10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[For the transition period from                             to                             ]

Commission File No. 0-31157

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

(Exact name of registrant as specified in its charter)

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

(610) 646-9800

(Registrant’s telephone number, including area code)

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 day.  Yes x 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 o No o

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer	x Accelerated filer
o Non-accelerated filer	o Smaller reporting company
(Do not check if a smaller reporting company)

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

As of August 3, 2010, there were 16,768,991 shares of the Registrant’s Common Stock, with par value of $.001 per share, outstanding.

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

FORM 10-Q June 30, 2010

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION	—
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets — June 30, 2010 and September 30, 2009	1
	Condensed Consolidated Statements of Operations — Three and Nine months ended June 30, 2010 and 2009	2
	Condensed Consolidated Statements of Cash Flows — Nine months ended June 30, 2010 and 2009	3
	Notes to Condensed Consolidated Financial Statements	4 – 14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 – 20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults upon Senior Securities	22
Item 4.	Removed and reserved	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
SIGNATURES		23

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			September 30,
	2010			2009
ASSETS
Current Assets
Cash and cash equivalents	$	38,019,536		$	35,565,694
Accounts receivable, net	3,909,442			6,188,706
Inventories	5,002,468			5,306,985
Deferred income taxes	450,113			503,993
Prepaid expenses and other current assets	980,120			1,227,413
Total current assets	48,361,679			48,792,791
Property and equipment, net	7,915,716			8,343,701
Other assets	237,720			399,520
Total Assets	$	56,515,115		$	57,536,012
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current portion of capitalized lease obligations	$	9,908		$	9,908
Accounts payable	991,504			1,207,990
Accrued expenses	2,268,420			2,785,560
Deferred revenue	145,125			164,856
Total current liabilities	3,414,957			4,168,314
Long-term portion of capitalized lease obligations	18,490			26,991
Deferred revenue	21,714			60,792
Deferred income taxes	579,089			642,651
Other liabilities	168,464			238,522
Total Liabilities	4,202,714			5,137,270
Commitments and contingencies	—			—
Shareholders’ Equity
Preferred Stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at June 30, 2010 and September 30, 2009	—			—
Common stock, $.001 par value: 75,000,000 shares authorized, 18,236,759 and 18,206,839 issued at June 30, 2010 and September 30, 2009	18,236			18,207
Additional paid-in capital	46,900,432			46,462,135
Retained earnings	24,658,373			25,161,276
Treasury stock, at cost, 1,476,000 and 1,470,510 shares at June 30, 2010 and September 30, 2009, respectively	(19,264,640		)	(19,242,876		)
Total Shareholders’ Equity	52,312,401			52,398,742
Total Liabilities and Shareholders’ Equity	$	56,515,115		$	57,536,012

The accompanying notes are an integral part of these statements.

1

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ending June 30,						Nine Months Ending June 30,
Net sales:	2010			2009			2010			2009
Product	$	7,295,526		$	6,645,822		$	16,117,839		$	24,900,246
Engineering - modification and development	518,290			1,113,478			1,676,173			3,900,126
Total net sales	7,813,816			7,759,300			17,794,012			28,800,372
Cost of sales
Product	2,890,660			3,302,823			8,072,055			13,213,569
Engineering - modification and development	120,150			318,222			718,024			880,262
Total cost of sales	3,010,810			3,621,045			8,790,079			14,093,831
Gross profit	4,803,006			4,138,255			9,003,933			14,706,541
Operating expenses:
Research and development	1,274,872			1,287,397			3,844,282			4,178,585
Selling, general and administrative	1,938,411			1,840,571			5,965,876			6,471,958
Total operating expenses	3,213,283			3,127,968			9,810,158			10,650,543
Operating income (loss)	1,589,723			1,010,287			(806,225		)	4,055,998
Interest income	69,164			62,594			119,774			360,907
Interest (expense)	(562		)	(19,798		)	(1,840		)	(74,513		)
Other income	—			—			50,000			50,073
Income (loss) before income taxes	1,658,325			1,053,083			(638,291		)	4,392,465
Income tax expense (benefit)	270,293			(199,228		)	(135,385		)	(30,762		)
Net income (loss)	$	1,388,032		$	1,252,311		$	(502,906	)	$	4,423,227
Net income (loss) per common share:
Basic	$	0.08		$	0.07		$	(0.03	)	$	0.26
Diluted	$	0.08		$	0.07		$	(0.03	)	$	0.26
Weighted Average Shares Outstanding:
Basic	16,760,759			16,727,269			16,752,973			16,727,269
Diluted	16,799,157			16,750,308			16,752,973			16,746,631

The accompanying notes are an integral part of these statements.

2

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Nine Months Ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income	$	(502,906	)	$	4,423,227
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	632,175			767,849
Deposit forfeiture, installation kits	118,660			—
Share-based compensation expense:
Stock options	283,412			395,006
Nonvested stock awards	149,946			150,110
Tax benefit from share-based compensation:
Nonvested stock awards	4,939			3,094
Loss on disposal of property and equipment	1,126			260
Excess and obsolete inventory cost	—			666,580
(Increase) decrease in:
Accounts receivable	2,279,264			(529,160		)
Inventories	304,517			3,198,957
Prepaid expenses and other current assets	326,393			98,247
Other non-current assets	—			(74,534		)
Increase (decrease) in:
Accounts Payable	(216,486		)	(1,402,254		)
Accrued expenses	(517,140		)	(2,032,173		)
Income taxes payable	(149,158		)	(718,039		)
Deferred income tax	(9,682		)	—
Deferred revenue	(58,809		)	(310,871		)
Net cash provided by operating activities	2,646,251			4,636,299
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(162,173		)	(244,127		)
Net cash (used in) investing activities	(162,173		)	(244,127		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock	(21,735		)	(108,250		)
Repayment of capitalized lease obligations	(8,501		)	(7,916		)
Net cash (used in) financing activities	(30,236		)	(116,166		)
Net increase in cash and cash equivalents	2,453,842			4,276,006
Cash and cash equivalents, beginning of year	35,565,694			35,031,932
Cash and cash equivalents, end of period	$	38,019,536		$	39,307,938
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	1,840		$	44,488
Cash paid for income tax	$	121,473		$	704,486
Cash received from income tax refund	$	1,000		$	25,115
Noncash Investing activities
Accrual for purchase of property and equipment	—			68,780

The accompanying notes are an integral part of these statements.

3

Innovative Solutions and Support, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Description of the Company

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission in accordance with the disclosure requirements for the quarterly report on Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. In the opinion of Company management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to fairly state the results for the interim periods presented. The condensed consolidated balance sheet as of September 30, 2009 is derived from audited financial statements. Operating results for the three and nine months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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, as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates are used in accounting for, among other items, allowance for doubtful accounts, inventory obsolescence, product warranty cost liability, income taxes and contingencies. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

Highly liquid investments purchased with an original maturity of three months or less are classified as cash equivalents. Cash equivalents at June 30, 2010 and September 30, 2009 consist of funds invested in money market accounts with financial institutions.

Property and Equipment

Property and equipment is stated at cost. Depreciation is provided using an accelerated method over 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 are depreciated using the straight-line method over estimated useful lives of ten years and thirty-nine years, respectively. 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.

Long-Lived Assets

The Company assesses the impairment of long-lived assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 360-10, “Property, Plant and Equipment” (ASC Topic 360-10). This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, 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 estimated future cash flows expected to result from use of

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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.  No impairment charges were recorded during the nine months ended June 30, 2010 or 2009.

Revenue Recognition

The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver flight information computers, large flat-panel displays, and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, and altitude, as well as engine and fuel data measurements.  Additionally, during the three months ended June 30, 2010 the Company began delivery in accordance with a new arrangement with a new customer to provide, among other deliverables, functional upgrades to the Company’s flight information computers and flat-panel displays.  The Company’s sales arrangements may include multiple deliverables as defined in FASB ASC Topic 605-25, “Multiple-Element Arrangements” (ASC Topic 605-25), which typically include design and engineering services and the production and delivery of the flat panel display and related components.

Multiple Element Arrangements -

The Company identifies all goods and/or services that are to be delivered separately under such a sales arrangement and allocates revenue to each deliverable (if more than one) based on that deliverable’s selling price.  The Company then considers the appropriate recognition method for each deliverable; deliverables under multiple element arrangements are typically purchased engineering and design services, product sales and/or the sale of functional upgrades.  The Company’s multiple element arrangements can typically include defined design and development activities and/or functional upgrades, along with product sales.

The Company utilizes the selling price hierarchy that has been established by FASB Accounting Standards Update (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13), which requires that the selling price for each deliverable be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available.  To the extent that an arrangement includes a deliverable for which estimated selling price is used, the Company determines the best estimate of selling price by applying the same pricing policies and methodologies that would be used to determine the price to sell the deliverable on a standalone basis.

To the extent that an arrangement contains software elements that are essential to the functionality of tangible products sold in the arrangement, the Company recognizes revenue for the deliverables in accordance with the guidance included in FASB Accounting Standards Update 2009-14, “Revenue Arrangements That Include Software Elements”, ASU 2009-13 and FASB ASC Topic 605, “Revenue Recognition” (ASC Topic 605).

To the extent that an arrangement contains defined design and development activities as an identified deliverable in addition to products (resulting in a multiple element arrangement), the Company recognizes as Engineering — Modification and Development (“EMD”) revenue amounts earned during the design and development phase of the contract following the guidance included in the FASB ASC Topic 605-35, “Construction-Type and Production-Type Contracts” (ASC Topic 605-35).  To the extent that multiple element arrangements include product sales, revenue is generally recognized once revenue recognition criteria for the product deliverable has been met based on the provisions of FASB ASC Topic 605, “Revenue Recognition”(ASC Topic 605).

To the extent that an arrangement contains software components, which include functional upgrades, that are sold on a standalone basis and the Company has deemed outside the scope the exception defined by ASU 2009-14, the Company recognizes software revenue in accordance with ASC Topic 985, “Software” (ASC Topic 985).

Single Element Arrangements —

Products -

To the extent that a single element arrangement provides for product sales and repairs, revenue is generally recognized once revenue recognition criteria for the product deliverable has been met based on the provisions of ASC Topic 605.  The Company also receives orders for existing equipment and parts.  Revenue from the sale of such products is generally recognized upon shipment to the customer.

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.

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Engineering Services -

The Company also may enter into service arrangements to perform specified design and development services related to its products.  The Company recognizes revenue from these arrangements as EMD revenue, following the guidance included in ASC Topic 605-35. The Company considers the nature of these service arrangements (including term, size of contract, level of effort) when determining the appropriate accounting treatment for a particular contract. The Company recognizes the revenue from these contracts using either the percentage-of-completion method or completed contract method of accounting.

The Company records revenue relating to these contracts using the percentage-of-completion method when the Company determines that progress toward completion is reasonable and reliably estimable and the contract is long-term in nature; the Company uses the completed contract method for all others.

