10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

Commission File No. 33-18978

TEL-INSTRUMENT ELECTRONICS CORP

(Exact name of Registrant as specified in its charter)

New Jersey	22-1441806
(State of incorporation)	(IRS Employer Identification Number)
728 Garden Street Carlstadt, New  Jersey	07072
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number, including area code:   (201) 933-1600

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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 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 x     No o

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

Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date:   2,648,215 shares of Common stock, $.10 par value as of August 17, 2011.

TEL-INSTRUMENT ELECTRONICS CORPORATION

TABLE OF CONTENTS

		PAGE
Part I – Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets June 30, 2011 and March 31, 2011	3
	Condensed Consolidated Statements of Operations - Three Months Ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows - Three Months Ended June 30, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of the Results of Operations and Financial Condition	15
Item 4.	Controls and Procedures	21
Part II – Other Information
Item 1.	Legal Proceedings	22
Item 2.	Unregistered sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
Signatures		23

Item 1.            Financial Statements

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2011			March 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	715,323			123,955
Accounts receivable, net		1,714,744			2,585,619
Unbilled government receivables		1,466,623			1,466,623
Inventories, net		2,520,492			2,970,378
Prepaid expenses and other		101,241			70,970
Deferred debt expense		108,321			108,321
Deferred income tax asset		1,105,802			1,131,175
Total current assets		7,732,546			8,457,041
Equipment and leasehold improvements, net		300,813			330,694
Deferred debt expenses – long-term		346,025			373,105
Deferred income tax asset – non-current		1,461,664			1,461,664
Other assets		52,886			35,235
Total assets	$	9,893,934		$	10,657,739
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion long-term debt		367,859			282,798
Capital lease obligations		7,353			15,685
Accounts payable		730,260			1,598,679
Progress billings		-			424,202
Deferred revenues – current portion		18,450			28,382
Accrued payroll, vacation pay and payroll taxes		444,357			445,738
Accrued expenses		1,451,387			1,287,034
Total current liabilities		3,019,666			4,082,518
Subordinated notes payable-related parties, net of debt discount		250,000			250,000
Deferred revenues		12,037			15,381
Warranty Liability		534,723			366,137
Long-term debt, net of debt discount		1,907,449			1,979,114
Total liabilities		5,723,875			6,693,150
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,648,215 and           2,646,215 issued and outstanding as of June 30,           2011 and March 31, 2011, respectively		264,821			264,621
Additional paid-in capital		5,740,952			5,711,531
Accumulated deficit		(1,835,714	)		(2,011,563	)
Total stockholders' equity		4,170,059			3,964,589
Total liabilities and stockholders' equity	$	9,893,934		$	10,657,739

See accompanying notes to condensed consolidated financial statements.

3

TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	June 30, 2011			June 30, 2010
Net sales	$	3,990,211		$	2,455,280
Cost of sales		2,128,580			1,372,900
Gross margin		1,861,631			1,082,380
Operating expenses:
Selling, general and administrative		798,822			758,044
Engineering, research and development		849,038			757,346
Total operating expenses		1,647,860			1,515,390
Income (loss) from operations		213,771			(433,010	)
Other income (expense):
Amortization of debt discount		(13,395	)		(5,769	)
Amortization of debt expense		(27,080	)		-
Change in fair value of common stock warrants		(168,586	)		-
Gain on sale of capital asset		-			3,600
Proceeds from life insurance policy		300,029			-
Interest income		93			47
Interest expense		(102,694	)		(23,505	)
Income (loss) before income taxes		202,138			(458,637	)
Income tax provision (benefit)		26,289			(183,225	)
Net Income (loss)	$	175,849		$	(275,412	)
Net Income (loss) per share:
Basic income (loss) per common share	$	0.07		$	(0.11	)
Diluted income (loss) per common share	$	0.06		$	(0.11	)
Weighted average shares outstanding:
Basic		2,647,138			2,615,625
Diluted		2,731,749			2,615,625

See accompanying notes to condensed consolidated financial statements.

4

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months ended
	June 30, 2011June 30, 2010
Cash flows from operating activities:
Net income (loss)	$	175,849		$	(275,412	)
Adjustments to reconcile net loss to net     cash used in operating activities:
Deferred income taxes		25,373			(185,940	)
Depreciation and amortization		56,961			42,310
Provision for inventory obsolescence		10,000			-
Gain on sale of asset		-			(3,600	)
Amortization of debt discount		13,396			5,769
Increase in cash surrender value of life insurance		2,011			-
Gain on proceeds from life insurance policy		(300,029	)		-
Change in fair value of common stock warrant		168,586			-
Non-cash stock-based compensation		24,231			23,665
Changes in assets and liabilities:
Decrease in accounts receivable		870,875			96,358
Decrease (increase) in inventories		439,886			(119,697	)
Increase in prepaid expenses & other		(3,569	)		(2,789	)
Increase in other assets		(32,316	)		(20,278	)
Decrease in accounts payable		(868,419	)		(12,501	)
(Decrease) increase in accrued payroll, vacation pay and payroll taxes		(1,381	)		65,486
Decrease in deferred revenues		(13,276	)		(22,378	)
(Decrease) increase in progress billings		(424,202	)		450,694
Increase (decrease) in accrued expenses		164,353			(133,095	)
Net cash provided by (used in) operating activities		308,329			(91,408	)
Cash flows from investing activities:
Proceeds from the sale of capital asset		-			3,600
Purchases of equipment		-			(86,801	)
Net cash used in investing activities		-			(83,201	)
Cash flows from financing activities:
Proceeds from the exercise of stock options		5,390			6,075
Repayment of capitalized lease obligations		(8,332	)		-
Proceeds from borrowings from line of credit		-			150,000
Proceeds from life insurance policy		285,981			-
Net cash provided by financing activities		283,039			156,075
Net increase (decrease) in cash and cash equivalents		591,368			(18,534	)
Cash and cash equivalents at beginning of period		123,955			173,048
Cash and cash equivalents at end of period	$	715,323		$	154,514
Taxes paid	$	-		$	-
Interest paid	$	87,192		$	9,269

