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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 Ended January 31, 2003

Commission File Number 1-11750

AEROSONIC CORPORATION

(Exact name of registrant as specified in its charter)

1212 North Hercules Avenue

Clearwater, Florida 33765

(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (727) 461-3000

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

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

None.

Indicate by check mark 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  ¨  No  x

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 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 in Rule 12b-2 of the Act).  Yes  ¨  No  x

As of July 31, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $24,845,179. The aggregate market value of the voting stock held by non-affiliates of the registrant was $62,553,984 as of July 31, 2002.

As of October 1, 2003, the issuer had 3,921,019 shares of Common Stock outstanding, net of treasury shares.

Documents Incorporated by Reference:  None.

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PART I

THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED THEREUNDER. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “ANTICIPATE,” “ESTIMATE,” “CONTINUE,” “PLANS,” “INTENDS” AND WORDS OF SIMILAR IMPORT. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD BE INACCURATE. THEREFORE, THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. ADDITIONALLY, ACTUAL RESULTS MIGHT BE AFFECTED BY CERTAIN FACTORS SET FORTH HEREIN IN “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

Significant Events. On March 17, 2003, Aerosonic Corporation (the “Company”) issued a press release stating that it had initiated an investigation into financial and accounting irregularities involving revenue and inventory reported during prior periods. On May 19, 2003, J. Mervyn Nabors resigned as the Company’s Chairman and ceased all day-to-day involvement in management activity. Prior to this event, David A. Baldini was appointed President of the Company (on November 14, 2002) to replace Mr. Nabors in that capacity, and Gary E. Colbert was appointed Chief Financial Officer (on January 14, 2003), to replace Eric J. McCracken in that capacity, who had resigned in October 2002. Item 3 and Item 7 of this report include discussions of both an investigation by the U.S. Securities and Exchange Commission regarding the above referenced accounting issues and the September 25, 2003 halt of trading in the Company’s Common Stock imposed by the American Stock Exchange. Such investigation and trading halt also are discussed in several other portions of this report.

As a result of the restatements set forth herein and in the attached financial statements and the underlying contributing factors discussed herein, the financial information previously reported by the Company and included in reports on Form 10-K and Form 10-Q previously filed by the Company for the fiscal years ended January 31, 1999, 2000, 2001, and 2002, the quarters in such fiscal years, and the first three quarters of the fiscal year ended January 31, 2003 should not be relied upon and are superseded by the information in this Annual Report on Form 10-K.

However, as a result of the unavailability of certain accounting records for periods predating 2001, the Company is unable to determine the full extent of adjustments that would be necessary to a fair presentation of the restated financial information included herein for 1999 and 2000—See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Internal Review and Restatement.”

Item l. Business.

The Company is a Delaware corporation formerly known as Instrument Technology Corporation (“ITC”). ITC, which was incorporated in 1968, was the surviving corporation of a merger, in 1970, with Aerosonic Corp., a Florida corporation (“Aerosonic Florida”). Aerosonic Florida, which was incorporated in 1957, ceased to exist as a separate corporation as a result of the merger. Following the merger, ITC changed its name to Aerosonic Corporation.

In January 1993, the Company acquired Avionics Specialties, Inc., a Virginia corporation (“Avionics”), from Teledyne Industries, Inc. (“Teledyne”). Prior to the acquisition, Avionics had been a division of Teledyne. Since the acquisition, Avionics has been maintained as an operating and wholly owned subsidiary of the Company.

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As used herein, unless the context requires otherwise, references to “Aerosonic,” the “Company,” “we” or “our” include Aerosonic Corporation and its operating subsidiary, Avionics.

The Company is principally engaged in one business segment: The manufacture of aircraft instruments. The Company consists of four operating divisions in three locations. The divisions are: the Clearwater, Florida Instrument Division (“Clearwater Instruments”), the Aerosonic Wichita, Kansas Division (“Kansas Instruments”), Avionics, and the Precision Component Division (“Precision Components”).

Clearwater Instruments primarily manufactures altimeters, airspeed indicators, rate of climb indicators, microprocessor controlled air data test sets, and a variety of other flight instrumentation. Kansas Instruments is the source inspection location for our Wichita customers and is the primary location for Clearwater Instruments’ repair business. Avionics maintains three major product lines in the aircraft instrument segment: (1) angle of attack stall warning systems; (2) integrated multifunction probes, which are integrated air data sensors; and (3) other aircraft sensors and monitoring systems. In August 1998, the Company formed a new division called Precision Components, to perform high volume precision machining of mechanical components, which was not significant to operations in the fiscal years ended January 31, 2003, 2002 or 2001.

The Company has a January 31 fiscal year end. Accordingly, all references in this Annual Report on Form 10-K to a fiscal year mean the fiscal year ended on January 31 of the referenced year; for example, references to fiscal year 2003 mean the fiscal year ended January 31, 2003.

Industry

The current market niche for Aerosonic has been and will continue to be the design, development and supply of primary flight control systems components and instruments. These include altimeters, airspeed indicators, angle of attack, stall prevention systems, and air data measurement systems. All of these aircraft products are critical to aircraft operations, performance and safety.

With the cost of both commercial and military aircraft rising, the number of new aircraft programs continues to decrease in both the number of programs and quantity of aircraft being built. Increasing value to the customer has become extremely important to sustaining Aerosonic’s market position as well as the Company’s market share.

The military original equipment manufacturers (OEMs), such as BAE Systems LTD, Bell Helicopter Textron Inc., Korea Aerospace Industries, Lockheed Martin Corporation, Sikorsky Aircraft Corporation, The Boeing Company, and others, have increased their reliance on their subcontractors to carry a greater share of the aircraft responsibility, including system requirements, hardware design, and physical and electrical interfaces. This increased

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responsibility has allowed Aerosonic to develop a greater technical capability for serving its customer base. The evolution of this role has taken Aerosonic to a dominant position in its business segment within the military aircraft market.

This increased technical capability has also positioned the Company to push further into the commercial aircraft market with our new technologies. New programs with Gulfstream Aerospace Corporation, Learjet Inc., and Raytheon Aircraft Company will allow us to increase and protect our market share.

The Company continues as an industry leader in the manufacturing of mechanical instruments. These products are used for both primary flight data as well as standby redundant instruments in cockpits that use electronic displays for primary flight data. As cockpit panel space becomes more valuable in the new age of glass displays, the Company has maintained a strong position with OEMs as a premier supplier of quality mechanical instruments in both the military and commercial aircraft marketplace.

Strategy

The Company’s goal is to continue to reposition its products for profitable growth and maintain dominance within niche markets. The Company intends to focus on the development of profitable long-term contracts. New aircraft cockpits increasingly are being developed through strategic alliances with market leaders. The Company is well positioned to take advantage of these strategic alliances. An increase in sales volume will depend upon new product introduction and further penetration of existing markets. The Company continues to hold a competitive advantage derived from its philosophy of vertical integration. The Company is substantially vertically integrated in its manufacturing and distributing activities.

