** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

**FORM 10-KSB**

** **

| **(Mark One)**                      |
|-------------------------------------|
| **ý**                          | **Annual Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 (Fee Required)** |
|                                |   |
|                                | **For the  fiscal year ended September 30, 2003** |
|                                |   |
| **o**                               | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 (No Fee Required)** |
|                                |   |
|                                | **For the  transition period from                        to                      ** |
|                                |   |
| **Commission  File number 0-15318** |

** **

**BALLISTIC RECOVERY SYSTEMS, INC.**

(Nameof Small Business Issuer in its Charter)

** **

|                                                                                   | **Minnesota**                     |                     | **41-1372079** |
|----------------------------------------------------------------------------------------|-----------------------------------|--------------------------|----------------|
| (State or other jurisdiction  of  incorporation or organization)                       |                              | (IRS Employer ID Number) |
|                                                                                   |                              |                     |
| **300 Airport  Road, South St. Paul, Minnesota**                                       |                              |                     | **55075-3541** |
| (Address of Principal Executive  Offices)                                              |                              |                     | (Zip Code)     |
|                                                                                   |                              |                     |
| Issuer’s telephone number  including area code: **(651) 457-7491**                |
|                                                                                   |                              |                     |
| Securities registered pursuant  to Section 12(b) of the Act:   **None** |
|                                                                                   |
| Securities registered pursuant  to Section 12(g) of the Act:                      | **Common Stock,  $.01 par value** |
|                                                                                   | (Title of Class)                  |                     |
|                                                                                        |                                   |                          |                |  |  |  |  |  |

 

Check whether the Issuer (1) has filed allreports required to be filed by section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:  ý  Yes  o  No

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Registration S-B contained in this form, andno disclosure will be contained, to the best of the Issuer’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.  o.

 

State Issuer’s revenues for the most recentfiscal year:  $6,549,011.

 

Based upon the average bid and asked pricesof the Issuer’s Common Stock, the aggregate market value of the Common Stockheld by Non-affiliates of the Issuer as of December 22, 2003 wasapproximately $4,053,000. 

 

Number of shares outstanding as ofDecember 23, 2003:  6,245,928.

 

Index forexhibits is located on page 40.  Thisdocument contains 45 pages.

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the Company’s Definitive ProxyStatement to be used in connection with the election of directors at the 2004annual shareholders meeting (the “Proxy Statement”) are incorporated byreference into Part III, Items 9-12 as follows:

 
| Part of Form 10-K          |
|----------------------------|
|                       |   |
| 1.                         | Part III, Item 9. |
|                       | Directors and Executive  Officers of the Registrant. |
|                       |   |
| 2.                         | Part III, Item 10. |
|                       | Executive Compensation. |
|                       |   |
| 3.                         | Part III, Item 11. |
|                       | Security Ownership of Certain  Beneficial Owners and Management. |
|                       |   |
| 4.                         | Part III, Item 12. |
|                       | Certain Relationships and  Related Transactions. |
|                       |   |
| Portion of Proxy Statement |
|                       |   |
| 1.                         | Proposal 1: Election of  Directors. |
|                       |   |
| 2.                         | Proposal 1: Executive  Compensation. |
|                       |   |
| 3.                         | Common Stock Ownership of  Principal Shareholders and Management. |
|                       |   |
| 4.                         | Certain Relationships and  Related Transactions. |

 

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**PART I**

 

Item 1.  Description of Business

 

Ballistic Recovery Systems, Inc. (the“Company”) was incorporated in 1980 under the laws of the State of Minnesota.

 

(a)                                  Business Development 

 

TheCompany’s core business is the design, manufacturing and marketing ofwhole-aircraft recovery parachute systems for use with general aviation andrecreational aircraft. The emergency parachute systems are designed to bringdown the entire aircraft and its occupants in the event of an in-airemergency.  The parachute system isdesigned for in-air emergencies that include but are not limited to midaircollisions, structure failure, engine out at night, engine out over unlandableterrain, pilot incapacitation, and unintentional flight into instrumentmeteorological conditions.  The Companybelieves it is the only United States manufacturer of whole aircraft recoverysystems.  In addition, the Company hasdesigned and sold systems for use with various military and civilian unmannedaircraft.

 

Since itsinception, the Company has delivered over 18,000 systems that have beeninstalled on general aviation and recreational aircraft throughout the world,and the Company has documented 158 lives saved through the use of its systemsin actual in-air emergencies.

 

The Company was founded to providerecreational aircraft parachute systems for use in ultralight and experimentalaircraft.  That portion of the businesscontinues to be a consistent source of revenues for the Company and accountedfor 25% of the Company’s revenues in both fiscal year 2003 and 2002.

 

The Company’sgeneral aviation product lines accounted for 75% of the Company’s revenues inboth fiscal year 2003 and 2002.  Duringthe past several years, the Company’s primary general aviation product has beenfor the Cirrus SR20 (SR20) and SR22 aircraft manufactured by Cirrus DesignCorporation (“Cirrus Design”). Sales to Cirrus Design account for 74% and 75%of Company revenues for fiscal 2003 and 2002, respectively.  Cirrus Design, based in Duluth Minnesota ispresently the world’s second largest manufacturer of single engine certifiedaircraft.  Both models of CirrusDesign’s aircraft utilize the Company’s parachute system as a required standardequipment feature.  In addition, the Companybegan delivering its aftermarket FAA certified parachute system for the Cessna172 aircraft called the BRS172.

 

Thedevelopment of the parachute systems for the SR20 and SR22 aircraft was a jointeffort between the Company and Cirrus Design. The Company has retained the developed technology for the parachutesystems in general and Cirrus Design has retained the developed technology thatis specific to their individual aircraft.

 

CirrusDesign announced in July 2003 that it was introducing an entry-levelversion of the SR20 named the SRV.  Thisis a limited production model, which also utilizes the Company’s parachutesystem as required standard equipment. Cirrus Design is also planning to introduce a diesel version of itsaircraft called the SR21TDi (SR21), which will also utilize the Company’sparachute system as required standard equipment.  Introduction of the SR21 is dependent on the supply of newlycertified diesel engines for use in development and testing.  Cirrus Design expects that this model willbe available in the next year or so and will be first introduced in the Europeanmarket.

 

InNovember 2000, the Company entered into an agreement with Charles F.Parsons (d.b.a. Millennium Aerospace) to provide specific funding for aparachute recovery system for the Cessna 172 model aircraft.  The funding was used towards research anddevelopment for the BRS172 product, which received FAA certification inJuly 2002.  The first customerdelivery of the BRS172 was made in September 2002.  Under additional terms of the agreement,Parsons has exclusive 

 

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distributionrights to the BRS172 in general while the Company has the right to selectfactory direct sales.  The Company madean additional nine sales of the BRS172 systems during fiscal year 2003.  The Company is currently looking at ways toexpand its sales penetration in this market.

 

During thefirst part of fiscal year 2002, the Company was working under a contract withthe National Aeronautics and Space Administration (NASA) through its SmallBusiness Innovation Research (SBIR) program. The contract, which was a Phase I feasibility study, covered a six monthperiod and was a firm-fixed grant for $68,571. The Phase I award is entitled “Advanced Aircraft Parachute RecoverySystem” and has been granted to allow the Company to investigate thefeasibility of developing parachute systems for larger and faster aircraft thanthose currently supported by the Company. The Phase I work was completed in May 2002 and effectiveSeptember 16, 2002, the Company was awarded a Phase II grant under a firmfixed contract for $598,694 with a period of performance not to exceed 24months.  During fiscal year 2003, theCompany performed work under the contract and submitted progress reports forthe first 12 months of the contract. The work performed amounted to $189,000 of the total contractamount.  Work will be completed underthe Phase II award by the end of fiscal year 2004 and the full amount of thecontract is expected to be utilized and billed to NASA by the end of thecontract period.

 

Over thepast several years, the Company has been successful in establishing variousthird party funding sources for its research and development.  Outside funding for research and developmentactivities is an ongoing objective for the Company; however, no assurances canbe made that the Company will be successful in this regard.

 

 (b)                              Narrative Description of Business

 

**Principal Products**:

 

The Company’s principal product line iswhole-aircraft emergency parachute recovery systems.  The product, when utilized in an in-air emergency and at theappropriate altitude, may be activated by the pilot releasing a parachute thatis designed to open quickly, slow the descent of the aircraft, and lower theaircraft and its occupants safely to the ground to prevent or reduce humaninjury and damage to the aircraft. Possible parachute usage scenariosinclude:  Mid-air collision (loss ofintegrity or control); severe weather upset (wind shear, turbulence); powerloss with poor visibility (night or IMC); loss of control (component failure ormalfunction); engine out over hostile (unlandable) terrain; structural failure(age-weakened parts); pilot medical trauma (heart attack); overstress (due toaerobatics, violent weather).

 

GeneralAviation Products:

 

The Company entered the general aviationmarket in the mid 1980’s when it began development of an emergency parachuterecovery system for the Cessna 150/152 series of aircraft.  In 1993, this system, known as the GARD-150(now called the “BRS150”), received a Supplemental Type Certificate (STC) fromthe FAA that allows owners of Cessna 150/152 model aircraft to install thesystem.  Media attention for this newproduct resulted in domestic and international television and radio broadcastsas well as coverage in domestic and international aviation and non-aviationprint media.  The Company believes thatthe successful completion of the product for the Cessna 150/152, whichgenerated media attention for both the product and the Company, created interestin the Company’s product by general aviation manufacturers.  Although the BRS150 was not successfullysold, the Company believes that it helped for the development of the Company’scurrent products.

 

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In 1994, the Company entered into anagreement with Cirrus Design, a privately held company that began developmentand certification of a four-place all composite general aviation aircraft.  The FAA certified the aircraft, known as theCirrus Design SR20 (SR20), on October 23, 1998.  This was the first FAA certified aircraft to offer one of theCompany’s recovery systems as required standard equipment.  The Company began delivering systems for theSR20 in fiscal year 1999.  During fiscalyear 2000, Cirrus Design began development and certification efforts for theirnext generation aircraft called the SR22. The SR22 is a heavier and faster version of the SR20 and utilizes muchof the same parachute technology developed for the SR20.  The SR22 received FAA certification inNovember 2000 and was certified with the Company’s parachute system as astandard equipment component of the aircraft. Deliveries of SR22 parachute systems by the Company began in December2000.  The SR22 became the third of theCompany’s products to have received FAA certification (the BRS150 and SR20products being the others).  In July2003, Cirrus Design introduced an entry-level version of the SR20 called theSRV, which utilizes the same parachute system as the SR20 aircraft.  For fiscal year 2003, approximately 74% ofthe Company’s total revenues were generated from sales to Cirrus Design.

 

In November 2000, the Company signed an agreement withCharles F. Parsons (d.b.a. Millennium Aerospace) relating to and receivedfunding for a substantial portion of the development costs to develop and testa parachute recovery system for the Cessna 172 model aircraft.  During fiscal year 2001, the Companyreceived $200,000 in funding, which took the form of equity and projectspecific funding, to develop and test such a recovery system.  The development and testing was completed infiscal year 2002 and the Company received FAA certification for the BRS-172recovery system in July 2002.  TheCompany made its first customer delivery in September 2002 and deliveredan additional nine customer units during fiscal year 2003.

 

RecreationalAviation Products:

 

Recreational aviation products includeproducts designed and manufactured for use on unregistered aircraft such asultralights and aircraft registered with the FAA as experimental.  Like the general aviation product, theserecreational aviation products are designed to prevent or reduce bodily injuryto the human occupant.  The Companymanufactures these products and sells them directly to individuals and throughdealers and distributors who also market and sell the aircraft and relatedproducts.  The Company currently workswith approximately 200 dealers and distributors worldwide, although the Companyhas no written distribution agreement with such distributors.  Accordingly, these dealers and distributorscould sell competing products.  Sales toEurope accounted for 22.7% of recreational aviation product sales.

 

ContractResearch and Development:

 

Contractresearch and development has allowed the Company to expand its product line andexpertise in whole-aircraft recovery systems. It has been and will continue tobe a goal of the Company to receive outside funding for its research anddevelopment activities to supplement its own financial commitment.

