##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 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 November 23, 2007
 Commission File Number 1-10655
 ENVIRONMENTAL TECTONICS CORPORATION
 Pennsylvania
    
    23-1714256(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
   o þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ  o þ




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##### Table of Contents



Explanatory Statement
 Restatement of previously issued financial statements
  Settlement with U.S. Navy
         Audit Committee Review and Regulatory Compliance Matters
   2




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##### Table of Contents



Change in Independent Registered Public Accounting Firm
  Restatement of Previously Filed Financial Statements
         Previously Filed Reports
  Additional Matters Regarding H.F. Lenfest
 Lenfest Acquisition Proposal
  Lenfest Letter Agreement
  3




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##### 



PART I  FINANCIAL INFORMATION
    
    
    5Item 1. Financial Statements (unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the 13 and 39 week periods ended November
23, 2007 and November 24, 2006
    
    
    5Condensed Consolidated Balance Sheets as of November 23, 2007 and February 23, 2007
    
    
    6Condensed Consolidated Statements of Cash Flows for the 39 week periods ended November 23, 2007
and November 24, 2006
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    25Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32
   4




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements (unaudited)
 
 Environmental Tectonics Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except share and per share information)
 Thirteen weeks ended
    
    
    Thirty-nine weeks endedNovember 23,
    
    
    November 24,
    
    
    November 23,
    
    
    November 24,2007
    
    
    2006
    
    
    2007
    
    
    2006(restated)
    
    
    
    
    
    
    (restated)Net sales
    
    $
    6,701
    
    
    $
    4,718
    
    
    $
    15,295
    
    
    $
    13,622Cost of goods sold
    
    
    5,479
    
    
    
    3,688
    
    
    
    12,635
    
    
    
    11,084Gross profit
    
    
    1,222
    
    
    
    1,030
    
    
    
    2,660
    
    
    
    2,538Operating expenses:Selling and administrative
    
    
    2,785
    
    
    
    2,568
    
    
    
    8,219
    
    
    
    7,204Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,639
    
    
    
    3,004Research and development
    
    
    64
    
    
    
    43
    
    
    
    355
    
    
    
    5292,849
    
    
    
    5,615
    
    
    
    12,213
    
    
    
    10,737Operating loss
    
    
    (1,627
    )
    
    
    (4,585
    )
    
    
    (9,553
    )
    
    
    (8,199
    )Other expenses:Interest expense
    
    
    406
    
    
    
    291
    
    
    
    1,146
    
    
    
    857Other expense (income), net
    
    
    61
    
    
    
    (43
    )
    
    
    102
    
    
    
    (36
    )467
    
    
    
    248
    
    
    
    1,248
    
    
    
    821Loss before income taxes
    
    
    (2,094
    )
    
    
    (4,833
    )
    
    
    (10,801
    )
    
    
    (9,020
    )Provision for income taxes
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    13Loss before minority interest
    
    
    (2,094
    )
    
    
    (4,837
    )
    
    
    (10,801
    )
    
    
    (9,033
    )Income (loss) attributable to
minority interest
    
    
    4
    
    
    
    33
    
    
    
    (8
    )
    
    
    16Net loss
    
    $
    (2,098
    )
    
    $
    (4,870
    )
    
    $
    (10,793
    )
    
    $
    (9,049
    )Preferred stock dividend
    
    
    (231
    )
    
    
    (90
    )
    
    
    (411
    )
    
    
    (169
    )Loss applicable to common shareholders
    
    $
    (2,329
    )
    
    $
    (4,960
    )
    
    $
    (11,204
    )
    
    $
    (9,218
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.26
    )
    
    $
    (0.55
    )
    
    $
    (1.24
    )
    
    $
    (1.02
    )Basic and diluted weighted average
number of common shares
    
    
    9,030,000
    
    
    
    9,027,000
    
    
    
    9,030,000
    
    
    
    9,031,000
  5




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##### Table of Contents



Environmental Tectonics Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
 November 23,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)AssetsCurrent assets:Cash
    
    $
    795
    
    
    $
    2,215Restricted cash
    
    
    5,648
    
    
    
    20Accounts receivable, net of allowance for bad debts of $404 and $3,372
    
    
    6,443
    
    
    
    2,094Costs and estimated earnings in excess of billings on uncompleted
long-term contracts
    
    
    3,099
    
    
    
    2,816Inventories
    
    
    6,527
    
    
    
    4,739Deferred tax asset
    
    
    77
    
    
    
    71Prepaid expenses and other current assets
    
    
    350
    
    
    
    213Total current assets
    
    
    22,939
    
    
    
    12,168Property, plant and equipment, at cost, net of accumulated depreciation of
$13,300 and $12,760
    
    
    15,086
    
    
    
    4,054Construction in progress
    
    
    
