Back to GetFilings.com



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year Commission File No.
ended March 31, 2004 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

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

2,144,151 shares of Common Stock were outstanding as of June 10, 2004.

Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
Common Stock $.10 par value American Stock Exchange

Indicate by 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 |_|.

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes |_| No |X|.

The aggregate market value of the voting Common Stock (par value $.10 per share)
held by non-affiliates on June 10, 2004 was $4,126,121 using the price of the
last trade on June 10, 2004.

Total Pages - 64

Exhibit Index - pages 56 - 58



PART I

Item 1. Description of Business

General

Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in
business since 1947. Tel is a leading designer and manufacturer of
avionics test and measurement solutions for the global commercial air
transport, general aviation, and government/military aerospace and defense
markets. The Company provides instruments to test, measure, calibrate, and
repair a wide range of airborne navigation and communication equipment.

In January, 2004, the Company acquired privately held Innerspace
Technology, Inc. ("ITI"). ITI has been in the marine systems business for
over 30 years designing, manufacturing, and distributing a variety of
shipboard and underwater instruments to support hydrographers,
oceanographers, researchers, engineers, geophysicists, and surveyors
worldwide. References to the Company or Tel include ITI unless the context
requires otherwise (see Note 16 to Financial Statements - Segment
Information).

In recent years, the Company significantly improved its financial
condition and market position, and firmly established itself as one of the
leading suppliers in the avionics test equipment industry. In 2004,
revenues decreased on a year to year basis for the first time in over five
years. For the year ended March 31, 2004, sales declined 10% from the
prior year, but were still 10% higher than revenues for 2002. The decrease
in sales in 2004 is primarily attributed to the reduced shipments of the
AN/APM-480 to the U.S. Navy and delays in other government procurement
programs. The Company, in agreement with the U.S. Navy, temporarily
decreased the number of units shipped in anticipation of these units being
returned for the planned upgrades and enhancements. The total number of
units under contract did not change and remained at 1,300 units. As of
March 31, 2004, 1,153 units of the AN/APM-480 have been shipped. This
decline in shipments was partially offset by an increase in commercial
sales, primarily as a result of the introduction of the TR-220/210 family
of products. As a result of reduced revenues and increased engineering,
research, and development and marketing costs, net income for the year was
lower than the previous year.

The acquisition of ITI was the Company's first step in its strategy to
pursue growth and diversification through acquisitions and alliances of
compatible businesses or technologies. The Company is attempting to
increase ITI's sales by expanding distribution and enhancing marketing and
product development.

The Company continues to invest in new product development. Engineering,
research, and development expenditures increased 35% for the year ended
March 31, 2004 as compared to the previous year, and represented 20% of
total sales for the current fiscal year as compared to 14% for the prior
fiscal year.

The Company has been active in responding to customer requests for
quotation, and continues to pursue opportunities in both the commercial
and government markets, both domestically and internationally.


2


Item 1. Description of Business

General (Continued)

The Company also continues its efforts with Semaphore Capital Advisors LLC
and Investment Partners Group, investment bankers, to pursue growth and
diversification through acquisitions and alliances of compatible
businesses or technologies.

Tel's instruments are used to test navigation and communications equipment
installed in aircraft, both on the flight line ("ramp testers") and in the
maintenance shop ("bench testers"), and range in list price from $7,900 to
$85,000 per unit. Tel continues to develop new products in anticipation of
customers' needs, in order to continue to strengthen its market position.
Its development of multifunction testers, for example, has made it easier
for customers to perform ramp tests with less operator training, and lower
product support costs. In recent years the Company has become a major
manufacturer and supplier of IFF (Identification Friend or Foe) flight
line test equipment, discussed below. The Company is currently working on
the next generation of IFF test sets in anticipation of U.S. and NATO
requirements for more sophisticated IFF testing, and which will provide
the foundation technology for future products.

The AN/APM-480 is a militarized avionics ramp tester used to simulate IFF
Transponder/Interrogator and TCAS (Traffic Alert and Collision Avoidance
system) functions to provide "go, no-go" testing of avionics in military
aircraft, on the flight line and aircraft carrier deck. The Company has
begun development of the next generation of more sophisticated IFF testers
in anticipation that the U.S. Navy will issue a contract in the future to
upgrade the AN/APM-480 units. Although there is no assurance that the
Company will receive any such contracts to upgrade the AN/APM 480, which
may be issued by the U.S. Navy, the Company believes that it is well
positioned to obtain such contracts.

The introduction of the TR-220 Multi-Function tester has been very
successful. The TR-220 has the capability to test TCAS, Distance Measuring
Equipment (DME), and Transponders (Mode A, C and S) for commercial
aircraft fitted with these avionics systems, as required by the FAA. In
addition, the test set transmits and receives Mode S 1090 MHz extended
squitter (unsolicited broadcast transmissions which state the aircraft's
three-dimensional location and direction and velocity of its flight path),
which are officially labeled Automatic Dependent Surveillance - Broadcast
(ADS-B) and also transmits Traffic Information System (TIS) intruder
flight data. The TR-220 also provides test capability for Mode S
Elementary and Enhanced Surveillance Transponders which are currently
being introduced to meet the new European requirements.

Innerspace Technology, Inc. ("ITI") is a leading designer and manufacturer
of marine instrumentation systems, including depth sounders and tide
gauges, and is a systems integrator to support hydrographers,
oceanographers, researchers, engineers, geophysicists, and surveyors
worldwide with components, complete turnkey systems, and equipment
rentals. To assist in providing a full-function system for its customers,
ITI is an authorized dealer of Trimble Global Positioning System (GPS)
products.

A depth sounder is an instrument that uses an acoustic transmitter and
receiver to measure sonic travel time from the transmitter to the sea
floor and back to the receiver, in order to map the contour of the sea
floor. ITI offers these products with both single and dual frequency
operation, and ITI's products range in price from approximately $5,000 to
$20,000.


3


Item 1. Description of Business

General (Continued)

Marketing and Distribution

Domestic commercial sales are made directly or through distributors. No
direct commercial customer accounted for more than 10% of commercial sales
in 2004, 2003, and 2002. There are no written agreements with domestic
distributors, who receive a 15%-20% discount for stocking, selling, and,
in some cases, supporting these products. Tel gives a 5% to 10% discount
to non-stocking distributors, and to independent sales representatives,
depending on their sales volume and promotional effort. One domestic
distributor (Avionics International) accounted for approximately 8%, 13%,
and 19% of commercial sales for the years ended March 31, 2004, 2003, and
2002, respectively. In addition, another domestic distributor (Aero
Express) accounted for 26% of commercial sales in each of the years ended
March 31, 2004 and 2003.

Marketing to the U.S. Government is made directly by employees of the
Company or through independent sales representatives, who receive
commissions.

International sales are made direct, through American export agents, or
through the Company's distributors at a discount reflecting a 20% selling
commission, under written or oral, year-to-year arrangements. The Company
has an exclusive distribution agreements with Muirhead Avionics and
Accessories, Ltd, based in the United Kingdom, to represent the Company in
parts of Europe and with Milspec Services in Australia and New Zealand.
Muirhead accounted for approximately 20% of commercial sales for the year
ended March 31, 2004. Tel also sells its products through exclusive
distributors in Australia, New Zealand, Spain, Portugal, and the Far East
and is exploring distribution in other areas. For the years ended March
31, 2004, 2003, and 2002, foreign commercial sales were 31%, 24%, and 20%,
respectively, of total commercial sales. Additionally, the Company entered
into an agreement with M.P.G. Instruments s.r.l., wherein this distributor
has the exclusive sales rights for DME/P ramp and bench test units. The
Company continues to explore additional marketing opportunities in other
parts of the world, including the Far East. The Company has no material
assets overseas.

Tel also provides customers with calibration and repair services.

Future domestic market growth will be affected in part on whether the U.S.
Federal Aviation Administration (FAA) implements plans to upgrade the U.S.
air traffic control system and on continuing recent trends towards more
sophisticated avionics systems, both of which would require the design and
manufacture of new test equipment. The Company continues to analyze the
needs of the market, to develop new and improved instruments to meet
emerging FAA requirements, and to redesign models to add functions and
reduce the cost. The Company believes its test equipment is recognized by
its customers for its quality, durability, reliability, and affordability.


4


Item 1. Description of Business

General (Continued)

Marine Systems

Most ITI sales of marine instrumentation products are made directly to
customers. ITI has embarked on an extensive marketing campaign, including
advertising in most trade journals and attendance at trade shows, to
increase its product exposure in the industry.

Backlog

Set forth below is Tel's backlog, including an immaterial amount for ITI
in 2004, at March 31, 2004, 2003, and 2002.

Commercial Government Total
---------- ---------- -----

March 31, 2004 $496,156 $2,922,491 $3,418,647
March 31, 2003 $869,930 $6,072,504 $6,942,434
March 31, 2002 $186,690 $8,346,557 $8,533,247

Tel believes that most of the backlog at March 31, 2004 will be delivered
during the next 12-18 months. Reduction in backlog is a result of having
delivered approximately 89% of the 1,300 units ordered by the U.S. Navy
for the AN/APM-480 IFF test sets and delays in other government
procurement programs. Historically, orders received by the Company, other
than for larger programs like the AN/APM-480, are received and shipped
within the year and, as such, are not reflected in year-end backlog.

All of the backlog is pursuant to purchase orders and all of the
government contracts are fully funded. However, government contracts are
always susceptible to termination by the government for convenience.

Suppliers

Tel and ITI obtain its purchased parts from a number of suppliers. These
materials are standard in the industry and Tel foresees no difficulty in
obtaining purchased parts, as needed, at acceptable prices.

Competition

Avionics

The Company manufactures and sells commercial and military products as a
single avionics business.

Civilian Markets

The general aviation market consists of some 1,000 avionics repair and
maintenance service shops, at private and commercial airports in the
United States, which purchase test equipment to assist in the repair of
aircraft electronics. The commercial aviation operator market consists of
approximately 80 domestic and foreign commercial airlines.

The civilian market for avionic test equipment is dominated by three
manufacturers, including Tel, IFR, a division of Aeroflex, Inc., and JC
Air, a division of Goodrich Corporation. This market is relatively small
and highly competitive. Tel has been successful because of its high
quality products, competitive prices, and responsive service.


5


Item 1. Description of Business

General (Continued)

Competition (Continued)

Military Markets

The military market is large and is dominated by large corporations with
substantially greater resources than the Company. Tel competitively bids
for government contracts on the basis of the uniqueness of its products
and "small business set asides" (i.e., statutory provisions requiring the
military to entertain bids only from statutorily defined small
businesses), and on bids for sub-contracts from major government
suppliers. The military market consists of many independent purchasing
agencies and offices.

In recent years the Company has become an important supplier for the U.S.
Military, as well as the NATO countries, for flight line IFF test
equipment. The Company is currently working on the next generation of IFF
test sets.

Marine Systems

The market for marine instrumentation systems is small and is dominated by
five major manufacturers, including Innerspace Technology, Inc. (wholly
owned by Tel), Odom Hydrographic Systems, Inc., Knudsen Engineering
Limited, Simrad AS (a division of Kongsberg), and Reson AS. There are
approximately another five companies that compete on a smaller scale. The
Company is able to compete based upon its reputation in the industry, the
quality of its products, and its responsive service.

Patents

Tel has no patents or licenses which are material to its business.

