##### 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 May 25, 2007
 Commission File Number 1-10655
 ENVIRONMENTAL TECTONICS CORPORATION
 Pennsylvania
    
    23-1714256(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 (Address of principal executive offices, Zip Code)
   o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  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




---



##### 



PART I  FINANCIAL INFORMATION
    
    
    5Item 1. Financial Statements (unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the 13 week periods ended May 25, 2007 and May 26, 2006
    
    
    5Condensed Consolidated Balance Sheets as of May 25, 2007 and February 23, 2007
    
    
    6Condensed Consolidated Statements of Cash Flows for the 13 week periods ended May 25, 2007 and May 26. 2006
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 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 EndedMay 25,
    
    
    May 26,2007
    
    
    2006Net sales
    
    $
    4,347
    
    
    $
    4,575Cost of goods sold
    
    
    3,452
    
    
    
    3,561Gross profit
    
    
    895
    
    
    
    1,014Operating expenses:Selling and administrative
    
    
    2,799
    
    
    
    2,492Claim settlement costs
    
    
    3,389
    
    
    
    Research and development
    
    
    54
    
    
    
    2236,242
    
    
    
    2,715Operating loss
    
    
    (5,347
    )
    
    
    (1,701
    )Other expenses:Interest expense
    
    
    354
    
    
    
    282Other, net
    
    
    30
    
    
    
    50384
    
    
    
    332Loss before income taxes
    
    
    (5,731
    )
    
    
    (2,033
    )Provision for income taxes
    
    
    
    
    
    
    5Loss before minority interest
    
    
    (5,731
    )
    
    
    (2,038
    )Loss attributable to minority interest
    
    
    (6
    )
    
    
    (8
    )Net loss
    
    $
    (5,725
    )
    
    $
    (2,030
    )Preferred stock dividend
    
    
    (89
    )
    
    
    (24
    )Loss applicable to common shareholders
    
    $
    (5,814
    )
    
    $
    (2,054
    )Per share information:Basic and diluted loss per share applicable to
common shareholders
    
    $
    (0.64
    )
    
    $
    (0.23
    )Basic and diluted weighted average number of
common shares
    
    
    9,029,000
    
    
    
    9,035,000
  5




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##### Table of Contents



Environmental Tectonics Corporation
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share information)
 May 25,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)AssetsCurrent assets:Cash
    
    $
    473
    
    
    $
    2,215Restricted cash
    
    
    21
    
    
    
    20Accounts receivable, net of allowance for bad debts of $371
and $3,372
    
    
    2,797
    
    
    
    2,094Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    1,713
    
    
    
    2,816Inventories
    
    
    4,798
    
    
    
    4,739Deferred tax asset
    
    
    72
    
    
    
    71Prepaid expenses and other current assets
    
    
    301
    
    
    
    213Total current assets
    
    
    10,175
    
    
    
    12,168Property, plant and equipment, at cost, net of accumulated
depreciation of $12,939 and $12,760
    
    
    3,965
    
    
    
    4,054Construction in progress
    
    
    10,070
    
    
    
    8,460Software development costs, net of accumulated amortization of
$11,222 and $10,949
    
    
    1,910
    
    
    
    2,158Goodwill
    
    
    455
    
    
    
    455Other assets
    
    
    24
    
    
    
    30Total assets
    
    $
    26,599
    
    
    $
    27,325Liabilities and Stockholders DeficiencyLiabilitiesCurrent liabilities:Note payable
    
    $
    2,000
    
    
    $
    Accounts payable  trade
    
    
    2,176
    
    
    
    2,254Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    1,292
    
    
    
    1,400Customer deposits
    
    
    893
    
    
    
    794Accrued claim settlement costs
    
    
    3,300
    
    
    
    Accrued interest and dividends
    
    
    993
    
    
    
    668Accrued liabilities
    
    
    965
    
    
    
    1,539Total current liabilities
    
    
    11,619
    
    
    