    
    
    
    8,460Software
development costs, net of accumulated amortization of $11,768 and $10,949
    
    
    1,921
    
    
    
    2,158Goodwill
    
    
    455
    
    
    
    455Other assets
    
    
    11
    
    
    
    30Total assets
    
    $
    40,412
    
    
    $
    27,325Liabilities and Stockholders DeficiencyLiabilitiesCurrent liabilities:Accounts payable  trade
    
    
    3,603
    
    
    
    2,254Billings in excess of costs and estimated earnings on uncompleted
long-term contracts
    
    
    5,011
    
    
    
    1,400Customer deposits
    
    
    2,857
    
    
    
    794Accrued claim settlement costs
    
    
    3,550
    
    
    
    Accrued interest and dividends
    
    
    1,797
    
    
    
    668Accrued liabilities
    
    
    1,611
    
    
    
    1,539Total current liabilities
    
    
    18,429
    
    
    
    6,655Long-term obligations:Credit facility payable to bank
    
    
    8,810
    
    
    
    Subordinated convertible debt
    
    
    9,224
    
    
    
    8,83018,034
    
    
    
    8,830Total liabilities
    
    
    36,463
    
    
    
    15,485Commitments and contingencies
    
    
    
    
    
    
    Minority interest
    
    
    45
    
    
    
    53Cumulative convertible participating preferred stock, Series B, $.05 par value,
15,000 shares authorized; 6,000 shares issued and outstanding at November 23,
2007 and February 23, 2007, respectively
    
    
    6,000
    
    
    
    6,000Cumulative convertible participating preferred stock, Series C, $.05 par value
3,300 shares authorized, issued and outstanding at November 23, 2007
    
    
    3,300
    
    
    
    Stockholders DeficiencyCommon stock; $.05 par value; 20,000,000 shares authorized; 9,030,415 and
9,028,459 shares issued and outstanding at November 23, 2007 and February 23,
2007, respectively
    
    
    451
    
    
    
    451Additional paid-in capital
    
    
    16,337
    
    
    
    16,662Accumulated other comprehensive loss
    
    
    (214
    )
    
    
    (149
    )Accumulated deficit
    
    
    (21,970
    )
    
    
    (11,177
    )Total stockholders (deficiency) equity
    
    
    (5,396
    )
    
    
    5,787Total liabilities and stockholders deficiency
    
    $
    40,412
    
    
    $
    27,325
  6




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##### Table of Contents



Environmental Tectonics Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Thirty-nine weeks endedNovember 23,
    
    
    November 24,2007
    
    
    2006(restated)Cash flows from operating activities:Net loss
    
    $
    (10,793
    )
    
    $
    (9,049
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    1,359
    
    
    
    1,400Accretion of debt discount
    
    
    394
    
    
    
    333Increase in allowance for accounts receivable and inventories
    
    
    653
    
    
    
    2,697(Loss) income attributable to minority interest
    
    
    (8
    )
    
    
    16Stock  compensation expense
    
    
    86
    
    
    
    296Deferred income taxes
    
    
    (6
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,471
    )
    
    
    (1,771
    )Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    (283
    )
    
    
    (1,199
    )Inventories
    
    
    (2,319
    )
    
    
    (2,330
    )Prepaid expenses and other current assets
    
    
    (137
    )
    
    
    136Other assets
    
    
    19
    
    
    
    20Accounts payable
    
    
    1,349
    
    
    
    (293
    )Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    3,611
    
    
    
    917Customer deposits
    
    
    2,063
    
    
    
    524Accrued claim settlement costs
    
    
    3,550
    
    
    
    Other accrued liabilities
    
    
    790
    
    
    
    (67
    )Net cash used in operating activities
    
    
    (4,143
    )
    
    
    (8,351
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (3,114
    )
    
    
    (216
    )Capitalized software development costs
    
    
    (580
    )
    
    
    (67
    )Net cash used in investing activities
    
    
    (3,694
    )
    
    
    (283
    )Cash flows from financing activities:Proceeds from borrowings under line of credit
    
    
    8,810
    
    
    
    Proceeds from notes payable, Lenfest
    
    
    4,000
    
    
    
    3,000Repayment of notes payable, Lenfest
    
    
    (4,000
    )Issuance of common stock / warrants
    
    
    
    
    
    
    3Increase in restricted cash
    
    
    (5,628
    )
    
    
    (3
    )Proceeds from issuance of preferred stock
    
    
    3,300
    
    
    
    6,000Net cash provided by financing activities
    
    
    6,482
    
    
    
    9,000Other comprehensive losses
    
    
    (65
    )
    
    
    70Net (decrease) increase in cash and cash equivalents
    
    
    (1,420
    )
    
    
    436Cash at beginning of period
    
    
    2,215
    
    
    
