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<SEC-DOCUMENT>0000950116-04-003712.txt : 20041208
<SEC-HEADER>0000950116-04-003712.hdr.sgml : 20041208
<ACCEPTANCE-DATETIME>20041208143439
ACCESSION NUMBER:		0000950116-04-003712
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		7
CONFORMED PERIOD OF REPORT:	20040930
FILED AS OF DATE:		20041208
DATE AS OF CHANGE:		20041208

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			INNOVATIVE SOLUTIONS & SUPPORT INC
		CENTRAL INDEX KEY:			0000836690
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER PROGRAMMING SERVICES [7371]
		IRS NUMBER:				232507402
		STATE OF INCORPORATION:			PA
		FISCAL YEAR END:			0930

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-31157
		FILM NUMBER:		041190576

	BUSINESS ADDRESS:	
		STREET 1:		420 LAPP RD
		CITY:			MALVERN
		STATE:			PA
		ZIP:			19355
		BUSINESS PHONE:		6108899898

	MAIL ADDRESS:	
		STREET 1:		420 LAPP ROAD
		CITY:			MALVERN
		STATE:			PA
		ZIP:			19355
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>ten-k.htm
<DESCRIPTION>FORM 10-K
<TEXT>
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Prepared and filed by St Ives Burrups
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<p align="center"><b><font face="serif" size="5">UNITED STATES<br>
</font></b><b><font face="serif" size="5">SECURITIES AND EXCHANGE COMMISSION<br>
</font></b><font size="2" face="serif"><b>Washington, D.C. 20549</b></font></p>
<hr width="20%" size="1" noshade>
<p align="center"><b><font face="serif" size="5">FORM 10-K</font></b></p>
<p align="left"><font size="2" face="serif"><img src="tickedbox.gif" width="12" height="12">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</strong></font></p>
<p align="left"><font size="2" face="serif"><b>For the fiscal year ended September 30, 2004</b></font></p>
<p align="left"><font size="2" face="serif"><b>OR</b></font></p>
<p align="left"><font size="2" face="serif"><img src="emptybox.gif" width="12" height="12">&nbsp;&nbsp;&nbsp;&nbsp;<b>&nbsp;TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934</b></font></p>
<p align="left"><font size="2" face="serif"><b>For the transition period from
      _____________ to_____________ .</b></font></p>
<p align="center"><font size="2" face="serif"><b>Commission File No. 0-3115</b></font></p>
<hr width="20%" size="1" noshade>
<p align="center"><b><font face="serif" size="5">INNOVATIVE SOLUTIONS AND SUPPORT, INC.<br>
</font></b><b><font face="serif" size="1">(Exact name of registrant as specified in its charter)</font></b></p>
<table width="100%" cellspacing="0" cellpadding="0" align="center" border="0">
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<td align="center"><font size="2" face="serif"><b>Pennsylvania</b></font></td>
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<td width="44%" align="center"><font size="2" face="serif"><b>23-2507402</b></font></td>
<td width="2%" align="left">&nbsp;</td> </tr>
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<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">(State or other jurisdiction of incorporation)</font></b></font></td>
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<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">(IRS Employer Identification No.)</font></b></font></td>
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<td align="center"><font size="2" face="serif"><b>720 Pennsylvania Drive, Exton, Pennsylvania</b></font></td>
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<td align="center"><font size="2" face="serif"><b>19341</b></font></td>
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<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">(Address of principal executive offices)</font></b></font></td>
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<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">(Zip Code)</font></b></font></td>
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  <td colspan="7" align="center"><div align="center"><font size="2" face="serif"><b>(610) 646-9800 </b></font></div>    <div align="center"></div>    <div align="center"></div>    <div align="center"></div>    <div align="center"></div>    <div align="center"></div>    <div align="center"></div></td>
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  <td colspan="7" align="center"><b><font face="serif" size="1">(Registrant&#8217;s telephone
    number, including area code) </font></b></td>
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<p align="left"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Securities registered pursuant to Section 12 (b) of the Act: None</font></strong></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Indicate
    by check mark whether registrant (1) has filed all reports required to be
    filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
    the preceding 12 months (or for such shorter period that the registrant was
    required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes <img src="tickedbox.gif" width="12" height="12"> No
<img src="emptybox.gif" width="12" height="12"></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant&#8217;s
    knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. <img src="tickedbox.gif" width="12" height="12"></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Indicate
    by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes <img src="tickedbox.gif" width="12" height="12"> No <img src="emptybox.gif" width="12" height="12"></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The
    aggregate market value of the Registrant&#8217;s
    common stock held by non-affiliates of the Registrant as of December 6,
    2004 was approximately $284,548,000. Shares of common stock held by each
    executive officer and director and by each person who owns 10% or more of
    our outstanding
    common stock have been excluded since such persons may be deemed affiliates.
    This determination of affiliate status is not necessarily a conclusive determination
for other purposes. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>As
of December 6, 2004, there were 11,838,356 outstanding shares of the Registrant&#8217;s
Common Stock.</font></p>
<p align="center"><font size="2" face="serif"><b>Documents Incorporated by Reference </b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Portions of the Registrant&#8217;s Proxy Statement for the 2005 Annual Meeting of Shareholders to be filed prior to February 1, 2005 are incorporated by reference into Part III of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed &#8220;filed&#8221; for the purposes of this Report on Form 10-K.</font></p>
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<page> <a name="contents"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.<br>
</b></font><font size="2" face="serif"><b>2004 Annual Report on Form 10-K </b></font></p>
<p align="center"><font size="2" face="serif"><b>Table of Contents </b></font></p>
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<td colspan="3" align="left"><div align="center"><font size="2" face="serif"><b><font face="serif" size="1">Page</font></b></font></div></td>
<td width="2%" align="left">&nbsp;</td> </tr>
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<td align="left"><font size="2" face="serif">&nbsp;</font></td>
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<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
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<td colspan="4" align="left"><hr width="100%" size="1" noshade>  <font size="2" face="serif">&nbsp;</font></td>
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<td align="center"><a href="#p3"><font size="2" face="serif"><b>Part I</b></font></a></td>
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<td align="left"><a href="#p3"><font size="2" face="serif">Item 1.</font></a></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
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<td align="left"><a href="#p3"><font size="2" face="serif">Business</font></a></td>
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<td align="right">&nbsp;</td>
<td align="left"></td>
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<td align="right"><font size="2" face="serif"><a href="#p3">3</a></font></td>
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<td align="left"><a href="#p10a"><font size="2" face="serif">Item 2.</font></a></td>
<td align="left">&nbsp;</td>
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<td align="left"><font size="2" face="serif"><a href="#p10a">Properties</a></font></td>
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<td align="right"><font size="2" face="serif"><a href="#p10a">10</a></font></td>
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<td align="left"><a href="#p10b"><font size="2" face="serif">Item 3.</font></a></td>
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<td align="left"><a href="#p10b"><font size="2" face="serif">Legal Proceedings</font></a></td>
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<td align="left"></td>
<td align="right">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="right"><font size="2" face="serif"><a href="#p10b">10</a></font></td>
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<td align="left"><a href="#p10c"><font size="2" face="serif">Item 4.</font></a></td>
<td align="left">&nbsp;</td>
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<td align="left"><a href="#p10c"><font size="2" face="serif">Submission of Matters to a Vote of Security Holders</font></a></td>
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<td align="right">&nbsp;</td>
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<td align="right"><font size="2" face="serif"><a href="#p10c">10</a></font></td>
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<td align="left"><font size="2" face="serif">&nbsp;</font></td>
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<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="center"><a href="#p11"><font size="2" face="serif"><b>Part II</b></font></a></td>
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<td align="left"><a href="#p11a"><font size="2" face="serif">Item 5.</font></a></td>
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<td align="left"><a href="#p11a"><font size="2" face="serif">Market for the Registrant&#8217;s
    Common Equity and Related Shareholder Matters</font></a></td>
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<td align="right"><font size="2" face="serif"><a href="#p11a">11</a></font></td>
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<td align="left"><a href="#p11b"><font size="2" face="serif">Item 6.</font></a></td>
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<td align="left"><a href="#p11b"><font size="2" face="serif">Selected Financial Data</font></a></td>
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<td align="right"><font size="2" face="serif"><a href="#p11b">11</a></font></td>
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<td align="left"><a href="#p12"><font size="2" face="serif">Item 7.</font></a></td>
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<td align="left"><a href="#p12"><font size="2" face="serif">Management&#8217;s
    Discussion and Analysis of Financial Condition and Results of Operations</font></a></td>
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<td colspan="3" align="right"><a href="#p12"><font size="2" face="serif">12-21</font></a></td>
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<td align="left"><a href="#p20"><font size="2" face="serif">Item 7A.</font></a></td>
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<td align="left"><a href="#p20"><font size="2" face="serif">Quantitative and Qualitative Disclosures About Market Risk</font></a></td>
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<td align="right"><font size="2" face="serif"><a href="#p20">21</a></font></td>
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<td align="left"><a href="#p21"><font size="2" face="serif">Item 8.</font></a></td>
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<td align="left"><a href="#p21"><font size="2" face="serif">Financial Statements and Supplementary Data</font></a></td>
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<td colspan="3" align="right"><a href="#p21"><font size="2" face="serif">21-39</font></a></td>
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<td align="left"><a href="#p40a"><font size="2" face="serif">Item 9.</font></a></td>
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<td align="left"><a href="#p40a"><font size="2" face="serif">Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</font></a></td>
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<td align="right"><font size="2" face="serif"><a href="#p40a">40</a></font></td>
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<td align="left"><a href="#p40b"><font size="2" face="serif">Item&nbsp;9A.</font></a></td>
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<td align="left"><a href="#p40b"><font size="2" face="serif">Controls and Procedures</font></a></td>
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<td align="right"><font size="2" face="serif"><a href="#p40b">40</a></font></td>
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<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
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<td align="center"><a href="#p40c"><font size="2" face="serif"><b>Part III</b></font></a></td>
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<p align="center"><font size="2" face="serif"><b>PART I </b></font></p>
<p align="left"><font size="2" face="serif"><b>Item 1.&nbsp;&nbsp;&nbsp;&nbsp;Business</b></font></p>
<p align="left"><font size="2" face="serif"><b>Overview</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Innovative Solutions and Support, Inc. (the &#8220;Company&#8221;, &#8220;IS&amp;S&#8221; or &#8220;We&#8221;) was founded in 1988. The Company designs, manufactures and sells flight information computers, flat-panel displays and advanced monitoring systems to the Department of Defense (DoD), government agencies, defense contractors, commercial air transport carriers, original equipment manufacturers (OEMs), and corporate/general aviation markets. Our strategy is to leverage the latest technologies developed for the personal computer and telecommunications industries into advanced, cost-effective solutions for both the aviation industry and DoD requirements. We believe that this approach, combined with our industry experience, enables us to
develop high-quality products, substantially reduce product time to market and achieve cost advantages over the products offered by our competitors.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Historically, we have focused our efforts on developing and marketing air data systems that measure, calculate and display critical flight information, such as airspeed and altitude, and instruments that measure engine and fuel data, primarily for use in the aircraft retrofit market but also for the Original Equipment Manufacturer (OEM) market. Since fiscal 1997, a substantial portion of our revenues has been from the sale of air data systems that are critical for safe flight. Additionally, our air data equipment will bring aircraft into compliance with government regulations; including Reduced Vertical Separation Minimum (RVSM) requirements that have been phased in by regulatory authorities on most heavily traveled global flight routes. We
believe we are one of three primary suppliers of RVSM products to the U.S. retrofit market. As a result of our expertise, we were selected as a supplier of RVSM systems and components in connection with the United States Air Force&#8217;s KC-135 retrofit program, which we believe to be one of the largest U.S. military RVSM retrofit programs to date. The Company successfully completed this major multi-year procurement in fiscal 2002. We have been selected by a number of airframe OEM&#8217;s and modification centers as an RVSM system supplier for a variety of air transport and business aviation aircraft.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Advances in technology are providing pilots increasing amounts of information that enhance both the safety and efficiency of flying. However, the limited amount of space in the cockpit coupled with inefficiencies associated with currently used displays inhibits the display and integration of this information in a user-friendly manner.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>During fiscal 2000, we introduced our large flat-panel display system, or Cockpit Information Portal (CIP), which is the first in a series of new products we intend to develop to enhance the management and integration of cockpit information. Our CIP is the centerpiece of our cockpit information management system that organizes and displays a multitude of flight information. This system provides enhanced growth capability for systems that will become available to pilots in the future. This information may be generated from a variety of sources, including our RVSM air data system, our engine and fuel instrumentation, or from third-party data and information products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In fiscal 2003 our CIP product line was advanced by the capture of two strategic programs. The first was the U.S. Navy Landing Craft Air Cushion (LCAC) Service Life Extension Program on which the Company provided six large flat panel displays. The second award came from Boeing to provide Aerial Refuel Operator Control Display Units for Boeing&#8217;s Global Tanker Transport Aircraft.</font></p>
<p align="left"><font size="2" face="serif">          <strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In fiscal 2004 the CIP product line was further advanced when the Federal Aviation Administration (FAA) awarded the Company a Technical Standard Order (TSO) for the large flat panel display or CIP. The TSO establishes the product as meeting the requirements that have been implemented by the FAA to ensure safe flight on a variety of aircraft types. The TSO awarded to the Company addresses the most stringent Commercial Air Transport Market requirements as provided in Section 14 of the Code of Federal Regulation, subpart 25, Commercial Air Transport.</font></p>
<p align="left"><font size="2" face="serif"><b>Our Industry</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>A wide range of information, including airspeed and altitude, is critical for the proper and safe operation of aircraft. With advances in technology, new types of information to assist pilots, such as weather depiction and ground terrain maps, are becoming available for display in cockpits. We believe that aircraft cockpits will increasingly become information centers, capable of delivering additional information that is either mandated by regulation or demanded by pilots to assist them in the safe and efficient operation of aircraft.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>There are three general types of flight data: flight critical aircraft control information such as air data, which includes aircraft speed, altitude and rates of ascent and descent; aircraft heading and altitude as well as engine data such as fuel and oil quantity and other engine measurements; navigation data such as radio position, flight management and GPS and alternative source information, which is information not originating on the aircraft, including weather depiction maps, GPS navigation and surface terrain maps. Air data calculations are based primarily on air pressure measurements derived from sensors on the aircraft. Engine data are determined by measuring various indices such as temperature, volume, RPM and pressure within an
aircraft&#8217;s engines and other mechanical equipment. Alternative source information is typically derived from satellites or equipment located on land and fed by satellite or radio signals to the aircraft. Pilots can then display this information in the cockpit for reference.</font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Traditionally, flight data and other
    cockpit information were displayed on a series of separate analog dials.
    In the early 1980s, digital displays using cathode ray tubes began to replace
    some of the individual analog displays. The industry has now begun to develop
    color flat panel displays using liquid crystal displays (LCD) to replace
    traditional analog or digital displays. We expect that the ability to display
    more information in a space-efficient and customized platform will become
    increasingly important as additional information, such as weather depiction
    maps, traffic information and surface terrain maps, becomes mandated by regulation
    or demanded by pilots. Accordingly, we believe that flat panel displays,
    which can integrate and display a &#8220;suite&#8221; of information, will increasingly replace individual displays as the method for delivering and ordering the information displayed in the cockpit.</font></p>
<p align="left"><font size="2" face="serif"><b>Air Data and Reduced Vertical Separation Minimum (RVSM)</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Pilots use air data for a number of important purposes, including maintaining safe separation from other aircraft. Until recently, aircraft on a similar flight path at altitudes between 29,000 and 41,000 feet have been required to maintain a vertical separation of at least 2,000 feet. As air travel has increased over the past decade, U.S. and global aviation authorities sought ways to increase traffic flow on high traffic routes. These organizations have developed RVSM for adoption in the most congested air space to reduce vertical separation between aircraft from 2,000 feet to 1,000 feet. RVSM essentially doubles flight routes within a vertical airspace, thereby increasing aircraft capacity on high traffic routes throughout the world.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Safe travel on RVSM routes requires that an aircraft&#8217;s altimeter be extremely accurate, and aircraft flying RVSM routes must have RVSM-certified equipment. RVSM has been in effect, as part of the international mandate, between 29,000 and 41,000 feet for certain North Atlantic routes since March 1997. Western Atlantic air routes commenced in 2001 and, as of January 2002, RVSM was phased in on Trans-Pacific and European air routes. We believe the North American market comprises over half of the total RVSM marketplace. On October 24, 2003, the Federal Aviation Administration (FAA) affirmed the mandatory compliance date for Domestic Reduced Vertical Separation Minimum (DRVSM) as January 20, 2005.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company is well positioned to support the aviation industry&#8217;s needs in both a timely and cost effective manner. The recent investment in a new manufacturing facility was made to ensure we would have the production capacity to meet the market demands associated with this mandate. It is clear the number of planes that need to receive updated equipment in order to fly in RVSM space will not all make the compliance deadline. While there is equipment capacity to accommodate the demand, there are insufficient installation facilities, as planes need to be grounded for several days in order to change out equipment. Accordingly, the demand will continue well into 2005.</font></p>
<p align="left"><font size="2" face="serif"><b>Flat Panel Displays</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Air data and other flight information have traditionally been displayed on analog instrumentation and, more recently, individual small digital displays. Within the last several years, color flat panel displays began to be used in aircraft cockpits. Flat panel displays are LCD screens that can replicate the display of one or a suite of analog or digital displays on one screen. Like other instrumentation, flat panel displays can be installed in new aircraft or used to replace existing displays in aircraft already in use. LCDs are also being used for cabin entertainment, security monitoring on-board aircraft and as tactical workstations on military aircraft. The flat panel product line presents numerous advantages for the presentation of engine
performance data as well.</font></p>
<p align="left"><font size="2" face="serif"><b>Engine and Fuel Displays</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Equipment data, such as engine and fuel related data, traditionally have been displayed on conventional solid-state displays. Equipment data displays fuel and oil levels and provides information on engine activity, including oil and hydraulic pressures and temperature. This instrumentation includes individual and multiple displays clustered throughout an aircraft&#8217;s cockpit. Engine and fuel displays tend to be replaced more frequently than other displays due to normal wear-and-tear. As the information displayed by this instrumentation is vital for safe and efficient flight, aircraft operators continue to purchase individual conventional engine and fuel displays to replace older or non-functioning displays.</font></p>
<p align="left"><font size="2" face="serif"><b>Strategy</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our objective is to become a leading supplier and integrator of cockpit information. We believe that our industry experience and reputation, our technology and products and our business strategy provide a basis to achieve this objective. Key elements of our strategy include:</font></p>
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    <td width="98%"><font size="2" face="serif"><i>Maintaining our leadership in the air
          data markets.</i>&nbsp;&nbsp;&nbsp;We believe that we are one of the
    largest suppliers of air data products to the U.S. retrofit market. </font></td>
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    <td><font size="2" face="serif"><i>Establishing leadership in the flat panel
          display market.</i>&nbsp;&nbsp;&nbsp;We expect that over the next several
          years, many aircraft will either be retrofitted or newly manufactured
          with flat panel displays. Given the versatility, visual appeal and
          lower cost of displaying a series of instruments and other flight-relevant
          information on a single flat panel, we believe that flat panel displays
          will increasingly replace individual analog and digital instruments.
          We also believe that our CIP has significant benefits over the flat
          panel displays currently offered by our competitors, including its
          lower cost, larger size and enhanced viewing angles. Accordingly, we
          believe that these advantages will allow us to generate significant
          revenues from our CIP and gain significant market share within this
    market.</font></td>
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    <td><font size="2" face="serif"><i>Continuing our engineering and product
          development successes.&nbsp;&nbsp;&nbsp;</i>We have developed innovative
          products by combining our avionics, engineering and design expertise
          with commercially available technologies, components and products from
          non-aviation applications, including the personal computer and telecommunications
          industries. We believe our processes allow us to bring products to
          market quickly and to control our development costs. Our CIP is an
          example of our ability to engineer a superior product through the selective
    application of non-avionic technology.</font></td>
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    <td><font size="2" face="serif">Increasing our sales to the DoD, government
        agencies, defense contractors, commercial air transport and corporate/general
        aviation markets.&nbsp;&nbsp; We have strengthened our efforts to diversify
        our sales to include all end user markets of the aviation industry, particularly
        legacy military aircraft programs and the commercial air transport market,
        including national and regional carriers and other fleet operators as
        well as the corporate/general aviation market, primarily through aircraft
        modification centers, as well as the OEM market. We have begun building
        a sales and marketing force dedicated to expanding our sales efforts
        to these markets while at the same time maintaining our position as a
        provider
of avionics products for the DoD.</font></td>
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    <td><font size="2" face="serif"><i>Expanding our international presence.&nbsp;&nbsp;&nbsp;</i>We
        plan to increase our international sales through expanding sales and
        marketing personnel and adding foreign offices. As large flat panel displays
        become more prevalent throughout the world, we believe that European
        and other international aircraft operators and aircraft modification
        centers will accelerate their retrofitting activities, thereby increasing
    the demand for large flat panel displays.</font></td>
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    <td><font size="2" face="serif"><i>Growth through acquisitions or joint ventures.&nbsp;&nbsp;&nbsp;</i>We
        intend to pursue strategic acquisitions or joint ventures as a means
        of growing our business with respect to both information management products
        and content. We have identified profiles of the types of companies we
        would like to acquire and are evaluating various potential forms of joint
        ventures. We may seek to acquire developers or suppliers of complementary
        products, technology or information, or we may acquire suppliers of similar
    products as a means of increasing our product offerings and market share.</font></td>
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<p align="left"><font size="2" face="serif"> </font><font size="2" face="serif"><b>Our Products</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our current line of products includes:</font></p>
<p align="left"><font size="2" face="serif"><i>Air Data and RVSM Systems and Components</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our air data and RVSM products calculate and display various measures of air data, such as aircraft speed, altitude and rate of ascent and descent. The functionality of our traditional non-RVSM air data systems and our RVSM systems is similar. However, our RVSM systems use advanced sensors to gather air pressure data and customized algorithms to interpret the data, thus allowing the system to more accurately calculate altitude and to qualify for RVSM certification.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We sell individual components as well as partial and complete air data systems. Our components and systems include:</font></p>
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    <td width="98%"><font size="2" face="serif">digital air data computers, which
        calculate various air data parameters such as altitude, airspeed, vertical
        speed, angle of attack and other information derived from the measure
    of air pressure;</font></td>
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    <td><font size="2" face="serif">integrated air data computers and display
    units, which calculate and convey air data information;</font></td>
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    <td><font size="2" face="serif">altitude displays, which convey aircraft
    altitude measurements;</font></td>
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    <td><font size="2" face="serif">airspeed displays, which convey various types
        of airspeed measurements including vertical airspeed and rates of ascent
    and descent; and</font></td>
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    <td><font size="2" face="serif">altitude alerters, which allow the pilot
        to select a desired cruising altitude that the aircraft will reach and
    maintain.</font></td>
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<p align="left"><font size="2" face="serif"><i>Flat Panel Displays</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We have developed a large flat panel color display that can replace the conventional analog and digital displays currently used in a cockpit and can also display additional information that is not now commonly displayed in the cockpit. Our Cockpit Information Portal (CIP) is capable of displaying nearly all types of air data, equipment data, altitude, heading and navigational data as well as alternative source information. As technology and information delivery systems further develop, additional information, such as surface terrain maps, will be displayed in the cockpit. We have designed our CIP to be capable of displaying information generated from a variety of sources, including our RVSM air data system, our engine and fuel instrumentation and
third-party data and information products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our flat panel display system has demonstrated its broad capability by being selected by the U.S. Navy for application on a Service Life Extension Program for the Landing Craft Air Cushion (LCAC) vehicle. In this program six IS&amp;S flat panel displays replace the previous outdated displays. This kit includes two sizes of displays&#150;10-inch and 15-inch. This program is in current production. Over 75 LCACs exist in the U.S. Navy fleet.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The flat panel display system broad capability was further demonstrated when The Boeing Company selected our displays for use on its new B767 Global Tanker Transport Aircraft (GTTA). This new refueling and transport aircraft is intended to provide a significant upgrade in capability to air forces around the world. The aircraft has already been sold to Japan and Italy. The U.S. Air Force is expected to purchase this aircraft as a replacement for the KC-135 tanker. The Company&#8217;s equipment on the GTTA includes two displays and one Symbol Generator (SG). The SG is a computer capable of displaying graphics on our flat panel displays.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Boeing GTTA program represents a series of opportunities for the Company. In addition to the United States Air Force, several foreign governments have picked the GTTA program to replace their aging refueling tankers. The initial GTTA business the Company received from Boeing is for end use with the Italian government and is expected to continue without interruption. The United States Air Force order of 100 planes, however, is currently on hold and under investigation.</font></p>
<p align="left"><font size="2" face="serif">          <strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>On July 2, 2004 the Federal Aviation Administration (FAA) awarded the Company a Technical Standard Order (TSO) for the large flat panel display or CIP. The TSO establishes our flat panel display as meeting FAA requirements that have been put in place to ensure safe flight on a variety of aircraft types. The TSO awarded to the Company addresses the most stringent Commercial Air Transport Market requirements as provided in Section 14 of the Code of Federal Regulation, subpart 25, Commercial Air Transport.</font></p>
<p align="left"><font size="2" face="serif"><i>Engine and Fuel Displays</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We develop, manufacture and market engine and fuel displays. Our solid-state multifunction displays convey information with respect to fuel and oil levels as well as engine activity, such as oil and hydraulic pressures and temperature. This instrumentation includes individual and multiple displays clustered throughout an aircraft&#8217;s cockpit. Our displays can be used in conjunction with our own engine and fuel data equipment or that of other manufacturers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Engine and fuel displays are found in all aircraft and are vital to the safe and proper flight of aircraft. In addition, the accurate conveyance of engine and fuel information is critical for the monitoring of engine stress and the maintenance of engine parts. Engine and fuel displays tend to be replaced more frequently than other displays and have remained largely unchanged since their introduction due to their low cost, standard design and universal use.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We believe that our engine and fuel displays are extremely reliable, and we have designed them to be programmable to adapt easily without major modification to most modern aircraft. Our products have been installed on C-130H, DC-9, DC-10, P3 and A-10 aircraft.</font></p>
<p align="left"><font size="2" face="serif"><b>Customers</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our customers include, among others, the United States Government, Garrett, Bombardier Aerospace (the manufacturer of Learjet), Raytheon, Northwest Airlines, ASTAR Air Cargo (formerly DHL Airways, Inc.), Federal Express Corporation, The Boeing Company, Lockheed Martin Corporation, Rockwell Collins, Airborne Express, Gulfstream Aerospace Corporation, Plain Avionics and Star Aviation.</font></p>
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<p align="left"><font size="2" face="serif"><b>Retrofit Market</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Historically, the majority of our sales have come from the retrofit market. Among other reasons, we have pursued the retrofit market because of its continued rapid growth in response to the increasing need to support the world&#8217;s aging fleet of aircraft.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Updating an individual aircraft&#8217;s existing electronics equipment has become increasingly common as new technology makes existing instrumentation outdated while an aircraft is still structurally and mechanically sound. Retrofitting an aircraft is generally a substantially less expensive alternative to purchasing a new aircraft. We expect our main customers in the retrofit market to be:</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the DoD and defense contractors;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;aircraft operators; and</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;aircraft modification centers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Department of Defense and Defense Contractors.</i>&nbsp;&nbsp;&nbsp;&nbsp;We sell our products directly to the DoD as well as to defense contractors for end use on military aircraft retrofit programs. DoD programs generally take one of two forms, a subcontract with a prime government contractor, such as Boeing or Rockwell Collins, or a direct contract with the appropriate government agency such as the United States Air Force&#8217;s requirement for replacing Central Air Data Computers on the fleet of A-10 aircraft. The government&#8217;s desire for cost-effective retrofitting of aircraft has led it to purchase commercial off-the-shelf equipment rather than requiring the development of specially designed products, which are usually more costly
and take a longer time to develop. These contracts tend to be on commercial terms, although some of the termination and other provisions of government contracts described below are typically applicable to these contracts. Each government agency or general contractor retains the right to terminate the contract at any time at its convenience. Upon such alteration or termination, we would be entitled to an equitable adjustment to the contract price so that we may receive the purchase price for already delivered items and reimbursement for allowable costs incurred.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Aircraft Operators.</i>&nbsp;&nbsp;&nbsp;&nbsp;We also sell our products to aircraft operators, including commercial airlines, cargo carriers and business and general aviation. Our products are used mostly in the retrofitting of aircraft owned or operated by these customers, which generally retrofit and maintain their aircraft themselves. Our commercial fleet customers include Northwest Airlines, Air Canada, Midcoast, MK Airlines, ASTAR Air Cargo, Emery, ABX Air, Federal Express, Kitty Hawk, ARC, Champion and Kelowna Flightcraft LTD. We sell these customers a range of products from fuel quantity indicators to air data systems.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Aircraft Modification Centers.</i>&nbsp;&nbsp;&nbsp;&nbsp;Based on industry data, we believe there are approximately 12,800 private and corporate aircraft in service in North America. The primary retrofit market for private and corporate jets is through aircraft modification centers, which repair and retrofit private aircraft in a manner similar to the way auto mechanics service a person&#8217;s car. We have established relationships with a number of aircraft modification centers throughout the United States. These modification centers essentially act as distribution outlets for our products. We believe that our air data systems and related components are being promoted by aircraft modification centers to update older or outdated equipment.
