TEL INSTRUMENT ELECTRONICS CORP - Quarter Report: 2010 December (Form 10-Q)

telinstrument10q123110.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

Commission File No. 33-18978

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of the Registrant as specified in Charter)

New Jersey 22-1441806

(State of Incorporation) (I.R.S. Employer ID Number)

728 Garden Street, Carlstadt, New Jersey 07072

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone No. including Area Code: 201-933-1600

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 X No ______

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ______ No X

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

Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date:

2,626,823 shares of Common stock, $.10 par value as of February 3, 2011.

TEL-INSTRUMENT ELECTRONICS CORPORATION

TABLE OF CONTENTS

PAGE

Part I – Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets

December 31, 2010 and March 31, 2010 3

Condensed Consolidated Statements of Operations -

Three and Nine Months Ended December 31, 2010 and 2009 4

Condensed Consolidated Statements of Cash Flows -

Nine Months Ended December 31, 2010 and 2009 5

Notes to Condensed Consolidated Financial Statements 6-14

Item 2. Management’s Discussion and Analysis of the Results of

Operations and Financial Condition 15-22

Item 4. Controls and Procedures 23

Part II – Other Information

Item 1. Legal Proceedings 23

Item 2. Unregistered sales of Equity Securities and Use of Proceeds 23

Item 4. Submission of Matters to a Vote of Security Holders 23-24

Item 5 Other Information 24

Item 6. Exhibits 24

Signatures 25

Certifications

Item 1 - Financial Statements

TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31, 2010			March 31, 2010
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	440,086		$	173,048
Accounts receivable, net		1,614,232			939,143
Unbilled government receivables		1,490,290			1,491,111
Inventories, net		3,328,969			2,242,227
Prepaid expenses and other		72,816			87,535
Deferred debt expense		108,320			-
Deferred income tax asset		1,373,691			1,234,788
Total current assets		8,428,404			6,167,852

Equipment and leasehold improvements, net		333,294			336,131
Deferred income tax asset – non-current		1,176,223			1,176,223
Deferred debt expense – long-term		400,185			-
Other assets		43,075			54,131
Total assets	$	10,381,181		$	7,734,337

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:
Line of credit		-			600,000
Current portion of long-term debt		158,493			-
Capital lease obligations		24,279			-
Subordinated notes payable-related parties, net of debt discount		244,231			226,923
Accounts payable		1,885,957			1,145,572
Progress Billings		-			69,412
Deferred revenues		28,843			50,279
Accrued payroll, vacation pay and payroll taxes		466,030			420,572
Accrued expenses		1,388,448			1,335,506
Total current liabilities		4,196,281			3,848,264

Long-term debt, net of debt discount		2,090,027			-
Warranty liability		411,340			-
Deferred revenues		18,725			27,957
Total liabilities		6,716,373			3,876,221

Commitments

Stockholders' equity:
Common stock, par value $.10 per share, 2,626,823 and 2,615,361 issued and outstanding as of December 31, 2010 and March 31, 2010, respectively		262,682			261,536
Additional paid-in capital		5,621,031			5,481,091
Accumulated deficit		(2,218,905	)		(1,884,511	)
Total stockholders' equity		3,664,808			3,858,116
Total liabilities and stockholders' equity	$	10,381,181		$	7,734,337
See accompanying notes to condensed consolidated financial Statements

TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31, 2010			December 31, 2009			December 31, 2010			December 31, 2009

Net sales	$	4,261,222		$	1,690,460		$	9,772,435		$	6,443,770
Cost of sales		2,395,206			949,644			5,354,804			3,376,840

Gross margin		1,866,016			740,816			4,417,631			3,066,930

Operating expenses:
Selling, general and administrative		686,380			741,397			2,137,055			2,259,603
Engineering, research and development		767,366			937,299			2,385,802			2,709,463
Total operating expenses		1,453,746			1,678,696			4,522,857			4,969,066

Income (loss) from operations		412,270			(937,880	)		(105,226	)		(1,902,136	)

Other income (expense):
Amortization of debt discount		(19,164	)		-			(33,678	)		-
Amortization of debt expense		(27,080	)		-			(33,098	)		-
Change in fair value of common stock warrant		(129,684	)		-			(129,684	)		-
Gain on sale of capital asset		-			-			3,600			-
Interest income		71			209			219			702
Interest expense		(102,016	)		(15,422	)		(172,715	)		(34,418	)