See accompanying notes to condensed consolidated financial statements.

5

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1                      Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2011, the results of operations for the three months ended June 30, 2011 and June 30, 2010, and statements of cash flows for the three months ended June 30, 2011 and June 30, 2010.  These results are not necessarily indicative of the results to be expected for the full year.

The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2011 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Note 2                     Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)

Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. In July 2011, the Company secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.  (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.

Note 3                     Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	June 30, 2011			March 31, 2011
Government	$	1,281,152		$	2,344,438
Commercial		470,262			277,851
Less: Allowance for doubtful accounts		(36,670	)		(36,670	)
	$	1,714,744		$	2,585,619

6

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 4                     Inventories, net

Inventories consist of:

	June 30, 2011			March 31, 2011
Purchased parts	$	1,693,513		$	2,119,957
Work-in-process		1,224,968			1,184,812
Finished goods		57,011			110,609
Less: Inventory reserve		(455,000	)		(445,000	)
	$	2,520,492		$	2,970,378

Note 5                      Earnings (Loss) Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the period ended June 30, 2010 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended		Three Months Ended
	June 30, 2011		June 30, 2010
Basic net loss per share computation:
Net Income (loss) attributable to common stockholders	$	$175,849	$	(275,412	)
Weighted-average common shares outstanding		2,647,138		2,615,625
Basic net income (loss) per share attributable to common stockholders	$	0.07	$	(0.11	)
Diluted net loss per share computation
Net Income (loss) attributable to common stockholders	$	$175,849	$	(275,412	)
Weighted-average common shares outstanding		2,647,138		2,615,625
Incremental shares attributable to the assumed exercise of outstanding stock options		84,611		-
Total adjusted weighted-average shares		2,731,749		2,615,625
Diluted net income (loss) per share attributable to common stockholders	$	0.06	$	(0.11	)

7

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 6                      Long-Term Debt

In September 2010 the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2.5 million in the form of a Promissory Note (“the “Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees. These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses will be amortized over the term of the loan. The features of the note are as follows:

The features of the note are as follows:

1.	The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount. Payments for the first year are interest only and amount to $28,762 monthly and after the first year the Company will make monthly payments of approximately $69,000 for the remaining term of the loan.
2.	The Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully –diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the loan closing on the NYSE-Amex Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount (see above) and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Condensed Consolidated Financial Statements). The debt discount is to be amortized over the life of the loan
3.	Loan provisions also contain customary representations and warranties.
4.	BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.
5.	The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year. Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.
6.	Upon the occurrence of a Change of Control or within five (5) Business Days of an O’Hara Life Insurance Realization Event, the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first loan year, 102% in the second loan year, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”). If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid. At the election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of Marketable Securities in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations. In the event BCA makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.
7.	The senior notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of June 30, 2011.
8.	The Company and BCA have amended certain provisions to ease some restrictions.

8

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 7                     Stock Options

The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting ASC 718, operations was charged $24,231 and $23,665 for three months ended June 30, 2011 and 2010, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.98% to 2.31%, volatility at 40.74% to 40.76% of the Company’s stock, and an expected life of 5 years for options granted for the three months ended June 30, 2010. The Company did not grant any stock options for the three months ended June 30, 2011.  The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.

Note 8                      Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial.  There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally.  All long-lived assets are located in the U.S.

9

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 8                      Segment Information (continued)

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2011 and 2010:

	Avionics		Avionics		Avionics		Corporate
Three Months Ended June 30, 2011	Gov’t		Comm’l.		Total		Items			Total
Net sales		3,145,592		844,619		3,990,211		-			3,990,211
Cost of Sales		1,674,813		453,767		2,128,580		-			2,128,580
Gross Margin		1,470,779		390,852		1,861,631		-			1,861,631
Engineering, research, and   development						849,038					849,038
Selling, general, and admin.						361,816		437,006			798,822
Amortization of debt discount						-		13,395			13,395
Amortization of debt expense						-		27,080			27,080
Change in fair value of   common stock warrants						-		168,586			168,586
Proceeds from life insurance						-		(300,029	)		(300,029	)
Interest (income) expense, net						-		102,601			102,601
Total expenses						1,210,854		448,639			1,659,493
Income (loss) before income   taxes					$	650,777	$	(448,639	)	$	202,138

