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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. 0-31157

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

(Exact name of registrant as specified in its charter)

(610) 646-9800
(Registrant's telephone number, including area code)

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

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

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

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

         Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or section 15(d) of the Exchange Act from their obligations under those sections.

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).). Yes oý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noý

         The aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant as of March 31, 20092012 (the last business day of the registrant's most recently completed second quarter) was approximately $53.7$45.4 million. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of ourthe Registrant's 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.

         As of December 04, 2009,November 30, 2012, there were 16,745,37916,583,037 outstanding shares of the Registrant's Common Stock

Documents Incorporated by Reference

         Portions of the Registrant's Proxy Statement for the 20102012 Annual Meeting of Shareholders to be filed prior to January 28, 201025, 2013 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 "filed" for the purposes of this Report on Form 10-K.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

2009
2012 Annual Report on Form 10-K

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FORWARD LOOKING STATEMENTS

        This report contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We have based these1934, as amended (the "Exchange Act"). These forward looking statements are based largely on our current expectations and projections about future events and trends affecting our business.the business, are not guarantees of future performance and involve a number of risks, uncertainties and assumptions that are difficult to predict. In this report, the words "believe,"anticipates," "believes," "may," "will," "estimate,"estimates," "continue,"continues," "anticipate,"anticipates," "intend,"intends," "forecast,"forecasts," "expect,"expects," "plan,"plans," "could," "should," "is"would,""is likely" and similar expressions, as they relate to ourthe business or ourto its management, are intended to identify forward looking statements, but they are not exclusive means of identifying them. Unless the context otherwise requires, all references herein to "IS&S," "the Registrant," "the Company," "we," "us" or "our" are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.

        The forward looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause our actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-lookingforward looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of this Annual Report on Form 10-K and the following factors:

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the availability of government funding;



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the impact of general economic trends on ourthe Company's business;



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



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difficulties in developing and producing ourthe Company's COCKPIT/IP™ systemIP® Flat Panel Display System or other planned products or product enhancements;



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market acceptance of ourthe Company's flat panel display systems, or COCKPIT/IP™ systemIP® or other planned products or product enhancements;



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our ability to gain regulatory approval of our products in a timely manner;



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failure to retain/recruit key personnel;



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continued market acceptance of ourthe Company's air data systems and products;



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the availabilityability to gain regulatory approval of government funding;products in a timely manner;



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delays in receiving components from third party suppliers;



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the competitive environment;environment and new product offerings from competitors;



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the bankruptcy or insolvency of one or more key customers;



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new product offerings from competitors;



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protection of intellectual property rights;



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ourfailure to retain/recruit key personnel;



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a cyber security incident;



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the ability to service the international market; and



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potential future acquisitions; and



•

other factors disclosed from time to time in ourthe Company's filings with the United States Securities and Exchange Commission.Commission (the "SEC").

        Except as expressly required by the federal securities laws, we undertakethe Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise after the date of this report. Our resultsResults of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of ourthe Company's common stock.

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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this Form 10-K, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the "Securities Act") and 21E of the Exchange Act.

        Investors should also be aware that while we do,the Company, from time to time, communicatecommunicates with securities analysts, it is against ourits policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that we agreethe Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we havethe Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports arenot the responsibility of Innovative Solutions and Support, Inc.

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PART I

Item 1.    Business

Overview

        Innovative Solutions and Support, Inc. (the "Company," or "IS&S" or "we") was founded in 1988. The Company is a systems integrator that designs, manufactures and sells Flat Panel Display Systems, Flight Information Computersflight guidance and advanced monitoringcockpit display systems to the Department of Defense (DoD), government agencies, defense contractors, commercial air transport carriers,for original equipment manufacturers (OEMs),("OEMs") and corporate/general aviation markets.retrofit applications. The Company supplies integrated Flight Management Systems ("FMS") and advanced Global Positioning System ("GPS") receivers for precision reduced carbon footprint navigation.

        Increasingly, the Company is increasingly positioning itself as a system integrator; thisintegrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. The Company has demonstrated an ability to incorporate added electronic flight bag functionality such as electronic flight bags, charting and mapping systems into its Flat Panel Display SystemSystems ("FPDS") product line. OurThe strategy, as both a manufacturer and integrator, is to leverage the latest technologies developed for the personal computer and telecommunications industries into advanced and cost-effective solutions for both the general aviation, industrycommercial, the United States Department of Defense ("DoD")/governmental and DoD. We believe thisforeign military markets. This approach, combined with ourthe Company's industry experience, enables usIS&S to develop high-quality products and systems, reduce substantially reduce product time to market and achieve cost advantages over products offered by ourits competitors.

        For several years the Company has been working with advances in technology to provide pilots increasing amounts ofwith more information thatto enhance both the safety and efficiency of flying. These advances have come together in the Company'sflying, and has developed its COCKPIT/IP™ (CockpitIP® Cockpit Information Portal or CIP) or("CIP") product line, referred to as Flat Panel Display System product line("FPDS"), that incorporates proprietary technology, low cost, reduced power consumption, decreased weight, and diverseincreased functionality. The Company's Flat Panel Display SystemCompany believes the FPDS product line is suited to address market demand that we believe will be driven by regulatory mandates, new technologies, and agingthe high cost of maintaining aging/obsolete equipment on airplanes that have been in service for up to fifty years. We believeIS&S believes that the transition to Flat Panel Display SystemsFPDS as part of airplane retrofit requirements is underway. Thiswill continue. The shift in regulatory and technological environment is illustrated by the dramatic increase in the number of Wide Area Augmentation System (WAAS)("WAAS") approach qualified airports. Aircraft equipped with our Flat Panel Display Systemthe Company's FMS and FPDS product line (equipped with a WAAS enabled navigator) will be qualified to land at such airports and comply with upcoming Federal Aviation Administration ("FAA") mandates for Required Navigation Performance ("RNP"), and Automatic Dependent Surveillance-Broadcast ("ADS-B") navigation, a fact which we believeIS&S believes will further increase the demand for ourthe Company's products.