    3,566Cash at end of period
    
    $
    795
    
    
    $
    4,002Supplemental schedule of cash flow information:Interest paid
    
    
    116
    
    
    
    621Income taxes paid
    
    
    
    
    
    
    4Supplemental information on non-cash operating and investing
activities:In the 39
weeks ended November 23, 2007, the Company reclassified
$8,460,000 from Construction in Progress to Property, Plant and
Equipment
  7




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##### Table of Contents



Environmental Tectonics Corporation
 
 Notes to the Condensed Consolidated Financial Statements
 1.
Restatement of Previously Issued Financial Statements and Subsequent
Events
  Settlement with U.S. Navy
         Audit Committee Review and Regulatory Compliance Matters
   8




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Change in Independent Registered Public Accounting Firm
  Restatement of Previously Filed Financial Statements
         Subsequent
Events
 Additional Matters Regarding H.F. Lenfest
 Lenfest Acquisition Proposal
  Lenfest Letter Agreement
  9




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  Restated Statements of Operations amounts:
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim 
Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    4,718
    
    
    $
    
    
    
    $
    4,718Cost of goods sold
    
    
    3,688
    
    
    
    
    
    
    
    3,688Gross profit
    
    
    1,030
    
    
    
    
    
    
    
    1,030Operating expenses:Selling and administrative
    
    
    2,568
    
    
    
    
    
    
    
    2,568Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    43
    
    
    
    
    
    
    
    432,611
    
    
    
    3,004
    
    
    
    5,615Operating loss
    
    
    (1,581
    )
    
    
    (3,004
    )
    
    
    (4,585
    )Other expenses:Interest expense
    
    
    291
    
    
    
    
    
    
    
    291Other income, net
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )248
    
    
    
    
    
    
    
    248Loss before income taxes
    
    
    (1,829
    )
    
    
    (3,004
    )
    
    
    (4,833
    )Provision for income taxes
    
    
    4
    
    
    
    
    
    
    
    4Loss before minority interest
    
    
    (1,833
    )
    
    
    (3,004
    )
    
    
    (4,837
    )Income attributable to minority interest
    
    
    33
    
    
    
    
    
    
    
    33Net loss
    
    $
    (1,866
    )
    
    $
    (3,004
    )
    
    $
    (4,870
    )Preferred stock dividend
    
    
    (90
    )
    
    
    
    
    
    
    (90
    )Loss applicable to common shareholders
    
    $
    (1,956
    )
    
    $
    (3,004
    )
    
    $
    (4,960
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.22
    )
    
    $
    (0.33
    )
    
    $
    (0.55
    )Basic and diluted weighted average
number of common shares
    
    
    9,027,000
    
    
    
    9,027,000
    
    
    
    9,027,000
 10




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim
 Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    13,622
    
    
    $
    
    
    
    $
    13,622Cost of goods sold
    
    
    11,084
    
    
    
    
    
    
    
    11,084Gross profit
    
    
    2,538
    
    
    
    
    
    
    
    2,538Operating expenses:Selling and administrative
    
    
    7,204
    
    
    
    
    
    
    
    7,204Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    529
    
    
    
    
    
    
    
    5297,733
    
    
    
    3,004
    
    
    
    10,737Operating loss
    
    
    (5,195
    )
    
    
    (3,004
    )
    
    
    (8,199
    )Other expenses:Interest expense
    
    
    857
    
    
    
    
    
    
    
    857Other income, net
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )821
    
    
    
    
    
    
    
    821Loss before income taxes
    
    
    (6,016
    )
    
    
    (3,004
    )
    
    
    (9,020
    )Provision for income taxes
    
    
    13
    
    
    
    
    
    
    
    13Loss before minority interest
    
    
    (6,029
    )
    
    
    (3,004
    )
    
    
    (9,033
    )Income attributable to minority interest
    
    
    16
    
    
    
    
    
    
    
    16Net loss
    
    $
    (6,045
    )
    
    $
    (3,004
    )
    
    $
    (9,049
    )Preferred stock dividend
    
    
    (169
    )
    
    
    
    
    
    
    (169
    )Loss applicable to common shareholders
    
    $
    (6,214
    )
    
    $
    (3,004
    )
    
    $
    (9,218
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (0.69
    )
    
    $
    (0.33
    )
    
    $
    (1.02
    )Basic and diluted weighted average
number of common shares
    
    
    9,031,000
    
    
    
    9,031,000
    
    
    
    9,031,000
 11




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (unaudited)
(in thousands, except share and per share information)
 As Originally
    
    
    Claim 
Receivable
    
    
    AsReported
    
    
    Impairment
    
    
    RestatedNet sales
    
    $
    17,419
    
    
    $
    
    
    