Products and Distribution

The Company’s products are sold to manufacturers of commercial and private aircraft, both domestic and foreign, and the U.S. military services. For the fiscal year ended January 31, 2003, approximately 60% of the Company’s total sales were to the private sector and 40% to military services. Domestic sales of the Company’s products are made to many different commercial (non-government) customers, and there is an increasing movement toward development contracts for future applications. For the fiscal year ended January 31, 2003, sales related to development programs accounted for approximately 16% of net sales, or $4.1 million, an increase of $2.2 million from the fiscal year ended January 31, 2002, where such sales represented 7% of net sales. During fiscal year 2003, there were two commercial customers, Lockheed and Boeing, who each represented over 10% of total revenues. A substantial amount of the business related to these customers is related to contracts each customer has with the U.S. Government. If the Company lost either of these customers, such a loss would have a material adverse effect on the Company’s results of operations.

In addition, the Company sells its products to customers outside of the U.S. The aggregate percentage of international sales to overall sales was 17%, 21%, and 29% for the fiscal years ended January 31, 2003, 2002, and 2001, respectively.

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Most of the Company’s instrument sales are made directly through Company employees to original equipment manufacturers (“OEMs”) or to the military, with the Company’s remaining sales being made through other customers (who resell to aircraft operators).

The Company produces a full line of both three-inch and two-inch mechanical and electro-mechanical cockpit instruments. These instruments require no backup power, as they transfer valuable flight data to the pilot using only air pressure (from aircraft probes) as a power source. The Company also manufactures a state of the art air data test set used by aircraft OEMs, repair centers and the U.S. military.

The Company also produces an integrated multifunction probe (“IMFP”), which is a combination of existing technologies, including the angle of attack/air data sensing probe and pressure sensing electronics. This integrated approach to providing aircraft air data reduces the customers’ system complexity with respect to aircraft troubleshooting and logistics support, increases reliability, and decreases system costs.

The Company has completed a redesign of the basic components of the angle of attack (“AOA”)/stall warning product line. The combined stall warning transmitter merges existing technologies of AOA and stall warning into a single technical standard order C54 stall warning transmitter. This combined instrument has dramatically reduced the system weight and increased the system reliability.

Precision Components operates as a high-precision machining operation. Precision Components products include a variety of mechanical parts primarily related to the optics industry. Some of the products include the mechanical components for rifle scopes, printing presses, microscopes and tank gun sights. The majority of the products produced by the division are under long-term agreements.

Customers

The Company primarily markets its products to OEMs, particularly manufacturers of corporate and private jets, and to contractors of military jets. Customers include, among others, the U.S. Government and a majority of the OEMs throughout the world. The Company also markets its products to private aircraft owners through its network of authorized resellers.

Contracts

The Company’s contracts are normally for production or development. The Company’s production contracts are typically fixed-price over a two to five year period, and the trend for such contracts is moving away from five year contracts and toward two year contracts. The Company also secures purchase orders from customers for product sales in the normal course of business that are binding contracts upon acceptance of the terms of orders by the Company.

Fixed-price contracts provide for a firm fixed price on a variety of products and quantities of those products. These contracts allow the Company to negotiate better overall prices that fit into

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customers’ production programs. These long-term commitments also allow the Company to capitalize on quantity based price reduction for raw materials. Under the firm fixed-price contracts, the Company agrees to perform for an agreed-upon price. Accordingly, the Company derives benefits from cost savings, but bears the risk of cost overruns.

Development contracts provide resources for technology advancement necessary for development of various products. The Company negotiates for and generally receives payments from customers based upon milestones that correlate with the costs incurred. Early in our fiscal year ending January 31, 2003, we were notified that a variation of the IMFP had been selected for use on the Joint Strike Fighter.

In accordance with normal practice, our contracts with the U.S. Government and its agencies and departments are subject to partial or complete termination at any time at the government’s convenience. Our government contracts generally contain provisions providing that in the event of a termination for convenience by the government, the Company shall have the right to recover allowable costs incurred to the date of termination as well as a proportionate share of the profit on the work completed, consistent with U.S. Government contract regulations and procedures.

Sales and Marketing

The Company has generally focused sales efforts on government and military entities, OEMs and resellers. The Company intends to increase sales efforts with respect to retrofit, modifications and repair programs.

Due to the system impact of its components, the Company is involved at a very early stage with the aircraft manufacturers’ engineers to integrate the components into the aircraft design. All of the Company’s component instruments are integrated into the aircraft in order to help maintain the safe operation of the airplane.

At January 31, 2003, the Company’s backlog of firm orders was $35,274,000, an increase of $16,962,000 when compared to backlog as of January 31, 2002. The amount of backlog that is deliverable within twelve months is $24,935,000 at January 31, 2003, an increase of $13,689,000 when compared to January 31, 2002. The foregoing backlog amounts represent firm orders only and do not include current contract options. Such orders, however, may be subject to rescheduling and/or cancellation.

In January 2001, the Company moved its repair operations to the Kansas facility. The Company believes this improves its ability to provide prompt and effective repair and upgrade service.

Government Regulation

The manufacture and installation of the Company’s products in aircraft owned and operated in the U.S. are governed by U.S. Federal Aviation Administration (“FAA”) regulations. The regulations that have the most significant impact on the Company are the Technical Standard Order (“TSO”) and Type Certificate (“TC”) or Supplemental Type Certificate (“STC”) certifications. TSO outlines the minimum standards that a certain type of equipment has to

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satisfy to be TSO certified. Many OEMs and retrofitters prefer TSO-certified aviation equipment because it acts as an industry-wide stamp of approval. The Company also sells its products to European and other non-U.S. OEMs, which typically require approval from the Joint Aviation Authorities (“JAA”).

The Company has received TSO approval on over 400 different instruments, as well as 70 STCs. Most new instruments qualify for approval based on similarity. This provides a significant advantage to the Company and its customers by reducing the time required to obtain TSO approval on new instruments. The Company also has many instruments with JAA approval.

Quality Assurance

Product quality is critical in the aviation industry. The Company strives to maintain the highest standards within each of its divisions.

The Company is ISO 9001 certified. ISO 9001 standards are an international consensus on effective management practices for ensuring that a company can consistently deliver its products and related services in a manner that meets or exceeds customer quality requirements. ISO 9001 standards outline the minimum requirements a quality system must meet to achieve this certification.

As an ISO 9001-certified manufacturer, the Company can represent to its customers that it maintains high quality industry standards in the education of employees and the design and manufacture of its products. In addition, the Company’s products undergo extensive quality control testing prior to being delivered to customers. As part of the Company’s quality assurance procedures, the Company maintains detailed records of test results and quality control processes.

Patents and Licenses

The Company has patents on certain commercial and military products such as air data probes. The Company also has certain registered trademarks. The patents and intellectual property portfolio, in the aggregate, is valuable to operations, however the Company does not believe the business, as a whole, is materially dependent on any single patent, trademark or copyright.

Research and Development

The Company expended approximately $745,000, $1,083,000 and $780,000 in research and development costs for potential new products and enhancements during the fiscal years ended January 31, 2003, 2002 and 2001, respectively. Approximately 25 engineers working at the Company, on a full-time or part-time basis, are involved in these activities.

