I would like to welcome everyone to the Innovative Solutionsand Support fourth quarter 2007 earnings conference call. (OperatorInstructions) It is now my pleasure to turn the floor over to your host, Mr.Ray Wilson, Chief Executive Officer. Sir, you may begin your conference.

Good morning. This is Ray Wilson, Chief Executive ofInnovative Solutions & Support. Iwelcome you to our conference call this morning where in a few minutes we willdiscuss the results of the fourth quarter and the fiscal year ending September 30, 2007. In addition, wewill discus the current business climate and outlook. Joining me today in our corporate office is Jim Reilly, ourChief Financial Officer. Due to a death in the family Roman Ptakowskiunfortunately is unable to join us today. He, of course, is our President. Before we get started, I would like to say that I’m extremelypleased with the progress achieved over the past year; a very tough year forthe company and its employees. When we first introduced our flat panel displaysystem we essentially had no market. Today, through the relationships with someof the world’s most respected commercial, military and business aviationoperators, we have created a very healthy, increasing demand for our Cockpit/IP. We are now using the in-depth knowledge gained from workingwith these world-class operators to expand and improve our product to not onlyrespond to existing needs, but to build in new functionality in anticipation ofnew uses brought about by increasing concerns regarding safety due to runwayincursions, air space congestion and other emerging challenges precipitated bygrowth in air travel. Our investments have been rewarded. We have grown our flatpanel display system backlog to $63 million in fiscal 2007. That’s an increaseof $45 million, up 250% from September ‘06. In addition, not considered inbacklog is significant additional revenue that our contracts with Cessna,Eclipse, and FedEx will be generating over the next several years. In a very short period of time, we have created many solidrelationships and established a stream of future revenues that will serve as anexcellent foundation from which we can leverage additional growth. I’m alsovery pleased to reiterate the fact that we received a favorable jury verdict inour trade secret misappropriation case. In addition, the jury found that thecompany has suffered damages approximating $6 million. The jury also found infavor of the company’s claim for breach of duty and contract, and on faircompetition. The judge presiding over the case will hear the company’s claimsfor a permanent injunction, as well as punitive and exemplary damages in futureproceedings. None of the numbers shown here or on the attached financialstatements reflect the $6 million in damages awarded by the jury, nor do they reflectany anticipated punitive or exemplary damages to be determined in futureproceedings. Now I would like to turn over the call to Jim Reilly, ourCFO.

Thanks, Ray and thank you all for being on the call with usthis morning. Certain matters discussed in this conference call today,including operational and financial results for future periods, areforward-looking statements that are subject to risks and uncertainties thatcould cause actual results to differ materially -- either better or worse -- fromthose discussed including other risks and uncertainties reflected in thecompany’s 10-K which is on file with the SEC. I’d now like to take a few moments after that statement toaddress last night’s press release. Revenue in the fourth quarter was about$5.1 million and was marginally ahead of last year’s $4.6 million fourthquarter number. On a sequential basis, revenue in the fourth quarter this yearwas down slightly from the third quarter by about 12%. Revenue in the fourth quarter results are slightly lowerthan what we expected and what we discussed with you on the conference callabout three months ago. At that time, we expected the fourth quarter revenue tobe between $6 million and $10 million and we were hoping to come in the middleof that range. The shortfall in revenue was essentially due to a delay inachieving software certification on the Eclipse 500 flat panel display system. Asa result, we were unable to recognize any Eclipse production hardware revenuein the quarter. Completion of the clutch software has since been achieved andwe’re working to establish a production hardware delivery schedule that willmeet their needs. A recap of Q4 sales reflects the revenue split betweenproduct and EMD sales, which we call engineering, development and modification.Product revenue was about $4.8 million in the quarter and we recorded a grossprofit of $1.8 million, for a gross profit margin of 38%. The EMD revenue wasabout $400,000 in the quarter and recorded a gross loss of $2.2 million. The product gross margin is expected to increase…