    6,655Subordinated convertible debt
    
    
    8,956
    
    
    
    8,830Total liabilities
    
    
    20,575
    
    
    
    15,485Commitments and contingencies
    
    
    
    
    
    
    Minority interest
    
    
    47
    
    
    
    53Cumulative convertible participating preferred stock, $.05 par value,
15,000 shares authorized; 6,000 shares issued and outstanding at May
25, 2007 and February 23, 2007, respectively
    
    
    6,000
    
    
    
    6,000Stockholders DeficiencyCommon stock; $.05 par value; 20,000,000 shares authorized;
9,028,459 shares issued and outstanding at May 25, 2007 and February
23, 2007, respectively
    
    
    451
    
    
    
    451Additional paid-in capital
    
    
    16,602
    
    
    
    16,662Accumulated other comprehensive loss
    
    
    (174
    )
    
    
    (149
    )Accumulated deficit
    
    
    (16,902
    )
    
    
    (11,177
    )Total stockholders (deficiency) equity
    
    
    (23
    )
    
    
    5,787Total liabilities and stockholders (deficiency) equity
    
    $
    26,599
    
    
    $
    27,325
  6




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##### Table of Contents



Environmental Tectonics Corporation
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited)

(in thousands)
 Thirteen Weeks EndedMay 25,
    
    
    May 26,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (5,725
    )
    
    $
    (2,030
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    452
    
    
    
    463Accretion of debt discount
    
    
    126
    
    
    
    106Increase in allowances for accounts receivable and inventories
    
    
    289
    
    
    
    146Income attributable to minority interest
    
    
    (6
    )
    
    
    (8
    )Stock
compensation expense
    
    
    29
    
    
    
    267Changes in operating assets and liabilities:Accounts receivable
    
    
    (784
    )
    
    
    129Costs and estimated earnings in excess of billings on
uncompleted long-term contracts
    
    
    1,103
    
    
    
    (1,237
    )Inventories
    
    
    (259
    )
    
    
    (960
    )Prepaid expenses and other current assets
    
    
    (88
    )
    
    
    (83
    )Other assets
    
    
    6
    
    
    
    (11
    )Accounts payable
    
    
    (78
    )
    
    
    (592
    )Billings in excess of costs and estimated earnings on
uncompleted long-term contracts
    
    
    (108
    )
    
    
    339Customer deposits
    
    
    99
    
    
    
    453Accrued claim settlement costs
    
    
    3,300
    
    
    
    Other accrued liabilities
    
    
    (347
    )
    
    
    (281
    )Net cash used in operating activities
    
    
    (1,991
    )
    
    
    (3,299
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (90
    )
    
    
    (83
    )Capitalized software development costs
    
    
    (25
    )
    
    
    (15
    )Payments for construction in progress
    
    
    (1,610
    )
    
    
    Net cash used in investing activities
    
    
    (1,725
    )
    
    
    (98
    )Cash flows from financing activities:Proceeds from note payable
    
    
    2,000
    
    
    
    Increase in restricted cash
    
    
    (1
    )
    
    
    (1
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    3,000Net cash provided by financing activities
    
    
    1,999
    
    
    
    2,999Effect of exchange rate changes on cash
    
    
    (25
    )
    
    
    100Net decrease in cash
    
    
    (1,742
    )
    
    
    (298
    )Cash at beginning of period
    
    
    2,215
    
    
    
    3,566Cash at end of period
    
    $
    473
    
    
    $
    3,268Supplemental schedule of cash flow information:Interest paid
    
    
    
    
    
    
    203Income taxes paid
    
    
    
    
    
    
    Supplemental information on non-cash operating and investing activities:None
  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)
 ClaimAs Originally
    
    
    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)
 ClaimAs Originally
    
    
    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)
 ClaimAs Originally
    
    
    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
    
    
    ClaimStock
    
    
    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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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Subsequent Event
 Bank Credit and Facility
      15




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 2. Summary of Significant Accounting Policies
 Basis of Presentation
     Use of Estimates
  Inventories
  May 25,
    
