approach to aircraft flight
management systems thus requiring communication with other aircraft systems. This increase
in communication requirements, coupled with the computerized nature of the products
themselves, has led to requirements for more sophisticated diagnostic and test equipment,
and Aerosonic is investigating new ways to meet these new needs. Further, the Company
plans to continue its design efforts to satisfy its existing contractual obligations as
well as its internal development of products for future customer applications.

7



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# Competition

The markets for the Companys
products are highly competitive and characterized by several aerospace industry niches in
which a number of manufacturers specialize. The Company, in its market niche, manufactures
a broader variety of aircraft instruments than its competitors who, in most instances,
compete with the Company on no more than a few types of aircraft instruments. In addition
to the mechanical instruments that were the traditional foundation of the Companys
business, the Company offers electronic instruments and components that are integrated
into the flight management system of aircraft. This product offering allows the Company to
compete on many levels within the aerospace industry.

The Company believes that the
principal competitive factors are price, development cycle time, responsiveness to
customer preferences, product quality, technology, reliability and variety of products.
Management believes that the Companys significant and long-standing customer
relationships reflect its ability to compete favorably with respect to these factors.

# Manufacturing, Assembly
and Material Acquisition

The Companys manufacturing
processes (except for certain electronic components) include the manufacture of all
principal components and subassemblies for the instruments, the assembly of those
components, and the testing of products at various stages in the manufacture and assembly
process.

The Company manufactures, or has the
capability to manufacture, principally all components (except for certain electronic
components) and subassemblies for its instruments. Raw materials, such as glass lenses,
raw metals and castings, generally are available from a number of sources and in
sufficient quantities to meet current requirements, subject to normal lead times. The
Company believes that retaining the ability to completely manufacture the instruments
allows the Company the flexibility to respond to customers quickly and control the quality
of its products.

When appropriate, less critical
component parts are purchased under short and long term supply agreements. These purchased
parts are normally standard parts that can be easily obtained from a variety of suppliers.
This allows the Company to focus its attention on more critical component parts to
maintain a level of quality control required to meet the exacting tolerances demanded
within the aerospace industry and by our customers.

# Employees

As of the fiscal year ended January
31, 2007, the Company employed 240 employees in its business operations. This consists of
139 Clearwater Instruments employees and 101 Avionics employees. The Companys future
success depends on the ability to attract, train and retain quality personnel. The
Companys employees are not represented by labor unions and management considers its
relations with its employees to be good.

|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following factors are important
and should be considered carefully in connection with any evaluation of the Companys
business, financial condition, results of operations, prospects, or an investment in the
Companys common stock. In particular, the Companys results of operations,
revenue, liquidity and capital resources may be materially and unfavorably affected by a
number of risk factors, trends and uncertainties. Set forth below are some of the risk
factors, trends and uncertainties which we believe could have a material and unfavorable
impact on the Companys results of operations, revenue, liquidity, capital resources
and any investment in the Company. Additional risk factors, trends and uncertainties may
be discussed elsewhere within this document. The following list is not exhaustive, and
other factors which are not presently apparent to us also may have a material and
unfavorable impact on our business or financial results.

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# Risks associated with
dependence on the aerospace industry

The Companys principal business
is in the aerospace industry. This industry is primarily affected by the general state of
the economy in the commercial sector and defense budgets of the U.S. and foreign
governments in the military sector. The Companys focus in the commercial sector is
in the business jet market. In the military sector, the levels of defense spending as well
as the status of international conflicts have a direct impact on the Companys
business. While the Company expects increases in homeland security spending to benefit
fixed-wing and helicopter aircraft, the Company cannot guarantee that such increased
levels of spending will actually occur nor that such increases will be to the benefit of
the Company. Although we have worked to offset the potentially negative impact of such
factors, the outbreak or escalation of terrorist attacks or international hostilities
could cause deterioration in the commercial and business aircraft market.

# Risks associated with
dependence on U.S. Government contracts

Our dependence on revenue from U.S.
Government contracts subjects us to a number of risks, including the risk that we may not
be successful in bidding for future contracts and the risk that funding for these
contracts may be delayed or diverted to other uses.

We perform work under a number of
contracts with the Department of Defense and other agencies and departments of the U.S.
Government. Sales under these contracts as a whole, including sales under contracts with
the Department of Defense, as prime contractor or subcontractor, represented approximately
30% of our total revenue for fiscal year 2007 and 48% of our total revenue for fiscal year
2006.

U.S. Government
contracts are conditioned upon the continuing availability of           Congressional
appropriations. Congress typically appropriates funds for a given           program on a
fiscal-year basis even though contract performance may take more           than one year.
As a result, at the beginning of a major program, a contract is           typically only
partially funded, and additional monies are normally committed to           the contract
by the procuring agency only as appropriations are made by Congress           for future
fiscal years.

While the overall U.S. military
budget declined in real dollars from the mid-1980s through the early 1990s, as a result of
the September 11th terrorist attacks and given the current Middle East and global
situation, U.S. defense spending has increased and is expected to increase over the next
several years. Increased defense spending does not necessarily correlate to increased
business for the Company, because not all the programs in which the Company participates
or has current capabilities may be earmarked for increased funding.

Most of our U.S. Government contracts
are subject to termination by the U.S. Government either at its convenience or upon our
default. Termination-for-convenience provisions permit only the recovery of costs incurred
or committed, settlement expenses, and profit on work completed prior to termination.
Termination-for-default imposes liability on us for excess costs incurred by the U.S.
Government in procuring undelivered items from another source.

A substantial majority of our U.S.
Government contracts are fixed price type contracts. A majority of these contracts are for
mature products and costs are well established. However, some contracts include costs
associated with product development. These types of contracts bear the inherent risk that
actual performance cost may exceed the fixed contract price.

We, like other U.S. Government
contractors, are subject to various audits, reviews and investigations (including private
party whistleblower lawsuits) relating to our compliance with federal and
state laws. In addition, we have a compliance program designed to uncover issues that may
lead to voluntary disclosures to the U.S. Government. Generally, claims arising out of
these inquiries and voluntary disclosures can be resolved without resorting to litigation.
However, should a business unit or division of the Company involved in a government
contract be charged with violation of law, or should the U.S. Government determine that
the unit or division is not a presently responsible contractor, that unit or
division, and conceivably the Company as a whole, could be temporarily suspended or, in
the event of a conviction, could be debarred for up to three years from receiving new U.S.
Government contracts or government-approved subcontracts. In addition, we could expend
substantial amounts in defending against such charges and in damages, fines and penalties
if such charges are proven or result in negotiated settlements. If we were to be debarred
from U.S. Government contracts, it would have a material adverse effect on our results of
operations, revenue, liquidity and capital resources.

9



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# Risks associated with
aerospace industry regulations

The aerospace industry is heavily
regulated and failure to comply with applicable laws or regulations could reduce our
sales, or require us to incur additional costs to achieve compliance, which could have a
material adverse effect on our results of operations.

The FAA prescribes standards and
licensing requirements for aircraft components, including virtually all of our products.
Comparable agencies, such as the U.K. Civil Aviation Authority and the Japanese Civil
Aviation Board, regulate these matters in other countries.

If we fail to obtain a required
license for one of our products or services or lose a license previously granted, the
sale of the subject product or service would be prohibited by law until such license is
obtained or renewed. In addition, designing new products to meet existing regulatory
requirements and retrofitting installed products to comply with new regulatory
requirements can be both expensive and time consuming.

From time to time the FAA proposes
new regulations. These new regulations generally cause an increase in costs to bring our
existing and developmental products into compliance.

The challenge to compete
against larger well-established companies

We compete with numerous
well-established companies. Some of these companies have significantly greater financial,
technological and marketing resources than us. Our ability to be an effective competitor
depends in large part on our success in causing our products to be selected for
installation in new aircraft, including next generation aircraft, and in avoiding product
obsolescence.

# Risks associated with
rapid technological change and products that are subject to obsolescence as a result
thereof

Our operating results depend in part
on our ability to introduce new and enhanced products on a timely basis. Successful
product development and introduction depend on numerous factors, including our ability to
anticipate customer and market requirements, changes in technology and aerospace industry
standards, our ability to differentiate our offerings from offerings of our competitors,
and market acceptance. The markets for a number of our products and services are generally
characterized by rapid technological development, evolving aerospace industry standards,
changes in customer requirements and new product introductions and enhancements. A faster
than anticipated change in one or more of the technologies related to our products or
services or in market demand for products or services based on a particular technology
could result in faster than anticipated obsolescence of certain of our products or
services and could have a material adverse effect on our business, results of operations
and financial condition. Currently accepted aerospace industry standards are also subject
to change, which may contribute to the obsolescence of our products or services and could
have a material adverse effect on our business, results of operations and financial
condition.

Risks associated with
ongoing capital requirements

Although the aerospace industry niche
is not highly capital intensive, our need to expend resources on research and development
to provide our customer base with new and enhanced products as well as to continuously
upgrade our process technology and manufacturing capabilities requires us to expend
significant amounts annually. If we elect to expand our operations in future periods,
whether as a result of organic growth or through strategic acquisitions, our capital needs
would increase. Our ability to raise capital to meet our existing and future needs may
depend on a variety of factors, some of which will not be within our control, including
investor perceptions of us, our businesses and the industries in which we operate, and
general economic conditions. We may be unable to successfully raise additional capital, if
needed. If we are unable to generate sufficient cash from operations or raise additional
capital in the future, we may have to limit our growth, enter into less favorable
financing arrangements, or scale back on planned research and development or upgrades, any
of which could have a materially adverse effect on our profitability.

10



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Risks related to the
Companys handling and use of hazardous substances and related environmental matters

Our operations require the handling
and use of hazardous substances, and we are subject to federal, state and local laws,
regulations, rules and ordinances relating to pollution, the protection of the environment
and the use or cleanup of hazardous substances and wastes. From time to time, our
operations could result in violations under such environmental laws, including spills or
other releases of hazardous substances into the environment. We may incur substantial
costs or experience interruptions in our operations for actual or alleged violations or
compliance requirements arising under environmental laws. Additionally, we may be liable
for the costs of investigating and cleaning up environmental contamination on or from our
properties. In the event of a major incident, we could incur material costs or experience
interruption in our operations as a result of addressing the incident and implementing
measures to prevent such incidents in the future, as well as potential litigation that
could arise from such an incident. In addition, we could incur significant expenditures in
order to comply with existing or future environmental laws. Based on available
information, we are aware of only one existing environmental matter, which is discussed
below under Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations  Environmental Matters.

We are subject to
significant restrictive operational and financial covenants.

As noted above and in Note 6 to the
Consolidated Financial Statements, the Company successfully refinanced its long term debt
instruments in February 2004. The new facilities contain fewer restrictive financial
covenants than the preceding debt instruments, but do contain covenants that restrict our
ability to declare and pay dividends and require the Company to obtain consent or a waiver
prior to taking certain other corporate actions, including the disposition of assets,
mergers and changes in corporate management. Among other things, these covenants may
prevent the Company from consummating potential dispositions or acquisitions, and may
deter or prevent an acquisition or merger of the Company.

We are subject to the
risks associated with international sales.

During fiscal year 2007,
international sales accounted for approximately 24% of our total revenues. We anticipate
that future international sales will continue to account for a significant percentage of
our revenues. Risks associated with these sales include:


Political and economic instability;

 Export
controls and other trade restrictions;


Changes in legal and regulatory requirements;

 U.S.
and foreign government policy changes affecting the markets for our products;


Changes in tax laws and tariffs;

 Convertibility
and transferability of international currencies; and


International currency exchange rate fluctuations.

Any of these factors could have a
material adverse effect on our business, results of operations and financial condition.
Currency exchange rate fluctuations may negatively affect the cost of our products to
international customers and therefore reduce our competitive position.

Attracting and retaining
key personnel is an essential element of our future success

Our future success depends to a
significant extent upon the continued service of our executive officers and other key
management and technical personnel and on our ability to continue to attract, retain and
motivate qualified personnel. Recruiting and retaining skilled technical personnel is
highly competitive. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a material adverse
effect on our business, financial condition and results of operations.

11



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Risks associated with
terrorism and world conflict

United States and global responses to
the Middle East conflict, terrorism, perceived nuclear, biological and chemical threats
and other global crises increase uncertainties with respect to U.S. and other business and
financial markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats and other
global crises and responses thereto, may adversely affect the Company.

While some of our products that are
sold to the U.S. Government may experience greater demand as a result of increased defense
spending, various responses could realign U.S. Government programs and affect the
composition, funding or timing of our government programs. U.S. Government spending could
shift to defense programs in which we do participate.

The Company has contracts with
governments of certain states located in the Middle East. The instability in that region,
as well as U.S., local or global responses to potentially controversial policies or
actions adopted or taken by such governments, may negatively impact those contracts and,
thus, the Company.

The Company has contracts with the
government of South Korea. Recent actions and perceived provocations by the government of
North Korea have resulted in increased concern regarding the stability of the Korean
armistice. Additionally, reports indicate that North Korea may be moving to produce and
test nuclear weapons or otherwise provoke the U.S. and international community. Resulting
instability on the Korean peninsula, and any U.S., local or global responses to perceived
provocations by the government of North Korea, could impact the Companys contracts
with South Korea. While an escalation of hostilities on the Korean peninsula might lead to
increased military spending by South Korea, there is no certainty that the Companys
contracts with South Korea would benefit. Additionally, it is possible that any
instability in that region could have a negative impact on the Companys contracts
and, thus, the Company.

Risks associated with
significant stock price fluctuations

The market price of our Common Stock
ranged from a high of $11.30 per share to a low of $5.45 per share during the 52 week
period ended January 31, 2007. Certain accounting misstatements, resulting restatements,
contributing factors that led to the restatements and an SEC investigation discussed in
previous SEC filings and in the Companys Annual Report on Form 10-K for the fiscal
year ended January 31, 2003 might continue to have an adverse effect on the price of our
common stock.

The average daily trading volume in
our Common Stock on the American Stock Exchange (Amex) for the six
month period ended January 31, 2007 was approximately 11,723 shares per day and the daily
trading volume in our common stock during the same period ranged from a low of zero shares
traded to a high of 307,500 shares traded.

Other factors and general market
conditions that could affect our stock price are:


Our quarterly operating results and variations therein;

 Changes
in earnings estimates by securities analysts;


Changes in our business;

 Changes
in the markets perception of our business;


Changes in the businesses, earnings estimates or market perceptions of our competitors or
customers;


Changes in the outlook for the aerospace industry;

 Changes
in general market or economic conditions unrelated to our performance;


Changes in the legislative or regulatory environment;


Changes in U.S. defense spending or appropriations;

12



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
Increased military or homeland defense activities;

 An
outbreak or escalation of national or international hostilities;


Terrorist attacks;


Sales of significant blocks of our common stock; and

 Our
ability to successfully renew our line of credit that is set to expire in June 2007.

Additionally, the stock market has
experienced extreme price and volume fluctuations in recent years that have significantly
affected the quoted prices of the securities of many companies, including companies in the
aerospace industry. The changes often appear to occur without regard to specific operating
performance. The price of our common stock could fluctuate based upon factors that have
little or nothing to do with our Company and these fluctuations could materially reduce
our stock price. When a stocks price continues to fluctuate significantly over a
sustained period, the risk of loss, including a total loss, is increased.

We do not plan to pay
cash dividends on our common stock in the foreseeable future

We intend to retain our earnings to
finance the development and expansion of our business. Additionally, covenants in our
long-term debt agreements impose significant restrictions on our ability to pay dividends.