Income (loss) before income taxes		134,397			(953,093	)		(470,582	)		(1,935,852	)

Income tax provision (benefit)		105,385			(380,763	)		(136,188	)		(773,373	)

Net income (loss)		29,012			(572,330	)		(334,394	)		(1,162,479	)

Income (loss) per common share
Basic	$	0.01		$	(0.22	)	$	(0.13	)	$	(0.46	)
Diluted	$	0.01		$	(0.22	)	$	(0.13	)	$	(0.46	)

Weighted average shares outstanding:
Basic		2,626,149			2,605,148			2,621,417			2,529,752
Diluted		2,642,747			2,605,148			2,621,417			2,529,752

See accompanying notes to condensed consolidated financial statements

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months ended
	December 31, 2010			December 31, 2009
Cash flows from operating activities:
Net loss	$	(334,394	)	$	(1,162,479	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(138,903	)		(777,663	)
Depreciation and amortization		202,069			133,263
Change in fair value of common stock warrant		129,684			-
Gain on sale of asset		(3,600	)		-
Non-cash stock-based compensation		75,771			55,135

Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net		(675,089	)		350,947
Decrease (increase) in unbilled government receivables		821			(158,389	)
(Increase) decrease in inventories		(1,086,742	)		306,732
Decrease in prepaid expenses & other		14,719			15,628
Decrease in other assets		11,056			1,047
Increase (decrease) increase in accounts payable		740,385			453,458
Increase (decrease) in accrued payroll, vacation pay and payroll taxes		45,458			16,862
Decrease in deferred revenues		(30,668	)		1,208
Decrease in progress billings		(69,412	)		-
Increase (decrease) in accrued expenses		52,942			(385,168	)
Net cash used in operating activities		(1,065,903	)		(1,149,419	)

Cash flows from investing activities:
Proceeds from the sale of capital asset		3,600			-
Purchases of equipment		(106,070	)		(36,653	)
Net cash used in investing activities		(102,470	)		(36,653	)

Cash flows from financing activities:
Proceeds from the issuance of common stock		50,000			359,470
Proceeds from the exercise of stock options		15,315			213,355
Proceeds from long-term debt		2,500,000			-
Expenses associated with long-term debt		(527,796	)		-
Proceeds from borrowings from line of credit		400,000			-
Repayment of capitalized lease obligations		(2,108	)		-
Repayment of line of credit		(1,000,000	)		150,000
Net cash provided by financing activities		1,435,411			722,825

Net increase (decrease) in cash and cash equivalents		267,038			(463,247	)
Cash and cash equivalents at beginning of period		173,048			601,887
Cash and cash equivalents at end of period	$	440,086		$	138,640

Taxes paid	$	-		$	3,990
Interest paid	$	136,408		$	15,406

Supplemental Schedule of Non-Cash Financing Activities:
Capital expenditures funded by capital lease borrowings	$	26,387		$	-

See accompanying notes to condensed consolidated financial statements

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of December 31, 2010, the results of operations for the three and nine months ended December 31, 2010 and December 31, 2009, and statements of cash flows for the nine months ended December 31, 2010 and December 31, 2009. These results are not necessarily indicative of the results to be expected for the full year.

The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K. The March 31, 2010 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Note 2

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

Due to the unique nature of the ITATS program, wherein a significant portion of this contract wasl not to be delivered for over a year, revenues under this contract were recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. This contract is nearing completion and a major portion of the revenues associated with this program have been recognized. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. (See Critical Accounting Policies – Revenue Recognition). These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.