Our large modification center customers include Bombardier Learjet, Garrett Aviation, AVCON, Star Aviation, Plain Avionics and Raytheon Aircraft Services.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We anticipate that retrofitting of air data systems by aircraft modification centers, and thus the demand for our RVSM products, will increase significantly as RVSM is phased-in on many of the world&#8217;s most popular flight routes. Furthermore, we anticipate that as flat panel displays gain popularity, aircraft modification centers will become significant customers of our flat panel product as aircraft owners seek to upgrade their display systems.</font></p>
<p align="left"><font size="2" face="serif"><b>OEM Market</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We also market our products to original equipment manufacturers, particularly manufacturers of corporate and private jets as well as to DoD contractors manufacturing military jets. Customers of our products include Bombardier (the manufacturer of Learjet), Gulfstream, Boeing, Raytheon, Piaggio and Lockheed. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Most aircraft manufacturers equip their current production aircraft with RVSM-compliant air data systems. In addition, we expect that as flat panel displays become increasingly popular, OEMs will begin manufacturing an increasing percentage of their aircraft with flat panel displays, either as standard or optional equipment. Most new high-end business aviation aircraft have flat panel displays as standard equipment.</font></p>
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<p align="left"><font size="2" face="serif"><b>Backlog</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>As of September 30, 2004, our released backlog was $35.4 million.  This represented an increase of $11.3 million or 47% from the September 30, 2003 released backlog of $24.1 million.  We anticipate that essentially all of the current released backlog will be delivered to customers in fiscal 2005. </font></p>
<p align="left"><font size="2" face="serif"><b>Sales and Marketing</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We have generally focused our sales efforts on the DoD, DoD contractors, aircraft operators and OEMs, and more recently on aircraft modification centers. We have recently increased our sales efforts with respect to the commercial and corporate aviation markets. To date, we have made substantial use of third-party sales representatives for our sales efforts. We compensate these third-party sales representatives through commissions.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We believe that our ability to provide prompt and effective repair and upgrade service is critical to our marketing efforts. As part of our customer service program, we have implemented a 24-hour hotline that customers can call with respect to product repair or upgrade concerns. We employ five field service engineers to service our equipment and, depending on the service required, we may either dispatch a service crew to make necessary repairs or request that the customer return the product to us for repairs or upgrades at our facility. In the event repairs or upgrades are required to be made at our facility, we provide spare products for use by our customers during the repair time. Our in-house turnaround repair times average 15 days and
turnaround upgrade times average 30 days. Before returning our products to customers, all repaired or upgraded products are retested for airworthiness.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In connection with our customer service program, we typically provide our customers with a two-year warranty on new products. We also offer our customers extended warranties of varying terms for additional fees.</font></p>
<p align="left"><font size="2" face="serif"><b>Government Regulation</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The manufacture and installation of our products in aircraft owned and operated in the United States is governed by U.S. Federal Aviation Administration (FAA) regulations. We maintain an FAA certified production facility. The most significant of the product and installation regulations focus on Technical Standard Order (TSO) and Supplemental Type Certificate (STC) certifications. These certifications set forth the minimum general standards that a certain type of equipment should meet. As required, we deliver our product in accordance with FAA regulations.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Sales of our products to European or other non-U.S. owners of aircraft also typically require approval of the Joint Aviation Authorities (JAA), the European counterpart of the FAA, or another appropriate governmental agency. JAA certification requirements for the manufacturing and installation of our products in European-owned aircraft mirror the FAA regulations. Much like the FAA certification process, the JAA has established a process for granting European Certifications.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In addition to product-related regulations, we are also subject to the government&#8217;s procurement regulations with respect to sales of our products to government entities or government contractors. These regulations dictate the manner in which products may be sold to the government and set forth other requirements that must be met in order to do business with or on behalf of government entities. For example, pursuant to such regulations, the government agency or general contractor may alter the price, quantity or delivery schedule of our products. In addition, the government agency or general contractor retains the right to terminate the contract at any time at its convenience. Upon such alteration or termination, we would be entitled to an
equitable adjustment to the contract price so that we may receive the purchase price for already delivered items and reimbursement for allowable costs incurred.</font></p>
<p align="left"><font size="2" face="serif"><b>Manufacturing, Assembly and Materials Acquisition</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our manufacturing activities consist primarily of assembling and testing components and subassemblies and integrating them into a finished system. We believe that this method allows us to achieve relatively flexible manufacturing capacity while minimizing expenses. We generally purchase the components for our products from third-party vendors and assemble them in a clean room environment to reduce impurities and improve the performance of our products. Many of the components we purchase are standard products, although certain parts are made to our specifications.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>When appropriate, we enter into long-term supply agreements and use our relationships with long-term suppliers to improve product quality and availability and to reduce delivery times and product costs. In addition, we are continually identifying alternative suppliers for important component parts. Using component parts from new suppliers in our products generally requires FAA certification of the entire finished product if the newly sourced component varies significantly from our original drawings and specifications. To date, we have not experienced any significant delays in the delivery of our products caused by the inability to obtain either component parts or FAA approval of products incorporating new component parts.</font></p>
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<p align="left"><font size="2" face="serif"><b>Quality Assurance</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Product quality is of vital importance to our customers, and we have taken steps to enhance the overall quality of our products. We are ISO 9001 and AS 9100 certified. ISO 9001 and AS 9100 standards are an international consensus on effective management practices with the goal of ensuring that a company can consistently deliver its products and related services in a manner that meets or exceeds customer quality requirements. These standards allow us to represent to our customers that we maintain high quality industry standards in the education of our employees and the design and manufacture of our products. In addition, our products undergo extensive quality control testing prior to being delivered to customers. As part of our quality assurance
procedures, we maintain detailed records of test results and our quality control processes.</font></p>
<p align="left"><font size="2" face="serif"><b>Our Competition</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The market for our products is highly competitive and characterized by several industry niches in which a number of manufacturers specialize. Our competitors vary in size and resources, and substantially all of our competitors are much larger and have substantially greater resources. With respect to air data systems and related products, our principal competitors include Kollsman Inc., Honeywell International Inc., Rockwell Collins, Inc., Thales and Smiths PLC. With respect to flat panel displays, our principal competitors currently include Honeywell, Rockwell Collins, Inc., L-3 Communications and Smiths. However, because the flat panel display industry is a new and evolving market, as the demand for flat panel displays increases, we may face
competition in this area from additional companies in the future.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We believe that the principal competitive factors in the markets we serve are cost, development cycle time, responsiveness to customer preferences, product quality, technology, reliability and breadth of product line. We believe that our significant and long-standing customer relationships reflect our ability to compete favorably with respect to these factors.</font></p>
<p align="left"><font size="2" face="serif"><b>Intellectual Property and Proprietary Rights</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We rely on patents to protect our proprietary technology. We currently hold twelve U.S. patents and have seven U.S. patent applications pending relating to our technology. In addition, we have eight international patents and twenty-four international patent applications pending. Our patents have durations of between 3 and 18 years. Certain of these patents and patent applications cover technology relating to air data measurement systems and RVSM calibration techniques while others cover technology relating to flat panel display systems and other aspects of our CIP solution. While we believe that these patents have significant value in protecting our technology, we also believe that the innovative skill, technical expertise and the know-how of our
personnel in applying the technology reflected in our patents would be difficult, costly and time consuming to reproduce.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>While there are no pending lawsuits against us regarding the infringement of any patents or other intellectual property rights, we cannot be certain that such infringement claims will not be asserted against us in the future.</font></p>
<p align="left"><font size="2" face="serif"><b>Innovative Solutions and Support Website</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our primary website is at <u>http://www.innovative-ss.com.</u> We make available, free of charge, at our corporate website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.</font></p>
<p align="left"><font size="2" face="serif"><b>Our Employees</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>As of September 30, 2004, we had 129 employees, 61 were in our manufacturing and assembly operations, 33 in research and development, 11 in quality and 24 in selling &amp; general administrative positions.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our future success depends on our ability to attract, train and retain highly qualified personnel. We plan to hire additional personnel, including, in particular, sales and marketing personnel, during the next twelve months. Competition for such qualified personnel is intense and we may not be able to attract, train and retain highly qualified personnel in the future. Our employees are not represented by a labor union.</font></p>
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<p align="left"><font size="2" face="serif"><b>Executive Officers of the Registrant</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The following is a list of our executive officers, their ages and their positions:</font></p>
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<td align="left"><font size="2" face="serif">Geoffrey&nbsp;S.&nbsp;M.&nbsp;Hedrick</font></td>
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<td align="left"><font size="2" face="serif">Chairman of the Board and Chief Executive Officer</font></td>
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<td align="left"><font size="2" face="serif">Roman G. Ptakowski</font></td>
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<td align="left"><font size="2" face="serif">James J. Reilly</font></td>
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<td align="left"><font size="2" face="serif">Roger E. Mitchell</font></td>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Geoffrey S. M. Hedrick</i> has been our Chief Executive Officer since he founded IS&amp;S in February 1988 and our Chairman of the Board since 1997. Prior to founding IS&amp;S, Mr. Hedrick served as President and Chief Executive Officer of Smiths Industries North American Aerospace Companies. He also founded Harowe Systems, Inc. in 1971, which was subsequently acquired by Smiths Industries. Mr. Hedrick has over 35 years of experience in the avionics industry, and he holds a number of patents in the electronics, optoelectric, electromagnetic, aerospace and contamination-control fields.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Roman G. Ptakowski </i>has been our President since March 2003. Prior to that, Mr. Ptakowski served as a Group Vice President and General Manager and, before that, as a Vice President of Sales and Marketing at B/E Aerospace, Inc. Previously, Mr. Ptakowski held a number of positions with increasing responsibility within ASEA Brown Boveri Power T&amp;D Company, Inc. There, he was General Manager of the Protective Relay Division before leaving to join B/E Aerospace, Inc. Mr. Ptakowski received a B.S. in Electrical Engineering from New York University and a MBA from Duke University.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>James J. Reilly</i> has been our Chief Financial Officer since February 2000. From 1996 to 1999, Mr. Reilly was employed by B/E Aerospace, Inc., Seating Products Group, where he served as Vice President and Chief Financial Officer. From 1989 to 1996, Mr. Reilly was employed by E-Systems, Inc. as Vice President and Principal Accounting Officer. Mr. Reilly received a Bachelor of Science degree and a MBA from The University of Hartford.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Roger E. Mitchell</i> has been our Vice President of Operations since September 1999. From July 1998 until September 1999, Mr. Mitchell served as our Director of Operations. Prior to joining us, Mr. Mitchell was employed by AlliedSignal, where he held various positions, including Operations Manager from 1994 to 1998. Mr. Mitchell received a Bachelor of Arts degree from Lewis University.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p10a"></a>Item 2.&nbsp;&nbsp;&nbsp;&nbsp;Properties.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In fiscal 2001 we purchased 7 and 1/2 acres of land in the Eagleview Corporate Park located in Exton, Pennsylvania, a suburban Philadelphia location. There we constructed a 44,800 square foot design, manufacturing and office facility. Land development approval allows for expansion of up to 20,400 additional square feet. This would provide for a 65,200 square foot facility. The construction was principally funded with a Chester County Industrial Revenue Bond. The building serves as security for the Industrial Revenue Bond.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p10b"></a>Item 3.&nbsp;&nbsp;&nbsp;&nbsp;Legal Proceedings.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In the ordinary course of our business, we are at times subject to various legal proceedings. We do not believe that any current legal proceedings will have a material adverse effect on our results of operations or financial position.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p10c"></a>Item 4.&nbsp;&nbsp;&nbsp;&nbsp;Submission of Matters to a Vote of Security Holders.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>No matters were submitted to a vote of our shareholders during the three months ended September 30, 2004.</font></p>
<p align="center"><font size="2" face="serif">10</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p11"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a>
<p align="center"><font size="2" face="serif"><b>Part II</b></font></p>
<p align="left"><font size="2" face="serif"><b><a name="p11a"></a>Item 5.&nbsp;&nbsp;&nbsp;&nbsp;Market for the Registrant&#8217;s Common Equity and Related Stockholder Matters.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our common stock has been traded on the Nasdaq National Market under the symbol &#8220;ISSC&#8221; since our initial public offering on August 4, 2000. The following table lists the high and low per share sale prices for our common stock for the periods indicated:</font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan="5" align="center"><b><font size=1 face="serif">Fiscal 2004</font></b></td>
    <td align="center">&nbsp;</td>
    <td colspan="5" align="center"><b><font size=1 face="serif">Fiscal 2003</font></b></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="5"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan="5" align="center"><hr noshade size=1>
    </td>
  </tr>
  <tr valign="bottom">
    <td><b><font size=1 face="serif">Period</font></b></td>
    <td width="2%">&nbsp;</td>
    <td width="10%" align="center"><b><font size=1 face="serif">High</font></b></td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="10%" align="center"><b><font size=1 face="serif">Low</font></b></td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="10%" align="center"><b><font size=1 face="serif">High</font></b></td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="10%" align="center"><b><font size=1 face="serif">Low</font></b></td>
  </tr>
  <tr>
    <td><hr align="left" width="80%" size=1 noshade>
    </td>
    <td><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1></td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><hr noshade size=1></td>
    <td align="center">&nbsp; </td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><hr noshade size=1></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">First Quarter</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">18.25</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">7.58</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">8.00</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5.50</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Second Quarter</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">17.10</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11.90</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6.49</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5.50</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Third Quarter</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">21.60</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13.85</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">9.06</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5.70</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Fourth Quarter</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">29.10</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">19.06</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">8.49</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6.62</font></td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>On
    December 6, 2004, there were 43 holders of record of the shares of outstanding
common stock.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We have not paid cash dividends on our common stock, and we do not expect to declare cash dividends on our common stock in the near future. We intend to retain any earnings to finance the growth of our business.</font></p>
<p align="left"><font size="2" face="serif"><b>Equity Compensation Plan Information</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans and arrangements as of September 30, 2004, including the 1998 Stock Option Plan.</font></p>
<table width="100%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Plan Category</font></b></font></td>
<td align="center" valign="bottom"><b><font face="serif" size="1">Number of Securities </font></b><font size="2" face="serif"><b><font face="serif" size="1">to
        be issued upon exercise
        of outstanding        options, warrants and rights</font></b></font></td>
<td align="center" valign="bottom">&nbsp;</td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Weighted-average<br>
exercise price of<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">outstanding options,<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">warrants
and rights</font></b></font></td>
<td align="center" valign="bottom">&nbsp;</td>
<td align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Number&nbsp;of&nbsp;Securities<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">remaining&nbsp;available&nbsp;for<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">future
        issuance under<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">equity
    compensation<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">plans&nbsp;(excluding&nbsp;securities<br>
</font></b></font><font size="2" face="serif"><b><font face="serif" size="1">reflected&nbsp;in&nbsp;second&nbsp;column)</font></b></font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
  <td align="left"><hr align="left" width="80%" size=1 noshade></td>
  <td align="right"><hr noshade size=1></td>
  <td align="right">&nbsp;</td>
  <td align="center"><hr noshade size=1></td>
  <td align="right"><hr noshade size=1></td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Equity compensation plans approved by security holders</font></td>
<td width="15%" align="right"><font size="2" face="serif">560,458</font></td>
<td width="2%" align="right">&nbsp;</td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="12%" align="right"><font size="2" face="serif">10.19</font></td>
<td width="1%" align="right">&nbsp;</td>
<td width="15%" align="right"><font size="2" face="serif">194,012</font></td>
<td width="2%" align="left">&nbsp;</td> </tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Equity compensation plans not approved by security holders</font></td>
<td align="right"><font size="2" face="serif">0</font></td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">0</font></td>
<td align="right">&nbsp;</td>
<td align="right"><font size="2" face="serif">0</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"></td>
<td align="left">
  <hr noshade size=1></td>
<td align="right">&nbsp;</td>
<td align="left">
  <hr noshade size=1></td>
<td align="left">
  <hr noshade size=1></td>
<td align="right">&nbsp;</td>
<td align="left">
  <hr noshade size=1></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Total</font></td>
<td align="right"><font size="2" face="serif">560,458</font></td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">10.19</font></td>
<td align="right">&nbsp;</td>
<td align="right"><font size="2" face="serif">194,012</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"></td>
<td align="left">
  <hr noshade size=1></td>
<td align="right">&nbsp;</td>
<td align="center">
  <hr noshade size=1></td>
<td align="left">
  <hr noshade size=1></td>
<td align="right">&nbsp;</td>
<td align="left">
  <hr noshade size=1></td>
<td align="left">&nbsp;</td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The 2003 Restricted Stock Plan for non-employee directors was approved by shareholders at the Company&#8217;s February 26, 2004 Annual Meeting of Shareholders.  Each individual who was an eligible Director on both October 1, 2003 and February 26, 2004, was automatically granted a one-time award of restricted stock for shares having a fair market value of $25,000 as of the close of business on October 1, 2003. The shares vest quarterly during the fiscal year, provided that the director was still serving on the board on the date the shares were scheduled to vest. Six of our seven non-employee directors received a grant of 3,125 shares of restricted stock as of October 1, 2003. The remaining Director received a pro rated grant of 2,500 shares as of
October 1, 2003. <br></font></p>
<p align="left"><font size="2" face="serif"><b><a name="p11b"></a>Item 6.&nbsp;&nbsp;&nbsp;&nbsp;Selected Financial Data.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The following tables present portions of our consolidated financial statements. You should read the following selected consolidated financial data set forth below together with &#8220;Management&#8217;s Discussion and Analysis of Financial Condition and Results of Operations&#8221; and our consolidated financial statements and related notes to our financial statements appearing elsewhere herein. The selected statement of operations data for the years ended September 30, 2004, 2003 and 2002 and the balance sheet data as of September 30, 2004 and 2003 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected statements of operations data for the years ended September 30, 2001
and 2000 and the balance sheet data as of September 30, 2002, 2001 and 2000 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.</font></p>
<p align="center"><font size="2" face="serif">11</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p12"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan="14" align="center" valign="bottom"><b><font size=1 face="serif">Fiscal year ended September
    30,</font></b><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font><font size="1">&nbsp;</font></td>
    <td align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="14" align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2" align="center"><b><font size=1 face="serif">2000</font></b></td>
    <td align="center">&nbsp;</td>
    <td colspan="2" align="center"><font size="1"><b><font size=1 face="serif">2001</font></b></font></td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td colspan="2" align="center"><font size="1">&nbsp;</font><font size="1"><b><font size=1 face="serif">2002</font></b></font></td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td colspan="2" align="center"><font size="1">&nbsp;</font><font size="1"><b><font size=1 face="serif">2003</font></b></font></td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td colspan="2" align="center"><b><font size=1 face="serif">2004</font></b></td>
    <td align="center">&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Statement of Operations Data:</font></b></td>
    <td width="2%"><hr noshade size=1></td>
    <td width="8%"><hr noshade size=1></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%"><hr noshade size=1></td>
    <td width="8%"><hr noshade size=1></td>
    <td width="2%">&nbsp;</td>
    <td width="2%"><hr noshade size=1></td>
    <td width="8%"><hr noshade size=1></td>
    <td width="2%">&nbsp;</td>
    <td width="2%"><hr noshade size=1></td>
    <td width="8%"><hr noshade size=1></td>
    <td width="2%">&nbsp;</td>
    <td width="2%"><hr noshade size=1></td>
    <td width="8%"><hr noshade size=1></td>
    <td width="2%">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net sales</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">33,273,890</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">34,384,562</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">28,345,620</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">28,168,752</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">46,099,777</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cost of sales</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">14,819,043</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">14,477,868</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,290,085</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,346,057</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">15,663,108</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Gross profit</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">18,454,847</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">19,906,694</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">17,055,535</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">16,822,695</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">30,436,669</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Research and development</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,274,708</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,371,570</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,755,422</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,376,849</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,811,156</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Selling, general and administrative</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,951,732</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,777,929</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,732,886</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,890,362</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,567,959</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Total operating expenses</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">8,226,440</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,149,499</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,488,308</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9,267,211</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,379,115</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Operating income</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,228,407</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9,757,195</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">6,567,227</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,555,484</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">18,057,554</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Interest (income) expense, net</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(564,555</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(2,196,401</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(722,850</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(450,421</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(404,727</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Income before income taxes</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,792,962</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,953,596</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,290,077</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">8,005,905</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">18,462,281</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Income tax (expense) benefit, net</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(4,043,405</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(4,422,831</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(1,879,799</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(2,464,715</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(6,530,084</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$6,749,557</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">7,530,765</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td align="left">&nbsp;    </td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income per common share:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Basic</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.86</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.59</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.42</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.45</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.03</font></td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Diluted</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.66</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.57</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.41</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.44</font></td>
    <td align="left">&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.00</font></td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Weighted average shares outstanding</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Basic</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,893,630</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,731,395</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,830,894</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,261,084</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,600,253</font></td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Diluted</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,231,931</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,284,484</font></td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,069,387</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,495,774</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,952,120</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="14" align="center" valign="bottom"><b><font size=1 face="serif">September 30,</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="14">    <hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2000</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2001</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2002</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp; </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp; </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp; </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp; </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Balance Sheet Data:</font></b></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cash and cash equivalents</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">38,657,433</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">42,769,837</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">52,245,754</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">48,789,744</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">65,867,167</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Working capital</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">50,944,599</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">56,254,288</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">59,158,307</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">55,996,411</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">70,627,114</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Total Assets</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">60,746,527</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">68,051,426</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">72,616,685</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">69,876,625</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">87,468,627</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Debt and capital lease obligations,</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2 face="serif">less current
        portion</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,265,447</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,252,635</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,235,000</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,235,000</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,255,681</font></td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Total shareholders&#146; equity</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">50,822,496</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">60,378,704</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">64,726,210</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">61,058,290</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">75,454,987</font></td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><b>Item 7.&nbsp;&nbsp;&nbsp;&nbsp;Management&#8217;s Discussion and Analysis of Financial Condition and Results of Operations.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>All statements made in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. The words &#8220;anticipate&#8221;, &#8220;believe&#8221;, &#8220;estimate&#8221;, &#8220;expect&#8221;, &#8220;intend&#8221;, &#8220;may&#8221;, &#8220;plan&#8221;, &#8220;will&#8221;, &#8220;would&#8221;, &#8220;should&#8221;, &#8220;guidance&#8221;, &#8220;potential&#8221;, &#8220;continue&#8221;, &#8220;project&#8221;, &#8220;forecast&#8221;, and similar expressions, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate are not guarantees of future performance and involve risks, uncertainties and assumptions, which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results are discussed under &#8220;Risk Factors&#8221;. We expressly disclaim any intent or obligation to update these forward-looking statements.</font></p>
<p align="left"><font size="2" face="serif"><b>Overview</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Innovative Solutions and Support was founded in 1988. The Company designs, develops, manufactures and markets flight information computers, large flat-panel displays and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation (RVSM), airspeed and altitude as well as engine and fuel data measurements.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our sales are derived from the sale of our products to the retrofit market and, to a lesser extent, original equipment manufacturers (OEMs). Our customers include the DoD and their commercial contractors, aircraft operators, aircraft modification centers and various OEMs. Although we occasionally sell our products directly to the DoD, we primarily have sold our products to commercial customers for end use in DoD programs.  Sales to defense contractors are on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts.</font></p>
<p align="center"><font size="2" face="serif">12</font></p>
<p></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our cost-of-sales are comprised of
    material components purchased through our supplier base and direct in-house
    assembly labor and overhead costs. Many of the components we use in assembling
    our products are standard, although certain parts are manufactured to meet
    our specifications. The overhead portion of cost of sales is primarily comprised
    of salaries and benefits, building occupancy, supplies, and outside service
    costs related to our production, purchasing, material control and quality
    departments as well as warranty costs.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We intend to continue investing in the development of new products that complement our current product offerings and will expense associated research and development costs as they are incurred.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our selling, general and administrative expenses consist of sales, marketing, business development, professional services and salaries and benefits for executive and administrative personnel as well as facility costs, recruiting, legal, accounting and other general corporate expenses.</font></p>
<p align="left"><font size="2" face="serif"><b>Results of Operations</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><b>Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Net sales.</i>&nbsp;&nbsp;&nbsp;&nbsp;Net sales increased $17.9 million or 64% to $46.1 million for the fiscal year ended September 30, 2004 from $28.2 million in the fiscal year ended September 30, 2003. The rise in net sales was primarily due to increased demand for our Air Data Display Units, Digital Air Data Computers and other related air data products. The increased demand is in response to commercial aviation and air transport customers continuing to upgrade their respective aircraft with up-to-date air data systems that fully meet the Federal Aviation Administration&#8217;s (FAA) Reduced Vertical Separation Minimum (RVSM) mandate. Several customers, including Garrett, Northwest Airlines, Bombardier, Plain Avionics, Raytheon, Star