    $
    17,419Cost of goods sold
    
    
    15,348
    
    
    
    
    
    
    
    15,348Gross profit
    
    
    2,071
    
    
    
    
    
    
    
    2,071Operating expenses:Selling and administrative
    
    
    9,434
    
    
    
    
    
    
    
    9,434Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004Research and development
    
    
    569
    
    
    
    
    
    
    
    56910,003
    
    
    
    3,004
    
    
    
    13,007Operating loss
    
    
    (7,932
    )
    
    
    (3,004
    )
    
    
    (10,936
    )Other expenses:Interest expense
    
    
    1,151
    
    
    
    
    
    
    
    1,151Other income, net
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )1,093
    
    
    
    
    
    
    
    1,093Loss before income taxes
    
    
    (9,025
    )
    
    
    (3,004
    )
    
    
    (12,029
    )Benefit from income taxes
    
    
    (77
    )
    
    
    
    
    
    
    (77
    )Loss before minority interest
    
    
    (8,948
    )
    
    
    (3,004
    )
    
    
    (11,952
    )Loss attributable to minority interest
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Net loss
    
    $
    (8,940
    )
    
    $
    (3,004
    )
    
    $
    (11,944
    )Preferred stock dividend
    
    
    (259
    )
    
    
    
    
    
    
    (259
    )Loss applicable to common shareholders
    
    $
    (9,199
    )
    
    $
    (3,004
    )
    
    $
    (12,203
    )Per share information:Basic and diluted loss per share
applicable to common shareholders
    
    $
    (1.02
    )
    
    $
    (0.33
    )
    
    $
    (1.35
    )Basic and diluted weighted average
number of common shares
    
    
    9,030,000
    
    
    
    9,030,000
    
    
    
    9,030,000
 12




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued  Restated Balance Sheets amounts:
  (in thousands, except share and per share information)
 As OriginallyReportedadjusted forPreferred
 Stock
    
    
    Claim
Receivable
    
    
    AsReclass
    
    
    Impairment
    
    
    RestatedAssetsCurrent assets:Cash
    
    $
    4,002
    
    
    $
    
    
    
    $
    4,002Restricted cash
    
    
    19
    
    
    
    
    
    
    
    19Accounts receivable, net of allowance
for bad debts of $376 and $3,380
    
    
    8,381
    
    
    
    (3,004
    )
    
    
    5,377Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts
    
    
    4,679
    
    
    
    
    
    
    
    4,679Inventories
    
    
    12,782
    
    
    
    
    
    
    
    12,782Prepaid expenses and other current assets
    
    
    428
    
    
    
    
    
    
    
    428Total current assets
    
    
    30,291
    
    
    
    (3,004
    )
    
    
    27,287Property, plant and equipment, at cost, net of
accumulated depreciation of $12,643
    
    
    4,099
    
    
    
    
    
    
    
    4,099Software development costs, net of accumulated
amortization of $10,773
    
    
    2,008
    
    
    
    
    
    
    
    2,008Goodwill
    
    
    455
    
    
    
    
    
    
    
    455Other assets
    
    
    29
    
    
    
    
    
    
    
    29Total assets
    
    $
    36,882
    
    
    $
    (3,004
    )
    
    $
    33,878Liabilities and Stockholders EquityLiabilitiesCurrent liabilities:Notes payable
    
    
    3,000
    
    
    
    
    
    
    
    3,000Accounts payable  trade
    
    
    1,818
    
    
    
    
    
    
    
    1,818Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts
    
    
    2,035
    
    
    
    
    
    
    
    2,035Customer deposits
    
    
    1,401
    
    
    
    
    
    
    
    1,401Accrued liabilities
    
    
    2,134
    
    
    
    
    
    
    
    2,134Total current liabilities
    
    
    10,388
    
    
    
    
    
    
    
    10,388Long-term obligations:Subordinated convertible debt
    
    
    8,709
    
    
    
    
    
    
    
    8,709Total liabilities
    
    
    19,097
    
    
    
    
    
    
    
    19,097Commitments and contingenciesMinority interest
    
    
    77
    
    
    
    
    
    
    
    77Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding
    
    
    6,000
    
    
    
    
    
    
    
    6,000Stockholders EquityCommon stock; $.05 par value; 20,000,000
shares authorized; 9,026,958 issued and
outstanding
    
    
    451
    
    
    
    
    
    
    
    451Additional paid-in capital
    
    
    16,455
    
    
    
    
    
    
    
    16,455Accumulated other comprehensive loss
    
    
    (179
    )
    
    
    
    
    
    
    (179
    )Accumulated deficit
    
    
    (5,019
    )
    
    
    (3,004
    )
    
    
    (8,023
    )Total stockholders equity
    
    
    11,708
    
    
    
    (3,004
    )
    