Risks related to the
inherent limitations of internal control systems

The Company continues to take action
to assure compliance with the internal controls, disclosure controls and other
requirements of the Sarbanes-Oxley Act of 2002 and prudent industry practice. However, we
cannot guarantee that our internal controls and disclosure controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are
met. In addition, the design of a control system must reflect the fact that there are
resource constraints and the benefit of controls must be relative to their costs.

Due to the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. Further, controls
can be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management override of the controls.

The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, a control may be inadequate because of changes
in conditions or the degree of compliance with the policies or procedures may deteriorate.
Because of inherent limitations in a cost effective control system, misstatements due to
error or fraud may occur and not be detected.

|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.

|ITEM 2. | PROPERTIES.
|------- | -----------

The following table sets forth the
locations and general characteristics of the Companys principal properties:

|Location              | Approximate Number of Square Feetof Factory and Office Area
|--------------------- | -----------------------------------------------------------
|Clearwater, Florida   | 90,000                                                     
|Earlysville, Virginia | 53,000                                                     

13



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All of the Companys properties
are well maintained, fully occupied by the Company and suitable for the Companys
present level of production and usage. All locations operate one shift, five days a week.
The Earlysville, Virginia property was purchased from Teledyne Industries in April 1994.
The property consists of a 53,000 square foot manufacturing facility on approximately 12
acres of land. As of January 31, 2007, both the Clearwater, Florida property and the
Earlysville, Virginia property were mortgaged with Wachovia Bank N.A. (See Note 6,
Financial Statements).

|ITEM 3. | LEGAL PROCEEDINGS.
|------- | ------------------

From time to time, the Company may be
involved in certain claims and legal actions arising in the ordinary course of business.
In the opinion of management, at this time, there are no claims or legal actions that will
have a material adverse effect on the Companys financial position, results of
operations, or liquidity.

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

No matters were submitted to a vote
of stockholders of the Company during the fourth quarter of fiscal year 2007.

# SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF THE REGISTRANT.

Our executive officers as of February
1, 2007, are as follows:

David A. Baldini, age 57, has
been a director since 1995 and Chairman of the Board since June 2004. Mr. Baldini was with
Teledyne Industries Inc. from 1974 through 1993, when Teledyne Avionics was acquired by
Aerosonic and renamed Avionics Specialties, Inc. Mr. Baldini was named President of
Teledyne Avionics in 1990 and continues to serve in that capacity. Mr. Baldini was elected
President in November 2002 and subsequently was elevated to the position of Chief
Executive Officer. Mr. Baldini holds a B.S. in Economics from Hampden-Sydney College.

P. Mark
Perkins, age 50, has been Executive Vice President of Sales and           Marketing
since 1998 and a director since 1997. Mr. Perkins has over 18 years of
          experience in various segments of the aviation industry, most recently serving
          as Vice President of Marketing at Gulf Aerospace, Inc.

Gary E. Colbert, age 49,
joined Aerosonic as our Chief Financial Officer in January 2003, and subsequently was
named Executive Vice President, Secretary and Treasurer. Mr. Colbert has an MBA in Finance
and Marketing from Washington University, is a Certified Public Accountant licensed to
practice in the State of Florida and a Certified Management Accountant. Mr. Colbert has
extensive domestic and international accounting, financial and operational experience,
primarily in manufacturing industries. Prior to joining the Company, Mr. Colbert was a
partner with Tatum Partners, LLP.

Carmelo Russo, age 60, has
served as Aerosonics Executive Vice President of Operations since 2004 and Executive
Vice President of Production since 1997. Mr. Russo joined us in 1988 and served as a
member of the Board from 1999 until 2001. Mr. Russo has over 20 years of experience in the
aviation industry.

14



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# PART II

|ITEM 5. | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
|------- | -------------------------------------------------------------------------

# Market Information

Our common stock is listed on the
Amex under the symbol AIM. The range of high and low sales prices as
reported by the Amex for each of the quarters of the fiscal years ended January 31, 2007
and January 31, 2006 is as follows:

|               | COMMON STOCK MARKET PRICE
|-------------- | -------------------------
|
|               |                          
|Fourth quarter | $    8.45                
|Third quarter  | $    7.81                
|Second quarter | $  10.79                 
|First quarter  | $  11.30                 

|2006           | HIGH      | LOW      
|-------------- | --------- | ---------
|               |           |          
|Fourth quarter | $    8.00 | $    5.76
|Third quarter  | $    8.69 | $    5.68
|Second quarter | $    8.35 | $    3.80
|First quarter  | $    5.50 | $    3.75

# Holders

As of April 20, 2007, the
Companys outstanding shares of common stock were owned by approximately 1,365
stockholders of record.

# Dividends

During those same periods, no cash
dividends were paid. The Company does not anticipate or intend on paying a dividend in the
foreseeable future. Rather, the Company intends to retain its earnings to finance the
development and expansion of its business. Additionally, covenants in our long-term debt
documents impose significant restrictions on our ability to pay dividends. Any future
payment of any dividends on the Companys common stock and the amount thereof will
depend on the Companys earnings, financial requirements, compliance with the above
described covenants, and other factors deemed relevant by the Companys Board of
Directors.

# Recent Sales of
Unregistered Securities

None

# Issuer Repurchases

On March 17, 2006, the Company
repurchased 365,524 shares of its common stock from First Commercial Bank, an Alabama
state-chartered bank (FCB), pursuant to the terms of a Stock Repurchase
Agreement, dated March 17, 2006, by and between the Company and FCB for a total aggregate
purchase price of $2,467,287 in cash. The 365,524 repurchased shares represented
approximately 9.31% of the Companys 3,927,358 outstanding shares and were
repurchased at a price of $6.75 per share. The repurchase was financed entirely with cash
and has been recorded as treasury stock.

15



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# Securities Authorized
for Issuance Under Equity Compensation Plans

The following table sets forth
information with respect to the Companys equity compensation plans.

|Plan Category                          | Number of securities to be
issued upon exercise
of outstanding options,
warrants and rights | Weighted-average
exercise price of
outstanding options,
warrants and rights | Number of securities remaining
available for future issuance under
equity compensation plans (excluding
those reflected in column (a)
|-------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------
|                                       |                                                                                             |                                                                             |                                                                                                                                      
|
|Equity compensation plans approved by  |                                                                                             |                                                                             |                                                                                                                                      
|security holder                        | 83,220                                                                                      | $  7.25                                                                     | 116,780                                                                                                                              
|Equity compensation plans not approved
|by security holders                    | -----                                                                                       | -----                                                                       | -----                                                                                                                                
|                                       |                                                                                             |                                                                             |                                                                                                                                      
|Total                                  | 83,220                                                                                      | $  7.25                                                                     | 116,780                                                                                                                              
|                                       |                                                                                             |                                                                             |                                                                                                                                      

|ITEM 6. | SELECTED FINANCIAL DATA.
|------- | ------------------------

The following table represents
selected financial data for the five fiscal years ended January 31. The data set forth
below does not purport to be complete. It should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the Financial
Statements and Notes, appearing elsewhere in this document. The selected financial data as
of January 31, 2004 and 2003 and for each of the years then ended have been derived from
audited financial information not separately presented herein.

|                                             | Years Ended January 31,
|-------------------------------------------- | -----------------------
|
|Revenue                                      |                        
|Cost of sales                                |                        
|                                             |                        
|Gross margin                                 |                        
|Selling, general and administrative expenses |                        
|                                             |                        
|Operating income                             |                        
|Other income (expense)                       |                        
|                                             |                        
|Income before income taxes                   |                        
|Income tax benefit (expense)                 |                        
|                                             |                        
|Net income                                   |                        
|                                             |                        
|Basic and diluted earnings per share         |                        
|                                             |                        
|Total assets                                 |                        
|                                             |                        
|Long term debt (1)                           |                        
|                                             |                        

(1)    
          Long term debt is defined as all outstanding long term debt and capital leases,
          including current maturities.

16



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Managements Discussion and
Analysis of Results of Operations and Financial Condition (MD&A) is
provided as a supplement to the accompanying consolidated financial statements and
footnotes to help provide an understanding of our business, financial condition, changes
in financial condition and results of operations. The MD&A is organized as follows:

Overview.The
following discussion and analysis should be read in conjunction with our
          Financial Statements and Notes included elsewhere in this report. This
          discussion and analysis contains trend analysis and may contain forward-looking
          statements. These statements are based on the Companys current
          expectations and actual results may materially differ from such expectations.
          Among the factors that could cause actual results to vary are those described
in           this Overview section and in ITEM 1A. RISK
          FACTORS.

Results of Operations.This
section provides an analysis of results of operations for the three fiscal years presented
in the accompanying consolidated statements of operations.

Liquidity and Capital Resources.This section provides an analysis of cash flows, a discussion of outstanding debt and
commitments, both firm and contingent, that existed as of January 31, 2007, and trends,
demands, commitments, events and uncertainties with respect to the Companys ability
to finance its continuing operations.

Critical Accounting Policies.This section discusses the accounting policies (i) that require the Company to make
estimates that are highly uncertain at the time the estimate is made, (ii) for which a
different estimate which could have been made would have a material impact on the
Companys financial statements, (iii) that are the most important and pervasive
policies utilized, and (iv) that are the most sensitive to material change from external
factors. In addition, our significant accounting policies, including the critical
accounting policies, are summarized in Note 1 to the accompanying consolidated financial
statements.

# Overview

The trend in the aerospace industry
is toward digital cockpits as the aerospace industry moves away from mechanical cockpit
instrumentation that was the foundation of the Company. The Company has made considerable
progress in developing electronic instrumentation that is integrated into cockpit flight
management systems to replace mechanical instrumentation that the Company had previously
offered to its customers. The Company is currently developing digital-display
instrumentation to further replace mechanical instrumentation in its product line to
broaden its offering to customers who may want to upgrade their cockpits. The Company has
increased its research and development expenditures to facilitate this upgrade in its
product line as it anticipates further movement toward digital cockpits in the aerospace
industry, positioning itself in a market niche where it has the ability to offer both
digital and mechanical instrumentation. While the Company believes that this strategy
strengthens its position in the aerospace industry, it cannot guarantee that this strategy
will be successful.

An additional trend in the aerospace
industry is toward system integration by the OEMs. While the Company currently maintains
direct relationships with OEMs, it anticipates that OEM suppliers will need to align
themselves with integrators in order to preserve its position on future aircraft
platforms.

The Company also has significant
business tied to military programs. As a consequence, the Companys business can
fluctuate depending on government spending on military programs for which the Company
supplies its products. While the Company has been successful in obtaining contracts to
supply military needs in recent years, changes in government spending could have a
favorable or unfavorable impact on the Companys future military business.

Likewise, changes in the commercial
sector of the aerospace industry can have a favorable or unfavorable impact on the
Companys future business. While the Company has invested heavily in product
development for both funded and unfunded programs, OEM requirements may change such that
additional product development efforts will be necessary to maintain or increase the
Companys revenue in the aerospace industry.

As the Company endeavors to increase
its international presence, its exposure to international economic changes as well as
foreign currency risk may increase. While the Company may manage this exposure with
appropriate resources, it cannot guarantee that such risks will be fully mitigated.

17



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# RESULTS OF OPERATIONS

RevenuesRevenues
decreased $3,510,000, or 10%, to $31,253,000 for fiscal year 2007, from $34,763,000 for
fiscal year 2006. This decrease was largely driven by a reduction in revenue recognition
for the JSF development program of approximately $1,938,000 as that program nears
completion. In addition, shipments for spare parts decreased $2,497,000 as customers
curtailed orders for replacement parts for primarily military applications, while
revenues for non-recurring engineering projects declined approximately $330,000. These
reductions were partially offset by increase in repair revenues of approximately $494,000
and core product revenues of approximately $761,000.

Revenues increased $4,042,000, or
13%, to $34,763,000 for fiscal year 2006, from $30,721,000 for fiscal year 2005. This
increase was largely driven by shipments of IMFPs, particularly the initiation of IMFP
shipments to Korea Aerospace. In addition, volume for core instrument revenues increased
approximately $303,000 and recognition of revenue for the Joint Strike Fighter
(JSF) development program increased approximately $225,000.



Cost of SalesCost of sales decreased $2,138,000 or
9%, to $22,433,000, or 72% of revenues, for fiscal year 2007 from $24,571,000, or 71% of
revenues, for fiscal year 2006. This decrease in cost was primarily due to lower revenues.
Increases in manufacturing efficiencies yielded greater throughput that helped offset the
impact of reductions in high-margin spare parts sales, thus allowing margins to remain
relatively flat despite the reduction in revenue that was largely high-margin products. In
addition, continuing cost increases on the JSF program, due to changes in requirements as
described in the section entitled Revenue Recognition
below, adversely affected cost of sales and gross margin.

Cost of sales increased $1,917,000 or
8%, to $24,571,000, or 71% of revenues, for fiscal year 2006 from $22,654,000, or 73% of
revenues, for fiscal year 2005. This increase in cost was primarily due to higher
revenues, while increases in manufacturing efficiencies yielded greater throughput that
reduced overall costs as a percentage of revenues. However, margins on the JSF development
program were negative, as the rate of growth in JSF program costs incurred exceeded the
rate of growth in revenues recognized, partially offsetting the effect of increased
manufacturing throughput.

Negotiations with Lockheed Martin,
the customer for the JSF program, resulted in changes to the focus of remaining activities
related to product development for the JSF. This refocus of activities has resulted in a
change to the estimate to complete the project, and the Company now estimates its overall
loss on the project to be approximately $3,245,000. The Company continues to recognize
the losses throughout the program as revisions to the estimate are identified.

Selling, General and
Administrative Expenses Selling, general and administrative
(SG&A) expenses decreased $6,000, to $7,878,000, or 25% of
revenue, for fiscal year 2006 from $7,884,000, or 23% of revenue for fiscal year 2006. The
decrease was primarily attributable to reductions in research and development
(R&D) costs as the Company completed nearly all of its R&D activities
in-house. This decrease was partially offset by an increase in sales and marketing costs
due to a substantial increase in commission-based sales to customers in Asia as well as
increased travel costs as the Company pursued new business opportunities.

SG&A expenses decreased $112,000,
or 1%, to $7,884,000, or 23% of revenue, for fiscal year 2006 from $7,996,000, or 26% of
revenue for fiscal year 2005. The decrease was primarily attributable to reductions in
R&D costs as the transition of projects from outside contractors to internal
engineering staff was completed early in fiscal year 2005. This decrease was partially
offset by an increase in sales commissions due to a substantial increase in sales to
customers in Asia.

Interest Expense Net interest expense increased
$19,000, or 13%, to $170,000 in fiscal year 2007 from net interest expense of $151,000 in
fiscal year 2006. The net interest expense increase was due to higher average interest
rates during the year as well as lower average cash balances due a repurchase of some of
the Companys outstanding stock, offsetting the benefit of lower average outstanding
debt.

Net interest expense increased
$8,000, or 6%, to $151,000 in fiscal year 2006 from net interest expense of $143,000 in
fiscal year 2005. The net interest expense increase was due to higher average interest
rates during the year, offsetting the benefit of lower average outstanding debt as well as
interest income earned on accumulated excess cash.

18



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Other Income (Expense) 
Other income (expense) decreased
$15,000 to $37,000 in fiscal year 2007 from other income (expense) of $52,000 in fiscal
year 2006. The decrease in miscellaneous income from the prior year was primarily due to a
slightly lower incidence of asset sales.