	Avionics		Avionics		Avionics			Corporate
Three Months Ended June 30, 2010	Gov’t		Comm’l.		Total			Items			Total
Net sales		1,848,473	$	606,807	$	2,455,280		$	-		$	2,455,280
Cost of Sales		940,672		432,228		1,372,900			-			1,372,900
Gross Margin		907,801		174,579		1,082,380			-			1,082,380
Engineering, research, and development						757,346			-			757,346
Selling, general, and admin.						348,095			409,949			758,044
Gain on sale of asset									(3,600	)		(3,600	)
Interest (income) expense,net									29,227			29,227
Total expenses						1,105,441			435,576			1,541,017
Income (loss) before income   taxes					$	(23,061	)	$	(435,576	)	$	(458,637	)

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TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9                      Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.    The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying June 30, 2011 and March 31, 2011 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. (See Critical Accounting Policies)

Note 10           Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by  ASC 820-10 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

11

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 10           Fair Value Measurements (continued)

The valuation techniques that may be used to measure fair value are as follows:

Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

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 as of June 30, 2011 and March 31, 2011. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2011	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		534,723		534,723
Total Liabilities	$	-	$	-	$	534,723	$	534,723

March 31, 2011	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	--	$	-
Warrant liability		-		-		366,137		366,137
Total Liabilities	$	-	$	-	$	366,137	$	366,137

12

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 10           Fair Value Measurements (continued

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

	At Inception			March 31, 2011			June 30, 2011
Risk free interest rate		2.81	%		3.47	%		3.18	%
Expected life in years		9			8.45			8.2
Expected volatility		28.51	%		29.11	%		39.74	%
Fair market value per share	$	6.70		$	7.63		$	9.00
Exercise price	$	6.70		$	6.70		$	6.70
Warrant Liability	$	281,656		$	366,137		$	534,723

The volatility calculation was based on the 18 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.

13

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 11           Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

Note 12           Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortuously interfered with its business relationship; conspired to harm Aeroflex and tortuously interfered with its contract and seeks injunctive relief and damages. The crux of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award.

In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time. Tel remains confident as to the outcome of this appeal and any potential follow-on litigation. An estimate of possible loss, if any cannot be made in view of, among other things, the Army findings and the decision of the Kansas Court, discussed above, as well as the fact that there has not yet been discovery of the merits of the claims and defenses.

Note 13           New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, guidance to improve consistency in application of existing fair value measurement and disclosure requirements.  The standard is intended to clarify the application of the requirements, not to establish valuation standards or affect valuation practices outside of financial reporting.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.  

In June 2011, the FASB issued ASU 2011-05, guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The standard eliminates the current option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment does not affect how earnings per share is calculated or presented.  The guidance is effective for interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The Company currently does not have other comprehensive income. Should the company have other comprehensive income in the future, we will determine if we will present it on a single continuous statement of comprehensive income or in two separate but consecutive statements.

With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations or cash flows.

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Item 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Forward Looking Statements

A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, including statements regarding litigation and utilization of deferred tax assets, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially.  Among the factors that could cause a difference are:  changes in the general economy; changes in demand for the Company’s products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation, environmental matters; and other unforeseen circumstances.  A number of these factors are discussed in the Company’s filings with the Securities and Exchange Commission.

Critical Accounting Policies

In preparing the financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Financial Statements included in our Form 10-K.  The Company’s accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include:

Revenue recognition – revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer.  Provisions, when appropriate, are made where the right to return exists.  In certain instances, the Company may offer the unit on trial basis. The Company does not recognize revenue until the unit has been accepted. The Company only offers product on a trial basis in rare instances, and no provision has been made at June 30, 2011 and March 31, 2011.

Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at the time that the work is completed.

Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract have been recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. In July 2011, the Company secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.

15

Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold.

Payments received prior to the delivery of units or services performed are recorded as deferred revenues

Inventory reserves – inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives.  If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. While such estimates have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.

Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information.  The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that its estimates will continue to be within the provision established.

Warranty reserves – warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale.  While warranty costs have historically been within expectations and the provisions established, future warranty costs could be in excess of the Company’s warranty reserves.  A significant increase in these costs could adversely affect the Company’s operating results for the period and the periods these additional costs materialize.  Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates.

Income taxes - deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse.  The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. In assessing the need for a valuation allowance, future taxable income is estimated, in order to determine the amount of realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels.

In the event it is determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such recorded amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made.  In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets.

All projections contain a measure of uncertainty and accordingly, actual results could differ materially.  As in the case of many development projects, there can be delays which can cause expected revenues to be delayed, and additional expenses to be incurred. Our revenue projections were based upon the contract award, which includes the number of units which are expected to be delivered, and our expectation for the completion of the development and production start-up.