    
    8,704Total liabilities and stockholders equity
    
    $
    36,882
    
    
    $
    (3,004
    )
    
    $
    33,878
 13




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  (in thousands, except share and per share information)
 As OriginallyReportedadjusted forPreferred
    
    
    ClaimStock
    
    
    Receivable
    
    
    AsReclass
    
    
    Impairment
    
    
    RestatedAssetsCurrent assets:Cash
    
    $
    2,215
    
    
    $
    
    
    
    $
    2,215Restricted cash
    
    
    20
    
    
    
    
    
    
    
    20Accounts receivable, net of allowance
for bad debts of $368 and $3,372
    
    
    5,098
    
    
    
    (3,004
    )
    
    
    2,094Costs and estimated earnings in excess
of billings on uncompleted long-term
contracts
    
    
    2,816
    
    
    
    
    
    
    
    2,816Inventories
    
    
    4,739
    
    
    
    
    
    
    
    4,739Deferred tax asset
    
    
    71
    
    
    
    
    
    
    
    71Prepaid expenses and other current assets
    
    
    213
    
    
    
    
    
    
    
    213Total current assets
    
    
    15,172
    
    
    
    (3,004
    )
    
    
    12,168Property, plant and equipment, at cost, net of
accumulated depreciation of $12,760
    
    
    4,054
    
    
    
    
    
    
    
    4,054Construction in progress
    
    
    8,460
    
    
    
    
    
    
    
    8,460Software development costs, net of accumulated
amortization of $10,949
    
    
    2,158
    
    
    
    
    
    
    
    2,158Goodwill
    
    
    455
    
    
    
    
    
    
    
    455Other assets
    
    
    30
    
    
    
    
    
    
    
    30Total assets
    
    $
    30,329
    
    
    $
    (3,004
    )
    
    $
    27,325Liabilities and Stockholders EquityLiabilitiesCurrent liabilities:Accounts payable  trade
    
    
    2,254
    
    
    
    
    
    
    
    2,254Billings in excess of costs and
estimated earnings on uncompleted
long-term contracts
    
    
    1,400
    
    
    
    
    
    
    
    1,400Customer deposits
    
    
    794
    
    
    
    
    
    
    
    794Accrued liabilities
    
    
    2,207
    
    
    
    
    
    
    
    2,207Total current liabilities
    
    
    6,655
    
    
    
    
    
    
    
    6,655Long-term obligations:Subordinated convertible debt
    
    
    8,830
    
    
    
    
    
    
    
    8,830Total liabilities
    
    
    15,485
    
    
    
    
    
    
    
    15,485Commitments and contingenciesMinority interest
    
    
    53
    
    
    
    
    
    
    
    53Cumulative convertible participating preferred
stock, Series B, $.05 par value, 15,000 shares
authorized; 6,000 shares issued and
outstanding
    
    
    6,000
    
    
    
    
    
    
    
    6,000Stockholders EquityCommon stock; $.05 par value; 20,000,000
shares authorized; 9,028,459 issued and
outstanding
    
    
    451
    
    
    
    
    
    
    
    451Additional paid-in capital
    
    
    16,662
    
    
    
    
    
    
    
    16,662Accumulated other comprehensive loss
    
    
    (149
    )
    
    
    
    
    
    
    (149
    )Accumulated deficit
    
    
    (8,173
    )
    
    
    (3,004
    )
    
    
    (11,177
    )Total stockholders equity
    
    
    8,791
    
    
    
    (3,004
    )
    
    
    5,787Total liabilities and stockholders equity
    
    $
    30,329
    
    
    $
    (3,004
    )
    
    $
    27,325
 14




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 2. Summary of Significant Accounting Policies
 Basis of Presentation
     Use of Estimates
  Inventories
  November 23,
    
    
    February 23,2007
    
    
    2007(unaudited)(in thousands)Raw materials
    
    $
    94
    
    
    $
    95Work in process
    
    
    5,936
    
    
    
    3,820Finished goods
    
    
    497
    
    
    
    824Total
    
    $
    6,527
    
    
    $
    4,739
 15




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Revenue Recognition
     Net loss per common share
  Share-Based Compensation
   16




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  77
  Income Taxes
  3. Accounts Receivable:
  November 23,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)(in thousands)U.S. government receivables billed and
unbilled contract costs
subject to negotiation
    
    $
    494
    
    
    $
    3,135U.S. commercial receivables billed
    
    
    2,027
    
    
    
    1,525International receivables billed
    
    
    4,326
    
    
    
    8066,847
    
    
    
    5,466Less: allowance for doubtful accounts
    
    
    (404
    )
    
    
    (3,372
    )$
    6,443
    
    
    $
    2,094
  17




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 4. Stockholders Deficiency
  Additional
    