Engineering, Research, and Development

In the fiscal years ended March 31, 2004, 2003, and 2002, Tel spent
$2,152,515, $1,601,493, and $1,521,219, respectively, on the engineering,
research, and development of new and improved products. None of these
amounts was sponsored by customers. Tel's management believes that
continued significant expenditures for engineering, research, and
development are necessary to enable Tel to expand its sales and profits.
Approximately 26% of 2004 revenues are attributed to products developed by
Tel in the last two years.

The increase in expenditures is the result of an increase in staff and the
Company's development efforts. Engineering, research, and development
expenditures in 2004 were directed primarily to the continued development
of the next generation of IFF test sets, the development of a
multi-function commercial bench tester (TB-2100), the development of a
foundation technology for future products, and the incorporation of other
product enhancements. The Company owns all of these designs.


6


Item 1. Description of Business

General (Continued)

Personnel

At June 10, 2004, Tel had 25 employees in manufacturing, materials
management, and quality assurance, 15 in administration and sales, and 13
in engineering, research and development, none of whom belongs to a union.
While the job market is tight for technical personnel, Tel has generally
been able to add personnel as required. At June 9, 2004, the Company
utilized 8 part-time individuals in manufacturing and several part-time
consultants on an as needed basis.

Item 2. Properties

The Company leases 19,564 square feet in Carlstadt, New Jersey as its
manufacturing plant and administrative offices, pursuant to a ten-year
lease expiring in February, 2011 (see Note 13 to the Financial
Statements). The Avionics and Marine Divisions are both located in this
facility. Tel is unaware of any environmental problems in connection with
its location and, because of the nature of its manufacturing activities,
does not anticipate such problems.

Item 3. Pending Legal Proceedings

There are no material pending legal proceedings.


7


PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Common Stock, $.10 par value, of the Registrant ("Common Stock") is
traded on the American Stock Exchange and its symbol is TIK. The Company
was listed on the American Stock Exchange and started trading on February
10, 2004 at a price of $3.00 per share. Prior to that date, there had been
no established public trading market for Registrant's Common Stock.
Subsequent to the public offering of the Company's Common Stock in
December 1988, the Tel shares had traded sporadically in the
Over-The-Counter ("OTC") market. During the year ended March 31, 2004, the
Company's Common Stock had the high and low closing prices of $3.62 on the
American Stock Exchange and $1.70 on the over-the-counter market. OTC
quotations reflect inter-dealer prices, without retail markup or
commission, and may not necessarily represent actual transactions. On June
10, 2004, the bid on the Amex was $3.75.

The following table sets forth the high and low sale prices for our common
stock for the periods indicated:

Fiscal Year High Low
--------------- ---- ----
2004

First Quarter 2.70 1.70
Second Quarter 2.48 1.80
Third Quarter 3.10 2.15
Fourth Quarter 3.62 2.95

2003

First Quarter 2.50 2.07
Second Quarter 2.35 1.97
Third Quarter 2.10 1.70
Fourth Quarter 2.20 1.85

During fiscal year 2004, the Company issued 8,350 shares of common stock
upon exercise of stock option grants pursuant to its 1998 and 2003 Stock
Option Plans. All of the shares were issued pursuant to the exemption from
registration under the Securities Act, pursuant to Section 4(2) of that
Act. See Note 15 to Financial Statements and Item 11, Executive
Compensation for information on the Company's Employee Stock Option Plans
of 1998 and 2003.

Approximate Number of Equity Holders

Number of Holders
on Record as of
Title of Class March 31, 2004
------------------------------------------------------
Common Stock, par value
$.10 per share 303

Dividends

Registrant has not paid dividends on its Common Stock and does not expect
to pay such dividends in the foreseeable future.


8


Item 6. Selected Financial Data

TEL-INSTRUMENT ELECTRONICS CORP.
SUMMARY OF FINANCIAL INFORMATION



Years Ended March 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----

Statement of Income Data:
Sales $ 10,704,029 $ 11,861,387 $ 9,731,081 $ 7,508,901 $ 5,130,782

Cost of sales 4,977,537 5,738,729 4,684,147 3,704,572 2,489,769
------------ ------------ ------------ ------------ ------------

Gross Margin 5,726,492 6,122,658 5,046,934 3,804,329 2,641,013

Operating costs and expenses:
Selling, general and administrative 2,976,137 2,803,498 1,858,843 1,622,881 1,165,844
Engineering, research & development 2,152,515 1,601,493 1,521,219 1,047,305 1,051,833
------------ ------------ ------------ ------------ ------------
5,128,652 4,404,941 3,380,062 2,670,186 2,217,677

Income from operations 597,840 1,717,667 1,666,872 1,134,143 423,336
------------ ------------ ------------ ------------ ------------

Other expenses, net (4,047) (10,881) (81,183) (95,026) (64,378)
------------ ------------ ------------ ------------ ------------

Diluted income before income taxes 593,793 1,706,786 1,585,689 1,039,117 358,958

Income tax expense (benefit) 230,883 702,796 557,999 (295,888) (241,595)
------------ ------------ ------------ ------------ ------------

Net income $ 362,910 $ 1,003,990 $ 1,027,690 $ 1,335,005 $ 600,553
============ ============ ============ ============ ============

Diluted income per common share $ 0.16 $ 0.47 $ 0.48 $ 0.63 $ 0.28
============ ============ ============ ============ ============





Years Ended March 31,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----

Balance Sheet Data:

Working capital $ 3,767,150 $ 4,154,887 $ 3,154,081 $ 1,766,360 $ 921,130

Total assets 7,392,501 7,311,177 6,233,572 5,934,646 3,932,765

Long-term debt -- 71,069 152,183 218,345 301,682

Stockholders' equity 5,287,693 4,907,874 3,900,794 2,862,348 1,522,047



9


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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, 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 costs and availability of
its raw materials; the actions of 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.

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 with the Statement of Critical Accounting Policies noted below.
The Company's fiscal year begins on April 1 and ends of March 31. Unless
otherwise noted, all references in this document to a particular year
shall mean the Company's fiscal year.

The Company's aviation business is conducted in the Government, Commercial
and General aviation markets (see Note 16 of Notes to Financial Statements
for segment financial information). In January 2004, the Company completed
its acquisition of ITI, a company selling products to the marine industry.
ITI, as of January 2004, was a wholly-owned subsidiary of the


10


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General (continued)

Company, and ITI's balance sheet and results of operations from January
16, 2004 are consolidated in the Company's financial statements. ITI's
contribution to consolidated sales and revenues for February and March of
2004 is not material, but the Company anticipates an increased
contribution in fiscal 2005.

Overview

The Company sells its test units to commercial and government purchasers.
Commercial sales are generally made to a large number of purchasers, for a
relatively small number of units, for delivery inside of a year, and
therefore substantial amounts of these sales never appear in year-end
backlog. From time to time, the Company wins a large government contract
calling for deliveries of a substantial number of units over a several
year delivery period. These units are reflected in annual backlog.

In 2000, the Company won a large government contract to deliver 1,300
AN/APM-480 IFF units to the Navy over several years, commencing in 2001.
This contract and the AN/APM-480 units are further described in Item 1
above, Description of Business.

As a consequence of this contract, annual backlog increased significantly
in 2000 and subsequent years, government sales increased significantly in
2001 and subsequent years and, the government's acceptance of the
AN/APM-480 helped the Company become a major supplier of IFF Test Units to
the United States and NATO countries.

Deliveries of AN/APM-480 units under this contract declined in 2004, as a
result of the facts that (a) a majority of the units under contract have
been delivered, (b) the Company agreed with the Navy to reduce shipments
in the 4th quarter in contemplation of the Navy returning units for
upgrading, and (c) unexpected government delays in new programs. As a
consequence, government sales were almost $3 million less in 2004 than in
2003. One-hundred forty-seven units of the original 1,300 contracted for
remain to be delivered in 2005.

The Company is well positioned to bid for new government contracts for
test units. The government programs, which will award new test equipment
contracts, have been delayed by the government. The Company contemplates
that the bidding for these new programs will begin in 2005, and the
Company intends to submit bids on these programs and is optimistic,
although no assurance can be given, that it will be able to win one or
more large government contracts.

Fiscal Year 2004

Revenues and income before taxes in 2004 declined from the comparable
items in 2003, for the first annual year-to-year decline in 5 years.
Between 1999 and 2003, revenues increased from $3.5 million to $11.9
million, income before taxes improved from a loss of $244,000 to a profit
of $1.7 million, and shareholders' equity increased from $919,000 to $4.9
million.

In 2004, revenues declined by 10% from the prior year ($10.7 million as
compared to $11.9 million in 2003), but still exceeded revenues in 2002 by
9%, and income before taxes declined from $1.7 million last year to
$594,000 in 2004. Shareholders' equity increased to $5,287,693 ($2.34 per
share) at March 31, 2004.


11


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Fiscal Year 2004 (continued)

Revenues declined in 2004 principally because: (a) the Company's large
Navy contract for deliveries of its AN/APM-480 is winding down (at March
31, 2004, 147 of the original 1,300 units under contract remain to be
delivered), (b) the Company and the Navy agreed to reduce deliveries of
the AN/APM-480 scheduled for the last quarter of 2004, in contemplation of
delivered units being returned to the Company for upgrading, and (c)
unexpected delays on the government's part in several new procurement
programs in which the Company intends to bid and as to which it believes
it is well positioned to win some awards.

Commercial avionics sales in 2004 increased substantially over 2003, as a
result of new products like the TR-220/210 and of increased marketing
efforts. Commercial sales have continuously increased from 1999,
increasing from $1.7 million in that year to $3.9 million in the current
year.

The Company is continuing its efforts to increase commercial sales.

The Company continues to invest in new product development in order to
maintain and expand its market position. Engineering, research and
development costs increased in 2004 by 35% over the prior year and amounts
to 20% of revenues as compared to 14% in the prior year. Approximately 26%
of products sold in 2004 were developed by the Company in the last two
years.

Early in 2004, the Company hired senior employees in marketing,
engineering, and business development, acquired ITI in January 2004, which
expands the Company's sales, markets, and products, and is making efforts
to expand the geographical markets for the Company's avionics products.

Income before taxes declined from $1.7 million in 2003 to $594,000 in the
current year, as a result of lower revenues and increased costs associated
with engineering, research and development, and marketing.


12


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Comparison of 2004, 2003, and 2002

Set forth below is a schedule of the Company's sales, gross margin,
operating expenses and income before taxes for FY 2002-2004.

- --------------------------------------------------------------------------------
Operating
Expenses Income
GM as a % Operating as a % Before
Year Sales Gross Margin of Sales Expenses of Sales Taxes
- --------------------------------------------------------------------------------
2004 10,704,024 5,726,492 53.5% 5,128,652 47.9% 593,793
- --------------------------------------------------------------------------------
2003 11,861,387 6,122,658 51.6% 4,404,941 37.1% 1,706,786
- --------------------------------------------------------------------------------
2002 9,731,081 5,046,934 51.9% 3,380,062 34.7% 1,585,689
- --------------------------------------------------------------------------------

Results of Operations 2004 Compared to 2003

Sales

For the year ended March 31, 2004, net sales decreased $1,157,358 (9.7%)
as compared to the prior year. Government sales decreased $2,709,989 (29%)
for the current year as compared to 2003. The decrease in sales is
primarily attributed to the reduced shipments of the AN/APM 480 to the
U.S. Navy and delays in other government procurement programs discussed
above. Sales of the AN/APM 480 to the U.S. Navy accounted for 30% of total
sales in 2004 as compared to 49% in 2003. Commercial sales increased
$1,663,654 (70%) for the year ended March 31, 2004, as compared to the
year ended March 31, 2003. The introduction of the TR-220 Multi-Function
test set accounted for most of this increase. The commercial market
continues to remain uncertain, primarily as a result of the continuing
weak financial position of most commercial airlines.

