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________________________________________________________________________________
________________________________________________________________________________
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
 
                                  FORM 10-KSB
                 [x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
                                       OR
               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
  FOR THE TRANSITION PERIOD FROM                     TO                     
                        COMMISSION FILE NUMBER: 0-28114

                            ------------------------
 
                        PARAVANT COMPUTER SYSTEMS, INC.
              (EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
<TABLE>
<S>                                                             <C>
                           FLORIDA                                                        59-2209179
                   (STATE OF INCORPORATION)                                  (I.R.S. EMPLOYER IDENTIFICATION NO.)
 
           1615A WEST NASA BOULEVARD, MELBOURNE, FL                                         32901
           (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                       (ZIP CODE)
</TABLE>
 
         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 727-3672

                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                      None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                            ------------------------
 
                         COMMON STOCK, $.015 PAR VALUE
                                (TITLE OF CLASS)

                  REDEEMABLE WARRANTS TO PURCHASE COMMON STOCK
                                (TITLE OF CLASS)

                            ------------------------
 
     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 amendments to this Form 10-KSB. [ ]
 
     The issuer's revenues for its most recent fiscal year were $13,209,541.
 
     The aggregate market value of voting stock held by non-affiliates of the
registrant on December 15, 1997 was approximately $17,218,191. On such date, the
closing price of the issuer's common stock was $3.50 per share. Solely for the
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the issuer that beneficially own more than 10% of
the issuer's voting stock have been excluded, except such shares, if any, with
respect to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the issuer that
such individuals are, in fact, affiliates of the registrant.
 
     The number of shares of the registrant's Common Stock, $.015 par value,
outstanding on December 15, 1997 was 7,993,652.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of the Company's Proxy Statement in connection with its Annual
Meeting scheduled to be held on March 12, 1998 are incorporated by reference in
Part III. The Company's Proxy Statement will be filed within 120 days after
September 30, 1997.
 
     Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
 
________________________________________________________________________________
________________________________________________________________________________






<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                          ANNUAL REPORT ON FORM 10-KSB
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
 
                               TABLE OF CONTENTS
 
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                                                                                                              PAGE
                                                                                                              ----
 
<S>              <C>                                                                                          <C>
PART I
     Item  1.    Description of Business...................................................................     3
     Item  2.    Description of Property...................................................................    16
     Item  3.    Legal Proceedings.........................................................................    16
     Item  4.    Submission of Matters to a Vote of Security Holders.......................................    17
 
PART II
     Item  5.    Market for Common Equity and Related Stockholder Matters..................................    17
     Item  6.    Management's Discussion and Analysis of Financial Condition and Results of Operation......    18
     Item  7.    Financial Statements......................................................................    21
     Item  8.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......    21
 
PART III
     Item  9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
                   16(a) of the Exchange Act...............................................................    22
     Item 10.    Executive Compensation....................................................................    22
     Item 11.    Security Ownership of Certain Beneficial Owners and Management............................    22
     Item 12.    Certain Relationships and Related Transactions............................................    22
     Item 13.    Exhibits and Reports on Form 8-K..........................................................    22
</TABLE>
 
                                       2





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                                     PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
GENERAL
 
     Paravant Computer Systems, Inc. (the 'Company', 'Paravant' or 'PCS') is a
manufacturer of ruggedized, portable computers and communications interfaces
utilized in outdoor and medical settings. Paravant also offers extensive
customization services to modify its standard products to the specific needs of
end users. The Company's laptop and hand-held processors are designed and built
to function in adverse environments under harsh weather, climate and operational
conditions. Insulated from temperature extremes, flying debris, shock,
vibration, moisture and humidity, its products have a reputation for high-level
performance and reliability in difficult circumstances. The Company's products
are sold to U.S. and foreign military establishments, other government agencies
and commercial enterprises.
 
HISTORY
 
     In early 1983, the Company commenced its business operations and offered
only engineering services for computer applications. In this initial period, PCS
modified computer hardware and other equipment and developed special software
applications for its customers. It also served as a value-added reseller for a
Japanese manufacturer of portable computers.
 
     In the mid 1980's, the Company began developing its first rugged computer
under a special grant from the U.S. Department of Defense Small Business
Innovative Research Program. By 1987, PCS was producing its RHC-88 hand-held
computer and selling it to the U.S. Army and the electric utility industry.
Subsequently, the Company designed and produced other computer-related products.
 
     By late 1989, UES, Inc., under the control of Krishan K. Joshi (presently
the Company's Chairman), purchased a 51% equity interest in the Company through
its wholly owned subsidiary, UES Florida, Inc. Previously, PCS and UES had
worked together on a joint development project. By mid 1990, four of its
original five founders had left PCS's employ and sold all their equity interest
in it. Of this group, only Richard P. McNeight, its President, remains. For a
while after the acquisition of control of PCS, UES and Mr. Joshi played an
active and substantial role in its day-to-day management and operations. In the
Fall of 1991, William R. Craven joined the Company and became its Vice President
of Marketing. Since that time, UES and Mr. Joshi have devoted much less time and
effort to the management of the Company's affairs.
 
     The Company, which was incorporated under the laws of the State of Florida
in June 1982, consummated in June 1996 an initial public offering (the 'IPO') of
1,150,000 shares (before giving effect to the Stock Split (as defined below)) of
common stock, par value $.045 per share ('Common Stock'), and 1,610,000
redeemable warrants (before giving effect to the Warrant Split (as defined
below)), each to purchase one share of Common Stock (the 'Warrants').
 
     On July 25, 1996, the Company effected a three-for-one stock split (the
'Stock Split'). In connection with the Stock Split, the Company amended its
Articles of Incorporation to decrease the par value of the Common Stock from
$.045 per share to $.015 per share. Also in connection with the Stock Split,
each Warrant to purchase one share of Common Stock at an exercise price of $6.00
per share was converted into three Warrants, each to purchase one share of
Common Stock at an exercise price of $2.00 per share. The redemption price of
the Warrants was reduced to $.0167 per Warrant (the 'Warrant Split'). Unless
otherwise noted, all references to the Common Stock and the Warrants contained
herein are after giving effect to the Stock Split and the Warrant Split.
 