Other income (expense) decreased
$467,000 to $52,000 in fiscal year 2006 from other income (expense) of $519,000 in fiscal
year 2005. Miscellaneous income in fiscal year 2006 was primarily provided by foreign
exchange gains on British Pound-denominated  transactions.              The
decrease in miscellaneous income from the prior year was due to the
          non-recurrence of substantial one-time items that included the receipt of an
          insurance settlement of approximately $997,000 in May 2004 related to the June
          2003 fire in the machine shop at the Companys Clearwater Instruments
          location as well as the receipt of net proceeds of approximately $267,000
          related to the sale of the Companys Engine Vibration Monitoring System
          (EVMS) product line inventory in February 2004. The sales
          price of the EVMS product line was approximately $626,000, and the costs
related           to this sale included inventory that was sold of approximately
$257,000,           inventory that was made obsolete by the sale of approximately $74,000
and legal           fees of approximately $28,000. The increases in other income, net
were partially           offset by the recognition of a liability of approximately
$800,000 related to           the anticipated settlement of the Companys class
action litigation.

Income Tax Expense Income tax expense was approximately
$244,000 for fiscal year 2007 as compared to a benefit of $341,000 for fiscal year 2006.
The effective tax rate increased to 30.2% in fiscal year 2007 from a benefit of 15.4% in
fiscal year 2006. The increase in the effective tax rate is primarily due to a substantial
reduction in the availability of extraterritorial income tax credits due to lower
international sales as well as a reduction in the amount of credits permitted for the
current tax year. The Company has recognized extraterritorial income tax benefits of
approximately $194,000 in fiscal year 2007 derived from non-U.S. sales activity for the
fiscal year ended January 31, 2007.

Income tax expense was a benefit of
$341,000 for fiscal year 2006 as compared to a benefit of $1,094,000 for fiscal year 2005.
The effective tax benefit decreased to 15.4% in fiscal year 2006 from 244.7% in fiscal
year 2005. The increase in the effective tax rate is primarily due to a substantial
increase in operating income when compared to the tax effect of the lower level of
operating income in fiscal year 2005 as well as the impact of the change in the deferred
tax valuation allowance recognized in fiscal year 2005. However, the Company has
recognized extraterritorial income tax benefits of approximately $805,000 in fiscal year
2006 derived from non-U.S. sales activity for the fiscal years ended January 31, 2003
through 2006.

Income Net income decreased $1,985,000 or
78% to $565,000, or 2% of revenue, for fiscal year 2007 from $2,550,000, or 7% of revenue,
for fiscal year 2007. Earnings per share decreased $0.49 to $0.16 for fiscal year 2007
from $0.65 in fiscal year 2006.

Net income increased $1,009,000 or
65% to $2,550,000, or 7% of revenue, for fiscal year 2006 from $1,541,000, or 5% of
revenue, for fiscal year 2005. Earnings per share increased $0.26 to $0.65 for fiscal year
2006 from $0.39 in fiscal year 2005.

Inflation The Company does not believe that
inflation has had a material effect on the Companys financial position or results of
operations. However, the Company cannot predict the future effects of inflation.

# Liquidity and Capital
Resources

Cash provided by operating activities
was $1,190,000 for fiscal year 2007 as compared to cash provided by operating activities
of $2,964,000 for fiscal year 2006. The decrease was primarily attributable to lower
progress billings to and collections from Lockheed for the JSF development program as well
as reductions in accounts payable due to lower manufacturing activity. In addition, the
receipts of federal income tax refunds were lower while accounts receivable increased.
Although revenues were lower, accounts receivable increased due to a substantial account
receivable from one customer that was resolved shortly after the end of the fiscal year.
The February 2007 collection for this customer was approximately $620,000. These factors
were offset by the impact of reductions in inventories and prepaid expenses.

19



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Cash provided by operating activities
was $2,964,000 for fiscal year 2006 as compared to cash provided by operating activities
of $477,000 for fiscal year 2005. The increase was primarily attributable to a substantial
increase in progress billings to Lockheed for the JSF development program as well as the
receipt of federal income tax refunds for the fiscal year ended January 31, 2003. Higher
volume resulted in the use of cash to fund increases in accounts receivable and
inventories to sustain the increased activity level. In addition, cash outflows for
prepaid expenses increased as the Company began utilizing its excess cash to pay its
insurance premiums, discontinuing the practice of utilizing premium financing for this
purpose.

Cash used in investing activities was
$323,000 for fiscal year 2007 as compared to $455,000 for fiscal year 2006. These
expenditures were primarily made to sustain existing business activity.

Cash used in investing activities was
$455,000 for fiscal year 2006 as compared to $534,000 for fiscal year 2005. These
expenditures were primarily made to sustain existing business activity.

Cash used in financing activities was
approximately $2,697,000 for fiscal year 2007 as compared to cash used of $243,000 in
fiscal year 2006. The majority of this cash usage was due to the repurchase of 365,524
shares of the Companys outstanding stock on March 17, 2006, while the remainder was
the result of paying down long-term debt as scheduled.

Cash used in financing activities was
approximately $243,000 for fiscal year 2006 as compared to cash used of $379,000 in fiscal
year 2005. This cash usage was entirely the result of paying down long-term debt as
scheduled.

To accommodate fluctuations in cash
flow, the Company has a $2.5 million revolving credit facility with Wachovia Bank, N.A.
(Wachovia), which is set to expire in June 2007. Although unused as of
January 31, 2007, this revolving credit facility remains fully available for the
Companys short-term financing needs. The Company intends to negotiate a new credit
line with Wachovia, and will endeavor to obtain terms and conditions that are at least
equal to if not better than the existing terms and conditions. However, the Company cannot
guarantee the outcome of these negotiations.

Note 6 to the Financial Statements
provides details of the Companys refinancing of its principal debt with Wachovia on
February 25, 2004 (the Wachovia Refinancing). The debt facilities
provided by the Wachovia Refinancing consist of a $3,000,000 term loan, the aforementioned
revolving credit facility and a $211,000 term loan. The proceeds from the Wachovia
Refinancing were used to repay all of the Companys debt obligations to First
Commercial Bank and SunTrust Bank N.A. The repayment of the Companys debt to First
Commercial Bank and SunTrust Bank, N.A. was at stated value, and therefore resulted in no
gain or loss.

The Companys long-term debt
agreements with Wachovia contain certain financial and other restrictive covenants,
including the requirement to maintain: (i) at all times, a ratio of total liabilities to
tangible net worth that does not exceed 1.30 to 1.00: and (ii) at the end of each fiscal
quarter, a cash flow coverage ratio (with regard to the ratio of cash flow to
the debt service) of at least 1.25 to 1.00.

The Wachovia loan agreement subjects
the Company to a number of additional covenants that, among other things, require the
Company to obtain consent from the lender prior to making a material change of management,
prior to making a guarantee of or otherwise becoming responsible for obligations of any
other person or entity or assuming or becoming liable for any debt, contingent or direct,
in excess of $100,000.

The Company is also required to
provide Wachovia with its interim (quarterly) financial statements within 45 days of the
close of each fiscal quarter and its annual financial statements within 90 days of the
close of each fiscal year.

As of January 31, 2007, the Company
was in compliance with all of its debt covenants.

The Companys ability to
maintain sufficient liquidity and compliance with covenants in fiscal year 2007 and beyond
is highly dependent upon achieving expected operating results.  Failure to achieve
expected operating results and compliance with covenants could have a material adverse
effect on the Companys liquidity and operations in fiscal year 2008 and beyond, and
could require implementation of further measures, including, but not limited to, deferring
planned capital expenditures, reducing discretionary spending, and, if necessary, selling
assets.

20



---

In addition, future capital
requirements depend on numerous factors, including research and development, expansion of
products lines, and other factors. Management believes that cash and cash equivalents,
together with the Companys cash flow from operations and current borrowing
arrangements, will provide for these necessary capital expenditures. Furthermore, the
Company may develop and introduce new or enhanced products, respond to competitive
pressures, invest or acquire businesses or technologies or respond to unanticipated
requirements or developments, which would require additional resources.

As shown in the table below, as of
January 31, 2007, there were liquidation payments that were due with respect to long-term
debt and other contractual obligations in fiscal year 2008 and beyond:

|                                   | Payments Due by Period
|---------------------------------- | ----------------------
|
|                                   |                       
|Purchase Commitments               |                       
|Long-Term Debt (1)                 |                       
|Operating Leases                   |                       
|                                   |                       
|Total Contractual Cash Obligations |                       
|                                   |                       

|(1) |  | The long term debt carries an interest obligation equal to the one-month LIBOR
               interest rate plus 300 basis points. As of January 31, 2007, the annualized
               amount of interest for the January 31, 2007 long-term debt balance of
               approximately $2,564,000 would be approximately $213,000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys ability to
maintain sufficient liquidity in fiscal year 2008 and beyond is highly dependent upon
achieving expected operating results and renewing its credit line. The Companys
credit facilities with Wachovia, as discussed above, include a $2.5 million credit line
that is set to expire on June 30, 2007. Failure to renew that line of credit or failure to
achieve expected operating results could have a material adverse effect on our liquidity
and our operations in fiscal year 2008, and could require us to consider further measures,
including, but not limited to, deferring planned capital expenditures, reducing
discretionary spending and, if necessary, selling assets.

# Acquisitions

Currently, the Company has no present
arrangements or understandings with respect to any acquisitions. Nevertheless, the Company
continues to monitor and evaluate acquisition opportunities. The Companys ability to
consummate any acquisitions, including a merger with another entity, is substantially
limited by covenants in the Companys long term debt documents.

# Environmental Matters

In accordance with a consent
agreement with the Department of Environmental Protection signed by the Company in 1993,
the Companys environmental consultant developed an interim remedial action plan (the
Remedial Plan) to contain and remediate certain soil and groundwater
contamination that had been discovered at the Companys Clearwater, Florida location.
The contamination was discovered after a series of site investigations that revealed
impacts to both shallow soils and groundwater that may have resulted from the accidental
loss of solvents and metalworking fluids as well as activities from neighboring property
over a period of 20 years or more. Although the exact cause of the contamination has never
been ascertained, the Company nonetheless accepted responsibility for remediating the
pollutants that were discovered on its property.

During 1997, the Company recorded a
provision of approximately $175,000 related to the estimated costs to be incurred under
the Remedial Plan. As of January 31, 2000, the Company had utilized all amounts originally
recorded in other accrued expenses, and the remediation phase of the Remedial
Plan had been completed.

During the third quarter of 2001,
management determined the post-remediation monitoring expense related to the environmental
cleanup of 1993 would cost approximately $125,000. This amount was accrued and expensed
during the third quarter of 2001. As of January 31, 2003, all existing reserve balances
had been utilized. Based upon an assessment by the Companys environmental
consultants, the Companys management has calculated the Companys expected
future expenditure for post-remediation monitoring expense and has established a reserve
of $70,000 for such expense as of January 31, 2007.

21



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The Company is now in a
monitoring-only stage of the remediation (where periodic measurements are taken by
environmental consultants to determine the effectiveness of the remediation). The existing
reserve contemplates the remaining expected expenses, based upon advice from the
Companys environmental consultants, as of January 31, 2007.

The following table is a recap of the
financial impact of the Companys environmental activities:

|                                     | Years ended January 31,
|------------------------------------ | -----------------------
|
|                                     |                        
|Beginning reserve balance            |                        
|Costs incurred                       |                        
|Replenish reserve for costs incurred |                        
|Increase in estimate                 |                        
|                                     |                        
|Ending reserve balance               |                        
|                                     |                        

# Critical Accounting
Policies

The discussion and analysis of our
financial condition and results of operations are based upon the accompanying consolidated
financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of those financial statements and
this Annual Report on Form 10-K requires us to make estimates and judgments that affect
the reported amount of assets and liabilities, revenues and expenses, and related
disclosure items, including disclosure of contingent assets and liabilities, at the date
of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions, and as a result of trends and uncertainties
identified above under Results of Operationsand Liquidity and
Capital Resources and in ITEM 1A. RISK FACTORS. Further, such
differences could be material.

Set forth below is a discussion of
the Companys critical accounting policies. The Company considers critical accounting
policies to be those (i) that require the Company to make estimates that are highly
uncertain at the time the estimate is made, (ii) for which a different estimate which
could have been made would have a material impact on the Companys financial
statements, (iii) that are the most important and pervasive policies utilized, and (iv)
that are the most sensitive to material change from external factors. Additionally, the
policies discussed below are critical to an understanding of the financial statements
because their application places the most significant demands on managements
judgment, with financial reporting results relying on estimates about the effect of
matters that are highly uncertain. Specific risks for these critical accounting policies
are described in the following paragraphs. The impact and any associated risks related to
these policies on business operations is discussed throughout this MD&A where such
policies affect reported and expected financial results.

For a detailed discussion regarding
the application of these and other accounting policies, see Note 1 to the accompanying
consolidated financial statements. Senior management has discussed the development and
selection of the critical accounting estimates and the related disclosure included herein
with the Audit Committee of the Board of Directors.

Revenue Recognition
The Company manufactures most of its
products on a build-to-order basis and ships products upon completion. The Company has a
policy of strict adherence to the provisions of SEC Staff Accounting Bulletin 104
(SAB 104) in order to accurately state its revenues in each accounting
period. For certain situations, some judgment is required, but most sales have clear
revenue recognition criteria.

Revenue sources for product sales are
largely from sales to commercial and government customers. The majority of customer sales
terms are F.O.B. origin, although some customer terms are F.O.B. destination. For those
customers where terms are origin, revenue is generally recognized upon
shipment, unless additional prevailing factors would not be in accordance with the revenue
recognition requirements of SAB 104. For those customers whose terms are
destination, revenue is generally not recognized until goods arrive at the
customers premises and all other revenue recognition criteria are met.

22



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The Company experiences a certain
degree of sales returns that varies over time. Generally, such returns occur within no
more than 90 days after shipment by the Company to its customers. In accordance with
Statement of Financial Accounting Standards No. 48 (SFAS48) Revenue
Recognition When Right of Return Exists, the Company is able to make a reasonable
estimation of expected sales returns based upon history and as contemplated by the
requirements of SFAS 48. For example, sales returns may occur if delivery schedules are
changed by customers after products have shipped or if products are received by customers
but do not meet specifications. In such cases, customers may choose to return products to
the Company. Absent such circumstances, customers do not have a right to return products
if the Company has met all contractual obligations. Previously, the Company had
established a sales return reserve that approximated an expected level of sales returns
over a 90-day period. The Companys experience with respect to sales returns for the
fiscal years ended January 31, 2007 and 2006 has changed such that a reserve for sales
returns has been provided due to experience and the reasonable possibility that certain
customers will continue with such chargebacks.

From time to time, the Company will
jointly develop products with its customers for future applications. In such
circumstances, the Company recognizes revenue on a percentage of completion basis,
measured by the percentage of costs incurred to date to estimated total costs for the
contract. This method is used because management considers expended costs to be the best
available measure of progress on the contracts. The percentage of completion contract
costs include direct labor, material, subcontracting costs, test facilities, and other
indirect costs as allocated. Other operating costs are charged to expense as incurred.
During fiscal 2003, the Company secured one long-term fixed-price contract for the
development of instrumentation for the JSF program. Costs and estimated earnings on this
contract as of January 31, 2007 and 2006 are as follows:

|                                                  | January 31, 2007 |  | January 31, 2006 |            
|------------------------------------------------- | ---------------- |  | ---------------- | -----------
|Costs incurred to date                            |                  |  | $                | 18,072,000 
|Estimated losses                                  |                  |  |                  | (3,245,000 
|                                                  |                  |  |                  |            
|                                                  |                  |  |                  | 14,827,000 
|Less billings to date                             |                  |  |                  | (14,927,000
|                                                  |                  |  |                  |            
|Costs less estimated losses in excess of billings |                  |  |                  |            
|                                                  |                  |  |                 
|Billings in excess of costs less estimated losses |                  |  | $                | (100,000   
|                                                  |                  |  |                 

The billings in excess of cost less
estimated losses are included in accrued expenses and other liabilities on the balance
sheets.