Gross Margin

Gross margin dollars decreased $396,166 (6.5%) for the year ended March
31, 2004, as compared to the prior fiscal year, due to the lower sales
volume. The gross margin percentage for the year ended March 31, 2004
improved to 53.5% as compared to 51.6% for 2003, primarily as a result of
improving manufacturing efficiency and, to a lesser extent, higher prices
as a result of a change in product mix.

Operating Expenses

Selling, general and administrative expenses increased $172,639 (6.2%) for
the 12 months ended March 31, 2004 as compared to the twelve months ended
March 31, 2003, as a result of sales and


13


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Results of Operations 2004 Compared to 2003 (continued)

Operating Expenses (continued)

marketing expenses associated with newly acquired ITI, increases in new
personnel and related expenses, which are offset partially by lower
selling commissions, recruitment and relocation expenses, and professional
fees.

Engineering, research, and development expenses increased $551,022 (34.4%)
for the year ended March 31, 2004 as compared to the year ended March 31,
2003. The increase in expenditures is the result of development of a new
generation of products, including an increase in staff. Engineering,
research, and development expenditures in 2004 were directed to the
continued development of the next generation of IFF test sets, the
development of a multi-function commercial bench tester (TB-2100), the
development of a foundation technology for future products, and the
incorporation of other product enhancements.

Liquidity and Capital Resources

At March 31, 2004, the Company had positive working capital of $3,767,150
as compared to $4,154,887 at March 31, 2003, principally due to the
reduction in accounts receivable. For the year ended March 31, 2004, the
Company generated cash from operations in the amount of $811,772 as
compared to $875,568 in the prior year. This decrease in cash from
operations is primarily attributed to the lower net income for the year
and a decrease in accounts payable, partially offset by a decrease in
accounts receivable.

The Company has a line of credit in the amount of $1,750,000 from Fleet
Bank, and bears an interest rate of 0.5% above the lender's prevailing
base rate, which is payable monthly on any outstanding balance. The
Company does not pay to maintain this open line. At March 31, 2004, the
Company had no outstanding balance. The line of credit is collateralized
by substantially all of the assets of the Company. As of March 31, 2004,
the Company was in compliance with all financial covenants required by the
loan agreement. The line of credit expires at September 30, 2004.

Although accounts receivable, cash, working capital and income from
operations were reduced in 2004, for the reasons discussed above, the
Company's liquidity and capital resources remain positive. Based upon its
current backlog, its existing bank line, and cash balance, the Company
believes that it has sufficient working capital to fund its operating
plans for at least the next twelve months. However, as the Company pursues
additional opportunities, the need for additional capital may arise. The
Company has retained Semaphore Capital Advisors L.P. as its investment
banker to help pursue acquisitions and alliances and, if needed, to help
raise capital. The Company maintains its cash balances primarily in a
money market account for use in operations or in the event that it needs
these funds for an acquisition.

There was no significant impact on the Company's operations, as a result
of inflation for the ended March 31, 2004.


14


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Results of Operations 2004 Compared to 2003

Critical Accounting Policies

In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed
in Note 2 of our Notes to Financial Statements. 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. Revenues under service contracts are recognized when the
services are performed.

Property and equipment - property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets over
periods ranging from three to eight years. Useful lives are estimated at
the time the asset is acquired and are based upon historical experience
with similar assets as well as taking into account anticipated
technological or other changes. Leasehold item improvements are amortized
over the term of the lease or the useful life of the asset, whichever is
shorter.

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.

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 our expectations and
the provisions established, future warranty costs could be in excess of
our warranty reserves. A significant increase in these costs could
adversely affect 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.

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 it will continue to receive positive results.


15


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Critical Accounting Policies (continued)

Income taxes - 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 will 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. The
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in the period that such tax rate changes are enacted.

Contractual Obligations and Commitments

At March 31, 2004, the Company's contractual obligations and commitments
to make future payments are as follows:



Payment Due by Period

Total Less than 1 year 1-3 Years 3-5 Years More than 5 years

Long-Term Debt Obligations $ 257,500 $ 57,500 $ 150,000 $ 50,000 $ --
Capital Lease Obligations 24,768 24,768 -- -- --
Operating Leases 988,368 130,733 416,203 441,432
Purchase Commitments (1) 450,651 450,651 -- -- --
Interest on long-term obligations 34,784 12,284 20,250 2,250

Total Contractual Obligations $1,756,071 $ 675,936 $ 586,453 $ 493,682 $ --


(1) Purchase commitments consist primarily of obligations to purchase
certain raw materials to be utilized in the ordinary course of business.

See Notes 8, 12, and 13 to the Financial Statements.

Borrowings

See Note 7 to the Financial Statements.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

The Company, at this time, is generally not exposed to financial market
risks, including changes in interest rates, foreign currency exchange
rates, and marketable equity security prices.


16


Item 8. Financial Statements and Supplementary Data

Pages
-----

(1) Financial Statements:

Report of Independent Registered Public Accountants
- BDO Seidman, LLP 18

Report of Independent Registered Public Accounting Firm -
PricewaterhouseCoopers, LLP 19

Consolidated Balance Sheet- March 31, 2004 and 2003 20

Consolidated Statements of Income - Years Ended 21
March 31, 2004, 2003 and 2002

Consolidated Statements of Changes in Stockholders' 22
Equity - Years Ended March 31,
2004, 2003 and 2002

Consolidated Statements of Cash Flows - Years Ended 23
March 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements 24-42

(2) Financial Statement Schedule:

II - Valuation and Qualifying Accounts 43

Financial statement schedules not included in this annual report on Form
10-K have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.


17


Report of Independent Registered Public Accountants

The Board of Directors and Stockholders of
Tel-Instrument Electronics Corp
Carlstadt, New Jersey

We have audited the accompanying consolidated balance sheets of
Tel-Instrument Electronics Corp as of March 31, 2004 and 2003 and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the two years in the period ended March 31, 2004. We
have also audited the schedule listed in the accompanying index. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tel-Instrument Electronics Corp as of March 31, 2004 and March 31, 2003,
and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein.

/s/ BDO Seidman, LLP
Woodbridge, New Jersey

May 21, 2004


18


Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
of Tel-Instrument Electronics Corp.:

In our opinion, the statements of income, changes in stockholders equity and
cash flows for the year ended March 31, 2002 present fairly, in all material
respects, the results of operations and cash flows of Tel-Instrument Electronics
Corp. for the year ended March 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule with respect to the year ended
March 31, 2002 included in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Florham Park, NJ
June 13, 2002


19


TEL-INSTRUMENT ELECTRONICS CORP

Balance Sheets

ASSETS March 31, 2004 March 31, 2003
-------------- --------------
Current assets:
Cash and cash equivalents $1,509,828 $1,680,124
Accounts receivable, net of allowance
for doubtful accounts of $41,598 and
$36,598 at March 31, 2004 and 2003,
respectively 1,266,905 1,966,815
Inventories, net 2,202,143 2,262,147
Taxes Receivable 161,695 --
Prepaid expenses and other
current assets 102,039 42,587
Deferred income tax benefit - current 581,348 535,448
---------- ----------
Total current assets 5,823,958 6,487,121

Equipment and leasehold improvements, net 867,886 726,594
Intangible assets, net 413,047 --
Other assets 287,610 97,462
---------- ----------

Total assets $7,392,501 $7,311,177
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Convertible note payable - related
party - current portion (Note 12) $ 250,000 $ 200,000
Convertible subordinated note - related
party 7,500 7,500
Notes payable - other 87,000 --
Capitalized lease obligations - current
portion 24,768 28,637
Accounts payable 346,169 503,216
Deferred revenues 44,663 51,203
Accrued payroll, vacation pay and
payroll withholdings 333,180 436,630
Accrued expenses - related parties 130,279 115,455
Income taxes payable -- 103,924
Other accrued expenses 833,249 885,669
---------- ----------
Total current liabilities 2,056,808 2,332,234

Deferred taxes - long term 48,000 --
Convertible note payable - related party -- 50,000
Capitalized lease obligations - excluding
current portion -- 21,069
---------- ----------
Total liabilities 2,104,808 2,403,303

Commitments -- --

Stockholders' equity
Common stock, par value $.10 per share,
2,144,151 and 2,135,801 issued and
outstanding as of March 31, 2004 and
2003, respectively 214,418 213,583
Additional paid-in capital 3,960,886 3,944,812
Retained earnings 1,112,389 749,479
---------- ----------

Total stockholders' equity 5,287,693 4,907,874
---------- ----------

Total liabilities and stockholders' equity $7,392,501 $7,311,177
========== ==========

The accompanying notes are an integral part of the financial statements


20


TEL-INSTRUMENT ELECTRONICS CORP
Statements of Income

For the years ended March 31,
-----------------------------
2004 2003 2002
---- ---- ----
Net sales $ 10,704,029 $ 11,861,387 $ 9,731,081

Cost of sales 4,977,537 5,738,729 4,684,147
------------ ------------ ------------

Gross margin 5,726,492 6,122,658 5,046,934

Operating expenses:
Selling, general and
administrative 2,976,137 2,803,498 1,858,843
Engineering, research and
development 2,152,515 1,601,493 1,521,219
------------ ------------ ------------

Total operating expenses 5,128,652 4,404,991 3,380,062
------------ ------------ ------------

Income from operations 597,840 1,717,667 1,666,872

Other income/(expense):
Interest income 23,572 48,509 15,103
Interest expense (4,388) (17,832) (52,361)
Interest expense - related
parties (23,231) (41,558) (43,925)
------------ ------------ ------------

Income before income taxes 593,793 1,706,786 1,585,689

Income tax expense 230,883 702,796 557,999
------------ ------------ ------------

Net income $ 362,910 $ 1,003,990 $ 1,027,690
============ ============ ============

Income per common share:
Basic $ 0.17 $ 0.47 $ 0.48
============ ============ ============
Diluted $ 0.16 $ 0.47 $ 0.48
============ ============ ============

Weighted average number of
shares outstanding
Basic 2,142,416 2,135,597 2,127,782
============ ============ ============
Diluted 2,257,575 2,139,681 2,159,986
============ ============ ============

The accompanying notes are an integral part of the financial statements.


21


TEL-INSTRUMENT ELECTRONICS CORP
Statements Of Changes - In Stockholders' Equity



Common Stock
Number of Shares Additional Retained
------------------------ Paid-In -----------
Authorized Issued Amount Capital Earnings Total
---------- --------- ----------- ----------- ----------- -----------

Balances at March 31, 2001 4,000,000 2,124,351 $ 212,438 $ 3,932,111 $(1,282,201) $ 2,862,348

Net income -- -- -- -- 1,027,690 1,027,690
Issuance of common stock upon conversion
of convertible subordinated note -- 5,000 500 7,000 -- 7,500
Issuance of common stock in connection
with the exercise of stock options -- 4,000 400 2,856 -- 3,256
--------- --------- ----------- ----------- ----------- -----------

Balances at March 31, 2002 4,000,000 2,133,351 213,338 3,941,967 (254,511) 3,900,794

Net income -- -- -- -- 1,003,990 1,003,990
Issuance of common stock in connection
with the exercise of stock options -- 2,450 245 2,845 -- 3,090
--------- --------- ----------- ----------- ----------- -----------

Balances at March 31, 2003 4,000,000 2,135,801 213,583 3,944,812 749,479 4,907,874

Net Income -- -- -- -- 362,910 362,910
Issuance of common stock in connection
with the exercise of stock options -- 8,350 835 16,074 -- 16,909
--------- --------- ----------- ----------- ----------- -----------

Balances at March 31, 2004 4,000,000 2,144,151 $ 214,418 $ 3,960,886 $ 1,112,389 $ 5,287,693
========= ========= =========== =========== =========== ===========


The accompanying notes are an integral part of the financial statements.