    
    Accumulated
 other
    
    
    
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    capital
    
    
    loss
    
    
    deficit
    
    
    deficiencyBalance, February 23,
2007*
    
    
    9,028,459
    
    
    $
    451
    
    
    $
    16,662
    
    
    $
    (149
    )
    
    $
    (11,177
    )
    
    $
    5,787Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,793
    )
    
    
    (10,793
    )Interest hedge valuation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    
    
    
    
    (118
    )Foreign
currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    53Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,858
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Dividends payable on
preferred stock
    
    
    
    
    
    
    
    
    
    
    (411
    )
    
    
    
    
    
    
    
    
    
    
    (411
    )Balance, November 23, 2007
    
    
    9,028,459
    
    
    $
    451
    
    
    $
    16,337
    
    
    $
    (214
    )
    
    $
    (21,970
    )
    
    $
    (5,396
    )
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes. 5. Long-Term Obligations and Credit Arrangements:
 Bank Credit and Facility
       18




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##### Table of Contents



Environmental Tectonics Corporation
Notes to the Condensed Consolidated Financial Statements, continued
    (in thousands)November 23, 
2007
    
    February 23, 
2007(unaudited)Note payable to bank
    
    $
    8,810
    
    
    $
    Subordinated convertible debt,
net of unamortized discount of
$776 and $1,170
    
    
    9,224
    
    
    
    8,830$
    18,034
    
    
    $
    8,830
  (in thousands)2008
    
    $
    2009
    
    
    18,0342010
    
    
    2011
    
    
    2012 and thereafter
    
    
    Total future obligations
    
    $
    18,034
    19




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
         20




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
          (in thousands)Face Value
    
    $
    10,000Less value of conversion feature
    
    
    (1,400
    )Less value of warrants
    
    
    (1,209
    )7,391Accretion 2008, through November 23, 2007
    
    
    394Accretion 2007
    
    
    454Accretion prior years
    
    
    985Carrying value at November 23, 2007
    
    $
    9,224
      21




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
   6. Segment Information (unaudited):
  (in thousands)TSG
    
    
    CSG
    
    
    TotalThirteen weeks ended and as of
November 23, 2007:Net sales
    
    $
    1,774
    
    
    $
    4,927
    
    
    $
    6,701Interest expense
    
    
    300
    
    
    
    106
    
    
    
    406Depreciation and amortization
    
    
    131
    
    
    
    322
    
    
    
    453Operating loss
    
    
    (1,027
    )
    
    
    52
    
    
    
    (975
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    10,119
    
    
    
    7,871
    
    
    
    17,990Expenditures for segment assets
    
    
    3,146
    
    
    
    46
    
    
    
    3,192Thirteen weeks ended and as of
November 24, 2006*:Net sales
    
    $
    2,533
    
    
    $
    2,185
    
    
    $
    4,718Interest expense
    
    
    217
    
    
    
    74
    
    
    
    291Depreciation and amortization
    
    
    214
    
    
    
    238
    
    
    
    452Operating loss
    
    
    (847
    )
    
    
    (3,501
    )
    
    
    (4,348
    )Income tax
    
    
    4
    
    
    
    
    
    
    
    4Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    22,577
    
    
    
    3,625
    
    
    
    26,202Expenditures for segment assets
    
    
    46
    
    
    
    (16
    )
    
    
    30
 Reconciliation to consolidated amounts
    
    2007
    
    
    2006*Segment assets
    
    $
    17,990
    
    
    $
    26,202Corporate assets
    
    
    22,422
    
    
    
    7,676Total assets
    
    $
    40,412
    
    
    $
    33,878Segment operating loss
    
    $
    (975
    )
    
    $
    (4,348
    )Interest expense
    
    
    406
    
    
    
    291Income tax expense
    
    
    
    
    
    
    4Total loss for segments
    
    
    (1,381
    )
    
    
    (4,643
    )Corporate home office expenses
    
    
    652
    
    
    
    237Other expenses
    
    
    61
    
    
    
    (43
    )Minority interest
    
    
    4
    
    
    
    33Net loss
    
    $
    (2,098
    )
    
    $
    (4,870
    )
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes. 22




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 (in thousands)TSG
    
    
    CSG
    
    
    TotalThirty-nine weeks ended and as of
November 23, 2007:Net sales
    
    $
    4,905
    
    
    $
    10,390
    
    
    $
    15,295Interest expense
    
    
    848
    
    
    
    298
    
    
    
    1,146Depreciation and amortization
    
    
    387
    
    
    
    972
    
    
    
    1,359Operating loss
    
    
    (2,820
    )
    
    
    (5,440
    )
    
    
    (8,260
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    10,119
    
    
    
    7,871
    
    
    
    17,990Expenditures for segment assets
    
    
    3,448
    
    
    