Further discussions with the
Companys customer for the JSF program have resulted in product modifications that
include making the product design more responsive to conditions as well as a change to
accommodate differing system needs. Consequently, the Company has revised its estimate at
completion for the JSF program. The estimated costs of the project increased by
approximately $432,000 and, as a result, estimated total program costs exceed estimated
program revenues by approximately $3,245,000. The Company recognized this additional loss
in its financial statements for the fiscal year ended January 31, 2007. These design
changes are in addition to many issues encountered throughout the year related to testing
and verification of the design change, resulting in increased expenditures for the
program. The Company recognized these additional losses in fiscal year 2007 as the
likelihood of incurring those losses were identified.

The JSF program is a customer-funded
product development program that is presently expected to generate total project revenues
of approximately $16,293,000. As of January 31, 2007, based on project progress, the
Company has recognized revenues of approximately $14,827,000 for the JSF program. The JSF
program represents a significant investment in the Companys future product
development capabilities. While Company management is expending considerable effort to
control costs and complete the development process on schedule, the key benefit to the
program is the substantial revenue that the Company may earn if it is awarded the
competitive production contract for the JSF. The production contract is expected to be
awarded near the conclusion of the development program, and is presently expected to occur
in late 2007. There is no assurance that production will begin after the completion of the
development program or that the Company will be awarded the production contract.

Occasionally the Company enters into
research and development contracts with customers. The Company accounts for such contracts
on the basis of the lesser of non-refundable cash versus percentage of completion.

23



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Accounts Receivable
Allowance for Doubtful Accounts and Credit Losses The Company continuously evaluates
its customers and provides reserves for anticipated credit losses as soon as collection
becomes compromised. The Company does maintain a limited reserve in anticipation that
smaller accounts may become a collection issue, which occurs from time to time based on
historical experience. However, most of the Companys customers are financially sound
and the Companys history of bad debts is relatively low. While credit losses have
historically been within expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that have been
experienced in the past. Measurement of such losses requires consideration of historical
loss experience, including the need to adjust for current conditions, and judgments about
the probable effects of relevant observable data, including present economic conditions
such as delinquency rates and financial health of specific customers.

Provisions for Excess and
Obsolete Inventory Losses and Residual Value Losses The Company values inventory at the lower
of cost (using a method that approximates the first-in, first-out method) or net
realizable value. Reviews of inventory quantities on hand have been conducted to determine
if usage or sales history supports maintaining inventory values at full cost or if it has
instead become necessary to record a provision for slow moving, excess and obsolete
inventory based primarily on estimated forecasts of product demand and production
requirements for the subsequent twelve months. Estimates of future product demand may
prove to be inaccurate, in which case the Company may understate or overstate the
provision required for excess and obsolete inventory. Although the Company endeavors to
ensure the accuracy of forecasts of future product demand, any significant unanticipated
changes in demand or technological developments could have a significant impact on the
value of inventory and consequently reported operating results.

Work In Process
Inventories Management employs certain methods to
estimate the value of work in process inventories for financial reporting purposes.
Company practice has been to conduct cycle counts of inventory at its Clearwater, Florida
and Earlysville, Virginia operations throughout the year. Generally, for items that are in
process at the end of a fiscal year, management will make an estimate during the cycle
counting process regarding the percentage of completion of such items in order to
accurately reflect costs incurred to date on the production of the items that are still in
process. These estimates are affected by the nature of the operation at which the items
are located at the time a physical inventory is conducted, and are subject to judgment.
This practice was employed for the fiscal years ended January 31, 2007 and 2006.

Manufacturing Overhead
Cost Application The Company establishes its
inventoriable cost of manufacturing overhead by calculating its overhead costs as a
percentage of direct labor and applying that percentage to direct labor that has been
charged to inventory on a twelve month rolling average basis. This application percentage
is reviewed at least quarterly and is adjusted at least annually.

Deferred Tax Asset
Valuation AllowanceThe Company accounts for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Under this method, deferred tax
liabilities and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. A valuation
allowance is provided against the future benefit of deferred tax assets if it is
determined that it is more likely than not that the future tax benefits associated with
the deferred tax asset will not be realized.

Long-Lived AssetsThe useful lives of property, plant
and equipment for purposes of computing depreciation are:

|                           |            
|-------------------------- | -----------
|Land Improvements          | 15-20 Years
|Buildings and improvements | 25-30 Years
|Machinery and equipment    | 3-10 Years 
|Patterns, dies, and tools  | 3-5 Years  
|Furniture and fixtures     | 5-10 Years 

Management periodically evaluates
long-lived assets for potential impairment and will record an impairment charge whenever
events or changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. As of January 31, 2007 and 2006, management does not believe that any
assets are impaired.

24



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The Company will capitalize
production costs for computer software that is to be utilized as an integral part of a
product when both (a) technological feasibility is established for the software and (b)
all research and development activities for the other components of the product have been
completed. Amortization is charged to expense at the greater of the expected unit sales
versus units sold or the straight line method for a period of three years from the date
the product becomes available for general release to customers.

Other Accounts Affected
by Management Estimates

From time to time, management will
utilize estimates when preparing the financial statements of the Company. Such areas
include amortization and other accruals.

The Company has established a
provision for warranty claims in anticipation of a certain degree of warranty activity,
which generally is a minimal expense. For the fiscal years ended January 31, 2007 and
2006, the Company did experience one-time warranty costs related to specific applications
for its AOA transmitter for one customer in 2007 and its IMFP for another customer in
2006. The provision, which is included in accrued expenses and other liabilities on the
balance sheet, is based upon recent warranty experience excluding such one-time,
non-recurring items. The Companys warranty experience is as follows:

|                                     | For the years ended January 31, | 
|------------------------------------ | ------------------------------- | 
|
|                                     |                                 | 
|Beginning reserve balance            |                                 | 
|Costs incurred                       |                                 | 
|Replenish reserve for costs incurred |                                 | 
|Increase (decrease) in estimate.     |                                 | 
|                                     |                                 | 
|Ending reserve balance               |                                 | 
|                                     |                                 | 
|AOA one-time expense                 |                                 | 
|IMFP one-time expense                |                                 | 

The following table summarizes
significant areas which require management estimates:

|                                               | As of January 31, | 
|---------------------------------------------- | ----------------- | 
|
|                                               |                   | 
|Allowance for doubtful accounts                |                   | 
|Reserve for obsolete and slow moving inventory |                   | 
|Warranty reserve                               |                   | 
|Environmental reserve                          |                   | 
|Reserve for sales returns                      |                   | 
|                                               |                   | 
|                                               |                   | 
|                                               |                   | 

In addition to the items noted in the
above table, management uses estimates in calculating the percentage of completion of the
JSF program. These estimates have a significant impact on Costs and estimated losses
in excess of billings included in the Companys consolidated balance sheets.

Management also uses estimates in the
calculation of depreciation and amortization on its property, plant and equipment and loan
costs. The following table summarizes depreciation and amortization expense:

|             | For the year ended January 31, | 
|------------ | ------------------------------ | 
|
|             |                                | 
|Depreciation |                                | 
|Amortization |                                | 
|             |                                | 
|             |                                | 
|             |                                | 

25



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Recent Accounting
Pronouncements In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), which clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position in accordance with
this Interpretation is a two-step process. The first step is recognition: The enterprise
determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on
the technical merits of the position. In evaluating whether a tax position has met the
more-likely-than-not recognition threshold, the enterprise should presume that the
position will be examined by the appropriate taxing authority that has full knowledge of
all relevant information. The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount of benefit
to recognize in the financial statements. The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. This Interpretation is effective for fiscal years beginning after December 15,
2006. As of the date of issue of this Annual Report on Form 10-K, the Company is still
evaluating the impact of FIN 48 on its future results of operations. The Company plans to
adopt FIN 48 beginning with its first interim reporting period for fiscal year 2008.

|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------

The primary market risk exposure for
the Company is interest rate risk. The Companys existing debt facilities require the
payment of interest at a variable rate equal to one-month LIBOR plus 300 basis points.
Consequently, the Company has an exposure to fluctuations in the underlying interest rate
for its debt facilities. As an example, the prevailing rate for one-month LIBOR at January
31, 2007 was 5.32%. Therefore, the Companys borrowing cost under its existing debt
facilities as of January 31, 2007 was 8.32%. For each $1.0 million of borrowing at the
January 31, 2007 one-month LIBOR interest rate, the Companys annual interest cost
would be $83,200. Significant fluctuations in the underlying LIBOR interest rate index
could have a material impact on the Companys financial statements. Presently, the
Company does not utilize any financial instruments to manage this interest rate risk.

The Company also has a market risk
exposure to fluctuations in foreign exchange rates. The Company has a limited number of
purchase and sale transactions that are denominated in British Pounds. The Companys
strategy in managing this risk exposure is to match the timing of British
Pound-denominated cash inflows and outflows. British Pound-denominated cash inflows
generally exceed outflows, and the excess balance, if nominal, is maintained in a British
Pound-denominated bank account. Substantial amounts of foreign currency are otherwise
immediately converted to U.S. Dollars when received.

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- | --------------------------------------------

The consolidated financial statements
and supplementary data required by Item 8 are listed in the index beginning on page F-1
and are included in this Form 10-K.

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------

None, as of the date of this report.

|ITEM 9A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

# Disclosure Controls and
Procedures

As required by SEC Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended (the Exchange
Act), the Companys management, Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based upon their
evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures (as defined in SEC
Rule 13a-15(f)), were effective in timely making known to them material information
relating to the Company (including its subsidiary Avionics) required to be disclosed in
the Companys reports under the Exchange Act.

26



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# Changes in Internal
Control Over Financial Reporting

As required by SEC Rule 13a-15(d),
the Companys management, including the Chief Executive Officer and the Chief
Financial Officer, also conducted an evaluation of the Companys internal control
over financial reporting to determine whether any changes occurred during the fourth
fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. Based upon that
evaluation, there has been no such change during the fourth fiscal quarter.

It should be noted that any system of
controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design
of any control system is based in part upon certain assumptions about the likelihood of
future events.

|ITEM 9B. | OTHER INFORMATION.
|-------- | ------------------

None, as of the date of this report.

27



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# PART III

|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------

Information with respect to Directors
and certain Executive Officers required by Item 10 shall be included in the section
captioned Election of Directors, appearing in the definitive Proxy Statement
(the Proxy Statement) for the 2007 Annual Meeting of
Stockholders and that information is incorporated herein by reference. Certain
information regarding Executive Officers of the Company may be found in the section
captioned Information Regarding Executive Officers in the Proxy Statement. In
addition, information for compliance with 16(a) of the Exchange Act may be found in the
section captioned 16(a) Beneficial Ownership Reporting Compliance appearing in
the proxy statement.

We have adopted a Code of Conduct
that includes a code of ethics that applies to all of our employees and directors
(including our principal executive officer and our principal finance and accounting
officer). This Code of Conduct is posted on our website and is available for review at
www.aerosonic.com/conduct.htm. We intend to disclose on our website any amendments to, or
waivers of, the Code of Conduct covering our CEO and/or CFO promptly following the date of
such amendments or waivers. A copy of the Code of Conduct may be obtained upon request,
without charge, by contacting our Chief Financial Officer at 727.461.3000 or by writing to
us at Aerosonic, 1212 N. Hercules Avenue, Clearwater, FL, 33765 Attn: Chief Financial
Officer. The information contained or connected to our website is not incorporated by
reference into this annual report on Form 10-K and should not be considered part of this
or any reported filed with the SEC.

No family relationships exist among
any of the executive officers, directors or director nominees.

A listing of our executive officers as
of April 20, 2007 is included in Part I, and that information is incorporated by reference
herein.

There have been no material changes
to the procedures by which security holders may recommend nominees to our board of
directors.

The information required by Item
407(d)(4) and (d)(5) of Regulation S-K will be included under the caption Audit
Committee in the section entitled Board Membership and Director
Independence in the Proxy Statement, and that information is incorporated by
reference herein.

|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by Item 402
of Regulation S-K will be included under the captions Compensation of Executive
Officers and Director Compensation in the Proxy Statement, and that
information is incorporated by reference herein.

The information required by Item
407(e)(4) and (e)(5) of Regulation S-K will be included under the captions
Compensation Committee Interlocks and Insider Participation and
Compensation Committee Report in the Proxy Statement, and that information is
incorporated by reference herein.

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by
Item 403 of Regulation S-K will be included under the captions Security
Ownership of Directors and Executive Officers and Security Ownership of More
Than 5% Shareholders in the 2007 Proxy Statement, and that information is
incorporated by reference herein.

We currently maintain one equity
compensation plan that provides for the issuance of common stock to officers and other
employees, directors and consultants. This compensation plan was approved by our
shareholders. The following table sets forth information regarding outstanding options and
shares available for future issuance under these plans as of January 31, 2007:

28



---

|Plan Category                                          | Number of shares to be issued
upon exercise of outstanding
options (a) | Weighted-average
exercise price of
outstanding options | Number of securities
remaining available for
future issuance under equity
compensation
plans (excluding
shares reflected in column
(a))
|------------------------------------------------------ | ---------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------
|
|Stock options                                          |                                                                        |                                                        |                                                                                                                                        
|Deferred compensation                                  |                                                                        |                                                        |                                                                                                                                        
|Other stock units                                      |                                                                        |                                                        |                                                                                                                                        
|Equity compensation plans not approved by shareholders |                                                                        |                                                        |                                                                                                                                        
|                                                       |                                                                        |                                                        |                                                                                                                                        
|Total                                                  |                                                                        |                                                        |                                                                                                                                        
|                                                       |                                                                        |                                                        |                                                                                                                                        

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

Aerosonic has maintained a
long-standing business relationship with the Commercial Infrared division of Raytheon
Company. In late 2004, L-3 Communications Corporation acquired this business from Raytheon
and renamed it L-3 Integrated Systems Group. Aerosonic has continued its business
relationship with the Integrated Systems Group. During fiscal year 2006 and fiscal year
2007, sales to this division amounted to $250,000 and $96,000, respectively. These sales
were made on terms at least as favorable as would have been available to other parties and
intends to continue its dealings with the Infrared Products division going forward on
similar terms. Based on the pertinent facts and circumstances and taking into
consideration all applicable laws, regulations and stock exchange listing requirements,
the Board has determined that this ongoing relationship is not material and does not
affect the independence of Messrs. McGill and Whytas.

|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

Tedder, James, Worden &
Associates P.A. (Tedder James) served as our independent auditors for
the fiscal years ended January 31, 2007 and 2006 upon recommendation by the Audit
Committee of the Board of Directors. We have selected Tedder James to be our independent
auditors for the fiscal year ending January 31, 2008. Representatives from Tedder James
are expected to be present at the meeting, will have the opportunity to make a statement
if they desire to do so and are expected to be available to respond to appropriate
inquiries.