Aviation and AVCON contributed to the year over year growth. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Cost of sales</i>.&nbsp;&nbsp;&nbsp;&nbsp;Cost of sales increased $4.3 million or 38% to $15.7 million, or 34% of net sales, for fiscal 2004 from $11.3 million, or 40% of net sales, for fiscal 2003. The increase in the dollar amount was essentially due to higher sales in the period. The decline as a percent of net sales was primarily the result of cost containment efforts coupled with fixed operating costs being absorbed over higher net sales in the current period.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Research and development.</i>&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses increased $1.4 million, or 42%, to $4.8 million, or 10% of net sales in fiscal 2004 from $3.4 million or 12% of net sales in fiscal 2003. The dollar increase was principally due to increased spending on the flat panel program as the Company was in final stages of submitting its Technical Standard Order (TSO) application to the FAA. As a result of that effort the Company was awarded a TSO certification for their Flat Panel Display on July 2, 2004 by the FAA. On a percent to sales basis, fiscal 2004 was less than fiscal 2003 by two percentage points because of higher net sales in the current period.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Selling, general and administrative.</i>&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses increased $1.7 million or 28% to $7.6 million, or 16% of net sales, for fiscal 2004 from $5.9 million, or 21% of net sales, for fiscal 2003. The increase in the dollar amount was the result of higher wages, corporate governance initiatives and commissions due to higher net sales. The decrease as a percent of net sales was the result of higher net sales in the current period.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Interest (income) expense, net.</i>&nbsp;&nbsp;&nbsp;&nbsp;Net interest income decreased less than $0.1 million to $0.4 million in fiscal 2004 as compared to net interest income of $0.5 million in fiscal 2003. Net interest income for fiscal 2004 was lower because of lower interest rates in the current period.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<i>Income tax.</i>&nbsp;&nbsp;&nbsp;&nbsp;Income tax expense was $6.5 million in fiscal 2004 compared to $2.5 million in fiscal 2003. The $4.1 million income tax increase was the result of a higher profit before tax and a smaller research and development tax credit in fiscal 2004 as compared to fiscal 2003.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Net income.</i>&nbsp;&nbsp;&nbsp;&nbsp;As a result of the factors described above, net income increased $6.4 million or 115% to $11.9 million, or 26% of net sales in fiscal 2004 from $5.5 million, or 20% of net sales in fiscal 2003. On a fully diluted basis, earnings per share (EPS) increased $0.56 or 127% to $1.00 during fiscal 2004 from $0.44 in fiscal 2003.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><b>Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Net sales.</i>&nbsp;&nbsp;&nbsp;&nbsp;Net sales in fiscal 2003 were $28.2 million. This amount was essentially unchanged from the $28.3 million recorded in fiscal 2002. The sales mix, however, reflected some significant changes as evidenced in a drop off from the completed KC-135 business from $10.3 million in fiscal 2002 to only $0.2 million in fiscal 2003. This $10.1 million reduction was offset with replacement RVSM business from several customers, including Garrett, Northwest Airlines and Bombardier and CIP revenues from the LCAC and Boeing programs.</font></p>
<p align="center"><font size="2" face="serif">13</font></p>
<p></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Cost of sales</i>.&nbsp;&nbsp;&nbsp;&nbsp;Cost
    of sales remained flat at $11.3 million or, 40% of net sales, for fiscal
    2003 from $11.3 million, or 40% of net sales, for fiscal 2002.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Research and development.</i>&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses decreased $1.4 million, or 29%, to $3.4 million, or 12% of net sales, for fiscal 2003 from $4.8 million, or 17% of net sales, for fiscal 2002. The decline in both dollar amount and percent of sales was the result of the following: In fiscal 2002 the Company expensed $0.7 million of certification cost that was incurred in prior periods and carried as an intangible asset supporting Flat Panel certification on the Pilatus airplane. The decision to change our initial launch aircraft from a Pilatus PC-12 to a Boeing 737 necessitated recognizing the change at that time. As a result, fiscal 2003&#8217;s research and development spending was lower by $0.7 million,
the amount of the prior year&#8217;s write down. The balance of the $1.4 million decrease was principally due to research and development expenses related to the non recurring engineering contracts that provided revenue. As a result, these costs were recognized in cost of sales.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Selling, general and administrative.</i>&nbsp;&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses increased $0.2 million or 3% to $5.9 million, or 21% of net sales, for fiscal 2003 from $5.7 million, or 20% of net sales, for fiscal 2002. The increase was principally driven by salary and relocation expenses for new hires including our new president.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Interest (income) expense, net.</i>&nbsp;&nbsp;&nbsp;&nbsp;Net interest income decreased $0.3 million to $0.4 million in fiscal 2003 as compared to net interest income of $0.7 million in fiscal 2002. Net interest income for fiscal 2003 was lower because of lower interest rates in the year.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Income tax.</i>&nbsp;&nbsp;&nbsp;&nbsp;Income tax expense was $2.5 million in fiscal 2003 compared to $1.9 million in fiscal 2002. The $0.6 million income tax increase was the result of a higher profit before tax and a smaller research and development tax credit in fiscal 2003 as compared to fiscal 2002.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Net income.</i>&nbsp;&nbsp;&nbsp;&nbsp;As a result of the factors described above, net income increased $0.1 million or 2% to $5.5 million, or 20% of net sales in fiscal 2003 from $5.4 million, or 19% of net sales in fiscal 2002. On a fully diluted basis, earnings per share (EPS) increased $0.03 or 7% to $0.44 during fiscal 2003 from $0.41 in fiscal 2002.</font></p>
<p align="left"><font size="2" face="serif"><b>Related-Party Transactions:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company incurred legal fees of $168,779, $127,990 and $115,898 with a law firm which is a shareholder of the Company for the years ended September 30, 2002, 2003 and 2004, respectively. The fees paid were comparable with the fees paid prior to the law firm&#8217;s investment in the Company.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company derived net sales of $0, $67,989 and $124,652 for the years ended September 30, 2002, 2003 and 2004, respectively from an entity which is a shareholder, and purchased $0, $5,612 and $0 of component parts used in the manufacturing process from this related party during such years.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>For
    the years ended September 30, 2002, 2003 and 2004, respectively, we incurred
    service fees of $29,486, $18,703 and $124,932 with a commercial graphics
    firm controlled by
    an individual who is married to a significant shareholder and the daughter
    of the Company&#8217;s Chairman and Chief Executive Officer.</font></p>
<p align="left"><font size="2" face="serif"><b>Liquidity and Capital Resources</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our primary sources of liquidity have been cash flows from operations, proceeds from our initial public offering (IPO), and borrowings. We require cash principally to finance inventory, payroll and accounts receivable.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our cash flow provided from operating activities was $16.1 million in fiscal 2004 as compared to $6.1 million in fiscal 2003. The increase in year over year cash flow was primarily the result of higher net income ($6.4 million), improved accounts receivable ($3.6 million), accrued expenses ($1.0 million) and accounts payable ($0.8 million) partially offset with $3.0 million of higher inventory. Cash flow provided by operating activities was $6.1 million in fiscal 2003 as compared to $13.3 million in fiscal 2002. The decrease in year over year cash flow was primarily the result of prior year reductions in inventory and accounts receivable that were not repeated in fiscal 2003.</font></p>
<p align="left"><font size="2" face="serif">Our cash used in investing activities was $0.8 million in fiscal 2004 as compared to $0.2 million used in fiscal 2003. The year over year increase in investing activities primarily relates to purchases of manufacturing and engineering equipment. Our cash used in investing activities was $0.2 million in fiscal 2003 as compared to $2.6 million used in fiscal 2002. The year over year decrease in investing activities primarily relates to our new building being completed in fiscal 2002. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our cash inflow from financing activities in fiscal 2004 was $1.8 million as opposed to cash used in fiscal 2003 of $9.4 million. The cash inflow in fiscal 2004 relates to the exercise of stock options ($1.1 million) and warrants ($0.7 million). The outflow or use of cash in fiscal 2003 relates to the open market re-purchase of our stock. The stock re-purchase was treated as Treasury Stock and the amount purchased in fiscal 2003 was 1,440,026 shares at an aggregate price of $9.4 million. In fiscal 2002 the Company purchased 250,000 shares at an aggregate price of $1.25 million.</font></p>
<p align="center"><font size="2" face="serif">14</font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We allowed our credit facility to
    lapse in August 2000 as a result of the strong cash balance we have from
    the net proceeds of our IPO. We are in discussions with a number of financial
    institutions regarding the establishment of a new credit facility.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>To accommodate our future growth, we purchased 7 and 1/2 acres of land in the Eagleview Corporate Park, Exton, Pennsylvania. There we constructed a 44,800 square foot facility, completed in October 2001, that is expandable to 65,200 square feet. Both the land and building cost approximate $6.5 million. Of this amount, $4.3 million was funded through an Industrial Development Bond (IDB) and the remainder from cash from operations.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our future capital requirements depend on numerous factors, including market acceptance of our products, the timing and rate of expansion of our business, acquisitions, joint ventures and other factors. We have experienced increases in our expenditures since our inception consistent with growth in our operations, personnel, and product line and we anticipate that our operations and expenditures will continue to increase in the foreseeable future. We believe that our cash and cash equivalents, together with net proceeds from any new credit facility we may enter into, will provide sufficient capital to fund our operations for at least the next twelve months. However, we may need to raise additional funds through public or private financing or other
arrangements in order to support more rapid expansion of our business than we currently anticipate. Further, we may develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies or respond to unanticipated requirements or developments.</font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td colspan="14" align="center" valign="bottom"><b><font size=1 face="serif">Payments Due by Period</font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;    </td>
    <td colspan="14" align="center" valign="bottom"><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td valign="bottom"><font size=1 face="serif"><b>Contractual Obligations</b></font></td>
    <td>&nbsp;</td>
    <td colspan=2 align="center" valign="bottom"><b><font size=1 face="serif">Total</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><b><font size=1 face="serif">Less than<br>
    1 Year    </font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><b><font size=1 face="serif">1-3 Years</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td align="center" valign="bottom"><b><font size=1 face="serif">4-5 Years</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td align="center" valign="bottom"><b><font size=1 face="serif">After 5<br>
    Years</font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><hr align="left" width="90%" size=1 noshade>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Interest on loan from Chester County Industrial
        Dev. Auth. (1)</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">663,256</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">66,326</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">132,651</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">132,651</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">331,628</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Principal on Chester County Industrial Loan</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">4,335,000</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">100,000</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">4,235,000</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Operating Leases</font></td>
    <td width="2%">&nbsp;</td>
    <td width="2%"><font size=2 face="serif">$</font></td>
    <td width="6%" align="right"><font size=2 face="serif">18,343</font></td>
    <td width="2%">&nbsp;</td>
    <td width="2%"><font size=2 face="serif">$</font></td>
    <td width="6%" align="right"><font size=2 face="serif">18,343</font></td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="6%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="6%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="6%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Capital Leases</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">27,938</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">7,257</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">14,514</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6,167</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Purchase Obligations (2)</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6,416,092</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6,416,092</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,460,629</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6,608,018</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">147,165</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">138,818</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">4,566,628</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="left"><font size="2" face="serif">(1) The interest on the Industrial Development Bond assumes the current rate of 1.53%. The interest rate set by the remarketing agent is consistent with 30-day tax-exempt commercial paper.  </font></p>
<p align="left"><font size="2" face="serif">(2) A &#8220;purchase obligation&#8221; is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms, including:  fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  These amounts are primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to fulfillment of our current order backlog.</font></p>
<p align="left"><font size="2" face="serif"><b>Off-Balance Sheet Arrangements</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company does not have any off-balance sheet arrangements.</font></p>
<p align="left"><font size="2" face="serif"><b>Inflation</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We do not believe that inflation has had a material effect on our financial position or results of operations during the past three years. However, we cannot predict the future effects of inflation.</font></p>
<p align="left"><font size="2" face="serif"><b>Critical Accounting Policies</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The Company&#8217;s most critical accounting policies are revenue recognition, income taxes, allowance for doubtful accounts, inventory valuation and warranty reserves. </font></p>
<p align="center"><font size="2" face="serif">15</font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company recognizes sales for
    products when the following revenue recognition criteria are met: persuasive
    evidence of an arrangement exists, product delivery and acceptance has occurred,
    pricing is fixed or determinable, and collection is reasonably assured. The
    Company recognizes sales upon shipment of products to customers. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Sales related to certain long-term contracts requiring development and delivery of products over several years are accounted for under the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, <i>Accounting for Performance of Construction-Type and Certain Production-Type Contracts. </i>We consider the nature of these contracts as well as the types of products and services provided when determining the appropriate accounting treatment for a particular contract. Certain long-term contracts are recorded on a percentage of completion basis using cost-to-cost methodology to measure progress towards completion. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company offers its customers extended warranties for additional fees. These warranty sales are recorded as deferred revenue and recognized as sales on a straight-line basis over the warranty period. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company enters into certain sales arrangements that include multiple deliverables as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, <i>Accounting for Revenue Arrangements with Multiple Deliverables</i>. Effective July 1, 2003, the Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based on fair value that is established with the customer during contract negotiations. In general, revenues are separated between product sales and non-recurring engineering services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods. Effective for transactions entered into after October 1, 2003,
the Company accounts for transactions with software and non-software components under EITF Issue 03-5, &#8220;Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.&#8221; </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Income taxes are recorded in accordance with SFAS No. 109, <i>Accounting for Income Taxes. </i>Provisions for federal and state income taxes are calculated on reported financial statement pre-tax income based on current tax law. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company&#8217;s assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are determined by analyzing historical data and trends. If actual losses are greater than estimated amounts or if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, future results from operations could be adversely affected. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Inventories are written down for estimated obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We offer warranties on some products of various lengths. At the time of shipment, we establish a reserve for the estimated cost of warranties based on our best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product&#8217;s failure rates and the customer&#8217;s usage affects warranty cost. If the actual cost of warranties differs from our estimated amounts, future results of operations could be adversely affected. </font></p>
<p align="left"><font size="2" face="serif"><b>New Accounting Pronouncements</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In January 2003, the FASB issued FIN 46, &#8220;Consolidation of Variable Interest Entities an Interpretation of ARB No. 51.&#8221; FIN 46 addresses consolidation by business enterprises of variable interest entities. The FASB then issued FIN 46(R), &#8220;Consolidation of Variable Interest Entities an Interpretation of ARB No. 51,&#8221; which replaced FIN 46. Application of FIN 46(R) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March
15, 2004. The Company has adopted both FIN 46 and FIN 46(R), and their adoption had no impact on the Company&#8217;s financial position or results of operations. </font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In
    May 2003, the FASB issued SFAS 150, &#8220;Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and Equity.&#8221; This
    Statement establishes standards for how an issuer classifies and measures
    certain financial instruments with characteristics of both liabilities and
    equity. It requires that an issuer classify a financial instrument that is
    within its scope as a liability (or an asset in some circumstances). This
    Statement is effective for financial instruments entered into or modified
    after May 31, 2003, and otherwise is effective at the beginning of the first
    interim period beginning after June 15, 2003. The Company adopted the provisions
    of SFAS 150, including the deferral of certain effective dates as a result
    of the provisions of FASB Staff Position 150-3, &#8220;Effective Date, Disclosures,
    and Transition for Mandatorily Redeemable Financial Instruments of Certain
    Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
    Under FASB Statement No. 150, &#8216;Accounting for Certain Financial Instruments
    with Characteristics of Both Liabilities and Equity.&#8217;&#8221; The Company
    does not have any significant financial instruments with characteristics
    of both liabilities and equity as of September 30, 2004. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In July 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 03-5, &#8220;Applicability of AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.&#8221; EITF 03-5 addresses whether non-software deliverables included in an arrangement that contains software that is more than incidental to the products or services as a whole are included within the scope of SOP 97-2. EITF 03-5 was ratified by the FASB on August 13, 2003 and is effective for transactions entered into after the beginning of the first reporting period after FASB ratification. The Company adopted this statement and it did not have a material impact on its
consolidated financial position or results of operations.</font></p>
<p align="left"><font size="2" face="serif"><b>Business Segments</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company operates in one principal business segment which designs, manufactures and sells flight information computers, large flat-panel displays and advanced monitoring systems to the DoD, government agencies, defense contractors, commercial air transport carriers and corporate/general aviation markets. The Company currently derives virtually all of its revenues from the sale of this equipment. Almost all of the Company&#8217;s sales, operating results and identifiable assets are in the United States.</font></p>
<p align="left"><font size="2" face="serif"><b>Risk Factors</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Risks Related to Our Business</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Most of our sales are of air data systems products, and we cannot be certain that the market will continue to accept these or our other products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>During fiscal 2004 and 2003, we derived 97% and 88%, respectively, of our revenues from the sale of air data systems and related products. We expect that revenues from our air data products will continue to account for a significant portion of our revenues in the future. Accordingly, our revenues will decrease if such products do not continue to receive market acceptance or if our existing customers do not continue to incorporate our products in their retrofitting or manufacturing of aircraft. In seeking new customers, it may be difficult for our products to displace competing air data products. Accordingly, we cannot assure you that potential customers will accept our products or that existing customers will not abandon them.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>A portion of our sales has been, and we expect will continue to be, to defense contractors or government agencies in connection with government aircraft retrofit or original manufacturing contracts. Sales to government contractors and government agencies accounted for approximately 56%, 22% and 7%, respectively, of our revenues during fiscal 2002, 2003 and 2004. Accordingly, our revenues in this area could decline further as a result of DoD spending cuts and general budgetary constraints.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In addition, our revenues are concentrated with a limited number of customers. We derived 46% of our revenues during fiscal year 2004 from five customers, Bombardier, Northwest Airlines, Star Aviation, Plain Avionics and Raytheon and 51% of our revenues during fiscal year 2003 from five customers, Bombardier, DHL, Garrett, Northwest Airlines and the DoD. We expect a relatively small number of customers to account for a majority of our revenues for the foreseeable future. As a result of our concentrated customer base, a loss of one or more of these customers could adversely affect our revenues and results of operations.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The growth of our customer base could be limited by delays or difficulties in completing the development and introduction of our planned products or product enhancements. If we fail to enhance existing products or to develop and achieve market acceptance for flat panel displays and other new products that meet customer requirements, our business may not grow.</font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Although a substantial majority of
    our revenues has come from sales of air data systems and related products,
    we expect to spend a large portion of our research and development efforts
    in developing and marketing our large flat panel display systems (CIP) and
    complementary products. Our ability to grow and diversify our operations
    through the introduction and sale of new products, such as large flat panel
    displays, is dependent upon our success in continuing product development
    and engineering activities as well as our sales and marketing efforts and
    our ability to obtain requisite approvals to sell such products. Our sales
    growth will also depend in part on the market acceptance of and demand for
    our CIP and future products. We cannot be certain that we will be able to
    develop, introduce or market our CIP or other new products or product enhancements
    in a timely or cost-effective manner or that any new products will receive
    market acceptance or necessary regulatory approval.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We rely on third party suppliers for the components of our air data systems products, and any interruption in the supply of these components could hinder our ability to deliver our products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our manufacturing process consists primarily of assembling components purchased from our supply chain. These suppliers may not continue to be available to us. If we are unable to maintain relationships with key third party suppliers, the development and distribution of our products could be delayed until equivalent components can be obtained and integrated into our products. In addition, substitution of certain components from other manufacturers may require FAA or other approval, which could delay our ability to ship products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our government retrofit projects are generally pursuant to either a direct contract with a government agency or a subcontract with the general contractor to a government agency. Each contract includes various federal regulations that impose certain requirements on us, including the ability of the government agency or general contractor to alter the price, quantity or delivery schedule of our products. In addition, the government agency or general contractor retains the right to terminate the contract at any time at its convenience. Upon alteration or termination of these contracts, we would be entitled to an equitable adjustment to the contract price so that we may receive the purchase price for items we have delivered and reimbursement for
allowable costs we have incurred. Accordingly, because these contracts can be terminated, we cannot assure you that our government retrofit backlog will result in sales.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We depend on our key personnel to manage our business effectively, and if we are unable to retain our key employees, our ability to compete could be harmed.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our success depends on the efforts, abilities and expertise of our senior management and other key personnel. With the exception of our President, we generally do not have employment agreements with our employees. There can be no assurance that we will be able to retain such employees, the loss of some of whom could hurt our ability to execute our business strategy. We intend to continue hiring key management and sales and marketing personnel. Competition for such personnel is intense, and we may not be able to attract or retain additional qualified personnel. We do not maintain key man life insurance for our executive officers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our future success will depend in part on our ability to implement and improve our operational, administrative and financial systems and controls and to manage, train and expand our employee base. We cannot assure you that our current and planned personnel levels, systems, procedures and controls will be adequate to support our future operations. If inadequate, we may not be able to exploit existing and potential market opportunities. Any delays or difficulties we encounter could impair our ability to attract new customers or enhance our relationships with existing customers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our revenue and operating results may vary significantly from quarter to quarter, which may cause our stock price to decline.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including:</font></p>
<table width="95%" border="0" align="center" cellpadding="0" cellspacing="0">
  <tr align="left" valign="top">
    <td width="2%"><font size="2" face="serif">&#149;</font></td>
    <td width="98%"><font size="2" face="serif">demand for our products;</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">capital expenditure budgets of aircraft owners
    and operators and the appropriation cycles of the U.S. government;</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">changes in the use of our products, including
    air data systems and flat panel displays;</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">delays in introducing or obtaining government
    approval for new products;</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">new product introductions by competitors;</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">changes in our pricing policies or the pricing
    policies of our competitors; and</font></td>
  </tr>
  <tr align="left" valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="left" valign="top">
    <td><font size="2" face="serif">&#149;</font></td>
    <td><font size="2" face="serif">costs related to possible acquisitions of
    technologies or businesses.</font></td>
  </tr>
</table>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We plan to increase our operating expenses to expand our sales and marketing operations and fund greater levels of product development. As a result, a delay in generating revenues could cause significant variations in our operating results from quarter to quarter.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our competition includes other manufacturers of air data systems and flight information displays against whom we may not be able to compete successfully.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The markets for our products are intensely competitive and subject to rapid technological change. Our competitors include Kollsman, Inc., Honeywell International Inc., Rockwell Collins Inc., Smiths Industries plc and L-3 Communications. Substantially all of our competitors have significantly greater financial, technical and human resources than we do. In addition, our competitors have much greater experience in and resources for marketing their products. As a result, our competitors may be able to respond more quickly to new or emerging technologies and customer preferences or devote greater resources to the development, promotion and sale of their products than we can. Our competitors may also have greater name recognition and more extensive
customer bases that they can use to their benefit. This competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We may not be able to identify or complete acquisitions or we may consummate an acquisition that adversely affects our operating results.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>One of our strategies is to acquire businesses or technologies that will complement our existing operations. We have limited experience in acquiring businesses or technologies. There can be no assurance that we will be able to acquire or profitably manage acquisitions or successfully integrate them into our operations. Furthermore, certain risks are inherent in our acquisition strategy, such as the diversion of management&#8217;s time and attention and combining disparate company cultures and facilities. Acquisitions may have an adverse effect on our operating results, particularly in quarters immediately following the consummation of such transactions, as we integrate the operations of the acquired businesses into our operations. Once
integrated, acquisitions may not perform as expected.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our success depends on our ability to protect our proprietary rights, and there is a risk of infringement. If we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our success and ability to compete will depend in part on our ability to obtain and maintain patent or other protection for our technology and products, both in the United States and abroad. In addition, we must operate without infringing the proprietary rights of others.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We currently hold twelve U.S. patents and have seven U.S. patent applications pending. In addition, we have eight international patents and twenty-four international patent applications pending. We cannot be certain that patents will be issued on any of our present or future applications. In addition, our existing patents or any future patents may not adequately protect our technology if they are not broad enough, are successfully challenged or other entities are able to develop competing methods without violating our patents. If we are not successful in protecting our intellectual property, competitors could begin to offer products that incorporate our technology. Patent protection involves complex legal and factual questions and, therefore, is
highly uncertain, and litigation relating to intellectual property is often very time consuming and expensive. If a successful claim of patent infringement were made against us or we are unable to develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, we might not be able to make some of our products.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Risks Related to Our Industry</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>If we are unable to respond to rapid technological change, our products could become obsolete and our reputation could suffer. Future generations of air data systems, engine and fuel displays and flat panel displays embodying new technologies or new industry standards could render our products obsolete. The market for aviation products is subject to rapid technological change, new product introductions, changes in customer preferences and evolving industry standards. Our future success will depend on our ability to:</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;adapt to rapidly changing technologies;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;adapt our products to evolving industry standards; and</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our future success will also depend on our developing high quality, cost-effective products and enhancements to our products that satisfy the needs of our customers and on our introducing these new technologies to the marketplace in a timely manner. If we fail to modify or improve our products in response to evolving industry standards, our products could rapidly become obsolete.</font></p>
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<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our products are currently subject
    to direct regulation by the U.S. Federal Aviation Administration (FAA), its
    European counterpart, the Joint Aviation Authorities (JAA), and other comparable
    organizations. Our products, as they relate to aircraft applications, must
    be approved by the FAA, JAA or other comparable organizations before they
    can be used in an aircraft. To be certified, we must demonstrate that our
    products are accurate and able to maintain certain levels of repeatability
    over time. Although the certification requirements of the FAA and the JAA
    are substantially similar, there is no formal reciprocity between the two
    systems. Accordingly, even though some of our products are FAA-approved,
    we may need to obtain approval from the JAA or other appropriate organizations
    to have them certified for installation outside the United States.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Significant delay in receiving certification for newly developed products or enhancements to our products or losing certification for our existing products could result in lost sales or delays in sales. Furthermore, the adoption of additional regulations or product standards, as well as changes to the existing product standards, could require us to change our products and underlying technology.  We cannot assure you that we will receive regulatory approval on a timely basis or at all. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Because our products utilize sophisticated technology and are deployed in complex aircraft cockpit environments, problems with these products may arise that could seriously harm our reputation for quality assurance and our business.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Our products use complex system designs and components that may contain errors, omissions or defects, particularly when we incorporate new technologies into our products or we release new versions or enhancements of our products. Despite our quality assurance process, errors, omissions or defects could occur in our current products, in new products or in new versions or enhancements of existing products after commercial shipment has begun. We may be required to redesign or recall those products or pay damages. Such an event could result in the following:</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the delay or loss of revenues;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the cancellation of customer contracts;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the diversion of development resources;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;damage to our reputation;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;increased service and warranty costs; or</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;litigation costs.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Although we currently carry product liability insurance, this insurance may not be adequate to cover our losses in the event of a product liability claim. Moreover, we may not be able to maintain such insurance in the future.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>We expect to derive an increasing amount of our revenues from sales outside the United States, particularly in Europe. We have limited experience in marketing and distributing our products internationally. In addition, there are certain risks inherent in doing business on an international basis, such as:</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;differing regulatory requirements for products being installed in aircraft;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;legal uncertainty regarding liability;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;tariffs, trade barriers and other regulatory barriers;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;political and economic instability;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;changes in diplomatic and trade relationships;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;potentially adverse tax consequences;</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the impact of recessions in economies outside the United States; and</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>&#149; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;variance and unexpected changes in local laws and regulations.</font></p>
<p align="center"><font size="2" face="serif">20</font></p>
<p></p>
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<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Currently, all of our international
    sales are denominated in U.S. dollars. An increase in the value of the dollar
    compared to other currencies could make our products less competitive in
    foreign markets. In the future, we may conduct sales in local currencies,
    exposing us to changes in exchange rates that could adversely affect our
    operating results.</font></p>
<p align="left"><font size="2" face="serif"><b>Item 7A.&nbsp;&nbsp;&nbsp;&nbsp;Quantitative and qualitative disclosures about market risk.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company&#8217;s operations are exposed to market risks primarily as a result of changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. The Company&#8217;s exposure to market risk for changes in interest rates relates to its cash equivalents and an industrial revenue bond. The Company&#8217;s cash equivalents consist of funds invested in money market accounts, which bear interest at a variable rate, while the industrial revenue bond carries an interest rate that is consistent with 30-day tax-exempt commercial paper. As the interest rates are variable, a change in interest rates earned on the cash equivalents or paid on the industrial revenue bond, would impact interest income