    
    February 23,2007
    
    
    2007(unaudited)(in thousands)Raw materials
    
    $
    95
    
    
    $
    95Work in process
    
    
    3,993
    
    
    
    3,820Finished goods
    
    
    710
    
    
    
    824Total
    
    $
    4,798
    
    
    $
    4,739
 16




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 Revenue Recognition
     Net loss per common share
  Share-Based Compensation
  17




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
     Income Taxes
  18




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Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 3. Accounts Receivable:
  May 25,
    
    
    February 23,2007
    
    
    2007(unaudited)
    
    
    (restated)(in thousands)U.S. government receivables billed and
unbilled contract costs
subject to negotiation
    
    $
    279
    
    
    $
    3,135U.S. commercial receivables billed
    
    
    1,957
    
    
    
    1,525International receivables billed
    
    
    932
    
    
    
    8063,168
    
    
    
    5,466Less: allowance for doubtful accounts
    
    
    (371
    )
    
    
    (3,372
    )$
    2,797
    
    
    $
    2,094
  4. Stockholders Deficiency
  AccumulatedAdditional
    
    
    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 year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,725
    )
    
    
    (5,725
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,750
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    29Dividends payable on
preferred stock
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    
    
    
    
    
    
    
    
    (89
    )Balance, May 25, 2007
    
    
    9,028,459
    
    
    $
    451
    
    
    $
    16,602
    
    
    $
    (174
    )
    
    $
    (16,902
    )
    
    $
    (23
    )
 
 *
    
    restated for reserve of claim receivable. See Note 1  Subsequent Events in the accompanying
notes. 19




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 5. Long-Term Obligations and Credit Arrangements:
  (in thousands)May 25,
    
    February 23,2007
    
    2007(unaudited)Note payable
    
    $
    2,000
    
    
    $
    Subordinated convertible debt, net of
unamortized discount of $1,044 and $1,170
    
    
    8,956
    
    
    
    8,83010,956
    
    
    
    8,830Less current portion
    
    
    2,000
    
    
    
    $
    8,956
    
    
    $
    8,830
       20




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##### Table of Contents



(in thousands):2008
    
    $
    2,0002009
    
    
    8,9562010
    
    
    2011
    
    
    2012 and thereafter
    
    
    Total future obligations
    
    $
    10,956
 21




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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 May 25, 2007
    
    
    126Accretion 2007
    
    
    454Accretion prior years
    
    
    985Carrying value at May 25, 2007
    
    $
    8,956
    Payments Due by Period (in thousands)Less Than 1(unaudited)
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsLong-term debt,
including current
maturities
    
    $
    10,956
    
    
    $
    2,000
    
    
    $
    8,956
    
    
    $
    
    
    
    $
    Operating leases
    
    
    663
    
    
    
    128
    
    
    
    338
    
    
    
    197
    
    
    
    Total
    
    $
    11,619
    
    
    $
    2,128
    
    
    $
    9,294
    
    
    $
    197
    
    
    $
    
  22




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##### Table of Contents



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 6. Segment Information (unaudited):
  (amounts in thousands)TSG
    
    CSG
    
    TotalThirteen weeks ended May 25, 2007:Net sales
    
    $
    1,269
    
    
    $
    3,078
    
    
    $
    4,347Interest expense
    
    
    234
    
    
    
    120
    
    
    
    354Depreciation and amortization
    
    
    137
    
    
    
    315
    
    
    
    452Operating loss
    
    
    (963
    )
    
    
    (4,146
    )
    
    
    (5,109
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    7,428
    
    
    
    3,790
    
    
    
    11,218Expenditures for segment assets
    
    
    60
    
    
    
    55
    
    
    
    115Thirteen weeks ended May 26, 2006:Net sales
    
    $
    2,433
    
    
    $
    2,142
    
    
    $
    4,575Interest expense
    
    
    206
    
    
    
    76
    
    
    