Note 3 Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	December 31, 2010			March 31, 2010

Government	$	1,451,826		$	735,184
Commercial		199,076			243,878
Less: Allowance for doubtful accounts		(36,670	)		(39,919	)

	$	1,614,232		$	939,143

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 4 Inventories, net

Inventories consist of:

	December 31, 2010			March 31, 2010

Purchased parts	$	2,226,298		$	1,432,782
Work-in-process		1,489,668			1,142,851
Finished goods		53,003			76,594
Less: Inventory reserve		(440,000	)		(410,000	)

	$	3,328,969		$	2,242,227

Note 5 Earnings (Loss) Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 (Prior authoritative Financial Accounting SFAS No. 128, "Earnings Per Share") requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the nine months ended December 31, 2010 and the three and nine months ended December 31, 2009 do not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	December 31,2010		December 31,2009
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders	$	29,012		$	(572,330	)
Weighted-average common shares outstanding		2,626,149			2,605,148
Basic net income(loss) per share attributable to common Stockholders	$	0.01		$	(0.22	)
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders	$	29,012		$	(572,330	)
Weighted-average common shares outstanding		2,626,149			2,605,148
Incremental shares attributable to the assumed exercise of Outstanding stock options		16,598			-
Total adjusted weighted-average shares		2,642,747			2,605,148
Diluted net income(loss) per share attributable to common stockholders	$	0.01		$	(0.22	)

	Nine Months Ended			Nine Months Ended
	December 31,2010			December 31,2009
Basic and diluted net loss per share computation:
Net loss attributable to common stockholders	$	(334,394	)	$	(1,162,479	)
Weighted-average common shares outstanding		2,621,417			2,529,752
Basic and diluted net loss per share attributable to common stockholders	$	(0.13	)	$	(0.46	)

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 6 Stock Options

The Company adopted the FASB ASC 718, utilizing the modified prospective method. FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. As a result of adopting FASB ASC 718-10, operations were charged $26,743 and $18,986 and $75,771 and $55,135 for three and nine months ended December 31, 2010 and 2009, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.23% to 2.11%, volatility at 39.84% to 41.15%, and an expected life of 5 years for the nine months ended December 31, 2010; expected dividend yield of 0.0%, risk-free interest rate of 2.09% to 2.74%, volatility at 37.28% to 43.06%, and an expected life of 5 years for the nine months ended December 31, 2009. The Company estimates the forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 8%.

Note 7 Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has three reportable segments - avionics government, avionics commercial, and until March 31, 2010, marine systems. There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments. The marine systems segment consists of sales to hydrographic, oceanographic, researchers, engineers, geophysicists, and surveyors, which terminated operations in fiscal year 2010.

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

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 7 Segment Information (continued)

The table below presents information about reportable segments for the periods ending December 31, 2010 and 2009:

Three Months Ended December 31, 2010	Avionics Gov’t	Avionics Comm’l.	Avionics Total	Marine Systems	Corporate Items	Total
Net sales	$ 3,696,348	$ 564,874	$ 4,261,222	-	-	$ 4,261,222
Cost of Sales	2,087,951	307,255	2,395,206	-	-	2,395,206

Gross Margin	1,608,397	257,619	1,866,016	-	-	1,866,016

Engineering, research, and Development			767,366	-	-	767,366
Selling, general, and admin.			364,957	-	$ 321,423	686,380
Change in fair value of common Stock warrant			-	-	129,684	129,684
Amortization					46,244	46,244
Interest (income) expense,net			-		101,945	101,945
Total expenses			1,132,323	-	599,296	1,731,619

Income (loss) before income taxes			$ 733,693	-	$ (599,296)	$ 134,397

Three Months Ended December 31, 2009	Avionics Gov’t	Avionics Comm’l.	Avionics Total	Marine Systems	Corporate Items	Total
Net sales	$ 1,161,985	$ 471,986	$ 1,633,971	$ 56,489	-	$ 1,690,460
Cost of Sales	599,849	349,593	949,442	202	-	949,644

Gross Margin	562,136	122,393	684,529	56,287	-	740,816

Engineering, research, and development			924,044	13,255	-	937,299
Selling, general, and admin.			341,152	1,147	$ 399,098	741,397
Interest (income) expense,net			-	-	15,213	15,213
Total expenses			1,265,196	14,102	414,311	1,693,909
7
Income (loss) before income taxes			$ (580,667)	$ 41,885	(414,311)	$ (953,093)

Nine Months Ended December 31, 2010	Avionics Gov’t	Avionics Comm’l.	Avionics Total	Marine Systems	Corporate Items	Total
Net sales	$ 7,942,668	$ 1,829,767	$ 9,772,435	-	-	$ 9,772,435
Cost of Sales	_4,208,229	1,146,575	5,354,804	-	-	5,354,804