        In fiscal 2009, IS&S announced it began delivering a new productsells to both the U.S. military; high resolution, 20 inch diagonal displays. These displaysretrofit market and OEMs. Customers include the DoD and its commercial contractors, aircraft operators, aircraft modification centers, foreign militaries, and various OEMs. Occasionally, IS&S sells its products directly to DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are used in the rearmade on commercial terms, although some of the aircraft by tactical mission officers. The Company also initiated shipmentstermination and other provisions of government contracts are applicable to these contracts.

        In October 2012 Eclipse Aerospace, Inc. placed a production order with IS&S for an initial fifty ship sets of a three hundred ship set contract for the Flat Panel Display System being marketed by CessnaIS&S advanced avionics suite for the production model Eclipse 550. IS&S is the supplier of Primary Flight and Multi-Function Displays as well as the "AdViz" cockpit upgrade solution for legacy Citation 500/501, 550/551, S550 and 560 aircraft. "AdViz" provides access to navigational aids such as XM Weather, navigation charts, remote radio tuning, and enhanced video all while improving reliability and reducing weight. IS&S received an amended Supplement Type Certificate (STC) on the PC-12 Flat Panel DisplayIntegrated Flight Management System ("IFMS") for the WAAS program with LateralEclipse Jet. The advanced avionics suite will include Dual Flight Management systems, Auto Throttles, Synthetic Vision, integrated Terrain Awareness System ("TAWS") and Vertical Precision Performance with a fully coupled auto-pilot. The company also received a Supplemental Type Certificate (STC) for RVSM Compliance of its PC-12 Flat Panel DisplayEnhanced Vision System in fiscal 2009.

        In fiscal 2008 IS&S announced an addition to its Cockpit/IP™ product line: the IS&S Vantage COCKPIT/IP™, an open architecture flat panel display system capable of interfacing with most third party avionics. The Vantage system can be retrofitted into a variety of airframes. The Company launched a Wide Area Augmentation System (WAAS) program with Lateral and Vertical Precision Performance with a fully coupled auto-pilot for its PC-12 Flat Panel Display System. WAAS capability allows PC-12 operators to fly precision approaches at smaller airports. This capability is also available on other aircraft platforms. IS&S received amended Supplemental Type Certificates (STC) for the Boeing 757/767 platform from the Federal Aviation Administration (FAA) adding increased functionality to the Cockpit/IP Flat Panel Display System. The Company increased the volume of work it is conducting for Homeland Security's Pilatus PC-12 and Lockheed Martin C-130 fleets.("EVS").

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        In August 2012, the FAA issued its Supplemental Type Certificate ("STC") to IS&S for its FPDS for use on Classic B-737 aircraft. This certification enables IS&S to expand its marketing of its FPDS to owners of B737 in the United States.

        In October 2011, Eclipse Aerospace Inc. selected IS&S to design and develop the advanced avionics suite for the production model Eclipse 550.

Our         In July 2011, the National Nuclear Security Administration ("NNSA") awarded IS&S a contract for the complete Systems Integration and Cockpit Avionics upgrade of their B737-400 classic aircraft. Upon completion, this upgrade will provide NNSA full Communication Navigation Surveillance/Air Traffic Management ("CNS/ATM") capabilities and similar efficiency and performance to the B737 Next Generation ("NG") at the fraction of the cost of a new aircraft. This program complements the IS&S FPDS contracts for more than 400 B757/B767 aircraft with more than 160 aircraft already in revenue service. The upgrade for the B737-300/-400/-500 series aircraft and the existing B757/B767 FPDS are platforms for compliance with NextGen and Single European Sky ATM Research ("SESAR") requirements, is Controller Pilot Data Link Communication ("CPDLC"), RNP, ADS-B and in-Trail capable, provides power and weight savings, and reduces fuel consumption and CO₂ emissions.

        In June 2011, Boeing awarded IS&S a contract to design and develop the Aerial Refueling Operator Control and Display Units ("AROCDU") for the KC-46A Tanker Program.

        In March 2011, IS&S announced it received FAA STC for its FMS and dual GPS receivers for the Eclipse Aerospace, Inc. ("EAI") Twin-Engine Jet. The IS&S FMS displays controls all major systems on the aircraft and includes improvements to e-Chart, mapping and satellite weather functionality and precision navigation. Eclipse Twin-Engine Jet operators are now able to upgrade their aircraft within Integrated Flight Management System through EAI.

        In February 2011, the FAA issued its Technical Standard Order authorization ("TSO") to IS&S for its Beta-3 Global Positioning System ("GPS")—Satellite Based Augmentation System ("SBAS") Receiver. This certification enabled IS&S to expand its product offering to include a GPS in its FPDS. Additionally, the FAA also issued a TSO in March 2011 for the IS&S Class Gamma 3 FMS and a Type 2 FAA Letter of Acceptance ("LOA") that allows IS&S to provide navigation data. The combination of these certifications enables IS&S to be a flight management system provider to its customers.

        In December 2010, the European Aviation Safety Agency ("EASA"), the European counterpart of the FAA issued its Supplemental Type Certificate ("STC") to IS&S for the B757 FPDS. Further, in August 2011, IS&S obtained an STC from EASA for its B767 FPDS. These certifications enable IS&S to expand its marketing of its B757 and B767 FPDS to customers in Europe.

Industry

        A wide range of information including airspeed and altitude, is critical for proper and safe operation of aircraft. With advances in technology, new types of information to assist pilots are becoming available for display in cockpits, such as satellite based weather and ground terrain maps, are becoming available for display in cockpits. We believemaps. The Company believes 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 in the safe and efficient operation of aircraft.