Research and development during the fiscal year ended January 31, 2003 was focused on the completion of the design and qualification of the integrated multi-function probe (“IMFP”) and the initial work on the design for the IMFP derivative on the Lockheed Martin Corporation F-35 Joint Strike Fighter. Flight testing of the IMFP by the Korean T-50 Golden Eagle programs was successfully started and will continue into the first half of fiscal year 2004. Production deliveries are expected to follow during fiscal year 2005.

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The U.S. Government and certain foreign partners are engaged in a multi-year development program for the F-35 fighter jet, which will be the next generation fighter jet aircraft used by all branches of the U.S. military and its foreign partners. Aerosonic is currently working on a $14 million development contract for the aircraft’s air data system. This program rapidly progressed from concept drawings to prototype models, and, during fiscal year 2003, into preliminary wind tunnel testing. The Company’s development work under the contract is scheduled for completion in 2006, with continuing support through 2012. The Company expects to negotiate a production contract to manufacture and supply its air data system for all future program production requirements.

The stall warning and angle of attack transmitter (“SWTx”) was delivered to British Aerospace for the Nimrod upgrade program flight test late in fiscal year 2003. Program requirements continue to be met and the development phase will continue in the upcoming year. Delays on the Sino Swearingen SJ-30 Business Jet program have resulted in the rescheduling of flight testing of the SWTx for that aircraft. When conducted, these tests will result in the determination of the final parameters necessary to complete software development for that program in 2004.

The development of a new digital output angle of attack transmitter for initial use by the Gulfstream Aerospace GIV-XP program progressed through the year and will begin qualification and flight testing during the second half of fiscal 2004.

During the fiscal year ended January 31, 2003, the Company had several engineering developmental programs not related to traditional products. The Company contracted with Lockheed Martin Palmdale to update production drawings for, produce, and deliver pilot static measurement probes for the Lockheed Martin F-117 Nighthawk stealth fighter. This program utilizes the engineering and manufacturing resources and experience within the Company to improve the manufacturability of this previously difficult-to-produce part. We expect the one year development program to result in production contracts for this item in the future. A modification contract with Boeing also was accepted to produce and deliver a wind tunnel to the U.S. Navy for testing and repair of the Boeing F-18 Hornet angle of attack system components. The customer inspection and acceptance of the completed wind tunnel occurred in February 2003, with final installation for the Navy scheduled in the latter part of fiscal year 2004 in San Diego.

A program to update the Navy’s ability to repair and test the APCS throttle control system on the Northrop Grumman EA-6B Intruder aircraft began during fiscal 2003. The initial delivery of re-manufactured throttle control systems and test procedures is complete. Verification of the process, including flight testing of the initial systems, is currently underway by the U.S. Navy. Developmental programs similar to the Northrop Grumman EA-6B Intruder program will be undertaken as they become available in the future.

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Competition

The markets for the Company’s products are highly competitive and characterized by several industry niches in which a number of manufacturers specialize. The Company manufactures a larger variety of aircraft instruments than its competitors who, in most instances, compete with the Company on no more than a few types of aircraft instruments.

The Company believes that the principal competitive factors are price, development cycle time, responsiveness to customer preferences, product quality, technology, reliability and variety of products. Management believes that the Company’s significant and long-standing customer relationships reflect its ability to compete favorably with respect to these factors.

Manufacturing, Assembly and Material Acquisition

The Company’s manufacturing processes (except for certain electronic products) includes the manufacture of all principal components and subassemblies for the instruments, the assembly of those components, and the testing of products at various stages in the manufacture and assembly process.

The Company manufactures, or has the capability to manufacture, principally all components and subassemblies for its instruments. Raw materials, such as glass lenses, raw metals and castings, generally are available from a number of sources and in sufficient quantities to meet current requirements, subject to normal lead times. The Company believes that retaining the ability to completely manufacture the instruments allows the Company the flexibility to respond to customers quickly and control the quality of its products.

When appropriate, less critical component parts are purchased under short and long term supply agreements. These purchased parts are normally standard parts that can be easily obtained from a variety of suppliers. This allows the company to lower overhead expenses and maintain control required to meet the exacting tolerances demanded in the industry.

Employees

As of the fiscal year ended January 31, 2003, the Company employed approximately 269 employees in its business operations. This consisted of 127 Clearwater Instrument employees, 15 Kansas Instrument employees, 113 Avionics employees and 14 Precision Component employees. The Company’s future success depends on the ability to attract, train and retain quality personnel. The Company’s employees are not represented by labor unions and management considers its relations with its employees to be good.

Available Information

The Company’s Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports are available on the Company’s Internet website as soon as reasonably practicable after such materials are filed with or furnished

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to the SEC. Such reports are also available from the SEC, and can be obtained by accessing the SEC website at www.sec.gov/edgar.shtml or writing to the following address:

U.S. Securities and Exchange Commission

450 5th Street N.W.

Washington D.C. 20222

The Company’s Internet website address is www.aerosonic.com. No charge is assessed for any access, viewing, printing or downloading reports from the Internet website. Alternatively, if a paper copy of any such report (without exhibits) is desired, please write to Mark Perkins, Executive Vice President of Sales and Marketing, Aerosonic Corporation, 1212 North Hercules Avenue, Clearwater, Florida 33765, and a copy of such requested report will be provided, free of charge.

Item 2. Properties.

The following table sets forth the locations and general characteristics of the Company’s principal properties:

All of the Company’s properties are well maintained, fully occupied by the Company and suitable for the Company’s present level of production and usage. All locations operate one shift, five days a week. The Clearwater, Florida property, which is used by both Clearwater Instruments and Precision Components, is mortgaged in accordance with an Industrial Revenue Bond executed in 1987 (See Note 8, “Financial Statements”).

The Charlottesville, Virginia property was purchased from Teledyne Industries in April 1994, and is mortgaged by a long-term note with the Company’s bank. The property consists of a 53,000 square foot manufacturing facility on approximately 12 acres of land (See Note 8, “Financial Statements”).

Item 3. Legal Proceedings.

SEC Formal Investigation

The Company is the subject of a Formal Order of Investigation issued by the U.S. Securities and Exchange Commission (the “SEC”) on May 13, 2003 with respect to potential violations of the federal securities laws in connection with the accounting misstatements and contributing causes disclosed by the Company in press releases dated March 17 and May 22, 2003 and further discussed in this annual report, which the Company brought to the attention of the SEC in conjunction with management’s internal investigation, and other potential issues. The Company is cooperating fully with the SEC.

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Matters Relating to the American Stock Exchange

In April 2003, the Company contacted the American Stock Exchange (the “Amex”) to begin a dialogue regarding the anticipated late filing of this Annual Report on Form 10-K, the financial misstatements and contributing causes disclosed by the Company in its March and May 2003 press releases and further discussed in this annual report, the SEC’s investigation and related matters. Since that time, the Company has had frequent contact with the Amex staff to keep them apprised of the results of the Company’s internal review of such misstatements, the Company’s progress in preparing this Annual Report on Form 10-K and the Company’s Quarterly Reports on Form 10-Q for the first and second quarters of fiscal year 2004, and related matters.