and expense along with cash flows, but would not impact the fair market value of the related underlying instruments.</font></p>
<p align="left"><font size="2" face="serif"><b>Item 8.&nbsp;&nbsp;&nbsp;&nbsp;Financial statements and supplementary data.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The financial statements of Innovative Solutions and Support, Inc. listed in the index appearing under Item 8 herein are filed as part of this Report.</font></p>
<p align="left">&nbsp;</p>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">21</font></p>
<p></p>
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<p align="center"><font size="2" face="serif"><b>INNOVATIVE SOLUTIONS AND SUPPORT,
      INC. </b></font></p>
<p align="center"><font size="2" face="serif"><b>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS </b></font></p>
<table width="100%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td width="5%" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Page</font></b></font></td>
<td width="2%" align="left">&nbsp;</td> </tr>
<tr valign="top" bgcolor="#ffffff">
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Report of Independent Registered Public Accounting Firm</font></td>
<td align="right"><font size="2" face="serif">23</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Consolidated Balance Sheets</font></td>
<td align="right"><font size="2" face="serif">24</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Consolidated Statements of Operations</font></td>
<td align="right"><font size="2" face="serif">25</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Consolidated Statements of Shareholders&#8217; Equity</font></td>
<td align="right"><font size="2" face="serif">26</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Consolidated Statements of Cash Flows</font></td>
<td align="right"><font size="2" face="serif">27</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Notes to Consolidated Financial Statements</font></td>
<td align="right"><font size="2" face="serif">28-39</font></td>
<td align="left">&nbsp;</td>
</tr>
</table>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p align="center"><font face="serif" size="2">22</font></p>
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<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p><b><font face="serif" size="2">REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</font></b></p>
<p align="left"><font size="2" face="serif">To the Board of Directors and Stockholders of<br>
</font><font size="2" face="serif">Innovative Solutions and Support, Inc.<br>
</font><font size="2" face="serif">Exton, Pennsylvania</font></p>
<p align="left"><font size="2" face="serif">We have audited the accompanying consolidated balance sheets of Innovative Solutions and Support, Inc. and subsidiaries (the &#8220;Company&#8221;) as of September 30, 2004 and September 30, 2003, and the related consolidated statements of operations, stockholders&#8217; equity, and cash flows for each of the three years in the period ended September 30, 2004.  These financial statements are the responsibility of the Company&#8217;s management.  Our responsibility is to express an opinion on these financial statements based on our audits.</font></p>
<p align="left"><font size="2" face="serif">We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.</font></p>
<p align="left"><font size="2" face="serif">In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2004 and September 30, 2003, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.  </font></p>
<p align="left"><font size="2" face="serif">Philadelphia, Pennsylvania<br>
</font><font size="2" face="serif">December 8, 2004</font></p>
<p align="left">&nbsp;</p>
<p align="left">&nbsp;</p>
<p align="left">&nbsp;</p>
<p align="center"><font face="serif" size="2">23</font></p>
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<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><b><font size=2 face="serif">INNOVATIVE
      SOLUTIONS AND SUPPORT, INC.</font></b> <br>
<b><font size=2 face="serif">CONSOLIDATED BALANCE SHEET</font></b> </p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td align="center"><u><b><font size=2 face="serif">ASSETS</font></b></u></td>
    <td colspan=2 align="center"><b><font size=1 face="serif">September 30,<br>
    FY 2003    </font></b></td>
    <td><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center"><b><font size=1 face="serif">September 30,<br>
    FY 2004    </font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Current Assets:</font></td>
    <td width="2%">&nbsp;</td>
    <td width="10%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="10%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Cash and cash
    equivalents</font></div></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">48,789,744</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">65,867,167</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Accounts receivable,
    less allowance for doubtful accounts of</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">6,955,207</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,003,100</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 9%"><font size=2 face="serif">$100,000 at September
    30, 2003 and 2004</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Inventories</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">2,840,648</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,191,628</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Deferred income
    taxes</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">673,134</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">984,111</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 9%"><font size=2 face="serif">Prepaid expenses</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">660,430</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">665,276</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Total current
    assets</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">59,919,163</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">77,711,282</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Property and Equipment:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Computers and
    test equipment</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,309,852</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,933,326</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Corporate airplane</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">2,998,161</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">2,998,161</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Furniture and
    office equipment</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">520,973</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">622,364</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Manufacturing
    facility</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,368,690</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,414,986</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Land</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,021,245</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,021,245</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,218,921</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,990,082</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Less-Accumulated
    depreciation and amortization</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(3,670,430</font></td>
    <td><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(4,369,851</font></td>
    <td><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 9%"><font size=2 face="serif">Net property and
    equipment</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9,548,491</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9,620,231</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Deposits and other assets</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">408,971</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">137,114</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Total assets</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">69,876,625</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">87,468,627</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
    </td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
    </td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="center"><u><b><font size=2 face="serif">LIABILITIES AND SHAREHOLDERS&#146; EQUITY</font></b></u></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">CURRENT LIABILITIES:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Current portion
    of notes payable</font></div></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">100,000</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">100,000</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Current portion
    of capitalized lease obligations</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,257</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Accounts payable</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">578,306</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,696,247</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Accrued expenses</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,146,409</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,754,641</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Deferred revenue</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">98,036</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">526,023</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 9%"><font size=2 face="serif">Total current
    liabilities</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,922,751</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,084,168</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Note payable</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,235,000</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,235,000</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Long-term portion
    of capitalized lease obligations</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">20,681</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Deferred revenue</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">332,407</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">261,934</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Deferred income
    taxes</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">328,177</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">411,857</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Commitments and
    contingencies</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Shareholders&#146; Equity:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Preferred stock,</font><font size=2 face="serif">10,000,000
    shares authorized-Class A</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Convertible stock,</font><font size=2 face="serif"> $.001
        par value; 200,000 shares authorized,</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">no shares issued and outstanding
        at September 30, 2003 and 2004, respectively</font></td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Common stock,
    $.001 par value: 75,000,000 shares</font></div></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">authorized, 13,080,717 and 13,515,330
        shares issues and</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">outstanding at September 30, 2003
        and 2004.</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,081</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,515</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Additional paid-in
    capital</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">46,248,224</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">48,712,289</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Retained earnings</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">25,410,742</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">37,342,940</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 3%"><font size=2 face="serif">Treasury stock,
    at cost, 1,690,026 shares</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(10,613,757</font></td>
    <td><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(10,613,757</font></td>
    <td><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><div style="margin-left: 9%"><font size=2 face="serif">Total shareholders&#146; equity</font></div></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">61,058,290</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">75,454,987</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Total liabilities and shareholders&#146;
        equity</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">69,876,625</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">87,468,627</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
    </td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
    </td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="center"><font size="2">The accompanying notes are an integral part of these statements.</font></p>
<p align="center"><font face="serif" size="2">24</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>INNOVATIVE SOLUTIONS AND SUPPORT,
      INC.<br>
  CONSOLIDATED STATEMENTS OF OPERATIONS </b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan="8" align="center"><b><font size=1 face="serif">For the Fiscal
    Year Ended September 30,</font></b></td>
    <td align="center">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2002</font></b></td>
    <td width="2%" align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td width="2%" align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
    <td width="2%">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td width="2%" valign="bottom"><hr noshade size=1></td>
    <td width="10%" align="center" valign="bottom"><hr noshade size=1>
    </td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td width="2%" align="center" valign="bottom"><hr noshade size=1></td>
    <td width="10%" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp; </td>
    <td width="2%" align="center" valign="bottom"><hr noshade size=1></td>
    <td width="10%" align="center" valign="bottom"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net sales</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">28,345,620</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">28,168,752</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">46,099,777</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cost of sales</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,290,085</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,346,057</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">15,663,108</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Gross profit</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">17,055,535</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">16,822,695</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">30,436,669</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Operating expenses:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Research and development</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,755,422</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">3,376,849</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">4,811,156</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Selling, general and administrative</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,732,886</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,890,362</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,567,959</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,488,308</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9,267,211</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,379,115</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Operating income</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">6,567,227</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,555,484</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">18,057,554</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Interest income</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(855,995)</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(582,023</font></td>
    <td><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(532,745)</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Interest expense</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">133,145</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">131,602</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">128,018</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Income before income taxes</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7,290,077</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">8,005,905</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">18,462,281</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Income taxes</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(1,879,799</font></td>
    <td><font size=2 face="serif">)</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(2,464,715)</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(6,530,084)</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net Income Per Common Share:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Basic</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.42</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.45</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.03</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Diluted</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.41</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.44</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.00</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2></td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Weighted Average Shares Outstanding:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Basic</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,830,894</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,261,084</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,600,253</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2></td>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Diluted</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">13,069,387</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,495,774</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,952,120</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2></td>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=2></td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">The accompanying notes are an integral part of these statements.</font></p>
<p align="center">&nbsp;</p>
<p align="center"><font size="2" face="serif">25</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>INNOVATIVE SOLUTIONS AND SUPPORT,
      INC.<br>
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS&#8217; EQUITY </b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2 align="center" valign="bottom"><font size="1">&nbsp;</font><b><font size=1 face="serif">Common<br>
    Stock</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><font size="1"><b></b></font><b><font size=1 face="serif">Additional<br>
      Paid-in<br>
    Capital</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><font size="1"><b></b></font><b><font size=1 face="serif">Retained<br>
    Earnings</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><font size="1"><b></b></font><b><font size=1 face="serif">Treasury<br>
    Stock</font></b></td>
    <td align="center" valign="bottom"><font size="1">&nbsp;</font></td>
    <td colspan=2 align="center" valign="bottom"><font size="1">&nbsp;</font><b><font size=1 face="serif">Total</font></b></td>
    <td align="center"><font size="1">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1>
</td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><font size="1">&nbsp;</font></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center"><font size="1">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Balance, September 30, 2001</font></b></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13,024</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">45,906,405</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">14,459,275</font></td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">60,378,704</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Exercise of options to purchase</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="8%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="8%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="8%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="8%" align="right">&nbsp;</td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="8%" align="right">&nbsp;</td>
    <td width="2%" align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">common stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">11</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">23,992</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">24,003</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Issuance of stock to directors</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">17</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">163,208</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">163,225</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Purchase of treasury stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(1,250,000</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">(1,250,000</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Balance, September 30, 2002</font></b></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13,052</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">46,093,605</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">19,869,553</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($1,250,000</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">64,726,210</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Exercise of options to purchase</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">common stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">9</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">19,191</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">19,200</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Issuance of stock to directors</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">20</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">135,428</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">135,448</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Purchase of treasury stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(9,363,757</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">(9,363,757</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Balance, September 30, 2003</font></b></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13,081</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">46,248,224</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">25,410,743</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($10,613,757</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">61,058,291</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Exercise of options to purchase</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">common stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">133</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,553,662</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,553,795</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Exercise of warrants to purchase</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">common stock</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">281</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">614,317</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">614,598</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Issuance of stock to directors</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">20</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">296,086</font></td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">296,106</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net income</font></td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&#151;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&#151;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td align="left"><hr noshade size=1></td>
    <td align="right"><hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Balance, September 30, 2004</font></b></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13,515</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">48,712,289</font></td>
    <td>&nbsp;</td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">37,342,940</font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($10,613,757</font></td>
    <td align="left"><font size=2 face="serif">)</font></td>
    <td align="left"><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">75,454,987</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td align="left"><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;    </td>
    <td><hr noshade size=2>
</td>
    <td align="right"><hr noshade size=2></td>
    <td align="left">&nbsp;</td>
    <td align="left"><hr noshade size=2>
    </td>
    <td align="right"><hr noshade size=2>
    </td>
    <td align="left">&nbsp;</td>
  </tr>
</table>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">The accompanying notes are an integral part of these statements.</font></p>
<p align="center"><font size="2" face="serif">26</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>INNOVATIVE SOLUTIONS AND SUPPORT,
      INC.<br>
</b></font><font size="2" face="serif"><b>CONSOLIDATED
      STATEMENTS OF CASH FLOWS </b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan=8 align="center"><b><font size=1 face="serif">For the Fiscal
    Year Ended September 30,</font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=8><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center"><b><font size=1 face="serif">FY 2002</font></b></td>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center"><b><font size=1 face="serif">FY 2003</font></b></td>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center"><b><font size=1 face="serif">FY 2004</font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">CASH FLOWS FROM OPERATING ACTIVITIES:</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
    <td width="10%" align="right"><font size="2">&nbsp;</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
    <td width="10%"><font size="2">&nbsp;</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
    <td width="10%"><font size="2">&nbsp;</font></td>
    <td width="2%"><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;<font face="serif">Net income (loss)</font></font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;<font face="serif">Adjustments to reconcile
        net income to net cash</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">provided
        by (used in) operating activities:</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Depreciation
        and amortization</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">860,943</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">714,210</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">729,993</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Write
        off of software deposit</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">101,738</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Loss
        on Disposal of Fixed Assets</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">52,779</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">50,453</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">1,660</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Writeoff
        of Capitalized certification costs</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">711,195</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Excess
        and obsolete inventory expense</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(78,495</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(118,298</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Disposal
        of obsolete inventory</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">163,856</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Deferred
        income taxes</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">164,859</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">99,599</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">83,680</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Compensation
        expense for stock issued to directors</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">156,330</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">135,448</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">296,106</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Tax
        benefit from exercise of stock options</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">381,469</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">(Increase)
        decrease in:</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Accounts
        receivable</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">3,029,705</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(1,654,786</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,952,107</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Inventories</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">2,349,024</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">590,496</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(2,396,538</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Prepaid
        expenses and other</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">535,139</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(260,555</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(55,966</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Increase
        (decrease) in:</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Accounts
        payable</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(226,970</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">331,492</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,117,941</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Accrued
        expenses</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">383,738</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">601,500</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,647,350</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Deferred
        revenue</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(78,608</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(110,372</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">357,514</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Net
        cash provided by operating activities</font></font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">13,348,412</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">6,061,918</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">16,093,071</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">CASH FLOWS FROM INVESTING ACTIVITIES:</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Purchases
        of property and equipment</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(2,947,743</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(156,260</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">(791,393</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Change
        in restricted cash</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">317,465</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Net
        cash used in investing activities</font></font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($2,630,278</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">($156,260</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($791,393</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">CASH FLOWS FROM FINANCING ACTIVITIES:</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Proceeds
        from exercise of stock options</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">24,003</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">19,200</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,127,991</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Proceeds
        from exercise of warrants</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">658,934</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Purchase
        of treasury stock</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(1,250,000</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(9,363,757</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right">&#151;</td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Repayment
        of capitalized lease obligations</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(16,220</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(17,111</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(11,180</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Net
        cash provided by (used in) financing activities</font></font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($1,242,217</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">(9,361,668</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">1,775,745</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Net
        increase (decrease) in cash and cash equivalents</font></font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">9,475,917</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">($3,456,010</font></td>
    <td><font size=2 face="serif">)</font><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">17,077,423</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cash and cash equivalents, beginning of year</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">42,769,837</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">52,245,754</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">48,789,744</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cash and cash equivalents, end of year</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">52,245,754</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">48,789,744</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">65,867,167</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><b><font size=2 face="serif">Supplemental Cash flow Information:</font></b></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Cash Paid For:</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Interest</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">73,838</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">56,868</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">53,711</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
</td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif">Income
        Taxes</font></font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">1,598,192</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">1,948,658</font></td>
    <td><font size="2">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">5,991,777</font></td>
    <td><font size="2">&nbsp;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
</td>
    <td>&nbsp;</td>
    <td colspan=2><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="center"><font size="2" face="serif">The accompanying notes are an integral part of these statements. </font></p>
<p align="center"><font face="serif" size="2">27</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</font></b></p>
<p align="left"><font size="2" face="serif"><b>1.&nbsp;&nbsp;&nbsp;&nbsp;Background:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Innovative Solutions and Support, Inc., (the &#8220;Company&#8221;), was incorporated in Pennsylvania on February 12, 1988. The Company&#8217;s primary business is the design, manufacture and sale of flight information computers; large flat panel displays and advanced monitoring systems to the DoD, defense contractors, commercial air transport and corporate/general aviation markets.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company completed an initial public offering of Common stock in August 2000. Upon the closing of the offering, the outstanding shares of Series A Preferred stock were converted into 1,941,353 shares of Common stock.</font></p>
<p align="left"><font size="2" face="serif"><b>2.&nbsp;&nbsp;&nbsp;&nbsp;Concentrations:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Major Customers and Products</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>In fiscal 2002, 2003 and 2004 the Company derived 61%, 51% and 46% of net sales from five customers, although not all the same customers in each year. The accounts receivable related to the current five customers was $1.0 million at September 30, 2004. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>In addition, sales of air data systems and components were 91%, 88% and 97% of total sales for the years ended September 30, 2002, 2003 and 2004, respectively. Sales of other instrumentation were 9%, 12% and 3% of net sales in the years ended September 30, 2002, 2003 and 2004. Sales to government contractors and agencies accounted for approximately 56%, 22% and 7% respectively, of the Company&#8217;s net sales during fiscal 2002, 2003 and 2004.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Major Suppliers</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>The Company currently buys several of its components from sole source suppliers. Although there are a limited number of manufacturers of the particular components, management believes that other suppliers could provide similar components on comparable terms.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Concentration of Credit Risk</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivables. The Company invests its excess cash where preservation of principal is the major consideration. The Company&#8217;s customer base principally consists of companies within the aviation industry. The Company routinely requests advance payments and or letters of credit from new customers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>The Company also maintains a reserve for doubtful accounts in the amount of $100,000 and had accounts receivable write-offs of $21,137 and $0 in fiscal 2003 and 2004, respectively.</font></p>
<p align="left"><font size="2" face="serif"><b>3.&nbsp;&nbsp;&nbsp;&nbsp;Summary Of Significant Accounting Policies:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Principles of Consolidation</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>The consolidated financial statements include the accounts of the Company and its subsidiaries. All material inter-company balances and transactions have been eliminated.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Use of Estimates</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Cash and Cash Equivalents</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>Highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents. Cash equivalents at September 30, 2003 and 2004 consist of funds invested in money market accounts with financial institutions.</font></p>
<p align="center"><font size="2" face="serif">28</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b></p>
<p><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Inventories</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong></font></strong>Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="5" align="center" valign="bottom"><b><font size=1 face="serif">September 30,</font></b></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="5">      <hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td width="5%" align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
    <td width="5%"><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">      <hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">      <hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Raw materials</font></td>
    <td width="3%"><font size=2 face="serif">$</font></td>
    <td width="12%" align="right"><font size=2 face="serif">1,412,242</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td width="3%"><font size=2 face="serif">$</font></td>
    <td width="12%" align="right"><font size=2 face="serif">1,928,005</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Work-in-process</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">785,771</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">2,573,932</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Finished goods</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">642,635</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td align="right"><font size=2 face="serif">689,691</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">      <hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">      <hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">2,840,648</font></td>
    <td><font face="serif">&nbsp;</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,191,628</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">    <hr noshade size=2>
    </td>
    <td><font face="serif">&nbsp;</font></td>
    <td colspan="2">    <hr noshade size=2>