16

Our projections were largely predicated upon the receipt of timely production orders for the CRAFT 708 based on contractual requirements from our U.S. Navy customer and prior experience with U.S. Navy developmental contracts. The delivery of these units and the associated revenues were delayed due in large part to an extended Navy technical evaluation process that did not successfully conclude until April 2011. The CRAFT 708 is testing new technology and incorporated many functions which were never combined together, and, as such, the duration of the testing and Navy technical evaluation (which is outside the Company’s control) took much longer than prior programs. It is as a result of these delays that the Company incurred losses and the increase in the deferred asset. The Company has successfully completed technical evaluation and has received a production order for $16.2 million. The Company believes, although no assurance can be given, that with this order in combination with existing business and the completion and delivery of units for the TS-4530A program that it will be able to realize its deferred tax asset associated with its net operating loss carryforwards.

Fair Value Measurements– the Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 10) to market and recognize any change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model.

The volatility calculation was based on the 18 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. If the Company used different measurements in calculating the volatility of its stock, it could have an impact on its balance sheet and statement of operations. However, the Company believes the measurement period used is the best predictor of the value of the warrant. All inputs to the Black-Scholes options model are evaluated each reporting period.

General

Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary.  This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes and Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.

17

Overview

For the first quarter of Fiscal year 2012, the Company recorded its third consecutive quarter of profitability. For the three months ended June 30, 2011, the Company recorded net income of $175,849 as compared to a net loss of $275,412 for the same period in the prior year. Sales for the three months ended June 30, 2011 increased $1,534,931 (62.5%) to $3,990,211 as compared to the same period last year. Net income was affected by non-cash charges of approximately $199,000 attributed to the Company’s note and warrant issued to BCA Mezzanine Fund LLP in fiscal year 2011, as discussed in Note 6 to the Condensed Consolidated Financial Statements.

As a result of the Company’s improving operations and financial results, sales and profits have continued to increase, and there have been improvements in the Company’s liquidity and stockholders’ equity, which currently exceeds the NYSE Amex requirement of $4 million. The Company has also rescheduled its move to the new facility until this fall.

The U.S. Navy evaluated the Company’s AN/USM-708 test set, which utilizes new generation technology, and concluded it was suitable for fleet use.

The Company announced that it has secured the production release from the U.S. Navy for the $16.2 million CRAFT AN/USM 708 delivery order the Company received in April 2011. Production deliveries on this 732 unit order are expected to begin in the fourth quarter of the current calendar year. The CRAFT 708 is a multi-purpose flight-line test set that will replace up to eight older test sets currently being used by the U.S. Navy.

The Company also has secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to The ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units ($5.3 million) are now expected to begin in the middle of the next calendar year.

The TS-4530A product is currently in Army product verification and AIMS testing which is scheduled to be completed in the next several months. Volume production of the TS-4530A is currently scheduled to begin in the third quarter of the current fiscal year subject to receipt of required regulatory approvals.

The Company believes, although no assurance can be given, that with the U.S. Navy’s evaluation approval of the AN/USM-708, and the resolution of the issues regarding the ITATS contract, the Company can look forward to continued financial growth in the near and mid-term. Future approval of the TS-4530A unit will enhance this outlook.

At June 30, 2011 the Company’s backlog was approximately $48.4 million, including the order for 102 ITATS units in the amount of $5 million for which a production order has not yet been released, as compared to approximately $25.4 million at June 30, 2010.

The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material capital expenditure requirements. The Company believes it will have moderate moving and capital expenditure costs associated with the upcoming move to a new facility located in East Rutherford, NJ.

18

Results of Operations

Sales

For the first quarter ended June 30, 2011 total sales increased $1,534,931 (62.5%) to $3,990,211 as compared to $2,455,280 for the same quarter in the prior year. Avionics Government sales increased $1,297,119 (70.2%) to $3,145,592 for the period as compared to $1,848,473 for the same period last year. This increase in Avionics Government sales is primarily attributed to an increase in shipments of the AN/UPM -708, the TR-100AF TACAN test sets to the U.S. Air Force and initial pilot production units of the TS-4530A test sets  offset partially by lower sales of the AN/USM-719. Commercial sales increased $237,812 (39.2%) to $844,619 for the three months ended June 30, 2011 as compared to $606,807 in the same period in the prior year. This increase is primarily attributed to an increase in its repair and overhaul business.

Gross Margin

Gross margin increased $779,251 (72%) to $1,861,631 for the three months ended June 30, 2011 as compared to $1,082,380 for the same three months in the prior fiscal year.  This increase is mostly attributed to the increase in sales volume. The gross margin percentage for the three months ended June 30, 2011 was 46.7% as compared to 44.1% for the three months ended June 30, 2010. This change in gross margin percentage is a result of a change in mix of products sold.

Operating Expenses

Selling, general and administrative expenses increased $40,778 (5.4%) to $798,822 for the three months ended June 30, 2011, as compared to $758,044 for the three months ended June 30, 2010. This increase is attributed mainly to an increase in investor relations expenses and accrued bonus compensation expense offset partially by lower administrative salaries and outside commission expenses.

Engineering, research and development expenses increased $91,692 (12.1%) to $849,038 for three months ended June 30, 2011 as compared to $757,346 for the three months ended June 30, 2010, primarily as a result of an increase in salaries as a result of efforts related to finalize the AN/USM-708 product and efforts related to the TS-4530A program. The Company has completed the design of the AN/USM-708 and the TS-4530A program is undergoing product verification.