On July 30, 2003, the Company received a deficiency letter from the Amex informing the Company that it was not in compliance with the Amex continued listing standards. The deficiency letter cited, among other things, the Company’s May 22, 2003 disclosure regarding underlying causes of the financial misstatements and the late filing of this Form 10-K and the Company’s Form 10-Q for the first quarter of fiscal year 2004. On August 20, 2003, the Company provided a response, which included a plan to achieve compliance with applicable Amex rules. Subsequently, the Company submitted an amended compliance plan to the Amex, which included an undertaking by the Company to file this Annual Report on Form 10-K no later than October 31, 2003 and to file its Forms 10-Q for the first and second quarters of fiscal year 2004 no later than November 15, 2003. The Amex has accepted the Company’s compliance plan, as amended, and the Company’s listing currently is being continued with the understanding that the Company will implement its compliance plan within the timeframe set forth therein.

On September 25, 2003, the Amex halted trading in the Company’s Common Stock due to the lack of current financial information concerning the Company. The Company anticipates that the Amex will allow trading in its Common Stock to resume after the markets have had sufficient time to absorb the information set forth in this Annual Report and after the Company files its Form 10K and quarterly reports on Form 10-Q for the quarters ended April 30 and July 31, 2003.

With the filing of this Form 10-K, the Company has implemented a major component of its compliance plan. Additionally, the Company expects that it will file the required April 30, 2003 and July 31, 2003 Forms 10-Q no later than November 15, 2003, and that its Common Stock will continue to be listed on the Amex. However, there is no assurance that the Company will satisfy the continued listing standards in the required time, or that the Company’s Common Stock will continue to be listed on the Amex.

Additional Proceedings and Matters

During the third quarter of fiscal 2003, the Company concluded its litigation with its former President and Chief Executive Officer, David Goldman and his company, Mil-Spec Finishers, Inc. The Company received approximately $150,000 in settlement of the litigation.

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A claim has been asserted by Miriam Frank, on behalf of the estate of former President and Chairman Herbert J. Frank, for indemnification with respect to fines paid and legal expenses incurred by Mr. Frank in connection with litigation that the United States government brought against the Company and Mr. Frank and for which Mrs. Frank claims the Company was obligated to indemnify Mr. Frank. As of the date of this annual report, Ms. Frank has not notified the Company of the amount of her claim or provided the Company with information sufficient to determine the amount of the alleged loss. However, Ms. Frank gave the Company a copy of a November 1996 letter to the Company from counsel to the Estate of Herbert J. Frank requesting indemnification for the payment by Mr. Frank of a $250,000 fine together plus interest thereon and attorneys’ fees of approximately $100,000. Based upon the available information, the Company believes that any obligation to pay the claim is remote.

In addition to the foregoing, from time to time, the Company is involved in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, at this time, there are no claims or legal actions that will have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Stock and Related Security Holder Matters.

The Company’s Common Stock is listed on the American Stock Exchange under the symbol “AIM”. As discussed above in “Item 3. Legal Proceedings – Matters Relating to the American Stock Exchange,” on September 25, 2003, the Amex halted trading in the Company’s Common Stock due to the lack of current financial information concerning the Company. The Company anticipates that the Amex will allow trading in its Common Stock to resume after the markets have had sufficient time to absorb the information set forth in this Annual Report and after the Company files its quarterly reports on Form 10-Q for the quarters ended April 30 and July 31, 2003.

The range of high and low sales prices as reported by the Amex for each of the quarters of the fiscal years ended January 31, 2003 and January 31, 2002 is as follows:

Fiscal Year Ended January 31, 2003

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Fiscal Year Ended January 31, 2002

During those same periods, no cash dividends were paid. The Company does not anticipate or intend on paying a dividend in the foreseeable future. Rather, the Company intends to retain its earnings to finance the development and expansion of its business. Additionally, covenants in our long-term debt documents impose significant restrictions on our ability to pay dividends, including a covenant related to the Company’s Industrial Development Revenue Bond which prohibits the Company from paying any dividend in excess of 25% of the Company’s increase in retained earnings for the calendar year. Any future payment of any dividends on the Company’s Common Stock and the amount thereof will depend on the Company’s earnings, financial requirements, compliance with the above described covenants, and other factors deemed relevant by the Company’s Board of Directors.

As of October 1, 2003, the Company’s outstanding shares of Common Stock were owned by approximately 1,453 shareholders of record.

The following table sets forth information with respect to the Company’s equity compensation plans.

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In 1993, the Company’s Board of Directors and stockholders approved the Aerosonic Corporation 1993 Incentive Stock Option Plan, pursuant to which the Company was authorized to issue options for up to 300,000 shares of Common Stock to its employees (including officers), directors and consultants. Following the adoption of the plan by the Company’s Board of Directors, options were granted to a limited number of employees, all of which have been exercised or have expired pursuant to their terms. As of March 2003, no additional options may be granted pursuant to the terms of the plan. The Company does not have any other equity compensation plans or arrangements.

Item 6. Selected Financial Data.

The following selected financial data as of January 31, 2003 and 2002 and for each of the three years in the period ended January 31, 2003 have been derived from the Company’s audited Consolidated Financial Statements included elsewhere herein. The selected financial data as of January 31, 2001 and 2000 have been derived from audited financial information not separately presented herein. The selected financial data as of January 31, 1999 and for each of the two years in the period ended January 31, 2000 have been derived from unaudited financial information. As discussed in Note 2 below to the selected financial data, it should be noted that the Company is unable to determine the full extent of adjustments that would be necessary to a fair presentation of the selected financial data as of January 31, 1999 and for each of the two years in the period ended January 31, 2000.

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

Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our business, financial condition, changes in financial condition and results of operations. The MD&A is organized as follows:

Overview. This section provides a discussion of recent events which we believe are important to understanding the Company’s financial condition and the information set forth in the MD&A.

Results of Internal Review and Restatement. This section discusses the findings of the Company’s previously announced internal review of misstatements in its previously reported financial information for the fiscal years ended January 31, 1999, 2000, 2001 and 2002, and the resulting financial restatements. The financial statements for the years ended January 31, 1999 and 2000 are unaudited.

Results of Operations. This section provides an analysis of results of operations for the three fiscal years presented in the accompanying consolidated statements of operations.

Liquidity and Capital Resources. This section provides an analysis of cash flows, a discussion of outstanding debt and commitments, both firm and contingent, that existed as of January 31, 2003, and trends, demands, commitments, events and uncertainties with respect to the Company’s ability to finance its continuing operations.

Critical Accounting Policies. This section discusses the accounting policies (i) that require the Company to make estimates that are highly uncertain at the time the estimate is made, (ii) for which a different estimate which could have been made would have a material impact on the Company’s financial statements, (iii) that are the most important and pervasive policies utilized, and (iv) that are the most sensitive to material change from external factors. In addition, our significant accounting policies, including the critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial statements.