    </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Property and Equipment</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>Property and equipment are stated at cost. Depreciation is provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the airplane and manufacturing facility, which is depreciated over a straight-line method. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred. Depreciation expense was $834,934, $702,210 and $717,993 for the fiscal years ended 2002, 2003 and 2004.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Long-Lived Assets</i></font></p>
<p align="left"><font size="2" face="serif"><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company assesses the impairment of long-lived assets in accordance with SFAS No. 144, <i>Accounting for the Impairment or Disposal of Long-Lived Assets</i>.  This statement required that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Also, in general, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell.  The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset.  If the
carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value.  The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments.  No impairment charges were recorded in fiscal 2002, 2003, and 2004.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Revenue Recognition</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The Company recognizes sales for products when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, product delivery and acceptance has occurred, pricing is fixed or determinable, and collection is reasonably assured. The Company essentially recognizes sales upon shipment of products to customers.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>Sales related to certain long-term contracts requiring development and delivery of products over several years are accounted for under the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, <i>Accounting for Performance of Construction-Type and Certain Production-Type Contracts</i> and the amounts are not significant for fiscal years 2002, 2003 and 2004.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The Company offers its customers extended warranties for additional fees. These warranty sales are recorded as deferred revenue and recognized as sales on a straight-line basis over the warranty period.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The Company enters into certain sales arrangements that include multiple deliverables as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, <i>Accounting for Revenue Arrangements with Multiple Deliverables. </i>Effective July 1, 2003, the Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenue to each deliverable based on fair value that is established with the customer during contract negotiations. In general, revenues are separated between product sales and non-recurring engineering services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Warranty</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>Estimated cost to repair or replace products under warranty is provided when sales of product are recorded.</font></p>
<div align="center"><font size="2">29
  </font>
</div>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i>Income Taxes</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>Income taxes are recorded in accordance with SFAS No. 109, &#8220;Accounting for Income Taxes&#8221; (see Note 7).</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i>Research and Development</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>Research and development charges incurred for product enhancements and future product development are recorded as expense as incurred.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i>Comprehensive Income</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>Pursuant to SFAS No. 130, &#8220;Reporting Comprehensive Income,&#8221; the Company would be required to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Comprehensive income consists of net income and there were no items of other comprehensive income for any of the periods presented.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i>Fair Value of Financial Instruments</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>The estimated fair value amounts presented in these consolidated financial statements have been determined by the Company using available market information and appropriate methodologies. The Company&#8217;s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt instruments. The carrying values of these assets and liabilities are considered to be representative of the respective fair values based on pertinent information available to management as of September 30, 2003 and 2004. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i>Stock Options</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>Stock-based employee compensation is recognized using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, &#8220;Accounting for Stock Issued to Employees.&#8221; For disclosure purposes, pro forma net income and net income per share data are provided in accordance with SFAS No. 123, &#8220;Accounting for Stock-Based Compensation,&#8221; as if the fair value method had been applied.</font></p>
<p align="center"><font size="2" face="serif">30</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>Under SFAS No. 123, compensation
    cost related to stock options granted to employees is computed based on the
    fair value of the stock option at the date of grant using the Black-Scholes
    option pricing model. Had the Company recognized compensation cost for its
    stock option plans consistent with the provisions of SFAS 123, the Company&#8217;s pro forma net income for the periods ended September 30, 2003 and 2004 would have been as follows:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif">&nbsp;</font><font size="2" face="serif"><b><font face="serif" size="1">Fiscal&nbsp;Year&nbsp;Ended<br>September&nbsp;30,&nbsp;2002</font></b></font></td>
<td align="center" valign="bottom"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Fiscal&nbsp;Year&nbsp;Ended<br>
  September&nbsp;30,&nbsp;2003</font></b></font></td>
<td align="center" valign="bottom"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Fiscal&nbsp;Year
        Ended<br>
  September&nbsp;30,&nbsp;2004</font></b></font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif">Net income:</font></td>
<td colspan="2" align="left" valign="bottom">
  <hr noshade size=1></td>
<td width="2%" align="left" valign="bottom"></td>
<td colspan="2" align="left" valign="bottom"><hr noshade size=1></td>
<td width="2%" align="left" valign="bottom"></td>
<td colspan="2" align="left" valign="bottom"><hr noshade size=1></td>
<td width="2%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>As reported</font></td>
<td width="2%" align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td width="9%" align="right" valign="bottom"><font size="2" face="serif">5,410,278</font></td>
<td width="4%" align="left" valign="bottom"></td>
<td width="2%" align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td width="9%" align="right" valign="bottom"><font size="2" face="serif">5,541,190</font></td>
<td width="4%" align="left" valign="bottom"></td>
<td width="2%" align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td width="9%" align="right" valign="bottom"><font size="2" face="serif">11,932,197</font></td>
<td width="2%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><div style="margin-left: 9%"><font size="2" face="serif">Deduct:
      Total stock based employee<br>
        <i></i><i></i><i></i></font><font size="2" face="serif">compensation
        expense determined<br>
        </font><font size="2" face="serif">under the fair value based method
        for</font> <font size="2" face="serif">all awards, <br>
  net of related tax effects.</font></div></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">(473,929</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">)</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">(634,144</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">)</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">(745,329</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"></td>
<td colspan="2" align="left" valign="bottom">
  <hr noshade size=1>
</td>
<td align="left" valign="bottom"></td>
<td colspan="2" align="left" valign="bottom">
  <hr noshade size=1>
</td>
<td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
<td colspan="2" align="left" valign="bottom">
  <hr noshade size=1>
</td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>Pro forma</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">4,936,349</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">4,907,046</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">11,186,868</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left" valign="bottom"></td>
  <td colspan="2" align="left" valign="bottom">
    <hr noshade size=1>
  </td>
  <td align="left" valign="bottom"></td>
  <td colspan="2" align="left" valign="bottom">
    <hr noshade size=1>
  </td>
  <td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
  <td colspan="2" align="left" valign="bottom">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif">Basic EPS:</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>As reported</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.42</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.45</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">1.03</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>Pro forma</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.39</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.40</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.96</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif">Diluted EPS:</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">&nbsp;</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>As reported</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.41</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.44</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">1.00</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left" valign="bottom"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>Pro forma</font></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.38</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.39</font></td>
<td align="left" valign="bottom"></td>
<td align="left" valign="bottom"><font size="2" face="serif">$</font></td>
<td align="right" valign="bottom"><font size="2" face="serif">.94</font></td>
<td align="left"></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i>New Accounting Pronouncements</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In January 2003, the FASB issued FIN 46, &#8220;Consolidation of Variable Interest Entities an Interpretation of ARB No. 51.&#8221; FIN 46 addresses consolidation by business enterprises of variable interest entities. The FASB then issued FIN 46(R), &#8220;Consolidation of Variable Interest Entities an Interpretation of ARB No. 51,&#8221; which replaced FIN 46. Application of FIN 46(R) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March
15, 2004. The Company has adopted both FIN 46 and FIN 46(R), and their adoption had no impact on the Company&#8217;s financial position or results of operations. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>In
    May 2003, the FASB issued SFAS 150, &#8220;Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and Equity.&#8221; This
    Statement establishes standards for how an issuer classifies and measures
    certain financial instruments with characteristics of both liabilities and
    equity. It requires that an issuer classify a financial instrument that is
    within its scope as a liability (or an asset in some circumstances). This
    Statement is effective for financial instruments entered into or modified
    after May 31, 2003, and otherwise is effective at the beginning of the first
    interim period beginning after June 15, 2003. The Company adopted the provisions
    of SFAS 150, including the deferral of certain effective dates as a result
    of the provisions of FASB Staff Position 150-3, &#8220;Effective Date, Disclosures,
    and Transition for Mandatorily Redeemable Financial Instruments of Certain
    Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
    Under FASB Statement No. 150, &#8216;Accounting for Certain Financial Instruments
    with Characteristics of Both Liabilities and Equity.&#8217;&#8221; The Company
    does not have any significant financial instruments with characteristics
    of both liabilities and equity as of September 30, 2004. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>In July 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 03-5, &#8220;Applicability of AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.&#8221; EITF 03-5 addresses whether non-software deliverables included in an arrangement that contains software that is more than incidental to the products or services as a whole are included within the scope of SOP 97-2. EITF 03-5 was ratified by the FASB on August 13, 2003 and is effective for transactions entered into after the beginning of the first reporting period after FASB ratification. The Company adopted this statement and it did not have a material impact on its
consolidated financial position or results of operations.</font></p>
<p align="left"><font size="2" face="serif"><b>4.&nbsp;&nbsp;&nbsp;&nbsp;Net Income Per Share:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i>Net income per share is calculated pursuant to SFAS No. 128, &#8220;Earnings per Share&#8221; (EPS). Basic EPS excludes potentially dilutive securities and is computed by dividing net income by the weighted-average number of Common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as preferred stock, options and warrants.</font></p>
<p align="center"><font size="2" face="serif">31</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Under SFAS No. 128, the Company&#8217;s granting of certain stock options, warrants and convertible preferred stock resulted in potential dilution of basic EPS. The following table summarizes the differences between basic weighted-average shares outstanding and diluted weighted-average shares outstanding used to compute diluted EPS.</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan=5 align="center" valign="bottom"><b><font size=1 face="serif">For the Fiscal Year Ended September
        30,</font></b></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan=5 align="center" valign="bottom"><hr noshade size=1>
    </td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td width="14%" align="center" valign="bottom"><b><font size=1 face="serif">2002</font></b></td>
    <td width="3%" align="center" valign="bottom">&nbsp;</td>
    <td width="14%" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td width="3%" align="center" valign="bottom">&nbsp;</td>
    <td width="14%" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Weighted average number of shares-basic</font></td>
    <td align="right"><font size=2 face="serif">12,830,894</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,261,084</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,600,253</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Effect of dilutive securities:</font></td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Stock Options</font></td>
    <td align="right"><font size=2 face="serif">40,272</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">43,797</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">278,510</font></td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Warrants</font></td>
    <td align="right"><font size=2 face="serif">198,221</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">190,893</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">73,357</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Weighted average number of shares-diluted</font></td>
    <td align="right"><font size=2 face="serif">13,069,387</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">12,495,774</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">11,952,120</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=2>
    </td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>The number of incremental shares from the assumed exercise of stock options and warrants is calculated by using the treasury stock method. For the fiscal years ended September 30, 2002, 2003 and 2004, there were 89,991, 219,820 and 8,391 options outstanding, respectively, that were excluded from the computation of diluted earnings per share as the effect would be antidilutive.</font></p>
<p align="left"><font size="2" face="serif"><b>5.&nbsp;&nbsp;&nbsp;&nbsp;Accrued Expenses:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Accrued expenses consist of the following:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"></td>
    <td colspan="5" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">September
    30,</font></b></font></td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"></td>
    <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"></td>
    <td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b></b></font><font size="2" face="serif"><b><font face="serif" size="1">2003</font></b></font></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b></b></font><font size="2" face="serif"><b><font face="serif" size="1">2004</font></b></font></td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left">&nbsp;</td>
    <td colspan="2" align="left"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
    <td colspan="2" align="left"><hr noshade size=1></td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Salary, benefits and payroll
        taxes</font></td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="14%" align="right"><font size="2" face="serif">521,730</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="14%" align="right"><font size="2" face="serif">1,198,267</font></td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif">Warranty</font></td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">842,541</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">757,476</font></td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Income taxes payable</font></td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">1,322,770</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">1,797,508</font></td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif">Other</font></td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">459,368</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"></td>
    <td align="right"><font size="2" face="serif">1,001,390</font></td>
  </tr>
  <tr valign="top">
    <td align="left"></td>
    <td colspan="2" align="left">
    <hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td colspan="2" align="left">
    <hr noshade size=1>
    </td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"></td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif">3,146,409</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif">4,754,641</font></td>
  </tr>
  <tr valign="top">
    <td align="left"></td>
    <td colspan="2" align="left">
      <hr noshade size=1>
    </td>
    <td align="left">&nbsp;</td>
    <td colspan="2" align="left">
      <hr noshade size=1>
    </td>
  </tr>
</table>
<p align="center"><font face="serif" size="2">32</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p><font size="2" face="serif"><b>6.&nbsp;&nbsp;&nbsp;&nbsp;Warranty:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>The Company provides for the estimated cost of product warranties at the time revenue is recognized. Warranty cost is recorded as cost of sales in the financial statements. While the Company engages in extensive product quality programs and processes, the Company&#8217;s warranty obligation is affected by product failure rates and the related material, labor and delivery costs incurred in correcting a product failure. Should actual product failure rates, material or labor costs differ from the Company&#8217;s estimates, revisions to the estimated warranty liability would be required.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Warranty cost and accrual information for the fiscal period ended September 30, 2003 is highlighted below:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Warranty accrual at September 30, 2002</font></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="6%" align="right"><font size="2" face="serif">675,640</font></td>
<td width="15%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><div style="margin-left: 6%"><font size="2" face="serif">Accrual
    expense for the year ended September 30, 2003</font></div></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">286,113</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><div style="margin-left: 6%"><font size="2" face="serif">Warranty
    costs for the year ended September 30, 2003</font></div></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(119,212</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Warranty accrual at September 30, 2003</font></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">842,541</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Warranty cost and accrual information for the fiscal period ended September 30, 2004 is highlighted below:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Warranty accrual at September 30, 2003</font></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="6%" align="right"><font size="2" face="serif">842,541</font></td>
<td width="15%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><div style="margin-left: 6%"><font size="2" face="serif">Accrual
    expense for year ended September 30, 2004</font></div></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">227,292</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><div style="margin-left: 6%"><font size="2" face="serif">Warranty
    costs for year ended September 30, 2004</font></div></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(145,957</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><div style="margin-left: 6%"><font size="2" face="serif"> Change
    in estimate of warranty liability</font></div></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="right"><font size="2" face="serif">(166,400</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Warranty accrual at September 30, 2004</font></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">757,476</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><hr size="1" noshade></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><b>7.&nbsp;&nbsp;&nbsp;&nbsp;Income Taxes:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Components of income taxes are as follows:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="8" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">For
    the Fiscal Year Ended September 30,</font></b></font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
  <td align="left"></td>
  <td colspan="8" align="center" valign="bottom"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b></b></font><font size="2" face="serif"><b><font face="serif" size="1">2002</font></b></font></td>
<td align="center" valign="bottom"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b></b></font><font size="2" face="serif"><b><font face="serif" size="1">2003</font></b></font></td>
<td align="center" valign="bottom">&nbsp;</td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b></b></font><font size="2" face="serif"><b><font face="serif" size="1">2004</font></b></font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Current Provision:</font></td>
<td colspan="2" align="left"><hr noshade size=1></td>
<td width="2%" align="left"></td>
<td colspan="2" align="left"><hr noshade size=1></td>
<td width="1%" align="right">&nbsp;</td>
<td colspan="2" align="left"><hr noshade size=1></td>
<td width="2%" align="left">&nbsp;</td> </tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Federal</font></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="10%" align="right"><font size="2" face="serif">1,567,129</font></td>
<td align="left"></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="10%" align="right"><font size="2" face="serif">2,252,101</font></td>
<td align="right">&nbsp;</td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="10%" align="right"><font size="2" face="serif">6,155,438</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">State</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">147,809</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">113,015</font></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">601,943</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="2" align="left">
  <hr noshade size=1>
</td>
<td align="left"></td>
<td colspan="2" align="left">
  <hr noshade size=1>
</td>
<td align="right">&nbsp;</td>
<td colspan="2" align="left">
  <hr noshade size=1>
</td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">1,714,938</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">2,365,116</font></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">6,757,381</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="right">&nbsp;</td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Deferred Provision (Benefit):</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="left"></td>
<td align="left"></td>
<td align="left"></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left"></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Federal</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">170,881</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">99,382</font></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(195,414</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">State</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(6,020</font></td>
<td align="left"><font size="2" face="serif">)&nbsp;</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">217</font></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(31,883</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="right">&nbsp;</td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">164,861</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">99,599</font></td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(227,297</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="right">&nbsp;</td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">1,879,799</font></td>
<td align="left"></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">2,464,715</font></td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">6,530,084</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="right">&nbsp;</td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
</table>
<p align="center"><font face="serif" size="2">33</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Following is a reconciliation of the statutory federal rate to the Company&#8217;s effective income tax rate:</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="5" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">For&nbsp;the&nbsp;Fiscal&nbsp;Year<br>
  Ended<br>
  September&nbsp;30,</font></b></font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
  <td align="left"></td>
  <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
  <td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"></td>
<td width="10%" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">2002</font></b></font></td>
<td width="2%" align="center" valign="bottom"></td>
<td width="10%" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">2003</font></b></font></td>
<td width="2%" align="center" valign="bottom"></td>
<td width="10%" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">2004</font></b></font></td>
<td width="2%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Federal statutory tax rate</font></td>
<td align="right"><font size="2" face="serif">34.0</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
<td align="right"><font size="2" face="serif">34.0</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
<td align="right"><font size="2" face="serif">35.0</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">State income taxes, net of federal benefit</font></td>
<td align="right"><font size="2" face="serif">1.3</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">0.9</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">2.2</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Research and development tax credits</font></td>
<td align="right"><font size="2" face="serif">(9.6</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="right"><font size="2" face="serif">(3.5</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="right"><font size="2" face="serif">(1.4</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">Other</font></td>
<td align="right"><font size="2" face="serif">.1</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(0.6</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="right"><font size="2" face="serif">(0.4</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="right"><font size="2" face="serif">25.8</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
<td align="right"><font size="2" face="serif">30.8</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
<td align="right"><font size="2" face="serif">35.4</font></td>
<td align="left"><font size="2" face="serif">%</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
  <td align="right"><hr noshade size=1>
  </td>
  <td align="left">&nbsp;</td>
</tr>
</table>
<p>&nbsp;</p>
<p>&nbsp;</p>
<p align="center"><font size="2" face="serif">34</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>The deferred tax effect of temporary
    differences giving rise to the Company&#8217;s deferred tax assets and liabilities consists of the components below. As of September 30, 2003, the Company had a cumulative net operating loss (NOL) in its subsidiary (that holds the Company airplane) of $2,268,929. The Company utilized $2,237,242 of this NOL in the current period leaving a balance of $31,687 as of September 30, 2004 which expires in 2023. As a result of utilizing this NOL, the Company has reversed its 100% valuation allowance recorded in the prior year.</font></p>
<table width="90%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">September&nbsp;30,<br>
  2003</font></b></font></td>
<td align="center" valign="bottom"></td>
<td colspan="2" align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">September&nbsp;30,<br>
  2004</font></b></font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Deferred tax assets&#150;</font></td>
<td colspan="2" align="left"><hr noshade size=1></td>
<td width="2%" align="left"></td>
<td colspan="2" align="left"><hr noshade size=1></td>
<td width="2%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Deferred revenue</font></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="12%" align="right"><font size="2" face="serif">151,411</font></td>
<td width="4%" align="left"></td>
<td width="2%" align="left"><font size="2" face="serif">$</font></td>
<td width="12%" align="right"><font size="2" face="serif">123,887</font></td>
<td width="2%" align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Reserves and accruals</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">799,959</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">1,003,897</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>State NOL carryforward</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">130,282</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">2,756</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Valuation allowance</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(130,282</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">&#151;</font></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td colspan="2" align="left">
  <hr noshade size=1>
</td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td colspan="2" align="left">
  <hr noshade size=1>
</td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">951,370</font></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">1,130,540</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">Deferred tax liabilities&#150;</font></td>
<td align="left"></td>
<td align="right"></td>
<td align="left"></td>
<td align="left"></td>
<td align="right"></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Depreciation</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(473,430</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(529,587</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><i></i><i></i>Other</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(132,983</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(28,699</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(606,413</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
<td align="left"></td>
<td align="right"><font size="2" face="serif">(558,286</font></td>
<td align="left"><font size="2" face="serif">)</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">344,957</font></td>
<td align="left"></td>
<td align="left"><font size="2" face="serif">$</font></td>
<td align="right"><font size="2" face="serif">572,254</font></td>
<td align="left"></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
  <td align="left"></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
  <td colspan="2" align="left">
    <hr noshade size=1>
  </td>
  <td align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><b>8.&nbsp;&nbsp;&nbsp;&nbsp;Notes Payable:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company entered into a $4,335,000 loan agreement dated August 1, 2000 with the Chester County, Pennsylvania Industrial Development Authority. The purpose of the loan was to fund the construction of the Company&#8217;s new office and manufacturing facility. The loan matures in 2015 and carries an interest rate set by the remarketing agent that is consistent with 30-day tax-exempt commercial paper. The future maturities of this note payable are as follows as of September 30, 2004:</font></p>
<table width="40%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top">
<td width="26%" align="right"></td>
<td width="74%" align="left"><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="right"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2005 &#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;&nbsp;&nbsp;&nbsp;100,000</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="right"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2006 &#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;&nbsp;&nbsp;&nbsp;150,000</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="right"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2007 &#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;&nbsp;&nbsp;&nbsp;200,000</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="right"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2008 &#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;&nbsp;&nbsp;&nbsp;250,000</font></td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="right"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2009 &#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;&nbsp;&nbsp;&nbsp;250,000</font></td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="right"><font size="2" face="serif">thereafter&nbsp;&#151;</font></td>
<td align="right"><font size="2" face="serif">$&nbsp;3,385,000</font></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The loan agreement requires the Company to maintain certain financial covenants including a ratio of liabilities to earnings before interest, taxes and depreciation and amortization (EBITDA), fixed charge ratio and a minimum tangible net worth. The Company was in compliance with the covenants of the loan agreement as of September 30, 2003 and 2004. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The interest cost associated with this debt was $56,803 for fiscal year 2003 and $51,949 for fiscal 2004. The entire amount was capitalized in 2001 as part of the construction cost of the new facility. The facility was completed on November 1, 2001. All interest costs after that date were expensed as incurred. The interest rate on this debt was 1.53% at September 30, 2004. The Company also is required to maintain a letter of credit covering this debt.</font></p>
<p align="left"><font size="2" face="serif"><b>9.&nbsp;&nbsp;&nbsp;&nbsp;Savings Plan:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company sponsors a voluntary defined contribution savings plan covering all employees. The Company does not contribute to the plan.</font></p>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">35</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><b>10.&nbsp;&nbsp;&nbsp;&nbsp;Shareholders&#8217; Equity:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Preferred Stock</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Holders of Class A Convertible Preferred stock were entitled to certain rights shared with Common shareholders, as defined, including equal voting rights and an equal share of dividends, if any. In addition, the Class A Convertible Preferred stock carried a liquidation right of $24 per share in the event of any liquidation, as defined. The Preferred stock was automatically converted into Common stock upon the closing of the Company&#8217;s initial public offering on August 4, 2000.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Common Stock</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company issued 17,477, 19,878 and 20,570 shares of Common stock to non-employee directors, with fair values of  $163,226, $135,448 and $296,106 for the years ended September 30, 2002, 2003 and 2004, respectively. The fair value of the Common stock was charged to selling, general and administrative expense in the accompanying consolidated statements of operations based on the fair market value of the stock on the vesting date. The Company also accrued $138,911 at September 30, 2004 for director shares earned during the year but not issued until after year-end.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i>Stock Options</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>The Company&#8217;s 1998 Stock Option Plan (the &#8220;Plan&#8221;) provides for the granting of incentive and nonqualified stock options to employees, officers, directors and independent contractors and consultants. Through September 30, 2004, no stock options have been granted to independent contractors or consultants under the Plan.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Incentive stock options granted under the Plan must be at least equal to the fair value of the Common stock on the date of grant. Nonqualified stock options granted under the Plan may be less than, equal to or greater than the fair value of the Common stock on the date of grant. The Company has reserved 1,259,350 shares of Common stock for awards under the Plan.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Under SFAS No. 123, compensation cost related to stock options granted to employees is computed based on the fair value of the stock option at the date of grant using the Black-Scholes option pricing model. The Company has elected the disclosure method of SFAS No. 123. Had the Company recognized compensation cost for its stock option plans consistent with the provisions of SFAS 123, the Company&#8217;s pro forma net income for fiscal 2002, 2003 and 2004 would have been as follows:</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td colspan="8" align="center" valign="bottom"><b><font size=1 face="serif">Fiscal year Ended September 30,</font></b></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="8" align="center" valign="bottom"><hr noshade size=1>
    </td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2002</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1>
    </td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1>
    </td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1>
    </td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Net Income:</font></td>
    <td width="2%">&nbsp;</td>
    <td width="10%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="10%" align="right">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="2%">&nbsp;</td>
    <td width="10%" align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">As reported</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,410,278</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">5,541,190</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,932,197</font></td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Pro forma</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">4,936,349</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">4,907,046</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">11,186,868</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Basic EPS:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">As reported</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.42</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.45</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.03</font></td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Pro forma</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.39</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.40</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.96</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Diluted EPS:</font></td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">As reported</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.41</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.44</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">1.00</font></td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Pro forma</font></td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.38</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.39</font></td>