22


TEL-INSTRUMENT ELECTRONICS CORP
Statements of Cash Flows

For the years ended March 31,
-----------------------------
2004 2003 2002
---- ---- ----
Cash flows from operating
activities:
Net income $ 362,910 $ 1,003,990 $ 1,027,690
Adjustments to reconcile net
income to cash provided by
operating activities:
Deferred income taxes (56,000) 133,551 462,599
Depreciation 269,658 247,677 210,489
Amortization of intangibles 17,958
Provision for losses on
accounts receivable -- -- 25,000
Provision for inventory
obsolescence 28,085 27,500 12,517
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable 780,342 (1,028,966) 301,534
Decrease (increase) in
inventories 106,979 192,033 (142,549)
Increase in taxes
receivable (161,195) -- --
(Increase) decrease in
prepaid expenses and
other assets (53,036) 17,936 (21,837)
(Decrease) increase in
accounts payable (211,713) 291,090 (730,047)
(Decrease) increase in
taxes payable (103,924) 66,568 (25,859)
(Decrease) increase in
deferred revenues, and
other accrued expenses (168,292) (75,811) 259,029
----------- ----------- -----------

Net cash provided by
operating activities 811,772 875,568 1,378,566
----------- ----------- -----------

Cash flows from investing
activities:
Additions to equipment and
leasehold improvements (238,000) (152,261) (238,603)
Acquisition of business,
including acquisition costs (545,921) -- --
Increase in cash surrender
value of life insurance (17,692) (33,142) (24,083)
----------- ----------- -----------

Net cash used in
investing activities (801,613) (185,403) (262,686)
----------- ----------- -----------

Cash flows from financing
activities:
Proceeds from exercise of
warrants and options 16,909 3,090 3,256
Repayment of convertible notes
payable -- (100,000) --
Repayment of line of credit -- -- (250,000)
Repayment of loan on life
insurance policy (172,426) -- --
Repayment of capitalized lease
obligations (24,938) (111,322) (104,383)
----------- ----------- -----------

Net cash used in
financing activities (180,455) (208,232) (351,127)
----------- ----------- -----------

Net (decrease) increase in cash
and cash equivalents (170,296) 481,933 764,753

Cash and cash equivalents,
beginning of year 1,680,124 1,198,191 433,438
----------- ----------- -----------

Cash and cash equivalents,
end of year $ 1,509,828 $ 1,680,124 $ 1,198,191
=========== =========== ===========

Supplemental information:
Taxes paid $ 552,000 $ 488,029 $ 140,314
=========== =========== ===========
Interest paid $ 27,252 $ 104,423 $ 69,757
=========== =========== ===========
Assets acquired through
capitalized leases $ -- $ -- $ 119,240
=========== =========== ===========
Notes payable in connection
with acquisition of business $ 87,000 $ -- $ --
=========== =========== ===========

The accompanying notes are an integral part of the financial statements.


23


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements

1. Business, Organization, and Liquidity

Business and Organization:

Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in
business since 1947. The Company is a leading designer and manufacturer of
avionics test and measurement instruments for the global, commercial air
transport, general aviation, and government/military aerospace and defense
markets. Tel-Instrument provides instruments to test, measure, calibrate,
and repair a wide range of airborne navigation and communication
equipment. The Company sells its equipment to both domestic and
international markets.

In January, 2004, the Company acquired privately held Innerspace
Technology, Inc. (ITI). ITI has been in the marine instrumentation systems
business for over 30 years designing, manufacturing and distributing a
variety of shipboard and underwater instruments to support hydrographers,
oceanographers, researchers, engineers, geophysicists, and surveyors
worldwide.

2. Summary of Significant Accounting Policies

Principles of Consolidation:

The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and
include the Company and its wholly-owned subsidiary. All significant
inter-company accounts and transactions have been eliminated. The Company
acquired Innerspace Technology, Inc. on January 16, 2004. As such,
financial statements have been consolidated as of this date.

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.
The Company does not currently have a provision since it has not
experienced a material amount of returns in the period presented. Revenues
under service contracts are recognized when the services are performed.

Shipping and handling costs charged to customers are not material.

Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.

In connection with an existing contract with the U.S. Navy for the
delivery of test equipment, the Company agreed to upgrade the equipment
being delivered under the contract. The Company accrued the estimated cost
of $63,626 and $337,793 in 2004 and 2003, respectively, of upgrade costs
with respect to pre-upgrade units delivered during those years. The
Company determined that the upgrade costs, estimated to be approximately
$450 per unit, were inconsequential and perfunctory. The Company is
charging costs of performing the upgrade work to the accrued upgrade
liability as the units are shipped.

Cash and Cash Equivalents:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost which approximates market value.


24


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Financial Instruments:

The carrying amounts of cash and cash equivalents and other current assets
and liabilities approximate fair value due to the short-term maturity of
these investments. The Company does not determine an estimated fair value
for its related party debt, since such debt does not have a readily
determinable market.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's avionics customer base is primarily comprised of
airlines, distributors, and the U.S. Government. The Company's marine
systems customer base consists primarily of engineering and surveying
companies, distributors and federal and state agencies. As of March 31,
2004, the Company believes it has no significant risk related to its
concentration within its accounts receivable. (See Note 14 to Financial
Statements).

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. In accordance with industry practice,
service parts inventory is included in current assets, although service
parts are carried for established requirements during the serviceable
lives of the products and, therefore, not all parts are expected to be
sold within one year.

Equipment and Leasehold Improvements:

Office and manufacturing equipment are stated at cost. Depreciation and
amortization is provided on a straight-line basis over periods ranging
from 3 to 8 years.

Leasehold improvements are amortized over the term of the lease or the
useful life of the asset, whichever is shorter.

Maintenance, repairs, and renewals that do not materially add to the value
of the equipment nor appreciably prolong its life are charged to expense
as incurred.

When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in the Statements of Operations.

Engineering, Research and Development Costs:

Engineering, research and development costs are expensed as incurred.


25


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Intangible Assets:

Intangible assets consist primarily of purchased intangible assets in
connection with the acquisition of ITI. Purchased intangible assets
primarily include existing and core technology, non-compete agreements,
and customer list. Intangible assets are amortized using the straight-line
method over 5 years.

Income Per Common Share:

The Company's basic income per share is based on net income for the
relevant period, divided by the weighted-average number of common shares
outstanding during the period. Diluted income per share is based on net
income for the relevant period, divided by the weighted average number of
common shares outstanding during the period, including common share
equivalents, such as outstanding stock options using the treasury stock
method. Incremental shares of 189,000 and 13,200 related to stock options
were excluded from the diluted earnings per share calculation for the
years ended March 31, 2003 and 2002, respectively, since they were
antidilutive. No shares were excluded for the year ended March 31, 2004.

Accounting for Income Taxes:

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 will 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. The effect on
deferred tax assets and liabilities of a change in tax rate is recognized
in the period that such tax rate changes are enacted.

Stock Option Plans:

The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 and 148, "Accounting for
Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 the
Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made since 1996 as if the
fair-value-based method as defined in SFAS No. 123 had been applied. The
Company does not plan to adopt the fair value based method prescribed by
SFAS No. 123.


26


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Stock Option Plan (continued):

The per share weighted-average fair value of stock options granted for the
years 2004, 2003, and 2002 was $1.10, $1.01, and $1.67, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 3.5% in 2004 and 5% in 2003 and 2002,
volatility factor of 50% in 2004 and 2003 and 135% in 2002, and an
expected life of 5 years. Had the Company determined compensation cost
based on the fair market value at the grant date for its stock options
under SFAS No. 123, the pro forma amounts are indicated below:

2004 2003 2002
---- ---- ----

Net income - as reported $ 362,910 $ 1,003,990 $ 1,027,690
Less fair value of stock
options (51,056) (47,044) (55,316)
--------- ----------- -----------
Net income - pro forma $ 311,854 $ 956,946 $ 972,374
========= =========== ===========

Basic earnings per share
- as reported $ 0.17 $ 0.47 $ 0.48
Basic earnings per share
- pro forma 0.15 0.45 0.46

Diluted earnings per share
- as reported 0.16 0.47 0.48
Diluted earnings per share
- pro forma 0.14 0.45 0.45


27


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Long-Lived Assets To Be Disposed Of:

The company follows SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard provides accounting and reporting
requirements for the impairment of all long-lived assets (including
discontinued operations) and it also extends the reporting requirements
for discontinued operations of APB 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," to all components of an entity. The primary purpose of SFAS
No. 144 is to establish guidelines to create a consistent accounting model
for the impairment of long-lived assets to be disposed of and to clarify
some implementation issues of SFAS No. 121. No impairment losses have been
recorded through March 31, 2004.

Use of Estimates:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
that management make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most significant estimates include income
taxes, warranty claims, inventory and accounts receivable valuations.

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 credit limits for 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 it will continue to receive positive results.

Warranty Reserve:

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 our expectations and the provisions
established, future warranty costs could be in excess of our warranty
reserves. A significant increase in these costs could adversely affect our
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.


28


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

2. Summary of Significant Accounting Policies (continued)

Risks and Uncertainties:

The Company's operations are subject to a number of risks, including but
not limited to changes in the general economy, demand for the Company's
products, the success of its customers, research and development results,
reliance on the government markets and the renewal of its line of credit.
The Company has a major contract with the U.S. Navy, which like all
government contracts, is subject to termination.

New Accounting Pronouncements:

In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation No. 46. Consolidation of Variable Interest Entities
("FIN 46"). FIN 46 addresses the consolidation by business enterprises of
variable interest entities, as defined in the Interpretation. FIN 46
expands existing accounting guidance regarding when a company should
include in its financial statements the assets, liabilities, and
activities of another entity. Many variable interest entities have
commonly been referred to as special-purpose entities or off-balance sheet
structures. In December 2003, the FASB issued Interpretation No. 46R ("FIN
46R"), a revision to FIN 46. FIN 46R clarifies some of the provisions of
FIN 46 and exempts certain entities from its requirements. FIN 46R is
effective at the end of the first interim period ending after March 15,
2004. This pronouncement does not currently impact the Company's financial
position, results of operations or cash flows.

In July 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity ("SFAS 150"). SFAS 150 requires the shares
that are mandatorily redeemable for cash or other assets at a specified or
determinable date or upon an event certain to occur to be classified as
liabilities, not as part of shareholders' equity. This pronouncement does
not currently impact the Company's financial position, results of
operations or cash flows.

Emerging Issues Task Force ("ETIF") Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables," is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The ETIF addresses
the accounting for revenue generating arrangements involving multiple
deliverables. This ETIF does not currently impact the Company since there
are no new sales agreements with multiple deliverables.