Cautionary Statement and Additional Trends and Uncertainties. This section cautions on the basis of certain forward looking statements which are susceptible to uncertainty and changes in circumstances and discusses important trends and uncertainties that may impact the Company’s financial condition and results of operations.

OVERVIEW

In March 2003, the Company announced that it had discovered apparent accounting discrepancies in previously reported financial information. As announced in March 2003 and on subsequent dates, upon discovery of such misstatements, the Company took immediate steps to

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quantify the extent of any incorrect financial reporting, discover the cause thereof, correct any problems and prevent future misstatements, including commencing a comprehensive internal review and notifying the U.S. Securities and Exchange Commission, the Company’s auditor, the American Stock Exchange, and the public of the existence of the apparent misstatements.

Shortly before these issues became known, the Company had made the following senior management changes:

Subsequent to the discovery of the misstatements, the Company has taken numerous and substantial additional steps to improve its corporate governance and internal compliance procedures and controls, including:

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As a result of the above referenced internal review and as discussed in greater detail below under “RESULTS OF INTERNAL REVIEW AND RESTATEMENT”, the Company is restating its financial statements for the fiscal years ended January 31, 1999, 2000, 2001 and 2002, restating its previously reported unaudited financial information for the first three quarters of the fiscal year ended January 31, 2003, and making corrections to certain items in its financial statements for the fiscal years ended January 31, 1999 and 2000. The Company’s financial statements for the fiscal years ended January 31, 1999 and 2000 are unaudited. The period-to-period comparisons set forth in the MD&A are based upon the restated and corrected financial statements, and all dollar and per share amounts and financial ratios have been revised, as appropriate, to reflect such restatements and corrections.

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto included elsewhere herein.

RESULTS OF INTERNAL REVIEW AND RESTATEMENT

The Company has determined that its previously reported financial information overstated inventory, understated cost of sales, overstated revenue and incorrectly reported other items. Contributing to these misstatements, among other things, were misstatements of the Company’s financial statements, the falsification of inventory records, improper adjustments for obsolete and slow moving inventory, improper revenue recognition, improper fixed asset capitalization, and errors in the application of Staff Accounting Bulletin No. 101 (released by the United States Securities and Exchange Commission in December 1999) (“SAB 101”) and generally accepted accounting principles. The Company reported the above referenced misstatements and falsification of inventory records to its auditors as well as the Securities and Exchange Commission, which currently is investigating potential violations of law in connection with the accounting misstatements and underlying causes discussed herein. The Company is cooperating fully with the Securities and Exchange Commission.

Accordingly, the Company is restating its financial statements for the fiscal years ended January 31, 2002, 2001, 2000 and 1999 and restating its previously reported unaudited financial information for the first three fiscal quarters of the fiscal year ended January 31, 2003. The accounting misstatements and resulting restatements are summarized below. A discussion of the restatements, including the comparative impacts of changes to the amounts previously reported in our fiscal year 2002 and 2001 financial statements, is set forth in Note 2 to the accompanying consolidated financial statements. The financial statements for the years ended January 31, 2000 and 1999 are unaudited. Additionally, as a result of the Company’s internal review, the Audit Committee recommended to the Company’s Board of Directors that J. Mervyn Nabors be removed from his position as Chairman of the Board and that Mr. Nabors refrain from any day-to-day role in the management of the Company’s affairs.

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Subsequently, Mr. Nabors was permitted to resign as Chairman of the Board of Directors and from any day-to-day role in management of the Company’s affairs prior to the Board taking action on the Audit Committee’s recommendations.

As a result of the restatements set forth herein and in the attached financial statements and the underlying contributing factors discussed herein, the financial information previously reported by the Company and included in reports on Form 10-K and Form 10-Q previously filed by the Company for the fiscal years ended January 31, 1999, 2000, 2001, and 2002, the quarters in such fiscal years, and the first three quarters of the fiscal year ended January 31, 2003 should not be relied upon and are superseded by the information in this Annual Report on Form 10-K.

However, as a result of the unavailability of certain accounting records for periods predating 2001, the Company is unable to determine the full extent of adjustments that would be necessary to a fair presentation of the restated financial information for 1999 and 2000. The 2000 income statement information includes pre-tax charges against income of approximately $3.2 million relating to adjustments necessary to properly state inventory balances as of February 1, 2000. The $3.2 million charge is comprised of $1.6 million relating to an overstatement of inventory overhead allocations, $1.0 million relating to an overstatement of work-in-process inventory, $375 thousand relating to physical inventory shortfalls and $260 thousand relating to an overstatement of inventory costs. The 1999 income statement includes a pre-tax charge against income of approximately $1.5 million relating to a write-down of inventory costs to net realizable value. While such adjustments are appropriate for purposes of appropriately stating the inventory balances as of February 1, 2000, the absence of certain accounting records precludes the Company from reliably determining the years to which the adjustments relate for income statement purposes. In addition, based on the unavailability of other accounting records, the Company is unable to reliably estimate the extent to which other adjustments, if any, would be necessary to fairly state the financial information as of January 1, 2000 and for each of the two years in the period ended January 31, 2000. Such adjustments, if any, would likely relate to similar adjustments made to the restated financial statements for the years 2001 and 2002 relating to the matters discussed above.

A detailed discussion of the adjustments recorded follows.

Inventory and Cost of Sales. The Company discovered misstatements and errors in its inventory accounting for the fiscal years ended January 31, 1999, 2000, 2001 and 2002 that resulted in an overstatement of the Company’s inventory and an understatement of the Company’s cost of sales which totaled approximately $6,764,000 over the periods being restated. The overstatements of inventory and understatements of the cost of sales resulted, in part, from the following:

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While the $375,000, $260,000, $1,529,000, $994,000, and $1,646,000 adjustments discussed above are appropriate for purposes of appropriately stating the inventory balances as of February 1, 2000, the absence of certain accounting records precludes the Company from reliably determining the years to which the adjustments relate for income statement purposes for years ended January 31, 2000 and prior.

The following table summarizes the balance sheet impact of the adjustments noted above:

Revenue Recognition. The Company has discovered errors in revenue recognition for the fiscal years ended January 31, 2001 and 2002. In total, approximately $1,882,000 of revenue

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recognized in fiscal years 2001 and 2002 has been reversed by the restatement adjustments, of which approximately $990,000 was improperly recognized as revenue and approximately $892,000 was recognized as revenue prematurely. The foregoing overstatements of revenue were comprised of the following:

During fiscal year 2001, the Company recognized $812,000 of revenue from the sale of goods to a single purchaser. During fiscal year 2002, the Company repurchased the same goods from an affiliate of such purchaser. As discussed above, the Company has determined that such transactions did not have a bona fide business purpose and, as a result, were not accounted for properly, and resulted in an overstatement of revenue of approximately $812,000.

The Company experienced difficulty in the installation of a new machine and negotiated a settlement with the vendor. This settlement was recognized as revenue during 2002 instead of offsetting lease payments. This resulted in an overstatement of revenue of $178,000 and equipment lease expense of approximately $6,000.