    246
    
    
    
    3,694Thirty-nine weeks ended and as of
November 24, 2006*:Net sales
    
    $
    7,951
    
    
    $
    5,671
    
    
    $
    13,622Interest expense
    
    
    635
    
    
    
    222
    
    
    
    857Depreciation and amortization
    
    
    748
    
    
    
    624
    
    
    
    1,372Operating loss
    
    
    (2,477
    )
    
    
    (4,778
    )
    
    
    (7,255
    )Income tax
    
    
    13
    
    
    
    
    
    
    
    13Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    22,577
    
    
    
    3,625
    
    
    
    26,202Expenditures for segment assets
    
    
    162
    
    
    
    26
    
    
    
    188
 Reconciliation to consolidated amounts
    
    2007
    
    
    2006*Segment assets
    
    $
    17,990
    
    
    $
    26,202Corporate assets
    
    
    22,422
    
    
    
    7,676Total assets
    
    $
    40,412
    
    
    $
    33,878Segment operating loss
    
    $
    (8,260
    )
    
    $
    (7,255
    )Interest expense
    
    
    1,146
    
    
    
    857Income tax expense
    
    
    
    
    
    
    (13
    )Total loss for segments
    
    
    (9,406
    )
    
    
    (8,125
    )Corporate home office expenses
    
    
    1,293
    
    
    
    944Other expenses
    
    
    101
    
    
    
    (36
    )Minority interest
    
    
    (7
    )
    
    
    16Net loss
    
    $
    (10,793
    )
    
    $
    (9,049
    )
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes.    23




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
     7. Recent Accounting Pronouncements
    24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 FORWARD-LOOKING STATEMENTS
        
    
    continued unfavorable global economic and political conditions for our
aeromedical products
    
    the cost of development and marketing efforts for our Authentic Tactical
Fighting Systems (ATFS)
    
    spending to modify our main facility in Southampton, Pa., and to build equipment
for the National Aerospace Training and Research (NASTAR) Center
    
    claim settlement costs and expenses related to litigation
 25




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##### Table of Contents




    
    continued development of software for our Advanced Disaster Management Scenario
product line;
    
    spending to investigate and evaluate the best way to offer disaster training
services;
    
    limited revenue generation coupled with high development costs in our low-end
entertainment products;
    
    higher costs of capital and amortization of deferred finance charges;
    
    cash flow;
           26




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##### Table of Contents



Results of Operations
 Thirteen weeks ended November 23, 2007 compared to thirteen weeks ended November 24, 2006
  Summary Table of ResultsThirteen weeks endedNovember 23,
    
    November 24,
    
    Variance2007
    

2006*
    
    $
    
    %(amounts in thousands
except share and per share Information)( ) = UnfavorableSales:Domestic
    
    $
    4,575
    
    
    $
    1,054
    
    
    $
    3,521
    
    
    
    334.1
    %US Government
    
    
    443
    
    
    
    27
    
    
    
    416
    
    
    
    1,540.7International
    
    
    1,683
    
    
    
    3,637
    
    
    
    (1,954
    )
    
    
    (53.7
    )Total Sales
    
    
    6,701
    
    
    
    4,718
    
    
    
    1,983
    
    
    
    42.0Gross Profit
    
    
    1,222
    
    
    
    1,030
    
    
    
    192
    
    
    
    18.6Selling, general and administrative
    
    
    2,785
    
    
    
    2,568
    
    
    
    (217
    )
    
    
    (8.5
    )Claim settlement costs
    
    
    
    
    
    
    3,004
    
    
    
    3,004
    
    
    
    100.0Research and development
    
    
    64
    
    
    
    43
    
    
    
    (21
    )
    
    
    (48.8
    )Operating loss
    
    
    (1,627
    )
    
    
    (4,585
    )
    
    
    2,958
    
    
    
    64.5Interest expense, net
    
    
    406
    
    
    
    291
    
    
    
    (115
    )
    
    
    (39.5
    )Other expense (income), net
    
    
    61
    
    
    
    (43
    )
    
    
    (104
    )
    
    
    (241.9
    )Income taxes
    
    
    0
    
    
    
    4
    
    
    
    4
    
    
    
    100.0Minority interest
    
    
    4
    
    
    
    33
    
    
    
    29
    
    
    
    87.9Net loss
    
    
    ($2,098
    )
    
    
    ($4,870
    )
    
    $
    2,772
    
    
    
    56.9
    %Net loss per common share
    
    
    ($0.26
    )
    
    
    ($0.55
    )
    
    $
    0.29
    
    
    
    52.7
    %
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes to the Consolidated Financial Statements. Net Loss
  Sales
  Domestic Sales
 $
 27