29


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

3. Accounts Receivable

The following table sets forth the components of accounts receivable:

March 31,
---------
2004 2003
---- ----
Government $ 446,259 $ 1,448,337
Commercial 862,244 555,076
Less: Allowance for doubtful accounts (41,598) (36,598)
----------- -----------
$ 1,266,905 $ 1,966,815
=========== ===========

4. Inventories

Inventories consist of:

March 31,
---------
2004 2003
---- ----
Purchased parts $ 846,782 $ 1,074,442

Work-in-process 1,401,722 1,289,578
Finished goods 94,537 10,940
Less: Reserve for obsolescence (140,898) (112,813)
----------- -----------
$ 2,202,143 $ 2,262,147
=========== ===========

Work-in-process inventory includes $916,045 and $770,081 for government
contracts at March 31, 2004 and 2003, respectively.

5. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

March 31,
---------
2004 2003
---- ----
Leasehold Improvements $ 398,386 $ 347,737
Machinery and equipment 1,121,600 988,314
Automobiles 16,514 16,514
Sales equipment 367,994 272,478
Rental assets 131,500 --
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation (1,535,731) (1,266,072)
------------ ------------
$ 867,886 $ 726,594
============ ============


30


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

6. Accrued Expenses

Accrued payroll, vacation pay and payroll withholdings consist of the
following:

March 31,
---------
2004 2003
---- ----
Accrued profit sharing $ 106,277 $ 212,743
Accrued vacation pay 168,295 160,779
Accrued salary and payroll taxes 58,608 63,108
--------- ---------
$ 333,180 $ 436,630
========= =========

Accrued payroll, vacation pay and payroll withholdings includes $85,114
and $146,834 at March 31, 2004 and 2003, respectively, which is due to
officers.

Other accrued expenses consist of the following:

March 31,
---------
2004 2003
---- ----
Accrued commissions $ 48,443 $ 160,791
Accrued legal -- 37,996
Accrued audit fees 64,500 63,000
Accrued consulting 86,940 29,350
Warranty reserve 15,851 18,442
Upgrade liability 505,364 441,738
Accrued - other 112,151 134,352
--------- ---------
$ 833,249 $ 885,669
========= =========

Accrued expenses - related parties consists of the following:

March 31,
---------
2004 2003
---- ----
Interest and professional fees to
non-employee officer stockholder $ 36,524 $ 20,611

Interest and other expenses due to
Company's Chairman/President 93,755 94,844
--------- ---------
$ 130,279 $ 115,455
========= =========


31


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

7. Line of Credit

The Company has a line of credit in the amount of $1,750,000 from Fleet
Bank. Interest on any outstanding balances is payable monthly at an annual
interest rate of one-half of one percent (0.5%) above the lender's
prevailing base rate. The Company's interest rate was 4.5% and 5% at March
31, 2004 and 2003, respectively. The Company pays no fee to maintain the
line of credit. The line is collateralized by substantially all of the
assets of the Company. The credit facility requires the Company to
maintain certain financial covenants. As of March 31, 2004 and March 31,
2003, the Company was in compliance with all financial covenants and had
no outstanding borrowings. The line of credit expires at September 30,
2004.

8. Capitalized Lease Obligations

The Company has entered into lease commitments for equipment that meet the
requirements for capitalization. The equipment has been capitalized and
shown in office and manufacturing equipment in the accompanying balance
sheets. The related obligations are also recorded in the accompanying
balance sheets and are based upon the present value of the future minimum
lease payments with interest rates ranging from 9% to 18%. The net book
value of equipment acquired under capitalized lease obligations amounted
to $89,850 and $161,906, respectively, at March 31, 2004 and 2003. As of
March 31, 2004 and 2003, accumulated amortization under capital leases
were $277,773 and $205,717, respectively.

Commitments under these leases, which all expire in 2005, for the years
subsequent to March 31, 2004 are as follows:

Total minimum lease payments $ 25,539
Less amounts representing interest (771)
---------
Present value of net minimum lease payments 24,768
Less current portion (24,768)
---------
Long-term capital lease obligation $ -0-
=========


32


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

9. Intangible Assets

Intangible assets, net totaling $413,047 as of March 31, 2004 consists of
intellectual property acquired, customer lists, and non-compete agreements
acquired and are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful life of the respective assets, five years.

The components of intangible assets at March 31, 2004 are as follows:

Accumulated
Cost Amortization
---- ------------
Intellectual Property $ 294,005 $ 12,250
Customer List 50,000 2,083
Non-Compete Agreement 87,000 3,625
--------- --------
Total intangible assets $ 431,005 $ 17,958
========= ========

The Company continues to amortize its intangible assets over their
estimated useful lives with no residual value. Amortization expense for
intangible assets was $17,958 for the year ended March 31, 2004.
Intangible amortization is projected to be approximately $86,201 per year
for the next four years and $68,243 in year five.


33


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

10. Acquisition

On January 16, 2004, the Company acquired Innerspace Technology, Inc.
("ITI") for $547,000, including a note and employment agreements with
principals. Additionally, the Company recorded $85,971 in costs associated
with the acquisition, including legal and investment banking fees. ITI has
been in business for over 30 years designing, manufacturing and
distributing a variety of shipboard and underwater instruments to support
hydrographers, oceanographers, researchers, engineers, geophysicists, and
surveyors worldwide. The acquisition was recorded under the purchase
method, whereby ITI's net assets were recorded at estimated fair value and
its operations have been reflected in the statement of operations since
the acquisition date. The allocation of the purchase price is as follows:

Assets:

Accounts receivable $ 80,432
Inventories 75,000
Other current assets 6,446
Property and equipment 173,000
Intangible assets 431,005
---------

Total assets 765,883
=========
Liabilities:

Accounts payable 54,666
Deferred tax liability 57,600
Other accrued expenses 20,646
---------

Total liabilities 132,912
---------

Net investment $ 632,971
=========

The following table represents the unaudited consolidated pro forma
results of operations as though the acquisition of ITI occurred on March
31, 2002.

Year Ended Year Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net sales $ 11,386,000 $ 12,780,000
Income before taxes 416,000 1,597,000
Net income 249,808 958,998
Basic income per common share 0.12 0.45
Diluted income per common share 0.11 0.45


34


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

11. Income Taxes

Income tax expense:

March 31, March 31, March 31,
--------- --------- ---------
2004 2003 2002
---- ---- ----
Current:

Federal $ 220,482 $ 392,654 $ (1,695)

State and Local 66,401 182,508 96,441
--------- --------- ---------

Total Current Tax Provision 286,883 575,162 94,746
--------- --------- ---------

Deferred:

Federal (47,600) 105,981 457,241

State and Local (8,400) 21,653 6,012
--------- --------- ---------

Total Expense $ 230,883 $ 702,796 $ 557,999
========= ========= =========

The components of the Company's deferred taxes at March 31, 2004 and 2003
are as follows:

March 31, March 31,
--------- ---------
2004 2003
---- ----

Deferred tax assets:

NOL and AMT carryforwards and credits $ 99,000 $ 21,000
Asset reserves 142,000 77,000
Deferred wages and accrued interest 143,000 186,000
Non-deductible intangible (132,000) --
Provision for estimated expenses 275,000 251,000
Other 6,000 --
---------- ---------
Total deferred tax asset $ 533,000 $ 535,000
========== =========

The recognized deferred tax asset is based upon the expected utilization
of its benefit from the reversal of tax asset temporary differences.


35


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

11. Income Taxes (Continued)

The foregoing amounts are management's estimates and the actual results
could differ from those estimates. Future profitability in this
competitive industry depends on continually obtaining and fulfilling new
profitable sales agreements and modifying products. The inability to
obtain new profitable contracts or the failure of the Company's
engineering development efforts could reduce estimates of future
profitability, which could affect the Company's ability to realize the
deferred tax assets.

A reconciliation of the income tax expense at the statutory Federal tax
rate of 34% to the income tax expense recognized in the financial
statements is as follows:

March 31, March 31, March 31,
--------- --------- ---------
2004 2003 2002
---- ---- ----
Income tax expense - statutory rate $ 201,889 $ 580,307 $ 539,134
Income tax expenses - state and
local, net of federal benefit 38,280 134,746 67,619
Federal income tax credit (14,000) (3,000) (30,000)
Other 4,714 (9,257) (18,754)
--------- --------- ---------
Income tax provision $ 230,883 $ 702,796 $ 557,999
========= ========= =========

12. Related Party Transactions

On March 31, 1997, the Company's Chairman/President renegotiated the terms
of the non-current note payable-related party. This note, along with
$250,000 of other accrued expenses due to the Company's
Chairman/President, were converted into seven $50,000 convertible
subordinated notes (the "Notes") totaling $350,000. The Notes are due in
consecutive years beginning March 31, 1999 with the last note due March
31, 2005.

In November 2002 the Company paid and redeemed $100,000 of the previously
matured and extended notes. As of March 31, 2004 and 2003 the total
principal amount of outstanding notes amounted to $250,000 (see below).
The Notes bore interest at a rate of 10% per annum, payable semi-annually
on the last day of September and March of each year. Effective October 1,
2003, the interest rate was changed to 4.5%. The Company is required to
prepay the outstanding balance of the Notes and any accrued interest
thereon, if the Company sells all or substantially all of its assets. The
Notes can be converted into newly issued common shares of the Company at
the conversion price of $2.50 per share. The conversion prices shall be
adjusted for any stock dividends, stock issuances or capital
reorganizations. The Notes may be redeemed by the Company prior to
maturity upon giving written notice of not less than 30 days or more than
60 days at a redemption price equal to 120% of the principal if redeemed
two years or more prior to the maturity date or 110% of the principal if
redeemed more than one year, but less than two years prior to the maturity
date.

In May 2004, the Company and its Chairman/President renegotiated the terms
of the notes payable-related party. The Notes now become due in
consecutive years beginning March 31, 2005.


36


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

12. Related Party Transactions (Continued)

Tel has obtained professional services from a non-employee
officer/stockholder with the related fees amounting to $157,302, $110,072,
and $66,834 for the years ended March 31, 2004, 2003, and 2002,
respectively. Additionally, Tel obtained professional services from a
director/stockholder with the related fees amounting to $98,700, $95,600,
and $88,300 for 2004, 2003, and 2002, respectively.

As of March 31, 2000, the Company had outstanding a $15,000 convertible
subordinated note-related party. In March 2002 the holder of this note
converted $7,500 into common stock. In 2004, the Company and the holder
extended the maturity date of the remaining $7,500 until September 30,
2004. This note accrues interest semi-annually at a rate of 7%. The
subordinate note is for past professional fees and services provided by an
officer/stockholder of the Company. The notes are convertible to common
stock at the option of the holder at $1.50 per share, at any time prior to
maturity.

13. Commitments and Contingencies

The Company leases 19,654 square feet of manufacturing and office space
under an agreement expiring in February 2011. Under terms of the lease,
the Company pays all real estate taxes and utility costs for the premises.

In addition, the Company has an agreement to lease equipment for use in
the operations of the business under operating leases.

The following is a schedule of future minimum rental payments for
operating leases for the five years subsequent to the year ended March 31,
2004.

2005 $ 130,733
2006 134,654
2007 138,694
2008 142,855
2009 147,141
2010 and thereafter 294,291
---------
$ 988,368
=========


37


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

13. Commitments and Contingencies (Continued)

Total rent expense, including real estate taxes, was approximately
$200,000, $167,000, and $159,000 for the years ended March 31, 2004, 2003
and 2002, respectively.