Gross Margin	3,734,439	683,192	4,417,631	-	-	4,417,631

Engineering, research, and Development			2,385,802	-	-	2,385,802
Selling, general, and admin.			1,060,756	-	$ 1,076,299	2,137,055
Gain on sale of asset			-	-	(3,600)	(3,600)
Amortization					66,776	66,776
Change in fair value of common Stock warrant					129,684	129,684
Interest expense,net			-	-	172,496	172,496
Total expenses			3,446,558	-	1,441,655	4,888,213

Income (loss) before income taxes			$ 971,073	-	$ (1,441,655)	$ (470,582)

Nine Months Ended December 31, 2009	Avionics Gov’t	Avionics Comm’l.	Avionics Total	Marine Systems	Corporate Items	Total
Net sales	$ 4,851,530	$ 1,492,550	$ 6,344,080	$ 99,690	-	$ 6,443,770
Cost of Sales	2,362,290	1,004,923	3,367,213	9,627	-	3,376,840

Gross Margin	2,489,240	487,627	2,976,867	90,063	-	3,066,930

Engineering, research, and Development			2,672,119	37,344	-	2,709,463
Selling, general, and admin.			998,225	1,387	$ 1,259,991	2,259,603
Interest (income) expense,net			-	-	33,716	33,716
Total expenses			3,670,344	38,731	1,293,707	5,002,782

Income (loss) before income taxes			$ (693,477)	$ 51,332	$ (1,293,707)	$ (1,935,852)

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 8 Income Taxes

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

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying December 31, 2010 and March 31, 2010 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.

Note 9 Fair Value Measurements

On September 2006, the FASB issued FASB ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820-10 are effective for fiscal periods after 2008

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

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

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

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9 Fair Value Measurements (continued)

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

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

Cash, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated balance sheets are a reasonable estimate of their fair value due to the short-term nature of these instruments.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2010 and March 31, 2010. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

December 31, 2010	Level I		Level II		Level III		Total
Total Assets	$ -		$ -		$ -		$ -

Warrant liability		-		-		411,340		411,340
Total Liabilities	$	-	$	-	$	411,340	$	411,340

March 31, 2010

Level I

Level II

Level III

Total

Total Assets

$ -

Total Liabilities

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9 Fair Value Measurements (continued)

We adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 13) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized currently in the statement of operations until such time as the warrants are exercised or expire. For the three and nine months ended December 31, 2010 the Company recorded a loss on revaluation of derivation in the amount of $129,684. These common stock warrants do not trade in an active securities market, and, as such, we estimate the fair value of these warrants using the Black-Scholes options model using the following assumptions:

December 31, 2010

Risk free interest rate 3.30%

Expected life in years 9

Expected volatility 31.49%

Fair market value of stock $8.09

Exercise price $6.70

Note 10 Reclassifications

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

Note 11 Litigation

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

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

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited

Note 11 Litigation (continued)

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

Note 12 New Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605)”. This Update provides amendments to the criteria in Subtopic 605-24 for separating consideration in multiple-deliverable revenue arrangements. It establishes a hierarchy to determine the selling price of each specific deliverable which includes vendor-specific objective evidence (if available), third-party evidence (if vendor-specific evidence is not available), or estimated selling price if neither of the first two are available. This Update also eliminates the residual method for allocating revenue between the elements of an arrangement and requires that arrangement consideration be allocated at the inception of the arrangement. Finally, this Update expands the disclosure requirements regarding a vendor’s multiple-deliverable revenue arrangements. This Update is effective for fiscal years beginning on or after June 15, 2010. We do not anticipate any material impact from this Update.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (the “Update”), which provides amendments to Accounting Standards Codification 820-10 (Fair Value Measurements and Disclosures – Overall Subtopic) of the Codification. The Update requires improved disclosures about fair value measurements. Separate disclosures need to be made of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with a description of the reasons for the transfers. Also, disclosure of activity in Level 3 fair value measurements needs to be made on a gross basis rather than a net basis. The Update also requires: (1) fair value measurement disclosures for each class of assets and liabilities, and (2) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements, which are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has complied with the new disclosure requirements.

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 13 Long-Term Debt

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

1.	The Note has a term of five (5) years with an interest rate of 14% on the outstanding principal amount. Payments for the first year are interest only, and after the first year the Company will make monthly payments of approximately $69,000 for the remaining term of the loan.

The Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully –diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the closing on the NYSE-Amex Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount and warrant liability of $267,848, which will be marked to fair value at the end of each period (see Note 9). The debt discount is to be amortized over the life of the loan.

3.	Loan provisions also contain customary representations and warranties.

4.	BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.

5.	Provisions of the loan also include certain financial covenants that the Company must comply with, beginning December 31, 2010.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Forward Looking Statements

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

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

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

Critical Accounting Policies

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

Revenue recognition – revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists.

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

Due to the unique nature of the ITATS program wherein a significant portion of this contract was not to be delivered for over a year, revenues under this contract were recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.

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

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

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Critical Accounting Policies (continued)

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

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

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

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

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

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

General

Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes and Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.

Overview

In the quarter ended December 31, 2010 the Company had record sales of $4.26 million which represented a 152% increase as compared to the same period last year. The revenue increase was due to strong sales of legacy test sets as well as sales of CRAFT 719 and 708 pilot production units. Income from operations increased to approximately $412,000 for the quarter versus an approximately $938,000 loss in the year ago period. Net income for the period was approximately $29,000 due to reductions for: (1) a non-cash charge of $129,684 for revaluing the BCA warrant options to fair market value (see Note 13 to Financial Statements); (2) $102,000 of interest expense; and (3) $105,000 of income tax accruals due to the non-deductibility for income tax purposes of the loss on revaluation of the BCA warrant. The revaluation loss was due to increase in value of common stock underlying the warrant from $6.70 per share at the closing of the loan to $8.09 on December 31, 2010. Additionally, the Company purchased a significant amount of inventory in anticipation of shipping orders received as well as orders anticipated from the government as described below.

Sales for the nine months ended December 31. 2010 were $9,772,435 or 9% more than sales for the entire fiscal year ended March 31, 2010, and loss before taxes improved over last year’s nine month period to a $470,582 loss, an improvement of almost $1.5 million. Operating expenses in the current nine month period were reduced by $446,209 to $4,522,857, or 9%.

Two of the Company’s key new products are currently undergoing evaluation by the U.S. Navy. Technical Evaluation of the CRAFT program has been going well and should be completed in the next few months. However, the U.S. Navy has delayed production of the 160 units ($3.6 million) of the AN/USM-708 until Technical Evaluation is completed. We are currently negotiating this issue with the U.S. Navy. If production order is not released, this could impact our sales growth in the fourth quarter of the current fiscal year. The Company believes that CRAFT will be successfully evaluated and that upon successful completion of the evaluation, the Navy will also exercise the remaining production options for the CRAFT AN/USM-708.

Production and delivery of the ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206) units with the U.S. Navy has been delayed as a result of certain issues during technical evaluation. Our subcontractor on this program has proposed a technical solution which is subject to acceptance by the U.S. Navy. The Company believes that these issues will be resolved, but this will delay the production and sales of the ITATS units. The Company has received a production order for 102 units amounting to approximately $5.3 million.

The TS-4530A program with the U.S. Army is going well and the Company expects to begin shipping the initial prototypes in the fourth quarter of the current fiscal year. The Company has received orders totaling approximately $17.6 million for this program.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Overview (continued)

As previously reported, the Company concluded a loan agreement in September 2010 in order to raise additional funding to support the increasing volume of sales and as a bridge to the anticipated higher sales and

cash flow commencing in the latter part of this fiscal year. The $2.5 million loan agreement with BCA Mezzanine Fund L.P. is a five year loan at 14% per year, payable interest only in the first year at approximately $29,000 per month, and thereafter payments will be approximately $69,000 monthly until paid. The loan is described in Note 13 to the Financial Statements.

The Company used the loan proceeds to repay its bank loan, pay accounts payable, and working capital needs to fund increases in inventories and accounts receivable. As a result, the Company increased working capital by approximately $1.8 million as it replaced the bank loan, classified as a current liability, with the BCA Loan, which is mostly classified as long-term debt.

However, the delays discussed above have adversely affected the Company’s cash flow, and in February 2011,BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.

Shareholder equity declined by approximately $193,000 for the nine months ended December 31, 2010 as the loss for the year was partially offset by proceeds from the issuance of additional common stock. The stock was sold pursuant to the exercise of outstanding employee stock options, and director purchases at the closing market price of the common stock on the NYSE Amex on the date of purchase.

At December 31, 2010 the Company’s backlog was approximately $30 million as compared to approximately $20.6 million at December 31, 2009. The backlog at December 31, 2010 includes only the amount of currently exercised delivery orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and is expected to materially increase when the volume production orders for the Navy CRAFT AN/USM-708 units are received. Historically, the Company obtains a substantial volume of orders which are required to be filled in less than twelve months, and, therefore, these anticipated orders are not reflected in the backlog.

As a result of the foregoing, as well as projected sales of other products, the Company anticipates a substantial increase in revenues and solid profits in this fiscal year ending March 31, 2011 as compared to the previous fiscal year. However, fourth quarter sales increases are dependent upon our negotiation with the U.S. Navy regarding the delay of the 160 units of the AN/USM-708 noted above, and shipment of the initial prototypes on the TS-4530A program.

As previously reported, on July 30, 2010, Tel received a letter from the staff of the NYSE Amex that, based on the Tel’s financial statements, Tel was no longer in compliance with the Exchange’s requirement for continued listing of its shares under Section 1009 of the Exchange’s rules. Tel is not in compliance with the listing requirements as its reported stockholders’ equity at March 31, 2010 was $3.85 million as compared to the $4.0 million minimum requirement. Pursuant to Exchange rules, the Company’s stock continues to be listed for trading, and the Company furnished the Exchange with a specific plan of how it will return to compliance on or before January 30, 2012.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Overview (continued)

On October 18, 2010 the NYSE Amex accepted the Company’s proposed plan to return to compliance with the minimum stockholder equity requirement by January 30, 2012. Based upon the information provided by the Company, the Exchange has determined that the Company has made a reasonable demonstration of its ability to regain compliance with Section 1009 of the Company Guide by January 30, 2012. Based on this, the Exchange will continue the listing of the Company. The Exchange will periodically review the Company for compliance with the Plan. If the Company does not show progress consistent with the Plan, the Exchange Staff will review the circumstances and could commence delisting proceedings. The Company is confident that it will achieve its objectives and maintain its listing on the NYSE Amex.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office, which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and the Company does not anticipate a decision for some time.. Tel remains confident as to the outcome of this appeal and any potential follow-on litigation. See Note 11 to the Financial Statements.

Results of Operations

Sales

For the quarter ended December 31, 2010, total sales increased $2,570,762 (152.1%) to $4,261,222 as compared to $1,690,460 for the same quarter in the prior year. Avionics Government sales increased $2,534,863 (218.1%) to $3,696,848 for the period as compared to $1,161,985 for the same period last year. This increase in Avionics Government sales is primarily attributed to shipments of the AN/USM-719 units and AN/USM-708 for the CRAFT program, the TR-100 with the U.S. Air Force, and the T-47NH with the U.S. Army. Avionics Commercial sales increased $92,888 (19.7%) to $564,874 for the three months ended December 31, 2010 as compared to $471,986 in the same period in the prior year. This increase is primarily attributed to revenues associated with repairs and calibrations. There were no sales from Marine Systems as this division was discontinued..

For the nine months ended December 31, 2010, total sales increased $3,328,665 (51.7%) to $9,772,435 as compared to $6,443,770 for the same period in the prior year. Avionics Government sales increased $3,091,138 (63.7%) to $7,942,668 for the period as compared to $4,851,530 for the same period last year. This increase in Avionics Government sales is primarily attributed to shipments of the AN/USM-719 units and AN/USM-708 for the CRAFT program, the TR-100 with the U.S. Air Force, and the T-47NH with the U.S. Army. Commercial sales increased $337,217 (22.6%) to $1,829,767 for the nine months ended December 31, 2010 as compared to $1,492,550 in the same period in the prior year. This increase is due to the timing of orders and shipments as well as the increase in revenues associated with repairs and calibrations. The Company continues to experience weakness in the commercial market and does not expect this growth in the commercial segment to continue.

Fourth quarter sales increases are dependent upon our negotiation with the U.S. Navy regarding the delay of the 160 units of the AN/USM-708 noted above, and shipment of the initial prototypes on the TS-4530A program.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Results of Operations (continued)

Gross Margin

Gross margin increased $1,125,200 (151.9%) to $1,866,016 for the quarter ended December 31, 2010 as compared to $740,816 for the same quarter in the prior fiscal year. The increase in gross margin is primarily attributed to the increase in volume. The gross margin percentage for the quarter ended December 31, 2010 was 43.8% the same as for the quarter ended December 31, 2009.

Gross margin increased $1,350,701 (44%) to $4,417,631 for the nine months ended December 31, 2010 as compared to $3,066,930 for the same period in the prior fiscal year. The increase in gross margin is primarily attributed to the increase in volume. The gross margin percentage for the nine months ended December 31, 2010 was 45.2% as compared to 47.6% for the nine months ended December 31, 2009. The decrease in gross margin percentage is due to a change in sales mix and lower prices on the AN/USM-719.

Operating Expenses

Selling, general and administrative expenses decreased $55,017 (7.4%) and $122,548 (5.4%) to $686,380 and $2,137,055, respectively, for the three and nine months ended December 31, 2010, as compared to $741,397 and $2,259,603 for the three and nine months ended December 31, 2009. This decrease is attributed mainly to a decrease in legal fees associated with the Aeroflex litigation offset partly by an increase in outside commissions.

Engineering, research and development expenses decreased $169,933 (18.1%) to $767,366 for three months ended December 31, 2010 as compared to $937,299 for the three months ended December 31, 2009 primarily as a result of lower outside contractor and material costs associated with the near completion of major programs. Engineering, research and development expenses decreased $323,661 (11.9%) to $2,385,802 for nine months ended December 31, 2010 as compared to $2,709,463 for the nine months ended December 31, 2009, primarily as a result of reduced outside contractor expenses associated with the near completion of major programs.

Income (Loss) From Operations

As a result of the above, the Company recorded income from operations of $412,270, for the quarter ended December 31, 2010 as compared to a loss from operations of $937,880 for the quarter ended December 31, 2009. The Company also recorded a loss from operations of $105,226 for the nine months ended December 31, 2010 as compared to a loss from operations of $1,902,136 for the nine months ended December 31, 2009.

Other Income (Expenses), net

Interest expense increased as a result of interest on the new $2.5 million loan from BCA, increased cumulative borrowings and interest rate on the line of credit (which was not paid off until September 2010), and increased interest expense associated with the officers’ subordinated notes. Amortization of debt discount is in connection with the stock options issued in conjunction with the officers’ subordinated notes and warrants issued in conjunction with the loan from BCA. The amortization of deferred expenses is also associated with the loan from BCA. The Company also incurred a loss associated with the revaluation of the warrant issued to BCA in the amount of $129,684.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Results of Operations (continued)

Loss before Income Taxes

As a result of the above, the Company recorded income before income taxes of $134,397, for the quarter ended December 31, 2010 as compared to a loss before income taxes of $953,093 for the quarter ended December 31, 2009. The Company also recorded a loss before income taxes of $470,582 for the nine months ended December 31, 2010 as compared to a loss before income taxes of $1,935,852 for the nine months ended December 31, 2009.

Income Taxes

An income tax provision of $105,385 was recorded for the three months ended December 31, 2010 as compared to an income tax benefit of $380,763 for the three months ended December 31, 2009. The change is due to the income before taxes for the three months ended December 31, 2010. An income tax benefit of $136,188 was recorded for the nine months ended December 31, 2010 as compared to an income tax benefit of $773,373 for the nine months ended December 31, 2009 as a result of the lower loss for the period. These amounts represent the effective federal and state tax rate of approximately 40% on the Company’s net income or loss before taxes, but the Company does not pay Federal Income taxes due to its net operating loss carryforward The high income tax accrual for the period was due to the non-deductibility of the loss on revaluation of the BCA warrant.

Net Loss

As a result of the above, the Company recorded net income of $29,012 for the three months ended December 31, 2010 as compared to a net loss of $572,330 for the three ended December 31, 2009. The Company recorded a net loss of $334,394 for the nine months ended December 31, 2010 as compared to a net loss of $1,162,479 for the nine months ended December 31, 2009.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

Liquidity and Capital Resources

At December 31, 2010, the Company had working capital of $4,232,123 as compared to $2,319,588 at March 31, 2010, primarily as a result of the increase in accounts receivable and inventories and the payment of the line of credit with the bank that was classified as a current liability with the long-term BCA loan, partially offset by the increase in accounts payable..

During the nine months ended December 31, 2010, the Company had a net increase in cash of $267,038. The Company’s principal sources and uses of funds were as follows:

Cash used in operating activities. For the nine months ended December 31, 2010, the Company used $1,065,903 in cash for operations as compared to using $1,149,419 in cash for operations for the nine months ended December 31, 2009. This is primarily attributed to the lower loss from operations mostly offset by increases in accounts receivable and inventories.

Cash used in investing activities. Net cash used in investing activities was $102,470 for the nine months ended December 31, 2010 as compared to $36,653 for the nine months ended December 31, 2009 due to the increase in purchases of equipment.

Cash provided by financing activities Net cash provided by financing activities for the nine months ended December 31, 2010 was $1,435,411 as compared to $722,825 for the nine months ended December 31, 2009. In September 2010 the Company raised $2.5 million in financing which was offset by financing costs and repayment to the bank of the line of credit. This amount was also offset partially by lower proceeds from the issuance of common stock and exercise of stock options.

At December 31, 2010 the Company’s backlog was approximately $30 million as compared to approximately $20.6 million at December 31, 2009. The backlog at December 31, 2010 includes only the amount of currently exercised delivery orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and the Company’s backlog is expected to materially increase when the large volume production orders for the AN/USM-708 units are received. Historically, the Company obtains a substantial volume of orders which are required to be filled in less than twelve months, and, therefore, these anticipated orders are not reflected in the backlog.

In September 2010 the Company, pursuant to an agreement with BCA Mezzanine Fund LP, borrowed $2.5 million for five years. See Overview and Note 13 to the Financial Statements.

There was no significant impact on the Company’s operations as a result of inflation for the nine months ended December 31, 2010. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended March 31, 2010.

Item 4 (T). Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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

Part II. Other Information

Item 1. Legal Proceedings

See discussion in Item 3 of the Company’s Report on Form 10-K for the fiscal year ended March 31, 2010, Note 11 to the Financial Statements above, and under Management’s Analysis and Discussion of the Results of Operations – Overview included in this report.

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

See Note 13 to the Financial Statements regarding warrant issued to BCA Mezzanine Fund LP and the restricted nature of any shares issued upon its exercise.

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

(a)	The Annual Meeting of Shareholders was held on December 15, 2010 (the “Annual Meeting”).

(b)	Not applicable

(c)	At the Annual Meeting, the Company’s shareholders voted in favor of re-electing management’s nominees for election as directors of the Company as follows:

	For	Against
Harold K. Fletcher	1,636,996	35,240
George J. Leon	1,672,036	200
Jeff C. O’Hara	1,618,996	53,240
Robert A. Rice	1,672,036	200
Robert H. Walker	1,672,036	200

Item 4. Submission of Matters to a Vote of Security Holders (continued)

The shareholders also voted 1,672,036 shares in favor of ratifying the audit committee’s appointment of BDO USA, LLP, as the Company’s independent registered public accountants for the fiscal year ending March 31, 2011. Shareholders owning 200 shares voted against this proposal.

The shareholders also ratified the of action of Board of Directors to agree to grant BCA Mezzanine Fund LP limited preemptive rights with respect to shares of common stock to be issued to BCA upon its exercise of the warrant. The vote was 1,608,496 shares in favor with 63,740 shares voted against this proposal.

The shareholders also voted in favor of amending our certificate of incorporation to provide that shares of common stock issued upon exercise of the warrant granted to BCA have preemptive rights, but shall be designated Series A common stock and no other shares of common stock shall have preemptive rights. The vote was 1,608,496 shares in favor with 63,740 shares voted against this proposal.

(d)	Not applicable

Item 5. Other Information

The Company filed a restated certificate of incorporation with the state of New Jersey reflecting the shareholders vote in the last paragraph 4(c) above.

Item 6. Exhibits

Exhibits

31.1 Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act.

31.2 Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act.

32.1 Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

TEL-INSTRUMENT ELECTRONICS CORP.

Date: February 14, 2011 By: /s/ Jeffrey C. O’Hara

Jeffrey C. O’Hara

CEO

Date: February 14, 2011 By: /s/ Joseph P. Macaluso

Joseph P. Macaluso

Principal Accounting Officer