        There are three general types of flight data: aircraft heading and altitude information, flight critical aircraft control data, and navigation data. Aircraft heading and altitude information includes aircraft speed, altitude, and rates of ascent and descent. Flight critical aircraft control information includes engine data such as fuel and oil quantity, and other engine measurements. Navigation data includes radio position, flight management, Global Positioning System (GPS)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

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aircraft. Engine data are determined by measuring various indices such as temperature, volume, revolutions per minute (RPM)("RPM"), and pressure within an aircraft's engines and other mechanical equipment. AlternativeGPS and alternative source information isare derived typically derived from satellites or equipment located on land and fed by satellite or radio signals to the aircraft. Pilots can thenpresently display this information in the cockpit for reference and enhanced position awareness.

        Traditionally, flight data and other cockpit information were displayed on a series of separate analog mechanical instruments. In the early 1980s, digital displays using Cathode Ray Tubes (CRT)("CRT") began to replace some individual analog instruments. ThePresently, the industry now offers high resolution color flat panels using active matrix liquid crystal displays (AMLCD)Active Matrix Liquid Crystal Displays ("AMLCD") to replace traditional analog instruments or CRT displays. We expectIS&S expects that the ability to display more information in a space efficient and customizedcustom platform will become increasingly important if additional information, such as weather depiction maps, traffic information, and surface terrain maps, becomebecomes mandated by regulation or demanded by pilots. Accordingly, we believethe Company believes flat panel displays, which can integrate and display a "suite" of information, will increasingly replace individual instruments and CRTs as the method for delivering and orderingdisplaying information displayed in cockpits.

        EquipmentIn the past, equipment data, such as engine and fuel related information, were traditionally displayed on conventional analog mechanical instruments. Engine and fuel instruments provide information on engine activity, including oil and hydraulic pressures, and temperature. These instruments are clustered throughout an aircraft's cockpit. Engine and fuel instruments tend to be replaced more frequently than other instruments due to increased obsolescence problems and normal wear-and-tear. AsInasmuch as information displayed by this instrumentationthese instruments is vital for safe and efficient flight, aircraft operators continue to purchase individual conventional engine and fuel instruments to replace older or non-functioning instruments.as replacements. Increasingly, operators are beginning to replacereplacing their individual instrument clusters of analog mechanical instruments with integrated Flat Panel Display Systems.FPDS.

        As the skies and airports are becomingbecome more crowded, the aviation industry and its regulators are concentrating on new technologies, procedures, and regulations that allow more aircraft to operate in the skies and on the ground safely, efficiently and with less impact on the environment. These new technologies and procedures, such as traffic avoidance, ground awareness, increased precision of navigation and vertical position, runway incursion prevention, and increased digital communication, will require innovation and intuitive methods to display situational awareness information for the pilots. The Company believes that flat panel displays areprovide the best methodsolution to handle these and future requirements.

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Strategy

        OurThe Company's objective is to become a leading supplier and integrator of cockpit information. We believe ourinformation, and believes that its industry experience and reputation, our technology and products, and our business strategy provide athe basis to achieve this objective. Key elements of ourthe Company's strategy include:

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Retrofit focus.Focusing on retrofits.  We believe offering cockpitCockpit avionics upgrades for existing aircraft is of great interest in today'sthe present economic environment. RetrofittingThe retrofit of an aircraft with the Flat Panel Display SystemCOCKPIT/IP® FPDS is cost effective compared to the acquisition of a new aircraft and yet can provide the same functionality. When the economy returns to more robust levels, the Company believes that lead times to acquire new aircraft will lengthen and demand for retrofits will continue as operators update their existing fleets to provide needed lift capacity.



•

Establishing leadership in the flat panel display market.  We expectIS&S expects that over the next several years, many aircraft will be retrofitted with flat panel displays.displays over the next several years. 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 believethe Company believes that flat panel displays will increasingly replace individual analog and digital instruments, and CRTs. We also believe ourThe Company believes the COCKPIT/IP™IP® has significant benefits over flat panel displays currently offered by competitors, including lower cost, larger size, reduced weight, enhanced viewing angles, and a broadbroader array of functions. OurThe

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Company's patented and proprietary Integrity Checking Processor and Zooming features provide increased situational awareness, reliability, performance, and utility to the owner/operator. Accordingly, we believethe Company believes that these advantages will allow usIS&S to generate significant revenues from ourthe COCKPIT/IP™IP® product, and increase market share. DemandIn addition, demand for new aircraft, FAA mandates to upgrade older aircraft and obsolescence issues on older aircraft will fuelcontribute to this growth.



•

Continuing our engineering and product development successes.  We developedIS&S develops innovative products by combining ourits avionics, engineering, and design expertise with commercially available technologies, components, and products from non-aviation applications, including the personal computer and telecommunications industries. OurThe Company's COCKPIT/IP™IP® FPDS is an example of ourthe ability to engineer products through the selective application of non-avionic technology. Our researchResearch and development ("R&D") expenses were $5.3$2.7 million, $10.3$5.5 million and $5.2 million for fiscal years ended September 30, 2009, 20082012, 2011 and 2007,2010, respectively. During fiscal 2012, 2011 and 2010 revenues related to Engineering—Modification and Development ("EMD") revenues accounted for 26%, 2% and 7%, respectively, of total sales. Against these EMD revenues, the Company's R&D resources charged $4.7 million, $0.2 million, and $0.8 million for fiscal years ended September 30, 2012, 2011 and 2010, respectively to cost of sales for EMD revenues.