Income Taxes

Income taxes are recorded in accordance with FASB ASC Topic 740, “Income Taxes” (ASC Topic 740), which principally utilizes a balance sheet approach to provide for income taxes.  Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities and expected benefits of utilizing net operating loss and tax credit carry-forwards. 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.  The Company files a consolidated United States federal income tax return (see Note 3).

Effective October 1, 2007 (the first day of fiscal 2008), income tax contingencies are accounted for in accordance with ASC Topic 740, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  Significant judgment is required in determining our provision for income taxes and recording the related assets and liabilities.  In the normal course of our business, there are transactions and calculations where the ultimate tax determination is less than certain.  The Company and its subsidiaries are subject to examination by Federal and State tax authorities.  The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of the provision for income taxes.  The Company continually assesses the likelihood and amount of potential adjustments and records any necessary adjustments in the period in which the facts that give rise to a revision become known.  The Company has elected to record any interest or penalties from the uncertain tax position as income tax expense.

A valuation allowance is established when it is more likely than not that all or a portion of the net deferred tax asset will not be realized.  The Company continues to maintain a full valuation allowance against its net deferred tax assets, as of the quarter ended June 30, 2010.  In accordance with ASC Topic 740, the Company will continue to evaluate the need for a full or partial valuation allowance in future periods.

Research and Development

Research and development charges incurred for product design, product enhancements and future product development are expensed as incurred. Product development and design charges incurred related to a specific customer agreement that are billable are capitalized and then charged to cost of sales — engineering modification and development as the revenue related to the agreements are recognized.

Comprehensive Income

Pursuant to FASB ASC Topic 220, “Comprehensive Income” (ASC Topic 220) the Company is 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 our condensed consolidated balance sheets.  For the three months ending June 30, 2010 and 2009, comprehensive income consists of net income and there were no items of other comprehensive income for any of the periods presented.

Fair Value of Financial Instruments

The Company adopted FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC Topic 820) in the first quarter of fiscal 2009 for financial assets and liabilities. This standard defines fair value as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC Topic 820 and directly related to the amount of subjectivity associated

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with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

·  Quoted prices for similar assets or liabilities in active markets;

·  Quoted prices for identical or similar assets in non-active markets;

·  Inputs other than quoted prices that are observable for the asset or liability; and

·  Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2010 and September 30, 2009, according to the valuation techniques the Company used to determine their fair values.

	Fair Value Measurement on June 30, 2010
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	36,844,666	$	—	$	—

	Fair Value Measurement on September 30, 2009
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents
Money market funds	$	34,793,543	$	—	$	—

Stock-Based Compensation

The Company accounts for stock-based compensation under FASB ASC Topic 505-50, “Equity-Based Payments to Non-Employees (ASC Topic 505-50) and FASB ASC Topic 718, “Stock Compensation” (ASC Topic 718), which require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Warranty

We offer warranties on some products of various lengths. At the time of shipment, we establish a reserve for estimated costs 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’s failure rates and the customer’s usage affects warranty cost. If actual warranty costs differ from our estimated amounts, future results of operations could be adversely affected.

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Concentrations

Major Customers and Products

For the three months ended June 30, 2010, two of the Company’s customers, Eclipse Aerospace, Inc. and Cessna Aircraft Company, accounted for 19% and 19% of net sales, respectively. During the nine months ended June 30, 2010, two of the Company’s customers, Lockheed Martin and Cessna Aircraft, accounted for 13% and 12% of net sales, respectively.

For the three months ended June 30, 2009, three of the Company’s customers, American Airlines, the United States Department of Defense and Western Aircraft, accounted for 24%, 21% and 13% of net sales, respectively. During the nine months ended June 30, 2009 two of the Company’s customers, American Airlines and the United States Department of Defense, accounted for 30% and 12% of net sales, respectively.

Major Suppliers

The Company currently buys several of its components from single source suppliers. Although there are a limited number of manufacturers of particular components, management believes other suppliers could provide similar components on comparable terms.

During the three months ended June 30, 2010 the Company did not have any suppliers who accounted for more than 10% of total inventory related purchases, as compared to the Company having one supplier who accounted for 30% of the Company’s total inventory related purchases during the three months ended June 30, 2009.

During the nine months ended June 30, 2010 and 2009 the Company had one supplier who accounted for 20% and 30% of the Company’s total inventory related purchases, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. The Company’s customer base principally consists of companies within the aviation industry. The Company routinely requests advance payments from new customers.

The Company has maintained a reserve for doubtful accounts in the amount of $0.2 million and $0.2 million, as of June 30, 2010 and September 30, 2009, respectively

Recent Accounting Pronouncements

In May 2009, the FASB issued Accounting Standards Codification Topic 855 (ASC Topic 855), Subsequent Events which establishes general accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This statement also outlines the circumstances under which an entity would need to record transactions occurring after the balance sheet date in the financial statements. These new disclosures identify the date through which the entity has evaluated subsequent events. ASC Topic 855 is effective for interim or annual financial periods ending after June 15, 2009.  In February 2010, the FASB amended its guidance removing the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events.  The Company adopted ASC Topic 855 on April 1, 2010 and the adoption had no impact on the condensed consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (ASU 2009-13), Multiple-Deliverable Revenue Arrangements which updates ASC Topic 605-25, Multiple Elements Arrangements, of the FASB codification.   ASU 2009-13 provides new guidance on how to determine if an arrangement involving multiple deliverables contains more than one unit of accounting, and if so allows companies to allocate arrangement considerations in a manner more consistent with the economics of the transaction.  ASU 2009-13 establishes a selling price hierarchy for determining the selling price of each specific deliverable, which includes vendor-specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available or estimated selling price if neither VSOE nor third party evidence is available. This update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements.  In accordance with ASU 2009-13 the Company has chosen to adopt this guidance retrospectively for fiscal 2010 and determined that it did not have a material impact on the Company’s financial condition or operating results, as the Company did not have a significant amount of sales that contain multiple elements.  Additionally the Company has assessed any potential impact the new accounting guidance would have had on all prior periods presented and determined that it would have had no impact on any of the Company’s prior financial statements or operating results.  The Company is required to adopt, and has adopted the amendments in both ASU 2009-13 and 2009-14 in the same period and using the same transitional method.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (ASU 2009-14), Revenue Arrangements That include Software Elements which amends ASC Topic 985-605, Software — Revenue Recognition in regard to the scope of software guidance.  ASU 2009-14 excludes software components of tangible products that function together to provide the tangible product’s essential

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functionality.  While ASU 2009-14 does not create any new methods of revenue recognition, it could significantly affect the Company’s recognition of revenue from period to period.  In accordance with ASU 2009-14 the Company has chosen to adopt this guidance retrospectively for fiscal 2010 and determined that it did not have a material impact on the Company’s financial condition or operating results, as the Company did not previously have arrangements and/or sales that were included within the scope of ASC Topic 985-605, Software-Revenue Recognition.  Additionally the Company has assessed any potential impact the new accounting guidance would have had on all prior periods being presented and determined that it would have had no impact on any of the Company’s prior financial statements or operating results. The Company is required to adopt, and has adopted the amendments in both ASU 2009-13 and 2009-14 in the same period and using the same transitional method.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures.  ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2012); early adoption is permitted.  The Company is currently evaluating the impact of adopting ASU 2010-06 on its financial statements.

In April 2010, the FASB issued Accounting Standards Update No. 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method which amends ASC Topic 605, Revenue Recognition, providing a consistent framework for applying the milestone method, thus adding clarity in practice on its application.  The objective of ASU 2010-17 is to provide guidance on defining a milestone and determining when to apply the milestone method of revenue recognition to research and development transactions.  ASU 2010-17 is effective for the Company, prospectively, for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 (the Company’s fiscal year 2011); early adoption is permitted.  The Company is currently evaluating the impact of adopting ASU 2010-17 on its financial statements.

2. Detail of Certain Balance Sheet Accounts

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market, net of reserve for excess and obsolete, and consist of the following:

	June 30,		September 30,
	2010		2009
Raw materials	$	3,156,381	$	3,535,109
Work-in-process	614,418		315,179
Finished goods	1,231,669		1,456,697
	$	5,002,468	$	5,306,985

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Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	June 30,		September 30,
	2010		2009
Revenue recognized not yet invoiced	$	413,817	$	491,417
Prepaid insurance	178,787		307,477
Deferred engineering costs	14,014		81,957
Income tax asset	79,100		—
Other	294,402		346,562
	$	980,120	$	1,227,413

Property and equipment

Property and equipment, net consists of the following balances:

	June 30,			September 30,
	2010			2009
Computer equipment	$	2,020,299		$	1,986,028
Corporate airplane	3,082,186			3,082,186
Furniture and office equipment	1,089,298			1,074,031
Manufacturing facility	5,576,466			5,558,553
Equipment	4,114,315			4,037,689
Land	1,021,245			1,021,245
	16,903,809			16,759,732
Less: Accumulated depreciation and amortization	(8,988,093		)	(8,416,031		)
	$	7,915,716		$	8,343,701

Depreciation and amortization related to property and equipment was approximately $179,000 and $227,000 for the three months ended June 30, 2010 and 2009, respectively.

Depreciation and amortization related to property and equipment was approximately $589,000 and $665,000 for the nine months ended June 30, 2010 and 2009, respectively.

Other assets

Other assets consist of the following:

	June 30,		September 30,
	2010		2009
Intangible assets, net of accumulated amortization of $241,280 and $198,140 at June 30, 2010 and September 30, 2009	$	237,720	$	280,860
Installation kits, deposit forfeiture	—		118,660
	$	237,720	$	399,520

Intangible assets consist of licensing and certification rights which are amortized over a defined number of units.  No impairment charge was recorded in the nine months ended June 30, 2010.

Total intangible amortization expense was approximately $23,190 and $19,300 for the three months ended June 30, 2010 and 2009, respectively. Total amortization expense for the nine months ended June 30, 2010 and 2009 was $43,140 and $102,600, respectively. Because the intangible assets are being amortized over a defined number of units, the future amortization expense over the next five years cannot be determined at this time.

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Accrued expenses

Accrued expenses consist of the following:

	June 30,		September 30,
	2010		2009
Warranty (a)	$	877,761	$	808,544
Salary, benefits and payroll taxes	518,071		617,224
Reduction in workforce / severance	—		166,453
Professional fees	267,169		188,349
Income taxes payable	—		112,449
Materials on order	31,824		108,210
Other	573,595		784,331
	$	2,268,420	$	2,785,560

(a)The Company provides for the estimated cost of product warranties at the time revenue is recognized. Warranty cost is recorded as cost of sales and the reserve balance recorded as an accrued expense in the financial statements. While the Company engages in extensive product quality programs and processes, the Company’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’s estimates, further revisions to the estimated warranty liability would be required.