Thank you, Jim. To follow up on what Jim just discussed, ourresults for both the quarter and the full year continue to demonstrate growingdemand for our flat panel display systems and preparations in our manufacturingfacilities for the ramp up in production as orders head onto the factory floor.These are strong indicators of the long-term health of the business. In the short term, obviously we are disappointed with theslippage in shipments to Eclipse that were originally anticipated during thefourth quarter. Unfortunately, software development took longer and cost morethan originally anticipated, in part due to the normal evolution in productionspecifications and requirements commonly associated with the development of acompletely new cockpit system. However, with our software completed in November, we shippedhardware to Eclipse. They have provided us with production schedules that willrequire us to ship 60 more flat panel display systems before the end of thiscalendar year and we have these in various stages of completion at our factorytoday. As these systems are delivered, you will see the next set of productionschedules roll forward, consistent with the terms of our contract. Over the past year we have continued business development ineach of our main market segments including commercial, air transport, military,business and general aviation. These efforts are yielding laudable results,with IS&S signing a significant new contract in each quarter of 2007 withhigh profile, well-respected operators such as Cessna and American Airlines;and most recently in the quarter just ended, FedEx, the international cargocarrier. The net result is a steady increase in backlog and an evengreater increase in our visibility as a result of the credibility and thecompany’s success with leading operators in a wide variety of markets.Successful implementation of these orders and potential regulatory changes areexpected to stimulate market growth as operators expand retrofit programs tomeet their entire fleet’s needs of similar aircraft,…

Our first question comes from Paul Kaump - NorthlandSecurities.

Jim, do you have the breakdown of air data revenue versusflat panel in Q4?

Yes I do, Paul. The air data revenue in the quarter wasapproximately $1.2 million.

All the rest is flat panel?

That’s correct.

Cash flow from operations during the quarter, what was theuse there?

The cash in the quarter was principally to drive theoperations. Obviously we had the net loss in the quarter which sucked up cash.We grew our inventory a little bit. The accounts receivable were up in thequarter. They have since come right down, but basically a lot of the revenuesthat we had in the fourth quarter came in the last month, unfortunately, and asa result are showing on the balance sheet as of the end of the year asoutstanding receivables. Those have since been collected. We had someadditional expenses that we put through at the end of the year in terms of someof the legal bills and things like that.

Do you actually have the cash flow from operations numberfor Q4?

Cash flow from operations for Q4 I don’t have right here, butI can give you the cash flow from operations for the year, that’s a lot easier.The year was a loss of $10 million; $8.8 million of that, of course, was thenet income loss. The other pieces of that were principally accounts receivable,inventories and prepaid expenses. Those things actually added up to a littlebit more than that and then we had some offsetting amounts; accounts payableand things like that.

Switching gears, can you talk about the status of the timingof some of the STCs for the 737, 747 and Cessna Citation? If I’m not mistaken,the 737 and 747 are more than a year old at this point from when you got theinitial orders. The Citation we are coming up on the year here, so I’m justcurious about the status on those things.

The 747 engine displays that we are working on, we shouldhave an SDC in the next quarter on that, first calendar year quarter of 2008.On Cessna, it’s probably going to be into the third quarter of 2008, the fourthquarter of this fiscal year. On the 737, quite frankly I think it’s going todrift out to the beginning of the next fiscal year. We are probably 12 monthsaway from that.

Have any customers pulled or reduced their orders for any ofthose airplanes? I know on the 747 I think it may have been Kalitta was inthere with some orders and it was Jet Partners for the 737 -- correct me if I’mwrong on any of those. Have any of them reduced or canceled orders or anythinglike that?

Kalitta was still working on it, it is their aircraft thatwe have specific work being done on; Jet Partners is still hanging in there. Stillgot orders on the order book.

How much of the FedEx order went into the backlog? Was that $6.8million?

No, it is a much smaller number. This is an interesting featureof the way people are contracting; it israther similar to the Eclipse where we only get a lead time of coverage. So itis a much smaller number than $6 million.

I’m trying to reconcile flat panel display backlog from lastquarter to this quarter. It looks like it went down by much more than it shouldhave. Did anybody reduce an order? Did something fall out of backlog? Anythingof that sort?

No, nothing fell out of backlog, Paul. The shipments in thequarter, we shipped almost $4 million worth of flat panel in the quarter.