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Maintaining our leadership in air data markets.  We believe we areThe Company believes that it is one of the largest suppliers of air data products to the U.S. retrofit market. Significant demandDemand remains to retrofit aging military aircraft with newer, more advanced and more supportable air data systems. Additionally, upgrading business jetsaircraft with higher performance engines is driving a need for more sophisticated air data products supplied by us.the Company.



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Increasing our sales to the DoD, other government agencies, defense contractors, commercial air transport and corporate/general aviation markets.  We strengthenedIS&S has extended its efforts to diversify our sales to include all aviation end user markets, of the aviation industry, particularlyespecially legacy military aircraft programs and the commercial air transport market. This includesaircraft. In the commercial air transport market, these efforts have addressed national andcarriers, regional carriers, and other fleet operators,operators. The Company has also targeted the corporate/general aviation market, primarily through aircraft modification centers,both for retrofits and original equipment, and has won new and ongoing retrofit programs and two OEM programs. One of which is Eclipse Aerospace and the OEM market. We continueother of which is not public. The Company continues to build a sales and marketing force dedicated to expanding our sales efforts toaddress these markets while at the same time maintaining our position as a provider of avionics products for the DoD.more effectively.



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Expanding our international presence.  We planIS&S plans to increase ourits international sales by adding sales and marketing personnel and foreign offices.personnel. As large flat panel displays become more prevalent, we believethe Company believes that European and other international aircraft operators and aircraft modification centers will accelerate retrofitting activities, thereby increasing demand for large flat panel displays. IS&S has obtained approval from the EASA for installing the FPDS in Europe for the B757/B767 aircraft and will continue obtaining EASA approvals for other European installations as applicable.

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GrowthGrowing through acquisitions or joint ventures.  WeIS&S may pursue strategic acquisitions or joint ventures as a means of growing ourto expand the business with respect toenhanced technology, distribution, customerscustomer base, or products. WeThe Company may seek to acquire developers or suppliers of complementary products, technology, or information, or we mayto acquire suppliers of similar products as a means of increasing ourits product offerings and market share.

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Products

        Our currentCurrent line of products includes:

Flat Panel Display Systems

        In recent years color flat panel displays have been introduced into aircraft cockpits. Flat panel displays are Liquid Crystal Display (LCD)("LCD") screens that can replicate the display of one or a suite of analog or digital displays on one screen. LikeAs with other instrumentation, flat panel displays can be installed in new aircraft or used to replace existing displays in aircraft already in use.legacy aircraft. LCDs are also used for security monitoring on-board aircraft and as tactical workstations on military aircraft. The flat panel product line also presents numerous advantages for presentation of engine performance data. During fiscal 2009, 20082012, 2011 and 2007 we derived 75%2010 revenues related to FPDS accounted for 87%, 77%79% and 53%68%, respectively, of our total revenues from sales of Flat Panel Display Systems.sales.

        We developed a Flat Panel Display System thatThe Company's FPDS can replace conventional analog and digital displays used currently used in a cockpit and can display additional information thatwhich is not now commonly displayed in the cockpit. Ourcockpit with conventional analog and digital displays. The COCKPIT/IP™IP® is capable of displaying nearly all types of air data, engine and fuel data, altitude, heading and navigational data, and alternative source information. As technology and information delivery systems develop further, develop, additional information will be displayed in the cockpit, such as surface terrain maps and data link messaging, will be displayed inmessaging. IS&S designed the cockpit. We designed our COCKPIT/IP™IP® to be capable of displaying information generated from a variety of sources, including ourits Reduced Vertical Separation Minimum (RVSM)("RVSM") air data system, engine and fuel instrumentation, and third-party data and information products.

        The Company's new Integrated Multifunction Standby Unit ("IMSU") can be installed in a variety of fixed wing aircraft and helicopters. The IMSU measures, processes, and displays altitude, attitude, airspeed, slip/skid, and navigation display information into an intuitive and concise single instrument display. The IMSU incorporates an integral Inertial Measurement Unit ("IMU") and includes an air data module to measure static and total pressure for independent display of altitude, airspeed, and Mach number. The unit also has an optional battery module that provides one hour of operation of the unit during emergency conditions or complete electrical system failures.

From time to time, customers may order one or more flat panel display systemsFPDSs customized to their particular requirements. Depending on the amount of non-recurring engineering effort needed to accommodate the customized request,Typically, the Company has and will continue to charge a feecharges for added development cost. This will result insource of revenue to the Company that is characterized as Engineering- modification and developmentEMD on the income statement.statement of operations. Consistent with this approach, engineering costcosts incurred in the performance of customizing the flat panel display system will be allocated from Operating expenses (Research and development) to Cost of Sales (Engineering—modification and development) and will beFPDSs are included in the Company's gross profit calculations.cost of sales (Engineering—Modification and Development).

Air Data Systems and Components

        OurThe Company's air data products calculate and display various measures such as aircraft speed, altitude, and rate of ascent and descent. The functionality of ourThese air data systems useproducts utilize advanced sensors to gather air pressure data and use customized algorithms to interpret data, thus allowing the system to calculate altitude more accurately calculate altitude.accurately. During fiscal 2009, 2008,2012, 2011, and 2007 we derived 25%, 23%, and 47%, respectively, of our total revenues from2010, sales of air data systems and related products.components accounted for 13%, 21%, and 32%, respectively, of total revenues.

        We sellIS&S sells individual components as well as partial and complete air data systems. OurThe components and systems include:

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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;



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integrated air data computers and display units, which calculate and convey air data information;



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altitude displays, which convey aircraft altitude measurements;

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altitude displays, which convey aircraft altitude measurements;



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airspeed displays, which convey various types of airspeed measurements including vertical airspeed and rates of ascent and descent; and



•

altitude alerter,alerters, which allow the pilot to select a desired cruising altitude that the aircraft will reach and maintain, and also provide warnings to pilots when an unacceptable deviation occurs.