Warranty cost and accrual information for the three months ended June 30, 2010 is highlighted below:

Warranty Accrual at March 31, 2010	$	790,684
Accrued expense for the three months ended June 30, 2010	137,408
Warranty cost for the three months ended June 30, 2010	(50,331		)
Warranty Accrual at June 30, 2010	$	877,761

Warranty cost and accrual information for the nine months ended June 30, 2010 is highlighted below:

Warranty Accrual at September 30, 2009	$	808,544
Accrued expense for the nine months ended June 30, 2010	256,479
Warranty cost for the nine months ended June 30, 2010	(187,262		)
Warranty Accrual at June 30, 2010	$	877,761

Notes payable

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’s new office and manufacturing facility. The loan matures in 2015 and carried an interest rate set by the remarketing agent that was consistent with 30-day tax-exempt commercial paper. The Company exercised its option to pay-down the outstanding balance during August, 2009.

The interest cost related to this debt for the three months ended June 30, 2010 and 2009 was $0 and $9,000, respectively. The interest cost related to this debt for the nine months ended June 30, 2010 and 2009 was $0 and $42,000 respectively. The Company was required to maintain a letter of credit in the amount of $5,000,000 covering the debt, prior to the August, 2009 redemption.

3. Income Taxes

Income tax expense was approximately $270,000 and income tax benefit was $135,000 for the three and nine months ended June 30, 2010, respectively, as compared to an income tax benefit of $199,000 and $31,000, respectively, for the three and nine months ended June 30, 2009. The increase in the income tax expense for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, is due to an increased level of pre-tax income for the quarter relative to the year-to-date result, as compared to the same quarter in the prior year.  The increase in the income tax benefit for the nine months ended June 30, 2010 was the result of the pre-tax

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loss for the period as compared to the pre-tax income from the same period in the prior year.  The income tax benefit in the nine months ended June 30, 2009 reflects the impact of net discrete tax benefits recognized in the period then ended, which offset the tax expense calculated on pre-tax income.

The effective tax rates for the three months ended June 30, 2010 and 2009 was 16% and (19%), respectively.  The effective tax rate differs from the statutory rate for the three months ended June 30, 2010 due to a decrease in the overall forecast effective tax rate for the year from the previous quarter, in conjunction with a positive pre-tax income for the current quarter as compared to prior quarters in the current year, and also a decrease in the liability related to an uncertain tax position upon the expiration of a statute of limitations. The effective tax rate differs from the statutory rate for the three months ended June 30, 2009 primarily due to the reversal of certain deductible temporary differences, which were fully offset by a valuation allowance, that were deductible for income tax purposes in the fiscal year ended September 30, 2009.

The effective tax rates for the nine months ended June 30, 2010 and 2009 was 21% and (1%), respectively.  The effective tax rate differs from the statutory rate for the nine months ended June 30, 2010 due to the forecasted net reversals of various deductible temporary differences that are fully offset by a valuation allowance, the forecasted utilization of research and experimentation tax credit carry-forwards, and the forecasted level of pre-tax income.  The effective tax rate differs from the statutory rate for the nine months ended June 30, 2009 primarily due to the reversal of certain deductible temporary differences, which were fully offset by a valuation allowance, that were deductible for income tax purposes in the fiscal year ended September 30, 2009.

As of June 30, 2010, the Company recognized a $79,000 current income tax asset resulting from current taxable losses that can be carried back to prior years to offset federal income tax paid.  The Company maintains a full valuation allowance against its net deferred tax assets, which may not be carried back to prior taxable years, and consist primarily of deductible temporary differences and other carry-forward items.  The Company will continue to maintain this valuation allowance until an appropriate level of profitability is sustained to conclude that it is more likely than not that a portion of these net deferred tax assets would be realized in future periods.  As such, improvements in pre-tax income in the future within the jurisdictions where the Company maintains a valuation allowance may result in these tax benefits ultimately being realized.  However, there is no assurance that such improvements will be achieved.

4. Capital Stock

At June 30, 2010, the Company’s Articles of Incorporation provide the Company authority to issue 75,000,000 shares of Common Stock and 10,000,000 shares of blank check Preferred Stock.

Share-based compensation

The Company accounts for share-based compensation under the provisions of ASC Topic 505-50 and ASC Topic 718, using the modified prospective approach and accounts for share-based compensation applying the fair value method for expensing stock options and non-vested stock awards.

Total share-based compensation expense was approximately $147,000 and $168,000 for the three months ended June 30, 2010 and 2009, respectively. The excess (shortfall in) tax benefits recognized as a credit (charge) to additional paid-in capital in the statement of shareholders’ equity related to share-based compensation arrangements was approximately $8,000 and ($1,000) for the three months ended June 30, 2010 and 2009, respectively.

Total share-based compensation expense was approximately $433,000 and $545,000 for the nine months ended June 30, 2010 and 2009, respectively The excess (shortfall in) tax benefits recognized as a credit (charge) to additional paid-in capital in the statement of shareholders’ equity related to share-based compensation arrangements was approximately $5,000 and $3,000 for the nine months ended June 30, 2010 and 2009, respectively.  Compensation expense related to share-based awards is recorded as a component of general and administrative expense.

The Company maintains the 1998 Stock Option Plan (the “1998 Plan”), the 2003 Restricted Stock Plan (the “Restricted Plan”) and the 2009 Stock-Based Incentive Compensation Plan (the “2009 Plan”).  These plans were approved by the Company’s shareholders. The 1998 Plan expired on November 13, 2008.

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1998 Stock Option Plan

The 1998 Plan allowed the granting of incentive and nonqualified stock options to employees, officers, directors, and independent contractors and consultants. No stock options were granted to independent contractors or consultants under this Plan.  Total compensation expense associated with awards under the 1998 plan was $81,000 and $118,000 for the three months ended June 30, 2010 and 2009, respectively. Total compensation expense associated with awards under the 1998 plan was $268,000 and $395,000 for the nine months ended June 30, 2010 and 2009, respectively.

Incentive stock options granted under the 1998 Plan have exercise prices that are at least equal to the fair value of the common stock on the grant date. Nonqualified stock options granted under the 1998 Plan have exercise prices that are less than, equal to or greater than the fair value of the common stock on the date of grant. The Company had reserved 3,389,000 shares of Common Stock for awards under the 1998 Plan.  On November 13, 2008, the 1998 Plan expired and no additional shares were granted under the Plan after that date.

Restricted Plan

Total compensation expense under the Restricted Plan was $50,000 for both the three months ended June 30, 2010 and 2009, respectively. Total compensation expense associated with the Restricted Plan was $150,000 for both the nine months ended June 30, 2010 and 2009, respectively. The expense relates to shares that are issued to non-employee members of the Board of Directors on a quarterly basis as part of their compensation.

2009 Stock-Based Incentive Compensation Plan

The 2009 Plan authorizes the grant of Stock Appreciation Rights (“SARs”), Restricted Stock, Options and other equity-based awards under the 2009 Plan (collectively referred to as “Awards”). Options granted under the 2009 Plan may be either “incentive stock options” as defined in section 422 of the Internal Revenue Code (the “Code”), or nonqualified stock options, as determined by the Compensation Committee of the Company’s Board of Directors (the “Committee”).

Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event, the maximum number of shares of Common Stock available for Awards under the 2009 Plan shall be 1,200,000, all of which may be issued pursuant to Awards of incentive stock options.  In addition, the Plan provides that no more than 300,000 shares may be awarded to any employee as a performance-based Award under Section 162(m) of the Code.  At June 30, 2010 there were 1,150,000 shares of Common Stock available for awards under the plan.

If any Award is forfeited, or if any Option terminates, expires or lapses without being exercised, shares of Common Stock subject to such Award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an Option or the tax liability with respect to an Award (including, in any case, shares withheld from any such Award) will not be available for future grant under the 2009 Plan.  If there is any change in the Company’s corporate capitalization, the Committee shall proportionately and equitably adjust the number and kind of shares of Common Stock which may be issued in connection with future Awards, the number and kind of shares of Common Stock covered by Awards then outstanding under the 2009 Plan, the number and kind of shares of Common Stock available under the 2009 Plan, the exercise or grant price of any Award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Committee. In addition, the Committee may make adjustments in the terms and conditions of any Awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations or accounting principles, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Committee.

Total compensation expense associated with awards under the 2009 plan was $15,000 and $0 for the three months ended June 30, 2010 and 2009, respectively. Total compensation expense associated with awards under the 2009 plan was $15,000 and $0 for the nine months ended June 30, 2010 and 2009, respectively.

Stock repurchase program

On February 16, 2010, the Company’s Board of Directors extended the Common Stock repurchase program to acquire up to 1,000,000 shares of the Company’s outstanding Common Stock.  Purchases of the stock were to be made from time to time, subject to market

13

conditions and at prevailing market prices.  There were no shares purchased under this plan during the three months ended June 30, 2010.  During the nine months ended June 30, 2010 the Company purchased 5,200 shares of common stock under the program at a cost of $21,661, or an average market price of $4.17 per share.  The Company financed these purchases through available cash.  The following table sets forth the purchases made under this new plan for each month since its inception through June 30, 2010:

				Total Number of	Number of
	Total			Shares Purchased as	Shares that May
	Number of	Average		Part of Publicly	Yet Be Purchased
	Shares	Price Paid		Announced Plans or	Under the
Period	Purchased	per Share		Programs	Program
January 2010	—	—		—	—
February 2010	4,100	$	4.16	4,100	995,900
March 2010	1,100	4.20		1,100	994,800
April 2010	—	—		—	—
May 2010	—	—		—	—
June 2010	—	—		—	—
	5,200	4.17		5,200

5. Income (Loss) per Share

Income (loss) per share (“EPS”) is calculated using the principles of FASB Accounting Standards Topic 260 (ASC 260), Earnings Per Share.

For the three month period ended June 30, 2010, there were 359,800 options to purchase common stock outstanding included in the computation of diluted earnings per share.  For the nine month period ended June 30, 2009, there were 362,500 options to purchase common stock outstanding excluded from the computations of diluted earnings per share as the effect would be anti-dilutive.

For the three and nine month periods ended June 30, 2009, there were 425,000 and 426,000 options to purchase common stock outstanding, respectively, excluded from the computations of diluted earnings per share as the effect would be anti-dilutive.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward looking statements largely on our current expectations and projections about future events and trends affecting our business. In this report, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “forecast,” “expect,” “plan,” “should,” “is likely” and similar expressions, as they relate to our business or our management, are intended to identify forward looking statements, but they are not exclusive means of identifying them.

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 looking statements. These risks, uncertainties and other factors include the following:

·the impact of general economic trends on our business;

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

·difficulties in developing and producing our COCKPIT/IP™ system or other planned products or product enhancements;

·market acceptance of our flat panel display systems, or COCKPIT/IP™ system or other planned products or product enhancements;

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

·failure to retain/recruit key personnel;

·continued market acceptance of our air data systems and products;

·the availability of government funding;

·delays in receiving components from third party suppliers;

·the competitive environment;

·the bankruptcy or insolvency of one or more key customers;

·new product offerings from competitors;

·protection of intellectual property rights;

·our ability to service the international market;

·potential future acquisitions; and

·other factors disclosed from time to time in our filings with the Securities and Exchange Commission.

Except as expressly required by the federal securities laws, we undertake 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 results 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 our common stock.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this Form 10-Q, 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, and 21E of the Exchange Act. For a discussion identifying some important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see the Company’s Securities and Exchange Commission filings including, but not limited to, the discussions of “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent

15

that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of Innovative Solutions and Support, Inc.

Company Overview

Innovative Solutions and Support, Inc. (The “Company”, “IS&S” or “we”) was founded in 1988. The Company designs, develops, manufactures and sells Flight Information Computers, Flat-Panel Display Systems, and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, and altitude, as well as engine and fuel data measurements.

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 United States Department of Defense (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.

Our cost of sales related to product sales is 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, and warranty costs.

Our cost of sales related to Engineering—modification and development (EMD) is comprised of engineering labor, consulting services, and other cost associated with specific design and development projects.

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.

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.

We sell our products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and original equipment manufacturers.  Our customers have been and may continue to be affected by the ongoing adverse economic conditions that currently exist both in the United States and abroad.  Such conditions may cause our customers to curtail or delay their spending on both new and existing aircraft.  Factors that can impact general economic conditions and the level of spending by our customers include, but are not limited to, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting spending behavior.  Additionally, spending by government agencies may in the future be further reduced due to declining tax revenues associated with this economic downturn.  If our customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations due to continuing adverse economic conditions, our revenues and results of operations will be adversely affected.  However, we believe that in a declining economic environment a customer that may have otherwise elected to purchase newly manufactured aircraft will instead be interested in retrofitting existing aircraft as a cost effective alternative, which should create a market opportunity for our products.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and consolidated results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.

We believe that our critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements. Our Annual Report on Form 10-K for the year ended September 30, 2009 contains a discussion of these critical accounting policies. During the three month period ended June 30, 2010 the Company chose to early adopt ASU 2009-13 and ASU 2009-14, for details related to the adoption of these Accounting Standards refer to the Revenue Recognition and Recent Accounting Pronouncements sections of the Notes to Condensed Consolidated Financial Statements.  Other than the adoption of ASU 2009-13 and ASU 2009-14 there have been no significant changes in our critical accounting policies since September 30, 2009.

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See also Note 1 to our unaudited condensed consolidated financial statements for the three and nine month periods ended June 30, 2010 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2010 AND 2009

The following table sets forth statement of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):

	Three Months Ending June 30,				Nine Months Ending June 30,
Net sales:	2010		2009		2010		2009
Product	93.4	%	85.6	%	90.6	%	86.5	%
Engineering - modification and development	6.6	%	14.4	%	9.4	%	13.5	%
Total net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales
Product	37.0	%	42.6	%	45.4	%	45.9	%
Engineering - modification and development	1.5	%	4.1	%	4.0	%	3.1	%
Total cost of sales	38.5	%	46.7	%	49.4	%	48.9	%
Gross profit	61.5	%	53.3	%	50.6	%	51.1	%
Operating expenses:
Research and development	16.3	%	16.6	%	21.6	%	14.5	%
Selling, general and administrative	24.8	%	23.7	%	33.5	%	22.5	%
Total operating expenses	41.1	%	40.3	%	55.1	%	37.0	%
Operating income (loss)	20.3	%	13.0	%	-4.5	%	14.1	%
Interest income	0.9	%	0.8	%	0.7	%	1.3	%
Interest (expense)	0.0	%	-0.3	%	0.0	%	-0.3	%
Other income	0.0	%	0.0	%	0.3	%	0.2	%
Income (loss) before income taxes	21.2	%	13.6	%	-3.6	%	15.3	%
Income tax expense (benefit)	3.5	%	-2.6	%	-0.8	%	-0.1	%
Net income (loss)	17.8	%	16.1	%	-2.8	%	15.4	%

Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009

Net sales. Net sales were $7.8 million for both the three months ended June 30, 2010 and 2009. For the three months ended June 30, 2010, product sales increased approximately $0.6 million and EMD sales decreased approximately $0.6 million from the same period in the prior year. The increase in product sales was primarily the result of increased product delivery against both existing backlog orders and new orders that were booked in the period. The decrease in EMD sales was primarily a result of a delayed contract award.

Cost of sales. Cost of sales decreased $0.6 million or 16.9%, to $3.0 million, or 38.5% of net sales in the three months ended June 30, 2010 from $3.6 million, or 46.7% of net sales in the three months ended June 30, 2009. The decrease was primarily driven by resumed sales associated with the Eclipse E500  aircraft that had de minimis direct costs and a continued focus on cost reduction.

Research and development. Research and development expense for the three months ended June 30, 2010 and 2009 was $1.3 million and $1.3 million or 16.3% and 16.6% of net sales, respectively.  This is consistent with the Company’s strategy to continue to invest in on-going research and development of our core products, consistent with revenues realized in a given period.

Selling, general, and administrative. Selling, general and administrative expenses increased $0.1 million, or 5.3%, to $1.9 million, or 24.87% of net sales in the three months ended June 30, 2010 from $1.8 million or 23.7% of net sales in the three months ended June 30, 2009. The increase was due to increased sales and marketing expenses.

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Interest income. Interest income was $69,000 in the three months ended June 30, 2010 as compared to $63,000 in the three months ended June 30, 2009. The increase in interest income was primarily the result of higher interest rates earned on invested cash in the quarter as compared to the same period in the prior year.

Interest expense. Interest expense was $1,000 in the three months ended June 30, 2010 as compared to $20,000 in the three months ended June 30, 2009. The reduction was primarily due to the redemption of the Industrial Development Bond during August, 2009.

Income tax expense (benefit). Income tax expense for the three months ended June 30, 2010 was $270,000 as compared to the income tax benefit of $199,000 for the three months ended June 30, 2009.  The increase in the income tax expense for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, is primarily due to an increased level of pre-tax income for the quarter relative to the year-to-date result, as compared to the same quarter in the prior year.

The effective tax rates for the three months ended June 30, 2010 and 2009 was 16% and (19%), respectively.  The effective tax rate differs from the statutory rate for the three months ended June 30, 2010 due to a decrease in the overall forecasted effective tax rate for the year from the previous quarter, in conjunction with a positive pre-tax income for the current quarter as compared to prior quarters in the current year, and also a decrease in the liability related to an uncertain tax position upon the expiration of a statute of limitations. The effective tax rate differs from the statutory rate for the three months ended June 30, 2009 primarily due to the reversal of certain deductible temporary differences, which were fully offset by a valuation allowance, that were deductible for income tax purposes in the fiscal year ended September 30, 2009.

Nine months ended June 30, 2010 Compared to the Nine months ended June 30, 2009

Net sales. Net sales decreased $11.0 million, or 38.2%, to $17.8 million for the nine months ended June 30, 2010 from $28.8 million in the nine months ended June 30, 2009. For the nine months ended June 30, 2010, product sales decreased $8.8 million and EMD sales decreased $2.2 million from the same period in the prior year. The decrease in product sales was primarily driven by customer delays in delivery schedules for backlog orders and the decrease in EMD sales was primarily driven by a reduction in volume.

Cost of sales. Cost of sales decreased $5.3 million or 37.6%, to $8.8 million, or 49.4% of net sales in the nine months ended June 30, 2010 from $14.1 million, or 48.9% of net sales in the nine months ended June 30, 2009. The decrease was primarily driven by a decrease in variable production costs associated with the reduced year to date sales volume, resumed sales associated with the Eclipse E500 aircraft that had de minimis direct costs as discussed above and a continued focus on cost reduction.

Research and development. Research and development expense decreased $0.3 million or 8.0% to $3.8 million or 21.6% of net sales in the nine months ended June 30, 2010 from $4.2 million or 14.5% of net sales in the nine months ended June 30, 2009.  The decrease in research and development expense in the nine months ended June 30, 2010 was primarily due to a reduction in headcount.

Selling, general, and administrative. Selling, general and administrative expenses decreased $0.5 million, or 7.8%, to $6.0 million, or 33.5% of net sales in the nine months ended June 30, 2010 from $6.5 million or 22.5% of net sales in the nine months ended June 30, 2009. The decrease in selling, general and administrative expense in the nine months ended June 30, 2010 was primarily due to decreased legal and consultant fees and stock option compensation expenses, of $0.2 million and $0.1 million, respectively.

Interest income. Interest income was $120,000 in the nine months ended June 30, 2010 as compared to $361,000 in the nine months ended June 30, 2009. The decrease in interest income was primarily the result of our reduced average cash balance during the nine months ended June 30, 2010 as compared to the same period in the prior year as well as lower interest rates earned on invested cash during the nine months ended June 30, 2010 as compared to the same period in the prior year.

Interest expense. Interest expense was $2,000 in the nine months ended June 30, 2010 as compared to $75,000 in the nine months ended June 30, 2009. The reduction was primarily due to the redemption of the Industrial Development Bond during August, 2009.

Income tax expense (benefit). Income tax benefit for the nine months ended June 30, 2010 was $135,000 as compared to a benefit of $31,000 for the nine months ended June 30, 2009. The increase in the income tax benefit for the nine months ended June 30, 2010 was the result of the pre-tax loss for the nine months ended June 30, 2010 as compared to the pre-tax income from the same period in the prior year.  The income tax benefit in the nine months ended June 30, 2009 reflects the impact of net discrete tax benefits recognized in the period then ended, which offset the tax expense calculated on pre-tax income.

The effective tax rates for the nine months ended June 30, 2010 and 2009 was 21% and (1%), respectively.  The effective tax rate differs from the statutory rate for the nine months ended June 30, 2010 due to the forecasted net reversals of various deductible temporary differences that are fully offset by a valuation allowance, the forecasted utilization of research and experimentation tax credit carry-forwards, and the forecasted level of pre-tax income.  The effective tax rate differs from the statutory rate for the nine months ended June 30, 2009 primarily due to the reversal of certain deductible temporary differences, which were fully offset by a

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valuation allowance, that were deductible for income tax purposes in the fiscal year ended September 30, 2009.

Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:

	June 30,		September 30,
	2010		2009
Cash and cash equivalents	$	38,019,536	$	35,565,694
Accounts receivable, net	3,909,442		6,188,706
Current assets	48,361,679		48,792,791
Current liabilities	3,414,957		4,168,314
Deferred revenue	166,839		225,648
Total debt and other non-current liabilities (1)	775,951		918,072
Quick ratio (2)	12.28		10.02
Current ratio (3)	14.16		11.71

	Nine Months Ending June 30,
	2010			2009
Cash flow activites:
Net cash provided by operating activites	$	2,646,250		$	4,636,299
Net cash (used in) investing activites	(162,173		)	(244,127		)
Net cash (used in) financing activites	(30,236		)	(116,166		)

(1)Excludes deferred revenue

(2)Calculated as:  (Cash and cash equivalents and Accounts receivable, net) divided by Current liabilities

(3)Calculated as:  Current assets divided by Current liabilities

Our main source of liquidity has been cash flow from operating activities. We require cash principally to finance inventory, accounts receivable and payroll.

Operating activities

Cash provided by operating activities was $2.6 million for the nine months ended June 30, 2010 as compared to cash provided by operating activities of $4.6 million for the nine months ended June 30, 2009. The decrease was primarily due to a net loss of $0.5 million for the nine months ended June 30, 2010 versus net income of $4.4 million in the prior year.

The cash provided by operating activities during the nine months ended June 30, 2010 was primarily due to decreases in accounts receivable, pre-paid expenses and inventories of $2.3 million, $0.3 million and $0.3 million, respectively.

Investing activities

Cash used in investing activities was $162,000 and $244,000 for the nine months ended June 30, 2010 and 2009, respectively, which primarily consisted of the purchase of production and laboratory test equipment.

Financing activities

Net cash used in financing activities was $30,000 for the nine months ended June 30, 2010 which consisted of $22,000 for the repurchase of common stock and $8,000 for the repayment of capitalized lease obligations. Net cash used in financing activities of $116,000 for the nine months ended June 30, 2009 primarily consisted of $108,000 for the repurchase of common stock and $8,000 for the repayment of capitalized lease obligations.

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 construction of the Company’s new office and manufacturing facility.

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The loan was scheduled to mature in 2015 and carried an interest rate set by the remarketing agent that is consistent with 30-day tax-exempt commercial paper. The Company exercised its option to pay-down the outstanding balance during August, 2009.

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 expenditures will continue to increase in the foreseeable future. We believe our cash and cash equivalents 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 financings or other arrangements in order to support more rapid expansion of our business than we now anticipate either through acquisitions or organic growth. Further, we may need to 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. If additional funds are raised through the issuance of equity securities, dilution to existing shareholders may result. If insufficient funds are available, we may not be able to introduce new products or compete effectively in any of our markets, which could hurt our business.

Backlog

As of June 30, 2010 and September 30, 2009, our backlog was $39.2 million and $34.1 million, respectively. The $5.1 million increase in backlog was the result of $24.1 million in new business orders offset by $17.8 million of recognized revenues and $1.2 million of de-bookings. Air Data product backlog as of June 30, 2010 increased $0.1 million from September 30, 2009; while Flat Panel Display Systems backlog, as of June 30, 2010, increased $5.0 million from September 30, 2009.  To the extent new business orders do not continue to equal or exceed recognized revenue from the Company’s existing backlog, future operating results may be negatively impacted.

Backlog activity for the nine months ended June 30, 2010 (in thousands):

Balance at						Balance at
September 30,		Additional		Recognized		June 30,
2009		Bookings		in Revenue		2010
$	34,142	$	22,880	$	17,794	$	39,228

Backlog activity for the three months ended June 30, 2010 (in thousands):

Balance at						Balance at
March 31,		Additional		Recognized		June 30,
2010		Bookings		in Revenue		2010
$	35,038	$	12,004	$	7,814	$	39,228

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities (“SPEs”) or variable interest entities (“VIEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of June 30, 2010 and September 30, 2009, we were not involved with any unconsolidated SPEs or VIEs.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’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’s exposure to market risk for changes in interest rates relates to its cash equivalents. The Company’s cash equivalents consist of funds invested in money market accounts, which bear interest at a variable rate.  As the interest rates are variable, and we do not engage in hedging activities, a change in interest rates earned on cash equivalents would impact interest income and cash flows, but would not impact the fair market value of the related underlying instruments.  Assuming that the balances during the three and nine months ending June 30, 2010 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical 1% increase or decrease in our variable interest rates would have affected interest income by approximately $93,000 and $275,000, respectively, with a resulting impact on cash flows of approximately $93,000 and $275,000, for the three and nine months ended June 30, 2010 respectively.

Item 4. Controls and Procedures

(a)An evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15e under the Exchange Act as of June 30, 2010. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance 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 and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b)There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such controls that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.   Legal Proceedings

In the ordinary course of business, we are at times subject to various legal proceedings and claims. We do not believe any such matters that are currently pending will have a material adverse effect on our results of operations or financial position.

On January 17, 2007 the Company filed suit in the Court of Common Pleas for Delaware County, Pennsylvania against Strathman Associates, a former software consultant for IS&S, alleging that Strathman had improperly used IS&S trade secret and proprietary information in assisting J2 and Kollsman in developing the J2/Kollsman Air Data Computer. The case is ongoing.

Item 1A.  Risk Factors

There are no material changes to the risk factors described under Item 1A of our Form 10-K for the year ended September 30, 2009.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Stock repurchase program

On February 16, 2010, the Company’s Board of Directors extended a Common Stock repurchase program to acquire up to 1,000,000 shares of the Company’s outstanding Common Stock. Purchases of the stock were to be made from time to time, subject to market conditions and at prevailing market prices.  During the three months ended June 30, 2010 the Company made no purchases of Common Stock under the program.  During the nine months ended June 30, 2010 the Company purchased 5,200 shares of Common Stock under the program at a cost of $21,661, or an average market price of $4.17 per share.  The Company financed these purchases through available cash.  The following table sets forth the purchases made under this new plan for each month of the six months ended June 30, 2010:

				Total Number of	Number of
	Total			Shares Purchased as	Shares that May
	Number of	Average		Part of Publicly	Yet Be Purchased
	Shares	Price Paid		Announced Plans or	Under the
Period	Purchased	per Share		Programs	Program
January 2010	—	—		—	—
February 2010	4,100	$	4.16	4,100	995,900
March 2010	1,100	4.20		1,100	994,800
April 2010	—	—		—	—
May 2010	—	—		—	—
June 2010	—	—		—	—
	5,200	4.17		5,200

Item 3.	Defaults upon Senior Securities
	None
Item 4.	Removed and reserved
Item 5.	Other Information
	None

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Item 6. Exhibits

(a)	Exhibits
	3.1*	Amended and Restated Bylaws of Innovative Solutions and Support, Inc. as amended
	31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
	31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
	32.1†	Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith
†	Furnished herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INNOVATIVE SOLUTIONS AND SUPPORT, INC.
Date: August 5, 2010	By:	/s/ JOHN C. LONG
		JOHN C. LONG
		CHIEF FINANCIAL OFFICER

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EX-3.1

EXHIBIT 3.1

AMENDED AND RESTATED
BYLAWS
OF
INNOVATIVE SOLUTIONS AND SUPPORT, INC.

ARTICLE I. - OFFICE

Section 1-1.   Registered Office.   The registered office of the Corporation shall be located within the Commonwealth of Pennsylvania at such place as the Board of Directors (hereinafter referred to as the “Board of Directors” or the “Board”) shall determine from time to time.

ARTICLE II. - MEETINGS OF SHAREHOLDERS

Section 2-1.   Place of Meetings of Shareholders.   Meetings of shareholders shall be held at such places, within or without the Commonwealth of Pennsylvania, as may be fixed from time to time by the Board of Directors. If no such place is fixed by the Board of Directors, meetings of the shareholders shall be held at the registered office of the Corporation.

Section 2-2.   Annual Meeting of Shareholders.

(a)    Time.   A meeting of the shareholders of the Corporation shall be held in each calendar year, commencing with the year 2000, at such time as the Board of Directors may determine.

(b)   Election of Directors.   At such annual meeting, there shall be held an election of Directors.

(c)   Alternate Directors.   At any meeting at which shareholders may elect Directors, shareholders may elect an Alternate Director for each Director elected at such meeting by the affirmative vote of such shareholders as would be required to elect a Director.

Section 2-3.   Special Meetings of Shareholders.   Except as expressly required by law, special meetings of the shareholders may be called at any time only by:

(a)   the Chairman of the Board, if any, if such officer is serving as the chief executive officer of the Corporation; or

(b)   the Board of Directors.

Upon the written request of any person who has called a special meeting, under these Bylaws or applicable law, which request specifies the general nature of the business to be transacted at such meeting, it shall be the duty of the Secretary to fix the time and place of such meeting, which shall be held not less than 5 nor more than 60 days after the receipt of such request, and to give due notice thereof as required by Section 2-4 hereof. If the Secretary neglects or refuses to fix the time and place of such meeting, the person or persons calling the meeting may do so.

Section 2-4.   Notices of Meetings of Shareholders.   Written notice, complying with Article VI of these Bylaws, stating the place and time and, in the case of special meetings, the general nature of the business to be transacted at any meeting of the shareholders, shall be given to each shareholder of record entitled to vote at the meeting, except as provided in Section 1707 of the Pennsylvania Business Corporation Law of 1988, as amended (the “Pennsylvania BCL”), at least five days prior to the day named for the meeting, provided that notice shall be given at least ten days prior to the day named for a meeting to consider a fundamental change under Chapter 19 of the Pennsylvania BCL. Such notices may be given by, or at the direction of, the Secretary or other authorized person. If the Secretary or other authorized person neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so.

Section 2-5.   Quorum of and Action by Shareholders.

(a)   General Rule.   Except as provided in subsections (c), (d) and (e) of this Section 2-5, the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purpose of consideration and action on the

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matter. To the extent that a quorum is present with respect to consideration of any action or particular matter or matters but a quorum is not present as to any other matter or matters, consideration of an action on the matter or matters for which a quorum is present may occur and, after such consideration and action, the meeting may be adjourned for purposes of the consideration of and action on a matter or matters for which a quorum is not present. Unless the Pennsylvania BCL permits otherwise, this Section 2-5(a) may be modified only by a Bylaw amendment adopted by the shareholders.

(b)   Action by Shareholders.   Except as otherwise provided by law, whenever any corporate action is to be taken by vote of the shareholders of the Corporation at a duly organized meeting of shareholders, it shall be authorized upon receiving the affirmative vote of a majority of the votes properly cast at the meeting with respect to such matter and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes properly cast by the shareholders entitled to vote as a class. Unless the Pennsylvania BCL permits otherwise, this Section 2-5(b) may be modified only by a Bylaw amendment adopted by the shareholders.

(c)   Withdrawal.   The shareholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

(d)   Election of Directors at Adjourned Meetings.   In the case of any meeting called for the election of Directors, those shareholders who attend a meeting called for the election of Directors that has been previously adjourned for lack of a quorum (whether with respect to a particular matter or all matters to be considered and acted upon at such meeting), although less than a quorum as fixed in subsection (a), shall nevertheless constitute a quorum for the purpose of electing Directors.

(e)   Conduct of Other Business at Adjourned Meetings.   Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum (whether with respect to a particular matter or all matters to be considered and acted upon at such meeting), although less than a quorum as fixed in subsection (a), shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter.

Section 2-6.   Adjournments.

(a)   General Rule.   Any regular or special meeting of the shareholders, including one at which directors are to be elected, may be adjourned for such period as the shareholders present and entitled to vote shall direct.

(b)   Lack of Quorum.   If a meeting cannot be organized because a quorum has not attended, those present may, except as otherwise provided in this Section 2-6, adjourn the meeting to such time and place as they may determine.

(c)   Notice of an Adjourned Meeting.   When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the Board fixes a new record date for the adjourned meeting.

Section 2-7.   Voting List, Voting and Proxies.

(a)   Voting List.   The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof, except that, if the Corporation has 5,000 or more shareholders, in lieu of making the list, the Corporation may make the information therein available at the meeting by any other means.

(b)   Voting.   Except as otherwise specifically provided by law, all matters coming before the meeting shall be determined by a vote of shares. Such vote shall be taken by voice unless the presiding officer determines, or a shareholder demands, before the vote begins, that it be taken by ballot.

(c)   Proxies.   At all meetings of shareholders, shareholders entitled to vote may attend and vote either in person or by proxy. Every proxy shall be executed in writing by the shareholder or by such shareholder’s duly authorized attorney-in-fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest (as defined in Section 1759(d) of the Pennsylvania BCL), shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to

2

the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the Corporation.

(d)   Judges of Election.   In advance of any meeting of shareholders of the Corporation, the Board of Directors may appoint one or three Judges of Election, who need not be shareholders and who will have such duties as provided in Section 1765(a)(3) of the Pennsylvania BCL, to act at the meeting or any adjournment thereof. If one or three Judges of Election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint one or three Judges of Election at the meeting. In case any person appointed as a Judge of Election fails to appear or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer. A person who is a candidate for office to be filled at the meeting shall not act as a Judge of Election. Unless the Pennsylvania BCL permits otherwise, this Section 2-7(d) may be modified only by a Bylaw amendment adopted by the shareholders.

Section 2-8.   Participation in Meetings by Conference Telephone.   The Board may provide by resolution, or the presiding officer may permit, with respect to a particular meeting of shareholders that one or more persons may participate in that meeting of the shareholders, be counted for the purposes of determining a quorum and exercise all rights and privileges to which such person might be entitled were such person personally in attendance, including the right to vote, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Unless the Board so provides, or the presiding officer so permits, no person may participate in a meeting of the shareholders by means of conference telephone or similar communications equipment.

Section 2-9.   No Consents in Lieu of Meeting.   No action of the shareholders shall be taken by either unanimous or partial written consent or other consent in lieu of a meeting.

Section 2-10.   Business at Meetings of Shareholders.   Except as otherwise provided by law (including but not limited to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, or any successor provision thereto) or in these Bylaws, the business which shall be conducted at any meeting of the shareholders shall (a) have been specified in the written notice of the meeting (or any supplement thereto) given by the Corporation, (b) be brought before the meeting at the direction of the Board of Directors, (c) be brought before the meeting by the presiding officer of the meeting unless a majority of the Directors then in office object to such business being conducted at the meeting, or (d) in the case of an annual meeting of shareholders, have been specified in a written notice given to the Secretary of the Corporation, by or on behalf of any shareholder who shall have been a shareholder of record on the record date for such meeting and who shall continue to be entitled to vote thereat (the “Shareholder Notice”), in accordance with all of the following requirements:

(a)   Each Shareholder Notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of shareholders, not less than 120 days nor more than 150 days prior to the date of the Corporation’s proxy statement was released to shareholders in connection with the previous year’s annual meeting of shareholders, and (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first; and

(b)   Each such Shareholder Notice must set forth: (i) the name and address of the shareholder who intends to bring the business before the meeting; (ii) the general nature of the business which such shareholder seeks to bring before the meeting and, if a specific action is to be proposed, the text of the resolution or resolutions which the proposing shareholder proposes that the shareholders adopt; and (iii) a representation that the shareholder is a holder of record of the stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to bring the business specified in the notice before the meeting. The presiding officer of the meeting may, in such officer’s sole discretion, refuse to acknowledge any business proposed by a shareholder not made in compliance with the foregoing procedure.

(c)   Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2-10. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by this Section 2-10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 2-10, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as

3

amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 2-10 and any shareholder proposal not required to be considered by such rules need not be considered.

ARTICLE III. - BOARD OF DIRECTORS

Section 3-1.

(a)   General Powers.   Except as otherwise provided by law and these Bylaws, all powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Unless the Pennsylvania BCL permits otherwise, this Section 3-1(a) may be modified only by a Bylaw amendment adopted by the shareholders.

(b)   Number.   The number of members of the Board of Directors shall be the number of Directors serving at the time of adoption of this Section 3-1, or such other number as may thereafter from time to time (i) be determined by the Board of Directors, or (ii) be set forth in a notice of a meeting of shareholders called for the election of a full Board of Directors; provided, that if such notice contemplates a change in the size of the Board of Directors, such change shall take effect as of the time the election called for by the notice is held.

(c)   Classified Board of Directors.   The Directors shall be classified, with respect to the duration of the term for which they severally hold office, into three classes (denominated Class I, Class II and Class III) as nearly equal in number as reasonably possible. The Board of Directors shall increase or decrease the number of Directors in one or more classes as may be appropriate whenever it increases or decreases the number of Directors in order to ensure that the three classes shall be as nearly equal in number as reasonably as possible. The current term of office of the Class I Directors shall expire at the annual meeting of shareholders in 2013, the current term of office of the Class II Directors shall expire at the annual meeting of shareholders in 2011 and the current term of office of the Class III Directors shall expire at the annual meeting of shareholders in 2012. At the annual meeting of shareholders, subject to Section 3-1(d) hereof, the successors of the class of Directors whose term expires at the meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election.  When a Director is elected, such director’s class shall be identified.

(d)   Term; Vacancies.   Each Director shall hold office until the expiration of the term for which he was selected and until his successor has been selected and qualified or until his earlier death, resignation or removal. Any vacancies on the Board of Directors, including vacancies resulting from an increase in the number of Directors, may be filled by a majority vote of the remaining members of the Board (though less than a quorum) or by a sole remaining Director or by the shareholders. A director elected by the Board of Directors to fill a vacancy on the Board shall be elected for an initial term expiring at the next annual meeting of shareholders, regardless of the class to which such director is elected.  If that director is re-elected by the shareholders at such annual meeting, the director shall then serve for a term expiring at the annual meeting when the term of a Director in such class would naturally expire.

(e)   Qualification.   A Director must be a natural person at least 18 years of age.

Section 3-2.   Place of Meetings.   Meetings of the Board of Directors may be held at such place within or without the Commonwealth of Pennsylvania as a majority of the Directors may determine from time to time or as may be designated in the notice of the meeting.

Section 3-3.   Regular Meetings.   A regular meeting of the Board of Directors shall be held annually, immediately following the annual meeting of the shareholders, at the place where such meeting of the shareholders is held or at such other place and time as a majority of the Directors in office after the annual meeting of shareholders may designate. At such meeting, the Board of Directors shall elect officers of the Corporation. In addition to such regular meeting, the Board of Directors shall have the power to fix by resolution the place and time of other regular meetings of the Board.

Section 3-4.   Special Meetings.   Special meetings of the Board of Directors shall be held whenever ordered by the Chairman of the Board, if any, by the President, by a majority of the executive committee of the Board, if any, or by a majority of the Directors in office.

Section 3-5.   Participation in Meetings by Conference Telephone.   Any Director may participate in any meeting of the Board of Directors or of any committee (provided such Director is otherwise entitled to participate), be counted for the purpose of determining a quorum thereof and exercise all rights and privileges to which such Director might be entitled were he or she personally

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in attendance, including the right to vote, or any other rights attendant to presence in person at such meeting, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.

Section 3-6.   Notices of Meetings of Board of Directors.

(a)   Regular Meetings.   No notice shall be required to be given of any regular meeting, unless the same is held at other than the place or time for holding such meeting as fixed in accordance with Section 3-3 of these Bylaws, in which event five days’ notice shall be given of the place and time of such meeting complying with Article VI of these Bylaws.

(b)   Special Meetings.   Written notice stating the place and time of any special meeting of the Board of Directors shall be sufficient if given at least one day, as provided in Article VI, in advance of the time fixed for the meeting.

Section 3-7.   Quorum; Action by the Board of Directors.   A majority of the Directors in office shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the Directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors. If there is no quorum present at a duly convened meeting of the Board of Directors, the majority of those present may adjourn the meeting from time to time and place to place.

Section 3-8.   Action by Unanimous Consent of the Board of Directors.   Any action required or permitted to be taken at a meeting of the Directors, or of the members of any committee of the Board of Directors, may be taken without a meeting if, prior or subsequent to the action, a written consent or consents thereto by all of the Directors in office (or all of the members of the committee with respect to committee action) is filed with the Secretary of the Corporation. In addition to other means of filing with the Secretary, insertion of such consent in the minute book of the Corporation shall be deemed filing with the Secretary regardless of whether the Secretary or some other authorized person has actual possession of the minute book. Written consents by all of the directors or committee members, as the case may be, executed pursuant to this Section 3-8 may be executed in any number of counterparts and shall be deemed effective as of the date set forth therein.

Section 3-9.   Committees.

(a)   Establishment and Powers.   The Board of Directors of the Corporation may, by resolution adopted by a majority of the Directors in office, establish one or more committees to consist of one or more Directors of the Corporation. Any committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to the following:

(i)   The submission to shareholders of any action requiring approval of shareholders under the Pennsylvania BCL.

(ii)   The creation or filling of vacancies in the Board of Directors.

(iii)   The adoption, amendment or repeal of the Bylaws.

(iv)   The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors.

(v)   Action on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the Board of Directors.

(b)   Alternate Members.   The Board of Directors may designate one or more Directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purpose of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at a meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of the absent or disqualified member.

(c)   Term.   Each committee of the Board of Directors shall serve at the pleasure of the Board of Directors.

(d)   Status of Committee Action.   The term “Board of Directors” or “Board,” when used in any provision of these Bylaws relating to the organization or procedures of or the manner of taking action by the Board of Directors, shall be

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construed to include and refer to any executive or other committee of the Board of Directors. Any provision of these Bylaws relating or referring to action to be taken by the Board of Directors or the procedure required therefor shall be satisfied by the taking of corresponding action by a committee of the Board of Directors to the extent authority to take the action has been delegated to the committee pursuant to this Section.

Section 3-10.   Nominations.   Notwithstanding the provisions of Section 2-10 of these Bylaws (dealing with business at meetings of shareholders), nominations for the election of Directors may be made by only the Board of Directors, a committee appointed by the Board of Directors or by any shareholder of record entitled to vote in the election of Directors who is a shareholder at the record date of the meeting and also on the date of the meeting at which Directors are to be elected; provided, however, that with respect to a nomination made by a shareholder, such shareholder must provide timely written notice to the President of the Corporation in accordance with the following requirements, except as otherwise provided by law:

(a)   To be timely, a shareholder’s notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation addressed to the attention of the President (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of shareholders, not less than 120 days nor more than 150 days prior to the date the Corporation’s proxy statement was released to shareholders in connection with the previous year’s annual meeting of shareholders, and (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, or in the case of a special meeting of shareholders called for the purpose of electing Directors, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first; and

(b)   Each such written notice must set forth: (i) the name and address of the shareholder who intends to make the nomination; (ii) the name and address of the person or persons to be nominated; (iii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (vi) the written consent of each nominee to serve as a Director of the Corporation if so elected. The presiding officer of the meeting may refuse, in such officer’s sole discretion, to acknowledge the nomination of any person as not made in compliance with the foregoing procedure.

(c)    No person shall be eligible to serve as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3-10. The Chairman of the meeting shall, as the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 3-10, and if he should do determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3-10, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3-10 and any shareholder proposal not required to be considered by such rules need not be considered.

Section 3-11.   Alternate Directors.   In the absence of a Director from any meeting of the Board of Directors, the Alternate Director of such Director, elected pursuant to Section 2-2(c) of these Bylaws, may attend the meeting or execute written consent to exercise all powers, rights and privileges of the absent Director. For the purposes of these Bylaws, the term “Directors” shall include the Alternate Directors except that an Alternate Director shall be entitled to exercise the powers, rights and privileges of a Director only upon the absence of the Director whom the Alternate Director represents.

Section 3-12.   Payments to Directors.   Directors may be reimbursed for the expenses of attending Board meetings and committee meetings and may be paid a fixed sum for attendance at each meeting or such other compensation for their services as may, from time to time, be fixed by the Board of Directors. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 3-13.   Distributions.   The Directors may, to the extent permitted by law, authorize and the Corporation may make distributions from time to time.

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ARTICLE IV. - OFFICERS

Section 4-1.   Election and Office.   The Corporation shall have a President, a Secretary and a Treasurer who shall be elected by the Board of Directors. The Board of Directors may elect as additional officers a Chairman of the Board, one or more Vice Chairmen of the Board, one or more Vice Presidents, a Chief Financial Officer, and one or more other officers or assistant officers. Any number of offices may be held by the same person. The President and the Secretary shall be natural persons of the age of 18 years or older. The Treasurer may be a corporation, but if a natural person shall be of the age of 18 years or older.

Section 4-2.   Term.   The officers and assistant officers shall each serve at the pleasure of the Board of Directors until the first meeting of the Board of Directors following the next annual meeting of shareholders, unless removed from office by the Board of Directors during their respective tenures. Officers may, but need not, be Directors.

Section 4-3.   Powers and Duties of the President.   Unless otherwise determined by the Board of Directors, the President shall have the usual duties of an executive officer with general supervision over and direction of the affairs of the Corporation. The President shall be the chief executive officer of the Corporation unless the Chairman of the Board is serving as chief executive officer, in which event the President shall be chief operating officer of the Corporation. In the exercise of these duties and subject to the actions and directions of the Board of Directors, the President may appoint, suspend, and discharge employees, agents and assistant officers, fix the compensation of all officers and assistant officers, shall preside at all meetings of the shareholders at which the President shall be present and, unless there is a Chairman of the Board, shall preside at all meetings of the Board of Directors. The President shall also do and perform such other duties as from time to time may be assigned to the President by the Board of Directors.

Unless otherwise determined by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the shareholders of any corporation in which this Corporation may hold stock and, at any such meeting, shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Corporation might have possessed and exercised. The President shall also have the right to delegate such power.

Section 4-4.   Powers and Duties of the Secretary.   Unless otherwise determined by the Board of Directors, the Secretary shall be responsible for the keeping of the minutes of all meetings of the Board of Directors and the shareholders, in books provided for that purpose, and for the giving and serving of all notices for the Corporation. The Secretary shall perform all other duties ordinarily incident to the office of Secretary and shall have such other powers and perform such other duties as may be assigned to the Secretary by the Board of Directors. The minute books of the Corporation may be held by a person other than the Secretary.

Section 4-5.   Powers and Duties of the Treasurer.   Unless otherwise determined by the Board of Directors, the Treasurer shall have charge of all the funds and securities of the Corporation which may come into such officer’s hands. When necessary or proper, unless otherwise determined by the Board of Directors, the Treasurer shall endorse for collection on behalf of the Corporation checks, notes and other obligations, and shall deposit the same to the credit of the Corporation to such banks or depositories as the Board of Directors may designate and may sign all receipts and vouchers for payments made to the Corporation. The Treasurer shall sign all checks made by the Corporation, except when the Board of Directors shall otherwise direct. The Treasurer shall be responsible for the regular entry in books of the Corporation to be kept for such purpose of a full and accurate account of all funds and securities received and paid by the Treasurer on account of the Corporation. Whenever required by the Board of Directors, the Treasurer shall render a statement of the financial condition of the Corporation. The Treasurer shall have such other powers and shall perform the duties as may be assigned to such officer from time to time by the Board of Directors. The Treasurer shall give such bond, if any, for the faithful performance of the duties of such office as shall be required by the Board of Directors. If the Corporation has a Chief Financial Officer, the Chief Financial Officer shall have such power and authority as determined by the Board of Directors, including without limitation, the powers provided herein of the Treasurer.

Section 4-6.   Powers and Duties of the Chairman of the Board.   Unless otherwise determined by the Board of Directors, the Chairman of the Board, if any, shall preside at all meetings of Directors. The Chairman of the Board shall have such other powers and perform such further duties as may be assigned to such officer by the Board of Directors, including, without limitation, acting as chief executive officer of the Corporation. To be eligible to serve, the Chairman of the Board must be a Director of the Corporation.

Section 4-7.   Powers and Duties of Vice Chairmen of the Board, Vice Presidents and Assistant Officers.   Unless otherwise determined by the Board of Directors, each Vice Chairman, Vice President and each assistant officer shall have the powers and perform the duties of his or her respective superior officer. Vice Presidents and assistant officers shall have such rank as may be designated by the Board of Directors. Vice Presidents may be designated as having responsibility for a specific area of the Corporation’s affairs, in which event such Vice President shall be superior to the other Vice Presidents in relation to matters within his or her area. The President shall be the superior officer of the Vice Presidents. The Chairman of the Board shall be the superior officer of the Vice Chairmen. The Treasurer and Secretary shall be the superior officers of the Assistant Treasurers and Assistant Secretaries, respectively.

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Section 4-8.   Delegation of Office.   The Board of Directors may delegate the powers or duties of any officer of the Corporation to any other person from time to time.

Section 4-9.   Vacancies.   The Board of Directors shall have the power to fill any vacancies in any office occurring for any reason.

ARTICLE V. - CAPITAL STOCK

Section 5-1.   Share Certificates.

(a)   Execution.   Except as otherwise provided in Section 5-5, the shares of the Corporation shall be represented by certificates. Unless otherwise provided by the Board of Directors, every share certificate shall be signed by two officers and sealed with the corporate seal, which may be a facsimile, engraved or printed, but where such certificate is signed by a transfer agent or a registrar, the signature of any corporate officer upon such certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. The provisions of this Section 5-1 shall be subject to any inconsistent or contrary agreement at the time between the Corporation and any transfer agent or registrar.

(b)   Designations, etc.   To the extent the Corporation is authorized to issue shares of more than one class or series, every certificate shall set forth upon the face or back of the certificate (or shall state on the face or back of the certificate that the Corporation will furnish to any shareholder upon request and without charge) a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the Board of Directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the  classes and series of shares of the Corporation.

(c)   Fractional Shares.   Except as otherwise determined by the Board of Directors, shares or certificates therefor may be issued as fractional shares for shares held by any dividend reinvestment plan or employee benefit plan created or approved by the Corporation’s Board of Directors, but not by any other person.

Section 5-2.   Transfer of Shares.   Transfer of certificated shares shall be made on the books of the Corporation only upon surrender of the share certificate, duly endorsed or with duly executed stock powers attached and otherwise in proper form for transfer, which certificate shall be cancelled at the time of the transfer. In the event the Board authorizes uncertificated shares, as permitted by the Corporation’s Articles of Incorporation, the Board shall adopt alternative procedures for registration of transfers of such uncertificated shares.

Section 5-3.   Determination of Shareholders of Record.

(a)   Fixing Record Date.   The Board of Directors of the Corporation may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting.

(b)   Determination when No Record Date Fixed.   If a record date is not fixed:

(i)   The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held.

(ii)   The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

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(c)   Certification by Nominee.   The Board of Directors may adopt a procedure whereby a shareholder of the Corporation may certify in writing to the Corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. The resolution of the Board of Directors may set forth:

(i)   the classification of shareholder who may certify;

(ii)   the purpose or purposes for which the certification may be made;

(iii)   the form of certification and information to be contained therein;

(iv)   if the certification is with respect to a record date, the time after the record date within which the certification must be received by the Corporation; and

(v)   such other provisions with respect to the procedure as are deemed necessary or desirable.

Upon receipt by the Corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.

Section 5-4.   Lost Share Certificates.   Unless waived in whole or in part by the Board of Directors, any person requesting the issuance of a new certificate in lieu of an alleged lost, destroyed, mislaid or wrongfully taken certificate shall (a) give to the Corporation his or her bond of indemnity with an acceptable surety, and (b) satisfy such other requirements as may be imposed by the Corporation. Thereupon, a new share certificate shall be issued to the registered owner or his or her assigns in lieu of the alleged lost, destroyed, mislaid or wrongfully taken certificate, provided that the request therefor and issuance thereof have been made before the Corporation has notice that such shares have been acquired by a bona fide purchaser.

Section 5-5.  Uncertificated Shares.  Notwithstanding any other provision in these Bylaws, shares of the capital stock of the Corporation may be uncertificated, as provided under Section 1528(f) of the Pennsylvania Business Corporation Law.  The Corporation may adopt a system of issuance, recordation and transfer of its shares by electronic or other means not involving any issuance of certificates, including provisions for notice to purchasers in substitution for any required statements or certificates, and as may be required by applicable law, which system has been approved by the Securities and Exchange Commission.  Any system so adopted shall not become effective as to issued and outstanding certificated securities until the certificates therefore have been surrendered to the Corporation.  Uncertificated shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holder’s attorney duly authorized in writing, upon proper instructions from the holder of the uncertificated shares.  In the event of such transfer of uncertificated shares, it shall be the duty of the Corporation to evidence the issuance of uncertificated shares to the person entitled thereto, and record the transaction on its books.