    <td>&nbsp;</td>
    <td><font size=2 face="serif">$</font></td>
    <td align="right"><font size=2 face="serif">0.94</font></td>
  </tr>
</table>
<p>&nbsp;</p>
<p align="center"><font size="2">36</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The weighted-average fair value of
    the stock options granted during the fiscal years ended September 30, 2002,
    2003 and 2004 were $0, $6.47 and $16.08, respectively. The fair value of
    each option grant is estimated on the grant date using the Black-Scholes
    option pricing model with the following assumptions:</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><b><font size="1" face="serif">&nbsp;Fiscal
    Year Ended&nbsp;&nbsp;</font><font size="1"><br>
    <font face="serif">September 30,</font></font></b></td>
    <td width="2%"><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom">      <hr noshade size=1>      </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="bottom">&nbsp;</td>
    <td width="12%" align="center" valign="bottom"><b><font size=1 face="serif">2002</font></b></td>
    <td width="2%" align="center" valign="bottom">&nbsp;</td>
    <td width="12%" align="center" valign="bottom"><b><font size=1 face="serif">2003</font></b></td>
    <td width="2%" align="center" valign="bottom">&nbsp;</td>
    <td width="12%" align="center" valign="bottom"><b><font size=1 face="serif">2004</font></b></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font face="serif">&nbsp;</font></td>
    <td align="center"><hr noshade size=1></td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1></td>
    <td align="center"><font face="serif">&nbsp;</font></td>
    <td align="center"><hr noshade size=1>
    </td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Expected dividend rate</font></td>
    <td align="center"><font face="serif">------</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font face="serif">------</font></td>
    <td align="center"><font face="serif">&nbsp;</font></td>
    <td align="center"><font face="serif">------</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Expected volatility</font></td>
    <td align="center"><font face="serif">------</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">67.4%</font></td>
    <td align="center"><font face="serif">&nbsp;</font></td>
    <td align="center"><font size=2 face="serif">67.4%</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Weighted average risk-free interest rate</font></td>
    <td align="center"><font face="serif">------</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">1.5%</font></td>
    <td align="center"><font face="serif">&nbsp;</font></td>
    <td align="center"><font size=2 face="serif">1.5%</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Expected lives (years)</font></td>
    <td align="center"><font face="serif">------</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">10</font></td>
    <td align="center"><font face="serif">&nbsp;</font></td>
    <td align="center"><font size=2 face="serif">10</font></td>
    <td><font face="serif">&nbsp;</font></td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>Information relative to the Plans is as follows:</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><b><font size=1 face="serif">Options</font></b></td>
    <td align="center">&nbsp;</td>
    <td align="center"><b><font size=1 face="serif">Range of<br>
      Exercise<br>
      Weighted<br>
    Prices</font></b></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><b><font size=1 face="serif">Weighted<br>
      Average<br>
      Exercise<br>
    Price</font></b></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td colspan=3><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Outstanding at September 30, 2001</font></td>
    <td align="center"><font size=2 face="serif">506,884</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 17.13</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">10.21</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Granted</font></td>
    <td width="12%" align="center"><font size=2 face="serif">0</font></td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="12%" align="center"><font size="2" face="serif">&#151;</font></td>
    <td width="2%" align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size="2" face="serif">&#151;</font></td>
    <td width="2%">&nbsp;</td>
  </tr>
  <tr>
    <td height="20">&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Exercised</font></td>
    <td align="center"><font size=2 face="serif">(10,963)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 2.19</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">2.19</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Cancelled</font></td>
    <td align="center"><font size=2 face="serif">(19,000)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">9.25 - 17.13</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">10.40</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="2%" align="center">&nbsp;</td>
    <td width="8%" align="center">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Outstanding at September 30, 2002</font></td>
    <td align="center"><font size=2 face="serif">476,921</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 15.00</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">10.39</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Granted</font></td>
    <td align="center"><font size=2 face="serif">225,000</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">6.00 - 7.67</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">6.47</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Exercised</font></td>
    <td align="center"><font size=2 face="serif">(8,770)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 2.19</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">2.19</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Cancelled</font></td>
    <td align="center"><font size=2 face="serif">(93,606)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">6.32 - 15.00</font></td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><font size=2 face="serif">12.11</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan=3 align="center"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Outstanding at September 30, 2003</font></td>
    <td align="center"><font size=2 face="serif">599,545</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 14.85</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$8.78</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Granted</font></td>
    <td align="center"><font size=2 face="serif">127,000</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">8.12 - 27.31</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$16.08</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Exercised</font></td>
    <td align="center"><font size=2 face="serif">(133,405)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.74 - 14.46</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$8.79</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;&nbsp;&nbsp;<font size=2 face="serif">Cancelled</font></td>
    <td align="center"><font size=2 face="serif">(32,682)</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">6.32 - 15.19</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$12.91</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=1>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan="2" align="center"><hr noshade size=1>
    </td>
    <td align="center"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Outstanding at September 30, 2004</font></td>
    <td align="center"><font size=2 face="serif">560,458</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 27.31</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$10.19</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=2>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=2>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan="2" align="center"><hr noshade size=2>
    </td>
    <td align="center"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td align="center">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size=2 face="serif">Options exercisable at September 30, 2004</font></td>
    <td align="center"><font size=2 face="serif">232,718</font></td>
    <td align="center">&nbsp;</td>
    <td align="center"><font size=2 face="serif">2.19 - 14.85</font></td>
    <td align="center">&nbsp;</td>
    <td colspan="3" align="center"><font size=2 face="serif">$9.00</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td align="center"><hr noshade size=2>
    </td>
    <td align="center">&nbsp;</td>
    <td align="center"><hr noshade size=2>
    </td>
    <td align="center">&nbsp;</td>
    <td colspan="2" align="center"><hr noshade size=2>
    </td>
    <td align="center"><hr noshade size=2>
    </td>
    <td>&nbsp;</td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>At September 30, 2004, 194,012 shares were available for grant under the 1998 stock option plan.</font></p>
<p align="center"><font face="serif" size="2">37</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The following table summarizes information concerning outstanding and exercisable options at September&nbsp;30, 2004:</font></p>
<table width="90%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr align="center" valign="bottom">
    <td colspan="8"><b><font size=1 face="serif">Options Outstanding</font></b></td>
    <td>&nbsp;</td>
    <td colspan="3"><b><font size=1 face="serif">Options Exercisable</font></b></td>
  </tr>
  <tr align="center" valign="bottom">
    <td colspan="8"><hr noshade size=1>      </td>
    <td>&nbsp;</td>
    <td colspan="3"><hr noshade size=1></td>
  </tr>
  <tr align="center" valign="bottom">
    <td colspan="2"><b><font size=1 face="serif">Range of Exercise<br>
    Prices</font></b></td>
    <td width="1%">&nbsp;</td>
    <td width="12%"><b><font size=1 face="serif">Outstanding<br>
      As of<br>
      September 30,<br>
    2004</font></b></td>
    <td width="1%">&nbsp;</td>
    <td width="12%"><b><font size=1 face="serif">Weighted-<br>
      Average<br>
      Remaining<br>
      Contractual<br>
    Life</font></b></td>
    <td width="1%">&nbsp;</td>
    <td width="12%"><b><font size=1 face="serif">Weighted-<br>
Average<br>
Exercise<br>
Price</font></b></td>
    <td width="2%">&nbsp;</td>
    <td width="12%"><b><font size=1 face="serif">As of<br>
      September 30,<br>
    2004</font></b></td>
    <td width="1%">&nbsp;</td>
    <td width="12%"><b><font size=1 face="serif">Weighted-<br>
Average<br>
Exercise<br>
Price </font></b></td>
  </tr>
  <tr>
    <td colspan="2"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1></td>
  </tr>
  <tr>
    <td width="6%" align="right"><font size=2 face="serif">$0.00 -</font></td>
    <td width="6%" align="right"><font size=2 face="serif">10.00</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">277,159</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">8.0</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$6.32</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">102,959</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$5.60</font></td>
  </tr>
  <tr>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td align="right"><font size=2 face="serif">$10.01 -</font></td>
    <td align="right"><font size=2 face="serif">15.00</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">225,699</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">6.4</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$12.04</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">129,759</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$11.70</font></td>
  </tr>
  <tr>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td align="right"><font size=2 face="serif">$15.01 -</font></td>
    <td align="right"><font size=2 face="serif">20.00</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">10,000</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9.3</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$16.13</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">0</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$0.00</font></td>
  </tr>
  <tr>
    <td align="right">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
  </tr>
  <tr>
    <td align="right"><font size=2 face="serif">$20.01 -</font></td>
    <td align="right"><font size=2 face="serif">27.31</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">48,000</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">9.9</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$22.65</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">0</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$0.00</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1></td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">560,858</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">7.5</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$10.19</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">232,718</font></td>
    <td>&nbsp;</td>
    <td align="right"><font size=2 face="serif">$9.00</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size=1>
    </td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Warrants</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>In connection with the issuance of subordinated notes, the Company issued warrants to purchase 734,570 shares of Common stock at an exercise price of $2.19 per share. No warrants were exercised in fiscal 2002 or 2003 and as of September 30, 2003, there were 280,637 outstanding warrants. These warrants were exercised during the current period and there are no outstanding warrants at September 30, 2004.</font></p>
<p align="left"><font size="2" face="serif"><b>11.&nbsp;&nbsp;&nbsp;&nbsp;Commitments and Contingencies:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Capital Leases</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The Company leased certain equipment under capital leases, with terms ranging from three to five years. Implicit interest rates under these leases range from 9% to 9.1%. The capitalized cost of $95,943 and the related accumulated amortization of $95,943 have been included in property and equipment at September 30, 2003. These leases expired during fiscal 2003. In fiscal 2004, the Company entered into a new capital lease with a term of five years and implicit interest rate of 4.3%. The balance due on this lease as of September 30, 2004 is $27,938. The payments for fiscal 2005, 2006, 2007 and 2008 are $7,257, $7,257, $7,257 and $6,167, respectively. </font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Operating Leases</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>Rent expense under operating leases totaled $38,743, $26,024 and $20,010 for the years ended September 30, 2002, 2003 and 2004, respectively. As of September 30, 2004, future minimum payments related to all non-cancelable operating leases total $18,343. None of the future minimum payments extend beyond fiscal 2005.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Product Liability</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>The Company currently has product liability insurance of $50,000,000, which management believes is adequate to cover potential liabilities that may arise.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Employment Agreement</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>In March 2003, the Company entered into an employee agreement with an employee for an annual salary of $250,000. There are no other employee agreements with any other officer of the Company.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i>Legal Proceedings</i></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i>From time to time, the Company is subject to various legal proceedings in the ordinary course of business. Management does not believe that any of the current legal proceedings will have a material adverse effect on the Company&#8217;s operations or financial condition.</font></p>
<p align="center"><font size="2" face="serif">38</font></p>
<p></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2"><b>INNOVATIVE SOLUTIONS AND SUPPORT, INC.</b></font></p>
<p align="center"><b><font size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151; (Continued)</font></b>
<p align="left"><font size="2" face="serif"><b>12.&nbsp;&nbsp;&nbsp;&nbsp;Related-Party Transactions:</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>The Company incurred legal fees of $168,779, $127,990 and $115,898 with a law firm which is a shareholder of the Company for the years ended September 30, 2002, 2003 and 2004, respectively. The fees paid were comparable with the fees paid prior to the law firm&#8217;s investment in the Company.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>The Company derived net sales of $0, $67,989 and $124,652 for the years ended September 30, 2002, 2003 and 2004, respectively from an entity which is a shareholder, and purchased $0, $5,612 and $0 of component parts used in the manufacturing process from this related party during such years.</font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>For the years ended September 30, 2002, 2003 and 2004, respectively, we incurred service fees of $29,486, $18,703 and $124,932 with a commercial graphics firm controlled by an individual who is married to a significant shareholder and the daughter of the Company&#8217;s Chairman and Chief Executive Officer.</font></p>
<p align="left"><font size="2" face="serif"><b>13.&nbsp;&nbsp;&nbsp;&nbsp;Quarterly Financial Data (unaudited):</b></font></p>
<table width="100%" cellspacing="0" cellpadding="0" align="center" border="0">
  <tr valign="top">
    <td align="left"><font size="1" face="serif">&nbsp;</font></td>
    <td colspan="5" align="center" valign="bottom"><b><font size="1" face="serif">First Quarter</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><b><font size="1" face="serif">Second Quarter</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><b><font size="1" face="serif">Third Quarter</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><b><font size="1" face="serif">Fourth Quarter</font></b></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top">
    <td align="left">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="5" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top">
    <td align="left"><font size="1" face="serif">&nbsp;</font></td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2004</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2004</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2004</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2003</font></b></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><b><font size="1" face="serif">2004</font></b></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top">
    <td align="left">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="center" valign="bottom">&nbsp;</td>
    <td colspan="2" align="center" valign="bottom"><hr noshade size=1></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif">Net Sales</font></td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 4,422,795</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 8,523,336</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 7,122,425</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 10,895,287</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 6,519,628</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 12,269,653</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 10,103,904</font></td>
    <td width="2%" align="left">&nbsp;</td>
    <td width="2%" align="left"><font size="2" face="serif">$</font></td>
    <td width="6%" align="right"><font size="2" face="serif"> 14,411,501</font></td>
    <td width="2%" align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Cost of Sales</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,042,998</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,481,411</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,964,740</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,662,841</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,744,729</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">4,056,372</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,593,590</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 4,462,484</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif">Gross Profit</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,379,797</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">5,041,925</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">4,157,685</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">7,232,446</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,774,899</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">8,213,281</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">6,510,314</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 9,949,017</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Operating Income</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">198,352</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,392,030</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">1,840,908</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,874,069</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">1,518,629</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">4,759,781</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,997,595</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 7,031,674</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif">Net Income</font></td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">223,686</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">1,607,350</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">1,271,258</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,574,081</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">1,230,958</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">3,285,608</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="right"><font size="2" face="serif">2,815,288</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 4,465,158</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Net Income Per</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif"> Share-Basic</font></td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.02</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.14</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.10</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.22</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.10</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.28</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.24</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.38</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#FFFFFF">
    <td align="left"><font size="2" face="serif">Net Income Per</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">&nbsp;</font></td>
    <td align="left">&nbsp;</td>
  </tr>
  <tr valign="top" bgcolor="#ffffff">
    <td align="left"><font size="2" face="serif"> Share-Diluted</font></td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.02</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.14</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.10</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.22</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.10</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.27</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.23</font></td>
    <td align="left">&nbsp;</td>
    <td align="left"><font size="2" face="serif">$</font></td>
    <td align="right"><font size="2" face="serif"> 0.37</font></td>
    <td align="left">&nbsp;</td>
  </tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>The sum of the quarterly per share amounts may not equal per share amounts reported for year ended fiscal 2003 and 2004. This is due to changes in the number of weighted-average shares outstanding and the effects of rounding for each period.</font></p>
<p align="left"><font size="2" face="serif"><b>14.&nbsp;&nbsp;&nbsp;&nbsp;Business Segments</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>The Company operates in one principal business segment which designs, manufactures and sells flight information computers, flat panel displays and advanced monitoring systems to the DoD, government agencies, commercial air transport carriers and corporate/general aviation markets. The Company currently derives virtually all of its revenues from the sale of this equipment. Almost all of the Company&#8217;s sales, operating results and identifiable assets are in the United States.</font></p>
<p align="center"><font face="serif" size="2">39</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<a name="p40a"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr valign="top">
    <td colspan="2"><font size="2" face="serif"><b>Item 9.&nbsp;&nbsp;&nbsp;&nbsp;Changes
    in and disagreements with accountants on accounting and financial disclosure.</b></font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td><font size="2" face="serif">None</font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td colspan="2"><font size="2" face="serif"><b><a name="p40b"></a>Item 9A.&nbsp;&nbsp;&nbsp;&nbsp;Controls
    and procedures</b></font></td>
  </tr>
  <tr valign="top">
    <td colspan="2">&nbsp;</td>
  </tr>
  <tr valign="top">
    <td width="3%"><font size="2" face="serif">(a)</font></td>
    <td width="97%"><font size="2" face="serif">An evaluation was performed under the supervision
        and with the participation of the Company&#8217;s management, including
        its Chief Executive Officer, or CEO, and Chief Financial Officer, or
        CFO, of the effectiveness of the Company&#8217;s disclosure controls
        and procedures, as such term is defined under Rule 13a-15(e) promulgated
        under the Securities Exchange Act of 1934, as amended (the &#8220;Exchange
        Act&#8221;) as of September 30, 2004. Based on that evaluation, the Company&#8217;s
        management, including the CEO and CFO, concluded that the Company&#8217;s
        disclosure controls and procedures are effective to ensure that information
        required to be disclosed by the Company in reports that it files or submits
        under the Exchange Act, is recorded, processed, summarized and reported
    as specified in Securities and Exchange Commission rules and forms.</font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td><font size="2" face="serif">(b)</font></td>
    <td><font size="2" face="serif">There were no changes in the Company&#8217;s
        internal control over financial reporting identified in connection with
        the evaluation of such controls that occurred during the Company&#8217;s
        most recent fiscal quarter that has materially affected, or is reasonably
        likely to materially affect, the Company&#8217;s internal control over
    financial reporting.</font></td>
  </tr>
</table>
<p align="center"><font size="2" face="serif"><b><a name="p40c"></a>PART III </b></font></p>
<p align="left"><font size="2" face="serif"><b><a name="p40d"></a>Item 10.&nbsp;&nbsp;&nbsp;&nbsp;Directors and executive officers of the registrant.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>This information (other than the information relating to executive officers included in Part I Item 1.) will be included in our Proxy Statement relating to our Annual Meeting of Shareholders, which will be filed within 120 days after the close of our fiscal year covered by this Report, and is hereby incorporated by reference to such Proxy Statement. We have adopted a written code of business conduct and ethics, known as our code of conduct, which applies to all of our directors, officers, and employees, including our president and chief executive officer and our chief financial officer. Our code of conduct is available on our Internet website, www.innovative-ss.com. Our code of conduct may also be obtained by contacting investor relations at
(610) 646-9800.  Any amendments to our code of conduct or waivers from the provisions of the code for our directors and our officers will be disclosed on our Internet website promptly following the date of such amendment or waiver.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p40e"></a>Item 11.&nbsp;&nbsp;&nbsp;&nbsp;Executive compensation.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders, which will be filed within 120 days after the close of our fiscal year covered by this Report, and is hereby incorporated by reference to such Proxy Statement.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p40f"></a>Item 12.&nbsp;&nbsp;&nbsp;&nbsp;Security ownership of certain beneficial owners and management.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders, which will be filed within 120 days after the close of our fiscal year covered by this Report, and is hereby incorporated by reference to such Proxy Statement.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p40g"></a>Item 13.&nbsp;&nbsp;&nbsp;&nbsp;Certain relationships and related transactions.</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders, which will be filed within 120 days after the close of our fiscal year covered by this Report, and is hereby incorporated by reference to such Proxy Statement.</font></p>
<p align="left"><font size="2" face="serif"><b><a name="p40h"></a>Item 14.&nbsp;&nbsp;&nbsp;&nbsp;Principal accounting fees and services</b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i>This information will be included in our Proxy Statement relating to our Annual Meeting of Shareholders, which will be filed within 120 days after the close of our fiscal year covered by this Report, and is hereby incorporated by reference to such Proxy Statement.</font></p>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">40</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p41"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>PART IV </b></font></p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr valign="top">
    <td colspan="3"><font size="2" face="serif"><b><a name="p41a"></a>Item 15.&nbsp;&nbsp;&nbsp;&nbsp;Exhibits,
    financial statement schedules and reports on Form 8-K.</b></font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td width="3%">&nbsp;</td>
    <td width="94%">&nbsp;</td>
  </tr>
  <tr valign="top">
    <td width="3%"><font size="2" face="serif">(a)</font></td>
    <td colspan="2"><font size="2" face="serif">The following documents are filed
    as part of this report:</font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td><font size="2" face="serif">(1)</font></td>
    <td><p align="left"><i><font size="2" face="serif">Financial
    Statements</font></i></p></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="serif">See index to Financial Statements at Item
    8 on page 28 of this report.</font></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td><font size="2" face="serif">(2)</font></td>
    <td><i><font size="2" face="serif">Financial
    Statement Schedules</font></i></td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="top">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="serif">Schedules have been omitted because they
        are not applicable or are not required or the information required to
        be set forth therein is included in the financial statements or notes
    thereto.</font></td>
  </tr>
</table>
<p align="left">&nbsp;</p>
<p align="left">&nbsp;</p>
<p align="center"><font size="2">41</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr valign="top">
    <td width="3%">&nbsp;</td>
    <td width="3%"><font size="2" face="serif">(3)</font></td>
    <td width="94%"><font size="2" face="serif">The following exhibits are filed as part
    of, or incorporated by reference into this report:</font></td>
  </tr>
</table>
<br>
<table width="100%" cellspacing="0" cellpadding="0" align="center" border="0">
<tr valign="top" bgcolor="#FFFFFF">
<td align="center" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Exhibit<br>
  Number</font></b></font></td>
<td width="2%" align="left" valign="bottom">&nbsp;</td>
<td width="1%" align="right" valign="bottom">&nbsp;</td>
<td width="1%" align="left" valign="bottom"></td>
<td width="2%" align="left" valign="bottom">&nbsp;</td>
<td width="1%" align="right" valign="bottom">&nbsp;</td>
<td width="85%" align="left" valign="bottom"><font size="2" face="serif"><b><font face="serif" size="1">Exhibit Title</font></b></font></td>
<td width="2%" align="left">&nbsp;</td> </tr>
<tr valign="top" bgcolor="#ffffff">
  <td align="center"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="left"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">&nbsp;&nbsp;3.1#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Articles of Incorporation of IS&amp;S.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">&nbsp;&nbsp;3.2#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Bylaws of IS&amp;S.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.1*#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">IS&amp;S 1988 Incentive Stock Option Plan.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">10.2*#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">IS&amp;S 1998 Stock Option Plan.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.4*#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Employment Agreement by and between Roger E. Mitchell and IS&amp;S dated July 7, 1998.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">10.5#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Stock Purchase Agreement by and between IS&amp;S and Parker Hannifin Corporation dated July&nbsp;11,&nbsp;1991.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.6#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Securities Purchase Agreement by and among IS&amp;S, Geoffrey S. M. Hedrick, The P/A Fund and Parker Hannifin Corporation dated May 8, 1995.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">10.7#</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Form of Warrant Agreement.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.8@</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Bond Purchase Agreement.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">10.9@</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Reimbursement, Credit and Security Agreement.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.10@</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Loan Agreement.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">10.11@</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Trust Indenture.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">10.12*&#134;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Employment Agreement by and between Roman G. Ptakowski and IS&amp;S dated March 29, 2003.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">21</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Subsidiaries of IS&amp;S.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">23.1</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Consent of Deloitte and Touche LLP.</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">31.1</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Certification of Chief Executive Officer pursuant to Rule 13a-14(a)</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#ffffff">
<td align="left"><font size="2" face="serif">31.2</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td colspan="4" align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left">&nbsp;</td>
</tr>
<tr valign="top" bgcolor="#FFFFFF">
<td align="left"><font size="2" face="serif">32.1</font></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"></td>
<td align="left">&nbsp;</td>
<td align="right">&nbsp;</td>
<td align="left"><font size="2" face="serif">Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the<br>Sarbanes-Oxley Act of 2002.</font></td>
<td align="left">&nbsp;</td>
</tr>
</table>
<p align="left"><font size="2" face="serif">* &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.<br>
</font><font size="2" face="serif"># &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Incorporated by reference from the Registrant&#8217;s
    Registration Statement on Form S-1 (File No. 333-96584) filed with the<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;  Commission
on May 9, 2000, as amended.<br>
</font><font size="2" face="serif">@ &nbsp;&nbsp;&nbsp;Incorporated by reference from the Registrant&#8217;s
Form 10-K filed with the Commission for fiscal year 2000.<br>
</font><font size="2" face="serif">&#134; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Incorporated by reference from the registrant&#8217;s
Form 10-Q filed with the Commission for the quarter ended March 31, 2003.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Reports on Form 8-K.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.</font></p>
<p align="left">&nbsp;</p>
<p align="center"><font size="2" face="serif">42</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page><p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>SIGNATURES </b></font></p>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.</font></p>  <table width="100%" cellspacing="0" cellpadding="0" border="0">
<tr valign="top">
<td align="left">&nbsp;</td>
<td colspan="2" align="left"><font size="2" face="serif">I<font size="1">NNOVATIVE</font> S<font size="1">OLUTIONS
    AND</font> S<font size="1">UPPORT</font>, I<font size="1">NC</font>.</font></td>
</tr>
<tr valign="top">
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
<td align="left" width="60%">&nbsp;</td>
<td align="left" width="5%"><font size="2" face="serif">By:</font></td>
<td width="35%" align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;G<font size="1">EOFFREY</font> S. M. H<font size="1">EDRICK</font>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></td>
</tr>
<tr valign="top">
  <td align="left"></td>
  <td align="left"></td>
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="left"></td>
<td align="left"></td>
<td align="center"><font size="2" face="serif"><b><font size="1">Geoffrey S. M. Hedrick</font></b></font><font size="1"><br>
    <font face="serif"><b><font face="serif">Chairman of the Board and</font></b></font><br>
    <font face="serif"><b><font face="serif">Chief Executive Officer</font></b></font></font></td>
</tr>
<tr valign="top">
  <td align="left">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
</tr>
<tr valign="top">
<td align="left">&nbsp;</td>
<td align="left"><font size="2" face="serif">Dated:</font></td>
<td align="left"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
</table>
<p align="left"><font size="2" face="serif"><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong><i></i><i></i><strong><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></strong>Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.</font></p>
<table width="100%" cellspacing="0" cellpadding="0" border="0">
<tr align="center" valign="bottom">
<td width="39%"><font size="2" face="serif"><b><font face="serif" size="1">Signature</font></b></font></td>
<td width="5%"></td>
<td width="32%"><font size="2" face="serif"><b><font face="serif" size="1">Title</font></b></font></td>
<td width="24%"><font size="2" face="serif"><b><font face="serif" size="1">Date</font></b></font></td>
</tr>
<tr align="center" valign="bottom">
  <td><hr noshade size=1></td>
  <td></td>
  <td><hr noshade size=1></td>
  <td><hr noshade size=1></td>
</tr>
<tr valign="top">
    <td align="center">&nbsp;</td>
    <td rowspan="3" align="left"></td>
    <td rowspan="3" align="left"><font size="2" face="serif">Chairman of the Board and Chief Executive Officer</font></td>
    <td rowspan="3" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;G<font size="1">EOFFREY</font> S.
    M. H<font size="1">EDRICK</font></font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif"><b><font size="1">Geoffrey S.
        M. Hedrick</font></b></font><font size="1"><br>
    <font face="serif"><b>(Principal Executive Officer)</b></font></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;R<font size="1">OMAN</font> G. P<font size="1">TAKOWSKI</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">President</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif"><b><font size="1">Roman G. Ptakowski</font></b></font><font size="1"><br>
    <font face="serif"><b>(President))</b></font></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;J<font size="1">AMES</font> J. R<font size="1">EILLY</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Chief Financial Officer</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif"><b><font size="1">James J. Reilly</font></b></font><font size="1"><br>
    <font face="serif"><b>(Principal Financial and Accounting Officer)</b></font></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;W<font size="1">ILLIAM</font> C. B<font size="1">OWES</font></font></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left"><font size="2" face="serif">Director</font></td>
<td align="center"><font size="2" face="serif">&nbsp;</font><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
  <td align="left">&nbsp;</td>
  <td align="left">&nbsp;</td>
  <td align="center">&nbsp;</td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">William C. Bowes</font></b></font></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="left"><font size="2" face="serif">&nbsp;</font></td>
<td align="center"><font size="2" face="serif">&nbsp;</font><font size="2" face="serif">&nbsp;</font></td>
</tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>