INDUSTRY BACKGROUND -- MILITARY MARKET
 
     Traditionally, the U.S. Department of Defense ('DoD') has retained military
contractors to develop computer technology for specific missions that meet
extensive military specifications. This approach has often taken longer from
development through production, and tends to be much more expensive, than
similar technology available in the commercial sector. Unlike other scientific
areas, the
 
                                       3
 



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<PAGE>
rapid advances made in computer technology in the commercial market have often
exceeded and driven those developed specifically for the military. Consequently,
when the U.S. military has pursued the more costly and time-consuming
procurement procedures, its computers have still lagged behind the comparable
commercial technology in terms of capabilities.
 
     Due to these factors, the DoD began in the mid 1980's to shift from its
over-dependence on computers meeting full military specifications ('Mil-Spec')
to acquiring commercially available computers that have been modified for
environmental and operational realities of the military applications in
question. While the U.S. military still procures Mil-Spec computers, this
transition to the more commercially oriented systems has resulted in its
realization of the desired benefits and savings.
 
     Given the dismantling of the former Soviet Union and related budgetary
considerations, there has been a concerted effort on the part of U.S. Congress
since 1990 to downsize the military, and U.S. military spending has declined.
The Company believes that further decreases of overall spending, but slight
increases in spending on defense electronics, will occur during the remaining
portion of this decade.
 
     The downward trend in overall defense spending has been a positive
development for sales to the U.S. military in recent years of less than full
Mil-Spec militarized computers in general and rugged computers specifically.
This is the case because such computers have produced cost savings and certain
operational benefits in meeting the military's need for computing capabilities.
In one sense, they have proven less expensive and, in some cases, better than
the full Mil-Spec computers. In another sense, they have extended the longevity
of older weapons and related systems while enhancing their technological
capabilities. In this manner, they have played a role in facilitating the
upgrading or retrofitting of existing weapons. Moreover, they have caused the
dissemination and utilization of computer technology throughout the military
structure, especially at the lower echelons. This has resulted in greater
tactical usage of such technology in the battlefield context.
 
     Despite such benefits, certain negative implications in regard to the
market prospects for rugged computers may arise in the longer run because of
less overall military spending. In any event, lower military spending may
eventually serve as a constraint on the growth of sales of such computers.
 
     Only a portion of militarized computers consist of ruggedized versions.
'Ruggedization' or 'rugged' or 'ruggedized computers' are terms used to describe
computers that are built to withstand certain environmental and operational
hazards with which standard commercial computers functioning indoors would not
typically have to contend. The ruggedization of the computer is an attempt to
protect or insulate it fully from such hazards or at least minimize their
adverse impact so that it functions to accomplish the task at hand or complete
the mission. From a strictly environmental point of view, these hazards are
usually weather-related or climatic in nature and can encompass temperature
extremes ranging from -30 to +145 degrees Fahrenheit, as well as severe moisture
and humidity conditions and the infiltration by flying or wind-borne debris,
such as sand, dust or other particles. These adverse conditions occur outdoors,
particularly in deserts, jungles, and arctic regions or at sea.
 
     In the operational area, the hazards involve strong vibrations and shocks
that result from rapid ascents and descents, rough handling, transportation and
explosions as well as electric interference or internal thermal conditions. In
the former situations, the signals emitted by other electronic equipment may
interfere with and distort the proper functioning of computers. In addition, as
increasingly more computing power is inserted into small spaces and containers,
the heat generated by the computer itself may cause the processor to malfunction
or fail. These operational hazards are, in all likelihood, greater in outdoor
military settings than in normal outdoor applications.
 
     Computers are ruggedized by the selection and mounting of certain
components, the design, configuration and fabrication of enclosures and
electronics and the application of special seals and coatings. Computer
components generally fall within three broad categories: Mil-Spec, industrial
and commercial. Mil-Spec components are at the far end of the continuum when it
comes to the degree of ruggedization. This category fulfills the highest
requirements for withstanding adverse factors. Mil-Spec and industrial parts for
computers tend to be of higher quality and composed of better materials than
commercial components. They are usually made on production lines using different
approaches than their commercial counterparts.
 
                                       4
 



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     Consequently, components made for Mil-Spec and industrial usage tend to be
much more expensive than comparable commercial ones due to the raw materials and
methods employed in their manufacture. Mil-Spec components are even more costly
than similar industrial parts. In addition, because the production runs in
Mil-Spec and industrial applications rarely reach the volume levels of
commercial production, there are no or few economies of scale and related cost
reductions that is achievable.
 
     Commercial components are lower in price initially and tend to cost even
less over time due to economies of scale and production efficiencies. Such
components, however, offer little protection from the adverse effects of harsh
environmental or operational conditions. Cost and pricing differences between
commercial and industrial/Mil-Spec items for both electric and mechanical
components are substantial and industrial and Mil-Spec products may cost from
three to ten times more than commercial ones.
 
     For most of its requirements, the U.S. Military takes the position that
Mil-Spec standards for computers are too expensive and excessive for the degree
of protection actually needed. Accordingly, if the equipment can survive and
operate satisfactorily under the same conditions that humans can, it will
usually be appropriate for its mission. Mil-Spec items are being gradually
phased out of military procurement programs.
 
     The use of the newer surface mount technology ('SMT') to attach components
to the computer boards enhances its durability and ruggedness over the older
mounting technology. In SMT, the components are glued to the board by means of a
chemical adhesion process and are then soldered instead of being inserted into
holes in the board and soldered. SMT is a more precise manufacturing technique
and offers better insulation against vibration and shock. See ' -- SUPPLY AND
MANUFACTURING'.
 
     Parts' selections, board design and proper case and sealing materials can
reduce the ill effects of electronic-magnetic interference ('EMI') from other
equipment and internal thermal generation. The design and fabrication of the
computer encasement and keyboard with tougher materials, full closure and
special sealants also protect it against moisture, humidity, particles and
temperature extremes.
 
     Typically, the companies that market and sell ruggedized computers are
repackagers having little or no input in the design of their electronics and the
selection and mounting of components on printed circuit boards. They usually
purchase the computer boards and sub-assemblies in an 'as is' condition from
commercial manufacturers. The major contribution of the repackagers to the
protection of the computer is a tougher box in which the computer is housed.
Because it is usually air breathing in nature, even this stronger covering fails
to shield the computer from the penetration of rain, snow, fog, dust or other
particles. In contrast, the Company uses industrial-type or highly selected
commercial components for most of its computers rather than strictly ordinary
commercial ones, as do many of its competitors. This selection allows it to
provide better quality and more rugged parts but at cheaper prices than full
Mil-Spec that tend to be much more costly. The Company also applies SMT to the
fabrication of most of its computer boards. In addition, PCS designs such
boards, the computer's outer case, keyboards, subassemblies and other elements
in order to maximize the ruggedness of its products, to furnish customization of
electronics and software and to give the customer greater control over
configuration and components. To address price concerns by some customers, the
Company has introduced a new rugged notebook line of products, which combine
Paravant's rugged outer case design and expertise in sealing the unit with
off-the-shelf commercial electronics products provided by a third-party
supplier.
 
     Militarized computers, including rugged computers, are available in many
different types, sizes and configurations. They may also bridge or overlap
product categories in certain instances. One category of militarized computer is
a dedicated system computer. This type of processor is typically installed and
integrated into specific command and control systems, weapons or other
equipment. Rack-mounted computers are an example of this type of computer. They
are usually an integral part of such equipment, are not easily detached from it
and weigh in excess of 30 lbs. The equipment sits in large racks with specified
dimensions and can be installed within trailers or vehicles.
 
     Another category involves transportable computers that are not fixed in
place and may be deployed in different applications. Typically, they are
stand-alone units and are characterized by desktop
 
                                       5
 



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computers and workstations. These computers weigh between 30 and 60 lbs. and
require external power sources.
 
     A third category of militarized computer is the portable computer, which
includes laptops and hand-helds, as well as the newer notebooks. Often carried
and used in the field, these computers are self-contained units that may be
employed in conjunction with other systems or on a stand-alone basis. They
usually operate on battery-power but, in certain cases, may be plugged into an
external power source. Such computers usually weigh less than 20 lbs.
 
     A substantial portion of the market for militarized computers, including
rugged computers, covers the first two categories, namely -- dedicated systems
and transportable computers. The market for portables in the military area is
considerably smaller than either of the first two categories and only a portion
of that market is ruggedized.
 
     In addition, many of the companies that sell portable computers also market
computers from more than one category as well as standard computer peripherals
such as printers, mass storage devices, communication terminals and displays.
 
INDUSTRY BACKGROUND -- MEDICAL
 
     Since the market introduction of the implantable pacemaker, medical
practitioners have increasingly turned to implantable devices for a wide range
of applications including drug delivery devices, electroneurostimulators,
difibrillators, and ventricular assist devices ('VADS'). Increasingly, such
implantable devices may be reprogrammed externally via a telemetry link, to
enable the physician to alter the drug delivery rate or dispensing of
medication. The devices used for this are commonly called Programmers and are
part of the medical support equipment market. It is believed that many
manufacturers of implantable devices would prefer to outsource the design and
production of these programmers, because the required skills and resources do
not necessarily align with the core competencies of the company -- the implant.
The Company has focused on the Programmer segment of the Medical Support
Equipment market, because the technical and operations needs of the market
appear to match the Company's strengths. These strengths include the ability to
design and manufacture highly specialized computing devices, meet tough design
requirements like EMI, strict adherence to specifications and regulations like
FDA, strong documentation and configuration control allowing the Company to
strictly control each component in the system and the system itself, high
reliability system performance and seamless field support.
 
     The Company acts as a design and manufacturing subcontractor to the medical
device manufacturers, who typically prefer to do final assembly and test, and
assume liability for the product.
 
     The Company began providing medical products in 1986 and by 1989 medical
accounted for approximately 30% of its revenues.
 
     Due to a lack of resources, the Company focused its efforts in 1991 on
military markets. It re-entered the medical market in early 1996, in
anticipation of a successful IPO in June of 1996. The Company had secured
development contracts with four implantable medical device manufacturers,
including Medtronic, Inc. in the implantable categories of drug pumps,
neurostimulators, defibrillators, and VADS.
 
PRODUCTS
 
     The Company currently offers its customers a line of rugged, portable
computers that includes two types of hand-held processors and four types of
laptops. In terms of performance, PCS's portables have the computing power of,
and are compatible with, IBM PC's and are designed with an open architecture
configuration for maximum flexibility. All its portable computers possess
substantial memory capabilities for their size. The Company's software is based
on MS-Windows or MS-DOS operating systems.
 
     Most of the Company's portable computers are battery-powered, contain
back-up power packs and have a longevity of 8 to 16 hours for its hand-held and
3 to 12 hours for its laptops. However, its
 
                                       6
 



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computers are also designed to be plugged into either AC (alternating current)
or DC (direct current), external power sources in vehicles or other systems.
 
     All PCS's computers have expansion capabilities with slots for additional
expansion boards and/or PCMCIA cards (credit card sized memory and interface
cards) and, for most of its laptops, optional removable hard drive and/or floppy
discs are available. The monitor or display aspects of the Company's computers
offer high-resolution, monochrome LCD (Liquid Crystal Devices) selected
specifically for sunlight visibility and wide temperature ranges. The standard
display also features, as optional, a white back-light or secure back-light for
use in low ambient light. In laptops, color displays are offered if desired.
 
     Like other elements of its computers, the Company's keyboards are arranged
for operational ease in hostile environments and under adverse conditions. In
its hand-held computers, the keyboard has tactile feedback keys and alphanumeric
keypads designed with wide spacing for glove-hand use by nontypists. As far as
its laptops are concerned, the keyboards are either of the membrane variety or
standard, full-travel keyboards, both featuring the regular QWERTY key
arrangement, generally used by typists, word processors and computer users. Each
laptop has a sealed mouse that serves as a pointer to move the cursor and select
functions. Although such a standard keyboard has been ruggedized to be
relatively water and dust-proof, the membrane type offers even greater
impermeability. It may be drenched or hosed with water and still function
adequately. As an option, membrane keypads are also available with back-lights
for use in darkness or low-light circumstances.
 
     In size, PCS's hand-held models are 9.4" and 10" by about 6.5" with
thickness' varying from 1.5" to 2.6"; they weigh either 2.7 lbs. or 4.5 lbs. In
contrast, its laptops range in size from 14" to 17" by 7.5" to 10.5" with
thickness' varying from 3" to 7.25". Weights of its laptop run from 12 lbs. to
23 lbs.
 
     The Company's computers are designed to meet and exceed certain military
specifications for operation in harsh environments and for insulation from
electromagnetic interference. The reliability and performance of its products in
extreme environmental and operational situations relate directly to PCS's
fundamental electrical and mechanical designs, its specification and selection
of proper components, its manufacturing techniques and the extensive testing
that it employs at various phases.
 
     Like many of its competitors, the Company's computers are available with
standard serial and parallel communications capabilities. These capabilities
allow PCS's computers to transmit and receive electronic signals and messages to
and from other electronic systems. Its standard communications interfaces may be
made operational in military, governmental and commercial applications. However,
unlike certain of its competitors, the Company also offers specialized
communication interfaces for military applications that meet certain military
specifications. These interfaces link up all the electronic devices in one
system so that they can exchange critical information necessary for the
performance and mission of that system. In addition, PCS has developed a
tactical communication interface that connects different electronics systems
operating on the battlefield with one another. Communication with these various
interfaces can be achieved electronically, by radio or other means.
 
     In the military area, typical applications of the Company's computers
entail aircraft and shipboard diagnostic, testing and maintenance systems,
controller and radar displays for missile systems, performance recorders in
training exercises, mission loaders and verifiers of data and field command
control systems.
 
     As of September 30, 1997, the following table represents a substantial
portion of the Company's current military business covering its three primary
applications (Maintenance & Support, Training, and Battlefield Communications),
the identity of its customer, the type of computer involved and the application
concerned:
 
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                                                                        TYPE OF
          DESCRIPTION OF PROGRAM                NAME OF CUSTOMER        COMPUTER            APPLICATION
-------------------------------------------  -----------------------   ----------  -----------------------------
 
<S>                                          <C>                       <C>         <C>
HAWK/AVENGER Air Defense Missile Systems...  Raytheon                    Laptop    Portable Fire Controller
Phalanx Gun Integrated Maintenance
  System...................................  U.S. Navy                   Laptop    Diagnostics and Repair Device
HARM Missile System........................  Raytheon -- Texas           Laptop    Mission Loading and
                                             Instruments                           Electronic Diagnostics
F-16 Fighter and Mission Loading...........  Lockheed Martin             Laptop    Electronic Diagnostics Check
</TABLE>
 
     In September 1996, PCS was awarded a contract by Raytheon Company under
which PCS will provide enhanced remote terminal units used as part of an air
defense command and control system, which Raytheon supplies to the U.S. Army
Missile Command in Huntsville, Alabama. Deliveries of the units began in the
fourth quarter of fiscal 1996 and are expected to continue throughout 1997 and
into 1998. In addition, in October 1996, PCS was awarded a contract to provide
Sanders, a Lockheed Martin company, with hardware elements for Enhanced
Diagnostic Aid ('EDNA') systems for use by the U.S. Air Force on F-16 fighter
aircraft. Deliveries began in March 1997 and are expected to continue through
1998. The contract is a continuation of a program started three years ago with
Lockheed Fort Worth under which EDNA systems were shipped to the U.S. Air Force
for both the F-16 and B-2 aircraft programs and for selected military programs.
In October 1997 Sanders received a contract for EDNA systems to be used as part
of the support equipment package for the F-117A Stealth Fighter. It is expected
that shipments for both the F-117A and the F-16 aircraft programs will continue
into 1999 and 2000. The EDNA system is used by Air Force maintenance personnel
on the flightline to quickly diagnose the condition of various sub-systems on
the aircraft and to program certain electronic devices. The compact EDNA system
can replace a large number of support boxes on the flightline and is
considerably less expensive to purchase and faster to use than current systems
employed by the Air Force.
 
     In the medical area, the company's products are custom platforms, which
include medical power supplies, custom interfaces to support customer's
telemetry hardware and protocols, a display, and various forms of input devices.
The product case can be a laptop, desktop or hand held, depending on the
customer need for portability and expansion. In all cases, the Paravant product
allows the medical practitioner to communicate with an inserted medical device
and adjust the function of an implanted device.
 
CUSTOMIZATION
 
     The Company provides its customers and end-users with engineering services
that modify or adjust its standard portable computers, related software and
communication interfaces to their specific needs and requirements. Substantial
portions of its product sales to the military involve varying degrees of
customization while each medical customer's product is a uniquely custom product
with some shared components.
 
     The range of engineering services furnished by PCS includes special rugged
packaging design, miniaturization of electronics, development of ultra-low power
systems and improvements in communications capabilities. There are many examples
of specific situations where PCS has rendered such services, and the following
modifications of its products are representative only:
 
      The development of special communication interface modules and cards to
      permit the computer to communicate with aircraft or a weapon system.
 
      The design of special connectors to computers to allow the use of the
      customer's existing cable set-up contained in other equipment.
 
      The expansion of environmental testing capabilities so that computers may
      be made impervious to certain chemicals or wider temperature ranges in
      accordance with program requirements.
 
      The addition of a fail-safe mechanical switch to a weapon firing system.
 
                                       8
 



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      The development of a custom communications card to enable the computer to
      communicate with a medical customer's telemetry package, specialized input
      switches or customized printer options.
 
     In the early phase of a military program, PCS is often called upon to
design, engineer and fabricate the prototype. Once this is successfully done, it
is generally in a better position to obtain the full production run for that
specific program. The Company also engages in system integration and post-sale
services to assist the customer in attaining operational status for the systems
or in correcting any problems.
 
     Management believes that by providing engineering services, the Company
facilitates the marketing of PCS's products especially since certain of its
competitors typically do not offer any customization of the electronics. In the
fiscal years ended September 30, 1997 and 1996, revenue from engineering
services represented approximately 1% and 5% of the Company's total sales,
respectively. Management anticipates, due to governmental budgetary constraints
and the anticipated continuing desire of DoD customers to procure commercial
'off-the-shelf' products, a continued reduction in the number of programs
pursuant to which customization services will be funded. Nevertheless,
management believes that such customization services are of significant value to
Paravant's customers and, accordingly, intends to continue to offer such
services on a reduced or no-charge basis, where offering such services will
provide production orders.
 
NEW PRODUCTS
 
     Because of its expertise in miniaturization and its efforts to incorporate
more computing power into smaller, completely sealed enclosures, the Company has
continually experimented with heat reduction methods. As a result of these
efforts, PCS has developed and successfully tested a solid-state, miniaturized
electronic chiller or heat pump, which has been incorporated as a significant
component in the Company's product offering. This device will more efficiently
lower temperatures and absorbs heat generated by the electronic components of
PCS's computers. Accordingly, this development should allow the placement of
more powerful, higher temperature microprocessors in its sealed containers.
 
     The Company has, until recently, only sold portable computers and
communications interfaces; it has not provided a broad range of standard
computer peripherals. In September 1996, the Company secured a contract to
supply its first rack-mounted computers to Harris RF of Rochester, New York. The
contract requires that Paravant provide a new type of rack-mounted computer,
which is a fully-sealed air-cooled computer incorporating many of Paravant's
electronics designs, for use by a foreign army in a desert environment. By
offering rack-mounted products, the Company believes it may expand its market
opportunities beyond those relating solely to ruggedized portable computers,
although there can be no assurance of such.
 
     In 1997, the Company developed two prototype products to be used as
programmers by medical device manufacturers.
 
SUPPLY AND MANUFACTURING
 
     The Company designs and engineers substantially all its portable computers,
purchases their components from third parties and then tests and assembles the
final products. As part of this process, PCS specifically designs for its
computers (other than for the Company's notebook, as to which commercial
electronics boards from other manufacturers are utilized), the electronics or
printed circuit board, which is the most important, sophisticated and complex
element thereof. At times, the board can be composed of as many as twelve
layers. The Company also fabricates the prototype of such board, tests it,
purchases all the necessary components for the board and then provides them in
kit form to specialized board fabricators for both pilot and production runs.
 
     This approach to outsourcing differs from that followed by most other
rugged computer manufacturers which, the Company believes, operate on a turn-key
basis with their board fabricators, who handle the design, testing and purchase
of all components themselves and then furnish the manufacturer with the
completed boards. In contrast, the Company's approach to board fabrication
allows it to maintain better control of the quality and delivery of such boards,
especially because it is designing the boards and selecting the parts. In
addition, its own personnel serve as on-site inspectors at
 
                                       9
 



<PAGE>
 
<PAGE>
the plants of the board fabricators. Each of the fabricators employed by PCS
applies surface mount technology in the fabrication of its printed circuit
boards.
 
     The Company anticipates that it will continue to outsource board
fabrication. Given the rapid changes in computer technology, PCS is not capable
of keeping abreast of the costly purchase requirements for new production
equipment necessary in the precise placement of electronic components on boards.
Outsourcing allows the Company's products to receive the benefit of the latest
technological development at an acceptable cost. Once the boards are completed,
they are tested by the fabricator and, upon satisfactory completion of such
tests, are shipped to the Company. When delivered, PCS further tests the
completed boards and other components and then assembles the computers. Apart
from the printed circuit boards, the components that PCS purchases from external
sources include chassis, wire harnesses, computer chips, keyboards, displays and
metal cases.
 
     With its new ruggedized notebook, the Company has selected the commercial
electronics boards of one manufacturer. Certain components will be attached to
the boards in a more secure fashion and some wiring connectors will be replaced
to improve shock and vibration performance. The electronics will be packaged in
a sealed container designed by the Company and, where required, a solid state
miniaturized heat pump will be installed to enhance the operating range of the
commercial electronics.
 
     The Company does not assemble its products on a continuous mass-production
basis. Instead, its computers are usually assembled on a batch basis in which
products move irregularly from station to station. Tests are performed at
various stages of the process according to PCS's standards or as requested by
specific customers. Further testing of products is generally accomplished at the
end of the assembly process. The Company's manufacture of computers is done
pursuant to specific purchase orders or for general inventory purposes.
 
     PCS utilizes modern equipment for the design, engineering, assembly and
testing of its products. The Company has utilized a portion of the funds from
the IPO in June 1996 to acquire additional equipment to enhance its operating
efficiency in such areas and to increase its capacity in order to facilitate
increased production, when and if required, as well as to obtain better control
of quality, inventory and order processing.
 
     Generally, PCS is not a party to any formal written contract regarding the
deliveries of its hardware, supplies and components or their fabrication. It
usually purchases such items pursuant to written purchase orders of both
individual and blanket variety. Blanket purchase orders usually entail the
purchase of a larger amount of items at fixed prices for delivery and payment on
specific dates.
 
     Except as set forth above, the Company relies on a few board fabricators of
different sizes and capabilities located within the same geographical area as
its design, engineering and assembly facilities. Certain components used in its
computers are obtained from sole sources, such as Distec, Xcel and HiTech. PCS
has also licensed its software from sole sources, including Microsoft, Phoenix
Technology, Magnavox and JFK Associates. PCS has occasionally experienced delays
in deliveries of components and may experience similar problems in the future.
In an attempt to minimize such problems, the Company has developed and keeps an
inventory of parts that are generally more difficult to obtain. However, any
interruption, suspension or termination of component deliveries from PCS's
suppliers could have a material adverse effect on its business. Although
management believes that in nearly every case alternate sources of supply can be
located, inevitably a certain amount of time would be required to find
substitutes. During any such interruption in supplies, the Company may have to
curtail the production and sale of its computers for an indefinite period.
 
     The Company's design, engineering and assembly facilities are located in
Melbourne, Florida. These facilities comply with certain U.S. military
specifications necessary for the manufacture and assembly of products supplied
to it. PCS is seeking to qualify its facility in order to meet the quality
management and assurance standards of an international rating organization
(ISO-9001) within the next six months. Some measures, such as the installation
of a new business computer system, have been taken by the Company to qualify
under such standards. During 1997, the Company has expended significant effort
in implementing new structures, procedures and disciplines that contribute
towards the goal of achieving the ISO-9001 qualification. Such qualification
should improve the Company's marketing opportunities in the international
military markets for rugged computers. However, there is
 
                                       10
 



<PAGE>
 
<PAGE>
no assurance that PCS can achieve such standards or that it will match or
increase such sales of its products abroad in the future even if such standards
are met.
 
     The Company has entered into licensing arrangements for certain hardware
and software elements contained in, or used in conjunction with, its computers.
These agreements are usually non-exclusive, provide for minimum fees and
royalties related to sales to be paid by the Company to the particular licenser,
run for a limited term and are subject to other terms, conditions and
restrictions.
 
     PCS receives its basic operating software system MS-DOS with various Window
versions from Microsoft, Inc. pursuant to such licensing arrangements. It also
obtains from Phoenix Technologies, Inc. its BIOS (Basic Input/Output System)
pursuant to a separate license agreement. Under either arrangement, the Company
may modify such software and occasionally alters the BIOS for special
situations. The termination, suspension or curtailment of these or other
licensing arrangements to which the Company is a party may have a material
adverse impact on its business and operations.
 
WARRANTY AND CUSTOMER SERVICE
 
     The Company usually provides one-year warranties on all its products
covering both parts and labor although extended warranties may be purchased by
customers. At its option, PCS repairs or replaces products that are defective
during the warranty period if the proper usage and preventive maintenance
procedures have been followed by its customers. Repairs that are necessitated by
misuse of such products or are required beyond the warranty period are not
covered by its normal warranty.
 
     In cases of defective products, the customer typically returns them to
PCS's facility. Its service personnel then replace or repair the defective items
and ship them back to the customer. Generally, all servicing is done at the
Company's plant, and it charges its customers a fee for those service items that
are not covered by warranty. Except for its extended warranties, it does not
offer its customers any formal written service contracts.
 
     Some personnel in its customer service area often answer technical
questions from customers and offer solutions to their specific applications
problems. In certain instances, other personnel receive and process orders for
product demonstrations, disseminate pricing information and accept purchase
orders for computers.
 
MARKETING AND SALES
 
     The Company markets and sells its computer products through an internal
sales force of four individuals and several of its officers, approximately 20
manufacturers' representatives in the United States and approximately 20
distributors abroad. Its manufacturers' representatives cover approximately 28
states, including Washington, D.C., and its foreign distributors operate in
nearly 30 countries, including England, France, Japan, Australia and Germany.
 
     PCS's relationship with its manufacturers' representatives is generally
governed by a written contract, terminable on 30 days' prior notice. These
contracts usually provide for exclusive territorial and product representation
and commissions of 8% of the net invoice price on standard products. In some
cases, the commission will decline from 8% to 4% on standard products as sales
rise above certain dollar levels. Commissions on non-standard products and
custom engineering are usually subject to negotiation between the parties in
accordance with the terms of the contract. However, they tend to range from 6%
to 8% in practice. The Company's manufacturers' representative contracts are
subject to certain other terms and conditions.
 
     PCS's manufacturers' representatives and distributors do not purchase for
their own account, but merely sell such computer products on PCS's behalf. Forty
manufacturers' representatives and distributors accounted for an aggregate of
approximately 33% of the Company's 1997 annual sales. The loss of certain of
such representatives may have a material negative effect on PCS's business.
 
     Sales of the Company's products or services to foreign distributors are
also generally made pursuant to written contracts. Under such contracts, the
distributor is granted either an exclusive or non-exclusive territorial and
product representation as well as discounts based on the list price ranging from
20% to 35%, depending on the type or amount of products sold. In some cases,
there are
 
                                       11
 



<PAGE>
 
<PAGE>
minimum order requirements. Due to the custom nature of PCS's products, its
foreign distributors generally do not keep its computers in their inventory
until specific orders are obtained. The term of these agreements generally run
from 1 to 3 years but are terminable on 60 days advance notice. Payment is due
in U.S. dollars within 30 days after delivery. These contracts are subject to
other terms and conditions. The Company has a primary distributor for Asia and
another primary distributor for Europe. No one international distributor
accounts for more than 5% of its total sales in any period referred to above.
 
     The Company promotes its computer products through the dissemination of
product literature, attendance and exhibition at trade shows, conduct of
seminars and the distribution of news releases on special developments to trade
magazines and newsletters to an extensive customer list. PCS does little
advertising in trade periodicals. Management believes that, to date, most of the
Company's sales leads have been generated by trade shows and word-of-mouth
referrals. The Company intends to expand its sales and marketing efforts in all
of its markets as follows: (i) increase its presence at trade shows with larger
booths and more extensive exhibits; (ii) increase the number of trade shows in
which Company personnel attend and products are presented; (iii) hold additional
seminars at military bases and other prime locations; (iv) hire additional sales
personnel and consultants to gather leads and promote sales; (v) expand sales
and marketing activities in the medical markets; and (vi) invest in research and
development in order to increase its product offering.
 
     The Company has entered into a cooperative marketing agreement with ITT
Industries' Aerospace/Communications Division ('ITT A/CD') in connection with
international sales of ITT's SINCGARS secure radio system. In selling the
SINCGARS radio to foreign countries, ITT will demonstrate to its customers a
selection of PCS computers and display products as part of a fully configured
system. Depending on customer preferences, the PCS systems may be sold directly
by PCS or through ITT A/CD, or the customer may opt to use other computers.
PCS's computers are well suited to the task of interoperation with ITT's
SINCGARS radios because PCS's computers are low emitters of EMI
(electro-magnetic interference) which can cause radio interference and can
reduce the operating range of a radio network. While management believes that
the marketing arrangement with ITT may be important in the future, it is not
presently material to the operations of the Company.
 
     In the military market, the sales cycle for the Company's products usually
entails a number of complicated steps and can take from one year to five years.
The sales cycle in the non-military government and commercial markets are
generally not as complex or time consuming, but still may take as long as two
years. Sales to the military and government markets are greatly influenced by
special budgetary and spending factors pertinent to these organizations and is
usually seasonal in nature.
 
CUSTOMERS
 
     The Company sells its products, directly or indirectly, to the U.S. and
foreign military establishments, large aerospace and military contractors
supplying these establishments, government agencies regulating environmental,
geologic and forestry matters, certain state departments of transportation,
forest products companies, and medical device manufacturers.
 
     The principal customers of the Company are DoD contractors who are subject
to federal budgetary constraints. For the fiscal years ended September 30, 1997
and September 30, 1996, Raytheon's Missile Systems Division accounted for 46%
and 49% of the Company's total sales, respectively. For those same periods,
Lockheed Martin, and Harris, accounted for 36% and 21%, and 7% and 0% of the
Company's total sales, respectively. The loss of any of these customers could
have a material adverse impact on PCS's business.
 
     In recent years, there have been a number of consolidations of various
prime contractors serving the defense industry. To date, the Company has not
been adversely affected by any such consolidations and the Company does not
anticipate that consolidations of contractors will negatively impact the
Company, although there can be no assurance of such.
 
                                       12
 



<PAGE>
 
<PAGE>
COMPETITION
 
     The Company competes in the rugged portable computer business with a wide
variety of computer manufacturers and repackagers, many of which are larger,
better known and have more resources in finance, technology, manufacturing and
marketing. PCS competes based on customization capabilities, price, performance,
delivery and quality. In many situations, the Company is the highest priced
bidder by a wide margin.
 
     With respect to its hand-held business, the Company encounters competition
from Litton Data Systems, SAIC, Tadiran and Miltope in military applications;
Husky Computer Company in both military and non-military markets; and CMT, Micro
Palm and DAP in non-military applications. As far as its laptops are concerned,
PCS faces competition from SAIC, Miltope, Cyberchron and North American
Industries (CODAR) in the military and non-military areas. Certain large
manufacturers of commercial notebook computers such as Panasonic, Amrel and IBM
have introduced commercial notebooks that have been sealed and ruggedized to
some extent. These companies are presently offering such products at prices
ranging from approximately one-third to one-half of the Company's more rugged
versions. In the medical systems business, the Company encounters competition
from customers' in-house engineering and a variety of medical systems
integrators.
 
     Management believes that the Company's ability to increase market
penetration in the commercial sector, other than the medical market, will be
limited substantially by the entry of such manufacturers into the ruggedized
computer market.
 
     Certain military procurement policies requiring purchases of computers for
the military under Indefinite Delivery, Indefinite Quantity ('IDIQ') contracts
could result in seriously restricting the Company's efforts to sell its
computers to the U.S. military. These IDIQ contracts encourage big purchases of
such computers amounting to many hundreds of millions of dollars. Such
procurement policies clearly favor large companies with resources of that
magnitude. Unless PCS can form strategic alliances with larger military
contractors having large resources or qualify for certain exceptions to IDIQ
arrangements, it may suffer adverse material consequences in its continuing
quest for military business. For the last five years, the Company has made
military sales of its computers because they fall into product categories not
currently covered by IDIQ requirements.
 
     In the military and government markets, the Company will often be engaged,
directly or indirectly, in the process of seeking competitive bid or negotiated
contracts with government departments and agencies. These government contracts
are subject to specific rules and regulations with which PCS may have difficulty
complying. However, PCS is occasionally one of only a few companies whose
products meet the required specifications designated by such customers.
 
     In most cases, PCS tends to be the high priced bidder for military bids.
The reasons for this situation are numerous. The Company designs its computers
on an overall basis to assure their ruggedness and use in the worst
circumstances. Accordingly, it generally employs more expensive components than
its competitors. These generally more expensive components consist of industrial
or higher-level commercial type instead of ordinary commercially available
parts. The Company's computers are enclosed in sealed containers. Moreover, PCS
makes extensive modifications and refinements of its computers for its customers
pursuant to their specifications and special needs. Consequently, PCS's products
generally function at a higher level of performance and reliability than its
competitors.
 
     For those applications in which harsh environmental and operational
conditions prevail, customers are sometimes willing to pay higher prices,
especially where few, if any, other companies offer similar devices. In those
less demanding circumstances, the Company's products sell at a severe
competitive disadvantage and often are not purchased because the applications do
not justify its higher prices. Since PCS sells its computer products into
segments of the commercial market and has a history of resale pricing, under DoD
regulations such commercial pricing information may be utilized to support the
prices that it charges in the military marketplace.
 
                                       13
 



<PAGE>
 
<PAGE>
BACKLOG
 
     As of September 30, 1997, the Company's backlog was $15,242,745, as
compared with backlog of $14,617,253 as of September 30, 1996. Four customers
accounted for approximately 37%, 26%, 19% and 10% of such backlog as of
September 30, 1997. As of December 15, 1997, the Company's backlog was
approximately $14,070,000, and the Company presently expects to manufacture and
deliver $8,551,525 of the products in backlog within the next 12 months. The
remaining $5,518,475 of products in backlog will be completed over the next 4
years.
 
     Substantially all the Company's backlog figures are based on purchase
orders executed by the customer. All orders are subject to cancellation.
However, in that event, PCS is generally entitled to reimbursement of its cost
and negotiated profits, provided that such contract would have been profitable.
 