 

InNovember 2001, the Company entered into a contract with NASA for theCompany’s second Phase I SBIR research grant. The Company has been a successful recipient of both Phase I and Phase IISBIR research grants in prior years. The contract, which was a Phase I feasibility study, was completed inMay 2002 and was a firm-fixed grant for $68,571.  The Phase I award is entitled “Advanced Aircraft ParachuteRecovery System” and was granted to allow the Company to investigate thefeasibility of developing parachute systems for larger and faster aircraft thanthose currently supported by the Company. Following the Phase I work, the Company applied for a follow-on Phase IIgrant and effective September 16, 2002 the Company began work under atwo-year contract for a firm fixed award of $598,694.  NASA and the United States Federal

 

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Governmentwill have a royalty free right to any developed technology, but only as acustomer for product that incorporates the developed technology that ispurchased from the Company.

 

**Manufacturing Operations and Suppliers:**

 

TheCompany’s personnel in a South St. Paul, Minnesota facility perform assembly ofthe Company’s product line.  Theparachutes utilized by the Company are purchased from a certain key supplieralthough there are other suppliers of parachutes. The Company manufactures itsown ballistic devices and receives its propellant from a single source.  The Company believes that there arealternate sources for propellant in the event that this source becomes unavailable.  Other components are purchased from avariety of suppliers or internally produced. The Company routinely searches for new vendors and believes alternatesources can be found should any of these vendors be unable to meet theCompany’s needs.  In addition, theCompany possesses or can acquire the expertise necessary for internalproduction of all key components.

 

**Patents**:

 

OnSeptember 5, 1989, United States Patent No. 4,863,119 was issued to theCompany on behalf of two of the Company’s employees for a “Parachute ReefingDevice” as part of a parachute recovery system.  The two employees assigned the patent to the Company, which withthe payment of continuing maintenance fees is effective until 2006.  This patented feature is utilized in theCompany’s general aviation line as well as in its recreational aviationproducts.  Current development projectsalso utilize the reefing device as an integral design component.

 

OnMay 2, 2000, United States Patent No. 6,056,241 was issued to the Companyon behalf of one of the Company’s employees for a “Thin Film Parachute withContinuous Lateral Reinforcing Fibers “. The employee assigned the patent to the Company, which with the paymentof continuing maintenance fees is effective until 2017.  The Company in connection with its NASA SBIRgrant program that was completed during fiscal year 1999 developed thispatented process. The Company does not have a current application for thepatented process, but the Company hopes that the patented process can be used inboth military and civilian applications complimenting or enhancing theCompany’s current product line.

 

When theCompany completes development of additional ballistic parachute recoverysystems, it intends to apply for patents for such systems if possible.  There can be no assurance, however, that anypatents will be granted or, if granted that they will be of material benefit tothe Company.

 

**Seasonality:**

 

Typically,the Company experiences seasonality in its recreational aviation line.  The second and third quarters have thehighest sales as this product line is marketed to recreational pilots who tendto fly their aircraft during the warmer months and equip their aircraft with arecovery system near the beginning of the flying season.  The Company’s expansion in the generalaviation market through the production of systems for the Cirrus Design SR20,SR22 and SRV has lessened the impact of seasonality on the Company.  This trend is expected to continue as theCompany increases its deliveries in the general aviation market over the nextseveral years.

 

**Dependence on a Single Customer:**

 

During thefiscal years ended September 30, 2003 and 2002, the Company was dependenton one customer, Cirrus Design Corporation, for 74% and 75% of the Company’stotal sales in the respective fiscal years. The Company supplies parachute recovery systems to Cirrus from itsgeneral aviation product line.

 

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**Dealer/DistributorNetwork:**

 

The Company’s recreational aviation productsales are primarily to dealers and distributors who in turn sell to the endconsumer.  The Company believes that inthe event that any individual dealers or distributors cease to represent theCompany’s recreational aviation products, that alternative dealers ordistributors can be established.  TheCompany does not have agreements with its dealers and distributors andaccordingly, such dealers and distributors are not prohibited from sellingproducts competitive with the Company’s products.

 

**Backlog of Orders:**

 

As of September 30, 2003 and 2002, theCompany had a backlog of orders totaling approximately $1,867,000 and$4,434,000, respectively. The backlogs included over $1.6 million and $3.8million of orders for the Cirrus Design aircraft, respectively.  The 2003 backlog is expected to be filledwithin 12 months.  The reduction inbacklog for Cirrus Design is a result of Cirrus Design’s efforts to reduce leadtimes and increase production volumes to better serve its customers.  Cirrus Design is currently producingaircraft at levels, which has made it the second largest producer of singleengine piston aircraft in the world behind Cessna Aircraft Company.  Due to the backlog period involved, however,it is possible that there could be cancellations of a portion of the currentlybacklogged orders.  The Company expectsto fund the build out and sale of the backlogged orders through cash flowprovided by the sale of those orders.  TheCompany cautions investors who may utilize published bookings and backlog informationas tools to forecast the Company’s revenue during a given timeframe sincecertain purchase orders may be subject to cancellation and/or delivery schedulerevision.

 

**Research and Development**:

 

A summaryof research and development is as follows:

 
|                                                                       |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Total research and development expenditures                                |   | $        | 596,581 |     | $      | 415,929 |   |
|                                                                       |   |     |    |     |   |
| Revenues recognized under contract research and development  relationships |   | (189,410 | )       | (112,741 | )      |
|                                                                       |   |     |    |     |   |
| Research and development, net                                              |   | $        | 407,171 |     | $      | 303,188 |   |

 

The source for the 2003 third party fundingwas from NASA under the Phase II SBIR grant. The source for the 2002 third party funding was from Charles F. Parsonsas part of an agreement for development and certification of the parachutesystem for the Cessna 172 model aircraft, and from NASA under the Phase I SBIRgrant.

 

**Competition**:

 

The Companysells its whole-aircraft emergency parachute systems in the United States andinternationally.  The Company enteredinto a covenant not to compete agreement on October 26, 1995 with SecondChantz (“SCI”), whom the Company believes was the only domestic competitor forwhole-aircraft emergency parachute systems for the domestic recreationalaviation market.  Several foreigncompanies have or are attempting to introduce new competitive products into theinternational recreational aviation market. Competition is strong in theEuropean market based on price, but the Company continues to pursue sales inthat market.  At present, none of theforeign companies have successfully entered the domestic market.  The Company believes its current systemswere the first in the market and that its products and service are superior toits competitors.

 

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The FAA, as part of the Cirrus Design SR20,SR22 and SRV certification process, has certified the Company’s product, whichis standard and required equipment on those aircraft.  These are the first whole aircraft recovery system ever certifiedby the FAA as standard equipment.  TheCompany also holds Supplemental Type Certificates for the recovery systems forthe Cessna 150/152 and Cessna 172 model aircraft.  At present, there are no other manufacturers with the FAASupplemental Type Certificate or FAA certification under a manufacturer’s TypeCertificate necessary to install a recovery system for the general aviationmarket.  The Company is unaware of anyother manufacturer performing contract or self-funded research and developmentactivities in an effort to obtain Supplemental Type Certificates or TypeCertificates for any other FAA certified aircraft.

 

Manycompanies with resources and capabilities greater than those of the Companycould develop, manufacture and market a parachute recovery system competitivewith that of the Company, although the Company believes that such developmentand approval could take several years to complete.

 

**Product Liability:**

 

The Company does not currently maintainproduct liability insurance. Accordingly, the costs of litigation must be funded directly by theCompany.

 

**Environmental Compliance:**

 

The Companybelieves that it is in compliance with all current federal and stateenvironmental laws.

 

**Employees:**

 

As ofSeptember 30, 2003, the Company had 23 full-time employees and onepart-time employee at its South St. Paul facility, which are paid both hourlyand by salary.  No employees arerepresented by a labor union and we consider our relations with employees to begood.

 

Item 2.  Description of Property

 

The Companyleases a stand-alone 13,000 square foot office and production facility locatedat Fleming Field Airport in South St. Paul, Minnesota.  The building is a World War II traininghangar, which the Company renovated.  TheCompany has a second building on Fleming Field, which it also leases.  This second building is also stand-alone andmeasures approximately 4,800 square feet of combined office and shop space andis used for engineering office space and testing.  The Company maintains all of its equipment in good working orderand has secured adequate insurance for the facilities and its contents.

 

The Companybelieves that the current facilities are adequate for the current level ofbusiness activities.  In the event thatthe Company requires additional facilities, the Company believes it could procureacceptable facilities.

 

Item 3.  Legal Proceedings

 

InAugust 2003, the Company was served in two related actions, Kathleen F.Fischer, Individually and as personal representative of the Estate of Joseph C.Fischer v. Cirrus Design Corp., Ballistic Recovery Systems, Inc., and WingsAloft, Inc., U.S. District Court for the Northern District of New York, FileNo. 03-CV-0782 (HGM/DEP), and Susan Sedgwick, Individually, on her own behalfas surviving spouse of Thomas P. Sedgwick, as Executrix of the Estate of ThomasP. Sedgwick, deceased, and on behalf of all interested beneficiaries, includingJamie Lynn Sedgwick and

 

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JacquelineAnn Sedgwick v. Cirrus Design Corp., Ballistic Recovery Systems, Inc. and WingsAloft, Inc., U.S. District Court for the Northern District of New York, FileNo. 03-CV-0592 (HGM/DEP).

 

Theseactions arise from the crash of a Cirrus Design Corp. SR22 airplane inApril 2002 near Parish, New York. Plaintiffs have brought claims for strict products liability, negligenceand breach of warranty against Cirrus Design, the airplane’s manufacturer, theCompany, which manufactures the CAPS (Cirrus Airframe Parachute System), aparachute system which is a required component of the plane, and Wings Aloft,Inc., which provided training on the SR22 to the decedents.

 

Inpreliminary reports submitted to the court, the plaintiff in *Fischer* has estimated the damages to besought at trial as sixty million dollars, and the plaintiff in *Sedgwick* has submitted an estimate ofseven million five hundred thousand dollars.

 

The mattershave been consolidated for purposes of discovery, which began inNovember 2003 and is scheduled to be completed by September 30, 2004,with the trials to commence after January 2005.

 

At thistime, the Company cannot state with any degree of certainty what the outcome ofthese matters will be or the amount or range of potential loss, if any.  The Company will vigorously defend thesematters.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

No matterswere submitted to a vote of security holders through a solicitation of proxiesor otherwise during the fourth quarter.

 

**PART II**

 

Item 5.  Market for Common Equity and RelatedShareholder Matters

 

(a)                                  Market Information

 

TheCompany’s Common Stock is traded on the electronic bulletin board on the overthe counter market and on the pink sheets under the trading symbol of BRSI orBRSI.OB.  Several Internet stocktracking services show the Company’s trading volumes with bid and ask prices asfar back as August 1995.  Based oninformation provided by these Internet stock-tracking services, the Companybelieves that the asking price would be $1.16 and the bid price would be $1.16as of September 30, 2003.

 

Thefollowing table sets forth the estimated high and low bid prices for theperiods indicated.  The estimated bidprices shown are based on information from several Internet stock-trackingservices. These figures represent inter-dealer prices, without retail markup,markdown or commission, and do not necessarily represent actual transactions.

 
|          |   | **First  Quarter** |   | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|---------------|--------|--------------------|--------|---------------------|------------|--------------------|------------|---------------------|------------|
|          |   |               |   |                |       |               |       |                |       |
| Common Stock: |   |               |   |                |       |               |       |                |       |
| 2003          | High   |               | $      | 1.37                |       | $                  | 1.25       |                | $          | 1.25 |   | $ | 1.27 |   |
|          | Low    |               | $      | 0.85                |       | $                  | 0.98       |                | $          | 0.90 |   | $ | 1.00 |   |
|          |   |               |   |                |       |               |       |                |       |   |
| 2002          | High   |               | $      | 1.03                |       | $                  | 1.53       |                | $          | 1.12 |   | $ | 1.05 |   |
|          | Low    |               | $      | 0.76                |       | $                  | 0.98       |                | $          | 0.86 |   | $ | 0.80 |   |

 

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(b)                                 Holders

 

As ofNovember 28, 2003, the Company estimates there were approximately 1,500beneficial owners of the Company’s common stock.

 

(c)                                  Dividends

 

The Companydeclared a dividend in the amount of $0.05 per share, payable January 30,2003 to all Common Shareholders of Record on January 15, 2003.