        We develop, manufactureIS&S develops, manufactures and marketmarkets engine and fuel displays. OurThese solid-state multifunction displays convey information with respect to fuel and oil levels, and engine activity, such as oil and hydraulic pressure and temperature. This instrumentation includes individual and multiple displays clusteredinstalled throughout an aircraft'sthe cockpit. OurThe displays can be used in conjunction with our ownthe Company's engine and fuel data equipment or that of other manufacturers.

        Engine and fuel displays are found in all aircraft and are vital to safe and proper aircraft flight. In addition, 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.

        We believe ourIS&S believes that its air data engine and fuel displays are extremely reliable, and we have been designed them to be programmable to adaptand adaptable easily without major modification to most modern aircraft. OurThese products have been installed on C-130H, DC-9, DC-10, P-3, F-16, and A-10 aircraft.

Customers

        OurThe Company's customers include the United States government (including DoD, DOI and the Department of Homeland Security), ABX Air, American Airlines, The Boeing Company, BombardierBAE Systems, Eclipse Aerospace, Cessna Aircraft Corporation,Inc., Federal Express Corporation ("FedEx"), Icelandair, L-3 Communication,Communications, Lockheed Martin Corporation, Raytheon, Rockwell Collins, Marshalls of Cambridge, United Kingdom, and the Department of National Defense Canada.(Canada), among others. In fiscal 2012, the three largest customers, Eclipse Aerospace, FedEx and National Nuclear Security Administration, accounted for 20%, 14% and 13% of total revenue, respectively. In fiscal year 2011, the two largest customers, Eclipse Aerospace, Inc. and FedEx, accounted for 20% and 15% of total revenue, respectively. In fiscal year 2010 the two largest customers, Lockheed Martin and FedEx, accounted for 11% and 10% of total revenue, respectively.

        On November 29, 2011, AMR Corporation, the parent company of American Airlines, Inc. ("AAI") and certain of its other U.S. based subsidiaries filed voluntary petitions for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy"). The Company's revenues from American Airlines, Inc. accounted for 5%, 8% and 8% of total revenue for the fiscal years 2012, 2011 and 2010, respectively. As at September 30, 2012, orders from American Airlines, Inc. account for a material portion of the Company's backlog. AAI continued to purchase products from the Company in the ordinary course of business after November 29, 2011. (See Note 13—Commitments and Contingencies in Notes to Consolidated Financial Statements attached).

Retrofit Market

        Historically, a majority of ourthe Company's sales have come from the retrofit market. Among other reasons, we haveIS&S has pursued the retrofit market specifically because of its continued rapid growth in response to the increasing need to support the world's aging fleet of aircraft. In fiscal 2009 our two largest customers, American Airlines and DoD, accounted for 24% and 11% of our total revenue, respectively. In fiscal year 2008 our two largest customers, Eclipse and FedEx, accounted for 42% and 10% of our total revenue, respectively. In fiscal year 2007 our three largest customers, DoD, Eclipse and Western Aircraft, accounted for 20%, 16% and 10% of our total revenue, respectively.

        Updating an individual aircraft's existing electronics equipment has become increasingly common as new technology makesobsoletes existing instrumentation outdated while an aircraft is still structurally and mechanically

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sound. Retrofitting an aircraft is generally a substantially less expensive alternative tothan purchasing a new aircraft. We expect ourIS&S expects its main customers in the retrofit market to be:

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the DoD and defense contractors;



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aircraft operators; and



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aircraft modification centers.

        Department of Defense and Defense Contractors.    We sell ourThe Company sells its products directly to the DoD as well asand to domestic and international defense contractors for end use on military aircraft retrofit programs. DoD programs generally take one of two forms,forms: a subcontract with a prime government contractor, such as Boeing, Lockheed Martin, or Rockwell Collins,L-3 Communications; or a direct contract with the appropriate government agency, such as the U.S. Air Force to satisfy its requirement for replacing Central Air Data

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Computers on its fleet of A-10 aircraft.Force. The government's desire for a cost-effective retrofittingretrofit of aircraft has led it to purchase commercial off-the-shelf equipment rather than requiring development ofto develop specially designed products, which are usually more costly and take longer to develop.implement. These contracts tend to be on arms length commercial terms, although some termination and other provisions of government contracts described under "Government Regulation" below are typically applicable to these contracts.contracts, as described under "Government Regulation" below. Each government agency or general contractor retains the right to terminate a contract at any time at its convenience. Upon such alteration or termination, we typicallyIS&S generally would be entitled to an equitable adjustment to the contract price andso that it would receive the purchase price for already delivered items, and reimbursement for allowable costs incurred.

        Aircraft Operators.    WeThe Company also sell oursells its products to aircraft operators, including commercial airlines, cargo carriers, and business and general aviation. Ouraviation aircraft owners or suppliers. The products are used mostly in retrofitting aircraft owned or operated by these customers, which generally retrofit and maintain their aircraft themselves. OurThe Company's commercial fleet customers include or have included, among others, American Airlines, ABX Air, Air Canada, Federal ExpressFedEx, Icelandair and Northwest Airlines. We sellIS&S sells these customers a range of products from flat panel display systemsFPDS to air data systems.

        Aircraft Modification Centers.    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's car. We haveaircraft. IS&S has established relationships with a number of aircraft modification centers throughout the United States. These modification centers essentially act as distribution outlets for ourthe Company's products. We believe 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, Western Aircraft, Aeromech, Star Aviation, Duncan Aviation, and Raytheon Aircraft Services.