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The following table presents the effects of the aforementioned adjustments on total revenue:

Other Items. The Company also has discovered errors in other items for the fiscal years ended January 31, 2001 and 2002. The other incorrect items are comprised, in part, of the following:

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The following table presents the effects of the aforementioned adjustments on pre-tax income (loss):

Income Taxes. The above adjustments had a significant effect on the Company’s income tax obligations.

The restatement adjustments resulted in a decrease in pre-tax income or an increase in pre-tax loss by $978,000, $1,085,000, $3,979,000 and $2,064,000 for the fiscal years ended January 31, 2002, 2001, 2000 and 1999, respectively. These changes reduced the Company’s current tax obligation from the amounts previously reported and paid which decreases income tax expense.

In addition, the Company recorded a deferred tax valuation allowance of $618,000 and $883,000 for the fiscal years ended January 31, 2002 and 2001. The deferred tax valuation allowance is required under SFAS 109 – Accounting for Income Taxes to establish a reserve against estimated future tax benefits reported as deferred tax assets when it is more likely than not that the tax benefits will not be realized in future periods.

The following table presents the effects of the aforementioned adjustments on income tax obligations:

The impact of these adjustments on certain key ratios is as follows:

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The foregoing adjustments result in a cumulative net reduction of Shareholders’ Equity of $6,232,000 as of January 31, 2002.

The following tables present the impact of the adjustments on our previously reported 1999, 2000, 2001 and 2002 results on a condensed basis:

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RESULTS OF OPERATIONS

Revenues

Revenues for the fiscal year ended January 31, 2003 decreased $1,014,000, or 4% to $25,672,000 when compared to the restated results for fiscal year 2002. The decrease in revenue resulted primarily from a decrease in demand for commercial products that was partially offset by an increase in demand for government products. For fiscal year 2003, the overall decrease in product sales was $3,320,000, or 16%, to $17,900,000 when compared to fiscal year 2002, as restated. However, such decrease in product sales was largely offset by the initiation of the Joint Strike Fighter development program, which was the primary reason for an increase in sales related to development projects of $2,193,000. The Company also experienced an increase in sales related to Spares and Repairs in fiscal year 2003 of approximately $113,000 when compared to fiscal year 2002, as restated.

Revenues increased $3,158,000, or 13%, to $26,686,000 for fiscal year 2002, as restated, from $23,528,000 for fiscal year 2001, as restated. This growth was largely driven by an increase of approximately $1,300,000, $1,100,000 and $900,000 in sales of integrated air data indicators, riflescope components and core instruments, respectively. These increases were partially offset by a decrease of $400,000 in engine vibration monitoring system (EVMS) sales.

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Cost of Sales

Cost of sales decreased $658,000 or 4%, to $16,783,000, or 65% of revenues, for fiscal year 2003 from $17,441,000 or 65% of revenues, for fiscal year 2002, as restated. This decrease in cost is primarily due to a reduction in revenue, as the change in sales mix that resulted in lower product sales was offset by higher sales of spare parts, repairs and development projects.

Cost of sales increased $2,060,000 or 13%, to $17,441,000, or 65% of revenues, for fiscal year 2002, as restated, from $15,381,000 or 65% of revenues, for fiscal year 2001, as restated. This increase in cost was primarily due to a related increase in revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expense decreased $306,000, or 4%, to $7,776,000, or 30% of revenue, for fiscal year 2003 from $8,082,000, or 30% of revenue for fiscal year 2002, as restated. The decrease was attributable to decreased commission expenses for sales in Europe and Japan as well as the redirection of engineering resources from internally-funded R&D efforts to customer-funded design work for the Joint Strike Fighter program.

Selling, general and administrative expense decreased $49,000, or 1%, to $8,082,000, or 30% of revenue, for fiscal year 2002, as restated from $8,130,000, or 35% of revenues for fiscal year 2001, as restated. The decrease was attributable to a one-time charge for a retirement contract that occurred in fiscal year 2001 that did not recur in fiscal year 2002, and is partially offset by increased employee compensation and employee benefit related costs.

Interest Expense

Net interest expense decreased $218,000, or 51% to $207,000 in fiscal year 2003 from net interest expense of $425,000 in fiscal year 2002, as restated. The net interest expense decrease was primarily due to lower average outstanding debt during the year and lower interest rates.

Net interest expense decreased $49,000, or 10% to $425,000 in fiscal year 2002, as restated, from net interest expense of $474,000 in fiscal year 2001, as restated. The net interest expense decrease was primarily due to lower average outstanding debt during the year and decreased interest rates.

Other Income (Expense)

Other income increased $84,000 to $78,000 in fiscal year 2003 from other income, net ($6,000) in fiscal year 2002, as restated. The increase was primarily related to the settlement of litigation.

Other income, net decreased $131,000 to ($6,000) in fiscal year 2002, as restated from other income, net $125,000 in fiscal year 2001, as restated. The decrease was primarily related to the one-time sale of property in Newport, Arkansas that occurred during fiscal year 2001.

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Income Tax Expense

Income tax expense was a benefit of $22,000 for fiscal year 2003 as compared to an expense of $21,000 for fiscal year 2002, as restated. The income tax obligations that arise from pretax income for fiscal year 2003 are offset by tax credits for research and development expenditures obtained through the filing of amended tax returns in the third quarter of fiscal year 2003 plus the change in the deferred tax allowance recognized in fiscal year 2003.

The effective tax rate decreased to (2.2)% in fiscal year 2003 from 2.9% in fiscal year 2002, as restated. The decrease in the effective tax rate is primarily due to the impact of the research and development credits that were recognized during fiscal year 2003 as well as the smaller change in the deferred tax valuation allowance recognized in fiscal year 2003 versus the large change in the deferred tax valuation allowance recognized in fiscal year 2002, as restated.

Income tax expense was $21,000 for fiscal year 2002, as restated, as compared to income tax expense of $10,000 for fiscal year 2001, as restated. The income tax obligation in each of these years includes the result of applying a deferred tax valuation adjustment against estimated future tax benefit as it was more likely than not that the tax benefit will not be realized in future periods.

The effective rate increased 5.8% to 2.9% in fiscal year 2002, as restated from (2.9%) in fiscal year 2001. The increase in the effective tax rate is due to a substantially lower effect of permanent difference between book income versus taxable income in fiscal year 2002, as restated, when compared to fiscal year 2001, as restated.

Net Income

The resulting effect of the factors described above caused net income to increase $295,000 or 41% to $1,006,000, or 3.9% of revenue, for fiscal year 2003 from $711,000 or 2.7% of revenue, for fiscal year 2002, as restated. Earnings per share increased $0.08 to $0.26 for fiscal year 2003 from $0.18 in fiscal year 2002, as restated.

Net income increased $1,053,000 to $711,000, or 2.7% of revenue, for fiscal year 2002, as restated from a loss of $342,000 or (1.5%) of revenues, for fiscal year 2001, as restated. Earnings per share increased $0.27 to $0.18 for fiscal year 2002, as restated from a loss per share of $0.09 in fiscal year 2001, as restated.