 

(d)                                 Equity Compensation Plan Table

 

Thefollowing table provides information as of September 30, 2003 about theCompany’s equity compensation plan.

 
| **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** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                                                     |   | **(a)**                                                                                            |   | **(b)**                                                                           |   | **(c)**                                                            |   |
| Equity  compensation plans approved by security holders                  |   | 20,000                                                                                             |   | $                                                                                 | 0.6238 |                                                               | 0      |   |
|                                                                     |   |                                                                                               |   |                                                                              |   |                                                               |   |
| Equity  compensation plans not approved by security holders - See Note 1 |   | 906,250                                                                                            |   | $                                                                                 | 1.0304 |                                                               | 0      |   |
|                                                                     |   |                                                                                               |   |                                                                              |   |                                                               |   |
| Total                                                                    |   | 926,250                                                                                            |   | $                                                                                 | 1.0216 |                                                               | 0      |   |

 

Note 1 – 500,000 shares represent stockwarrants issued to Cirrus Design under terms of a supply agreement. Theremaining shares represent stock options granted to employees and directors atthen current market prices.

 

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# **Item 6.**           Management’s Discussion and Analysis or Planof Operation

 

**Operations:**

 

Sales

 

Sales for fiscal 2003 were up 29.5% to$6,549,011 compared to $5,057,092 for the prior fiscal year.  The increase is attributed to the Company’snew general aviation products.  Revenuesderived from the Company’s general aviation products accounted forapproximately 75% of revenues for both fiscal year 2003 and 2002.

 

Sales to Cirrus Design accounted for 74% of Company revenues in fiscalyear 2003.  The Company understands thatCirrus Design is expected to exceed fiscal year 2003 manufacturing volumes forits aircraft throughout the next fiscal year for both its SR20 and SR22models.  As a result, the Company isforecasting further growth in 2004 in its general aviation revenues.  However, with respect to Cirrus Design,volume projections and timing of those volumes is uncertain at this time.  Cirrus Design had reduced their backlog bythe end of the current fiscal year compared to the prior fiscal year byincreasing production volumes in an effort to better serve its customers withshortened lead-times.  Accordingly, noassurance can be given that general aviation revenues will increase asanticipated.

 

The Company’s general aviation product is standard equipment on theCirrus Design SR20 and SR22 model aircraft. The Company delivered 466 and 367 units to Cirrus Design in fiscal year2003 and 2002, respectively.  TheCompany understands that as of the beginning of November 2003, Cirrus Designhas a backlog of approximately 200 aircraft all of which are required toinclude the Company’s parachute systems. The Company believes that Cirrus Design expects to be able to fill thebacklog of firm aircraft orders during the next 12 months.  The backlog of Cirrus Design aircraft ordersis a reduction from the same prior year period basically as a result of CirrusDesign’s efforts to reduce lead times and increase production volumes to betterserve its customers.  Future productionvolumes for the Cirrus Design aircraft, and therefore, the Company’s parachutesystems, will be dictated by ultimate market demands for Cirrus Design’sproducts.  Accordingly, the Company is,and will likely be, dependent on Cirrus Design for a material portion of itsrevenues for fiscal year 2004.  Anynegative impact on Cirrus Design’s sales would negatively impact the Company’srevenues.

 

In addition, the Company has begun productionand deliveries of products for the BRS-172 product for the Cessna 172 modelaircraft.  Since certified inJuly 2002, 11 systems have been installed in aircraft with three moresystems with deposits pending delivery. In addition, the Company’s distributor has placed orders for anadditional 6 systems, without deposits. Sales of the BRS-172 accounted for 2% of total Company sales in thecurrent fiscal year.  The BRS-172 isbeing marketed and distributed under an exclusive marketing arrangement withAerospace Marketing in conjunction with factory support.  Although certified, there can be noassurances that the system will sell in volumes that will have a materialimpact on the Company.

 

On July 30, 2003, the Company announced that it reached an agreement inprinciple with Canadian-based OMF Aircraft, Inc. (OMF) in which OMF would offerthe Company’s product as a factory installed feature.  On December 9, 2003, OMF GmbH, the parent company of OMF,declared bankruptcy in Germany.  OMF hasannounced its plan to restructure and is currently seeking new investmentpartners to provide financing required to develop and manufacture its two seatand four seat single engine airplane. Assuming OMF obtains adequate financing and upon negotiation andexecution of formal documentation between OMF and the Company, the Company’sparachute system would, following certification, be an optional feature onOMF’s currently certified 2-place aircraft and would be installed as standardequipment on OMF’s 4-place aircraft. The Company will pursue the Supplemental Type Certificate or STC on the2-place aircraft.  No assurance can begiven that OMF will find adequate financing and that it will emerge frombankruptcy of its parent company.  Iffinanced, no assurance can be given that the Company and OMF will enter intodefinitive documentation or what sales, if any, would result from suchagreement.

 

11

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The Company’s recreational aircraft product line sales, which largelyconsist of products for ultralight aircraft, increased 36.1% during fiscal year2003 compared to the prior fiscal year and accounted for 25% of the Company’srevenues for fiscal year 2003.  Incomparison, in fiscal year 2002 recreational aircraft product line sales weredown 8.5% from the prior fiscal year. Notwithstanding fiscal year 2003’s growth, the business continues to beimpacted by several factors.  Recentgeneral economic conditions dramatically affected the United Statesrecreational aircraft business. Although the recreational aircraft industry showed signs of recovery in2003, the long-term implications of the economic downturn on the sport aviationindustry are still unknown.

 

There are new federal proposed regulations that management believeswill, if enacted as proposed, positively affect future recreational aircraftdesigns and sales of the Company’s products. The new regulations are expected to increase sales of a new category ofaircraft called Light Sport Aircraft, which management believes will in turn increasedemand for the Company’s recreational aircraft products.  However, the international markets for theCompany’s recreational aircraft products have been affected by a number offactors including weakening global economic conditions and fluctuating currenciesthat affect the cost of the Company’s exports, increased competition in Europe,and increasing U.S. government regulations that make it more challenging totransport the Company’s product abroad. The Company has expanded its efforts to improve international businessfor its sport aviation products, but there can be no assurances that theseefforts will produce increased sales for the Company.

 

The Company anticipates being able to expand its product line toinclude other certified and non-certified aircraft as the recovery system gainsfurther market acceptance.  The Companyis in ongoing discussions with other domestic and foreign companies that haveexpressed interest in utilizing certain of the Company’s products.  These companies produce both certified andnon-certified aircraft.  No assurancecan be made as to the future benefits, if any, that the Company will derivefrom these discussions.

 

Gross Profit

 

For fiscal year 2003, gross profit as apercentage of revenues was 39.4% compared to 40.1% for the prior fiscalyear.  The reduction in gross profitreflects volume price reductions granted to Cirrus Design for sales of theCompany’s general aviation products.  Inaddition, despite increases in raw materials and labor costs, the relativelyconsistent gross profit is the result of leveraging the Company’s operationspersonnel and manufacturing overhead over a larger revenue base.  The Company’s gross profit percentage hasvaried each year, and each quarter, in both a positive and negative fashion dueto a variety of factors including customer and specific product mix, inventoryprovisions, and volume related efficiencies. Such variations may continue to impact gross profit percentages infuture reporting periods.

 

Selling, General and Administrative

 

Selling, general and administrative costs as a percentage of sales were18.5% for fiscal year 2003 as compared to 17.3% for fiscal year 2002.  These costs have gone up as a result ofincreases in shareholder related expenses such as audit fees, board fees andproxy and annual report distribution costs, advertising, increased corporateoffice staff and pay rate adjustments, business development expenses and legalfees.  Expenditures in this category areexpected to increase as the Company accelerates its efforts to expand thegeneral aviation market while strengthening the sport and recreational marketsales.  Furthermore, the Company doesnot have products liability insurance and must fund the expenses of its currentproducts liability litigation.

 

###### Research and Development, net

 

Third partyfunding has offset a portion of research and development costs for bothyears.  Third party offsets to theresearch and development costs were $189,410 and $112,741, respectively forfiscal year 2003 and 2002.  These offsetsreduced the costs reflected in the financial statements.  Gross and net (after offsets) research anddevelopment costs were 43.4% and 34.3%, respectively, higher in fiscal year2003 compared to fiscal year 2002. Management believes that research and development is an integral part ofthe 

 

12

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growth strategyfor the Company, and will continue to play an important role in the Company’ssuccess.  Therefore, increases inresearch and development expenditures are planned for the future in the areasof new product development and in the expansion of currently developed productsfor additional applications.  OnSeptember 16, 2002, the Company entered into a contact with NASA throughits Small Business Innovation Research (SBIR) program. The contract, which is afollow on to a Phase I feasibility study, is entitled “Advanced AircraftParachute Recovery System” and was granted to allow the Company to investigatethe feasibility of developing parachute systems for larger and faster aircraftthan those currently supported by the Company. The Phase II contract award was for $598,694 and covers a 24-monthperiod.  The Phase II grant will allowthe Company to continue its research and development that it began during thePhase I award.  Further offsets toexpenses will be made during fiscal year 2004 as a result of funding to bereceived from this award.  No assurancescan be made that if the Phase II is successful, that it will result in futureproducts and revenues for the Company.

 

Net Income and Earnings perShare

 

Pre-tax net income for the currentfiscal year was up 13.5% over fiscal year 2002 to $906,567 compared to$801,940.  Increasing income tax expenseof 5.5% of sales for fiscal year 2003 compared to 3.9% for fiscal year 2002 isa result of the full utilization of prior NOL benefits, which were used tooffset prior year income tax expense. On a fully diluted basis, net income of $549,567 for fiscal year 2003was 8.4% of sales or $0.09 per share, as compared to net income of $604,801,which was 12.0% of sales or $0.10 per share for the prior fiscal year.

 

**Liquidity andCapital Resources:**

 

Management intends to continue to fund its operations out of itscurrent sales with the exception of its contract research and developmentprojects.  The Company will continue tolook for non-equity sources to fund contract research and development projects,but there can be no assurances that the Company will be successful in its efforts.  As of September 30, 2003, the Company hadcash of $862,495.  The Company has aline-of-credit for $500,000, which was increased in October 2003 from itsprevious level of $250,000.  The Companyhas not drawn on that line during the current fiscal year as a result ofpositive cash flow from operations. There is no balance currently outstanding under the line-of-credit.  Management believes that cash from currentbusiness operations, along with the line-of-credit, is adequate to support theongoing operations of the Company during the next twelve-month period andmanagement will maintain and adjust expenses as necessary to improveprofitability.

 

The Company anticipates a need to make continuing capital improvementsto its current production facility as well as expenditures to increase inventorylevels during the fiscal year and beyond as a result of the production ofgeneral aviation recovery systems and further market penetration.  It is currently the intention of the Companyto fund the expenditures through current operations as well as revenuesgenerated by those units.  Furthermore,the Company does not presently have products liability insurance and must fundthe expenses of its pending lawsuits.

 

The Private Securities Litigation Reform Actof 1995 provides “safe harbor” for forward-looking statements.  Certain information included in this Form10-KSB and other materials filed or to be filed by the Company with theSecurities and Exchange Commission (as well as information included in oralstatements or other written statements made or to be made by the Company)contain statements that are forward-looking, such as statements relating toanticipated Cirrus Design delivery orders and schedules, plans for researchprojects, development, anticipated delivery orders and schedules for the Cessna172 system,  the Cessna 150/152 system,the Company’s new partnership with OMF and OMF’s restructuring, success ofcontracts for NASA SBIR research projects, the timing and impact of proposedregulations on Light Sport Aircraft sales, other business developmentactivities as well as other capital spending, financial sources, and theeffects of competition.  Suchforward-looking information involves important risks and uncertainties thatcould significantly affect anticipated results in the future and, accordingly,such results may differ from those

 

13

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expressed in any forward-looking statements made by or on behalf of theCompany.  These risks and uncertaintiesinclude, but are not limited to, dependence on Cirrus Design, potential productliability claims, federal transportation rules and regulation which maynegatively impact the Company’s ability to ship its products in a costefficient manner, the elimination of funding for new research and developmentprojects, the decline in registered and unregistered aircraft sales, dependenceon discretionary consumer spending, dependence on existing management, generaleconomic conditions, changes in federal or state laws or regulations.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion and analysis or planof operation is based upon our financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements, the reported amounts of revenues and expenses during thereporting period, and related disclosures of contingent assets and liabilitiesfor the periods indicated.  The notes tothe financial statements contained herein describe our significant accountingpolicies used in the preparation of the financial statements.  On an on-going basis, we evaluate ourestimates, including, but not limited to, those related to allowance fordoubtful accounts, inventory valuation allowance and contingencies.  Management has estimated an inventoryvaluation allowance of $125,000.  Due touncertainties, however, it is at least reasonably possible that management’sestimates will change during the next year, which cannot be estimated.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from these estimates under differentassumptions or conditions.