Other Income (Expense), net

Interest expense and amortization of debt issuance costs increased to $143,169 mostly as a result of interest on the new $2.5 million loan from BCA, which carries a higher face amount and interest rate. Amortization of debt discount is in connection with (i) the stock options issued in conjunction with the officers’ subordinated notes and (ii) warrants issued in conjunction with the loan from BCA. The amortization of deferred debt expense is also associated with the loan from BCA. The Company also incurred a non-cash loss associated with the revaluation of warrants issued in conjunction with the loan to BCA in the amount of $168,586 (see Note 10 of Notes to the Condensed Consolidated Financial Statements). The Company also recorded a gain of $300,029 from proceeds on a life insurance policy.

19

Income (Loss) before Income Taxes

As a result of the above, the Company recorded income before income taxes of $202,138 for the quarter ended June 30, 2011 as compared to a loss before income taxes of $458,637 for the quarter ended June 30, 2010.

Income Taxes

For the three months ended June 30, 2011, the Company recorded an income tax provision of $26,289 as compared to an income tax benefit of $183,225 for the three months ended June 30, 2010. The change is the result of the net income in the current year. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes.  The proceeds on the life insurance policy are not taxable, and the loss on the change in fair value of the common stock warrants is not deductible.

Net Income (Loss)

As a result of the above, the Company recorded net income of $175,849 for the quarter ended June 30, 2011 as compared to a net loss of $275,412 for the quarter ended June 30, 2010.

Liquidity and Capital Resources

At June 30, 2011, the Company had working capital of $4,712,880 as compared to $4,374,523 at March 31, 2011.

During the three months ended June 30 2011, the Company increased cash by $591,638. The Company’s principal sources and uses of funds were as follows:

Cash provided by/used in operating activities.For the three months ended June 30, 2011, the Company provided $308,329 in cash from operations as compared to using $91,408 in cash for the three months ended June 30, 2010. This increase is primarily attributed to the higher net income and decrease in accounts receivable and inventories offset partially by lower accounts payable and the liquidation of progress billings.

Cash used in investing activities. The Company did not use any of its cash for investing activities for the three months ended June 30, 2011. Net cash used in investing activities was $83,201 for the three months ended June 30, 2010 due primarily to the purchases of equipment.

Cash provided by financing activities.Net cash provided by financing activities for the three months ended June 30, 2011 was $283,039 as compared to $156,075 for the three months ended June 30, 2010. This increase is attributed to the proceeds from a life insurance policy.

In September 2010, the Company, pursuant to an agreement with BCA Mezzanine Fund LP, borrowed $2.5 million for five years (see Note 6 to the Condensed Consolidated Financial Statements).

On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs before shipment of units, thus helping to fund the costs of these programs.

The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. The Company will have moderate moving and capital expenditure costs associated with the upcoming move.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2011.  These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended March 31, 2011.

20

Item 4.            Controls and Procedures

Controlsand Procedures

Evaluation of disclosure controls and procedures.

The Company, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting  

There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

21

Part II. Other Information

Item 1.            Legal Proceedings

See discussion in Item 3 of the Company’s Report on Form 10-K for the fiscal year ended March 31, 2011 and Note 12 to the Condensed Consolidated Financial Statements above.

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

 None.

Item 6.             Exhibits

31.1	Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act.
31.2	Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act.
32.1	Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101.INS	XBRL Instance Document
**101.SCH	XBRL Taxonomy Extension Schema
**101.CAL	XBRL Taxonomy Extension Calculation Linkbase
**101.DEF	XBRL Taxonomy Extension Definition Linkbase
**101.LAB	XBRL Taxonomy Extension Label Linkbase
**101.PRE	XBRL Taxonomy Extension Presentation Linkbase

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.

22

SIGNATURES

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.

	TEL-INSTRUMENT ELECTRONICS CORP.
Date:  August 22, 2011	By:	/s/ Jeffrey C. O’Hara
		Jeffrey C. O’Hara
		CEO
Date:  August 22, 2011	By:	/s/ Joseph P. Macaluso
		Joseph P. Macaluso
		Principal Accounting Officer

23

EX-31.1

Exhibit 31.1

Tel-Instrument Electronics Corp

CEO Certification

I, Jeffrey C. O’Hara, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Tel-Instrument  Electronics Corp;

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 quarterlyreport;

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 13(a) - 15(f) and 15(d)-15(f)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, 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 (the registrant’s fourth quarter in the case of an annual report) 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 registrant's board of directors (or persons performing the equivalent function):

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

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

Date: August 22, 2011                                                                                        

/s/ Jeffrey C. O’Hara

Jeffrey C. O’Hara

CEO

EX-31.2

Exhibit 31.2

Tel-Instrument Electronics Corp

CFO Certification

I, Joseph P. Macaluso, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Tel-Instrument  Electronics Corp;

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 13(a) - 15(f) and 15(d)-15(f)) for the registrant and have:

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

d)   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;

e)   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

f)   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 (the registrant’s fourth quarter in the case of an annual report) 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 registrant's board of directors (or persons performing the equivalent function):

c)   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

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

Date: August 22, 2011                                                                                                

/s/ Joseph P. Macaluso

Joseph P. Macaluso

Principal Accounting Officer

EX-32.1

Exhibit 32.1

Tel-Instrument Electronics Corp

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 Tel-Instrument Electronics Corp (the “Company”), on Form 10-Q for the period ending June 30, 2011, as filed with the Securities Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify, pursuant to and solely for the purpose of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge:

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

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

By:  /s/ Jeffrey C. O’Hara                                                                

        Jeffrey C. O’Hara

        CEO

 /s/ Joseph P. Macaluso

        Joseph P. Macaluso

        Principal Accounting Officer

        August 22, 2011

          A signed original of this written statement required by Section 906 has been provided to Tel-Instrument Electronics Corp and will be retained by Tel-Instrument Electronics Corp and furnished to the Securities and Exchange Commission or its staff upon request.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)	Jun. 30, 2011	Mar. 31, 2011
Common stock, par value (in Dollars per share)	$ 0.10	$ 0.10
Common stock, shares issued	2,648,215	2,646,215
Common stock, shares outstanding	2,648,215	2,646,215

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)	3 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Net sales	$ 3,990,211	$ 2,455,280
Cost of sales	2,128,580	1,372,900
Gross margin	1,861,631	1,082,380
Operating expenses:
Selling, general and administrative	798,822	758,044
Engineering, research and development	849,038	757,346
Total operating expenses	1,647,860	1,515,390
Income (loss) from operations	213,771	(433,010)
Other income (expense):
Amortization of debt discount	(13,395)	(5,769)
Amortization of debt expense	(27,080)
Change in fair value of common stock warrants	(168,586)
Gain on sale of capital asset		3,600
Proceeds from life insurance policy	300,029
Interest income	93	47
Interest expense	(102,694)	(23,505)
Income (loss) before income taxes	202,138	(458,637)
Income tax provision (benefit)	26,289	(183,225)
Net Income (loss)	$ 175,849	$ (275,412)
Net Income (loss) per share:
Basic income (loss) per common share (in Dollars per share)	$ 0.07	$ (0.11)
Diluted income (loss) per common share (in Dollars per share)	$ 0.06	$ (0.11)
Weighted average shares outstanding:
Basic (in Shares)	2,647,138	2,615,625
Diluted (in Shares)	2,731,749	2,615,625

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Document And Entity Information	3 Months Ended
	Jun. 30, 2010	Aug. 17, 2010
Document and Entity Information [Abstract]
Entity Registrant Name	TEL INSTRUMENT ELECTRONICS CORP
Document Type	10-Q
Current Fiscal Year End Date	--03-31
Entity Common Stock, Shares Outstanding		2,648,215
Amendment Flag	false
Entity Central Index Key	0000096885
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2010
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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Note 7. Stock Options

3 Months Ended

Jun. 30, 2010

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Note 7                     Stock Options

The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting ASC 718, operations was charged $24,231 and $23,665 for three months ended June 30, 2011 and 2010, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.98% to 2.31%, volatility at 40.74% to 40.76% of the Company’s stock, and an expected life of 5 years for options granted for the three months ended June 30, 2010. The Company did not grant any stock options for the three months ended June 30, 2011.  The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.

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Note 12. Litigation

3 Months Ended

Jun. 30, 2010

Legal Matters and Contingencies [Text Block]

Note 12           Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortuously interfered with its business relationship; conspired to harm Aeroflex and tortuously interfered with its contract and seeks injunctive relief and damages. The crux of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award.

In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time. Tel remains confident as to the outcome of this appeal and any potential follow-on litigation. An estimate of possible loss, if any cannot be made in view of, among other things, the Army findings and the decision of the Kansas Court, discussed above, as well as the fact that there has not yet been discovery of the merits of the claims and defenses.

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Note 3. Accounts Receivable, net

3 Months Ended

Jun. 30, 2010

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3                     Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	June 30, 2011			March 31, 2011
Government	$	1,281,152		$	2,344,438
Commercial		470,262			277,851
Less: Allowance for doubtful accounts		(36,670	)		(36,670	)
	$	1,714,744		$	2,585,619

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Note 9. Income Taxes

3 Months Ended

Jun. 30, 2010

Income Tax Disclosure [Text Block]

Note 9                      Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.    The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying June 30, 2011 and March 31, 2011 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. (See Critical Accounting Policies)

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Note 10. Fair Value Measurements

3 Months Ended

Jun. 30, 2010

Fair Value Disclosures [Text Block]

Note 10           Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by  ASC 820-10 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The valuation techniques that may be used to measure fair value are as follows:

Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

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 as of June 30, 2011 and March 31, 2011. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2011	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		534,723		534,723
Total Liabilities	$	-	$	-	$	534,723	$	534,723

March 31, 2011	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	--	$	-
Warrant liability		-		-		366,137		366,137
Total Liabilities	$	-	$	-	$	366,137	$	366,137

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

	At Inception			March 31, 2011			June 30, 2011
Risk free interest rate		2.81	%		3.47	%		3.18	%
Expected life in years		9			8.45			8.2
Expected volatility		28.51	%		29.11	%		39.74	%
Fair market value per share	$	6.70		$	7.63		$	9.00
Exercise price	$	6.70		$	6.70		$	6.70
Warrant Liability	$	281,656		$	366,137		$	534,723

The volatility calculation was based on the 18 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes. The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised. All inputs to the Black-Scholes options model are evaluated each reporting period.

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Note 8. Segment Information

3 Months Ended

Jun. 30, 2010

Segment Reporting Disclosure [Text Block]

Note 8                      Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial.  There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific. As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally.  All long-lived assets are located in the U.S.

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2011 and 2010:

	Avionics		Avionics		Avionics		Corporate
Three Months Ended June 30, 2011	Gov’t		Comm’l.		Total		Items			Total
Net sales		3,145,592		844,619		3,990,211		-			3,990,211
Cost of Sales		1,674,813		453,767		2,128,580		-			2,128,580
Gross Margin		1,470,779		390,852		1,861,631		-			1,861,631
Engineering, research, and   development						849,038					849,038
Selling, general, and admin.						361,816		437,006			798,822
Amortization of debt discount						-		13,395			13,395
Amortization of debt expense						-		27,080			27,080
Change in fair value of   common stock warrants						-		168,586			168,586
Proceeds from life insurance						-		(300,029	)		(300,029	)
Interest (income) expense, net						-		102,601			102,601
Total expenses						1,210,854		448,639			1,659,493
Income (loss) before income   taxes					$	650,777	$	(448,639	)	$	202,138

	Avionics		Avionics		Avionics			Corporate
Three Months Ended June 30, 2010	Gov’t		Comm’l.		Total			Items			Total
Net sales		1,848,473	$	606,807	$	2,455,280		$	-		$	2,455,280
Cost of Sales		940,672		432,228		1,372,900			-			1,372,900
Gross Margin		907,801		174,579		1,082,380			-			1,082,380
Engineering, research, and development						757,346			-			757,346
Selling, general, and admin.						348,095			409,949			758,044
Gain on sale of asset									(3,600	)		(3,600	)
Interest (income) expense,net									29,227			29,227
Total expenses						1,105,441			435,576			1,541,017
Income (loss) before income   taxes					$	(23,061	)	$	(435,576	)	$	(458,637	)

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Note 1. Basis of Presentation

3 Months Ended

Jun. 30, 2010

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1                      Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2011, the results of operations for the three months ended June 30, 2011 and June 30, 2010, and statements of cash flows for the three months ended June 30, 2011 and June 30, 2010.  These results are not necessarily indicative of the results to be expected for the full year.

The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2011 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

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Note 4. Inventories, net

3 Months Ended

Jun. 30, 2010

Inventory Disclosure [Text Block]

Note 4                     Inventories, net

Inventories consist of:

	June 30, 2011			March 31, 2011
Purchased parts	$	1,693,513		$	2,119,957
Work-in-process		1,224,968			1,184,812
Finished goods		57,011			110,609
Less: Inventory reserve		(455,000	)		(445,000	)
	$	2,520,492		$	2,970,378

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Note 5. Earnings (Loss) Per Share

3 Months Ended

Jun. 30, 2010

Earnings Per Share [Text Block]

Note 5                      Earnings (Loss) Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the period ended June 30, 2010 does not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended		Three Months Ended
	June 30, 2011		June 30, 2010
Basic net loss per share computation:
Net Income (loss) attributable to common stockholders	$	$175,849	$	(275,412	)
Weighted-average common shares outstanding		2,647,138		2,615,625
Basic net income (loss) per share attributable to common stockholders	$	0.07	$	(0.11	)
Diluted net loss per share computation
Net Income (loss) attributable to common stockholders	$	$175,849	$	(275,412	)
Weighted-average common shares outstanding		2,647,138		2,615,625
Incremental shares attributable to the assumed exercise of outstanding stock options		84,611		-
Total adjusted weighted-average shares		2,731,749		2,615,625
Diluted net income (loss) per share attributable to common stockholders	$	0.06	$	(0.11	)

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Note 13. New Accounting Pronouncements

3 Months Ended

Jun. 30, 2010

Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]

Note 13           New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, guidance to improve consistency in application of existing fair value measurement and disclosure requirements.  The standard is intended to clarify the application of the requirements, not to establish valuation standards or affect valuation practices outside of financial reporting.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.  

In June 2011, the FASB issued ASU 2011-05, guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The standard eliminates the current option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment does not affect how earnings per share is calculated or presented.  The guidance is effective for interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. The Company currently does not have other comprehensive income. Should the company have other comprehensive income in the future, we will determine if we will present it on a single continuous statement of comprehensive income or in two separate but consecutive statements.

With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations or cash flows.