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Inflation

The Company does not believe that inflation has had a material effect on the Company’s financial position or results of operations. However, the Company cannot predict the future effects of inflation.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities was $93,000 for fiscal year 2003 as compared to cash provided by operating activities of $1,775,000 for fiscal year 2002, as restated. The decrease was primarily attributable to an increase in inventory balances in anticipation of fulfillment of orders for the 32A government contract that was awarded in May 2002 and the commencement of a product development contract for a government product application.

Cash provided by operating activities was $1,775,000 for fiscal year 2002, as restated, compared to $1,709,000 for fiscal year 2001, as restated. The cash flow effect from the substantial increase in net income in fiscal year 2002, as restated was largely offset by a decrease in the cash flow effect from collections of accounts receivable, and the remaining decrease was primarily attributable to a smaller reduction in inventory in fiscal year 2002, as restated than in fiscal year 2001, as restated.

Cash used in investing activities was $681,000 for fiscal year 2003 as compared to $617,000 for fiscal year 2002, as restated. The decrease was primarily attributable to a slight decrease in investment in Machinery and Equipment.

Cash used in investing activities was $617,000 for fiscal year 2002, as restated, as compared to $238,000 for fiscal year 2001, as restated. The increase was primarily attributable to the increase in purchases of Machinery and Equipment and Building Improvements.

Cash used in financing activities was $857,000 for fiscal year 2003 as compared to cash used of $530,000 in fiscal year 2002, as restated. This increase in cash usage was primarily due to repayments of a portion of the Company’s long-term debt.

Cash used in financing activities was $530,000 for fiscal year 2002, as restated, as compared to cash used of $1,358,000 in fiscal year 2001, as restated. This decrease in cash usage was primarily due to an increase in cash provided by operations, as well as the absence of treasury stock purchases.

To accommodate fluctuation in cash flow, the Company has a $1,000,000 revolving credit facility, which was set to expire in May 2003. As discussed below, the Company recently was in default under this facility with respect to, among other things, representations and warranties it made regarding encumbrances on the collateral, and covenants to provide annual and quarterly financial statements and maintain certain financial ratios, although waivers of such defaults were obtained. The Company requested and was granted subsequent extensions of this credit facility until September 5, 2003, December 5, 2003 and, most recently, until April 30, 2004. The credit facility originally bore interest at the trailing 90-day treasury index plus 2.75%. As a result of the extensions of the credit line, the interest rate for this facility has been changed to the prime rate, which was 4.00% as of September 5, 2003. At January 31, 2003, there was approximately $245,000 available under this facility.

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The Company’s current ratio was approximately 1.94 at January 31, 2003 compared to 2.52 at January 31, 2002, as restated. The primary reason for this decrease was an increase in accrued expenses related to product development programs.

The Company recently was in breach of certain covenants and other provisions of the documents related to its Industrial Development Revenue Bond, the Mortgage on its Charlottesville, Virginia property, and the Term Notes and Line of Credit with First Commercial Bank. Among other things, the Company was in breach of the financial ratios discussed in Note 8 to the Financial Statements, covenants prohibiting future liens on, and pledges of, the Company’s assets, covenants requiring the delivery of financial information and compliance certificates, representations and warranties it made regarding encumbrances on the collateral, and covenants with respect to the Company’s management and affairs (including a covenant requiring the Company to obtain consent from the purchaser of the Industrial Development Revenue Bond for any change in its executive officers).

The Company has obtained written waivers of the above referenced breaches. Additionally, the Company has received a written commitment from the purchaser of the Industrial Development Revenue Bonds to amend the covenants related thereto to (a) delete the minimum working capital requirement, minimum quick ratio requirement, minimum current ratio requirement and minimum net worth requirement, (b) add a minimum debt service coverage requirement of 1.5 (to be defined as the sum of net income, depreciation expense, amortization expense and interest expense, divided by current portion of long-term debt), (c) amend the debt to tangible net worth ratio to a maximum total liabilities to tangible net worth covenant (to be defined as total liabilities divided by the sum of net worth less intangible assets), (d) add a restriction prohibiting additional bank debt in excess of $100,000, (e) delete the restriction on changes in corporate management, and (f) delete a covenant requiring the Company to maintain its primary banking relationship with the purchaser of the Industrial Development Revenue Bond. As noted above, the Company also has negotiated an extension of its Term Notes and Line of Credit with First Commercial Bank to April 30, 2004.

Future capital requirements depend on numerous factors, including research and development, expansion of products lines, and other factors. Management believes that cash and cash equivalents, together with the Company’s cash flow from operations and current borrowing arrangements will provide for these necessary capital expenditures. Furthermore, the Company may develop and introduce new or enhanced products, respond to competitive pressures, invest or acquire businesses or technologies or respond to unanticipated requirements or developments, which would require additional resources.

As a consequence of the Company’s restatement of results of operations, the Company’s creditworthiness may be diminished from what existed prior to the restatement. As shown in the table below, there are liquidation payments that are due with respect to long-term debt and other contractual obligations in fiscal year 2004 and beyond as of January 31, 2003:

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¹ In addition to the obligations set forth in this table, the Company has outstanding purchase commitments but has the ability to modify or terminate such commitments.

The Company’s ability to maintain sufficient liquidity in fiscal year 2005 and beyond is highly dependent upon achieving expected operating results and completing a restructuring of the Company’s existing credit facilities. Shortly after the issuance of this report, the Company intends to negotiate new credit facilities with its lenders in order to provide more operating flexibility for the Company than what has been in existence. There is no assurance that these initiatives will be successful. Failure to successfully complete these initiatives could have a material adverse effect on our liquidity and our operations in fiscal year 2005, and could require us to consider further measures, including deferring planned capital expenditures, reducing discretionary spending, and/or, if necessary, selling assets.

ACQUISITIONS

Currently, the Company has no arrangements or understandings with respect to any acquisitions. However, the Company continues to monitor acquisition opportunities. The Company’s ability to consummate any acquisitions, including a merger with another entity, is substantially limited by covenants in the Company’s long-term debt documents.

ENVIRONMENTAL MATTERS

In accordance with a consent agreement with the Department of Environmental Protection that was signed by the Company in 1993, the Company’s environmental consultant developed an interim remedial action plan to contain and remediate certain contamination on and underlying the Company’s property located in Clearwater, FL. During 1997, the Company recorded a provision of approximately $175,000 related to the estimated costs to be incurred under this plan. As of January 31, 2000, the Company had utilized all amounts originally recorded in other accrued expenses, and the phase-one remediation had been completed.

During the third quarter of fiscal year 2001, management assessed the post-remediation monitoring expense related to the 1993 environmental clean up and determined that such remaining monitoring would cost approximately $125,000. This amount was accrued and expensed during the third quarter, fiscal year 2001, and the reserve was fully utilized as of January 31, 2003. Significant efforts have resulted in a successful remediation of contamination of the Company’s property, and the estimated remaining remediation costs to be incurred are expected to be approximately $38,000, for which a reserve has been provided as of January 31, 2003.