The following table sets forth the
aggregate fees billed by Tedder James to us for the fiscal years ended January 31, 2007
and 2006 for audit and other professional services.

|                   | Fiscal year ended January 31, | 
|------------------ | ----------------------------- | 
|                   |                               | 
|
|                   |                               | 
|Audit Fees         |                               | 
|Audit-Related Fees |                               | 
|Tax Fees           |                               | 
|All Other Fees     |                               | 
|                   |                               | 
|Total Fees         |                               | 
|                   |                               | 

|(1) | For the fiscal year ended January 31, 2007, the fees include current year
          billings and expected future billings from Tedder James.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

The terms Audit Fees,
Audit-Related Fees, Tax Fees, and All Other Fees in
the above table, shall have the following meanings:

29



---

Audit Fees. Audit Fees, which
were approximately $192,000 for fiscal year 2007 and approximately $190,000 for fiscal
year 2006, are fees billed to us for professional services rendered for the audit of our
annual financial statements and review of financial statements included in our Forms 10-Q,
and services that are normally provided by Tedder James in connection with statutory and
regulatory filings or engagements. The Audit Fees for fiscal year 2007 were billed for the
audit of our financial statements for fiscal year 2007. The Audit Fees for fiscal year
2006 were billed for the audit of our financial statements for fiscal year 2006.

Audit-Related Fees.
Audit-Related Fees, which were approximately $13,000 in fiscal year 2007 and approximately
$3,000 in fiscal year 2006, are fees billed to the Company for products and services
provided to the Company and not included in the foregoing categories. These fees are for
the audit of the Companys 401(k) plan.

Tax Fees. Tax Fees, which were
approximately $45,000 in fiscal year 2007 and approximately $60,000 in fiscal year 2006,
are fees billed to the Company for professional services rendered for tax compliance, tax
advice and tax planning.

All Other Fees. All Other
Fees, which were $0 in fiscal years 2007 and 2006, are fees billed to the Company for
products and services provided to the Company and not included in the foregoing
categories.

The Audit Committee has considered
whether the provision of the services identified under Audit-Related Fees, Tax Fees and
All Other Fees is compatible with maintaining the independence of our principal
accountants, and determined that the provision of such services is compatible with such
accountants independence.

The engagement of our independent
auditors and any non-audit services to be provided thereby shall be pre-approved by the
Audit Committee or approved pursuant to policies and procedures established by the Audit
Committee.

# PART IV

|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

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

| | 1. |  | The
financial statements and financial statement schedules listed in the index           to
Financial Statements and Schedules following the signature pages hereof.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | Exhibits
| | -- |  | --------

| | Exhibit No. |  | Description of Exhibit
| | ----------- |  | ----------------------

| |  | 3.1 |  | Restated
Certificate of Incorporation of Instrument Technology Corporation, filed on January 12,
1970, incorporated by reference to Exhibit 3.1 of the Companys Annual Report on
Form 10-K for the year ended January 31, 2003, filed on October 31, 2003.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.2 |  | Certificate
of Amendment to the Articles of Incorporation, changing the name Instrument Technology
Corporation to Aerosonic Corporation, filed on September 21, 1970, incorporated by
reference to Exhibit 3.3 of the Companys Annual Report on Form 10-K for the year
ended January 31, 2003, filed on October 31, 2003.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.3 |  | Certificate
of Amendment to the Articles of Incorporation of Aerosonic Corporation, filed on August
6, 1971, incorporated by reference to Exhibit 3.4 of the Companys Annual Report on
Form 10-K for the year ended January 31, 2003, filed on October 31, 2003.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30



---

| |  | 3.4 |  | Certificate
of Reduction of Capital of Aerosonic Corporation, filed on June 5, 1978, incorporated by
reference to Exhibit 3.5 of the Companys Annual Report on Form 10-K for the year
ended January 31, 2003, filed on October 31, 2003.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.5 |  | Certificate
of Amendment to Articles of Incorporation of Aerosonic Corporation, filed on February 12,
1993, incorporated by reference to Exhibit 3.6 of the Companys Annual Report on
Form 10-K for the year ended January 31, 2003, filed on October 31, 2003.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.6 |  | Amended
and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.8 of the
Companys Annual Report on Form 10-K for the year ended January 31, 2005, filed on
April 18, 2005..
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.1 |  | Amended
and Restated Employment Agreement, dated November 28, 2005, between Aerosonic Corporation
and David A. Baldini, incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q for the quarter ended October 28, 2005, filed on November
28, 2005.
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.2 |  | Amended
and Restated Employment Agreement, dated November 28, 2005, between Aerosonic Corporation
and Gary E. Colbert, incorporated by reference to Exhibit 10.2 of the Companys
Quarterly Report on Form 10-Q for the quarter ended October 28, 2005, filed on November
28, 2005.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.3 |  | Amended
and Restated Employment Agreement, dated November 28, 2005, between Aerosonic Corporation
and P. Mark Perkins, incorporated by reference to Exhibit 10.3 of the Companys
Quarterly Report on Form 10-Q for the quarter ended October 28, 2005, filed on November
28, 2005.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.4 |  | Amended
and Restated Employment Agreement, dated November 28, 2005, between Aerosonic Corporation
and Carmelo Russo, incorporated by reference to Exhibit 10.4 of the Companys
Quarterly Report on Form 10-Q for the quarter ended October 28, 2005, filed on November
28, 2005.
| |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.6 |  | Loan
Agreement, dated February 24, 2004, between Aerosonic Corporation and Wachovia Bank N.A.,
incorporated by reference to Exhibit 10.31 of the Companys Annual Report on Form
10-K for the year ended January 31, 2004, filed on April 6, 2004.
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.7 |  | Promissory
 Note,  dated February 16, 2004,  issued by Aerosonic  Corporation and Avionics
 Specialties,                                Inc. to Wachovia Bank N.A.,  incorporated
 by reference to Exhibit 10.32 of the Company's  Annual Report
                               on Form 10-K for the year ended January 31, 2004, filed on
April 6, 2004.
| |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.8 |  | Term
 Promissory  Note,  dated  February  16,  2004,  issued  by  Aerosonic   Corporation  and
 Avionics                                Specialties,  Inc. to Wachovia  Bank N.A.,
 incorporated  by reference to Exhibit 10.33 of the Company's
                               Annual Report on Form 10-K for the year ended January 31,
2004, filed on April 6, 2004.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.9 |  | Revolving
 Promissory  Note,  dated  February 16, 2004,  issued by  Aerosonic  Corporation  and
Avionics                                Specialties,  Inc. to Wachovia  Bank N.A.,
 incorporated  by reference to Exhibit 10.34 of the Company's
                               Annual Report on Form 10-K for the year ended January 31,
2004, filed on April 6, 2004.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.10 |  | Mortgage,
Assignment of Rents and Security Agreement dated February 24, 2004 between Aerosonic
Corporation and Wachovia Bank, N.A., incorporated by reference to Exhibit 10.35 of the
Companys Annual Report on Form 10-K for the year ended January 31, 2004, filed on
April 6, 2004.
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31



---

| |  | 10.11 |  | Deed
of Trust, Assignment of Rents and Security Agreement dated February 24, 2004 by and among
Avionics Specialties, Inc. TRSTE, Inc. and Wachovia Bank, N.A., incorporated by reference
to Exhibit 10.36 of the Companys Annual Report on Form 10-K for the year ended
January 31, 2004, filed on April 6, 2004.
| |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.12 |  | Aerosonic
Corporation 2004 Stock Incentive Plan, incorporated by reference to Appendix D to the
Companys Proxy Statement for the July 14, 2004 Annual Meeting of Shareholders,
filed on June 15, 2004
| |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 21 |  | Subsidiaries
of the Registrant, as of January 31, 2007
| |  | -- |  | ------------------------------------------------------

| |  | 23 |  | Consent
of Independent Registered Certified Public Accounting Firm
| |  | -- |  | ------------------------------------------------------------------

| |  | 24 |  | Power
of Attorney, incorporated into the Signature Page hereto.
| |  | -- |  | ---------------------------------------------------------------

| |  | 31.1 |  | Section
302 Certifications
| |  | ---- |  | --------------------------

| |  | 31.2 |  | Section
302 Certifications
| |  | ---- |  | --------------------------

| |  | 32.1 |  | Section
906 Certifications
| |  | ---- |  | --------------------------

| |  | 32.2 |  | Section
906 Certifications
| |  | ---- |  | --------------------------

32



---

# SIGNATURES

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

AEROSONIC CORPORATION
 (Registrant)

|    |                                       |                  
|--- | ------------------------------------- | -----------------
|By: | /s/ David A. Baldini                  | Date: May 1, 2007
|    | Chairman of the Board,               
|    | President and Chief Executive Officer

# Power of Attorney

Each person whose signature appears
below authorizes David A. Baldini and Gary E. Colbert, or either one of them, each of whom
may act without joinder of the others, to execute in the name of each such person who is
then an officer or director of the Registrant and to file any amendments to this annual
report on Form 10-K necessary or advisable to enable the Registrant to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission in respect thereof, which amendments may make
such changes in such report as such attorney-in-fact may deem appropriate.

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

|                                                      |                  
|----------------------------------------------------- | -----------------
|/s/ David A. Baldini                                  |                  
|David. A. Baldini                                    
|Chairman of the Board,                                | Date: May 1, 2007
|President and Chief Executive Officer                
|                                                     
|                                                     
|/s/ Gary E. Colbert                                  
|Gary E. Colbert                                      
|Executive Vice President and Chief Financial Officer, | Date: May 1, 2007
|Treasurer and Secretary                              
|                                                     
|                                                     
|/s/ P. Mark Perkins                                  
|P. Mark Perkins                                       | Date: May 1, 2007
|Executive Vice President and Director                
|                                                     
|                                                     
|/s/ Robert J. McGill                                  | Date: May 1, 2007
|Robert J. McGill, Director                           
|                                                     
|                                                     
|/s/ Donald Russell                                    | Date: May 1, 2007
|Donald Russell, Director                             
|                                                     
|                                                     
|/s/ Thomas E. Whytas Jr.                              | Date: May 1, 2007
|Thomas E. Whytas, Jr., Director                      

33

---

# AEROSONIC CORPORATION
AND SUBSIDIARY

|Table of Contents                                                                                     | Page(s)   
|----------------------------------------------------------------------------------------------------- | ----------
|                                                                                                     
|Report of Independent Registered Certified Public Accounting Firm                                     | F-2       
|                                                                                                     
|Consolidated Financial Statements:                                                                   
|                                                                                                     
|Consolidated Balance Sheets-- January 31, 2007 and 2006                                               | F-3       
|                                                                                                     
|Consolidated Statements of Operations-- For the Years Ended January 31, 2007, 2006 and 2005           | F-4       
|                                                                                                     
|Consolidated Statements of Stockholders' Equity-- For the Years Ended January 31, 2007, 2006 and 2005 | F-5       
|                                                                                                     
|Consolidated Statements of Cash Flows-- For the Years Ended January 31, 2007, 2006 and 2005           | F-6       
|                                                                                                     
|Notes to Consolidated Financial Statements                                                            | F-7 - F-19
|                                                                                                     
|Supplemental Schedule of Valuation Accounts                                                           | F-20      



---

# REPORT OF INDEPENDENT REGISTERED
CERTIFIED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Aerosonic Corporation:

We have audited the accompanying
consolidated balance sheets of Aerosonic Corporation and subsidiary as of January 31, 2007
and 2006, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended January 31, 2007.
Our audits also include the financial statement schedule of Aerosonic Corporation listed in
Item 15(a). These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Aerosonic Corporation and subsidiary as of January 31, 2007 and
2006, and the results of their operations and their cash flows for each of the three years
in the period ended January 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

/s/ TEDDER, JAMES, WORDEN
& ASSOCIATES, P.A.

Orlando, Florida
April 30, 2007

F-2



---

# AEROSONIC CORPORATION
AND SUBSIDIARY CONSOLIDATED BALANCE
SHEETSJanuary 31, 2007 and
2006

|                                                                                  | 2007 |  | 2006 |           
|--------------------------------------------------------------------------------- | ---- |  | ---- | ----------
|ASSETS                                                                            |      |  |      |           
|Current Assets:                                                                   |      | 
|Cash and cash equivalents                                                         |      |  | $    | 1,276,000 
|Receivables net of allowance for doubtful accounts of $10,000 and $10,000         |      |  |      | 5,214,000 
|Income taxes receivable                                                           |      |  |      | 13,000    
|Costs less estimated losses in excess of billings                                 |      |  |      | - -       
|Inventories                                                                       |      |  |      | 5,809,000 
|Prepaid expenses                                                                  |      |  |      | 332,000   
|Deferred income taxes                                                             |      |  |      | 1,030,000 
|                                                                                  |      |  |      |           
|Total current assets                                                              |      |  |      | 13,674,000
|                                                                                  |      |  |      |           
|Property, plant and equipment, net                                                |      |  |      | 3,340,000 
|Deferred income taxes                                                             |      |  |      | 656,000   
|Other assets, net                                                                 |      |  |      | 65,000    
|                                                                                  |      |  |      |           
|Total Assets                                                                      |      |  | $    | 17,735,000
|                                                                                  |      |  |      |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                              |      | 
|Current liabilities:                                                              |      | 
|Long-term debt and notes payable due within one year                              |      |  | $    | 230,000   
|Accounts payable, trade                                                           |      |  |      | 1,102,000 
|Compensation and benefits                                                         |      |  |      | 933,000   
|Income taxes payable                                                              |      |  |      | 29,000    
|Accrued expenses and other liabilities                                            |      |  |      | 1,692,000 
|                                                                                  |      |  |      |           
|Total current liabilities                                                         |      |  |      | 3,986,000 
|Long term debt and notes payable due after one year                               |      |  |      | 2,334,000 
|Deferred income taxes                                                             |      |  |      | 6,000     
|Other liabilities                                                                 |      |  |      | 143,000   
|                                                                                  |      |  |      |           
|Total liabilities                                                                 |      |  |      | 6,469,000 
|                                                                                  |      |  |      |           
|Commitments and contingencies                                                     |      | 
|Stockholders' equity:                                                             |      | 
|Common stock $40 par value: authorized 8,000,000 shares; issued 4,004,082         |      | 
|shares in 2007 and 3,992,601 shares in 2006; outstanding 3,573,315 shares in 2007 |      | 
|and 3,927,358 shares in 2006                                                      |      |  |      | 1,602,000 
|Additional paid-in capital                                                        |      |  |      | 4,686,000 
|Retained earnings                                                                 |      |  |      | 8,141,000 
|Less treasury stock: 430,767 in 2007 and 65,243 shares in 2006, at cost           |      |  |      | (3,163,000
|                                                                                  |      |  |      |           
|Total stockholders' equity                                                        |      |  |      | 11,266,000
|                                                                                  |      |  |      |           
|Total liabilities and stockholders' equity                                        |      |  | $    | 17,735,000
|                                                                                  |      |  |      |           

The accompanying notes
are an integral part of these consolidated financial statements.