Which was in backlog, right?

Which was in backlog.

That’s taking care of it. Did I hear you correctly in yourprepared remarks? You are looking to recoup some of the added expenses or costoverruns with the Eclipse program?

We are having discussions with them.

How much could that be, do you think?

It will be small numbers, I mean, it will get washed intowhatever opportunities we have for providing future functionality, I’m sure.

Your next question comes from Tyler Hojo - Sidoti & Co. Tyler Hojo - Sidoti& Co.: How should we think about some of these expenses as we movethrough the new fiscal year? Specifically, these Eclipse cost overruns and someof this legal expense? I know you guyswant a nice settlement there but it seems like you could see some additionalexpense, at least in the near term. I’mjust trying to contemplate that in terms of what you said with a $50 millionrun rate. I think Ray you said it would be profitable in the back half of theyear? Was that correct?

Yes, that’s what I said. Tyler Hojo - Sidoti& Co.: So how does that all mesh together?

First of all, I don’t think Ray said a $50 million run rate. I think he said $50 million for the year. Tyler Hojo - Sidoti& Co.: In revenue. Iapologize.

Because the run rate hopefully will be substantiallydifferent. Having said that, we do expect legal expenses to continue but at a significantlyreduced rate into the current quarter and perhaps even into the next quarterbecause as you see by the press release we put out, there will be some proceedingsthat are going to take place, probably in the January timeframe, but we don’tbelieve that this is going to be anything of any significance at that point. The cost on the Eclipse program, the EMD portion, thereshould be no further overruns on that. We’ve taken a very close look at theprogram. We’re almost done with it and we’ve written off costs yet to beincurred in the fourth quarter to bring that thing totally clean. Tyler Hojo - Sidoti& Co.: How much did you write-off?

We’re not really going to talk about specifically what wewrote off, but the numbers are very clear in the financials that we put out. Inthe quarter, we incurred revenue of $352,000 and we had $2.5 million of costs. Youcan impute that difference yourself, I am sure. Tyler Hojo - Sidoti& Co.: Good to know. I think earlier in this fiscal year you gave arange of backlog in terms of the goal; I think it was $75 million to $100million. I was wondering if you could provide another goal for next fiscalyear?

I’ll take this one, because we’ve been having someinteresting discussions internally about this whole concept of people lookingat the backlog and trying to determine where the business is going. The concernis that the contracting style and practice for some of this stuff is actuallydifferent from what we’ve all been used to and that’s why we keep talking aboutthe unreleased backlog. We don’t actually know that people are going to comealong and give us a firm, irrevocable contract for the full volume of theirupgrades because it will depend on where they are and in their own aircraftprograms and their own fiscal disciplines. So it is difficult to see what the backlog is going to be,but we are working with a good number of operators to try and get them under contractnow. That’s all I can say, I think. Tyler Hojo - Sidoti& Co.: In terms of the backlog as it sits currently, I think it is$70 million; how much of that is long term? How much do you expect to bedelivered within the next 12 months or shorter?

Well in that backlog you are absolutely right, the backlogis about $70 million. We anticipate liquidating it by about $15 million in thecurrent fiscal ’08; but keep in mind what Ray had mentioned earlier, asubstantial amount of the so-called unreleased backlog will be contributing torevenue as well and that is the type of a backlog, for example from Eclipse andFedEx and companies like that, they will give us a release in a given monththat might roll out for the next two or three months. So in some respects, it hardly will ever hit backlog justbecause of the nature of the way they are contracting. Does that make sense toyou?

Your next question comes from Jeff [Sarvis] - Janney Montgomery Scott.

I just want to go back to the backlog a minute. I think atthe end of the third quarter your backlog was roughly $72 million and now weare down to about $70 million. I guess Iwould have thought even with some deliveries for the quarter and with some newcontracts your backlog would have been ahead of what you stated in your thirdquarter.