14. Significant Customer Concentrations

For the years ended March 31, 2004, 2003, and 2002, sales to the U.S.
Government represented approximately 44%, 59%, and 63%, respectively of
total sales. No other individual customer represented over 10% of sales
for the years ended March 31, 2004, 2003, and 2002. One domestic
distributor accounted for 8%, 13%, and 19% of commercial sales for the
years ended March 31, 2004, 2003, and 2002, respectively. Additionally,
another domestic distributor accounted for 26% of commercial sales for the
years ended March 31, 2004 and 2003, respectively. Another international
distributor accounted for 20% of commercial sales for the year ended March
31, 2004. No other customers represented over 10% of government or
commercial sales for the fiscal years ended March 31, 2004, 2003, and
2002. As of March 31, 2004, one individual account customer balance
represented 22% of the Company's outstanding receivables. As of March 31,
2003, one individual account balance represented 19% of the Company's
outstanding accounts receivable. Receivables from the U.S. Government
represented approximately 17% and 48%, respectively, of total receivables
for the fiscal years ended March 31, 2004 and 2003.

Foreign sales are based on the country in which the customer is located.
Foreign sales were approximately $1,961,314, $2,004,961, and $1,007,000
for the years ended March 31, 2004, 2003, and 2002, respectively. All
other sales were to customers located in the U.S.

15. Stock Option Plans

In June 1998, the Board of Directors of the Company adopted the 1998 Stock
Option Plan ("the Plan") which reserves for issuance up to 250,000 shares
of its Common Stock. The shareholders approved the Plan at the December
1998 annual meeting. The Plan, which has a term of ten years from the date
of adoption is administered by the Board of Directors or by a committee
appointed by the Board of Directors. The selection of participants,
allotment of shares, and other conditions related to the grant of options,
to the extent not set forth in the Plan, is determined by the Board of
Directors. Options granted under the Plan are exercisable up to a period
of 5 years from the date of grant at an exercise price which is not less
than the fair market value of the common stock at the date of grant,
except to a shareholder owning 10% or more of the outstanding common stock
of the Company, at which the exercise price must be not be less than 110%
of the fair market value of the common stock at the date of grant. Options
are exercisable 20% at each of the first, second, and third anniversary of
the grant and 40% at the fourth year.


38


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

15. Stock Option Plans (continued)

In May 2003, the Board of Directors of the Company adopted the 2003 Stock
Option Plan which reserves for issuance up to 250,000 shares of its common
stock and is similar to the 1998 Plan. The shareholders approved this plan
at the November 2003 annual meeting.

A summary of the status of the Company's stock option plans for the fiscal
years 2004, 2003, and 2002 and changes during the years are presented
below: (in number of options):

March 31, March 31, March 31,
--------- --------- ---------
2004 2003 2002
---- ---- ----
Options held at beginning of year 243,250 165,700 82,650
Options Granted 100,950 126,000 94,900
Options Exercised (8,350) (2,450) (4,000)
Options Canceled or expired (18,050) (46,000) (7,850)
------- ------- -------
Options held at end of year 317,800 243,250 165,700
======= ======= =======

The average exercise price of options granted was $2.32, $2.14, and $1.89
for the years ended March 31, 2004, 2003, and 2002, respectively.

Remaining options available for grant were 171,850 and 10,550 as of March
31, 2004 and 2003, respectively.

As of March 31, 2004, the Company had the following options outstanding:

Number of Weighted Average
Options Exercise Remaining Options Exercisable
Outstanding Price Contract Life (years) At March 31, 2004
----------- -------- --------------------- -------------------
1,500 $ 3.1900 5.0 -0-
1,500 3.1500 4.9 -0-
1,500 3.1000 4.8 -0-
1,500 2.9000 4.7 -0-
1,500 2.5500 4.7 -0-
20,000 2.5000 4.5 -0-
1,500 2.5000 4.2 -0-
41,750 2.4000 4.6 -0-
1,500 2.4000 4.2 -0-
35,000 2.3100 3.4 7,000
1,500 2.3000 4.4 -0-
8,400 2.2800 1.6 5,040
1,500 2.2500 4.4 -0-
3,000 2.2500 3.2 1,200
2,000 2.1500 4.6 -0-
1,500 2.1000 4.4 -0-
35,000 2.1000 3.4 7,000


39


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

15. Stock Option Plan (continued)

Number of Weighted Average
Options Exercise Remaining Options Exercisable
Outstanding Price Contract Life (years) At March 31, 2004
----------- -------- --------------------- -------------------
19,400 2.0900 2.7 7,760
1,500 2.0500 3.9 300
19,200 2.0000 3.7 3,840
1,200 1.8500 3.8 240
11,400 1.8400 0.7 11,400
16,500 1.8200 4.1 3,300
37,750 1.8000 2.2 22,650
1,500 1.8000 4.4 -0-
8,800 1.7100 2.6 3,520
2,000 1.6600 0.2 2,000
36,900 1.5265 0.7 36,900
1,500 1.5000 3.9 300
------- -------
317,800 112,450
======= =======

For the years ended March 31, 2004, 2003 and 2002, 112,450, 69,320, and
47,350, respectively, of options were outstanding, vested, and
exercisable.

16. Segment Information

Information is presented for the Company's three reportable segments,
avionics government, avionics commercial, and marine systems. Marine
systems information includes information beginning January 16, 2004, the
date of acquisition. The Company evaluates the performance of its segments
and allocates resources to them based on gross margin. There are no
inter-segment revenues.

The Company is organized primarily on the basis of its avionics and marine
instrument 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,
to 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.
The marine instrumentation systems segment consists of sales to
hydrographic, oceanographic, researchers, engineers, geophysicists and
surveyors. 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 Company's general and administrative costs and marketing strategies
are not segment specific. As a result, selling, general, and
administrative 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.


40


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

16. Segment Information (Continued)

The table below presents information about reportable segments within the
avionics business for the years ending March 31:



Corporate/
Avionics Avionics Marine Reconciling
2004 Government Commercial Systems Items Total
- ---- ---------- ---------- ------- ----------- -----

Revenues $ 6,665,193 $ 3,893,978 $ 144,858 $ -- $10,704,029
Cost of Sales 2,833,579 2,046,784 97,174 -- 4,977,537
----------- ----------- ----------- ----------- -----------

Gross Margin 3,831,614 1,847,194 47,684 -- 5,726,492
----------- ----------- ----------- ----------- -----------

Engineering, research, and 2,152,515 2,152,515
development
Selling, general, and admin. 2,976,137 2,976,137
Interest expense, net 4,047 4,047
-----------

Income before income taxes $ 593,793
===========

Segment Assets $ 1,362,304 $ 1,311,323 $ 231,066 $ 4,487,808 $ 7,392,501
=========== =========== =========== =========== ===========




Corporate/
Reconciling
2003 Government Commercial Items Total
- ---- ---------- ---------- ----------- -----

Revenues $ 9,375,182 $ 2,375,182 $ -- $11,861,387
Cost of Sales 4,491,743 1,246,980 -- 5,738,729
----------- ----------- ----------- -----------
Gross Margin 4,883,439 1,239,219 -- 6,122,658
----------- ----------- ----------- -----------

Engineering, research, and 1,601,493 1,601,493
Development
Selling, general, and admin. 2,803,498 2,803,498
Interest expense, net 10,881 10,881
-----------

Income before income taxes $ 1,706,786
===========

Segment Assets $ 2,213,752 $ 1,037,976 $ 4,146,484 $ 7,311,177
=========== =========== =========== ===========




Corporate/
Reconciling
2002 Government Commercial Items Total
- ---- ---------- ---------- ----------- -----

Revenues $ 7,749,783 $ 1,981,298 $ -- $ 9,731,081
Cost of Sales 3,745,720 938,427 -- 4,684,147
----------- ----------- ----------- -----------
Gross Margin 4,004,063 1,042,871 -- 5,046,934
----------- ----------- ----------- -----------
Engineering, research, and
Development 1,521,219 1,521,219
Selling, general, and admin. 1,858,843 1,858,843
Interest expense, net 81,183 81,183
-----------

Income before income taxes $ 1,585,689
===========

Segment Assets $ 2,126,717 $ 395,833 $ 3,461,245 $ 6,233,572
=========== =========== =========== ===========



41


TEL-INSTRUMENT ELECTRONICS CORP

Notes To Financial Statements (Continued)

17. Quarterly Results of Operations (Unaudited)

Quarterly data for the years ended March 31, 2004 and 2003 is as follows:



Quarter Ended
-----------------------------------------------------------------------
FY 2004 June 30 September 30 December 31 March 31


Net sales $ 3,057,906 $ 2,616,716 $ 2,914,271 $ 2,115,136
Gross profit 1,771,384 1,423,907 1,496,446 1,034,755
Income (loss) before taxes 470,212 205,409 228,453 (310,281)
Net Income 281,943 123,767 137,187 (179,987)
Diluted earnings (loss) per share 0.13 0.06 0.06 (0.09)




Quarter Ended
-----------------------------------------------------------------------
FY 2003 June 30 September 30 December 31 March 31


Net Sales $ 2,849,733 $ 2,982,902 $ 3,066,803 $ 2,961,949
Gross profit 1,464,450 1,596,320 1,629,240 1,432,648
Income (loss) before taxes 428,723 381,841 435,979 460,243
Net Income 257,447 229,297 261,806 255,440
Diluted earnings (loss) per share 0.12 0.11 0.12 0.12



42


TEL-INSTRUMENT ELECTRONICS CORP

Schedule II - Valuation and Qualifying Accounts



Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period

Year ended March 31, 2004:
Allowance for doubtful
Accounts $ 36,598 $ 5,000(2) $ -- $ 41,598
======== ======== ======== ========

Allowance for obsolete
Inventory $112,813 $ 28,085 $ -- $140,898
======== ======== ======== ========

Year ended March 31, 2003:
Allowance for doubtful
Accounts $ 36,598 $ -- $ -- $ 36,598
======== ======== ======== ========

Allowance for obsolete
Inventory $ 85,313 $ 27,500 $ -- $112,813
======== ======== ======== ========

Year ended March 31, 2002:
Allowance for doubtful
Accounts $ 11,598 $ 25,000 $ -- $ 36,598
======== ======== ======== ========

Allowance for obsolete
Inventory $ 72,795 $ 95,000 $ 82,482(1) $ 85,313
======== ======== ======== ========


(1) Amounts represent disposals of obsolete inventory.

(2) Amount related to acquired company.


43


TEL-INSTRUMENT ELECTRONICS CORP

Item 9. Changes in and Disagreements with Accountant on Accounting and

Financial Disclosure

On December 11, 2002, the Board of Directors of the Company, upon
recommendation of its Audit Committee, appointed BDO Seidman, LLP as its
new independent auditors. In connection with its 2002 audit, there were no
disagreements, with its previous auditors, PricewaterhouseCoopers, LLP.

The Company has had no disagreements with its current auditors.

Item 9a. Controls and Procedures

The Company adopted disclosure controls and procedures, as called for by
the recently adopted legislation and rules of the Securities and Exchange
Commission. Under Rules promulgated by the SEC, disclosure controls and
procedures are defined as "those controls or other procedures of the
issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized, and reported, within the
time periods specified in the commission's rules and forms." Our Chief
Executive Officer and Principal Accounting Officer evaluated the Company's
Disclosure Controls and Procedures at March 31, 2004 and have concluded
that they are effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.

There were no changes in our internal control over financial reporting
identified in connection with the evaluation as of March 31, 2004 by the
Chief Executive Officer and Principal Accounting Officer, required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during
our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.


44


PART III

Item 10. Directors and Executive Officers of the Registrant

Year First
Elected a
Name (age) Position Director
- ---------- -------- ----------

Harold K. Fletcher (1) Chairman of the Board, 1982
(79) President and Chief Executive
Officer since 1982.