F-3

---

# AEROSONIC CORPORATION
AND SUBSIDIARY CONSOLIDATED
STATEMENTS OF OPERATIONS For the Years Ended
January 31, 2007, 2006 and 2005

|                                             | 2007 |  | 2006 |            | 2005 |  
|-------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|Revenue                                      |      |  | $    | 31,253,000 |      | $
|Cost of sales                                |      |  |      | 22,433,000 |      |  
|                                             |      |  |      |            |      |  
|Gross margin                                 |      |  |      | 8,820,000  |      |  
|Selling, general and administrative expenses |      |  |      | 7,878,000  |      |  
|                                             |      |  |      |            |      |  
|Operating income                             |      |  |      | 942,000    |      |  
|                                             |      |  |      |            |      |  
|Other income (expense):                      |      | 
|Interest expense, net                        |      |  |      | (170,000   | )    |  
|Miscellaneous income                         |      |  |      | 37,000     |      |  
|                                             |      |  |      |            |      |  
|                                             |      |  |      | (133,000   | )    |  
|                                             |      |  |      |            |      |  
|Income before income taxes                   |      |  |      | 809,000    |      |  
|Income tax benefit (expense)                 |      |  |      | (244,000   | )    |  
|                                             |      |  |      |            |      |  
|Net income                                   |      |  | $    | 565,000    |      | $
|                                             |      |  |      |            |      |  
|Basic earnings per share                     |      |  | $    | 0.16       |      | $
|                                             |      |  |      |            |      |  
|Diluted earnings per share                   |      |  | $    | 0.16       |      | $
|                                             |      |  |      |            |      |  
|Basic weighted average shares outstanding    |      |  |      | 3,618,349  |      |  
|                                             |      |  |      |            |      |  
|Diluted weighted average shares outstanding  |      |  |      | 3,628,734  |      |  
|                                             |      |  |      |            |      |  

The accompanying notes
are an integral part of these consolidated financial statements.

F-4

---

# AEROSONIC CORPORATION
AND SUBSIDIARY CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY For the Years Ended
January 31, 2007, 2006 and 2005

|                               | Common
Stock |  | Additional
Paid-In
Capital |           | Retained
Earnings |   | Treasury
Stock |  | Total
Stockholders'
Equity |          
|------------------------------ | ------------ |  | -------------------------- | --------- | ----------------- | - | -------------- |  | -------------------------- | ---------
|Balance at January 31, 2004    |              |  |                            | 1,595,000 |                   |   | 4,559,000      |  |                            | 3,485,000
|Net Income                     |              |  |                            | -         |                   |   | -              |  |                            | 1,541,000
|                               |              |  |                            |           |                   |   |                |  |                            |          
|Balance at January 31, 2005    |              |  |                            | 1,595,000 |                   |   | 4,559,000      |  |                            | 5,026,000
|Net Income                     |              |  |                            | -         |                   |   | -              |  |                            | 2,550,000
|Directors equity compensation |              |  |                            | 2,000     |                   |   | 43,000         |  |                            | -        
|Restricted stock compensation  |              |  |                            | 2,000     |                   |   | 2,000          |  |                            | -        
|                               |              |  |                            |           |                   |   |                |  |                            |          
|Balance at January 31, 2006    |              |  | $                          | 1,599,000 |                   | $ | 4,600,000      |  | $                          | 7,576,000
|Net Income                     |              |  |                            | -         |                   |   | -              |  |                            | 565,000  
|Purchase of treasury stock     |              |  |                            | -         |                   |   | -              |  |                            | -        
|Directors equity compensation |              |  |                            | 3,000     |                   |   | 34,000         |  |                            | -        
|Restricted stock compensation  |              |  |                            | -         |                   |   | 39,000         |  |                            | -        
|Deferred compensation          |              |  |                            | -         |                   |   | -              |  |                            | -        
|                               |              |  |                            |           |                   |   |                |  |                            |          
|Balance at January 31, 2007    |              |  | $                          | 1,602,000 |                   | $ | 4,686,000      |  | $                          | 8,141,000
|                               |              |  |                            |           |                   |   |                |  |                            |          

The accompanying notes
are an integral part of these consolidated financial statements.

F-5

---

# AEROSONIC CORPORATION
AND SUBSIDIARY CONSOLIDATED
STATEMENTS OF CASH FLOWS For the Years Ended
January 31, 2007, 2006 and 2005

|                                                               | 2007 |  | 2006 |            | 2005 |  
|-------------------------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|Cash flows from operating activities:                          |      |  |      |            |      |  
|Net income                                                     |      |  | $    | 565,000    |      | $
|Adjustments to reconcile net income to net cash from operating |      | 
|activities:                                                    |      | 
|Bad debt expense                                               |      |  |      | --         |      |  
|Stock-based compensation                                       |      |  |      | 89,000     |      |  
|Depreciation                                                   |      |  |      | 632,000    |      |  
|Amortization                                                   |      |  |      | 6,000      |      |  
|(Gain)/loss on disposal of property                            |      |  |      | (32,000    | )    |  
|Deferred income taxes                                          |      |  |      | 213,000    |      |  
|Changes in assets and liabilities:                             |      | 
|Receivables                                                    |      |  |      | (850,000   | )    |  
|Income taxes receivable and payable                            |      |  |      | 222,000    |      |  
|Inventories                                                    |      |  |      | 175,000    |      |  
|Prepaid Expenses                                               |      |  |      | 114,000    |      |  
|Other assets                                                   |      |  |      | 85,000     |      |  
|Accounts payable, trade                                        |      |  |      | (442,000   | )    |  
|Costs less estimated losses in excess of billings              |      |  |      | 420,000    |      |  
|Accrued expenses and other liabilities                         |      |  |      | (7,000     | )    |  
|                                                               |      |  |      |            |      |  
|Net cash provided by operating activities                      |      |  |      | 1,190,000  |      |  
|                                                               |      |  |      |            |      |  
|Cash flows from investing activities:                          |      | 
|Proceeds on sale of property                                   |      |  |      | 55,000     |      |  
|Capital expenditures                                           |      |  |      | (378,000   | )    |  
|                                                               |      |  |      |            |      |  
|Net cash used in investing activities                          |      |  |      | (323,000   | )    |  
|                                                               |      |  |      |            |      |  
|Cash flow from financing activities:                           |      | 
|(Payments on)/ proceeds from revolving credit facilities       |      |  |      | -          |      |  
|Proceeds received on refinancing of debt                       |      |  |      | -          |      |  
|Purchase of treasury stock                                     |      |  |      | (2,467,000 | )    |  
|Principal payments on long-term debt and notes payable         |      |  |      | (230,000   | )    |  
|                                                               |      |  |      |            |      |  
|Net cash used in financing activities                          |      |  |      | (2,697,000 | )    |  
|                                                               |      |  |      |            |      |  
|Net increase (decrease) in cash and cash equivalents           |      |  |      | (1,830,000 | )    |  
|Cash and cash equivalents at beginning of year                 |      |  |      | 3,106,000  |      |  
|                                                               |      |  |      |            |      |  
|Cash and cash equivalents at end of year                       |      |  | $    | 1,276,000  |      | $
|                                                               |      |  |      |            |      |  
|Supplemental disclosure of cash flow information:              |      | 
|Cash paid during the year for:                                 |      | 
|Interest                                                       |      |  | $    | 168,000    |      | $
|                                                               |      |  |      |            |      |  
|Income taxes                                                   |      |  | $    | -          |      | $
|                                                               |      |  |      |            |      |  

The accompanying notes
are an integral part of these consolidated financial statements.

F-6

---

# AEROSONIC CORPORATION
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

|1. |  | DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ----------------------------------------------------------------------

# Description of Business

The primary business of Aerosonic
Corporation and subsidiary (the Company) is to manufacture and sell
aircraft instrumentation to government and commercial users from its facilities located in
Florida and Virginia (see Note 15). The Companys customers are located worldwide.

# Principles of
Consolidation

The consolidated financial statements
include the accounts of Aerosonic Corporation (which operates as the Clearwater, Florida
Instrument division) and its wholly-owned subsidiary, Avionics Specialties, Inc., and are
presented in accordance with the accrual method of accounting. All significant
intercompany balances and transactions have been eliminated in consolidation.

# Use of Estimates

The preparation of the financial
statements in conformity with accounting principles generally accepted in the United
States of America requires the Company to make estimates and judgments that affect
reported and contingent amounts of assets, liabilities, revenues and expenses, including
such items as inventory costs, inventory reserves, allowance for accounts receivable,
deferred tax valuation allowances, percentage-of-completion accounting and other
miscellaneous accruals. Actual results may differ from these estimates under different
assumptions or conditions, and such differences could be material.

# Cash and Cash Equivalents

The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash
equivalents.

# Accounts Receivable
Allowance for Doubtful Accounts and Credit Losses

The Company continuously evaluates
its customers and provides reserves for anticipated credit losses as soon as collection
becomes compromised. The Company does maintain a limited reserve in anticipation that
smaller accounts may become a collection issue, which occurs from time to time based on
historical experience. However, most of the Companys customers are financially sound
and the Companys history of bad debts is relatively low. Measurement of such losses
requires consideration of historical loss experience, including the need to adjust for
current conditions, and judgments about the probable effects of relevant observable data,
including present economic conditions such as delinquency rates and financial health of
specific customers.

# Inventories

The Company values inventory at the
lower of cost (using a method that approximates the first-in, first-out method (FIFO)) or net
realizable value. Reviews of inventory quantities on hand have been conducted to determine
if usage or sales history supports maintaining inventory values at full cost or if it has
instead become necessary to record a provision for slow moving, excess and obsolete
inventory based primarily on estimated forecasts of product demand and production
requirements for the subsequent twelve months and actual usage for the previous two years.

During production, the Company uses
standards to estimate product costs. These standards are reviewed and updated periodically
by management and approximate costing under the FIFO method. Differences between standard
and actual costs have not been material.

F-7



---

# Property, Plant and
Equipment

Property, plant and equipment are
stated at cost. Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Upon disposition, the cost and
related accumulated depreciation are removed from the accounts and any related gain or
loss is reflected in earnings. Expenditures for repairs and improvements that
significantly add to the productive capacity or extend the useful life of an asset are
capitalized. Repair and maintenance charges are expensed as incurred.

The useful lives of property, plant
and equipment for purposes of computing depreciation are:

|                           |            
|-------------------------- | -----------
|Land improvements          | 15-20 Years
|Buildings and improvements | 25-30 Years
|Machinery and equipment    | 3-10 Years 
|Patterns, dies, and tools  | 3-5 Years  
|Furniture and fixtures     | 5-10 Years 

# Valuation Assessment of
Long-Lived Assets

Management periodically evaluates
long-lived assets for potential impairment and will record an impairment charge whenever
events or changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. As of January 31, 2007 and 2006, management does not believe that any
assets are impaired.

# Other Assets

Capitalized loan fees are recorded at
cost less accumulated amortization. The costs are determined at the time the loan
transactions are closed, and are amortized over the life of the loan, using a method which approximates
the effective interest method.

# Income Taxes

The Company accounts for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Under this method, deferred tax
liabilities and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. A valuation
allowance is provided against the future benefit of deferred tax assets if it is
determined that it is more likely than not that the future tax benefits associated with
the deferred tax asset will not be realized.

# Revenue Recognition

The Company generally recognizes
revenue from sales of its products when the following have occurred: evidence of a sale
arrangement exists; delivery has occurred or services have been rendered; the price to the
buyer is fixed or determinable; and collectibility is reasonably assured.

The Company follows the
percentage-of-completion method of accounting for one long-term engineering service
contract. Under this method, contract revenue is computed as that percentage of estimated
total revenue that costs incurred to date bear to total estimated costs, after giving
effect to the most recent estimates of costs to complete. From time to time, the Company
will record costs and estimated profits in excess of billings for certain of these
contracts. Revisions in costs and revenue estimates are reflected in the period in which
the revisions are determined. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined without regard to the
percentage-of-completion.

Occasionally the Company enters into
research and development contracts with customers. The Company accounts for such contracts
on the basis of the lesser of non-refundable cash versus percentage of completion.

F-8



---

As a general matter, the terms
specified in customer purchase orders determine whether the Company or the customer bears
the obligation for payment of freight charges. While customers pay for freight in most
transactions, the Company does occasionally pay freight charges on behalf of customers and
bill all or a portion to customers. Freight revenue of $11,000, $13,000 and $13,000 is
included in revenues in the consolidated statement of operations for the years ended
January 31, 2007, 2006 and 2005, respectively. Freight expense of $112,000, $143,000 and
$82,000 is included in cost of sales in the consolidated statement of operations for the
years ended January 31, 2007, 2006 and 2005, respectively.

# Research and Development

Research and development costs are
expensed as incurred. Research and development expense that is included in Selling,
General and Administrative Expenses in the Consolidated Statement of Operations
approximated $458,000, $688,000 and $758,000, during the years ended January 31, 2007,
2006 and 2005, respectively. Research and development costs that are included in Selling,
General and Administrative Expenses in the Consolidated Statements of Operations declined
as resources were devoted to the Joint Strike Fighter program, where expenditures are
charged to Cost of Sales.  In addition, the Company reduced its use of outside
contractors for certain development work that is now being handled by the engineering
staff that has been developed in the Clearwater operations. The amount related to the
Joint Strike Fighter program that was charged to cost of sales in fiscal years 2007, 2006
and 2005 was approximately $390,000, $575,000 and $607,000, respectively.

# Environmental
Expenditures

The Company accrues for environmental
expenses resulting from existing conditions that relate to past operations when the costs
are probable and reasonably estimable. The following table outlines the Companys
experience with such expenditures and the amount of the accrual that existed at the close
of each fiscal year:

|                                                | For the years ended January 31, | 
|----------------------------------------------- | ------------------------------- | 
|
|Environmental Expense (Statement of Operations) |                                 | 
|                                                |                                 | 
|Environmental Accrual (Balance Sheet)           |                                 | 
|                                                |                                 | 

# Treasury Stock

The Company accounts for the
acquisition of treasury shares at cost. The Company has not reissued acquired shares. It
has, however, used treasury shares to make matching contributions to the Companys
401(k) plan. For those transactions, the Company accounts for the contributions at fair
value at the date of contribution.

# Accounting for
Stock-Based Compensation

At January 31, 2007, the Company had a
stock incentive plan (the Plan), which authorizes the issuance of
options to purchase common stock. The Company had initially adopted the disclosure-only
provisions of FAS 123, Accounting for Stock-Based Compensation, as amended by FAS 148,
Accounting for Stock Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123, but accounted for the plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 and related interpretations.
Beginning with the first interim reporting period for fiscal year 2007, the Company began
to reflect stock-based employee compensation cost in net income for all options
outstanding as of the conclusion of each interim reporting period.

The weighted average fair value of
options granted in fiscal years 2007 and 2006 were approximately $105,000 and $83,000
using the Black-Scholes option-pricing model with the following assumptions:

|                        | 2007  | 2006 
|----------------------- | ----- | -----
|Volatility              | 78%   | 84%  
|Risk-free interest rate | 4.90  | 4.02 
|Expected life in years  | 1.5   | 1.5  
|Dividend yield          | 0.00% | 0.00%

F-9



---

For the fiscal years ended January
31, 2006 and 2005, if the Company had elected to recognize compensation expense for stock
options based on the fair value at grant date, consistent with the method prescribed by
FAS 123, net income and earnings per share would have been reduced to the pro forma
amounts as follows:

|                                           | For the years ended January 31, | 
|------------------------------------------ | ------------------------------- | 
|
|Net income, as reported                    |                                 | 
|Deduct:                                    |                                 | 
|Total stock-based employee compensation    |                                 | 
|determined under fair value based method   |                                 | 
|for all awards, net of related tax effects |                                 | 
|                                           |                                 | 
|Pro forma net income                       |                                 | 
|                                           |                                 | 
|Earnings per share:                        |                                 | 
|Basic  As reported                        |                                 | 
|Basic   Pro forma                         |                                 | 
|Diluted   As reported                     |                                 | 
|Diluted   Pro forma                       |                                 | 

For the fiscal year ended January 31,
2007, the Company included stock-based employee compensation expense of approximately
$52,000 in its net income.