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Note 6. Long-Term Debt

3 Months Ended

Jun. 30, 2010

Long-term Debt [Text Block]

Note 6                      Long-Term Debt

In September 2010 the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2.5 million in the form of a Promissory Note (“the “Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees. These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses will be amortized over the term of the loan. The features of the note are as follows:

The features of the note are as follows:

1.	The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount. Payments for the first year are interest only and amount to $28,762 monthly and after the first year the Company will make monthly payments of approximately $69,000 for the remaining term of the loan.
2.	The Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully –diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the loan closing on the NYSE-Amex Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount (see above) and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Condensed Consolidated Financial Statements). The debt discount is to be amortized over the life of the loan
3.	Loan provisions also contain customary representations and warranties.
4.	BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.
5.	The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year. Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.
6.	Upon the occurrence of a Change of Control or within five (5) Business Days of an O’Hara Life Insurance Realization Event, the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first loan year, 102% in the second loan year, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”). If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid. At the election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of Marketable Securities in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations. In the event BCA makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.
7.	The senior notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of June 30, 2011.
8.	The Company and BCA have amended certain provisions to ease some restrictions.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	3 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net income (loss)	$ 175,849	$ (275,412)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes	25,373	(185,940)
Depreciation and amortization	56,961	42,310
Provision for inventory obsolescence	10,000
Gain on sale of asset		(3,600)
Amortization of debt discount	13,395	5,769
Increase in cash surrender value of life insurance	2,011
Gain on proceeds from life insurance policy	(300,029)
Change in fair value of common stock warrant	168,586
Non-cash stock-based compensation	24,231	23,665
Changes in assets and liabilities:
Decrease in accounts receivable	870,875	96,358
Decrease (increase) in inventories	439,886	(119,697)
Increase in prepaid expenses & other	(3,569)	(2,789)
Increase in other assets	(32,316)	(20,278)
Decrease in accounts payable	(868,419)	(12,501)
(Decrease) increase in accrued payroll, vacation pay and payroll taxes	(1,381)	65,486
Decrease in deferred revenues	(13,276)	(22,378)
(Decrease) increase in progress billings	(424,202)	450,694
Increase (decrease) in accrued expenses	164,353	(133,095)
Net cash provided by (used in) operating activities	308,329	(91,408)
Cash flows from investing activities:
Proceeds from the sale of capital asset		3,600
Purchases of equipment		(86,801)
Net cash used in investing activities		(83,201)
Cash flows from financing activities:
Proceeds from the exercise of stock options	5,390	6,075
Repayment of capitalized lease obligations	(8,332)
Proceeds from borrowings from line of credit		150,000
Proceeds from life insurance policy	285,981
Net cash provided by financing activities	283,039	156,075
Net increase (decrease) in cash and cash equivalents	591,368	(18,534)
Cash and cash equivalents at beginning of period	123,955	173,048
Cash and cash equivalents at end of period	715,323	154,514
Taxes paid	0	0
Interest paid	$ 87,192	$ 9,269

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Note 2. RevenueRecognition - Percentage-of-Completion - ITATS ("Intermediate Level TACAN Test Set") (AN/ARM-206)

3 Months Ended

Jun. 30, 2010

Revenue Recognition, Percentage-of-Completion Method [Policy Text Block]

Note 2                     RevenueRecognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)

Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. In July 2011, the Company secured a $599k contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from Navy technical evaluation testing. These changes, and the required product verification testing, are expected to take an estimated nine to 12 months to complete. This additional funding will not have a material bottom line impact as most of the engineering work for this contract will be sub-contracted to DRS Sustainment Systems located in St. Louis. Production deliveries of the 102 ITATS units are now expected to begin in the middle of the next calendar year.  (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.

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Note 11. Reclassifications

3 Months Ended

Jun. 30, 2010

Reclassifications [Text Block]

Note 11           Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2011	Mar. 31, 2011
Current assets:
Cash and cash equivalents	$ 715,323	$ 123,955
Accounts receivable, net	1,714,744	2,585,619
Unbilled government receivables	1,466,623	1,466,623
Inventories, net	2,520,492	2,970,378
Prepaid expenses and other	101,241	70,970
Deferred debt expense	108,321	108,321
Deferred income tax asset	1,105,802	1,131,175
Total current assets	7,732,546	8,457,041
Equipment and leasehold improvements, net	300,813	330,694
Deferred debt expenses – long-term	346,025	373,105
Deferred income tax asset – non-current	1,461,664	1,461,664
Other assets	52,886	35,235
Total assets	9,893,934	10,657,739
Current liabilities:
Current portion long-term debt	367,859	282,798
Capital lease obligations	7,353	15,685
Accounts payable	730,260	1,598,679
Progress billings		424,202
Deferred revenues – current portion	18,450	28,382
Accrued payroll, vacation pay and payroll taxes	444,357	445,738
Accrued expenses	1,451,387	1,287,034
Total current liabilities	3,019,666	4,082,518
Subordinated notes payable-related parties, net of debt discount	250,000	250,000
Deferred revenues	12,037	15,381
Warranty Liability	534,723	366,137
Long-term debt, net of debt discount	1,907,449	1,979,114
Total liabilities	5,723,875	6,693,150
Commitments	0	0
Stockholders' equity:
Common stock, par value $.10 per share, 2,648,215 and 2,646,215 issued and outstanding as of June 30, 2011 and March 31, 2011, respectively	264,821	264,621
Additional paid-in capital	5,740,952	5,711,531
Accumulated deficit	(1,835,714)	(2,011,563)
Total stockholders' equity	4,170,059	3,964,589
Total liabilities and stockholders' equity	$ 9,893,934	$ 10,657,739