OEM Market

        The Company has been selected to provide the cockpit avionics suite for the Eclipse Aerospace, Inc. ("Eclipse") new production aircraft designated the E550. Eclipse is the successor to Eclipse Aviation, Inc. ("Aviation") which declared bankruptcy in late 2008. In fiscallate 2010, Sikorsky Aircraft (a unit of United Technologies Corp.) announced its intention to invest in Eclipse. In October 2011, Eclipse announced the planned production in 2013 of the E550 aircraft and selected IS&S as the system integrator. During the years 2006 through late 2008, the Company suspended work onprovided cockpit displays in support of Aviation production of approximately 150 aircraft. Eclipse purchased the assets of Aviation in 2009. During the past three years, IS&S has been providing, through Eclipse, VLJ program. Eclipseenhanced capability through retrofits to numerous owners of the Aviation filed for Chapter 11 Bankruptcy on November 25, 2008.produced aircraft.

        WeIS&S also market ourmarkets its products to other original equipment manufacturers, particularly manufacturers of corporateincluding Boeing and private jets as well as to contractors manufacturing military jets. Customers of our products have included Bombardier (the manufacturer of Learjet), Gulfstream, Boeing, Raytheon, Piaggio and Lockheed.Lockheed Martin.

Backlog

        As of September 30, 20092012 and 2008, our2011, the Company's backlog was $34.1$19.7 million and $57.3$27.5 million, respectively. Backlog represents the value of contracts and purchase orders received, less the revenue recognized to date on those contracts and purchase orders. The year over year decrease of $23.2$7.8 million or 40.5%

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was the result of $20.7booking $28.2 million in new business offset by $36.7$24.6 million of recognized revenue and $7.2order reductions of $11.4 million of Company initiated order de-bookings.primarily by American Airlines. Air Data product backlog as of September 30, 2009 decreased2012 increased by $6.3$0.4 million from September 30, 2008; while Flat Panel Display Systems2011, and FPDS backlog as of September 30, 20092012 decreased by $16.9$8.2 million from September 30, 2008.2011. The Company expects backlog to improve in the future because of potential future sole source production sales resulting from the present customer-funded EMD contracts. Although the Company believes that the orders included in backlog are firm, most of the backlog involves orders that can be modified or terminated by the customer. As of September 30, 2012, approximately 36% of the Company's backlog is not expected to be filled within fiscal 2013.

Engineering Development

        The Company invests a large percentage of its sales on engineering development, both R&D and EMD. At September 30, 2012, approximately 50% of the Company's employees were engineers engaged in various engineering development projects. IS&S invests a large percentage of its sales in engineering development to allow its customers to benefit from the latest technological advancements. Total engineering development expense is comprised of both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses of employees engaged in engineering development projects, engineering related product materials and equipment and subcontracting costs. R&D charges incurred for product design, product enhancements and future product development are expensed as incurred. Product development and design charges related to specific customer contracts are charged to cost of sales-engineering modification and development based on the method of contract accounting (either percentage of completion or completed contract) applicable to such contracts.

Sales and Marketing

        We focus ourIS&S focuses its sales efforts on passenger and cargo carrying aircraft operators, general aviation operators, aircraft modification centers, the DoD, DoD contractors, and OEMs. We continually evaluate ourThe Company periodically evaluates its sales and marketing efforts with respect to these focus areas and, where appropriate, have mademakes use of third-party sales representatives who receive compensation through commissions based on performance.

        We believe ourThe Company's ability to provide prompt and effective repair and upgrade service is critical to ourits marketing efforts. As part of ourThe customer service program we offeroffers a 24-hour hotline thatcustomer hotline. The Company services its customers

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can call for product repair or upgrade concerns. We employ utilizing either field service engineers to service our equipmentor its in-house repair and depending on the service required, we may either dispatch a service crewupgrade facility. The Company can lend spare units to make necessary repairs or request 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. Ourperiods when it is repairing or overhauling their equipment. The Company's in-house turnaround times for both repairs and upgrades average less than 30 days. Before returning our products to customers, all repaired or upgraded products are retested for airworthiness.

        In connection with our customer service program, we typically provideGenerally, IS&S provides customers with a two-year warranty on new products. We also offerThe Company offers customers extended warranties of varying terms for additional fees.

        The majority of the Company's sales, operating resultspersonnel and identifiable assets are inwithin the United States. In fiscal year 2009, 2008,2012, 2011 and 20072010 net sales outside the United States amounted to $4.4 million, $1.7$4.0 million and $1.1$2.8 million, respectively.

Government Regulation

        TheFAA regulations govern the manufacture and installation of ourthe Company's products in aircraft owned and operated in the United States, is governed by FAA regulations. We maintain a productionand the IS&S facility that is FAA certified. The most significant of the product and installation regulations focus on Technical Standard Order Authorizationsare TSO and Supplemental Type Certificates. These certifications set forthSTC, which establish the minimum product performance standards that a certain type of equipment should meet. As required, we deliver our product in accordance with FAA regulations.standards.

        SalesGenerally, sales of ourIS&S products to European or other non-U.S. owners of aircraft also typically require approval of the European Aviation Safety Agency (EASA),EASA, the European counterpart of the FAA, or another appropriateother relevant governmental agency. agencies.

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EASA certification requirements for manufacturingthe manufacture and installation of ourthe Company's products in European owned aircraft mirror FAA regulations. Much like the FAA certification process, theThe EASA has established a process for granting European Certifications.certifications is similar to that of the FAA.

        In addition to product related regulations, we are alsoIS&S is subject to U.S. Government procurement regulations with respect to the sale of ourthe Company's products to government entities or government contractors. These regulations dictate the manner inestablish requirements which products may be sold to the government and set forth other requirements thatcontractors must be met in ordermeet to do business with or on behalf of government entities. For example, the government agency or general contractor may alter the price, quantity or delivery schedule of our products. In addition, theThe government agency or general contractor retains the right to terminate thea contract at any time at its convenience. Upon such alteration or termination, we would typically beIS&S is generally entitled to an equitable adjustment to the contract price so that we would receivethe Company receives the purchase price for products or services already delivered, items and reimbursement for allowable costs incurred.incurred and for termination related costs.