 

**Disclosuresabout Contractual Obligations and Commercial Commitments**

 

The following summarizes our contractualobligations at September 30, 2003, and the effect of these contractualobligations are expected to have on our liquidity and cash flows in futureperiods:

 
|                      |   | **Total** |    | **1 Year  or Less** |   | **1-3  Years** |   | **Over  3 Years** |   |
|---------------------------|--------|-----------|---------|---------------------|--------|----------------|--------|-------------------|--------|
| Operating Leases          |   | $         | 115,338 |                | $      | 49,465         |   | $                 | 40,491 |   | $ | 25,382 |   |
| Line of Credit Borrowings |   | —    |    | —              |   | —         |   | —            |   |
|                      |   |      |    |                |   |           |   |              |   |
| Total                     |   | $         | 115,338 |                | $      | 49,465         |   | $                 | 40,491 |   | $ | 25,382 |   |

 

14

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Item 7.  Financial Statements and Supplementary Data

 
| Financial Statements for the  years ended September 30, 2003 and 2002: |                                                                                            |
|-----------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                                        |                                                                                            |
|                                                                        | Independent Auditors’ Reports                                                              |   |
|                                                                        |                                                                                            |   |
|                                                                        | Balance sheets at September 30, 2003  and 2002                                             |   |
|                                                                        |                                                                                            |   |
|                                                                        | Statements of operations for the years ended  September 30, 2003 and 2002.                 |   |
|                                                                        |                                                                                            |   |
|                                                                        | Statements of Shareholders’ Equity for the  years ended  September 30, 2003 and 2002. |   |
|                                                                        |                                                                                            |   |
|                                                                        | Statements of cash flow for years ended  September 30, 2003 and 2002.                      |   |
|                                                                        |                                                                                            |   |
|                                                                        | Notes to financial statements.                                                                  |   |

 

15

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**Virchow, Krause & Company, LLP**

7900 Xerxes Avenue South, Suite 2400

# **Bloomington, MN  55431-1115**

 

 

INDEPENDENT AUDITORS’ REPORT

 

 

Shareholders, Audit Committee and Board of DirectorsBallistic Recovery Systems, Inc.St. Paul, Minnesota

 

 

We haveaudited the accompanying balance sheet of Ballistic Recovery Systems, Inc. asof September 30, 2003 and the related statements of operations,shareholders’ equity and cash flows for the year then ended. These statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordancewith auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Ballistic Recovery Systems, Inc. as of September 30,2003 and the results of its operations and its cash flows for the year thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

 
|                   |   | /s/ Virchow, Krause & Company, LLP |
|------------------------|--------|----------------------------------------|
|                   |   |
|                   |   |
| Minneapolis, Minnesota |   |
| November 20, 2003 |   |

 

16

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# **Callahan,Johnston & Associates, LLCCertified Public Accountants and Consultants**

7400 Lyndale Avenue South,Suite 140Minneapolis, MN  55423(612) 861-0970 Fax (612) 861-5827

 

 

INDEPENDENT AUDITORS’ REPORT

 

 

Shareholders and Board of DirectorsBallistic Recovery Systems, Inc.South St. Paul, Minnesota

 

We have audited the accompanying balancesheet of Ballistic Recovery Systems, Inc. as of September 30, 2002 and therelated statements of operations, shareholders’ equity, and cash flows for theyear then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes an assessment of the accounting principlesused and significant estimates made by management, as well as an evaluation ofthe overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Ballistic Recovery Systems, Inc. as of September 30, 2002, andthe results of operations, cash flows and changes in shareholders’ equity forthe years then ended, in conformity with accounting principles generally acceptedin the United States of America.

 

 
| /s/ Callahan, Johnston &  Associates, LLC                                            |   |
|------------------------------------------------------------------------------------------|--------|
|                                                                                     |
| Callahan, Johnston &  Associates, LLC  Minneapolis, Minnesota  November 8, 2002 |

 

17

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PART II - Item 7.  Financial Statements

 

**Ballistic Recovery Systems, Inc.**

**Balance Sheets**

**September 30, 2003 and 2002**

 
|                                                                                                                               |   | **2003**  |      | **2002**  |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Assets                                                                                                                             |   |      |      |      |   |
| Current assets:                                                                                                                    |   |      |      |      |   |
| Cash                                                                                                                               |   | $         | 862,495   |      | $      | 997,629 |   |
| Accounts receivable - net of allowance for doubtful accounts of  $10,000 and $10,000, respectively                                 |   | 326,321   |      | 78,945    |   |
| Inventories, net                                                                                                                   |   | 1,118,190 |      | 827,898   |   |
| Deferred tax asset - current portion                                                                                               |   | 114,000   |      | 419,000   |   |
| Prepaid expenses                                                                                                                   |   | 60,695    |      | 48,371    |   |
| Total current assets                                                                                                               |   | 2,481,701 |      | 2,371,843 |   |
|                                                                                                                               |   |      |      |      |   |
| Furniture, fixtures and leasehold improvements                                                                                     |   | 467,578   |      | 367,405   |   |
| Less accumulated depreciation                                                                                                      |   | (207,038  | )         | (170,387  | )      |
| Furniture, fixtures and leasehold improvements - net                                                                               |   | 260,540   |      | 197,018   |   |
|                                                                                                                               |   |      |      |      |   |
| Other assets:                                                                                                                      |   |      |      |      |   |
| Patents, net of accumulated amortization of $9,367 and $8,681,  respectively                                                       |   | 2,297     |      | 2,984     |   |
| Long-term prepaid expenses                                                                                                         |   | 77,972    |      | 103,211   |   |
| Other intangible assets, net of accumulated amortization of $51,398  and $46,258, respectively                                     |   | —    |      | 5,140     |   |
| Covenant not to compete, net of accumulated amortization of $300,388  and $262,444, respectively                                   |   | 79,050    |      | 116,994   |   |
| Total other assets                                                                                                                 |   | 159,319   |      | 228,329   |   |
|                                                                                                                               |   |      |      |      |   |
| Total assets                                                                                                                       |   | $         | 2,901,560 |      | $      | 2,797,190 |   |
|                                                                                                                               |   |      |      |      |   |
| Liabilities and Shareholders’ Equity                                                                                          |   |      |      |      |   |
|                                                                                                                               |   |      |      |      |   |
| Current liabilities:                                                                                                               |   |      |      |      |   |
| Current portion of covenant not to compete                                                                                         |   | $         | 40,561    |      | $      | 36,354 |   |
| Accounts payable                                                                                                                   |   | 122,714   |      | 51,582    |   |
| Customer deposits                                                                                                                  |   | 116,827   |      | 192,754   |   |
| Accrued payroll                                                                                                                    |   | 103,229   |      | 75,172    |   |
| Other accrued liabilities                                                                                                          |   | 198,415   |      | 342,402   |   |
| Current liabilities                                                                                                                |   | 581,746   |      | 698,264   |   |
|                                                                                                                               |   |      |      |      |   |
| Long-term covenant not to compete, less current portion                                                                            |   | 49,254    |      | 89,816    |   |
|                                                                                                                               |   |      |      |      |   |
| Shareholders’ equity:                                                                                                         |   |      |      |      |   |
| Common stock ($.01 par value; 10,000,000 shares authorized; 6,245,928  and 6,209,736 shares, respectively, issued and outstanding) |   | 62,459    |      | 62,098    |   |
| Additional paid-in capital                                                                                                         |   | 2,784,635 |      | 2,764,197 |   |
| Accumulated deficit                                                                                                                |   | (576,534  | )         | (817,185  | )      |
| Total shareholders’ equity                                                                                                    |   | 2,270,560 |      | 2,009,110 |   |
| Total liabilities and shareholders’ equity                                                                                    |   | $         | 2,901,560 |      | $      | 2,797,190 |   |

 

TheAccompanying Notes are an Integral Part of these Financial Statements.

 

18

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**Ballistic Recovery Systems, Inc.**

**Statements ofOperations**

**For the Years Ended September 30, 2003and 2002**

 
|                                          |   | **2003**  |      | **2002**  |   |
|-----------------------------------------------|--------|-----------|-----------|-----------|--------|
| Sales                                         |   | $         | 6,549,011 |      | $      | 5,057,092 |   |
| Cost of sales                                 |   | 3,966,125 |      | 3,030,189 |   |
|                                          |   |      |      |      |   |
| Gross profit                                  |   | 2,582,886 |      | 2,026,903 |   |
|                                          |   |      |      |      |   |
| Selling, general and administrative           |   | 1,211,567 |      | 873,690   |   |
| Research and development, net                 |   | 407,171   |      | 303,188   |   |
|                                          |   |      |      |      |   |
| Income from operations                        |   | 964,148   |      | 850,025   |   |
|                                          |   |      |      |      |   |
| Other income (expense):                       |   |      |      |      |   |
| Interest expense                              |   | (14,905   | )         | (16,855   | )      |
| Intangible amortization                       |   | (43,083   | )         | (48,223   | )      |
| Other - net                                   |   | 3,407     |      | 16,543    |   |
|                                          |   |      |      |      |   |
| Income before income taxes                    |   | 909,567   |      | 801,490   |   |
|                                          |   |      |      |      |   |
| Income taxes expense                          |   | 360,000   |      | 196,689   |   |
|                                          |   |      |      |      |   |
| Net income                                    |   | $         | 549,567   |      | $      | 604,801 |   |
|                                          |   |      |      |      |   |
| Basic earnings per share                      |   | $         | 0.09      |      | $      | 0.10 |   |
|                                          |   |      |      |      |   |
| Weighted average number of shares outstanding |   | 6,222,399 |      | 6,184,925 |   |
|                                          |   |      |      |      |   |
| Diluted earnings per share                    |   | $         | 0.09      |      | $      | 0.10 |   |
|                                          |   |      |      |      |   |
| Weighted average number of shares outstanding |   | 6,346,373 |      | 6,330,360 |   |

 

TheAccompanying Notes are an Integral Part of these Financial Statements.

 

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**Ballistic Recovery Systems, Inc.**

**Statements ofShareholders’ Equity**

**For the Years Ended September 30, 2003and 2002**

 
|                                       |   | **Common Stock**      |   | **Additional** |       |                 |               | **Share-**               |               |
|--------------------------------------------|--------|-----------------------|--------|----------------|------------|----------------------|--------------------|--------------------------|--------------------|
|                                       |   | **Number of  Shares** |   | **Amount**     | ** ** | **Paid-in  Capital** | **    ** | **Accumulated  Deficit** | **    ** | **holders’  Equity** | **    ** |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Balance 9/30/01                            |   | 6,119,701             |   | $              | 61,197     |                 | $                  | 2,761,347                |               | $ | (1,298,661 | ) | $ | 1,523,883 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Issuance of stock in lieu of director fees |   | 3,750                 |   | 38             |       | 3,713                |               | —                   |               | 3,751 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Issuance of stock in cashless transaction  |   | 86,285                |   | 863            |       | (863                 | )                  | —                   |               | — |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Dividend declaration                       |   | —                |   | —         |       | —               |               | (123,325                 | )                  | (123,325 | ) |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Net income                                 |   | —                |   | —         |       | —               |               | 604,801                  |               | 604,801 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Balance 9/30/02                            |   | 6,209,736             |   | $              | 62,098     |                 | $                  | 2,764,197                |               | $ | (817,185 | ) | $ | 2,009,110 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Issuance of stock in cashless transactions |   | 36,192                |   | 361            |       | (361                 | )                  | —                   |               | — |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Expense from stock based transaction       |   | —                |   | —         |       | 20,799               |               | —                   |               | 20,799 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Dividend declaration                       |   | —                |   | —         |       | —               |               | (308,916                 | )                  | (308,916 | ) |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Net income                                 |   | —                |   | —         |       | —               |               | 549,567                  |               | 549,567 |   |
|                                       |   |                  |   |           |       |                 |               |                     |               |   |   |
| Balance 9/30/03                            |   | 6,245,928             |   | $              | 62,459     |                 | $                  | 2,784,635                |               | $ | (576,534 | ) | $ | 2,270,560 |   |

 

TheAccompanying Notes are an Integral Part of these Financial Statements.