<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;G<font size="1">LEN</font> R. B<font size="1">RESSNER</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="1" face="serif"><b>Glen R. Bressner</b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;W<font size="1">INSTON</font> J. C<font size="1">HURCHILL</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="1" face="serif"><b>Winston J. Churchill</b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;B<font size="1">ENJAMIN</font> A. C<font size="1">OSGROVE</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="1" face="serif"><b>Benjamin A. Cosgrove</b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;I<font size="1">VAN</font> M. M<font size="1">ARKS</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="1" face="serif"><b>Ivan M. Marks</b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;R<font face="serif" size="1">OBERT</font> E. M<font face="serif" size="1">ITTELSTAEDT</font>, J<font face="serif" size="1">R</font>.</font><br><font size="2" face="serif"><b></b></font></td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif"><b><font face="serif" size="1">Robert
    E. Mittelstaedt, Jr.</font></b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td> </tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left"></td>
  <td align="left">&nbsp;</td>
  <td align="center"></td>
</tr>
<tr valign="top">
<td align="center"><font size="2" face="serif">/s/&nbsp;&nbsp;&nbsp;&nbsp;R<font size="1">OBERT</font> H. R<font size="1">AU</font></font><br>
</td>
<td rowspan="2" align="left"></td>
<td rowspan="2" align="left"><font size="2" face="serif">Director</font></td>
<td rowspan="2" align="center"><font size="2" face="serif">December 6, 2004</font></td>
</tr>
<tr valign="top">
  <td align="center"><hr noshade size=1></td>
</tr>
<tr valign="top">
<td align="center"><font size="1" face="serif"><b>Robert H. Rau</b></font></td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td align="center">&nbsp;</td>
</tr>
<tr valign="top">
  <td align="center">&nbsp;</td>
  <td align="left">&nbsp;</td>
  <td align="left">&nbsp;</td>
  <td align="center">&nbsp;</td>
</tr>