ARTICLE VI. - NOTICES - COMPUTING TIME PERIODS

Section 6-1.   Contents of Notice.   Whenever any notice of a meeting is required to be given pursuant to these Bylaws, the Corporation’s Articles of Incorporation (the “Articles”) or otherwise, the notice shall specify: (a) the place, date and time of the meeting; (b) in the case of a special meeting of shareholders or where otherwise required by law or the Bylaws, the general nature of the business to be transacted at such meeting; and (c) any other information required by law.

Section 6-2.   Method of Notice.   Whenever written notice is required to be given to any person under the provisions of the Articles or these Bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to such person’s address (or to such person’s telex, TWX, telecopier or telephone number) appearing on the books of the Corporation or, in the case of Directors, supplied by such Director to the Corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. Except as otherwise provided herein, or as otherwise directed by the Board of Directors, notices of meetings may be given by, or at the direction of, the Secretary.

Section 6-3.   Computing Time Periods.

(a)   Days to be Counted.   In computing the number of days for purposes of these Bylaws, all days shall be counted, including Saturdays, Sundays or a holiday on which national banks are or may elect to be closed (“Holiday”); provided,

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however, that if the final day of any time period falls on a Saturday, Sunday or Holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or Holiday. In computing the number of days for the purpose of giving notice of any meeting, the date upon which the notice is given shall be counted but the day set for the meeting shall not be counted.

(b)   One Day Notice.   In any case where only one day’s notice is being given, notice must be given at least 24 hours in advance of the date and time specified for the meeting in question, by delivery in person, telephone, telex, TWX, facsimile or similar means of communication.

Section 6-4.   Waiver of Notice.   Whenever any notice is required to be given by law or the Articles or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by law or the next sentence, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened.

Section 6-5.   Modification of Proposal Contained in Notice.   Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Pennsylvania BCL or the Articles or these Bylaws, the meeting considering the resolution may, without further notice, adopt it with such clarifying or other amendments as do not enlarge its original purpose.

Section 6-6.   Bulk Mail.   If the Corporation has more than 30 shareholders, notice of any regular or special meeting of the shareholders, or any other notice required by the Pennsylvania BCL or by the Articles of these Bylaws to be given to all shareholders or to all holders of a class or a series of shares, may be given by any class of post-paid mail if the notice is deposited in the United States mail at least 20 days prior to the day named for the meeting or any corporate or shareholder action specified in the notice.

Section 6-7.   Shareholder without Forwarding Addresses.   Notice or other communications need not be sent to any shareholder with whom the Corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address.  Whenever the shareholder provides the Corporation with a current address, the Corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders.

ARTICLE VII. - LIMITATION OF DIRECTORS’ LIABILITY AND
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS

Section 7-1.   Limitation of Directors’ Liability.   No Director of the Corporation shall be personally liable for monetary damages as such for any action taken or any failure to take any action unless: (a) the Director has breached or failed to perform the duties of his or her office under the Pennsylvania BCL, and (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness; provided, however, that the provisions of this Section shall not apply to the responsibility or liability of a Director pursuant to any criminal statute, or to the liability of a Director for the payment of taxes pursuant to local, Pennsylvania or federal law.

Section 7-2.   Indemnification and Insurance.

(a)   Indemnification of Directors and Officers.

(i)   Each Indemnitee (as defined below) shall be indemnified and held harmless by the Corporation for all actions taken by him or her and for all failures to take action (regardless of the date of any such action or failure to take action) to the fullest extent permitted by Pennsylvania law against all expense, liability and loss (including without limitation attorneys fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement) reasonably incurred by or imposed upon the Indemnitee in connection with any Proceeding (as defined below). No indemnification pursuant to this Section shall be made, however, in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

(ii)   The right to indemnification provided in this Section shall include the right to have the expenses incurred by the Indemnitee in defending any Proceeding paid by the Corporation in advance of the final disposition of the Proceeding to the fullest extent permitted by Pennsylvania law; provided that, if Pennsylvania law continues

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so to require, the payment of such expenses incurred by the Indemnitee in advance of the final disposition of a Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of the Indemnitee, to repay all amounts so advanced without interest if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified under this Section or otherwise.

(iii)   Indemnification pursuant to this Section shall continue as to an Indemnitee who has ceased to be a Director or officer and shall inure to the benefit of his or her heirs, executors and administrators.

(iv)   For purposes of this Article, (A) “Indemnitee” shall mean each Director or officer of the Corporation who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any Proceeding, by reason of the fact that he or she is or was a Director or officer of the Corporation or is or was serving in any capacity at the request or for the benefit of the Corporation as a director, officer, employee, agent, partner, or fiduciary of, or in any other capacity for, another corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise; and (B) “Proceeding” shall mean any threatened, pending or completed action, suit or proceeding (including without limitation an action, suit or proceeding by or in the right of the Corporation), whether civil, criminal, administrative, investigative or through arbitration.

(b)   Indemnification of Employees and Other Persons.   The Corporation may, by action of its Board of Directors and to the extent provided in such action, indemnify employees and other persons as though they were Indemnitees. To the extent that an employee or agent of the Corporation has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, the Corporation shall indemnify such person against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

(c)   Non-Exclusivity of Rights.   The rights to indemnification and to the advancement of expenses provided in this Article shall not be exclusive of any other rights that any person may have or hereafter acquire under any statute, provision of the Articles or Bylaws, agreement, vote of shareholders or Directors, or otherwise.

(d)   Insurance.   The Corporation may purchase and maintain insurance, at its expense, for the benefit of any person on behalf of whom insurance is permitted to be purchased by Pennsylvania law against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person under Pennsylvania or other law. The Corporation may also purchase and maintain insurance to insure its indemnification obligations whether arising hereunder or otherwise.

(e)   Fund For Payment of Expenses.   The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise may secure in any manner its indemnification obligations, whether arising hereunder, under the Articles, by agreement, vote of shareholders or Directors, or otherwise.

Section 7-3.   Amendment.   The provisions of this Article VII relating to the limitation of Directors’ liability, to indemnification and to the advancement of expenses shall constitute a contract between the Corporation and each of its Directors and officers which may be modified as to any Director or officer only with that person’s consent or as specifically provided in this Section. Notwithstanding any other provision of these Bylaws relating to their amendment generally, any repeal or amendment of this Article VII which is adverse to any Director or officer shall apply to such Director or officer only on a prospective basis, and shall not reduce any limitation on the personal liability of a Director of the Corporation, or limit the rights of an Indemnitee to indemnification or to the advancement of expenses with respect to any action or failure to act occurring prior to the time of such repeal or amendment. Notwithstanding any other provision of these Bylaws, no repeal or amendment of these Bylaws shall affect any or all of this Article so as either to reduce the limitation of Directors’ liability or limit indemnification or the advancement of expenses in any manner unless adopted by (a) the unanimous vote of the Directors of the Corporation then serving, or (b) the affirmative vote of shareholders entitled to cast not less than a majority of the votes that all shareholders are entitled to cast in the election of Directors; provided that no such amendment shall have retroactive effect inconsistent with the preceding sentence.

Section 7-4.   Changes in Pennsylvania Law.   References in this Article VII to Pennsylvania law or to any provision thereof shall be to such law as it existed on the date this Article VII was adopted or as such law thereafter may be changed; provided that (a) in the case of any change which expands the liability of Directors or limits the indemnification rights or the rights to advancement of expenses which the Corporation may provide, the rights to limited liability, to indemnification and to the advancement of expenses provided in this Article shall continue as theretofore to the extent permitted by law; and (b) if such change permits the Corporation without the requirement of any further action by shareholders or Directors to limit further the liability of Directors (or limit the liability of officers) or to provide broader indemnification rights or rights to the advancement of expenses than the Corporation was permitted to provide prior to such change, then liability thereupon shall be so limited and the rights to indemnification and the advancement of expenses shall be so broadened to the extent permitted by law.

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ARTICLE VIII. - FISCAL YEAR

Section 8-1.   Determination of Fiscal Year.   The Board of Directors shall have the power by resolution to fix the fiscal year of the Corporation. If the Board of Directors shall fail to do so, the President shall fix the fiscal year.

ARTICLE IX. - AMENDMENTS

Section 9-1.   Except as otherwise expressly provided in Section 7-3:

(a)   Shareholders.   The shareholders entitled to vote thereon shall have the power to alter, amend, or repeal these Bylaws, by the vote of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast thereon, at any regular or special meeting, duly convened after notice to the shareholders of such purpose. In the case of a meeting of shareholders to amend or repeal these Bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the Bylaws.

(b)   Board of Directors.   The Board of Directors (but not a committee thereof), by a vote of the majority of Directors then in office, shall have the power to alter, amend, and repeal these Bylaws, regardless of whether the shareholders have previously adopted the Bylaw being amended or repealed, subject to the power of the shareholders to change such action, provided that the Board of Directors shall not have the power to amend these Bylaws on any subject that is expressly committed to the shareholders by the express terms hereof, by Section 1504 of the Pennsylvania BCL or otherwise.

ARTICLE X. - INTERPRETATION OF BYLAWS - SEPARABILITY

Section 10-1.   Interpretation.   All words, terms and provisions of these Bylaws shall be interpreted and defined by and in accordance with the Pennsylvania BCL. If any provision of these Bylaws shall be inconsistent with any provision of the Articles, the provision of the Articles shall prevail. Where any provision of these Bylaws refers to a rule or process as set forth in these Bylaws, the reference shall be construed to include and be satisfied by any rule or process on the same subject set forth in the Articles.

Section 10-2.   Separability.   The provisions of these Bylaws are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

ARTICLE XI. - DETERMINATIONS BY THE BOARD

Section 11-1.   Effect of Board Determinations.   Any determination involving interpretation or application of these Bylaws made in good faith by the Board of Directors shall be final, binding and conclusive on all parties in interest.

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

1.I have reviewed this quarterly report on Form 10-Q of Innovative Solutions and Support, Inc.

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures 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 report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)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; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent 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 officer 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 the 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.

	By:	/s/ GEOFFREY S.M. HEDRICK
Date: August 5, 2010		GEOFFREY S.M. HEDRICK
		CHIEF EXECUTIVE OFFICER

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, John C. Long, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Innovative Solutions and Support, Inc.

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 officer 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))  and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures 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 report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)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; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent 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 officer 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 the 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.

	By:	/s/ JOHN C. LONG
Date: August 5, 2010		JOHN C. LONG
		CHIEF FINANCIAL OFFICER

1

EX-32.1

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 Quarterly Report of Innovative Solutions and Support, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2010 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. §1350, as adopted pursuant to §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 result of operations of the Company.

By:	/s/ GEOFFREY S.M. HEDRICK
	GEOFFREY S.M. HEDRICK
	CHIEF EXECUTIVE OFFICER
	/s/ JOHN C. LONG
	JOHN C. LONG
	CHIEF FINANCIAL OFFICER
August 5, 2010

1