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##### Table of Contents



International Sales
   Gross Profit
  Selling and Administrative Expenses
  Claim Settlement Costs
  Research and Development Expenses
  Interest Expense
  Other Income/Expense, Net
 $
 28




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##### Table of Contents



Results of Operations
 Thirty-nine weeks ended November 23, 2007 compared to thirty-nine weeks ended November 24, 2006
  Summary Table of ResultsThirty-nine weeks endedNovember 23,
    
    November 24,
    
    Variance2007
    
    2006*
    
    $
    
    %(amounts
in thousands except share and per share information)( ) = UnfavorableSales:Domestic
    
    $
    9,416
    
    
    $
    4,270
    
    
    $
    5,146
    
    
    
    120.5
    %US Government
    
    
    1,090
    
    
    
    445
    
    
    
    645
    
    
    
    144.9International
    
    
    4,789
    
    
    
    8,907
    
    
    
    (4,118
    )
    
    
    (46.2
    )Total Sales
    
    
    15,295
    
    
    
    13,622
    
    
    
    1,673
    
    
    
    12.3Gross Profit
    
    
    2,660
    
    
    
    2,538
    
    
    
    122
    
    
    
    4.8Selling, general and administrative
    
    
    8,219
    
    
    
    7,204
    
    
    
    (1,015
    )
    
    
    (14.1
    )Claim settlement costs
    
    
    3,639
    
    
    
    3,004
    
    
    
    (635
    )
    
    
    (21.1
    )Research and development
    
    
    355
    
    
    
    529
    
    
    
    174
    
    
    
    32.9Operating loss
    
    
    (9,553
    )
    
    
    (8,199
    )
    
    
    (1,354
    )
    
    
    (16.5
    )Interest expense, net
    
    
    1,146
    
    
    
    857
    
    
    
    (289
    )
    
    
    (33.7
    )Other expense (income), net
    
    
    102
    
    
    
    (36
    )
    
    
    (138
    )
    
    
    (383.3
    )Income taxes
    
    
    
    
    
    
    13
    
    
    
    13
    
    
    
    100.0Minority interest
    
    
    (8
    )
    
    
    16
    
    
    
    24
    
    
    
    150.0Net loss
    
    
    ($10,793
    )
    
    
    ($9,049
    )
    
    
    ($1,744
    )
    
    
    (19.3
    )%Net loss per common share
    
    
    ($1.24
    )
    
    
    ($1.02
    )
    
    
    ($0.22
    )
    
    
    (21.6
    )%
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes to the Consolidated Financial Statements. Net Loss
  Sales
  Domestic Sales
   29




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##### Table of Contents



International Sales
  Gross Profit
  Selling and Administrative Expenses
  Claim Settlement Costs
  Research and Development Expenses
  Interest Expense
 $
 Other Income/Expense, Net
  Liquidity and Capital Resources
  30




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##### Table of Contents



Backlog
 , , ,
 31




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##### Table of Contents



$
  32




---



##### Table of Contents



Item 4. Controls and Procedures
    Internal Control  Integrated
Framework Internal Control  Integrated Framework,
   
    
    The Company did not file its Quarterly Reports on Form 10-Q for the quarters
ended May 23, 2007, August 24, 2007 and November 23, 2007 on a timely basis.
    
    Management had a lack of expertise in accounting for complex transactions.
    
    The Company lacked an independent review of the accounting records.
    
    Management exhibited a lack of training in compliance with government contracts.
        33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 U.S. Navy  See Note 1  Subsequent Events in the accompanying Notes to the Condensed
Consolidated Financial Statements.
 Walt Disney World Co.
  Other Matters
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Number
    
    Item3.1
    
    Registrants Articles of Incorporation, as amended, were filed as
Exhibit 3.1 to Registrants Form 10-K for the year ended February
28, 1997 and are incorporated herein by reference.3.2
    
    Registrants amended and restated By-Laws were filed as Exhibit 3.2
to Registrants Form 8-K dated May 25, 2005, and are incorporated
herein by reference.31.1
    
    Certification dated May 29, 2008 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 made by William F. Mitchell, Chief Executive Officer.31.2
    
    Certification dated May 29, 2008 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 made by Duane D. Deaner, Chief Financial Officer.32
    
    Certification dated May 29, 2008 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 made by William F. Mitchell, Chief Executive Officer, and
Duane D. Deaner, Chief Financial Officer.
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##### Table of Contents



Signatures
  ENVIRONMENTAL TECTONICS CORPORATION
(Registrant)Date: May 29, 2008
    By:
    /s/ William F. MitchellWilliam F. MitchellPresident and Chief
Executive Officer
(Principal Executive Officer)Date: May 29, 2008
    By:
    /s/ Duane DeanerDuane Deaner,Chief Financial Officer
(Principal Financial and Accounting Officer)