 

20

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**Ballistic Recovery Systems, Inc.**

**Statements ofCash Flow**

**For the Years Ended September 30, 2003and 2002**

 
|                                                                      |   | **2003** |    | **2002** |   |
|---------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Cash flows from operating activity:                                       |   |     |    |     |   |
| Net income                                                                |   | $        | 549,567 |     | $      | 604,801 |   |
| Adjustments to reconcile net income to net cash from operating  activity: |   |     |    |     |   |
| Deferred income tax                                                       |   | 305,000  |    | 81,000   |   |
| Depreciation and amortization                                             |   | 68,639   |    | 54,287   |   |
| Amortization of covenant not to compete                                   |   | 37,944   |    | 37,943   |   |
| Stock issued in lieu of board fees                                        |   | —   |    | 3,750    |   |
| Expense from stock based transaction                                      |   | 20,799   |    | —   |   |
| Loss on retirement of furniture and equipment                             |   | 1,096    |    | —   |   |
| (Increase) decrease in:                                                   |   |     |    |     |   |
| Accounts receivable                                                       |   | (247,376 | )       | (61,557  | )      |
| Inventories                                                               |   | (290,292 | )       | (141,496 | )      |
| Prepaid expenses                                                          |   | (12,324  | )       | (34,258  | )      |
| Long-term prepaid expenses                                                |   | 25,239   |    | (103,211 | )      |
| Increase (decrease) in:                                                   |   |     |    |     |   |
| Accounts payable                                                          |   | 71,132   |    | (54,771  | )      |
| Customer deposits                                                         |   | (75,927  | )       | 106,693  |   |
| Accrued expenses                                                          |   | (115,930 | )       | 162,147  |   |
|                                                                      |   |     |    |     |   |
| Net cash flows from operating activities                                  |   | 337,567  |    | 655,328  |   |
|                                                                      |   |     |    |     |   |
| Cash flows from investing activities:                                     |   |     |    |     |   |
| Purchases of furniture, fixtures and leasehold improvements               |   | (127,430 | )       | (169,399 | )      |
|                                                                      |   |     |    |     |   |
| Net cash flows from investing activities                                  |   | (127,430 | )       | (169,399 | )      |
|                                                                      |   |     |    |     |   |
| Cash flows from financing activities:                                     |   |     |    |     |   |
| Principal payments on covenant not to compete                             |   | (36,355  | )       | (32,583  | )      |
| Payments of dividends                                                     |   | (308,916 | )       | (123,325 | )      |
|                                                                      |   |     |    |     |   |
| Net cash flows from financing activities                                  |   | (345,271 | )       | (155,908 | )      |
|                                                                      |   |     |    |     |   |
| Increase (decrease) in cash                                               |   | (135,134 | )       | 330,021  |   |
| Cash - beginning of year                                                  |   | 997,629  |    | 667,608  |   |
|                                                                      |   |     |    |     |   |
| Cash - end of period                                                      |   | $        | 862,495 |     | $      | 997,629 |   |

 

The AccompanyingNotes are an Integral Part of these Financial Statements.

 

21

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**Ballistic Recovery Systems, Inc.**

**Notes toFinancial Statements**

**For the Years Ended September 30, 2003and 2002**

 

1.               Nature of Business

 

Ballistic Recovery Systems, Inc. (the“Company”) designs, manufactures and distributes rocket deployed whole-aircraftemergency parachute systems for use on general aviation and sport recreationalaircraft. The emergency parachute systems are intended for use in the event ofan in-air emergency and are designed to bring down the entire aircraft and itsoccupants under the parachute canopy. The Company is currently producing and selling emergency recoverysystems for two four-place general aviation aircraft, known as the CirrusDesign SR20 (SR20) and SR22, and the SR20 entry-level model called theSRV.  The products were developed in ajoint effort between the Company and Cirrus Design.  These aircraft were certified by the Federal AviationAdministration (FAA) in 1998 and 2000, respectively, and features the Company’sparachutes as standard equipment.  InNovember 2001, the Company entered into a contract to develop and market aproduct for the Cessna 172 model of aircraft. The development was completed and certification by the FAA was receivedin July 2002.  The Company’s productsare sold both domestically and internationally.

 

2.               Summary of Significant Accounting Policies

 

AccountingPrinciples

 

Thefinancial statements and accompanying notes are prepared in accordance withaccounting principles generally accepted in the United States of America.

 

Estimatesand Assumptions

 

Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, revenues and expenses.  Actual results and outcomes may differ frommanagement’s estimates and assumptions.

 

Cash Concentrations

 

Bankbalances exceeded federally insured levels during 2003 and 2002, and exceededfederally insured levels as of September 30, 2003.  Generally, these balances may be redeemedupon demand and therefore bear minimal risk.

 

AccountsReceivable, credit risk and allowance for doubtful accounts

 

The Companysells its products to domestic and foreign companies.  The Company reviews customers’ credit history before extendingunsecured credit and established an allowance for doubtful accounts based uponfactors surrounding the credit risk of specific customers and other information.  The Company does not accrue interest on pastdue accounts receivable.  Unlessspecific arrangements have been made, accounts receivable over 30 days areconsidered past due. The Company writes off accounts receivable when they aredeemed uncollectible.  Accountsreceivable are shown net of an allowance for doubtful accounts of $10,000 atboth September 30, 2003 and 2002.The Company’s research and developmentprojects are billed to its customers on an uncollateralized credit basis.  The estimated loss that management believesis probable is included in the allowance for doubtful accounts.  Due to uncertainties in the collectionprocess, however, it is at least reasonably possible that management’s estimatewill change during the next year, which cannot be estimated.

 

22

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CustomerConcentration

 

The Company hadsales to one major customer, Cirrus Design Corporation (Cirrus), whichrepresented 74%and 75% of the Company’s total sales for fiscal years 2003 and2002, respectively.  This customer alsoaccounted for 44% (or $142,000) and 84% (or $75,000) of accounts receivable atSeptember 30, 2003 and 2002, respectively.  The Company supplies parachute systems to Cirrus from theCompany’s general aviation product line.

 

In itsrecreational aviation product line, the Company primarily distributes itsproducts through dealers and distributors who in turn sell the products to theend consumer.  The Company believes thatin the event that any individual dealers or distributors cease to represent theCompany’s products, alternative dealers or distributors can be established.

 

Inventories

 

Inventoriesare recorded at the lower of cost (first-in, first-out) or market.Approximately 33% of the inventory on hand at the end of fiscal year 2003 and2002 related to unique components used in products for the Company’s majorcustomer as referred to above.  Theestimated loss that management believes is probable is included in the inventoryvaluation allowance.  Due to uncertainties,however, it is at least reasonably possible that management’s estimate willchange during the next year, which cannot be estimated.

 

CustomerDeposits

 

The Companyrequires order deposits from most of its domestic and internationalcustomers.  These deposits representeither partial or complete down payments for orders.  These down payments are recorded as customer deposits.  The deposits are recognized as revenue whenthe product is shipped.

 

IncomeTaxes

 

Differencesbetween accounting rules and tax laws cause differences between the bases ofcertain assets and liabilities for financial reporting purposes and taxpurposes.  The tax effects of thesedifferences, to the extent they are temporary, are recorded as deferred taxassets and liabilities under Statement of Financial Accounting Standards (SFAS)109.

 

Temporarydifferences relate primarily to: allowances for doubtful accounts; inventoryvaluation allowances; and accrued expenses not currently deductible.  Beginning in fiscal year 1997 and continuingto the present, a deferred tax asset, net of a valuation reserve, is reflectedfor future benefit of the Company’s net operating loss carry forwards and nettiming differences.  At the end offiscal year 2003 and 2002, the Company had fully valued its net operating losscarry forwards.

 

23

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Furniture,Fixtures and Leasehold Improvements

 

Furniture,fixtures and leasehold improvements are stated at cost. Depreciation iscomputed using the straight-line method over the estimated useful lives of therelated assets, ranging from three to ten years. When assets are retired orotherwise disposed of, the cost and related accumulated depreciation areremoved from the accounts and the resulting gain or loss is recognized inincome for the period.  The cost ofmaintenance and repairs is expensed as incurred; significant renewals andbetterments are capitalized. Deduction is made for retirements resulting fromrenewals or betterments.  Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe lease term, or the estimated useful life of the assets.

 

Intangibles

 

Patents arerecorded at cost and are being amortized on a straight-line method over 17years.  The covenant not to compete isrecorded at cost and is being amortized using the straight-line method over theten-year term of the agreement.  Otherintangible assets are recorded at cost and are being amortized on astraight-line method over five years.

 

Componentsof intangible assets are as follows:

 
|                                        |   | **September 30, 2003** |    | **September 30, 2002**   |       |
|---------------------------------------------|--------|-----------------------------|---------|-------------------------------|------------|
|                                        |   | **Gross Carrying  Amount**  |    | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets subject to amortization: |   |                        |    |                          |       |   |   |   |   |
|                                        |   |                        |    |                          |       |   |   |   |   |
| Patents                                     |   | $                           | 11,664  |                          | $          | 9,367 |   | $ | 11,664 |   | $ | 8,680 |   |
| Other  intangible assets                    |   | $                           | 51,398  |                          | $          | 51,398 |   | $ | 51,398 |   | $ | 46,258 |   |
| Covenant not  to compete                    |   | $                           | 379,438 |                          | $          | 300,388 |   | $ | 379,438 |   | $ | 262,444 |   |

 

Amortizationexpense of intangible assets was $43,771 and $48,909 for the years endedSeptember 30, 2003 and 2002, respectively.  Amortization expense is estimated to approximate $38,630,$38,630, $3,849 and $238 for the years ending September 30, 2004, 2005,2006 and 2007, respectively.

 

ComprehensiveIncome

 

SFAS No.130 establishes standards for the reporting and disclosure of comprehensiveincome and its components, which will be presented in association with acompany’s financial statements. Comprehensive income is defined as the change in a business enterprise’sequity during a period arising from transactions, events or circumstancesrelating to non-owner sources, such as foreign currency translation adjustmentsand unrealized gains or losses on available-for-sale securities.  It includes all changes in equity during a periodexcept those resulting from investments by or distributions to owners.  For the fiscal years endedSeptember 30, 2003 and 2002, net income and comprehensive income wereequivalent.

 

24

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Fair Valueof Financial Instruments

 

SFAS No.107, “Disclosures About Fair Value of Financial Instruments” requiresdisclosure of the estimated fair value of financial instruments as follows:

 

*Short-term Assets and Liabilities*:

 

The fairvalues of cash, accounts receivable, accounts payable, accrued liabilities, andshort-term debt approximate their carrying values due to the short-term natureof these financial instruments.

 

*Long-term Debt*:

 

Thefair value of long-term debt approximate their carrying value because the termsare equivalent to borrowing rates currently available to the Company for debtwith similar terms and maturities.

 

Segment Reporting

 

A business segment is a distinguishable componentof an enterprise that is engaged in providing an individual product or serviceor a group of related products or services and that is subject to risks andreturns that are different from those of other business segments. The Company’ssegments have similar economic characteristics and are similar in the nature ofthe products sold, type of customers, methods used to distribute the Company’sproducts and regulatory environment. Management believes that the Company meets the criteria for aggregatingits operating segments into a single reporting segment.

 

Stock-Based Compensation

 

In accordance with Accounting Principles Board(APB) Opinion No. 25 and related interpretations, the Company uses theintrinsic value-based method for measuring stock-based compensation cost whichmeasures compensation cost as the excess, if any, of quoted market price of theCompany’s common stock at the grant date over the amount the employee must payfor the stock.  The Company’s generalpolicy is to grant stock options at fair value at the date of grant. Optionsand warrants issued to non-employees are recorded at fair value, as required byStatement of Financial Accounting Standards (SFAS) No. 123, “Accounting forStock-Based Compensation”, using the Black Scholes pricing method.