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CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon the accompanying consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of those financial statements and this Annual Report on Form 10-K requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure items, including disclosure of contingent assets and liabilities, at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, and as a result of trends and uncertainties identified above under “RESULTS OF OPERATIONS” and “LIQUIDITY AND CAPITAL RESOURCES” and below under “CAUTIONARY STATEMENT AND ADDITIONAL TRENDS AND UNCERTAINTIES.” Further, such differences could be material.

Set forth below is a discussion of the Company’s critical accounting policies. The Company considers critical accounting policies to be those (i) that require the Company to make estimates that are highly uncertain at the time the estimate is made, (ii) for which a different estimate which could have been made would have a material impact on the Company’s financial statements, (iii) that are the most important and pervasive policies utilized, and (iv) that are the most sensitive to material change from external factors. Additionally, the policies discussed below are critical to an understanding of the financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimates about the effect of matters that are highly uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. The impact and any associated risks related to these policies on business operations is discussed throughout this MD&A where such policies affect reported and expected financial results.

For a detailed discussion regarding the application of these and other accounting policies, see Note 1 to the accompanying consolidated financial statements. Senior management has discussed the development and selection of the critical accounting estimates and the related disclosure included herein with the Audit Committee of the Board of Directors.

Revenue Recognition.

The Company manufactures most of its products on a build-to-order basis and ships products upon completion. The Company has a policy of strict adherence to the provisions of SAB 101 in order to accurately state its revenues in each accounting period. For certain situations, some judgment is required, but most sales have clear revenue recognition criteria.

Revenue sources for product sales are largely from sales to commercial and government customers. The majority of customer sales terms are F.O.B. origin, although some customer terms are F.O.B. destination. For those customers where terms are “origin”, revenue is generally recognized upon shipment, unless additional prevailing factors would not be in accordance with the revenue recognition requirements of SAB 101. For those customers whose terms are “destination”, revenue is generally not recognized until goods arrive at the customers’ premises and all other revenue recognition criteria are met.

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The Company experiences a certain degree of sales returns that varies over time. Generally such returns occur within no more than 90 days after shipment by the Company to its customers. In accordance with SFAS 48 – Revenue Recognition When Right of Return Exists, the Company is able to make a reasonable estimation of expected sales returns based upon history and as contemplated by the requirements of SFAS 48. For example, sales returns may occur if delivery schedules are changed by customers after products have shipped or if products are received by customers but do not meet specifications. In such cases, customers may choose to return products to the Company. Absent such circumstances, customers do not have a right to return products if the Company has met all contractual obligations. The Company has established a sales return reserve that approximates an expected level of sales returns over a 90-day period and, as of January 31, 2003, that reserve is $75,000.

From time to time, the Company will jointly develop products with its customers for future applications. In such circumstances, the Company recognizes revenue on a percentage of completion basis, measured by the percentage of costs incurred to date to estimated total costs for the contract. This method is used because management considers expended costs to be the best available measure of progress on the contracts. The percentage of completion contract costs include direct labor, material, subcontracting costs, test facilities, and other indirect costs as allocated. Other operating costs are charged to expense as incurred. During fiscal 2003, the Company secured one long-term fixed-price contract for the development of instrumentation for the Joint Strike Fighter program. Costs and estimated earnings on this contract as of the year ended January 31, 2003 are as follows:

Occasionally the Company enters into research and development contracts with customers. The Company accounts for such contracts on the basis of the lesser of non-refundable cash versus percentage of completion.

There were no earnings recognized or costs incurred in fiscal year 2002, as restated, with respect to this program.

Accounts Receivable Allowance for Doubtful Accounts and Credit Losses.

The Company continuously evaluates its customers and provides reserves for anticipated credit losses as soon as collection becomes compromised. The Company does maintain a limited reserve in anticipation that smaller accounts may become a collection issue, which occurs from time to time based on historical experience. However, most of the Company’s customers are financially sound and the Company’s history of bad debts is relatively low. While credit losses

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have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that have been experienced in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers.

Provisions for Excess and Obsolete Inventory Losses and Residual Value Losses.

The Company values inventory at the lower of cost (using a method that approximates the first-in, first-out method) or net realizable value. Reviews of inventory quantities on hand have been conducted to determine if usage or sales history supports maintaining inventory values at full cost or if it has instead become necessary to record a provision for slow moving, excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the subsequent twenty four months. Estimates of future product demand may prove to be inaccurate, in which case the Company may understate or overstate the provision required for excess and obsolete inventory. Although the Company endeavors to ensure the accuracy of forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of inventory and consequently reported operating results. Through the restatement of the Company’s financial statements described herein, the Company recorded $6,764,000 of cumulative inventory charges for the years ended January 31, 1999, 2000, 2001 and 2002, respectively. These amounts include $1,529,000 in 1999, $978,000 in 2000, $73,000 in 2001 and $37,000 in 2002 associated with obsolete and slow-moving inventory. The Company recorded a writedown of $322,000 in fiscal year 2003 for obsolete and slow-moving inventory.

Work In Process Inventories.

Management employs certain methods to estimate the value of work in process inventories for financial reporting purposes. These estimates are affected by the nature of the operation at which the items are located at the time a physical inventory is conducted, and are subject to judgment. This practice was employed for the fiscal year ended January 31, 2003.

Management employs certain methods to estimate the value of work in process inventories for financial reporting purposes. Company practice has been to conduct cycle counts of inventory at its Charlottesville, Virginia operations throughout the year while a full physical inventory at the Company’s Clearwater, Florida operations is conducted at the close of business each fiscal year. Generally, for items that are in process at the end of a fiscal year, management will make an estimate during the physical inventory process regarding the percentage of completion of such items in order to accurately reflect expenses incurred to date on the production of the items that are still in process. These estimates are affected by the nature of the operation at which the items are located at the time a physical inventory is conducted, and are subject to judgment. This practice was employed for the fiscal year ended January 31, 2003.

In connection with the financial restatements discussed in this annual report, the estimates of the percentage of completion of work in process inventories for the Clearwater, Florida facility previously made for the fiscal years ended January 31, 2000, 2001 and 2002 were determined to be unreliable. Consequently, in connection with the restatements, management employed alternative methods for estimating the amount of work in process at each of those fiscal year ends. Order dates, product production cycle information and sales records for each period subsequent to the year end were reviewed and the amount of work in process was estimated from such information.

Manufacturing Overhead Cost Application.

The Company establishes its inventoriable cost of manufacturing overhead by calculating its overhead costs as a percentage of direct labor and applying that percentage to direct labor that has been charged to inventory on a twelve month rolling average basis. This application percentage is reviewed at least quarterly and is adjusted at least annually.

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Deferred Tax Asset Valuation Allowance.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided against the future benefit of deferred tax assets if it is determined that it is more likely than not that the future tax benefits associated with the deferred tax asset will not be realized.

Long-Lived Assets.

The useful lives of property, plant and equipment for purposes of computing deprecation are: