<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-KSB

                             -----------------------

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

     For  the fiscal year ended March 31, 1999

( )  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

             For the transition period from _________ to __________

                         Commission File number 0-12392

                            ------------------------

                               PERCEPTRONICS, INC.

          DELAWARE                                      95-2577731
  (State of Incorporation)                  (I.R.S. Employer Identification No.)

              21010 Erwin Street, Woodland Hills, California 9l367
                                  818-884-7470

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ( )

    Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB ( )

    State Issuer's revenues for its most recent fiscal year: $4,315,285.

    State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of June 01, 1999 - $3,969,706.

    State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of June 01, 1999 -
5,637,030

    Documents Incorporated by Reference: Portions of the Proxy Statement for the
1999 annual meeting of stockholders are incorporated by reference into Part III
of this report.


<PAGE>

                                     PART I

ITEM 1. BUSINESS

G E N E R A L

Perceptronics, Inc. (the "Company") is a company in transition. The Company is
currently engaged in building a new position in commercial Internet
Collaborative 3D products and services from its previous main focus on defense
simulation products and services. We call our new Internet product line the
IC3D-TM- Framework.

Our new strategic course is based on our firm belief that the Internet
Collaborative 3D market is in the early process of rapid and large-scale growth,
and that we have a competitive advantage in that market. Today, detailed and
highly immersive 3D virtual environments can be created and visualized using PCs
with low-cost graphic cards and virtually free software. This means that the
worldwide 3D user base is now huge and getting more huge at a rapid pace. The
next step will be for multiple users to share such virtual environments and to
interact easily, naturally and completely within them. Such collaborative
interaction will bring tremendous benefits to online entertainment, distance
learning, e-commerce and business communications. Together, these markets
account for hundreds of billions of dollars annually.

Perceptronics' objective is to achieve a technical leadership position in the
large and growing field of Internet collaborative 3D, and to turn that technical
leadership into business leadership. We plan to do this by combining two key
critical elements. The first is proprietary networking communications software
based on our deep knowledge of the Department of Defense's distributed
simulation technology; the second is widely-available Internet capabilities for
3D simulation, 3D visualization and access, including JAVA, VRML, Web 3D, other
3D engines and standard browsers. The result is a proprietary framework that is
widely applicable and, most important, is firmly grounded in computer science
and a proven architecture.

Historically, Perceptronics has specialized in developing and producing
computer-based simulation systems for training and decision support, serving a
large number of worldwide military and commercial customers. The Company is
known internationally for its ability to move rapidly from innovative concept to
a fully integrated, successfully fielded product. Perceptronics has been a
leader in the defense simulation community in originating and applying
distributed and networked simulation systems involving "selective fidelity"
simulators.

The Company's defense simulation efforts have focused on low-cost,
high-performance, interactive simulators for training individuals and teams in
tactical combat skills, and on software for achieving high-speed communication
in large networks of simulators. Much of Perceptronics' simulation technology
has come from development and/or production contracts with prestigious U.S.
defense agencies, including the Defense Advanced Research Projects Agency
(DARPA), the Defense Modeling and Simulation Office (DMSO) and the U.S. Army's
Simulation, Training and Instrumentation Command (STRICOM).

The Company markets a variety of simulation system products using advanced
computer-based technology. In the defense area, these include the PGTS tabletop
gunnery trainers for anti-tank missiles, networked simulator systems for
combined arms tactical training, and CombatSim simulations for command training.
Products with both commercial and defense use include the affordable TT150
family of simulators for driver training.


                                      1

<PAGE>

The IC3D Framework also makes use of our defense simulation technology and
know-how. However, it is directed toward the rapidly growing commercial
market for multi-person, online, collaborative interaction in 3D simulations
and virtual environments accessed over the Internet. IC3D Framework
development and commercialization has been funded by a series of U.S.
Department of Defense SBIR (Small Business Innovation Research) contracts, a
grant from CalTIP (California Technology Innovation Partnership) and private
equity investment. A proof-of-principle demonstration called Head of the
River Challenge was completed during the 1999 fiscal year. Head of the River
Challenge is a collaborative rowing simulation incorporating Perceptronics'
3Dconnect-TM-software, an initial component of the overall IC3D Framework.

The Company's long-term growth strategy focuses on further developing and more
extensively marketing the IC3D Framework commercial products and services to 3D
Web site developers and owners and to Internet Service Providers. The Company's
near-term business strategy is to initiate marketing activities for the IC3D
Framework and at the same time increase its defense and commercial simulator
revenue base, in order to improve cash flow and reduce outstanding liabilities.
The Company's ability to complete these strategies in full will depend on
generating sufficient cash resources from operations and on obtaining additional
funding from private and public investments for further development and
marketing of the IC3D Framework, neither of which can be assured.

Perceptronics' business activities currently fall into three main areas:
Training and Instrumentation Systems, Simulation Networking R&D, and Commercial
Software Products

1.  TRAINING AND INSTRUMENTATION SYSTEMS. This area includes sales to the U.S.
Government and international customers of the Company's standard training
devices and systems, customized systems and/or components, and supporting
services.

During fiscal year 1996, the Company completed deliveries to the Egyptian
government of 64 TOW PGTS trainers under a contract which began in fiscal 1995.
Also in fiscal year 1996, the Company completed a $2.0 million subcontract with
Wegmann & Co. of Germany for development and production of Leopard II tank
simulator systems for use by the Swedish Army. During fiscal year 1997, the
Company completed a subcontract from FAAC, Inc., for production of TT150 truck
driver simulators to be used by the U.S. Department of Energy. Also in fiscal
year 1998 and 1997, the Company had sales of $2.1 million and $1.5 million,
respectively on a subcontract for TOW PGTS simulator systems for a foreign
customer. The Company also started production in the fourth quarter of fiscal
1998, on a contract with the Government of Egypt valued at $3.0 million for TOW
PGTS simulator systems. The contract with the Government of Egypt was completed
in the fourth quarter of fiscal 1999.

Also included in this area are sales of specialized systems and software in
such areas as process modeling, instrumentation and neural network software,
and other advanced applications of the Company's technology in artificial
intelligence (AI), computer-based modeling and simulation and electronics. In
fiscal year 1996, the Company performed on a U.S. Air Force program to
provide advanced mannequins and related instrumentation for live fire
testing. In fiscal year 1998 and 1997, the Company worked on a contract with
a commercial company for a microelectronics data recording system for
medication dosage. In fiscal 1998, the Company was awarded a SBIR Phase I
contract from DARPA for design of COVER (Commander's Observation Vehicle for
Elevated Reconnaissance), a system concept Perceptronics has promoted for a
number of years, which is well suited to

                                      2

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the future Army's need for improved sensing capabilities at the small unit
level. The SBIR Phase I contract was completed during fiscal 1999.

Training and Instrumentation Systems accounted for 67% of revenues in fiscal
1999, 76% in fiscal 1998 and 66% in fiscal 1997.

2.  SIMULATION NETWORKING R&D. This area includes sale to the U.S. Government
and other customers of research and development services on networked
simulation and related technologies. During fiscal year 1996, work in this
area was performed for U.S. Army Simulation, Training and Instrumentation
Command (STRICOM) and the U.S. Defense Modeling and Simulation Office (DMSO)
under a $2.4 million contract awarded in March 1995 for wide-area
communications protocols and software for distributed interactive simulation
(DIS). In fiscal 1997, work was performed on a subcontract to a U.S.
Government prime contractor for application software in the extension of DIS
to the High Level Architecture (HLA). In fiscal 1998, work was performed on
SBIR Phase I and Interim Phase contracts from STRICOM for adaptation of HLA
to commercial multi-player, online 3D games; this work was the predecessor
for the SBIR Phase II IC3D Framework contract described above. In June 1998,
the Company was awarded and began work on the SBIR Phase II contract. In July
1998, the Company was awarded a contract under the California Technology
Investment Partnership Program. These contracts provided funding for the
development and commercialization of network software products for online,
multi-player games involving complex 3D environments. In fiscal year 1999,
1998 and 1997 Networked Simulation R&D represented 33%, 24% and 31% of
revenues, respectively.

3.  COMMERCIAL SOFTWARE PRODUCTS. This area includes the sale and support of
the Company's commercial software packages and associated services, such as
the new IC3D Framework and the existing CACE/PM-Registered Trademark-
software for modeling and analyzing product development and manufacturing
processes and PERCNET-Registered Trademark- software for modeling and
simulating man-machine interfaces. In fiscal 1999 and 1998, Software Products
represented 0% and 1% of revenues, respectively.

U.S. GOVERNMENT CONTRACTS

Approximately 31% and 26% of the Company's revenue in fiscal years 1999 and 1998
respectively, were derived from contracts and subcontracts involving the U.S.
Government. As is the case with many companies deriving a portion of their
revenue from defense contracts, the Company is subject to various business
risks, including changes in governmental appropriations and changes in national
defense policies and priorities. Over the past several years, economic and
budgetary constraints have caused reductions in overall defense spending. These
circumstances have had a material adverse effect on the Company since many of
the Company's U.S. Government contracts have been curtailed or reduced, and new
programs have not been initiated. See "Backlog" and "Item 6 Management's
Discussion".

The Company's U.S. Government contracts are structured on either a
cost-plus-fixed-fee (CPFF) or a firm-fixed-price (FFP) basis. Under CPFF
contracts, the Company is reimbursed periodically for allowable costs together
with a portion of the fee with certain amounts being withheld pending the
Government's determination of final fiscal year indirect rates. Under FFP
contracts, the Company generally receives progress payments of allowable costs
incurred; the remainder (including profits) is billed upon delivery and final
acceptance of the product. For work performed under FFP contracts, the Company
carries a greater burden of risk associated with cost overruns. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section). In


                                    3

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fiscal years 1999 and 1998 respectively, 90% and 83% of the Company's U.S.
Government contract related revenues were attributable to CPFF contracts and
10% and 17% of such revenues were attributable to FFP contracts.

The Company's U.S. Government contracts and subcontracts are subject to
termination, reduction or modification in the event of changes in the
Government's requirements or budgetary constraints. Should a contract be
terminated for such reasons, the Company would be reimbursed for its allowable
costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed. During
fiscal year 1999, none of the Company's U. S. Government contracts were
terminated. When the Company participates as a subcontractor, it is also subject
to the risk that the prime contractor may fail or be unable to perform the prime
contract. During fiscal year 1999, all of the Company's contracts were as a
prime contractor to the U.S. Government.

The books and records of the Company are subject to audit by the Defense
Contract Audit Agency (DCAA). At March 31, 1999, the DCAA had an open audit of a
large multi-year contract which was completed in 1994. The Company believes that
the costs charged to this contract were proper and should not result in a
significant adjustment. The Company's overhead costs have been audited and
approved by the DCAA through fiscal year 1995. The Company believes that it is
in substantial compliance with Government record-keeping and cost-allocation
requirements, and does not expect any significant adjustments as a result of the
future audit of 1998, 1997 and 1996 overhead costs.

MARKETING AND CUSTOMERS

In April 1999 Perceptronics entered into a IC3D marketing agreement with
November Lazar Scher, Inc. (NLS) a Hollywood based promotion and licensing firm.
Under the agreement, NLS will market Perceptronics' IC3D Framework products and
services for Internet Collaborative 3D to the entertainment industry, including
online gaming and related e-commerce applications. The objectives include
developing immediate revenue generating opportunities for the current
IC3D/3Dconnect Technology in Hollywood and other entertainment markets and also
establishing contacts and alliances with major entertainment and Internet
companies.

In recent years the Company has primarily marketed its simulation products and
services to the U.S. Department of Defense and other U.S. government agencies as
well as to foreign government agencies and foreign companies. The Company
submits unsolicited research and system development proposals in areas where it
has original ideas and unique capabilities, and also responds to competitive
development and production proposal requests in areas of Company capability. The
Company has served as a subcontractor to a number of defense and commercial
companies. Subcontracts represented approximately 0% and 72% of revenues in
fiscal years 1999 and 1998, respectively.

The Company has marketing arrangements for its defense and commercial products
in a number of foreign countries. During fiscal years ended March 31, 1999 and
1998 foreign sales of defense training systems were approximately 65% and 70% of
total Company revenues, respectively. Foreign sales are subject to risks
associated with political or economic instability of a foreign country, currency
controls, exchange rate fluctuations, changes in import/export regulations,
trade policies and tariffs. Payments to the Company on all foreign sales are
made in U. S. currency. In the foreign sales area, the Company is dependent on a
limited number of customers.


                                     4

<PAGE>

During fiscal year 1999, 63% of the Company's revenue was with the Government of
Egypt for the purchase of TOW PGTS systems. In fiscal 1998, 8% of the Company's
revenue was with the Government of Egypt and 61% was with one other foreign
customer. During fiscal 1999, 65% of the Company's revenue was from foreign
customers for TOW PGTS training systems. At March 31, 1999, there was no backlog
for TOW PGTS training systems. The Company currently has a number of PGTS and
other training system proposals outstanding with both foreign and domestic
sources. Competitive negotiations with one foreign source are scheduled for July
1999. While the Company expects to receive one or more contract awards for TOW
PGTS and/or other training systems during the second or third quarter of fiscal
2000, such awards are not certain. In the event that the Company were to lose a
substantial portion of its defense training systems contract base the Company
would have to significantly reorganize it's operations.

RIGHTS TO TECHNOLOGY

Most of the Company's technology developments are the result of
customer-sponsored contracts. The Company's rights to such technology are
governed by its agreement with the customer. Under U.S. Government contracts,
the Company retains all rights to inventions discovered in the course of
performing the contract, subject to the Government's non-exclusive,
non-transferable, non-royalty bearing, worldwide license to use and sell the
invention. In addition, the Company may be obligated to grant non-royalty
bearing licenses to companies selected by the Government in competitive
procurement to use such inventions in the course of performing their
Government contracts. Unless otherwise specifically stated in the contract,
the Government retains unlimited rights to technical data and computer
software developed under the contract. Under non-Government contracts, unless
otherwise stated, the customer owns the rights to all technology and products
developed under the contract and Perceptronics may not utilize the technology
without obtaining a license from the customer.

The Company has been investigating application for patent protection related to
its IC3D Framework products. While the Company generally considers its business
to be primarily dependent upon proprietary knowledge and on rapid assimilation
of innovations it will seek patent protection where it is feasible.

MANUFACTURING AND SUPPLIES

The Company's manufacturing activities primarily involve its training products,
and include sub-system assembly, final system assembly, integration and testing
of component parts that have been fabricated by others. Many of the purchased
components are built to the Company's engineering designs and specifications by
subcontractors. Although most materials and purchased components generally are
available from a number of different sources, there are situations where several
suppliers are the Company's sole source of certain component parts.

COMPETITION

In its strategically emerging business area of Internet Collaborative 3D, the
Company faces several types of competitors who have already entered the market.
In the field of online 3D gaming and virtual communities, for example,
established companies include Sony, Sega, Blaxxun, Active Worlds and others. In
the field of multi-user communications, companies include Mpath, Macromedia and
Microsoft. In the field of enabling collaborative technologies, competitors
include Active Worlds, VRTelecom, HLAProducts, Geometrek and others.
Perceptronics is definitely the "new company on the block", and will seek to
compete on the basis of it's proprietary knowledge and knowhow. Our most
important


                                      5

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technical competency is the extensive R&D experience we have with the DOD
developed High Level Architecture (HLA) and its Run Time Infrastructure
(RTI). These are the distributed simulation communications standards and
protocols that underlie our commercial IC3D Framework. At the same time,
other competitors have more commercial experience and greater resources and
may also have an established customer base, and there is no assurance the
Company will be able to compete successfully in this new market area.

In its historical area of defense systems and services, the principal factors of
competition are responsiveness, price, technology expertise and product
performance. Due to the decline in overall defense spending, the Company has
been experiencing intense competition for U.S. and foreign government contracts.
The Company seeks to distinguish itself from its competitors on the basis of its
ability to meet customer needs by developing and producing innovative systems
that combine low cost with high performance, and its ability to move a system
successfully from the initial R&D concept to final fielded product. However, the
Company's size and financial condition impedes its ability to compete in many
areas.

In the case of competitively bid defense contracts, the Company's typical
competitors for system development contracts include SAIC, Litton, Lockheed
Martin, and TRW. Competitors for training and command support products include
Lockheed Martin, General Electric Company, ECC International, CAE, and such
foreign companies as Wegmann, SAAB and Giravions Dorand. All of these companies
have substantial financial, technological and marketing resources which enables
them to bid on larger contracts. There can be no assurance that the Company will
be able to compete successfully in the future.

STRATEGIC PARTNERING AND TEAMING AGREEMENTS

In the area of Internet products and services, the Company intends to minimize
investment risk by entering into a series of business alliances with established
suppliers of 3D design and graphics tools and services and with major and/or
leading edge developers of 3D Web sites. Utilizing such alliances would allow
Perceptronics to minimize the amount of capital investment required to enter
into the market, and would help bring new know-how into the Company.
Perceptronics is exploring possible alliances with an online game company, an
e-commerce consulting firm, several online education companies and a developer
and supplier of tools for high-end 3-D simulation on the Internet. There is no
assurance that Perceptronics will enter into any alliance.

In the defense area, the Company seeks to improve its competitive position,
particularly on larger programs, through teaming and strategic partnering
arrangements with other companies. The Company may act as prime contractor or
subcontractor under such arrangements, depending on the situation. Examples of
companies with whom Perceptronics has teamed for specific programs are Litton,
Infinity Multimedia, Lockheed Martin, Wegmann, Kollsman, Northrop Corporation,
SAIC, TRW, McDonnell Douglas and The Harris Corporation. These programs
accounted for approximately 0% and 72% of revenues in fiscal years 1999 and
1998, respectively.

EMPLOYEES

As of March 31, 1999, the Company had 24 full-time and part-time employees and
consultants, consisting of 4 management personnel, 1 marketing person, 4
administrative and support personnel, 9 scientific and technical personnel and 6
production personnel. Of the Company's employees, 3 have Ph.D. degrees and 5
have Masters degrees. None of


                                      6

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the Company's employees are represented by a labor union and the Company has
experienced no work stoppages.

ITEM 2. PROPERTIES

The Company's primary offices are located in a 8,700 square foot leased facility
in Woodland Hills, California, a Los Angeles suburb. The total monthly rent for
this space is approximately $12,600, and the lease expires in November 2000.

In August 1997, the Company moved its manufacturing operation to a leased
facility of approximately 11,000 square feet in Chatsworth, California. The
monthly rent for this manufacturing facility is approximately $6,500 and the
lease expires in October 2000. The Company also leases a 6,000 square foot
Southern California facility for storage purposes. The monthly rent is $3,300
and the lease expires in January 2001.


ITEM 3. LEGAL PROCEEDINGS

               None


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               None.



                                      7

<PAGE>


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is currently traded over the counter. The following
table sets forth the high and low prices for the Common Stock as reported by the
NASDAQ Bulletin Board, for the three month periods listed. The over-the-counter
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>
        Fiscal Year 1998                        High               Low
        ----------------                        ----               ----
        <S>                                 <C>                  <C>
        June 30, 1997                       $   0.14             $ 0.11
        September 30 1997                       0.16               0.13
        December 31, 1997                       0.63               0.22
        March 31, 1998                          0.55               0.34

        Fiscal Year 1999                        High               Low
        ----------------                        ----               ----

        June 30, 1998                       $   1.10             $ 0.52
        September 30, 1998                      0.63               0.34
        December 31, 1998                       0.81               0.34
        March 31, 1999                          1.66               0.66
</TABLE>

During the three month period ended March 31, 1999, the Company issued
136,111 shares of common stock in conjunction with stock purchase
subscription agreements with several investors for a purchase price of
$57,500. The subscription agreements also provided for the issuance of
warrants to the investors for the purchase of up to 136,111 shares of common
stock at an exercise price of $.75. Certain of the subscription agreements
provided for payments for the shares over several months starting in July
1998. At March 31, 1999, there were stock subscription amounts due the
Company of $5,000 for the purchase of 11,112 shares of common stock. The
common shares and warrants are not registered under the Securities Act in
reliance on section 4 (2) thereof.

During the three month period ended March 31, 1999, the Company issued 20,000
shares of common stock to a former employee as part of a settlement of a
dispute. The 20,000 common shares are not registered under the Securities Act in
reliance on section 4 (2) thereof.

As of March 31, 1999, the Company had approximately 349 shareholders of record
of its Common Stock.

The Company has never paid dividends and it does not expect to declare or pay
any dividends in the foreseeable future.


                                      8

<PAGE>

ITEM 6  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS


GENERAL

Perceptronics , Inc., (the "Company") designs, develops and manufactures
computer-based simulation systems for training and decision support. These
systems include both hardware and software. The Company's simulators are used
to train personnel in the use of various military and commercial equipment,
including weapons, vehicles and aircraft. In the decision support area, the
Company's computer software systems are used to enhance command and control
operations, for process modeling and simulation, and for management of
concurrent engineering activities in product development and manufacturing.
Much of the Company's simulator business is in the foreign defense industry
where the Company has built an international reputation. The Company is
currently developing new commercial products in the area of Internet
Collaborative 3D. The product, called IC3D-TM- Framework, is directed toward
the rapidly growing market for multi-person, online, collaborative
interactions in 3D virtual environments accessed over the internet. The major
market applications for IC3D-TM- Framework are entertainment, education,
e-commerce and business communication.

The following discussion is based on the audited consolidated financial
statements contained elsewhere in this report. The audited financial statements
have been prepared in conformity with generally accepted accounting principals,
which contemplate continuation of the Company as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of the liabilities that may result from the possible inability
of the Company to continue as a going concern. See Note A of Notes to
Consolidated Financial Statements.


RESULTS OF OPERATIONS

FISCAL 1999 COMPARED TO FISCAL 1998

NET SALES. Net sales for fiscal 1999 increased by $774,000 or 22% compared to
fiscal 1998. Training and instrumentation system sales account for 67% and
76% of net sales in fiscal year 1999 and 1998, respectively. Sales of
training instrumentation systems increased $208,000 or 8% as a result of a
contract with the Government of Egypt for TOW PGTS simulator systems. This
contract had a total contract value of $3.0 million of which $2.7 million was
recognized in fiscal 1999. The Egypt contract was completed prior to March
31, 1999. Refer to the backlog discussion below for the importance of Egypt
to future training simulator system sales. Simulation network technology
sales which represent 33% of net sales, increased $552,000 or 65% as a result
of U.S. Government contracts that are providing the funding for the
development and commercialization of the IC3D-TM- Framework network software
products for on-line, multi-user applications involving complex 3D
environments.

Net sales for the three months ended March 31, 1999 decreased by $215,000 or 22%
compared to the comparable three-month period in the prior fiscal year. Sales of
training instrumentation systems decreased $392,000 or 57% from the comparable
three month period in 1998, because the contract with the Government of Egypt
was completed during


                                      9

<PAGE>

January 1999 thus resulting in reduced PGTS revenue in the fourth quarter of
fiscal 1999. Simulation network technology sales increased $178,000 or 67% as
a result of the U.S. Government contracts described in the previous paragraph.

COST OF SALES. Cost of sales for fiscal 1999 increased 18% as a result of the
22% increase in sales discussed above and improved profit margins resulting from
the TOW PGTS simulator system sales. Cost of sales as a percentage of sales
during fiscal 1999 was 63% compared to 65% during fiscal 1998. The higher sales
of training simulator systems, which carry higher margins, contributed to the
positive effect of cost of sales as a percentage of sales in fiscal 1999.

Cost of sales for the three months ended March 31, 1999 decreased 32% as a
result of the 22% decrease in sales discussed above and improved profit margins
on the TOW PGTS simulator system sales. Cost of sales as a percentage of sales
during the three months ended March 31, 1999 was 49% compared to 58% during the
three-month period ended March 31, 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $285,000 or 32% in fiscal 1999 compared to
fiscal 1998. This increase was primarily the result of increased foreign
marketing expense. The Company's management continues to pursue cost
reduction measures consistent with the level of business wherever
opportunities can be identified.

Selling, general and administrative expenses increased $35,000 or 11% in the
three-month period ended March 31, 1999 compared to the comparable three-month
period in the prior fiscal year. The increase in the fourth quarter was
primarily due to costs associated with a settlement of a dispute with a former
employee.

INTEREST EXPENSE. Interest expense increased 19% or $46,000 in fiscal 1999
compared to fiscal 1998. Interest expense applicable to the increased usage in
fiscal 1999 of the export credit facility was the primary reason for the
increase. In the three month period ended March 31, 1999, interest expense
decreased $48,000 or 47% compared to the comparable three-month period in the
prior fiscal year because of the completion of the Egypt contract and the
resulting repayment of the export credit facility during the fourth quarter of
fiscal 1999.

BACKLOG. The Company's firm contract backlog was $723,000 at March 31, 1999,
compared to $2.9 million at March 31, 1998. The term "firm contract backlog"
refers to the aggregate revenue remaining under contracts held by the Company
and includes both funded and unfunded amounts. At March 31, 1999 all backlog
was funded. The backlog at March 31, 1998 included $2.7 million applicable to
the contract with the Government of Egypt for TOW PGTS training systems. The
contract was completed in January 1999 and there is no backlog on this
contract remaining at March 31, 1999. The entire March 31, 1999 backlog of
$723,000 consists of simulation network technology contracts. Included are
contracts in backlog of $302,000 for the development and commercialization of
the IC3D-TM-Framework network software products for on-line, multi-user
applications involving complex 3D environments. These contracts will be
completed by the end of the second quarter of fiscal 2000. Beyond that point,
the Company will require and is currently seeking independent investment
capital to fund the IC3D-TM- Framework products. The Company currently has a
proposal outstanding for a large foreign training system contract with the
Government of Egypt with negotiations scheduled to start in July 1999. The
award of this contract, while promising is not a certainty. In the event that
the Company was to

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<PAGE>

lose its foreign customer base, the Company would have to significantly
reorganize its operation.

CONTINGENCIES. In the Form 10-QSB reports for the quarters ended September 30,
1998 and December 31, 1998, it was reported that a California Limited
Partnership reasserted its claim that the Company is liable for material
monetary amounts in connection with an old real estate lease. On March 22, 1999,
the California Limited Partnership and the Company entered into a settlement
agreement which provided for the mutual release of all claims and the
termination of the partnership interests previously held by the Company's
Chairman and a Director. The agreement provides for payments by the Company to
the Partnership totaling $24,000 to be paid in eight monthly installments of
$3,000 commencing on April 1, 1999.


LIQUIDITY AND CAPITAL RESOURCES.

The Company's unrestricted cash balances were $151,000 at March 31, 1999,
resulting from the collection of receivables applicable to the TOW PGTS contract
with the Government of Egypt and increased billings on U.S. Government
development contracts. In fiscal 1999, the Company's principal sources of
liquidity were it's export credit facility, sale of securities, vendor credit
and cash flow generated from operations. The Company had positive working
capital of $93,000 at March 31, 1999, compared to negative working capital of
$500,000 at March 31, 1998. In the past the Company has experienced severe
liquidity problems and continues to have difficulty in meeting all of its
obligations as they come due.

With respect to foreign contracts for TOW PGTS simulator systems, an export
credit facility is in place to provide the cash flow required to perform on
these contracts. Payment terms with certain vendors for materials needed for
the contracts are in advance or on delivery terms and are being funded through
the credit facility. At March 31, 1999, vendor accounts totaling $208,000 are
past due and are being liquidated as positive cash flow permits. The Company is
making good progress in reducing this balance, however the lack of sufficient
working capital continues to restrict the Company's ability to expand its
revenue base. See Note A of the Notes to Consolidated Financial Statements,
which is hereby incorporated herein by reference.

The Company's short-term strategy is to increase its domestic and foreign
defense contract revenue base in order to generate sufficient cash flow from
operations and to reduce current liabilities. A major part of the Company's
long-term strategy will be to focus on the development of commercial products
derived from the Company's defense related technology and expertise in order to
reduce the Company's dependence on defense contracts. The SBIR software contract
for $748,000 and the California Technology Investment Partnership contract for
$250,000 together with equity financing of $385,000 are funding the development
of commercial software products associated with IC3D-TM- Framework. The Company
was successful in obtaining commitments for the required equity funding of
$390,000, of which $385,000 has been funded, to satisfy the self funding
requirements of the SBIR contract.

The Company's ability to pursue its long-term strategy will depend on generating
sufficient cash resources from equity investments and from operations to finance
new product development. Given the Company's current low backlog situation as
discussed under "Backlog" above, the Company will experience reduced sales and a
net loss in the first quarter and will not have sufficient cash flow to sustain
operations beyond the second


                                      11

<PAGE>

quarter without the addition of new contract awards and additional equity
investment funding. The Company is exploring alternative sources for
financing as well as potential business combinations and alliances in order
to meet the short and long-term objectives.

The export credit facility mentioned above was obtained in October 1997 from a
commercial lender and enables the Company to borrow up to $1,666,000 to be used
in conjunction with it's export contracts. The credit facility is guaranteed by
the U.S. Small Business Administration (SBA) and the California Export Finance
Office (CEFO). The borrowings bear interest at 3.0 points above prime rate and
are secured by a lien placed on the Company's general assets. During fiscal
1999, borrowings of $1,210,000 occurred on the credit facility as work
progressed on the export contracts. The borrowings were repaid with proceeds
received from the delivery of finished units. At March 31, 1999, borrowings
outstanding against the line had been repaid and there were no amounts owing
against the line.

The Company currently has a $200,000 note payable with a bank that is guaranteed
by SBA. At March 31,1999 the principal balance outstanding was $151,000. The
note bears interest at prime rate plus 2.75 percentage points with principal and
interest payable monthly amortizing over five years. The Company also has a
24-month note payable with a starting principal of $100,000 that bears interest
at 8% per annum. At March 31, 1999, the outstanding balance on this note payable
was $56,000.

The Company's operating activities provided cash of $1.0 million during the
fiscal 1999. During fiscal 1999, the cash provided was primarily the result of
profitability resulting from increased sales of TOW PGTS simulator systems to
the Government of Egypt and increased sales of simulation network technology
development contracts, as previously discussed. During fiscal 1998, net cash
inflow of $620,000 resulted from net income adjusted to a cash basis, the
collection of accounts receivable associated with the TOW PGTS simulator systems
sales offset by the repayment of accounts payable liabilities.

The Company's investing activities used cash of $8,000 during fiscal 1999
associated with capital expenditures for equipment. Capital expenditures during
fiscal 1998 were $104,000 for leasehold improvements associated with the move to
a new manufacturing facility.

The Company's financing activities used cash of $920,000 during fiscal 1999. A
warrant holder exercised a warrant for 50,000 shares of common stock for an
exercise price of $16,000 and employee stock options were exercised contributing
$15,000. The sale of common stock brought in $393,000. Net repayments of
borrowings from the export credit facility used $1.2 million of cash and the
Company used $285,000 to repay debt. During fiscal 1998, the Company's financing
activities used $306,000 to repay the export credit facility.

During the fiscal year ended March 31, 1999, the Company entered into stock
purchase subscription agreements with several investors for the purchase of up
to 1,008,612 shares of common stock for a purchase price of $390,000 and the
release of $50,050 of liability. The subscription agreements also provide for
the issuance of warrants to the investors for the purchase of up to 702,223
shares of common stock at exercise prices that range from $.57 to $.75. Certain
of the subscription agreements provide for payments for the common shares over
several months starting in July 1998. At March 31, 1999, there were stock
subscription amounts due the Company of $5,000 for the purchase of 11,112 shares
of common stock.


                                      12

<PAGE>

YEAR 2000 COMPLIANCE

The year 2000 issue results from computer programs that do not differentiate
between the year 1900 and the year 2000 because they were written using two
digits rather than four to define the applicable year; accordingly computer
systems that have time-sensitive calculations may not properly recognize the
year 2000. The Company has conducted an initial review of its manufacturing and
accounting computer system to identify whether the system is year 2000
compliant. The computer equipment and software currently used by the Company is
an older generation and will be affected by the year 2000 problem. The Company
has purchased a current generation system and is in the process of
implementation as a replacement for the existing computer system. The cost of
the new system is not a material expense. The Company has also conducted a
survey of its products and concluded that they are year 2000 compliant. The
Company has also surveyed certain key suppliers to confirm that they are year
2000 compliant. However, there can be no assurance that unexpected software
incompatibility with the year 2000 issue on the part of the Company's customers
and suppliers will not cause an interruption of operations or that the Company
will not have to incur substantial cost to avoid such occurrences.


FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, this report contains
forward-looking statements (identified by the words "estimate," "project,"
"anticipate," "plan," "expect," "intend," "believe," "hope," "strategy" and
similar expressions) which are based on Management's current expectations and
speak only as of the date made. These forward-looking statements are subject to
various risks, uncertainties and factors, including, without limitation, those
described below, that could cause actual results to differ materially from the
results anticipated in the forward-looking statements.

GOING CONCERN ISSUE AND SEVERE LIQUIDITY PROBLEMS. The Company's audited
financial statements for the fiscal year ended March 31, 1999 and 1998 have been
prepared in conformity with generally accepted accounting principals, which
contemplate continuation of the Company as a going concern . See the Independent
Auditors' Report and Note A of Notes to Consolidated Financial Statements
contained elsewhere herein. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern. The Company's revenue levels have declined in recent years and the
backlog at March 31, 1999 is low, and therefore may be insufficient to fund
operations beyond the second quarter without the addition of new contract
awards. The Company has also sustained operating losses in recent years and
requires substantial amounts of working capital in it's operations. As a result,
the Company suffers from limited cash resources which restrict its ability to
bid for, obtain and perform larger contracts. Even if the Company overcomes its
liquidity problems, there can be no assurance that in the future the Company
will be able to increase revenues or operate profitably.

BUSINESS STRATEGY; IC3D-TM- FRAMEWORK SOFTWARE PRODUCT. A major part of the
Company's long term business strategy is to focus on the development of
commercial products derived from the Company's defense related technology and
expertise in order to expand its customer base and reduce its dependence on
defense contracts. As part of this strategy, the Company has obtained a U.S.
Government Department of Defense SBIR Phase II Fast Track contract for $750,000
to develop and commercialize networking software for commercial on-line,
multi-player games involving complex 3D environments


                                      13

<PAGE>

("IC3D-TM- Framework software"). The Company has succeeded in obtaining
equity funding of $390,000 to satisfy self-funding requirements under the
SBIR contract. The Company will also require additional equity funding to be
able to fully commercialize, market and exploit the IC3D-TM- Framework
software. There can be no assurance that all future funding requirements will
be obtained and at terms that will be advantageous from an economic
standpoint. Furthermore, there can be no assurance that the Company will be
successful in its development efforts, that the IC3D-TM- Framework software
will be a commercially feasible product, or that the Company will be able to
successfully market the IC3D-TM- Framework software.

PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The simulation and internet
software markets are characterized by rapid technological change and are
highly competitive. The Company's success is dependent on its ability to
develop new products and product enhancements to keep up with technological
advances and to meet customer needs. Any failure by the Company to anticipate
or respond adequately to technological developments and customer
requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's financial
condition and results of operations. The Company has limited manufacturing
and marketing capabilities and financial resources and will be dependent upon
establishing relationships with strategic and marketing partners to be able
to fully exploit the IC3D-TM- Framework software and other commercial
products. There can be no assurance that the IC3D-TM-Framework software or
future new products will achieve market acceptance, result in increased
revenues, or be profitable. Such products could also be subject to
technological obsolescence and intense competition from companies with
greater resources than the Company.

DEPENDENCE ON ONE CUSTOMER AND ON FOREIGN SALES. During the fiscal years ended
March 31, 1999 and 1998, foreign sales, primarily to foreign governments,
represented approximately 65% and 70% of total revenues, including sales to one
foreign customer for TOW PGTS simulator systems during the fiscal year ended
March 31, 1999 which represented 63% of total sales. The loss of this customer
or the failure to obtain new customers would have a material adverse effect on
the Company's ability to operate profitably. While the Company hopes to increase
its domestic defense and commercial business, the Company anticipates that
foreign contracts will continue to account for a significant portion of its
sales. To the extent these revenues are derived from sales to foreign government
agencies they may be subject to risks similar to those set forth below under
"Dependence on Defense-Related Business." Foreign sales are also subject to
risks associated with political or economic instability of a foreign country,
currency controls, exchange rate fluctuations, changes in import/export
regulations, trade policies and tariffs.

DEPENDENCE ON DEFENSE-RELATED BUSINESS. The Company has historically derived
a substantial portion of its revenues from U.S. and foreign government
defense-related contracts. As a result, the Company's business has been
impacted by reductions in the U.S. federal defense budget and this business
will continue to be subject to risks affecting the defense industry,
including changes in governmental appropriations and changes in national
defense policies and priorities. The Company has sought to reduce its
dependence on defense-related business by developing products with commercial
applications, such as the proposed IC3D-TM- Framework software networking
products. As noted above there can be no assurance that these products will
achieve market acceptance, resulting in increased revenues or be profitable.

                                      14

<PAGE>

MANAGEMENT OF GROWTH. Successful expansion of the Company's operations will
depend on, among other things, the ability to develop and commercialize new
products, to continue to effectively market existing products, to attract and
retain skilled management and other personnel and to secure adequate sources of
capital to finance growth at reasonable terms. To manage growth effectively, the
Company will have to continue to improve its operational, financial and
management information systems, procedures and controls. As the Company expands,
it may from time to time experience constraints that will adversely effect its
ability to satisfy customer demand in a timely fashion. Failure to manage growth
effectively could adversely effect the Company's financial condition and results
of operations.

COMPETITION. The Company expects to encounter intense competition in the area of
networked on-line computer software products from companies that have
substantially greater financial, manufacturing and marketing capabilities than
the Company. The Company could also experience competition from emerging
companies. There can be no assurance that the Company's products will be
competitive with existing or future products, or that the Company will be able
to establish or maintain a profitable price structure for its products. The
Company also experiences intense competition for U.S. and foreign government
contracts from companies such as SAIC, Litton, Lockheed Martin and TRW, which
have substantially greater resources than the Company. The Company's size and
financial condition impedes its ability to compete in many areas.

PROTECTION OF INTELLECTUAL PROPERTY. The Company relies on a combination of
trade marks, trade secrets, and other intellectual property law, nondisclosure
agreements and other protective measures to preserve its proprietary rights
pertaining to its technology and products. Such protection, however, may not
preclude competitors from developing products or technology similar or superior
to the Company's. In addition, the laws of certain foreign countries do not
protect intellectual property rights to the same extent as the laws of the
United States. Although the Company continues to implement protective measures
and intends to defend its proprietary rights to the extent it has the financial
resources to do so, there can be no assurance that these efforts will be
successful. Furthermore, there can be no assurance that the Company's products
or technologies are not or will not be in violation of the patent rights of
third parties.



ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements are contained in this report
beginning at page F-l.



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE

        None



                                      15

<PAGE>

                            PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL PERSONS:
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.


The information required hereunder is incorporated by reference from the
sections entitled "Election of Directors", "Executive Officers" and "Ownership
of Common Stock - Section 16(a) Beneficial Ownership Reporting Compliance" of
the Company's Proxy Statement to be filed in connection with its 1999 Annual
Meeting of Stockholders.


ITEM 10.  EXECUTIVE COMPENSATION


The information required hereunder is incorporated by reference from the section
entitled "Executive Compensation" and "Election of Directors - Compensation of
Directors" of the Company's Proxy Statement to be filed in connection with its
1999 Annual Meeting of Stockholders.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT


The information required hereunder is incorporated by reference from the section
entitled "Ownership of Common Stock" of the Company's Proxy Statement to be
filed in connection with its 1999 Annual Meeting of Stockholders


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The information required hereunder is incorporated by reference from the section
entitled "Certain Transactions" of the Company's Proxy Statement to be filed in
connection with its 1999 Annual Meeting of Stockholders.


                                      16

<PAGE>

                                     PART IV

INDEX TO EXHIBITS

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibit Index (Management contracts, compensation plans and
               arrangements are identified by *.

                3.1  Certificate of Incorporation, as amended (4)

                3.2  By-Laws, amended. (2)

              *10.1  1992 Stock Option Plan (5)

              *10.2  Employment Agreement with Gershon Weltman dated August 1,
                     1989 (1) and First Amendment dated October 22, 1991. (3)

              *10.3  Form of indemnification Agreement with Officers and
                     Directors. (1)

              *10.4  1988 Directors' Stock Option Plan. (5)

              *10.5  Second Amendment to Employment Agreement with Gershon
                     Weltman dated August 27, 1996. (6)

              *10.6  Employment agreement with Thomas Lubaczewski dated January
                     1, 1997. (7)

              10.7   Loan Agreement and note dated September 23, 1997 between
                     the Company and The Pacific Bank. (8)

              10.8   Promissory Note dated September 22, 1997 between the
                     Company and Applied Controls Technology. (8)

              21.1   Subsidiaries

              23.1   Consent of Independent Accountants

              27.1   Financial Data Schedule

        (b) The Registrant filed no reports on Form-8K during the quarter ended
            March 31, 1999

(1) Incorporated by reference to the Company's Form 10-K for the year ended
    March 31, 1990.

(2) Incorporated by reference to the Company's Form 10-K for the year ended
    March 31, 1991.

(3) Incorporated by reference to the Company's Form 10-K for the year ended
    March 31, 1992.




<PAGE>

(4) Incorporated by reference to the Company's Form 8-K/A date of event reported
    April 30, 1993.

(5) Incorporated by reference to the Company's Form 10-K for the year ended
    March 31, 1993.

(6) Incorporated by reference to the Company's Form 10-KSB for the year ended
    March 31, 1996.

(7) Incorporated by reference to the Company's Form 10-KSB for the year ended
    March 31, 1997.

(8) Incorporated by reference to the Company's Form 10-QSB for the quarterly
    period ended September 30, 1997.


<PAGE>

                                   SIGNATURES

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

        Dated: June 24, 1999

                                            PERCEPTRONICS, INC.



                                            By:/s/Gershon Weltman
                                            ---------------------
                                               Dr. Gershon Weltman
                                              Chief Executive Officer

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

<TABLE>
<CAPTION>
        Signature                   Title                         Date
        ---------                   -----                         ----
<S>                         <C>                                 <C>

/s/Dr. Gershon Weltman                                          June 24, 1999
-----------------------
Dr. Gershon Weltman         Chairman and Chief Executive
                            Officer (Principal Executive
                            Officer)

/s/ Robert E. Anderson
-----------------------
Robert E. Anderson          Senior Vice President               June 24, 1999
                            and Chief Financial Officer
                            (Principal Financial &
                            Accounting Officer)

/s/Dr. John Lyman                                               June 24, 1999
-----------------------
Dr. John Lyman              Director


/s/Stanley Schneider                                            June 24, 1999
-----------------------
Stanley Schneider           Director


/s/Robert Parker                                                June 24, 1999
-----------------------
Robert Parker               Director


/s/Dr. Amos Freedy                                              June 24, 1999
-----------------------
Dr. Amos Freedy             Director


/s/Steven Corda                                                 June 24, 1999
-----------------------
Steven Corda                Director
</TABLE>


<PAGE>

                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors and
Perceptronics, Inc. and Subsidiary

We have audited the accompanying balance sheets of Perceptronics, Inc. and
Subsidiary as of March 31, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Perceptronics, Inc. and
Subsidiary as of March 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company had net income of $122,000, however, for the year
ended March 31, 1999, the Company had a working capital of $93,000 and a net
equity of $849,000. As described more fully in Note A to the financial
statements, the Company is in arrears on accounts with certain vendor
creditors which, among other things, causes the balances to become due on
demand. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




                                            Beckman Kirkland & Whitney




Agoura Hills, California
June 3, 1999


                                       F-1


<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                       March 31,
                                                                       ---------
                                                                1999                1998
                                                                ----                ----
<S>                                                         <C>                 <C>
ASSETS

CURRENT ASSETS
    Cash and short-term investments ....................    $  150,801          $   78,411
    Restricted cash ....................................       299,000             299,000
    Receivables
       Billed - Note B .................................       133,881             263,524
       Unbilled  - Note B ..............................       151,580           1,160,458
       Other receivables ...............................        17,854              32,302
    Inventory ..........................................       172,222             189,788
    Precontract costs ..................................       176,317                   -
    Prepaid expenses ...................................        29,337             166,982
                                                            ----------          ----------
       TOTAL CURRENT ASSETS ............................     1,130,992           2,190,465


EQUIPMENT & LEASEHOLD IMPROVEMENTS, at cost Note C .....       817,963             810,333
    Less accumulated depreciation and
       amortization ....................................       747,631             712,866
                                                            ----------          ----------
                                                                70,332              97,467


DEFERRED TAXES - Note F ................................       932,566             932,566
OTHER ASSETS ...........................................        82,930              23,715
                                                            ----------          ----------
       TOTAL ASSETS ....................................    $2,216,820          $3,244,213
                                                            ----------          ----------
                                                            ----------          ----------
</TABLE>



                 See notes to consolidated financial statements


                                       F-2


<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (continued)


<TABLE>
<CAPTION>
                                                                              March 31,
                                                                              ---------
                                                                       1999                   1998
                                                                       ----                   ----
<S>                                                              <C>                    <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
    Current portion of long term debt - Note D ................  $     96,629           $    288,778
    Short term debt - Note D ..................................        54,000              1,285,311
    Accounts payable ..........................................       528,442                688,097
    Accrued compensation ......................................       148,032                207,346
    Other accrued liabilities .................................       210,447                220,906
                                                                 ------------           ------------
       TOTAL CURRENT LIABILITIES ..............................     1,037,550              2,690,438

LONG TERM DEBT
    Long term debt, net of current portion - (Note D) .........       157,654                250,237
    Other long term liabilities - (Note D) ....................       172,500                      -

COMMITMENTS AND CONTINGENCIES - NOTES B & E

SHAREHOLDERS' EQUITY
    Common stock - par value $.001; authorized
       15,000,000 shares; 5,629,930 and 4,526,430
       shares issued and outstanding ..........................         5,630                  4,526
    Additional paid-in capital ................................    12,673,643             12,251,161
    Accumulated deficit .......................................   (11,830,157)           (11,952,149)
                                                                 ------------           ------------
       TOTAL SHAREHOLDERS' EQUITY .............................       849,116                303,538
                                                                 ------------           ------------

       TOTAL LIABILITIES & SHAREHOLDERS'
            EQUITY ............................................  $  2,216,820           $  3,244,213
                                                                 ------------           ------------
                                                                 ------------           ------------
</TABLE>







                 See notes to consolidated financial statements

                                       F-3


<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                 Year Ended March 31,
                                             ------------------------------
                                                1999                1998
                                             ----------          ----------
<S>                                          <C>                 <C>
Net sales .................................  $4,315,285          $3,541,373
Cost of sales .............................   2,706,106           2,288,743
                                             ----------          ----------

Gross profit ..............................   1,609,179           1,252,630

Cost and expenses:
Selling, general and administrative .......   1,180,000             895,462
Research and development ..................      14,263                   -
                                             ----------          ----------
Operating income ..........................     414,916             357,168


Interest expense ..........................     291,273             245,730
                                             ----------          ----------

Income (loss) before taxes ................     123,643             111,438
Income tax provision - Note F .............       1,651               2,829
                                             ----------          ----------
Net income ................................  $  121,992          $  108,609
                                             ----------          ----------
                                             ----------          ----------


Earnings per share:
   Basic:
     Net income ...........................  $      .02          $      .02
                                             ----------          ----------
                                             ----------          ----------
Diluted:
     Net income ...........................  $      .02          $      .02
                                             ----------          ----------
                                             ----------          ----------
Weighted average common and common
      equivalent shares:

      Basic ...............................   5,078,180           4,497,859
                                             ----------          ----------
                                             ----------          ----------

      Diluted .............................   5,474,009           4,562,843
                                             ----------          ----------
                                             ----------          ----------
</TABLE>



                 See notes to consolidated financial statements


                                       F-4


<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                Common Stock            Additional
                                                ------------              Paid In          Accumulated
                                            Shares         Amount         Capital            Deficit            Total
                                            ------         ------         -------            -------            -----
<S>                                       <C>             <C>           <C>               <C>                 <C>
Balance at March 31, 1997 ............    4,469,287       $ 4,469       $12,231,218       $(12,060,758)       $174,929


Common shares issued .................       57,143            57            19,943                             20,000
Net income ...........................                                                         108,609         108,609
                                          ---------       -------       -----------       ------------        --------
Balance at March 31, 1998 ............    4,526,430       $ 4,526       $12,251,161       $(11,952,149)       $303,538

Exercise of options and warrants .....       86,000            86            30,499                             30,585
Common shares issued .................    1,017,500         1,018           391,983                            393,001
Net Income ...........................                                                         121,992         121,992
                                          ---------       -------       -----------       ------------        --------

Balance at March 31,1999 .............    5,629,930       $ 5,630       $12,673,643       $(11,830,157)       $849,116
                                          ---------       -------       -----------       ------------        --------
                                          ---------       -------       -----------       ------------        --------
</TABLE>




                 See notes to consolidated financial statements


                                       F-5


<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Year Ended March 31,
                                                          ---------------------------------
                                                              1999                  1998
                                                              ----                  ----
<S>                                                       <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income .......................................     $   121,992           $   108,609
   Adjustments to reconcile net income
       to net cash used in operating activities:
     Depreciation and amortization ..................          34,765                26,606
   Changes in assets and liabilities:
     Receivables ....................................       1,152,969               558,700
     Inventory ......................................          17,566                (3,433)
     Precontract costs ..............................        (176,317)                    -
     Prepaid expenses ...............................         137,645                54,937
     Other assets ...................................         (59,215)               15,330
     Accounts payable ...............................        (159,655)             (146,394)
     Accrued compensation ...........................         (59,314)               57,005
     Advance from customer ..........................               -               (35,742)
     Other accrued liabilities ......................         (10,458)              (15,824)
                                                          -----------           -----------
         NET CASH PROVIDED
           IN OPERATING ACTIVITIES ..................         999,978               619,794

CASH FLOWS FROM INVESTING ACTIVITY:
   Capital additions ................................          (7,630)             (103,587)
                                                          -----------           -----------
         NET CASH  USED IN
           INVESTING ACTIVITIES .....................          (7,630)             (103,587)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Exercise of stock options and warrants ...........          30,585                     -
   Net proceeds (repayment) - export financing ......      (1,231,312)             (306,258)
   Payment of long term debt ........................        (284,732)              (23,598)
   Increase in other long term debt .................         172,500                     -
   Proceeds from sale of common stock ...............         393,001                20,000
                                                          -----------           -----------
         NET CASH USED IN
           FINANCING ACTIVITIES .....................        (919,958)             (309,856)
                                                          -----------           -----------
         NET INCREASE IN CASH
           AND CASH EQUIVALENTS .....................          72,390               206,351

         CASH AND CASH EQUIVALENTS AT
           THE BEGINNING OF THE YEAR ................         377,411               171,060
                                                          -----------           -----------
         CASH AND CASH EQUIVALENTS AT
           THE END OF THE YEAR ......................     $   449,801           $   377,411
                                                          -----------           -----------
                                                          -----------           -----------
         CASH PAID DURING PERIOD
           Interest .................................     $   240,318           $   280,451
           Income Taxes .............................     $     1,651           $     2,829
</TABLE>



                                       F-6

<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


DESCRIPTION OF THE COMPANY: Perceptronics, Inc., the "Company" designs,
developes, manufactures and markets computer-based simulation systems and
software for military and commercial training and decision support.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Perceptronics Inc. (the "Company") and its wholly owned subsidiary.
All significant intercompany transactions and balances have been eliminated.

BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company has sustained
operating losses in recent years and requires substantial amounts of working
capital in its operations. At March 31, 1999, current assets exceeded current
liabilities by $93,000. The Company continues to have difficulty in meeting its
obligations as they become due, however, this condition has improved from the
previous year. Payments to vendors, totaling approximately $208,000 at March
31,1999 are past due and certain vendors continue to require cash in advance or
on delivery terms for goods and services. The Company's cash flow during fiscal
1999 was sufficient to meet current operating requirements but the Company
continues to have difficulty making satisfactory progress toward liquidating its
past due obligations. While the Company continues to overcome its short-term
liquidity problems, the ability of the Company to operate profitably and
generate sufficient positive cash flows is dependent on the award of pending
training systems contracts and raising additional investment capital to fund
development of commercial software products. The Company's consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.

CASH EQUIVALENTS: All highly liquid investments maturing in three months or less
when purchased are considered as cash equivalents.

INVENTORY: Inventory is stated at cost, which is not in excess of market. Cost
is determined principally by the first-in, first-out method.

PRECONTRACT COSTS: Costs incurred in connection with contracts which have not
been signed at the balance sheet date (but where recoverability of costs is
probable) are accounted for as precontract costs. No revenues or profits have
been recognized on these costs. There were no precontract costs deferred at
March 31, 1998. At March 31, 1999 deferred precontract costs were $176,317.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are
stated at cost. Depreciation of equipment is provided for by the straight-line
method over their estimated useful lives, which range from 3 to 5 years.
Amortization of leasehold improvements is provided for by the straight-line
method over the shorter of the useful lives or the terms of the leases.






                                       F-7


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



REVENUE RECOGNITION: During fiscal 1999 and 1998, 69% and 74% of the Company's
total revenues resulted from products sold to commercial customers which were
either foreign governments or domestic or foreign companies, respectively. Sales
of products and services related to United States Government contracts were 31%
and 26% of total revenues, respectively. Of the U.S. Government contract sales,
90% and 83% were for contracts that provided for reimbursement of cost plus
fixed-fees and 10% and 17% were fixed price contracts. All sales were recorded
using the percentage-of-completion (cost-to-cost) method of accounting. Under
this method, sales are recorded as costs (including general and administrative
expenses) are incurred, plus a portion of the profit expected to be realized on
each contract in the ratio that costs incurred to date bear to total estimated
cost at completion.

General and administrative expenses in excess of rates billed on contracts are
recorded in the period incurred. Costs related to anticipated future losses on
contracts are accrued and charged to expense in the period when the losses are
identified.

INCOME TAXES: Provisions for federal and state income taxes are calculated on
reported financial statement income based on the current tax law. Such
provisions differ from the amounts currently payable because certain items of
income and expense, known as temporary differences, are recognized in different
tax periods for financial reporting purposes than for income tax purposes.
Deferred income taxes are the result of the recognition of tax benefits that
management expects to realize from the utilization of net operating loss
carryforwards. The amounts recorded are net of a valuation allowance and
represent management's estimate of the amount that is more likely than not to be
realized.

USE OF ESTIMATES: Company management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the reported
amounts of revenues and expenses, in conformity with generally accepted
accounting principles. Actual amounts could differ from these estimates.

EARNINGS (LOSS) PER SHARE: Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). This statement replaces the previously-reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is very similar to the
previously-reported primary earnings per share in that it includes the effect of
the additional common shares which would have been outstanding if dilutive stock
options had been exercised. All earnings per share amounts have been restated to
conform to the SFAS No. 128 requirements.






                                       F-8


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The following table summarizes the calculation of basic and diluted earnings per
share for the years ended March 31:

<TABLE>
<CAPTION>
                                              1999                1998
                                          ----------          ----------
<S>                                       <C>                 <C>
Numerator:
    Basic and diluted earnings
    per share -- net income               $  121,992          $  108,609
                                          ----------          ----------
                                          ----------          ----------

Denominator:
    Basic earnings per share --
    weighted average number of
    common shares outstanding
    during the year                        5,078,180           4,497,859

Incremental common shares
    attributable to assumed
    exercise of outstanding
    stock options                            395,829              64,984
                                          ----------          ----------

Denominator for diluted earnings
    per share                              5,474,009           4,562,843
                                          ----------          ----------
                                          ----------          ----------

Basic earnings per share                  $     0.02          $     0.02
                                          ----------          ----------
                                          ----------          ----------

Diluted earnings per share                $     0.02          $     0.02
                                          ----------          ----------
                                          ----------          ----------
</TABLE>

The calculations of earnings excluded the effect of the assumed exercise of the
following numbers of outstanding common stock options and warrants because their
effect was antidilutive: 40,300 in 1999 and 579,936 in 1998.


POST-RETIREMENT BENEFITS: The Company does not provide post-retirement health
care and life insurance benefits to retirees. Therefore, FASB Statement 106,
which became effective for fiscal years beginning after December 15, 1992, is
not applicable.


                                       F-9


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE B - RECEIVABLES

Billed receivables at March 31, 1999 of $133,881 and at March 31, 1998 of
$263,524 represent amounts that have been invoiced on commercial and United
States Government contracts that remain unpaid at year-end. The Company expects
to collect all amounts within one year.

Unbilled receivables at March 31, 1999 are $151,580 and at March 31, 1998 are
$1,160,458. These balances represent amounts recognized under the
percentage-of-completion method of accounting that have not been billed because
of the billing terms of the contract.

The amount of contract retention included in unbilled receivables was $70,000 in
fiscal 1999 and $147,000 in fiscal 1998.

The books and records of the Company are subject to audit by the Defense
Contract Audit Agency (DCAA). The Company's overhead costs have been audited and
approved by the DCAA through fiscal year 1995. The Company believes that it is
in substantial compliance with Government record-keeping and cost-allocation
requirements, and does not expect any significant adjustments as a result of the
future audit of 1998, 1997 and 1996 overhead costs. As discussed in Note E, a
large multi-year contract which was completed in fiscal 1994 remains open.

NOTE C - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following at March 31:

<TABLE>
<CAPTION>
                                                                   l999              1998
                                                                   ----              ----
     <S>                                                         <C>               <C>
     Computers and other equipment                               $336,664          $336,664
     Leasehold improvements                                       118,069           110,439
     Machinery & equipment                                        320,006           320,006
     Office furniture & fixtures                                   43,224            43,224
                                                                 --------          --------
                                                                  817,963           810,333
     Accumulated depreciation & amortization                      747,631           712,866
                                                                 --------          --------
                                                                 $ 70,332          $ 97,467
                                                                 --------          --------
                                                                 --------          --------
</TABLE>


                                      F-10


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE D - LONG-TERM DEBT AND OTHER FINANCING

Long-term debt included the following at March 31:

<TABLE>
<CAPTION>
                                                                            1999              1998
                                                                            ----              ----
<S>                                                                       <C>               <C>
Note Payable - Small Business Administration, secured by
Company assets, payable in monthly installments of $782
including interest at 4% per annum, due November 2004.                    $ 46,908          $ 54,362

Note Payable - Bank guaranteed by Small Business
Administration, secured by Company assets, payable in
monthly installments of $4,329 including interest at
prime rate plus 2.75 percentage points, due November 2002.                 151,259           184,653

Note Payable - Export customer bearing interest at 12%
annually payable in monthly installments of $2,000,
principal to be repaid as described in the paragraph
that follows.                                                                  -             200,000

Note Payable - Consultant issued to resolve open accounts
payable balance.  Payable in monthly installments of $4,521
including interest at 8% per annum, due April 2000.                         56,116           100,000
                                                                          --------          --------
                                                                           254,283           539,015
Current portion of long-term notes payable                                  96,629           288,778
                                                                          --------          --------
                                                                          $157,654          $250,237
                                                                          --------          --------
                                                                          --------          --------
</TABLE>

In September 1997, the Company entered into a $200,000 note with an export
customer that bears interest at 12 percent. On April 21, 1998, the Company
repaid $51,032 of the outstanding balance. On August 19, 1998, the Company
repaid the remaining outstanding balance of $148,968.

On March 31, 1998, the Company reached a settlement with a consultant to
resolve a past due accounts payable balance of $220,000. The Company entered
into a 24 month note payable in the amount of $100,000 that bears interest at
8% per annum. The Company also issued Warrants to purchase 240,000 shares of
common stock at an exercise price of $.50 in settlement of the remaining
accounts payable balance of $120,000. The Warrants expire March 30, 2003.


                                      F-11


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
      March 31,
      <S>              <C>
        2000           $  96,629
        2001              54,232
        2002              55,015
        2003              34,026
        2004               8,977
        Thereafter         5,404
                       ---------
                       $ 254,283
                       ---------
                       ---------
</TABLE>

Short-term debt included the following at March 31, 1999 and 1998:

As of March 31, 1998, there was an export line of credit facility with an
outstanding balance of $1,131,311 with a commercial lender. This credit
facility was guaranteed by the U.S. Small Business Administration (SBA) and
the California Export Finance Office (CEFO). The credit facility allows the
Company to borrow up to $1,666,000 to provide working capital for export
contracts to provide TOW PGTS training systems to foreign customers. The
credit facility bears interest at prime rate plus 3.0 points. The commercial
lender holds a second lien position on the general assets of the Company and
a first lien on the export inventory and accounts receivable financed under
the credit facility. During fiscal year 1999, the Company delivered all of
the training systems under the contract being financed and the facility was
repaid in full by March 31, 1999.

As of March 31,1999 and 1998, there is a loan outstanding of $50,000 with a
foreign customer, that bears interest at 6% per year. The terms of the note
required repayment by March 1, 1996, however, the Company was unable to repay
the note because of cash flow problems. The Company intends to pay off the
note as cash flow is available to do so. Interest continues to accrue at the
6% rate.

NOTE E - COMMITMENTS AND CONTINGENCIES


CLAIM SETTLEMENT: In the Form 10-QSB reports for the quarters ended September
30, 1998 and December 31, 1998, it was reported that a California Limited
Partnership reasserted its claim that the Company is liable for material
monetary amounts in connection with an old real estate lease. On March 22, 1999,
the California Limited Partnership and the Company entered into a settlement
agreement which provided for the mutual release of all claims and the
termination of the partnership interests previously held by the Company's
Chairman and a Director. The agreement provides for payments by the Company to
the Partnership totaling $24,000 to be paid in eight monthly installments of
$3,000 commencing on April 1, 1999.



                                            F-12


<PAGE>

                            PERCEPTRONICS, INC., AND SUBSIDIARY
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


LEASE COMMITMENTS: Approximate future minimum payments under non-cancellable
operating leases with initial or remaining terms of one year or more at March
31, 1999 consisted of the following:

<TABLE>
        <S>                                        <C>
        2000                                       $ 277,480
        2001                                         190,332
        2002                                               -
        2003                                               -
        2004 and beyond                                    -
                                                   ---------
                                                   $ 467,812
                                                   ---------
                                                   ---------
</TABLE>

Rent expense was $255,000 in fiscal year 1999 and $230,000 in fiscal year 1998.


DCAA - AUDIT: The Company's books and records are subject to audit by the
Defense Contract Audit Agency (DCAA). At March 31, 1998, there is a DCAA audit
open of a large multi-year contract which was completed in 1994. The Company
believes the costs charged to this contract were proper and should not result in
any significant adjustments. The Company has provided $200,000 in reserve for
possible contract price adjustments at March 31, 1999 and March 31, 1998. The
amount reserved is believed to be adequate and is included in accrued
liabilities.

NOTE F - INCOME TAXES

The provision for income taxes consist of the following:

<TABLE>
<CAPTION>
                                                           Year Ended March 31
                                                       ---------------------------
Current:                                                  1999             1998
                                                          ----             ----
<S>                                                    <C>                <C>
    Federal                                            $     851          $      -
    State                                                    800             2,829
                                                       ---------          --------
                                                           1,651             2,829

Deferred:
    (Increase) decrease in benefit
       of NOL carryforwards                              123,000            35,000
    Increase (decrease) in valuation
       allowance                                        (123,000)          (35,000)
                                                       ---------          --------
                                                       $   1,651          $  2,829
                                                       ---------          --------
                                                       ---------          --------
</TABLE>

At March 31, 1999, the Company has net operating loss (NOL) carryforwards of
approximately $21,100,000 for federal income tax purposes and $900,000 for state
income tax purposes, respectively, expiring in varying amounts through 2012. At
March 31, 1999, approximately $500,000 of state net operating losses expired.
The Federal NOL carryforwards, which are available to offset future profits of
the Company and are subject to limitations should a "change in ownership" as
defined by the Internal Revenue Code occur, will begin to expire in 2001 if not
utilized. State net operating loss carryforwards at March 31, 1999 expire
between 2000 and 2002, if not utilized.




                                      F-13

<PAGE>

                       PERCEPTRONICS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In 1994, the Company adopted Statement of Financial Accounting Standards No. 109
(SFAS 109) "Accounting for Income Taxes." SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. Previously, the Company used
the APB 11 approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
Under SFAS 109 the Company recognizes to a greater degree the future tax
benefits of expenses which have been recognized in the financial statements.

SFAS 109 requires that the tax benefit of such NOLs be recorded using current
tax rates as an asset to the extent management assesses the utilization of such
NOLs to be more likely than not. Management has determined that future taxable
income of the Company will more likely than not be sufficient to realize the
recorded deferred tax asset of $6,947,000 net of a valuation allowance of
$6,014,000.

Realization of the future tax benefits of the NOL carryforwards is dependent on
the Company's ability to generate taxable income within the carryforward period.
In assessing the likelihood of utilization of existing NOL carryforwards,
management considered the historical results of continuing operations over the
last three years and the current economic environment in which the Company
operates. Management did not consider any non-routine transactions in assessing
the likelihood of realization of the recorded deferred tax asset.

Federal income tax NOL carryforwards will expire between fiscal 2001 and 2012
and state income tax operating loss carryforwards will expire between fiscal
2000 and 2002 if not used to offset taxable income.

The following reconciles the federal statutory income tax rate to the effective
rate of the provision for income taxes.

<TABLE>
<CAPTION>
                                                                 1999               1998
                                                                 ----               ----
    <S>                                                         <C>               <C>
    Federal statutory rate                                       34.00%             34.00%
    Increase (reductions) in taxes due to:
      State income taxes (net of federal benefit)                 6.13%              6.13%
      Valuation allowance adjustment                            (38.78)%           (37.53)%
                                                                ------             ------
                                                                  1.35%              2.60%
                                                                ------             ------
                                                                ------             ------
</TABLE>

Income taxes paid amounted to $1,651 in fiscal 1999 and $2,829 in fiscal 1998.


NOTE G - EMPLOYEE BENEFITS

The Company has a combined profit sharing and retirement/savings plan
qualifying for treatment under Internal Revenue Code Section 401(k). All
employees aged 21 and older, except those covered by a collective bargaining
agreement, are eligible following six months of employment in which at least
500 hours are paid. Under the profit sharing portion of the plan,
contributions to the plan are determined by the Board of Directors and are
allocated among eligible participants in proportion to their salaries. There
were no contributions made by the Company in fiscal 1999 and 1998. Under the
retirement/savings portion of the plan, the Company may match 75% of eligible
employees' voluntary contributions to a maximum of 4.5% of their salaries.
There were no Company matching contributions made under the
retirement/savings plan portion in fiscal 1999 and 1998.


                                      F-14


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE H - SHAREHOLDERS' EQUITY

The Company's 1982 Employee Incentive Stock Option Plan, as amended, authorized
the issuance of options to purchase 690,000 shares of common stock which may be
granted to employees, including officers, of the Company. No options may be
granted under this plan after November 1992. Options to purchase 37,800 and
42,800 shares were outstanding and exercisable under this plan at March 31, 1999
and March 31, 1998, respectively.

In September 1992, the Company's shareholders approved the 1992 Stock Option
Plan which authorizes the issuance of incentive and non-qualified options to
purchase 300,000 shares of Common Stock which may be granted to employees,
directors, consultants and advisors. The exercise price of the incentive
options may not be less than 100% of the fair market value of the common
stock on the date of grant (110% with respect to optionees who are 10% or
more shareholders of the Company). The exercise price of non-qualified stock
options may not be less than 85% of fair market value. Options become
exercisable in installments as determined at the time of grant. Options
expire no later than ten years from date of grant (five years with respect to
incentive options granted to optionees who are 10% or more shareholders).
Options to purchase 230,000 and 218,500 shares were outstanding under this
plan at March 31, 1999 and March 31, 1998, of which 194,900 and 138,100
shares were exercisable.

The 1988 Directors' Option Plan authorizes the issuance of options to purchase
100,000 shares of common stock. The options are automatically granted on April 1
of each year and expire five years after the date of grant. The options are
fully vested and exercisable at date of grant. The exercise prices may not be
less than 100% of fair market value of the common stock on the date of grant.
Options to purchase 32,000 and 49,000 shares were outstanding under this plan at
March 31, 1999 and 1998, respectively. No options may be granted under this plan
after July 1998.

Changes in the status of options are summarized as follows for fiscal years
ended March 31:

<TABLE>
<CAPTION>
                                                1999               1998
                                                ----               ----
<S>                                         <C>               <C>
Outstanding at beginning of year .......     310,300            415,200
Granted ................................      46,000            195,500
Canceled or expired ....................     (20,500)          (300,400)
Exercised ..............................     (36,000)                 -
                                             -------           --------
Outstanding at end of year .............     299,800            310,300
Available for grant at end of year .....      48,000            128,500
Price range of options:
  Outstanding at end of year ...........    $.11 - $3.00     $.11 - $ 3.00
  Exercised ............................    $.11 -  $.63              -
</TABLE>


At March 31, 1999 and 1998, options for the purchase of 264,700 and 229,900
shares were exercisable.



                                      F-15


<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



At March 31, 1999 the following warrants to purchase common shares were
outstanding:

<TABLE>
<CAPTION>
        Quantity             Exercise Price           Expiration Date
        --------             --------------           ---------------
      <S>                    <C>                      <C>
         5,000                    $.57                June 21, 2000
        60,000                    $.34                August 16, 2000
        50,000                    $.32                December 31, 2000
        44,693                    $.32                October 30, 2002
        44,693                    $.29                January 28, 2003
        25,000                    $.30                March 06, 2003
        57,143                    $.57                March 16, 2003
       240,000                    $.50                March 30, 2003
        45,264                    $.74                April 28, 2003
        66,667                    $.75                June 5, 2003
        55,556                    $.75                June 10, 2003
       444,444                    $.70                June 17, 2003
        55,556                    $.75                July 1, 2003
        51,540                    $.53                July 28, 2003
        54,307                    $.47                October 26, 2003
        37,500                    $.75                January 29, 2004
        37,500                    $.75                February 5, 2004
</TABLE>

The Company applies APB 25 in accounting for its Stock Option Program described
above. The option price under the Stock Option Program equals or exceeds the
fair market value of the common shares on the date of grant and, accordingly, no
compensation cost has been recognized under the provisions of APB 25 for stock
options. Under SFAS 123, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service (or vesting)
period. Had compensation cost for the Company's Stock Option Program and other
stock based compensation been determined under SFAS 123, based on the fair
market value at the grant dates, the Company's pro forma net earnings and net
earnings per share would have been reflected as follows:

<TABLE>
<CAPTION>
(In thousands, except per share amount)        1999                 1998
                                               ----                 ----
<S>                                         <C>                  <C>
        Net earnings
               As reported                  $ 122.0              $  108.6
               Pro forma                    $  87.3              $   88.5

        Net earnings per share
               As reported                  $   0.02             $   0.02
               Pro forma                    $   0.02             $   0.02
</TABLE>

The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumption used for those options granted in 1999 and 1998,
respectively: divided yield of 0%, expected voiatility of 20% and 20%, risk-free
interest rates of 5.00% and 5.00%, and expected lives of 5 years.



                                      F-16

<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On September 15, 1997, the Company entered into an agreement with a financial
consultant. The financial consultant was retained to provide financial
management consulting and to locate and secure equity and debt financing on
behalf of the company. Under the terms of the agreement, the consultant is to be
paid $5,000 per month. In addition to the monthly retainer, the consultant is to
be granted warrants to purchase common stock of the Company in an amount up to
5% of the Company's outstanding shares. The warrants vest and are issuable in
amounts equal to 1% of the Company's outstanding shares each 90 day period
starting 46 days from the date of the agreement. The warrants are to have an
exercise price equal to 85% of the market value on the day prior to the date of
vesting and expire five years from date of grant. Warrants that have vested and
are outstanding at March 31, 1999 are;

<TABLE>
<CAPTION>
        Vesting date         Shares         Exercise price
        ------------         ------         --------------
        <S>                  <C>            <C>
        October 31, 1997     44,693              $0.32
        January 29, 1998     44,693              $0.29
        April 29, 1998       45,264              $0.74
        July 28, 1998        51,540              $0.53
        October 27, 1998     54,307              $0.47
</TABLE>

In addition to the monthly retainer and the warrants, the agreement calls for
other fees to be paid in cash related to the introduction of equity or debt
financing and for their involvement in any merger or acquisition transactions.

During the fiscal year ended March 31, 1999, the Company entered into stock
purchase subscription agreements with several investors for the purchase of up
to 1,008,612 shares of common stock for a purchase price of $360,000 and the
release of $50,050 of liability. The subscription argeements also provided for
the issuance of warrants to the investors for the purchase of up to 702,223
shares of common stock at exercise prices that range from $.57 to $.75. Certain
of the subscription agreements provide for payments for the shares over several
months starting in July 1998. At March 31, 1999, there were stock subscription
amounts due the Company of $5,000 for the purchase of 11,112 shares of common
stock.

A warrant holder exercised a warrant for 50,000 shares of common stock for an
exercise price of $16,000 and employee and director stock options were exercised
for 36,000 shares of common stock for $14,585.

During the fiscal year ended March 31, 1999, the Company issued 20,000 shares of
common stock to a former employee as part of a settlement of a dispute. The
Company issued a warrant to it's landlord in conjunction with the negotiation of
its building lease for 60,000 shares of common stock at an exercise price of
$.34, expiring in August 2000. Also, the Company issued a warrant to it's export
lender for 50,000 shares of common stock at an exercise price of $.32, expiring
in December 2000.



                                      F-17

<PAGE>

                       PERCEPTRONICS, INC., AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE I - SIGNIFICANT CUSTOMERS

During fiscal year 1999, sales to the Government of Egypt for TOW PGTS simulator
systems were approximately $2,700,000 (63% of total sales) and sales to the
United States Government were approximately $1,300,000 (31% of total sales). All
other customers accounted for approximately $300,000 (6% of total sales). During
fiscal year 1998, sales of TOW PGTS simulator systems to a foreign customer were
approximately $2,140,000 (61% of total sales), sales to the United Ststes
Government were approximately $907,000 (26% of total sales) and sales to the
Government of Egypt were approximately $272,000 (8% of total sales). All other
customers accounted for approximately $216,000 (5% of total sales).


                                      F-18

<PAGE>

                                INDEX TO EXHIBITS


               EXHIBITS AND REPORTS ON FORM 8-K


        (a)     Exhibit Index (Management contracts, compensation plans and
                arrangements are identified by *.

                3.1     Certificate of Incorporation, as amended (4)

                3.2     By-Laws, amended. (2)

                *10.1   1992 Stock Option Plan (5)

                *10.2   Employment Agreement with Gershon Weltman dated August
                        1, 1989 (1) and First Amendment dated October 22, 1991.
                        (3)

                *10.3   Form of indemnification Agreement with Officers and
                        Directors. (1)

                *10.4   1988 Directors' Stock Option Plan. (5)

                *10.5   Second Amendment to Employment Agreement with Gershon
                        Weltman dated August 27, 1996. (6)

                *10.6   Employment agreement with Thomas Lubaczewski dated
                        January 1, 1997. (7)

                10.7    Loan Agreement and note dated September 23, 1997 between
                        the Company and The Pacific Bank. (8)

                10.8    Promissory Note dated September 22, 1997 between the
                        Company and Applied Controls Technology. (8)

                21.1    Subsidiaries

                23.1    Consent of Independent Accountants

                27.1    Financial Data Schedule

        (b)     The registrant filed no reports on Form-8K during the quarter
                ended March 31, 1999

(1)  Incorporated by reference to the Company's Form 10-K for the year ended
     March 31, 1990.

(2)  Incorporated by reference to the Company's Form 10-K for the year ended
     March 31, 1991.

(3)  Incorporated by reference to the Company's Form 10-K for the year ended
     March 31, 1992.

(4)  Incorporated by reference to the Company's Form 8-K/A date of event
     reported April 30, 1993.

(5)  Incorporated by reference to the Company's Form 10-K for the year ended
     March 31, 1993.


<PAGE>

(6)  Incorporated by reference to the Company's Form 10-KSB for the year ended
     March 31, 1996.

(7)  Incorporated by reference to the Company's Form 10-KSB for the year ended
     March 31, 1997.

(8)  Incorporated by reference to the Company's Form 10-QSB for the quarterly
     period ended September 30, 1997.