 

Had compensation cost been recognized based on thefair values of options at the grant dates consistent with the provisions ofSFAS No. 123, the Company’s net income and basic and diluted net income percommon share would have been changed to the following pro forma amounts:

 

25

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|                                  |   | **Fiscal Year ended  September 30,** |    |
|---------------------------------------|--------|-------------------------------------------|---------|
|                                  |   | **2003**                                  |    | **2002** |   |
|                                  |   |                                      |    |   |   |
| Net income:                           |   |                                      |    |   |   |
| As reported                           |   | $                                         | 549,567 |   | $ | 604,801 |   |
| Pro forma                             |   | $                                         | 523,357 |   | $ | 532,307 |   |
|                                  |   |                                      |    |   |   |
| Basic net  income per common share:   |   |                                      |    |   |   |
| As reported                           |   | $                                         | 0.09    |   | $ | 0.10 |   |
| Pro forma                             |   | $                                         | 0.08    |   | $ | 0.09 |   |
|                                  |   |                                      |    |   |   |
| Diluted net  income per common share: |   |                                      |    |   |   |
| As reported                           |   | $                                         | 0.09    |   | $ | 0.10 |   |
| Pro forma                             |   | $                                         | 0.08    |   | $ | 0.08 |   |
|                                  |   |                                      |    |   |   |
| Stock based  compensation:            |   |                                      |    |   |   |
|                                  |   |                                      |    |   |   |
| As reported                           |   | $                                         | 20,799  |   | $ | 0 |   |
| Pro forma                             |   | $                                         | 26,210  |   | $ | 72,494 |   |

 

In determining the compensation cost of optionsgranted during fiscal year 2003 and 2002, as specified by SFAS No. 123, thefair value of each option grant has been estimated on the date of grant usingthe Black-Scholes option pricing model and the weighted average assumptionsused in these calculations are summarized as follows:

 
|                              |   | **Fiscal Year ended  September 30,** |   |
|-----------------------------------|--------|-------------------------------------------|--------|
|                              |   | **2003**                                  |   | **2002** |   |
|                              |   |                                      |   |   |   |
| Risk-free  interest rate          |   | 2.63                                      | %      | 4.38 | % |
| Expected  life of options granted |   | 5 years                                   |   | 5 years |   |
| Expected  volatility              |   | 36.61                                     | %      | 49.02 | % |
| Expected  dividend yield          |   | 5.00                                      | %      | 2.00 | % |

 

26

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Net Earnings per Common Share

 

Basic earnings per common share is computed by dividing net income bythe weighted average number of common shares outstanding during theperiod.  Diluted earnings per commonshare is computed by dividing net income by the weighted average number ofcommon shares outstanding plus all additional common stock that would have beenoutstanding if potentially dilutive common stock related to stock options andwarrants had been issued.  Weightedaverage shares outstanding-diluted includes 123,974 and 145,435 shares ofdilutive securities for fiscal year 2003 and 2002, respectively.

 

Following is a reconciliation of basic and dilutedearnings per common share for fiscal year 2003 and 2002, respectively:

 
|                                                              |   | **Fiscal Year ended  September 30,** |    |
|-------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                              |   | **2003**                                  |    | **2002** |   |
|                                                              |   |                                      |    |   |   |
| Net income                                                        |   | $                                         | 549,567 |   | $ | 604,801 |   |
|                                                              |   |                                      |    |   |   |
| Weighted  average shares outstanding                              |   | 6,222,399                                 |    | 6,184,925 |   |
|                                                              |   |                                      |    |   |   |
| Net income  per common share — basic                         |   | $                                         | 0.09    |   | $ | 0.10 |   |
|                                                              |   |                                      |    |   |   |
| Net income  per common share — diluted:                      |   |                                      |    |   |   |
|                                                              |   |                                      |    |   |   |
| Net income                                                        |   | $                                         | 549,567 |   | $ | 604,801 |   |
|                                                              |   |                                      |    |   |   |
| Weighted  average shares outstanding                              |   | 6,222,399                                 |    | 6,184,925 |   |
|                                                              |   |                                      |    |   |   |
| Common stock  equivalents                                         |   | 123,974                                   |    | 145,435 |   |
|                                                              |   |                                      |    |   |   |
| Weighted  average shares and potential diluted shares outstanding |   | 6,346,373                                 |    | 6,330,360 |   |
|                                                              |   |                                      |    |   |   |
| Net income  per common share — Diluted                       |   | $                                         | 0.09    |   | $ | 0.10 |   |

 

The Company uses the treasury method forcalculating the dilutive effect of the stock options and warrants (using theaverage market price).

 

Options andwarrants to purchase 390,000 and 140,000****sharesof common stock with a weighted average exercise price of $1.28 and $1.32 wereoutstanding at September 30, 2003 and 2002, respectively, but wereexcluded from the computation of common share equivalents for the fiscal yearended September 30, 2003 and 2002 because their exercise prices weregreater than the average market price of the common shares.

 

27

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Researchand Development Costs

 

Researchand development costs are charged to expense as incurred.

 

AdvertisingExpenses

 

Non-directresponse advertising expenses are recognized in the period incurred.  Non-direct response advertising expensestotaled $88,838 in 2003 and $81,839 in 2002.

 

Shippingand Handling Costs

 

The Companyrecords amounts being charged to customers for shipping and handling as salesand costs incurred in cost of sales.

 

3.               New Product Development, Research and Development Funding and IncomeRecognition

 

OnNovember 2, 2000, the Company entered into an agreement with Charles F.Parsons (d.b.a. Millennium Aerospace) to provide specific funding for aparachute recovery system for the Cessna 172 model aircraft to be developed andcertified by the Company.  The Agreementcalled for an investment by Parsons of $200,000.  The investment took the form of an equity investment at $110,000for 200,000 restricted shares of the Company’s Common Stock and $90,000 forresearch and development.  OnJuly 11, 2002, The Company received the supplemental type certificate fromthe Federal Aviation Administration (FAA), which allows the product to beinstalled on certified Cessna 172 series aircraft.  Since certified, 11 systems have been installed in aircraft withthree more systems with deposits pending delivery.  In addition, Parsons has placed orders for an additional 6systems, without deposits.

 

The Company begandelivering products to Cirrus Design Corporation (Cirrus) in 1999 following thecertification of the Cirrus SR20 aircraft. The SR20 aircraft received Federal Aviation Administration (FAA)certification in October 1998 and includes the Company’s parachute systemas a standard equipment feature. The development of the system for the SR20 wasa joint effort between the Company and Cirrus Design under an agreement thatbegan in 1994 and culminated with FAA certification of the SR20 in late 1998.Under terms of the agreement, the Company has retained the developed technologyfor the parachute systems in general and the outside company has retained thedeveloped technology that is specific to their individual aircraft.  The Company shared in the costs to developand certify the parachute system for this aircraft.  The SR22 received FAA certification in November 2000 and hasthe Company’s product installed as standard equipment as well.  The SR22 is heavier and faster than thepredecessor SR20.  The Company alsoshared in the costs to develop the parachute system for the SR22.

 

Cirrus Designannounced in April 2001 that it would introduce a diesel version of itsaircraft called the SR21TDi (SR21).  Thedevelopment has been delayed while the engine, which is being produced inEurope, completes US certification.  TheSR21 will be first introduced in the European market and is expected to be onthe market sometime in the next several years. This model, which is similar to the SR20 and SR22 aircraft, is expectedto utilize the Company’s parachute system as standard equipment as well.

 

28

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OnSeptember 16, 2002, the Company entered into a contact with NASA throughits Small Business Innovation Research (SBIR) program.  The contract, which is a follow on to aPhase I feasibility study, is entitled “Advanced Aircraft Parachute RecoverySystem” and was granted to allow the Company to investigate the feasibility ofdeveloping parachute systems for larger and faster aircraft than thosecurrently supported by the Company.  ThePhase II contract award was for $598,694 and covers a 24-month period.  During the current fiscal year, the Companyrecorded an offset to research and development expenditures in the amount of$189,410 and recorded a corresponding receivable.  NASA and the U.S. Federal Government will have a royalty freeright to any developed technology, but only as a customer for product thatincorporates the developed technology that is purchased from the Company.

 

On July 30, 2003,the Company announced that it reached an agreement in principle withCanadian-based OMF Aircraft, Inc. (OMF) in which OMF would offer the Company’sproduct as a factory installed feature. (See Note 13).

 

4.               Purchase and Supply Agreement

 

OnSeptember 17, 1999, the Company entered into a Purchase and SupplyAgreement with Cirrus Design Corporation (Cirrus), the manufacturer of the SR20and SR22 aircraft that utilize the Company’s parachute system as standardequipment.  Under the Agreement, Cirrushas been issued four warrants to acquire an aggregate of up to 1.4 millionshares of restricted Company stock.  Inorder to execute the warrants, Cirrus must meet certain purchase levels of theCompany’s emergency parachute systems for the SR20, SR22 and derivative aircraftover the subsequent five years.  The purchaselevels that must be achieved along with the corresponding number of sharesunder each warrant and warrant strike price are as follows:

 
| **Warr #** |   | **Exercise Period** | ** ** | **Warrant Shares** | ** ** | **Exercise Price per  Warrant Share** | ** ** | **Purchase Commitment** | ** **                 |
|------------|--------|---------------------|------------|--------------------|------------|---------------------------------------|------------|-------------------------|----------------------------|
| 1          |   | 01-2002 to 02-2003  |       | 250,000            |       | $                                     | 1.00       |                    | 250 units in calendar 2002 |   |
| 2          |   | 01-2003 to 02-2004  |       | 250,000            |       | $                                     | 1.00       |                    | 400 units in calendar 2003 |   |
| 3          |   | 01-2003 to 02-2004  |       | 250,000            |       | $                                     | 1.25       |                    | 400 units in calendar 2003 |   |
| 4          |   | 01-2004 to 02-2005  |       | 650,000            |       | $                                     | 1.25       |                    | 500 units in calendar 2004 |   |

 

If the minimumpurchase levels are met, then Cirrus has the right to exercise the warrantduring the exercise period for the stated exercise price.  In the event that Cirrus does not meet theminimum purchase levels, Cirrus will forfeit the right to exercise thecorresponding warrant.

 

Cirrus met theirminimum purchase commitment for the first warrant period, but such warrant for250,000 shares expired unexercised on February 28, 2003.  Cirrus has meet their minimum purchasecommitment for warrants number two and three, but the Company has not beeninformed of Cirrus’ intentions regarding the exercise or expiration of saidwarrants.

 

Pursuant toEmerging Issues Task Force 96-18 (EITF 96-18), “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services,” the Company has recorded $20,799as a reduction in sales related to the warrants earned by Cirrus during fiscalyear 2003.  Based on EITF 96-18, thewarrants were not considered earned until the products were sold.

 

29

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If Cirrus fulfillstheir purchase commitments and exercises their warrants, the impact on equitymay be as follows (assumes equity contributions based on the exercise of allwarrants near the end of the exercise period):

 
| **Fiscal Year** |   | **Equity Contribution** |      |
|-----------------|--------|-------------------------|-----------|
| 2004            |   | $                       | 562,500   |   |
| 2005            |   | 812,500                 |      |
| Total           |   | $                       | 1,375,000 |   |

 

5.               Covenant Not to Compete

 

OnOctober 26, 1995 the Company entered into an agreement with the presidentand majority shareholder of Second Chantz Aerial Survival Equipment, Inc.(SCI), whereby SCI ceased all business activities, and SCI’s president andmajority shareholder entered into a ten-year covenant not to compete with theCompany.  The payments required underthis agreement contained a non-interest-bearing portion and a portion thatbears interest at a rate below the Company’s incremental borrowing rate.  Under generally accepted accountingprinciples the future payments were discounted at the Company’s incrementalborrowing rate.

 

The 4% ten yearnote calls for monthly payments of $4,036 through October 2005.  Payments under this agreement are unsecured.

 

The present valueof the Company’s obligation under this agreement was recorded as an intangibleasset and is being amortized over ten years as shown in the accompanyingfinancial statements.

 

Future paymentsunder this agreement are as follows:

 
|   |   | **Future  Dollars** | ** ** | **Present  Dollars** | ** ** |
|--------|--------|---------------------|------------|----------------------|------------|
|   |   |                |       |                 |       |
| 2004   |   | $                   | 48,436     |                 | $          | 40,561 |   |
| 2005   |   | 48,436              |       | 45,255               |       |
| 2006   |   | 4,036               |       | 3,999                |       |
|   |   | $                   | 100,908    |                 | $          | 89,815 |   |

 

The Company alsogranted SCI’s president an option to purchase 50,000 shares of the Company’scommon stock at an exercise price of $.25. This option expires October 2005.

 

6.               Other Financial Information

 

Inventories

 

Thecomponents of inventory, net of allowance of $125,000 and $125,000,respectively, consist of the following:

 

30

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|              |   | **2003** |      | **2002** |   |
|-------------------|--------|----------|-----------|----------|--------|
| Raw materials     |   | $        | 811,538   |     | $      | 701,230 |   |
| Work in process   |   | 93,701   |      | 106,799  |   |
| Finished goods    |   | 212,951  |      | 19,869   |   |
| Total inventories |   | $        | 1,118,190 |     | $      | 827,898 |   |

 

FixedAssets

 

Fixedassets consisted of the following categories at September 30, 2003 and2002:

 
|                           |   | **2003** |    | **2002** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Office furniture and equipment |   | $        | 172,454 |     | $      | 149,201 |   |
| Manufacturing equipment        |   | 201,251  |    | 124,331  |   |
| Airplane                       |   | 93,873   |    | 93,873   |   |
| Total fixed assets             |   | $        | 467,578 |     | $      | 367,405 |   |

 

DepreciationExpense

 

Depreciationexpense totaled $62,812 in 2003 and $43,321 in 2002.