Jeff, it is strictly a matter of timing. I am not going tostand up and shout about the revenues in the fourth quarter; they are only $5million and the order book in the quarter was a little lower because of thefact that some of the programs that have the continual turn on didn’t getturned on. Part of that was perhaps our fault, and part of it was perhaps thecustomer’s fault in terms of releasing new business. But nonetheless, the backlog is substantial. The timing ofit can be a little bit problematic but the numbers stand on their own. Theincrease has been remarkable.

Perhaps I could jump in. The water has been muddied in thisperiod by the fact that we reschedule some Eclipse that we had expected todeliver in the quarter and move them into this financial year. That doesn’tmake it absolutely clear what’s coming and gone out of backlog, to be honest.

Your next question comes from Kevin Wenck - PolynousCapital.

On inventories, the growth from June to the end of Septemberfrom 7.6 to 9.3. How much was from not shipping what you originally might haveanticipated shipping in the September quarter, and how much is a build forsupporting whatever the revenue plan might be for the December quarter?

A lot of it Kevin, obviously, is tied into the anticipatedvolumes that we plan on getting to. The inventory increase, without beingprogram-specific, obviously a lot of that was for Eclipse. We are ready andable to deliver Eclipse hardware. We are in the position to do that. Essentially,that’s what the inventory build up relates to.

As you’ve been discussing on this call, the changingdynamics of how you are starting to receive orders from customers, whereinstead of coming out of backlog it’s more as the customer now decides theyneed it. Do you have to have somewhat more inventory on hand or are they stillgiving you reasonable visibility as to when you are going to get those spot orders?

Yes, we do have visibility. We have a forward schedule thatis not fully committed by them, but we do understand what their requirementsare. That’s the first thing; we have a picture ahead of us and productionorders for an aircraft producer, we have the same view as they have for the next18 months. In the case of a flat panel display retrofit contract thatwe have on our books, we know what their total requirements are, we know whattheir expectation is for aircraft availability, but their actual commitmentcomes only in the lead time for the product. So we are able, within that leadtime, to provision the materials and ship and build the product.

So in any case, you are not having to lay in new --

We are not having to pile up inventory to support shortorders, no.

That’s very helpful. I was a little bit distracted bysomething else going on in the market when expenses were being discussed, butthe growth in SG&A expenses sequentially, was that mainly from theadditional legal expenses?

Yes it was. The legal expenses, obviously we’ve talked aboutover the last several calls Kevin, they have been significant.

Absent legal expenses, what’s a core level of SG&Aexpenses at this point for the company?

We would like to target, if you were building a model, wewould like to target the G&A at around 16% of sales. That’s the long-termgoal for us and something we have achieved in the past.

Assuming if $50 million of sales were reached in this fiscalyear, you are talking roughly $2 million a quarter of SG&A?

Round numbers, I guess you could say that. We don’t want toget pegged down to anything right now. We are truly going through a renaissancehere from the small company we used to be to a very large company in terms ofbeing able to generate significant revenues. We have put the infrastructure inplace to get there.

One last question. $50 million is kind of a round number. Whatwould cause it to be reasonably higher than that and what could cause it to besomewhat below that?

Well, obviously a significant demand increase from any ofour current major customers could increase that, because for all of those whowe are delivering today, given that the year is only a few months old, a coupleof months old, we could increase their shipments certainly in the second half.So, if suddenly American, for example, said we are going to increase our pacefrom “x” aircraft a month to “x” multiplied by four, we could meet the demandand the revenue line will go up. You can apply that to any of our existingcustomers. Interms of new contracts, I think on the military side, there are probably someopportunities which we are working at that we hadn’t anticipated in this year’splanning, but we have them on our radar screens and they could come in earlier.On the other hand, I must say customers can make up their mind to go in eitherdirection.

This morning there was a new revenue estimate for thecompany of $36 million. Is that something that has a 10% chance of happening ora 25% chance of happening? What are your thoughts on that?

That wasn’t our estimate and we hadn’t heard it or hadn’tseen it. You are the first guy to mention that to me.

Wasn’t my estimate either.

Okay, well that’s good. I don’t want to talk about it.

Your next question comes fromGreg Fujii - Coghill.

I had a couple of questions around the Eclipse business. Iknow that you had invested a little over $2 million in some differentengineering for the company and I wouldn’t expect you to comment on the stateof affairs over there, but I guess from your perspective internally, how do youview further investment in Eclipse? Are there any concerns?

There are no concerns. I mean, you know as much about Eclipse as we do. We think they have gota winning product and we are talking to them about future enhancements thatthey may be looking for. So no, there are no particulars concerns in thatrespect.

When looking at the $50 million number as being achievablenext year or your next fiscal year, can you give us a sense for how muchEclipse is baked into that? I am guessingEclipse is mostly a turns business as well?

The Eclipse numbers, if I were prepared to give you them,would actually muddy the water because you have to remember that we havereplaced another supplier on that airplane and we are new to it; therefore, wehaven’t really got production numbers, we have got spares being laid down andretrofits for the displays that are on the 100-knob aircraft today. We haven’tworked that program in detail yet with Eclipse, but it would only confusematters for me to give you numbers.

The previous caller said that $50 million is a little bit ofa round number. Eclipse it sounds like could have a relatively meaningfulimpact on that number in your fiscal 2008. Can you at least confirm that youare expecting meaningful revenues from Eclipse on a turns basis in 2008?

I don’t understand what meaningful revenues mean. Can youexplain a little bit more?

Say 10% to 15% or more of your revenue next year.

Yes easily that sort of order, yes.

That makes sense. Thank you very much.

Your next question comes from Dan Rodgers – Titan Capital. Dan Rodgers – TitanCapital : A follow up on Eclipse as far as the payments that you havereceived from them. I heard they havehad difficult in making timely payments to one of their suppliers.

Giventhat we have only just shipped product, there is no production payments due. Iprobably won’t let you know, because I don’t really want to talk about ourbusiness with customers in that detail. But right now there are noproduction payments overdue. They haven’t identified to me that there is anyproblem with paying the bill. I know that isn’t the answer you are looking for,but those are the facts.

Your next question comes from [John Marconi] – RyersonCapital. John Marconi –Ryerson Capital : Can you discuss what the next steps are in the lawsuit with Kollsmanand when it might be reasonable to actually realize the settlement that youreceived?

Jim already mentioned that there might be some legal expensethat goes on into the early part of next calendar year and we would anticipatethat this thing gets done early next year. John Marconi –Ryerson Capital : Early in the next fiscal year?

Sorry, next calendar year. John Marconi –Ryerson Capital : Next calendar year?

Yes, 2008.

Your next question comes from [Ajama Amelio] – DGHM. Ajama Amelio – DGHM : Hi, gentlemen. I’m wondering about something here on thebalance sheet. I see in the press release that the receivables went to $6.3million in this latest quarter. In previous quarters your receivables wereconsiderably lower than that. That is a $4.5 million increase sequentially fromlast quarter.

But if you ask me what my receivables were today I wouldtell you they are probably down about $1.5 million to under $2 million. In thefourth quarter, as I mentioned, a lot of the revenues for many and diversereasons went out in the last month of the quarter and obviously they werecurrent, but significant. The real test of receivables is the days outstandingand the days outstanding, even as of the September quarter, were probably 35days. We have no problem at all with receivables and when we do the Q for thefirst quarter you will see that. Ajama Amelio – DGHM : The sequential increase in receivables is pretty much equalto revenues so it is a little bit alarming. The other thing I noticed too is onthat same line item you actually had a zero allowance for doubtful accounts inthis quarter. How can receivables go up so much and the allowance go down? Isthere a mix issue here?

No, that speaks to the quality of our receivables. Theallowance has gone down because our outside accountants, Deloitte & Touche,told us we couldn’t carry an allowance for doubtful accounts because we neverhave doubtful accounts. Ajama Amelio – DGHM : Okay. I guess that makes sense.

Can we start to limit, perhaps you can ask a supplementary,but from now on I think we are running against the time clock and one questionfor each person in the queue. Okay? Ajama Amelio – DGHM : All right. Well, I have heard enough. Thank you.

Your next question comes from David Campbell - ThompsonDavis.