Manufacturing, Assembly and Materials Acquisition

        OurThe Company's manufacturing activities consist primarily of assembling and testing components and subassemblies, and integrating them into a fully tested finished system. We believesystems. IS&S believes this methodapproach allows usit to achieve relatively flexible manufacturing capacity while minimizingand to minimize expenses. We typically purchaseTypically, the Company purchases components for our products from third-party suppliers and assembleassembles them in a clean room environment to reduce impurities and improve the performance of our products.environment. Many of the components we purchasepurchased are standard products, although certain parts are made to ourthe Company's specifications.

        When appropriate, we enterIS&S enters into long-term supply agreements and use ouruses its relationships with long-term suppliers to improve product quality and availability, and to reduce delivery times and product costs. In addition, we continually identifythe Company identifies alternative suppliers for important component parts. UsingGenerally, the introduction of component parts from new suppliers in ourexisting products generally requires FAA certification of the entire finished product if the newly sourced component varies significantly from ourthe original drawings

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and specifications. To date, we haveIS&S has not experienced any significant delays in delivery of our products caused by the inability to obtain either component parts or FAA approval of products incorporating new component parts.

Quality Assurance

        Product quality is of vital importance to ourthe Company's customers and we have taken steps to enhance the overall quality of our products. We areIS&S. The Company is ISO 9001 and AS 9100B9100C certified. ISO 9001 and AS 9100BThese standards arerepresent an international consensus on effective management practices with the goal of ensuring that a company can consistently deliver its products and related services consistently in a manner that meets or exceeds customer quality requirements. TheseIS&S's certification to these standards allow usallows the Company to represent to customers that we maintainit maintains high quality industry standards in the education of ourits employees, and in the design and manufacture of ourits products. In addition, ourthe Company's products undergo extensive quality control testing prior to being delivered to customers. As part of ourits quality assurance procedures, we maintainIS&S maintains detailed records of test results and ourits quality control processes.

Our Competition

        The market for ourthe Company's products is highly competitive, and characterized bythe Company competes in several industry niches in which a number of manufacturers specialize. Our competitorsCompetitors vary in size and resources, and substantially all of ourthe Company's competitors are much larger than IS&S and have substantially greater resources than us.resources. With respect to air data systems and related products, ourthe Company's principal competitors include Honeywell International Inc., Rockwell Collins, Inc., Thales, and GE Aviation.Garmin. With respect to flat panel displays, our principal competitors currently include Honeywell, Rockwell Collins, Inc., L-3 Communications, and GE Aviation. However, because the flat panel display industry is a new and

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evolving market, as the demand for flat panel displays increases, weIS&S may face future competition in this area from additional companies in the future.other suppliers.

        We believeThe Company believes that the principal competitive factors in its markets we serve are cost, development cycle time, responsiveness to customer preferences, product quality, technology, and reliability. We believe ourIS&S believes that its significant and long-standing customer relationships reflect ourthe Company's ability to compete favorably with respect to these factors.

Intellectual Property and Proprietary Rights

        We relyIS&S relies on patents to protect ourits proprietary technology. As of September 30, 20092012 the Company holds 2024 U.S. patents and has 65 U.S. patent applications pending relating to ourits technology. In addition, we hold 24IS&S holds 25 international patents and have 26has 25 international patent applications pending. Certain of these patents and patent applications cover technology relating to air data measurement systems and calibration techniques while others cover technology relating to flat panel display systems and other aspects of ourthe COCKPIT/IP™IP® solution. While we believeIS&S believes these patents have significant value in protecting ourits technology, we also believeit believes that the innovative skill, technical expertise, and know-how of ourthe Company's personnel in applying the technology reflected in ourits patents would be difficult, costly, and time consuming to reproduce.

        While we areIS&S is not aware of any pending lawsuits against us regardingthe Company alleging patent infringement or the violation of other intellectual property rights, weit cannot be certain such infringement claims will not be asserted against usthe Company in the future.

Our Employees

        As of September 30, 2009, we2012, IS&S had 140 employees, 48 were in engineering, research and development, 63 in manufacturing and assembly operations, 8 in quality and 21 in selling and general administrative positions.

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        Our105 employees. The Company's future success depends on ourits ability to attract, train and retain highly qualified personnel. We planIS&S plans to hire additional personnel, including, in particular sales and marketing personnel,R&D engineers, during the next twelve months. Competition for such qualified personnel is intense, and wethe Company may not be able to attract, train, and retain highly qualified personnel in the future. Our employees are not represented by a laborThe Company is non union.

Executive Officers of the Registrant

        The following is a list of ourthe Company's executive officers, their ages and their positions:

        Geoffrey S. M. Hedrick was the Chief Executive Officer sincefrom the time he founded IS&Sthe Company in February 1988 through June 4, 2007, and was reappointed as Chief Executive Officer on September 8, 2008. He has also been Chairman of the Board since 1997. Prior to founding IS&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 3540 years of experience in the avionics industry, and he holds a number of patents in the electronics, optoelectric, electromagnetic, aerospace, and contamination-controlcontamination control fields.