 

Long-LivedAssets

 

Inaccordance with SFAS 144, Accounting For The Impairment Of Long-Lived AssetsAnd For Long-Lived Assets To Be Disposed Of, the Company reviews its long-livedassets and intangibles related to those assets periodically to determinepotential impairment by comparing the carrying value of the long-lived assetsoutstanding with estimated future cash flows expected to result from the use ofthe assets, including cash flows from disposition.  Should the sum of the expected future cash flows be less than thecarrying value, the Company would recognize an impairment loss.  An impairment loss would be measured bycomparing the amount by which the carrying value exceeds the fair value of thelong-lived assets and intangibles.  Todate, management has determined that no impairment of long-lived assets exists.

 

OtherAccrued Liabilities

 

Otheraccrued liabilities consisted of the following categories at September 30,2003 and 2002:

 
|                                  |   | **2003** |    | **2002** |   |
|---------------------------------------|--------|----------|---------|----------|--------|
| Bonus and Profit Sharing Plan Accrual |   | $        | 139,875 |     | $      | 124,756 |   |
| Prepaid Lease Accrual                 |   | —   |    | 100,000  |   |
| Income Tax Accrual                    |   | 39,071   |    | 96,365   |   |
| Other Miscellaneous Accruals          |   | 19,469   |    | 21,281   |   |
|                                  |   | $        | 198,415 |     | $      | 342,402 |   |

 

31

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ExportSales

 

TheCompany’s international sales are made through independent representatives invarious foreign countries. International sales as a percentage of total sales were 5% in 2003 and6% in 2002.

 

MajorSuppliers

 

During thefiscal years ended September 30, 2003 and 2002, the Company purchased itsparachutes from a certain key vendor. The Company manufactures its ownballistic devices, but the propellant for the ballistic devices is purchasedfrom a single source.  The Companyroutinely searches for new suppliers and feels alternate sources can be foundshould any of these suppliers be unable to meet the Company’s needs.

 

### Related Parties

 

The Companycontracts with an officer/shareholder of the Company to coordinate itsadvertising.  Total advertising expenseswere $88,838 and $81,839 for fiscal year 2003 and 2002, respectively, with$39,259 and $39,460, respectively of these total being paid to thisindividual.  The advertising ratescharged are at or below current market rates. There were no outstanding balances due to this related party as ofSeptember 30, 2003 or 2002.

 

The Companypaid consulting fees to a member of the board of directors for servicesprovided in the amount of $4,635 in fiscal year 2003.

 

### Profit Sharing Plan

 

The Companyadopted a pre-tax salary reduction plan, under the provisions ofSection 401(k) of the Internal Revenue Code, in fiscal year 2000, whichcovers its full-time employees over age 21. The Company will match 25% of the first 4% contributed by the employee.  Company contributions made at the discretionof management and the board of directors for the years ended September 30,2003 and 2002, respectively, were $53,512 and $46,312.

 

ProductWarranties

 

The Company offers its customers up to a one-year warranty onits products.  The warranty covers onlymanufacturing defects, which will be replaced or repaired by the Company at nocharge to the customer.  To date, theCompany has not made any material claims against its products.  The Company has not recorded an accrual forpossible warranty claims and believes that the product warranties as offeredwill not have a material effect on the Company’s financial position, results ofoperations or cash flows.

 

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Backlog ofOrders

 

As of September 30, 2003 and 2002, theCompany had a backlog of orders totaling approximately $1,867,000 and$4,434,000, respectively. The backlogs included over $1.6 million and $3.8million of orders for the Cirrus Design aircraft, respectively.  The 2003 backlog is expected to be filledwithin 12 months.  The reduction inbacklog for Cirrus Design is a result of Cirrus Design’s efforts to reduce leadtimes and increase production volumes to better serve its customers.  Cirrus Design is currently producingaircraft at levels, which has made it the second largest producer of singleengine piston aircraft in the world behind Cessna Aircraft Company.  Due to the backlog period involved, however,it is possible that there could be cancellations of a portion of the currentlybacklogged orders.  The Company expectsto fund the build out and sale of the backlogged orders through cash flowprovided by the sale of those orders. The Company cautions investors who may utilize published bookings andbacklog information as tools to forecast the Company’s revenue during a giventimeframe since certain purchase orders may be subject to cancellation and/ordelivery schedule revision.

 

7.               Line-of Credit Borrowings

 

The Companyhas a $250,000 line-of-credit for use in operations.  In October 2003, the Company negotiated an increase in theline-of-credit to $500,000.  Theline-of-credit was established on an annual renewal basis and is secured by allof the Company’s assets.  The currentline-of-credit expires March 6, 2004. The line calls for a variable interest rate of 4.5% atSeptember 30, 2003.  AtSeptember 30, 2003 and 2002 there were no outstanding balances under theline of credit.  The Company expects torenew the line each year following the review of its financial results andprojections with the bank.

 

8.               Recent AccountingPronouncements

 

SFAS No.145

 

In April 2002, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections,” effective for fiscal years beginning afterMay 15, 2002.  The adoption of SFASNo. 145 did not have a material effect on the Company’s financial position,results of operations or cash flows.

 

SFAS No.146

 

In June 2002, FASB issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  SFAS No. 146 requires the recognition of a liability for a costassociated with an exit or disposal activity when the liability is incurredversus the date the Company commits to an exit plan.  In addition, SFAS No. 146 states the liability should beinitially measured at fair value.  Therequirements of SFAS No. 146 are effective for exit or disposal activities thatare initiated after December 31, 2002. The Company believes the adoption of SFAS No. 146 will not have amaterial effect on the Company’s financial position, results of operations orcash flows.

 

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SFAS No.147

 

In October 2002, FASB issued SFAS No. 147, “Acquisitionsof Certain Financial Institutions.” SFAS No. 147 is effective October 1, 2002.  The adoption of SFAS No. 147 did not have amaterial effect on the Company’s financial position, results of operations orcash flows.

 

SFAS No.149

 

In April 2003, the FASB issued SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,” effectivefor contracts entered into or modified after June 30, 2003.  This amendment clarifies when a contractmeets the characteristics of a derivative, clarifies when a derivate contains afinancing component and amends certain other existing pronouncements.  The Company believes the adoption of SFASNo. 149 will not have a material effect on the Company’s financial position,results of operations or cash flows.

 

SFAS No.150

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  SFAS No. 150requires the classification as a liability of any financial instruments with amandatory redemption feature, an obligation to repurchase equity shares, or aconditional obligation based on the issuance of a variable number of its equityshares.  The Company does not have anyfinancial instruments as defined by SFAS No. 150.  The Company believes the adoption of SFAS No. 150 will not have amaterial effect on the Company’s financial position, results of operations orcash flows.

 

FIN No. 45

 

In November 2002, the FASB issued FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN45).   FIN 45 clarifies therequirements for a guarantor’s accounting for and disclosure of certainguarantees issued and outstanding.  The initial recognition and initial measurement provisions of FIN 45 areapplicable to guarantees issued or modified after December 31,2002.   The disclosure requirementsof FIN 45 are effective for financial statements for periods ending afterDecember 15, 2002.   Theadoption of FIN 45 did not impact the Company’s financial position, results ofoperations or cash flows.

 

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FIN No. 46

 

In January 2003, the FASB issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities” (FIN46).  FIN 46 states that companies thathave exposure to the economic risks and potential rewards from another entity’sassets and activities have a controlling financial interest in a variableinterest entity and should consolidate the entity, despite the absence of clearcontrol through a voting equity interest. The consolidation requirements apply to all variable interest entitiescreated after January 31, 2003. For variable interest entities that existed prior to February 1,2003, the consolidation requirements are effective for annual or interimperiods beginning after December 15, 2004.  Disclosure of significant variable interest entities is requiredin all financial statements issued after January 31, 2003, regardless ofwhen the variable interest was created. The Company does not expect the adoption of FIN 46 to have a materialimpact on its financial position, results of operations or cash flows.

 

9.               Income Taxes

 

During the currentfiscal year, the Company absorbed all of their net operating losscarryforwards. The provision for (benefit from) income taxes consisted of thefollowing components for the years ended September 30:

 
| **Current:** |   | **2003** |    | **2002** |   |
|--------------|--------|----------|---------|----------|--------|
| Federal      |   | $        | —  |     | $      | — |   |
| State        |   | 55,000   |    | 65,000   |   |
| Deferred     |   | 305,000  |    | 132,000  |   |
|         |   | $        | 360,000 |     | $      | 197,000 |   |

 

Components of net deferredincome taxes are as follows at September 30:

 
| **Deferred income tax assets:**                |   | **2003** |    | **2002** |   |
|------------------------------------------------|--------|----------|---------|----------|--------|
| Net operating loss carryforwards               |   | $        | —  |     | $      | 294,000 |   |
| Amortization                                   |   | 12,000   |    | 9,000    |   |
| Allowance for doubtful accounts                |   | 4,000    |    | 4,400    |   |
| Vacation accruals                              |   | 28,000   |    | 15,700   |   |
| Asset valuation reserves                       |   | 51,000   |    | 54,750   |   |
| Other accruals                                 |   | —   |    | 16,700   |   |
| Inventory Section 263 adjustment          |   | 40,000   |    | 28,950   |   |
|                                           |   | 135,000  |    | 423,500  |   |
| Deferred income tax liabilities - depreciation |   | (21,000  | )       | (4,500   | )      |
| Net deferred income tax assets                 |   | $        | 114,000 |     | $      | 419,000 |   |

 

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Reconciliationbetween the statutory rate and the effective tax rate for the years endedSeptember 30, is follows:

 
|                                                                       |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Federal statutory tax rate                                                 |   | 34.0     | %      | 34.0     | %      |
| State taxes, net of federal benefit                                        |   | 6.4      |   | 6.4      |   |
| Change in valuation allowance and expiration of capital loss  carryforward |   | —   |   | (15.8    | )      |
| Other                                                                      |   | (0.8     | )      | —   |   |
| Effective tax rate                                                         |   | 39.6     | %      | 24.6     | %      |

 

10.         CommonStock

 

StockOptions

 

The Companyhas issued options to various directors, officers, employees and others on adiscretionary basis.  Transactionsduring 2003 and 2002, for these issuances were as follows:

 
|                                                                    |   | **Number  Of Shares** |   | **Option Price  Range per Share** | ** ** |
|-------------------------------------------------------------------------|--------|-----------------------|--------|-----------------------------------|------------|
|                                                                    |   |                  |   |                              |       |
| Balance at September 30, 2001                                      |   | 496,250               |   | $0.3125 to $1.25                  |       |
|                                                                    |   |                  |   |                              |       |
| Granted                                                                 |   | 80,000                |   | $1.38                             |       |
| Converted to stock under cashless transaction                           |   | (137,497              | )      | $0.25 to $0.3125                  |       |
| Forfeited                                                               |   | (6,667                | )      | $0.4375                           |       |
| Expired                                                                 |   | (15,000               | )      | $0.4375 to $1.25                  |       |
|                                                                    |   |                  |   |                              |       |
| Balance at September 30, 2002                                      |   | 417,086               |   | $0.25 to $1.38                    |       |
|                                                                    |   |                  |   |                              |       |
| Granted                                                                 |   | 80,000                |   | $1.05                             |       |
| Converted to stock under cashless transaction                           |   | (70,836               | )      | $0.3125 to $0.75                  |       |
|                                                                    |   |                  |   |                              |       |
| Balance at September 30, 2003                                      |   | 426,250               |   | $0.25 to $1.38                    |       |
|                                                                    |   |                  |   |                              |       |
| Weighted-average fair value of options granted during fiscal year  2003 |   | $                     | 0.227  |                              |       |   |
|                                                                    |   |                  |   |                              |       |
| Weighted-average fair value of options granted during fiscal year  2002 |   | $                     | 0.562  |                              |       |   |

 

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AtSeptember 30, 2003:

 
| Options vested and exercisable |   | 426,250 |   |
|--------------------------------|--------|---------|--------|
| Shares available for options   |   | -0-     |   |

 

Thefollowing tables summarize information about stock options outstanding as ofSeptember 30, 2003:

 

Options Outstanding

 
| **Exercise  Price** |   | **Number  Outstanding** |   | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted-Average  Exercise  Price** |   |
|---------------------|--------|-------------------------|--------|---------------------------------------------------|--------|---------------------------------------|--------|
|                |   |                    |   |                                              |   |                                  |   |
| $0.25               |   | 50,000                  |   | 2.08                                              |   | $                                     | 0.25   |   |
| $0.436 to  $0.56    |   | 86,250                  |   | 1.77                                              |   | $                                     | 0.47   |   |
| $0.6875             |   | 10,000                  |   | 4.46                                              |   | $                                     | 0.69   |   |
| $0.91 to  $1.25     |   | 200,000                 |   | 2.96                                              |   | $                                     | 1.07   |   |
| $1.38               |   | 80,000                  |   | 3.46                                              |   | $                                     | 1.38   |   |
|                |   |                    |   |                                              |   |                                  |   |
| $0.25 to  $1.38     |   | 426,250                 |   | 2.50                                              |   | $                                     | 0.87   |   |

 

StockWarrants

 

Inconnection with the Purchase and Supply Agreement with Cirrus DesignCorporation, Cirrus has been issued four warrants to acquire an aggregate of upto 1.4 million shares of restricted Company stock.  In order to execute the warrants, Cirrus must meet certainpurchase levels of the Company’s emergency parachute systems for the SR20, SR22and derivative aircraft over a five-year period. (See Note 4).