    282Depreciation and amortization
    
    
    245
    
    
    
    218
    
    
    
    463Operating loss
    
    
    (1,121
    )
    
    
    (75
    )
    
    
    (1,196
    )Income tax
    
    
    5
    
    
    
    
    
    
    
    5Goodwill and intangibles
    
    
    455
    
    
    
    
    
    
    
    455Identifiable assets
    
    
    18,050
    
    
    
    6,656
    
    
    
    24,706Expenditures for segment assets
    
    
    61
    
    
    
    22
    
    
    
    83
 2007
    
    
    2006Reconciliation to consolidated
amountsSegment assets
    
    $
    11,218
    
    
    $
    24,708Corporate assets
    
    
    15,381
    
    
    
    8,755Total assets
    
    $
    26,599
    
    
    $
    33,463Segment operating loss
    
    $
    (5,109
    )
    
    $
    (1,196
    )Interest expense
    
    
    354
    
    
    
    282Income tax expense
    
    
    
    
    
    
    5Total loss for segments
    
    
    (5,463
    )
    
    
    (1,483
    )Corporate home office expenses
    
    
    238
    
    
    
    505Other expenses
    
    
    30
    
    
    
    50Minority interest
    
    
    (6
    )
    
    
    (8
    )Net loss
    
    $
    (5,725
    )
    
    $
    (2,030
    )
 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 Financial Condition and Results of Operations
 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;
    
    accounting, litigation and claim settlement costs;
    
    cash flow;
      26




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##### Table of Contents



Results of Operations
 Thirteen weeks ended May 25, 2007 compared to thirteen weeks ended May 26, 2006
  Summary Table of Results13 weeks ended
    
    13 weeks ended
    
    Variance
    
    VarianceMay 25, 2007
    
    May 26, 2006
    
    $
    
    %(amounts in thousands)
    
    ( ) =UnfavorableSales:Domestic
    
    $
    2,441
    
    
    $
    1,765
    
    
    $
    676
    
    
    
    38.3
    %US Government
    
    
    569
    
    
    
    266
    
    
    
    303
    
    
    
    113.9International
    
    
    1,337
    
    
    
    2,544
    
    
    
    (1,207
    )
    
    
    (47.4
    )Total Sales
    
    
    4,347
    
    
    
    4,575
    
    
    
    (228
    )
    
    
    (5.0
    )Gross Profit
    
    
    895
    
    
    
    1,014
    
    
    
    (119
    )
    
    
    (11.7
    )Selling, general and administrative
    
    
    2,799
    
    
    
    2,492
    
    
    
    (307
    )
    
    
    (12.3
    )Claim settlement costs
    
    
    3,389
    
    
    
    
    
    
    
    (3,389
    )
    
    naResearch & development
    
    
    54
    
    
    
    223
    
    
    
    169
    
    
    
    75.8Operating loss
    
    
    (5,347
    )
    
    
    (1,701
    )
    
    
    (3,646
    )
    
    
    (214.3
    )Interest expense, net
    
    
    354
    
    
    
    282
    
    
    
    (72
    )
    
    
    (25.5
    )Other expense, net
    
    
    30
    
    
    
    50
    
    
    
    20
    
    
    
    40.0Income taxes
    
    
    0
    
    
    
    5
    
    
    
    5
    
    
    
    100.0Minority Interest
    
    
    (6
    )
    
    
    (8
    )
    
    
    (2
    )
    
    
    (25.0
    )Net loss
    
    $
    (5,725
    )
    
    $
    (2,030
    )
    
    $
    (3,695
    )
    
    
    (182.0
    )%Net loss per common share
    
    $
    (0.64
    )
    
    $
    (0.23
    )
    
    $
    (0.41
    )
    
    
    (178.3
    )%
 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
  Liquidity and Capital Resources
   28




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##### Table of Contents



Backlog
 , $
  29




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##### 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.
        30




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31




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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.
    32




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##### Table of Contents



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.
 33




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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)