</table>
<p align="center"><font face="serif" size="2">43</font></p>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<FILENAME>ex23-1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No.
333-70468 of Innovative Solutions and Support, Inc. on Form S-8 of our report
dated December 8, 2004, appearing in the Annual Report on Form 10-K of
Innovative Solutions and Support, Inc. for the year ended September 30, 2004.


/s/ Deloitte and Touche LLP

Philadelphia, Pennsylvania
December 8, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>5
<FILENAME>ex31-1.txt
<DESCRIPTION>EXHIBIT 31.1 CERTIFICATION
<TEXT>
<PAGE>

                                                                    EXHIBIT 31.1

I, Geoffrey S. M. Hedrick, certify that:

1.    I have reviewed this annual report on Form 10-K of Innovative Solutions
      and Support, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

        a)   Designed such disclosure controls and procedures or caused such
             disclosure controls to be designed under our supervision, to ensure
             that material information relating to the registrant, including its
             consolidated subsidiaries, is made known to us by others within
             those entities, particularly during the period in which this annual
             report is being prepared;

        b)   Evaluated the effectiveness of the registrant's disclosure controls
             and procedures and presented in this report our conclusions about
             the effectiveness of the disclosure controls and procedures, as of
             the end of the period covered by this report based on such
             evaluation;

        c)   Disclosed in this report any change in the registrant's internal
             control over financial reporting that occurred during the
             registrant's fourth fiscal quarter that has materially affected, or
             is reasonably likely to materially affect, the registrant's
             internal control over financial reporting; and

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of registrant's board
      of directors (or persons performing the equivalent functions);

        a)   All significant deficiencies and material weaknesses in the design
             or operation of internal control over financial reporting which are
             reasonably likely to adversely affect the registrant's ability to
             record, process, summarize and report financial information; and

        b)   Any fraud, whether or not material, that involves management or
             other employees who have a significant role in the registrant's
             internal control over financial reporting.

Date:    December 6, 2004

/s/    GEOFFREY S. M. HEDRICK
- -----------------------------------------------------
Geoffrey S. M. Hedrick
Chief Executive Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>6
<FILENAME>ex31-2.txt
<DESCRIPTION>EXHIBIT 31.2 CERTIFICATION
<TEXT>
<PAGE>
                                                                   EXHIBIT 31.2

I, James J. Reilly, certify that:

1.    I have reviewed this annual report on Form 10-K of Innovative Solutions
      and Support, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

        a)   Designed such disclosure controls and procedures or caused such
             disclosure controls to be designed under our supervision, to ensure
             that material information relating to the registrant, including its
             consolidated subsidiaries, is made known to us by others within
             those entities, particularly during the period in which this annual
             report is being prepared;

        b)   Evaluated the effectiveness of the registrant's disclosure controls
             and procedures and presented in this report our conclusions about
             the effectiveness of the disclosure controls and procedures, as of
             the end of the period covered by this report based on such
             evaluation;

        c)   Disclosed in this report any change in the registrant's internal
             control over financial reporting that occurred during the
             registrant's fourth fiscal quarter that has materially affected, or
             is reasonably likely to materially affect, the registrant's
             internal control over financial reporting; and

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of registrant's board
      of directors (or persons performing the equivalent functions);

        a)   All significant deficiencies and material weaknesses in the design
             or operation of internal control over financial reporting which are
             reasonably likely to adversely affect the registrant's ability to
             record, process, summarize and report financial information; and

        b)   Any fraud, whether or not material, that involves management or
             other employees who have a significant role in the registrant's
             internal control over financial reporting.

Date:    December 6, 2004

/s/    JAMES J. REILLY
- -----------------------------------------------------
James J. Reilly
Chief Financial Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>7
<FILENAME>ex32-1.txt
<DESCRIPTION>EXHIBIT 32.1 CERTIFICATION
<TEXT>
<PAGE>

                                                                   EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Innovative Solutions and Support, Inc.
(the "Company") on Form 10-K for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:

      (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

/s/ Geoffrey S. M. Hedrick
- -----------------------------------------------------
Geoffrey S. M. Hedrick
Chairman of the Board and Chief Executive Officer
December 6, 2004


/s/ James J. Reilly
- -----------------------------------------------------
James J. Reilly
Chief Financial Officer
December 6, 2004

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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