I assume that you can’t disclose or talk about the value ofthe Eclipse revenues in the December quarter. You mentioned that you deliveredsome in November and you were delivering, I think you said 60 more by the endof December. You can’t talk about the value of that I suppose?

You are absolutely right, David.

Your next question comes from Michael Kimuli - Boenning& Scatter. Michael Kimuli -Boenning & Scatter: I was wondering if you can give us a composition of thebacklog in terms of customers?

Customers in backlog we have roughly 20 to 25 customers. Michael Kimuli -Boenning & Scatter: Can you give us values on some of the bigger ones?

Michael, you know we don’t do that. We announce the bigorders when they come in but we try to stay away from articulating by elementsof the backlog. Michael Kimuli -Boenning & Scatter: On the margin structure, it looks like you have incurred alot of development cost with Eclipse; I understand that’s a unique project.What kind of cost do you foresee going forward on the American Airlinesprograms, FedEx, any other major customers you might get that might bring youroverall gross margins down or make you not able to achieve those historicallevels? I just want to make sure goingforward I have got an accurate representation.

We have studied that pretty carefully here, Mike, and theprograms that you have mentioned are the programs that are really almost legacyprograms for us now. We have been doing the flat panels for a couple of yearsand as long as the customer wants something that is relatively basic, there isreally no new added engineering and development work associated with it. Thatmeans that they should gravitate to the normal gross margins that we have hadin the past. The gross margin in the quarter that we are talking abouthere today is about 38%, which is lower than our historical margins. It’sinteresting though, we’ve talked about what volume will do to the margins here-- you’ve seen it in the past. If you were to take the current quarter, Mike,and just increase it by 50% -- now 50% sounds like a lot but the numbers arevery small -- the margins would go from 38% to over 50%. That speaks volumesfor our ability to transform profitability with volume here in the company.

Your next question comes from Luke Williams - Dark Cove Associates.

I wonder if you are spending much time at this stage intalking directly with the FAA or high level military people? It seems to me asthough you offer such a solution in many of the congestion problems of thewhole FAA system that you would want to spend some time talking with them toacquaint all of their people with what you have available, which can alleviatemany of the problems.

Well to be quite honest, we are not actually doing that. TheFAA have a program and discussion going on with some people which we arewatching very closely, but what we offer is the platform for the visibility.There are other things to be done by other people to enable, for example, allthe aircraft in the vicinity of the known aircraft to be visualized on thescreen. We can’t do that unless there is some equipment on board otherairplanes and that’s what the FAA are talking to some other major vendors in theindustry about. We can’t jump in on that act, I am afraid, at the moment but weare watching it carefully.

So there might be a time when you would have greater need towork with the FAA directly?

There might be, yes.

What about high level military?

Well, we haven’t pursued that avenue, I must say, but it’s agood idea and I’ll give that some thought. Thanks very much.

Your next question comes from Tamara Manoukian - GreenwoodInvestments.

What portion of backlog is on airplanes with no FPC rightnow?

I am not sure we know the answer to that off the top of ourheads. Just let Jim take a few seconds to do some arithmetic. It is very small.If I were to guess, I would say its between 10% and 15%.

About 15%.

Your next question comes from Ashok Ahuja – ICOR. Ashok Ahuja – ICOR : Based upon your statement, it appears as though at least 10%to 15% of backlog and expected revenues out of the $50 million will probablycome from Eclipse. Based upon the questions that were asked about Eclipse, itseems that the underlying concern that the people who are asking the questionshad was do you have a question in terms of viability of Eclipse long term? I guess that is really the question.

The deduction is flawed. There is no STC on Eclipse, so theanswer regarding STCs in terms of percentage, and the backlog not covered by STChas nothing to do with Eclipse. As far as the viability of Eclipse is concerned, that’ssomething we are very aware of where they sit at the moment, but I’m not goingto discuss it with anyone in the open marketplace for sure.

Our final question is coming Greg Fujii - Coghill.

Sorry guys. I’m in the queue too many times here. Noquestions, thank you.

At this time, there are no further questions. I will turnthe floor back over to management for any closing remarks.

I think that has been a very worthwhile call and we wouldlike to wish you all a very good day. Thanks.