# Computation of Earnings
per Share

Basic earnings per share is computed
using the weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed by dividing net income available to common stockholders by the
weighted average number of shares of common stock outstanding for the period, adjusted for
the dilutive effect of common stock equivalents, using the treasury stock method.

# Concentrations of Credit
Risk

Financial instruments which
potentially subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents and receivables. As of January 31, 2007 and 2006, substantially
all of the Companys cash balances were deposited with financial institutions who
management has determined are of high credit quality.

During the normal course of business,
the Company extends credit, without collateral, to customers conducting business in the
aerospace industry worldwide.

# Exchange Rate Fluctuation

The Company conducts a limited amount
of business in transactions that are denominated in foreign currencies. The Company
employs a natural hedging method of matching accounts receivable denominated in foreign
currencies with accounts payable denominated in foreign currencies to mitigate this risk.

# Financial Instruments

SFAS No. 107 Disclosures about
Fair Value of Financial Instruments, requires disclosure of the fair value of
certain financial instruments. Cash, accounts receivable, short-term borrowings, accounts
payable and accrued liabilities are reflected in the financial statements at amounts which
approximate fair value because of the short term maturity of these instruments. The
carrying amount of long-term debt and notes payable at January 31, 2007 and 2006
approximates fair value as most instruments have adjustable rates which change frequently.

# Segment Reporting

As of January 31, 2007 management
does not believe the Company has any reportable segments as defined in SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information.

F-10

---

# Recent Accounting
Pronouncements

In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), which clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position in accordance with
this Interpretation is a two-step process. The first step is recognition: The enterprise
determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on
the technical merits of the position. In evaluating whether a tax position has met the
more-likely-than-not recognition threshold, the enterprise should presume that the
position will be examined by the appropriate taxing authority that has full knowledge of
all relevant information. The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount of benefit
to recognize in the financial statements. The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. This Interpretation is effective for fiscal years beginning after December 15,
2006. As of the date of issue of this Annual Report on Form 10-K, the Company is still
evaluating the impact of FIN 48 on its future results of operations. The Company plans to
adopt FIN 48 beginning with its first interim reporting period for fiscal year 2008.

|2. |  | RECEIVABLES
|-- |  | -----------

Receivables at January 31, 2007 and
2006 consisted of the following:

|                                      | 2007 |  | 2006 |          
|------------------------------------- | ---- |  | ---- | ---------
|Trade                                 |      |  | $    | 5,224,000
|Less: allowance for doubtful accounts |      |  |      | (10,000  
|                                      |      |  |      |          
|                                      |      |  | $    | 5,214,000
|                                      |      |  |      |          

During fiscal year 2003, the Company
secured one long-term fixed-price contract for the development of instrumentation for the
Joint Strike Fighter (JSF) program. Costs and estimated earnings on
this contract for the years ended January 31, 2007 and 2006 were as follows:

|                                                  | January 31, 2007 |  | January 31, 2006 |            
|------------------------------------------------- | ---------------- |  | ---------------- | -----------
|Costs incurred to date                            |                  |  | $                | 18,072,000 
|Estimated losses                                  |                  |  |                  | (3,245,000 
|                                                  |                  |  |                  |            
|                                                  |                  |  |                  | 14,827,000 
|Less billings to date                             |                  |  |                  | (14,927,000
|                                                  |                  |  |                  |            
|Costs less estimated losses in excess of billings |                  |  |                  |            
|                                                  |                  |  |                 
|Billings in excess of costs less estimated losses |                  |  | $                | (100,000   
|                                                  |                  |  |                 

The billings in excess of costs less
estimated losses are included in accrued expenses and other liabilities on the balance
sheet.

Further discussions with the
Companys customer for the JSF program have resulted in product modifications that
include making the product design more responsive to conditions as well as a change to
accommodate differing system needs. Consequently, the Company has revised its estimate at
completion for the JSF program. The estimated costs of the project increased by
approximately $432,000 and, as a result, estimated total program costs exceed estimated
program revenues by approximately $3,245,000. The Company recognized this additional loss
in its financial statements for the fiscal year ended January 31, 2007. These design
changes are in addition to many issues encountered throughout the year related to testing
and verification of the design change, resulting in increased expenditures for the
program. The Company recognized these additional losses in fiscal year 2007 as the
likelihood of incurring those losses were identified.

F-11



---

The JSF program is a customer-funded
product development program that is presently expected to generate total project revenues
of approximately $16,293,000. As of January 31, 2007, based on project progress, the
Company has recognized revenues of approximately $14,827,000 for the JSF program. The JSF
program represents a significant investment in the Companys future product
development capabilities. While Company management is expending considerable effort to
control costs and complete the development process on schedule, the key benefit to the
program is the substantial revenue that the Company may earn if it is awarded the
competitive production contract for the JSF. The production contract is expected to be
awarded near the conclusion of the development program, and is presently expected to occur
in late 2007. There is no assurance that production will begin after the completion of the
development program or that the Company will be awarded the production contract.

|3. |  | INVENTORIES
|-- |  | -----------

Inventories at January 31, 2007 and
2006 consisted of the following:

|                                               | 2007 |  | 2006 |          
|---------------------------------------------- | ---- |  | ---- | ---------
|Raw materials                                  |      |  | $    | 4,384,000
|Work in process                                |      |  |      | 1,880,000
|Finished goods                                 |      |  |      | 163,000  
|Reserve for obsolete and slow moving inventory |      |  |      | (618,000 
|                                               |      |  |      |          
|                                               |      |  | $    | 5,809,000
|                                               |      |  |      |          
|                                               |      | 

Substantially all of the remaining
reserve is comprised of inventory items that were identified as being obsolete or slow
moving during the fiscal years ended January 31, 2007 and 2006.

|4. |  | PROPERTY,
PLANT AND EQUIPMENT
|-- |  | -----------------------------

Property, Plant and Equipment at
January 31, 2007 and 2006 consisted of the following:

|                                               | 2007 |  | 2006 |           
|---------------------------------------------- | ---- |  | ---- | ----------
|Land and improvements                          |      |  | $    | 464,000   
|Building and improvements                      |      |  |      | 4,124,000 
|Machinery and equipment                        |      |  |      | 4,651,000 
|Patterns, dies and tools                       |      |  |      | 999,000   
|Furniture and fixtures                         |      |  |      | 1,708,000 
|                                               |      |  |      |           
|                                               |      |  |      | 11,946,000
|Less accumulated depreciation and amortization |      |  |      | (8,606,000
|                                               |      |  |      |           
|                                               |      |  | $    | 3,340,000 
|                                               |      |  |      |           

Depreciation expense was $632,000,
$665,000 and $654,000 for the years ended January 31, 2007, 2006 and 2005, respectively.
The Company utilizes the straight-line method when accounting for depreciation. Certain
components of property, plant and equipment are pledged as collateral for debt obligations
(Note 6).

|5. |  | ACCRUED
EXPENSES
|-- |  | ----------------

Accrued expenses as of January 31,
2007 and 2006 were approximately $1,692,000 and $1,895,000, respectively. A substantial
portion of these expenses are related to amounts owed to subcontractors who participate in
the Companys product development programs, as shown below:

|                             | 2007 |  | 2006 |          
|---------------------------- | ---- |  | ---- | ---------
|Product development programs |      |  | $    | 944,000  
|Other accrued expenses       |      |  |      | 748,000  
|                             |      |  |      |          
|                             |      |  | $    | 1,692,000
|                             |      |  |      |          

F-12



---

|6. |  | LONG-TERM
DEBT, NOTES PAYABLE AND REVOLVING CREDIT FACILITY
|-- |  | -----------------------------------------------------------

Long-term debt and notes payable at
January 31, 2007 and 2006 consisted of the following:

|                                                          | 2007 |  | 2006 |          
|--------------------------------------------------------- | ---- |  | ---- | ---------
|Real estate term loan                                     |      |  | $    | 2,433,000
|Equipment term loan                                       |      |  |      | 131,000  
|                                                          |      |  |      |          
|                                                          |      |  |      | 2,564,000
|Less current maturities                                   |      |  |      | (230,000 
|                                                          |      |  |      |          
|Long-term debt and notes payable, less current maturities |      |  | $    | 2,334,000
|                                                          |      |  |      |          

The amount of long-term debt and
notes payable maturing in fiscal 2008 and thereafter is as follows:

|Maturity Schedule of Long Term Debt and Notes Payable | 
|----------------------------------------------------- | 
|2008                                                  | 
|2009                                                  | 
|2010                                                  | 
|2011                                                  | 
|2012                                                  | 
|Thereafter                                            | 
|                                                      | 
|Total                                                 | 
|                                                      | 

On February 25, 2004, the Company
completed a refinancing of its debt obligations by securing new credit facilities with
Wachovia Bank, N.A. (Wachovia Refinancing) The facilities total $5.7
million, and include a 15 year term loan of $3.0 million that is collateralized primarily
by the Companys real estate in Clearwater, Florida, a revolving credit facility of
$2.5 million, and a seven year equipment loan of $0.2 million. The entire debt also is
collateralized by a lien on other Company and Avionics assets and by a Deed of Trust
on Avionics real estate in Earlysville, Virginia. The 15 year term loan has
repayment obligations of approximately $200,000 per year. The seven year equipment loan,
drawn in May 2004, has repayment obligations of approximately $30,000 per year. The credit
line is set to expire on June 30, 2007. The Company intends to negotiate a new credit line
with Wachovia, and will endeavor to obtain terms and conditions that are at least equal to
if not better than the existing terms and conditions. However, the Company cannot
guarantee the outcome of these negotiations.

The interest rate on the credit
facility is one-month LIBOR (which was 5.32% at January 31, 2007) plus 300 basis points.
Certain loan covenants have been revised and include a debt coverage ratio (defined as
earnings before interest and taxes plus depreciation and amortization minus dividends,
withdrawals and non-cash income divided by the sum of current maturities of long term debt
and capital and synthetic lease obligations plus interest) that is greater than or equal
to 1.25 to 1.00 and a leverage ratio (defined as total liabilities divided by tangible net
worth) not to exceed 1.30 to 1.00. As of January 31, 2007, the Company was in compliance
with all covenants.

|7. |  | RESERVE
FOR WARRANTY
|-- |  | --------------------

The Company has established a
provision for warranty claims in anticipation of a certain degree of warranty activity,
which generally is a minimal expense. For the fiscal years ended January 31, 2007 and
2006, the Company did experience one-time warranty costs related to specific applications
for its AOA transmitter for one customer in 2007 and its IMFP for another customer in
2006. The provision, which is included in accrued expenses and other liabilities on the
balance sheet, is based upon recent warranty experience excluding such one-time,
non-recurring items. The Companys warranty experience is as follows:

F-13



---

|                                     | For the years ended January 31, | 
|------------------------------------ | ------------------------------- | 
|
|Beginning reserve balance            |                                 | 
|Costs incurred                       |                                 | 
|Replenish reserve for costs incurred |                                 | 
|Increase in estimate                 |                                 | 
|                                     |                                 | 
|Ending reserve balance               |                                 | 
|                                     |                                 | 
|AOA one-time expense                 |                                 | 
|IMFP one-time expense                |                                 | 

|8. |  | STOCK
OPTIONS, GRANTS AND RESTRICTED STOCK AWARDS
|-- |  | -------------------------------------------------

In July 2004, the Company adopted the
Aerosonic Corporation 2004 Stock Incentive Plan (2004 SIP), which
authorized the issuance of up to 200,000 shares. Through January 31, 2007, 65,000 options,
12,020 shares and 6,200 restricted stock awards had been granted under the 2004 SIP. Of
the 6,200 restricted stock awards, 400 shares have been forfeited. As of January 31, 2007,
117,180 shares were available for grant. The options granted in fiscal years 2007 and 2006
have an exercise price of $8.29 and $6.20, respectively, and the weighted average
remaining contractual life of these options was 8.8 years as of January 31, 2007. For
option awards, the plan provides that the strike price shall not be less than the fair
market value of the common stock on the date of grant and that no portion of any option
award may be exercised beyond ten years from that date. In addition, no incentive stock
option can be granted and exercised beyond five years to a stockholder owning 10% or more
of the Companys outstanding common stock. Options granted under the plan during the
years ended January 31, 2007 and 2006 vest between one year and three years from the date
of grant. The Company had no outstanding equity awards prior to the year ended January 31,
2006.

Restricted stock awards have been
granted to certain key employees. One-third of these awards vest on each anniversary date
of the award, until fully vested. Awards of 6,200 shares were granted during the year
ended January 31, 2006. The average market price on the date of grant for awards granted
in 2006 was $6.70, which resulted in the recording of unearned compensation of
approximately $41,000 that is classified as a component of stockholders equity. The
unearned compensation is being amortized over the vesting period of the stock. As a
result, restricted stock compensation charged to expense was approximately $13,000 for the
year ended January 31, 2007.

The following table summarizes the
amount of awards authorized, the amount of awards granted and the amount of awards
available for grant for the 2004 SIP:

|                                           | 2004 SIP | 
|------------------------------------------ | -------- | 
|Awards authorized                          |          | 
|Options granted                            |          | 
|Shares granted                             |          | 
|Restricted stock granted                   |          | 
|                                           |          | 
|Available for grant as of January 31, 2006 |          | 
|                                           |          | 

Since none of the option grants have
vested, there has been no activity relating to stock options granted under the 2004 SIP
during the three years ended January 31, 2007.

F-14



---

|9. |  | INCOME
TAXES
|-- |  | ------------

Income tax expense (benefit) for the
years ended January 31, 2007, 2006 and 2005 consisted of:

|          | 2007 |  | 2006 |         | 2005 |  
|--------- | ---- |  | ---- | ------- | ---- | -
|Current   |      |  |      |         |      |  
|Federal   |      |  | $    | 31,000  |      | $
|State     |      |  |      | -       |      |  
|          |      |  |      |         |      |  
|          |      |  |      | 31,000  |      |  
|          |      |  |      |         |      |  
|Deferred: |      | 
|Federal   |      |  |      | 184,000 |      |  
|State     |      |  |      | 29,000  |      |  
|          |      |  |      |         |      |  
|          |      |  |      | 213,000 |      |  
|          |      |  |      |         |      |  
|          |      |  | $    | 244,000 |      | $
|          |      |  |      |         |      |  

The following table illustrates the
difference between the statutory income tax rates applicable to the Company versus the
effective tax (benefit) rate:

|                                               | 2007 |  | 2006 |       | 2005 | 
|---------------------------------------------- | ---- |  | ---- | ----- | ---- | 
|Federal tax rate                               |      |  |      | 34.0% |      | 
|Increase (decrease) in taxes resulting from:   |      | 
|State income taxes, net of federal tax benefit |      |  |      | 2.8%  |      | 
|Tax-exempt foreign income                      |      |  |      | -8.2% |      | 
|Deferred tax asset valuation adjustment        |      |  |      | -     |      | 
|Research and experimentation and alternative   |      | 
|minimum tax credits                            |      |  |      | -     |      | 
|Other-primarily non-deductible expenses        |      |  |      | 1.6%  |      | 
|                                               |      |  |      |       |      | 
|Effective tax rate                             |      |  |      | 30.2% |      | 
|                                               |      |  |      |       |      | 

The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at January 31, 2007 and 2006 are as follows:

|                                                                 | 2007 |  | 2006 |          
|---------------------------------------------------------------- | ---- |  | ---- | ---------
|Current deferred tax assets:                                     |      |  |      |          
|Accounts receivable                                              |      |  | $    | 4,000    
|Inventories                                                      |      |  |      | 487,000  
|Vacation and sick pay accrual                                    |      |  |      | 264,000  
|Net operating loss carry forward                                 |      |  |      | 190,000  
|Other                                                            |      |  |      | 85,000   
|                                                                 |      |  |      |          
|Total current deferred tax assets                                |      |  | $    | 1,030,000
|                                                                 |      |  |      |          
|Non-current deferred tax assets                                  |      | 
|Property, plant and equipment, principally due to differences in |      | 
|depreciation and capitalized interest                            |      |  |      | 412,000  
|Research and experimentation and alternative minimum tax credits |      |  |      | 244,000  
|                                                                 |      |  |      |          
|Total non-current deferred tax assets                            |      |  |      | 656,000  
|                                                                 |      |  |      |          
|Net deferred tax asset                                           |      |  | $    | 1,686,000
|                                                                 |      |  |      |          
|Current deferred tax liabilities                                 |      | 
|Other                                                            |      |  |      | 6,000    
|                                                                 |      |  |      |          
|Total non-current deferred tax assets                            |      |  |      | 6,000    
|                                                                 |      |  |      |          
|Net deferred tax asset                                           |      |  | $    | 6,000    
|                                                                 |      |  |      |          

F-15



---

At January 31, 2007, the Company has
a total net operating loss carryforward from fiscal year 2006 of approximately $508,000
that the Company has elected to carryover into fiscal year 2008. This carryforward will
expire January 31, 2022.