 

Cirrus met theirminimum purchase commitment for the first warrant period, but such warrant for250,000 shares expired unexercised on February 28, 2003.  Cirrus has meet their minimum purchasecommitment for warrants number two and three, but the Company has not beeninformed of Cirrus’ intentions regarding the exercise or expiration of saidwarrants.  Warrants number two and threewill expire February 28, 2004 if they are not exercised.

 

11.         Commitmentsand Contingencies

 

Leases

 

The Companyleases its production facility on an airport in South St. Paul, Minnesota.Total rental expense for operating leases during 2003 and 2002 was $39,706 and$38,854, respectively.  The Companybought out the remaining portion of its five-year sublease with its landlord inSeptember 2002.  This buyoutresulted in short-term prepaid lease expense of $24,851 and $27,258 atSeptember 30, 2003 and 2002, respectively, and long-term prepaid leaseexpense of $77,972 and $103,211, respectively, as reflected in the accompanyingfinancial statements.  This buyoutallowed the Company to become a direct lessee with the City of South St. Paul.

 

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Futureminimum lease payments required on non-cancelable operating leases atSeptember 30, 2003 are as follows:

 
| 2004   |   | $      | 49,465  |   |
|--------|--------|--------|---------|--------|
| 2005   |   | 21,516 |    |
| 2006   |   | 18,975 |    |
| 2007   |   | 18,975 |    |
| 2008   |   | 6,407  |    |
|   |   |   |    |
|   |   | $      | 115,338 |   |

 

LegalProceedings

 

InAugust 2003, the Company was served in two related actions, Kathleen F.Fischer, Individually and as personal representative of the Estate of Joseph C.Fischer v. Cirrus Design Corp., Ballistic Recovery Systems, Inc., and WingsAloft, Inc., U.S. District Court for the Northern District of New York, FileNo. 03-CV-0782 (HGM/DEP), and Susan Sedgwick, Individually, on her own behalfas surviving spouse of Thomas P. Sedgwick, as Executrix of the Estate of ThomasP. Sedgwick, deceased, and on behalf of all interested beneficiaries, includingJamie Lynn Sedgwick and Jacqueline Ann Sedgwick v. Cirrus Design Corp.,Ballistic Recovery Systems, Inc. and Wings Aloft, Inc., U.S. District Court forthe Northern District of New York, File No. 03-CV-0592 (HGM/DEP).

 

Theseactions arise from the crash of a Cirrus Design Corp. SR22 airplane inApril 2002 near Parish, New York. Plaintiffs have brought claims for strict products liability, negligenceand breach of warranty against Cirrus, the airplane’s manufacturer, theCompany, which manufactures the CAPS (Cirrus Airframe Parachute System), aparachute system which is a required component of the plane, and Wings Aloft,Inc., which provided training on the SR22 to the decedents.

 

Inpreliminary reports submitted to the court, the plaintiff in *Fischer* has estimated the damages to besought at trial as sixty million dollars, and the plaintiff in *Sedgwick* has submitted an estimate ofseven million five hundred thousand dollars.

 

The mattershave been consolidated for purposes of discovery, which is beginning inNovember 2003 and is scheduled to be completed by September 30, 2004,with the trials to commence after January 2005.

 

At thistime, the Company cannot state with any degree of certainty what the outcome ofthese matters will be or the amount or range of potential loss, if any.  The Company will vigorously defend thesematters.

 

12.         SupplementalCash Flow Information

 
|           |   | **2003** |   | **2002** |   |
|----------------|--------|----------|--------|----------|--------|
| Cash paid for: |   |     |   |     |   |
| Interest       |   | $        | 14,905 |     | $      | 16,855 |   |
| Income taxes   |   | 121,463  |   | 34,631   |   |
|                |        |          |        |          |        |  |  |

 

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Summary ofnon-cash activity:

 

•                  Common stock was issued in lieu ofdirector’s fees of $0 and $7,250, for 2003 and 2002, respectively.

 

•                  Options to acquire 10,000 shares, 60,836shares and 134,497 shares of the Company’s common stock were converted into7,024 shares, 29,168 shares and 86,285 shares of the Company’s common stock incashless transactions on March 15, 2003, June 4, 2003 andJanuary 10, 2002, respectively.

 

13.         SubsequentEvents

 

At ameeting on November 24, 2003, the Company’s Board of Directors declared adividend of $0.06 per share for all holders of record as of the close ofbusiness on December 15, 2003 and payable January 5, 2004.

 

On December 9,2003, OMF GmbH, the parent company of OMF, declared bankruptcy in Germany.  OMF has announced its plan to restructureand is currently seeking new investment partners to provide financing requiredto develop and manufacture its two seat and four seat single engineairplane.  Assuming OMF obtains adequatefinancing and upon negotiation and execution of formal documentation betweenOMF and the Company, the Company’s parachute system would, followingcertification, be an optional feature on OMF’s currently certified 2-placeaircraft and would be installed as standard equipment on OMF’s 4-placeaircraft.  The Company will pursue theSupplemental Type Certificate or STC on the 2-place aircraft.  No assurance can be given that OMF will findadequate financing and that it will emerge from bankruptcy of its parentcompany.  If financed, no assurance canbe given that the Company and OMF will enter into definitive documentation orwhat sales, if any, would result from such agreement.

 

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Item 8.             Changes in and Disagreements withAccountants on Accounting and Financial Disclosures

 

The Companyfiled a report on Form 8-K on July 9, 2003 disclosing the change in theregistrant’s certifying accountants. The July 9, 2003 Form 8-K as filed with the SEC is incorporatedherein by reference.

 

There havebeen no disagreements with the Company’s independent certified publicaccountants on accounting principles or practices or financial statement disclosures.

 

Item 8A.  Controls and Procedures

 

The Company has carried out an evaluation,with the participation of its chief executive/chief financial officer, of theeffectiveness, as of the end of the most recent fiscal year, of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934), and the Company’s internal controlover financial reporting (as defined in Rules 13a - 15(f) and 13a-15(f) of theSecurities Exchange Act of 1934).  Basedupon that evaluation, the chief executive/chief financial officer concludedthat the Company’s disclosure controls and procedures are effective in alertinghim, on a timely basis, to material information required to be disclosed in theCompany’s periodic reports to the Securities and Exchange Commission and thatthere has been no significant change (including corrective actions with regardto significant deficiencies or material weaknesses) in the Company’s disclosurecontrols and procedures or its internal control over financial reporting thatoccurred over the most recently ended fiscal year that has had a materialaffect, or is reasonably likely to materially affect, the Company’s disclosurecontrols and procedures or its internal control over financial reporting.

 

**PART III**

 

Item 9.    Directors and Executive Officers of theRegistrant

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

Item 10.Executive Compensation

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

Item 11.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

Item 12.Certain Relationships and Related Transactions

 

Theinformation required by this item is incorporated by reference from the ProxyStatement.

 

**PART IV**

 

Item 13. Exhibits, Lists andReports on Form 8-K.

 

(a)                                  Exhibits

 
| **Exhibit  Number** |   | **Description**                                                                                                  |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------|
| 3.1                 |   | Company’s Articles of  Incorporation, as amended, appear as Exhibit 3.1 to the Company’s  Registration |

 

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|   |   | Statement on Form S-1 (No.  33-21843) filed May 12, 1988 (“Form S-1”) and are incorporated herein by  reference.                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Company’s Restated Bylaws as  amended, were filed as Exhibit 3.2, under Form 8, Amendment No. 1 (“1990  Amendment”) to the Company’s Report on Form 10-K for the fiscal year ended  September 30, 1990 (the “1990 10-K”) and are incorporated herein by  reference.                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Cessna 172 Development and  Funding Agreement dated October 26, 2000 between the Company and Charles  F. Parsons appears as exhibit 10.1 to the Company’s Report on Form 8-K filed  November 13, 2000 and is incorporated herein by reference.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Purchase and Supply Agreement  dated September 17, 1999 between the Company and Cirrus Design  Corporation appears as exhibit 10.1 to the Company’s Report on Form 8-K filed  September 20, 1999 and is incorporated herein by reference.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Covenant not to Compete  Agreement dated October 26, 1995 between the Company and the President  and majority shareholder of Second Chantz Aerial Survival Equipment, Inc.  appears as Exhibit 10.1 to the Company’s Report on Form 10-KSB for the fiscal  year ended September 30, 1995 and is incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | The Company filed a report on  Form 8-K on July 9, 2003 disclosing the change in the registrant’s  certifying accountants.  The  July 9, 2003 Form 8-K as filed with the SEC is incorporated herein by  reference.                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Section 1350 Certifications.                                                                                                                                                                                                                                                                                                                     |

 

Item 14.  Principal Accountant Fees and Services

 

Audit Fees

 

The aggregate fees billed or expected to bebilled by the Company’s auditors for professional services rendered inconnection with the audit of the Company’s annual financial statements forfiscal year 2003 and 2002 and reviews of the financial statements included inthe Company’s Form 10KSB for fiscal year 2003 and 2002 were $22,200 and$14,978, respectively.

 

Audit-Related Fees

 

For fiscal 2003 and 2002, the Company’sauditors did not bill any fees for assurances and related services that arereasonably related to the performance of the audit or review of the Company’sfinancial statements and are not reported under “Audit Fees” above.

 

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Tax Fees

 

The aggregate feesbilled by the Company’s auditors for professional services for tax compliance,tax advice, and tax planning were $2,200 and $2,144 for fiscal year 2003 and2002, respectively.

 

All Other Fees

 

For fiscal 2003 and 2002 the Company’sauditors did not bill any fees for any other non-audit services rendered to theCompany, such as attending meetings and other miscellaneous financialconsulting.

 

Audit Committee

 

The audit committee meets prior to filing ofany Form 10QSB or 10KSB to approve those filings.  In addition, the committee meets to discuss audit plans andanticipated fees for audit and tax work prior to the commencement of thatwork.  Approximately 95% of all feespaid to our independent auditors are pre-approved by the audit committee.

 

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SIGNATURES

 

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

 
|   | Ballistic Recovery Systems,  Inc.                                                          |
|--------|--------------------------------------------------------------------------------------------|
|   | By                                                                                         | /s/ Mark B. Thomas |   |
|   | Mark B. Thomas                                                                             |
|   | Principal Executive Officer,  Principal Financial Officer and Principal Accounting Officer |

 

 

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

 
| **Signature**         |   | **Title**             |   | **Date**               |
|-----------------------|--------|-----------------------|--------|------------------------|
|                  |   |                  |   |                   |   |
| /s/  Darrel D. Brandt |   | Director              |   | December 23, 2003 |   |
| Darrel D. Brandt      |   |                  |   |                   |   |
|                  |   |                  |   |                   |   |
| /s/ Boris  Popov      |   | Director              |   | December 23, 2003 |   |
| Boris Popov           |   |                  |   |                   |   |
|                  |   |                  |   |                   |   |
| /s/  Robert L. Nelson |   | Director and Chairman |   | December 23, 2003 |   |
| Robert L. Nelson      |   |                  |   |                   |   |
|                  |   |                  |   |                   |   |
| /s/  Thomas H. Adams  |   | Director              |   | December 23, 2003 |   |
| Thomas H. Adams       |   |                  |   |                   |   |
|                  |   |                  |   |                   |   |
| /s/ Mark  B. Thomas   |   | Director              |   | December 23, 2003 |   |
| Mark B. Thomas        |   |                  |   |                   |   |

 

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