George J. Leon (2) Director; Investment 1986
(60) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.

Robert J. Melnick Director and Vice 1998
(69) President since 1999;
Marketing and Management
Consultant for the Company
since 1991.

Jeffrey C. O'Hara, CPA (1) (2) Director; Financial Consultant 1998
(46) from 2001, Chief Financial
Officer from 1999-2000 of
Alarm Security Group;
Independent Financial
Consultant from 1996 to 1998.

Robert A. Rice Director as of May 2004; 2004
(49) President and Owner of
Spurwink Cordage, Inc since
1998 (textile manufacturing).


45


TEL-INSTRUMENT ELECTRONICS CORP

Item 10. Directors and Executive Officers of the Registrant (Continued)

Robert H. Walker (2) Director; Retired Executive 1984
(68) Vice President, Robotic
Vision Systems, Inc. (design
and manufacture of robotic
vision systems) 1983-1998.

All directors serve until the next annual shareholders' meeting and until
their successors are duly elected and qualified.

Charles R. Palanzo Chief Operating Officer and
(43) Vice President since August
2002. Founder and Director
of Product Development for
High Velocity Systems, Inc.
from 1998 to 2002.

(1) Mr. O'Hara is the son-in-law of Mr. Fletcher

(2) Members of the Audit Committee and Compensation Committee; Mr.
O'Hara withdrew as a formal member of these committees at the
end of fiscal year 2004.

Audit Committee

The Board of Directors established a separately designated standing Audit
Committee in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934. The Audit Committee was comprised of Messrs. Walker
(chairman), Leon, and O'Hara until March 31, 2004, and thereafter of
Messrs. Walker and Leon. Messrs. Walker, Leon, and O'Hara are independent,
as that term is defined under the Securities Exchange Act of 1934, and Mr.
Walker is a financial expert as defined in that act. As noted above, Mr.
Walker served as director and Executive Vice President of Robotic Vision
Systems, Inc. and as its principal financial officer for over 15 years.

In February 2004, the Company listed its securities for trading on the
Amex. Under Amex rules, Mr. O'Hara is not independent, and therefore, as
of 3/31/04, the Audit Committee has consisted of Mr. Walker and Mr. Leon.

Beneficial Ownerships Reporting Compliance

Registrant became subject for the first time to the reporting requirements
under Section 16 of the Securities Exchange Act of 1934 on February 10,
2004, and as of March 31, 2004, the end of the last fiscal year, all
officers, directors and 10% beneficial owners, known to the Company, had
filed required forms reporting beneficial ownership of Company securities.


46


TEL-INSTRUMENT ELECTRONICS CORP

Item 10. Directors and Executive Officers of the Registrant (Continued

Code of Ethics

The Board of Directors has adopted a written Code of Ethics that applies
to all of the Company's officers and employees, including the Chief
Executive Officer and the Principal Accounting Officer. A copy of the Code
of Ethics is available to anyone requesting a copy without cost by writing
to the Company, attention Joseph P. Macaluso.

Director Compensation

Directors who are not employees or officers of the Company receive $1,250
in cash and options, at the then market price, to purchase 1,000 shares
for attendance at each in-person meeting and $625 in cash and options to
purchase 500 shares for attendance at each formal telephonic meeting of
the Board or of a standing committee. During 2004 non-employee directors
received the following compensation pursuant to this plan.

Cash Compensation Stock Options
----------------- -------------

George J. Leon $10,625 11,000

Jeffrey C. O'Hara $11,250 11,500

Robert H. Walker $10,625 11,000

Other Officers

Donald S. Bab Secretary and General Counsel since 1982.
(68)

Joseph P. Macaluso Principal Accounting Officer since August
(52) 2002. Director - Finance and Administration
for the Company since February 1999. Chief
Financial Officer of Electro-Catheter Corp
from 1987-1999.


47


Item 11. Executive Compensation

The following table and accompanying notes set forth information
concerning compensation for the fiscal years ended March 31, 2004, 2003,
and 2002.

Stock (2) Other
Name and Principal position (1) Year Salary Options Compensation
- --------------------------------------------------------------------------------
Harold K. Fletcher 2004 $154,400 $14,000
Chairman of the Board 2003 $147,000 35,000 options(3) $26,000
President and Chief 2002 $140,000 $24,000
Executive Officer

Charles R. Palanzo (4) 2004 $134,300 15,000 options $15,000
Chief Operating Officer 2003 $130,000 35,000 options $87,100(5)
2002 -- -- --

(1) Robert J. Melnick, Vice President and director, serves pursuant to a
consulting contract that provided $98,700, $95,600, and $88,300 in
compensation for each of the fiscal years 2004, 2003, and 2002,
respectively, and has received options to purchase 4,000 shares of
common stock exercisable at the market price on the date of grant.

(2) Represents bonus based on the Company's profitability. The 2004
bonus is estimated. See Note 12 of Notes to the Financial
Statements. The Company also pays medical and life insurance
premiums for all its employees, which are not included above.

(3) The options are exercisable at 110% of the market price on the date
of grant. Options are exercisable 20% at each of the first, second
and third anniversary of the grant and 40% at the fourth year.

(4) Mr. Palanzo started with the company in August 2002, pursuant to an
agreement which provides for an annual salary of $130,000.

(5) Relocation expenses

Stock Option Grants

The following table sets forth information regarding grants of stock options to
executive officers during 2004.



Grant Date
Individual Grants Value
------------------------------------------------------- -----------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Price Expiration Grant Date
Name Granted Fiscal Year Per Share Date Present Value ($)
- ---- ---------- ------------ -------------- ---------- -----------------

Charles R. Palanzo 15,000(1) 15 $1.82 5/9/08 12,900(2)


(1) The stock options granted to Mr. Palanzo on May 9, 2003 were
Incentive Stock options granted pursuant to the Company's 1998 Stock
Plan. Such options become exercisable cumulatively at a rate of 20%,
20%, 20%, and 40% on May 9, 2004, May 9, 2005, May 9, 2006, and May
9, 2007, respectively.

(2) The fair value of these options on the date of grant was estimated
using the Black-Scholes option-pricing model with the following
assumptions volatility of 50%; risk-free interest rate of 3.5%,
expected life of 5 years; and no future dividends. The dollar amount
in this column is not intended to forecast potential future
appreciation, if any, of the Company's Common Shares.


48


Item 11. Executive Compensation (Continued)

Aggregate Option Held and Year-End Option Table

The following table provides information on options held (no option were
exercised) during 2004 by the named executive officers and the value of each of
their respective unexercised options at March 31, 2004.

Aggregated Option Held in Last Fiscal Year and FY-end Option Values



(A) (B) (C) (D) (E)
Number of Value of Unexercised
Unexercised Options In-the-Money Options
FY-End (#) FY-End ($) (1)

Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- -------------

Harold K. Fletcher -- -- 7,000/28,000 $6,580/$26,320

Charles R. Palanzo -- -- 10,000/40,000 $12,240/$49,360


(1) Calculated on the basis of fair market value of the underlying securities
at March 31, 2004 less the exercise price.

Equity Compensation Plan Information

See Footnote 15 to the Financial Statements for details of the Company's Stock
Option Plans.

The Company has individual employment agreements with seven individuals for the
grant of 103,000 stock options. These options include those for Charles Palanzo
(see above).


49


PERFORMANCE GRAPH

The following performance graph compares the five-year cumulative total return
on the Company's Common Stock to the S&P 500 Index and the S&P Electronics
Equipment Manufacturers and Supplies Index assuming $100 was invested on March
31, 1999 and all dividends were reinvested.

Total Return To Shareholders
(Includes reinvestment of dividends)

[The following information was depicted as a bar chart in the printed material]



ANNUAL RETURN PERCENTAGE
Years Ending

Company / Index Mar00 Mar01 Mar02 Mar03 Mar04

TEL-INSTRUMENT ELECTRONICS CORP 76.16 -33.81 46.96 -24.44 91.18
S&P 500 INDEX 17.94 -21.68 0.24 -24.76 35.12
S&P 500 ELECTRONIC EQUIPMENT MANUFACTURERS 132.75 -57.94 -24.85 -48.95 98.54




INDEXED RETURNS
Base Years Ending

Period
Company / Index Mar99 Mar00 Mar01 Mar02 Mar03 Mar04

TEL-INSTRUMENT ELECTRONICS CORP 100 176.16 116.60 171.36 129.47 247.52
S&P 500 INDEX 100 117.94 92.38 92.60 69.67 94.14
S&P 500 ELECTRONIC EQUIPMENT MANUFACTURERS 100 232.75 97.89 73.56 37.55 74.56



50


Item 11. Executive Compensation (Continued)

Compensation Committee Interlock and Insider Participation

During the last fiscal year, Messrs. Leon, O'Hara, and Walker served as members
of the Compensation Committee of the Board of Directors. None of the members was
or has been an officer or employee of the Company. Mr. O'Hara is the son-in-law
of Mr. Fletcher and stepped down as a formal member of the Committee on March
31, 2004.

Compensation Committee Report

Overview

The Compensation Committee approves or endorses all compensation paid or awarded
to senior executives. The Committee is made up only of non-employee directors
who do not participate in any of the compensation plans they administer, except
that stock options granted to directors (see director compensation above) are
granted under the Employee Stock Option Plan (see Directors Compensation).

The Company's success depends on developing, motivating, and retaining
executives who have the skills and expertise to lead the organization. The
executive compensation program is designed to help achieve these objectives. It
is comprised of the following three main components:

o Competitive base salaries

o Short-term rewards

o Long-term incentives

Competitive Base Salaries

Each year we evaluate the Company's salary structure based on salaries paid by
competitive companies; the Company's business performance, and general financial
and economic factors. Specific weights are not given to these factors. Within
the salary structure so determined, we determine individual executive salaries
based on individual performance, level of responsibility, contribution to
Company results, and experience. Based on this analysis, the Committee
recommends the CEO's salary to the Board of Directors and endorses salaries for
other senior executives.

Short-Term Rewards

The company has a key man incentive compensation program. Each year the
Committee determines upon a percentage of operating profits to be distributed
among senior employees. The percentage determined is based on the general
performance of the company and the amount of operating profits available for
shareholders and for reinvestment in the business.

The percentage of operating profits so determined is then distributed to senior
employees and to a category entitled "other", based on (a) the amount of the
employee's base salary, (b) his contribution to the Company, (c) the results of
that contribution, (d) an estimated amount of "special effort" on behalf of the
Company, (e) his technical expertise, leadership, and management skills, and (f)
the level of the overall compensation paid employees performing similar work in
competitive companies.


51


Item 11. Executive Compensation (continued)

Compensation Committee Interlock and Insider Participation (continued

A small portion of the overall incentive compensation is paid to "other"
employees upon the recommendation of the CEO, based on the foregoing criteria
and special circumstances for the fiscal year.

Long-Term Rewards

The Company grants long-term incentive awards with a view toward long-term
corporate performance and to develop and retain qualified employees.

The Company uses stock options as long-term incentive awards, granted pursuant
to the Company's Incentive Stock Option Plans that also provide the employee
with tax benefits. The options generally have an exercise price equal to the
market price at the time of grant, have a number of limitations and generally
have a five-year duration, with 20% of the awarded options vesting at the end of
each of the first three years and 40% at the end of the fourth year. See Note 15
of Notes to Financial Statements for more information on the Stock Option Plans.