For the fiscal year ended January 31,
2007, the Companys estimate with respect to the future utilization of its deferred
tax assets is that the Company believes it is more likely than not that all of its
deferred tax benefits will be realized.

|10. |  | OTHER
INCOME (EXPENSE)
|--- |  | ----------------------

During fiscal year 2007, the Company
recognized approximately $37,000 of miscellaneous income that was primarily related to the
sale of fixed assets.

During fiscal year 2006, the Company
recognized approximately $52,000 of miscellaneous income that was primarily related to
foreign exchange gains on British Pound transactions.

|11. |  | MAJOR
CUSTOMER INFORMATION
|--- |  | --------------------------

Direct and indirect sales to U.S.
Government agencies, when combined, represented 10% or more of net sales and amounted to
approximately $9,311,000, $16,809,000 and $13,453,000 for the years ended January 31,
2007, 2006 and 2005, respectively. Of these amounts, approximately $4,591,000, $7,201,000
and $5,269,000 were sales directly to U.S. Government agencies for the fiscal years ended
January 31, 2007, 2006 and 2005, respectively. The remaining amounts represent sales to
commercial customers that are for government applications.

Sales to Boeing represented 10% or
more of net sales and amounted to 11% for the year ended January 31, 2007. For the year
ended January 31, 2006, sales to Lockheed and Boeing represented 13% and 10% of net sales,
respectively. For the year ended January 31, 2005, sales to Lockheed and Boeing
represented 16% and 10% of net sales, respectively. Included in these amounts are sales of
products that are sold by each company to the U.S. Government. Foreign sales for the years
ended January 31, 2007, 2006 and 2005 represented 10% or more of net sales and amounted to
approximately $7,529,000, $7,684,000 and $4,614,000, respectively. Substantially all
foreign sales contracts are payable in U.S. dollars. No other customer sales totaled
greater than 10% of net sales for years ended January 31, 2007, 2006 or 2005.

Receivables at January 31, 2007
included approximately $1,339,000, $1,105,000 and $705,000 due from Raytheon, foreign
customers and Boeing, respectively. Receivables at January 31, 2006 included approximately
$676,000, $489,000, $444,000 and $425,000 due from the U.S. Government, Boeing, foreign
customers and Lockheed, respectively. No other customers represented greater than 10
percent of receivables at January 31, 2007 or 2006.

|12. |  | BENEFIT
PLANS
|--- |  | -------------

Effective February 1, 1993, the
Company adopted a tax-deferred savings plan which covers substantially all employees of
the Company. Under the plan, participants may elect to contribute up to 100% of pre-tax
earnings. The Company will fund a 100% matching contribution, up to 3% of the
participants yearly compensation. Such matching contributions will be made in cash
or Common Stock of the Company. Additional contributions may be made at the Companys
discretion. For the years ended January 31, 2007, 2006 and 2005, the Company contributed
cash of approximately $211,000, $457,000 and $204,000, respectively. During the fiscal
year ended January 31, 2006, the Board of Directors approved an acceleration of the
Companys matching contributions to the tax-deferred savings plan. Previously, the
Company made its matching contributions once per year, within twelve months of the close
of the plan year, which ends each December 31. The acceleration of matching contributions
resulted in the Company contributing its matching funds within thirty days of the close of
each calendar quarter. As a result, approximately $217,000 of the Companys fiscal
year 2006 matching contributions represent the matching contributions that would have
normally been made during the 2006 fiscal year, while approximately $240,000 of the
Companys fiscal year 2006 contributions were the result of the acceleration of
matching contributions. This acceleration of matching contributions had a one-time effect
on cash but had no impact on the recognition of expense, as the expense had been
recognized in all periods when the obligation arose.

F-16



---

William Parker was employed by the
Company for 34 years, most recently as its President, until his retirement in 1997. During
fiscal 2005, 2004 and 2003, the Company was, and until April 2005 continued to be, a party
to a Supplemental Pension Plan agreement with William C. Parker pursuant to which Mr.
Parker received monthly pension payments from the Company of $4,167. Amounts expensed
under this plan were approximately $10,000, $137,000 and $6,000 in 2005, 2004 and 2003,
respectively. In May 2003, the Company and Mr. Parker executed a new Supplemental Pension
Plan agreement, which became effective as of January 1, 2004, extending the then-existing
Supplemental Pension Plan, and pursuant to which Mr. Parker would continue to receive
monthly payments of $4,167 through December 2006. The extension resulted in a charge to
income and an additional liability of $134,000 during the fourth quarter of fiscal 2004.
This plan terminated upon the death of Mr. Parker in April 2005. The termination of the
plan results in a reduction of the liability that was originally recorded in the fourth
quarter of fiscal 2004. As a result, approximately $89,000 was recorded as other income
during fiscal 2006.

|13. |  | RELATED
PARTY TRANSACTIONS
|--- |  | --------------------------

As discussed in Note 12, the Company
had a Supplemental Pension Plan agreement with William Parker, a former employee who
served as a director of the Company until his death in April 2005.

|14. |  | COMMITMENTS
AND CONTINGENCIES
|--- |  | -----------------------------

In accordance with a consent
agreement with the Department of Environmental Protection signed by the Company in 1993,
the Companys environmental consultant developed an interim remedial action plan (the
Remedial Plan) to contain and remediate certain soil and groundwater
contamination that had been discovered at the Companys Clearwater, Florida location.
The contamination was discovered after a series of site investigations that revealed
impacts to both shallow soils and groundwater that may have resulted from the accidental
loss of solvents and metalworking fluids as well as activities from neighboring property
over a period of 20 years or more. Although the exact cause of the contamination has never
been ascertained, the Company nonetheless accepted responsibility for remediating the
pollutants that were discovered on its property.

During 1997, the Company recorded a
provision of approximately $175,000 related to the estimated costs to be incurred under
the Remedial Plan. As of January 31, 2000, the Company had utilized all amounts originally
recorded in other accrued expenses, and the remediation phase of the Remedial
Plan had been completed.

During the third quarter of 2001,
management determined the post-remediation monitoring expense related to the environmental
cleanup of 1993 would cost approximately $125,000. This amount was accrued and expensed
during the third quarter of 2001. As of January 31, 2003, all existing reserve balances
had been utilized. Based upon an assessment by the Companys environmental
consultants, the Companys management has calculated the Companys expected
future expense for post-remediation monitoring expense and has established a reserve of
$70,000 for such expense as of January 31, 2007.

The Company is now in a
monitoring-only stage of the remediation (where periodic measurements are taken by
environmental consultants to determine the effectiveness of the remediation), and the
existing reserve contemplates the remaining expected expenses, based upon advice from the
Companys environmental consultants, as of January 31, 2007.

The following table is a recap of the
financial impact of the Companys environmental activities:

|                                     | Years ended January 31, | 
|------------------------------------ | ----------------------- | 
|
|Beginning reserve balance            |                         | 
|Costs incurred                       |                         | 
|Replenish reserve for costs incurred |                         | 
|Increase in estimate                 |                         | 
|                                     |                         | 
|Ending reserve balance               |                         | 
|                                     |                         | 

F-17



---

At January 31, 2007, the Company was
committed to future purchases of approximately $4,023,000 for materials and services as
well as a development contract. These purchase commitments are supported by firm
underlying contracts with customers and contain provisions permitting the Company to
terminate such purchase commitments in the event the underlying contracts should be
terminated or discontinued. A tabular presentation is as follows:

|                     | Payments Due by Period
|-------------------- | ----------------------
|
|Purchase Commitments | $  4,023,000          

The Company entered into various
operating leases in fiscal years 2003 and 2002 to lease certain equipment. No new leases
occurred during fiscal year 2007, 2006 or 2005. Total rental expense was approximately
$391,000, $473,000 and $398,000 for the years ended January 31, 2007, 2006 and 2005,
respectively. The future minimum rental payments under leases that have initial or
remaining non-cancelable lease terms in excess of one year at January 31, 2007 are as
follows:

# Minimum Lease Payments

|                             | Operating Leases | 
|---------------------------- | ---------------- | 
|2008                         |                  | 
|2009                         |                  | 
|2010                         |                  | 
|                             |                  | 
|Total Minimum Lease Payments |                  | 
|                             |                  | 

The Company issued an irrevocable
standby letter of credit (LOC) in favor of the Ministry of Defense of
the Republic of Korea in May 2005. This LOC provides the South Korean government with
financial assurance that the Company will perform in accordance with the offset
requirements under its contract to provide integrated multifunction probes
(IMFP) for South Koreas T-50 military aircraft. The offset
requirements specify that the Company will effect a transfer of technology in accordance
with the agreement. The Company will incur certain expenses associated with this
obligation. Consequently, the Company accrues a liability with each IMFP shipment in
anticipation of satisfying the offset requirements of the contract. This liability was approximately
$143,000 and $46,000 for the years ended January 31, 2007 and 2006, respectively.  The South Korean
government can collect under the terms of the LOC only in the event that the Company is in
material breach of its contract obligations. The term of this $398,000 LOC expires in July
2009.

The Companys Board of
Directors approved Amended and Restated Employment Agreements between the Company and
four of its executive officers: David A. Baldini, Gary E. Colbert, P. Mark Perkins and
Carmelo Russo. The Amended and Restated Employment Agreements became effective on
November 28, 2005. These agreements provide for automatic renewal each November 28th,
absent earlier non-renewal. Each of the employment agreements provides for severance
payments in an amount equal to the employees base salary at the current level at
the time of termination for the remainder of the contract term following a change in
control if employment is terminated either by the Company without cause or by the
employee during the term in effect at the time of the change in control or within 18
months following the change in control after a material change in the terms of the
employees employment.

|15. |  | SUBSEQUENT
EVENTS
|--- |  | -----------------

On March 9, 2007, Aerosonic
Corporation announced the consolidation of the manufacturing functions of its Earlysville,
Virginia, operation into its Clearwater, Florida facility. The Earlysville location is
home to Avionics Specialties, Inc., Aerosonics wholly owned subsidiary. The
consolidation is a continuation of the Companys actions to be more responsive to
customers demands while increasing efficiencies. The existing Engineering and
Marketing functions will remain in the Earlysville area but will relocate to a new
facility more appropriately sized for the Companys streamlined structure. The
Company plans to sell the Earlysville facility. Avionics Specialties manufactures angle of
attack stall warning systems, integrated multifunction probes, which are integrated air
data sensors, and other aircraft sensors and monitoring systems. The Company will execute
the consolidation plan in a phased approach to maintain delivery schedules and product
quality.

F-18



---

|16. |  | QUARTERLY
DATA (UNAUDITED)
|--- |  | --------------------------

Set forth below are the
Companys quarterly data for the years ended January 31, 2007 and 2006.

|                                 | Quarter Ended | 
|-------------------------------- | ------------- | 
|
|2007                             |               | 
|Net sales                        |               | 
|Gross profit                     |               | 
|Income from operations           |               | 
|Net income                       |               | 
|Earnings per share (EPS) - basic |               | 
|Earnings per share (EPS) - dilut |               | 

|                                 | April 29 |  | July 29 |           | October 28 |   | January 31 | 
|-------------------------------- | -------- |  | ------- | --------- | ---------- | - | ---------- | 
|2006                             |          |  |         |           |            |   |            | 
|Net sales                        |          |  | $       | 9,075,000 |            | $ | 8,977,000  | 
|Gross profit                     |          |  |         | 2,525,000 |            |   | 3,011,000  | 
|Income from operations           |          |  |         | 712,000   |            |   | 836,000    | 
|Net income                       |          |  |         | 449,000   |            |   | 482,000    | 
|Earnings per share (EPS) - basic |          |  |         | 0.11      |            |   | 0.12       | 
|Earnings per share (EPS) - dilut |          |  |         | 0.11      |            |   | 0.12       | 

|17. |  | FOURTH
QUARTER ADJUSTMENTS
|--- |  | --------------------------

During the fourth quarter of fiscal
year 2007, the Company recorded an adjustment of approximately $432,000 to its
financial statements for the JSF program. This adjustment is described in detail in Note
2.

F-19



---

# SUPPLEMENTAL SCHEDULE OF
VALUATION ACCOUNTS

# Allowance for Doubtful
Accounts

|                                         | For the year ended January 31, | 
|---------------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance                |                                | 
|Amounts Written Off                      |                                | 
|Amounts Charged (Credited) to Operations |                                | 
|                                         |                                | 
|Ending Reserve Balance                   |                                | 
|                                         |                                | 

# Reserve for Obsolete and
Slow-Moving Inventory

|                                         | For the year ended January 31, | 
|---------------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance                |                                | 
|Amounts Charged (Credited) to Operations |                                | 
|                                         |                                | 
|Ending Reserve Balance                   |                                | 
|                                         |                                | 

# Environmental

|                                         | For the year ended January 31, | 
|---------------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance                |                                | 
|Amounts Charged (Credited) to Operations |                                | 
|                                         |                                | 
|Ending Reserve Balance                   |                                | 
|                                         |                                | 

# Warranty

|                                         | For the year ended January 31, | 
|---------------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance                |                                | 
|Amounts Charged (Credited) to Operations |                                | 
|                                         |                                | 
|Ending Reserve Balance                   |                                | 
|                                         |                                | 

# Sales Returns

|                                         | For the year ended January 31, | 
|---------------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance                |                                | 
|Amounts Charged (Credited) to Operations |                                | 
|                                         |                                | 
|Ending Reserve Balance                   |                                | 
|                                         |                                | 

# Deferred Tax Asset
Valuation Allowance

|                                    | For the year ended January 31, | 
|----------------------------------- | ------------------------------ | 
|
|Beginning Reserve Balance           |                                | 
|Amounts Credited to Operations      |                                | 
|                                    |                                | 
|Ending Reserve Balance, as restated |                                | 
|                                    |                                | 

F-20