        Roman G. PtakowskiShahram Askarpour has been President since March 2003. Prior to that, Mr. Ptakowski served2012. Dr. Askarpour joined the Company as a Group Vice PresidentDirector of Engineering in 2003, and General Manager and, before that, as awas promoted to Vice President of SalesEngineering in 2005. Dr. Askarpour has more than 30 years of aerospace industry experience in managerial and Marketing at B/Etechnical positions. Prior to joining IS&S he was employed by Smiths Aerospace Inc. Previously, Mr. Ptakowski held(a division of Smiths Group PLC), Instrumentation Technology and Marconi Avionics. He holds a number of positions with increasing responsibility within ASEA Brown Boveri Power T&D Company, Inc. There, he was General Managerkey patents in

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the Protective Relay Division before leaving to join B/E Aerospace, Inc. Mr. Ptakowskiaviation field. Dr. Askarpour received a B.S.his engineering education in the United Kingdom, and received an undergraduate degree in Electrical Engineering from New YorkMiddlesex University, a post graduate Certificate of Advanced Study in Systems Engineering, and a PhD in Automatic Control from Brunel University. He was awarded the title of Associate Research Fellow for three consecutive years by Brunel University, and a MBA from Duke University.has published numerous papers in leading international, peer reviewed journals. In addition, he has completed management courses at Carnegie Mellon University and finance courses at the Wharton Business School.

        JohnRonald C. LongAlbrecht has been Chief Financial Officer since January 2008.August 2010. Prior to joining the Company, Mr. LongAlbrecht served in a varietynumber of executive positions, both operational and financial, with Arrow International, Inc., includingSmiths Aerospace (UK). Smiths Aerospace was acquired by GE Aviation Systems ("GEAS") in 2007. Most recently, Mr. Albrecht served as Vice President and General Manager of Smiths Aerospace Electro Mechanical Business from January, 2003 to January, 2008 as Treasurer from January, 2003 to October, 2007, as Secretary from April, 2004 to October, 2007 and, as Assistant Treasurersubsequently, of GEAS' Electro Mechanical Business from 19952007 to January 2003.2010. Prior to joining Arrow International, Mr. Longhis operational roles, he served as Controller for the Jaindl Companies, a groupChief Financial Officer of privately held companies involvedSmiths Aerospace, based in agribusinessLondon, and real estate development, from 1989 to 1995. From 1986 to 1989,has substantial mergers & acquisition and strategic planning experience. Mr. Long was employed in the Allentown, Pennsylvania office of the accounting firm, Concannon, Gallagher, Miller & Co. Mr. Long also served as a director and Audit Committee Chairman of D&E Communications, Inc., an integrated communications provider. Mr. LongAlbrecht received a B.S.B.A. in AccountingGovernment and Economics from Wilkes UniversityDartmouth College and a MBA in Finance from ColumbiaStanford University. He is a Certified Public Accountant (California/Inactive).

Other

        The public may read and copy any materials filed by usIS&S with the SEC at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information about issuers such as that file electronically with the SEC.

        Our primary        IS&S maintains its corporate website isat http://www.innovative-ss.com. We makewww.innovative-ss.com and makes available, free of charge, at our corporateon that website our(under the "Investor Relations" tab) the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those as reasonably practicable after weit electronically filefiles such material with, or furnishfurnishes it to, the SEC. The information on ourthe Company's web site is not incorporated as part of this annual report.

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Item 1A.    Risk Factors

        YouEach reader should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set forth in this report, because they could materially and adversely affect ourthe Company's business, operating results, financial condition, cash flows, and prospects, as well as adversely affectand the value of an investment in ourIS&S common stock.

Risks Related to OurIS&S Business

Reductions in government expenditures could adversely affect IS&S business.

        The Budget Control Act of 2011 (the "Budget Act") will result in reduced U.S. government funding of the defense industry unless Congress acts. The Budget Act set $900 billion in immediate cuts to discretionary government spending for 2012 through 2021. It also established a bi-partisan congressional Joint Select Committee on Deficit Reduction (the "Super Committee") and charged it with recommending legislation by November 23, 2011, the result of which would reduce net government spending by at least $1.2 trillion over the next 10 years, in addition to the $900 billion in immediate discretionary spending reductions. The failure of the Super Committee to meet its objectives has triggered an automatic sequestration of discretionary appropriations, which if not altered by Congress, will make up any shortfall necessary to achieve the $1.2 trillion target. Under the Budget Act, 50% of any shortfall from the $1.2 trillion target would automatically be applied as a reduction to discretionary appropriations for national defense programs. Unless the U.S. Government takes further action, the Budget Control Act of 2011 (Budget Act) will trigger substantial, automatic reductions in both defense and discretionary spending in January 2013. While the impact of sequestration is yet to be determined, automatic across-the-board cuts would be in addition to reductions already reflected in the defense funding over a ten-year period. The resulting automatic across-the board budget cuts in sequestration could have negative consequences to the Company's business and industry. There could be disruption of ongoing programs and initiatives, and the resulting personnel reductions could negatively impact the Company's manufacturing operations and engineering expertise, and accelerate the loss of skills and knowledge. The impact of any resulting reductions in defense appropriations, and/or reductions in U.S. defense spending could negatively affect the Company's revenues, financial condition and results of operations.

The global recession and continued credit tightening could adversely affect us.IS&S.

        The global recession and continued concern regarding credit tightening,availability, including failures of financial institutions, has initiated unprecedented government intervention in the U.S., Europe and other regions of the world. If these concerns continue or worsen, risks to usIS&S include:

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Declinesdeclines in revenues and profitability from reduced orders, payment delays or other factors caused by the economic problems of customers;



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reprioritization of government spending away from defense programs in which we participate;IS&S participates;



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adverse impacts on ourreduced access to credit sources; and



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supply problemsdisruptions in supplies associated with any financial constraints faced by our vendors.

        A portion of ourIS&S sales havehas been, and we expect willis expected to continue to be, to defense contractors or government agencies in connection with government aircraft retrofit or original equipment manufacturing contracts. Sales to government contractors and government agencies could decline as a result of DoD spending cuts and general budgetary constraints which may become more frequentsevere as tax revenues decline due to the continued weakeningfederal budget deficit remains high.