The number of options granted to an employee is based on individual performance
and level of responsibility. For this purpose, the Committee measures
performance the same way as described above for short-term awards. The Committee
and the Board also consider the total outstanding shares and options, in
determining the maximum number of options to grant in any year. The company does
not have required levels for equity holdings of senior management.

CEO Compensation

Within the framework described above, the Committee determines the CEO's
compensation by considering his contributions to the Company's business, the
difficulty and progress of the business, the amount of revenues and profit
earned, the return to shareholders, and his experience. The Committee does not
think narrow quantitative measures or formulas are sufficient for determining
the CEO's compensation. The Committee does not give specific weights to the
factors considered, but the primary factors are the CEO's contributions and
business results.

In determining the CEO's total compensation, the Committee considered Mr.
Fletcher's level of responsibility, his leadership, and his overall contribution
as CEO. The Committee also considers the Company's financial resources in
determining the CEO's overall compensation.

Summary

The Compensation Committee is responsible for seeing that the Company's
compensation program serves the best interests of its shareholders. The
Committee's determination also considers compensation paid other employees in
comparable corporations.

In the opinion of the Committee, the Company continues to have an appropriate
and competitive compensation program, which has served the Company and
shareholders well. The combination of


52


Item 11. Executive Compensation (Continued)

Compensation Committee Interlock and Insider Participation (Continued)

Summary (continued)

base salary, short-term bonuses, and emphasis on long term incentives provides a
balanced and stable foundation for effective executive leadership.

George J. Leon, Chair
Jeffrey C. O'Hara
Robert H. Walker

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information known to the Company with
respect to the beneficial ownership as of March 31, 2004, by (i) all persons who
are beneficial owners of five percent (5%) or more of the Company's Common
Stock, (ii) each director and nominee, (iii) the Named Executive Officers, and
(iv) all current directors and executive officers as a group.

Number of Shares Percentage
Name and Address Beneficially Owned of Class (1)
- ---------------- ------------------ ------------

Named Directors and Officers
- ----------------------------

Harold K. Fletcher, Director 503,102 (2) 23.4%
728 Garden Street
Carlstadt, NJ 07072

George J. Leon, Director 315,367 (3) 14.7%
116 Glenview
Toronto, Ontario, Canada M4R1P8

Robert J. Melnick, Director 34,400 (4) 1.6%
57 Huntington Road
Basking Ridge, NJ 07920

Jeffrey C. O'Hara, Director 116,240 (5) 5.4%
853 Turnbridge Circle
Naperville, IL 60540

Robert A. Rice 76,000 3.5%
5 Roundabout Lane
Cape Elizabeth, ME 04107

Robert H. Walker, Director 33,243 (6) 1.5%
27 Vantage Court
Port Jefferson, NY 11777

Donald S. Bab, Secretary 77,034 (7) 3.6%
770 Lexington Ave.
New York, New York 10021

All Officers and Directors 1,186,559 (8) 53.9%
as a Group (9 persons)


53


INSTRUMENT ELECTRONICS CORP

Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)

(1) The class includes 2,144,151 shares outstanding plus shares
outstanding under Rule 13d-3(d)(1) under the Exchange Act. The
common stock deemed to be owned by the named parties, includes stock
which is not outstanding but subject to currently exercisable
options held by the individual named. The foregoing information is
based on reports made by the named individuals.

(2) Includes 24,681 shares owned by Mr. Fletcher's wife, and 4,254
shares owned by his son. Mr. Fletcher disclaims beneficial ownership
of the shares owned by his wife and son. Also includes 7,000 subject
to currently exercisable stock options.

(3) Includes 308,267 shares owned by the George Leon Family Trust, of
which Mr. Leon is trustee and a beneficiary, and 6,300 shares
subject to currently exercisable stock options. Mr. Leon disclaims
beneficial ownership of the shares owned by the trust.

(4) Includes 9,400 shares subject to currently exercisable stock options

(5) Includes 5,740 shares subject to currently exercisable stock
options.

(6) Includes 6,060 shares subject to currently exercisable stock
options.

(7) Includes 6,400 shares subject to currently exercisable stock
options. Mr. Bab also has a convertible debenture in the amount of
$7,500 that is convertible into common stock at $1.50 per share.

(8) Includes 57,760 shares subject to currently exercisable options held
by all executive offices and directors of the Company (including
those individually named above).

Item 13. Certain Relationships and Related Transactions

The disclosures required by this item are contained in Note 12 to the
Notes Financial Statements included on pages 36 and 37 of this document.


54


TEL-INSTRUMENT ELECTRONICS CORP

Item 14. Audit

For the fiscal years ended March 31, 2004 and 2003, professional services
were performed by BDO Seidman, the Company's independent accountant. Fees
paid for those years were as follows:

2004 2003
---- ----

Audit Fees $ 65,750 $ 62,500
Audit-Related Fees -- --
Total Audit and Audit-Related Fees 65,750 62,500
Tax Fees -- --
All Other Fees -------- --------
Total $ 65,750 $ 62,500
======== ========

Audit Fees. This category includes the audit of the Company's consolidated
financial statements, and reviews of the financial statements included in
the Company's Quarterly Reports on Form 10-Q. This category also includes
advice on accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements, registrations and
comfort letters.

Audit Related Fees. The services for fees under this category include
other accounting advice, employee benefit plan audits, due diligence
related to acquisitions, internal control evaluation and assessment and
Sarbanes-Oxley section 404 assistance.

Tax Fees. The services for fees related to this category include employee
income tax compliance, sales tax services, unclaimed property services,
international compliance and planning services, international assignment
services - employee assistance, other tax planning services and licensing
of income tax preparation software.

All Other Fees. The Company paid no fees in this category in 2004 and
2003.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor

Pursuant to the Applicable Rules, and as set forth in the terms of its
revised Charter, the Audit Committee has sole responsibility for
appointing, setting compensation for, and overseeing the work of the
independent auditor. The Audit Committee has established a policy which
required it to pre-approve all audit and permissible non-audit services,
including audit-related and tax services, if any, to be provided by the
independent auditor. Pursuant to that policy, the Audit Committee has
approved, for the fiscal year ending March 31, 2005, an aggregate of
specified services, including audit, audit-related and tax services,
expected to be rendered during the year, together with specified amounts
of approved fees to be incurred for those services.


55


Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a.) The following documents are filed as a part of this report:

Pages
-----
(1) Financial Statements:

Report of Independent Registered Public Accountants
- BDO Seidman, LLP 18

Report of Independent Registered Public Accounting Firm
- PricewaterhouseCoopers LLP 19

Consolidated Balance Sheets - March 31, 2004 and 2003 20

Consolidated Statements of Income - Years Ended 21
March 31, 2004, 2003 and 2002

Consolidated Statements of Changes in Stockholders' 22
Equity - Years Ended March 31, 2004,
2003 and 2002

Consolidated Statements of Cash Flows - Years Ended 23
March 31, 2004, 2003 and 2002

Notes to Financial Statements 24-42

(2) Financial Statement Schedule 43
II - Valuation and Qualifying Accounts

(3) 2003 Stock Option Plan

(4) Purchase Agreement between Registrant
and Innerspace Technology, Inc.

(5) Agreement between Registrant and Semaphore Capital
Advisors, LLC

b.) Reports on Form 8-K.

Report on Form 8-K regarding press release announcing that the
Company has finalized its agreement with Innerspace technology, Inc.
was submitted on January 26, 2004 under Item 9.


56


Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)

b). Reports on Form 8-K (continued)

Report on Form 8-K regarding press release announcing estimated
results for 2004 and another press release announcing a contract
award from British Airways was submitted on March 24, 2004 under
Item 9.

Report on Form 8-K regarding press release announcing the
introduction of the TB-2100 Bench Test Set was submitted on march
29, 2004 under Item 9.

Report on Form 8-K regarding press release stating that the Company
was unaware of any reason for the recent activity in its stock price
and trading volume was submitted on April 21, 2004 under Item 9.

Report on Form 8-K regarding press release stating that the Company
was awarded a contract from a leading global package delivery
company for its TR- 220 was submitted on May 27, 2004 under Item 9.

Report on Form 8-K regarding press release announcing new member of
Board of Directors was submitted on June 4, 2004 under Item 9.


57


TEL-INSTRUMENT ELECTRONICS CORP

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)

c.) Exhibits identified in parentheses below on file with the Securities
and Exchange Commission, are incorporated herein by reference as
exhibits hereto.

--------------------------------------------------------------------
* (3.1) Tel-Instrument Electronics Corp's Certificate of
Incorporation, as amended.
--------------------------------------------------------------------
* (3.2) Tel-Instrument Electronics Corp's By-Laws, as amended.
--------------------------------------------------------------------
* (3.3) Tel-Instrument Electronics Corp's Restated Certificate
of Incorporation dated November 8, 1996.
--------------------------------------------------------------------
* (4.1) Specimen of Tel-Instrument Electronics Corp's Common
Stock Certificate.
--------------------------------------------------------------------
* (10.1) 7%, $30,000 Convertible Subordinated Note dated March
31, 1992 between Registrant and Donald S. Bab.
--------------------------------------------------------------------
* (10.2) Distributor Agreement with Muirhead Avionics &
Accessories Ltd.
--------------------------------------------------------------------
* (10.3) Naval Air Warfare Center Aircraft Division Contract No.
N68335-97-D-0060
--------------------------------------------------------------------
* (10.4) Lease dated March 1, 2001 by and between Registrant and
210 Garibaldi Group.
--------------------------------------------------------------------
* (10.5) Agreement with Semaphore Capital Advisors dated November
28, 2001 and amendment dated as of June 1, 2002.
--------------------------------------------------------------------
* (10.6) 10% convertible subordinated note between Registrant and
Harold K. Fletcher.
--------------------------------------------------------------------
* (10.7) 1998 stock option plan and option agreement.
--------------------------------------------------------------------
(10.8) Purchase agreement between Registrant and Innerspace
Technology
--------------------------------------------------------------------
(10.9) Agreement between Registrant and Semaphore Capital
Advisors, LLC
--------------------------------------------------------------------
(10.10) 2003 Stock Option Plan
--------------------------------------------------------------------
(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 pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
--------------------------------------------------------------------
(32.2) Certification by CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
--------------------------------------------------------------------

* Incorporated by reference to Registration 33-18978 dated November 7,
1988.

The Company will furnish to a stockholder, upon request, any exhibit
at cost.


58


TEL-INSTRUMENT ELECTRONICS CORP

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

TEL-INSTRUMENT ELECTRONICS CORP

(Registrant)

Dated: July 9, 2004 By: /s/ Harold K. Fletcher
-----------------------
President and Director
(Principal Executive
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated and by signature hereto.

Signature Title Date
- --------- ----- ----

/s/ Harold K. Fletcher Director July 9, 2004
- --------------------------
/s/ Harold K. Fletcher

/s/ Joseph P. Macaluso Principal Accounting Officer July 9, 2004
- --------------------------
/s/ Joseph P. Macaluso

/s/ George J. Leon Director July 9, 2004
- --------------------------
/s/ George J. Leon

/s/ Robert J. Melnick Director July 9, 2004
- --------------------------
/s/ Robert J. Melnick

/s/ Jeffrey C. O'Hara Director July 9, 2004
- --------------------------
/s/ Jeffrey C. O'Hara

/s/ Robert A. Rice Director July 9, 2004
- --------------------------
/s/ Robert A. Rice

/s/ Robert H. Walker Director July 9, 2004
- --------------------------
/s/ Robert H. Walker