RESEARCH AND DEVELOPMENT
 
     The markets served by the Company are characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. PCS's business requires substantial ongoing
research and development efforts and expenditures. Its future success will
depend in large measure on its ability to enhance its current products, and
develop and introduce new products that keep pace with technological
developments in response to evolving customer requirements. The Company's
research and development activities are primarily accomplished on an in-house
basis, sometimes supplemented by third-party subcontractors and consultants.
 
     The Company continued to expend a portion of the net proceeds of the June
1996 IPO on the expansion and enhancement of its Rugged Note Book ('RNB')
product line. The Company has designed a new rugged notebook called the RNB 520.
This product is intended to fit between its laptops and its hand-held computers
in size, weight and price. Weighing approximately 15 lbs., it will have a full-
size display and sealed full travel keyboard similar to a laptop, a Pentium
processor and PC card expansion capabilities. The RNB 520 is fully
environmentally sealed and can be used in outdoor environments. The product
utilizes commercial electronics to reduce costs.
 
     During FY1997 the Company made additional R&D investments in developing the
first in a new line of rugged non-battery powered workstation products called
the Rugged Rack Mount ('RRM'). The RRM is a 19 rack-mountable product which has
an integral 12.1 color flat panel display, eight full ISA expansion slots and
either 486 or Pentium motherboards. The product is unique in that it is fully
sealed and meets all the environmental specifications (MIL-STD 810) and EMI/RFI
specifications (MIL-STD 461) of the entire standard RLT product line.
 
     Management believes that there is a market for these kinds of ruggedized
computers in the military area. As part of a continuing effort to upgrade its
products, the Company is also completing development of a high-speed Pentium
processor board for its RLT product line. See 'MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS'.
 
     As part of the development of the medical support equipment market,
significant investment was made in the development of the Medtronic medical
reprogramming device. The reprogrammer is designed to allow many of the case
parts to be used in other customers' programs. Much of the medical development
for the year ended September 30, 1997 is being reimbursed by Medtronic.
 
     Research and development expenditures during the fiscal years ended
September 30, 1997 and 1996 were $611,295 and $382,750, respectively, and
represented 4.6% and 3.7% of total sales, respectively. A substantial portion of
such expenditures for these fiscal years were applied to the development of the
new RNB and RRM product lines, the RLT 410/515, an Intel 80486/Pentium based
ruggedized laptop, the RLT 410/510 Model D, a larger laptop capable of accepting
both full-size ISA and PC/104 miniaturized expansion boards, and the early
development of a Pentium based main board for the RLT product line.
 
                                       14
 



<PAGE>
 
<PAGE>
INTELLECTUAL PROPERTY
 
     Proprietary information and know-how are important to the Company's
commercial success. PCS holds no patents or copyrights but has trademark
protection for the Paravant name and logo. There can be no assurance that others
will not either develop independently the same or similar information or obtain
and use proprietary information of the Company. In addition, none of its
employees has signed confidentiality agreements regarding its proprietary
information nor have any employees signed any non-competition agreements other
than Messrs. McNeight and Craven.
 
     Management believes that its products do not infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against it in the future or be successful in
asserting such claims.
 
GOVERNMENT REGULATIONS AND CONTRACTS
 
     Due to the nature of the products designed, manufactured and sold by PCS
for military applications, it is subject to certain DoD regulations. In
addition, commercial enterprises engaged primarily in supplying equipment and
services, directly or indirectly, to the United States government are subject to
special risks. These risks include dependence on government appropriations,
termination without cause, contract renegotiations and competition for the
available DoD business. PCS has no material direct DoD contracts, however, that
are subject to renegotiation in the foreseeable future and is not aware of any
proceeding to terminate material DoD contracts in which it may be indirectly
involved. In addition, many of the Company's contracts provide for the right to
audit its cost records and are subject to regulations providing for price
reductions if inaccurate cost information was submitted by PCS.
 
     Government contracts governing the Company's products are often subject to
termination, negotiation or modification in the event of changes in the
government's requirements or budgetary constraints. Products sold by PCS for
government applications are primarily sold to companies acting as contractors or
subcontractors and not directly to government entities. Agreements with such
contractors or subcontractors generally are not conditioned upon completion of
the contract by the prime contractor. To the extent that such contracts are so
conditioned, a failure of completion may have a material adverse effect on the
Company's business. Currently, it does not have any contracts so conditioned.
See ' -- COMPETITION'.
 
     The contracts for sale of the Company's computers are generally
fixed-priced contracts, as to which the price is set in advance and generally
may not be varied. Such contracts require the Company to properly estimate its
costs and other factors prior to commitment in order to achieve profitability
and compliance. The Company's failure to do so may result in unreimbursable cost
overruns, late deliveries or other events of non-compliance.
 
     Under certain circumstances, PCS is also subject to certain U.S. State
Department and U.S. Department of Commerce requirements involving prior
clearance of foreign sales. Such export control laws and regulations either ban
the sale of certain equipment to specified countries or require U.S.
manufacturers and others to obtain necessary federal government approvals and
licenses prior to export. As a part of this process, the Company generally
requires its foreign distributors to provide documents that indicate that the
equipment is not being transferred to, or used by, unauthorized parties abroad.
 
     The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended ('FCPA'), which prohibits the
promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holder, political parties and others
with regard to the obtaining or preserving commercial contracts or orders. These
restrictions may hamper the Company in its marketing efforts abroad.
 
     PCS's manufacturing operations are subject to various federal, state and
local laws, including those restricting or regulating the discharge of materials
into, or otherwise relating to the protection of, the environment. The Company
is not involved in any pending or threatened proceedings that would require
curtailment of, or otherwise restrict its operations because of such
regulations. Compliance with
 
                                       15
 



<PAGE>
 
<PAGE>
applicable environmental laws has not had a material effect upon its capital
expenditures, financial condition or results of operations.
 
     Management believes that although compliance with applicable federal laws
and regulations involves certain additional procedures by the Company that would
not otherwise be required, such compliance has not generally inhibited or
limited the Company's ability to enter into material contracts.
 
EMPLOYEES
 
     As of December 15, 1997, the Company had 77 full time employees including
its officers, of whom 32 were engaged in manufacturing and repair services, 7 in
administration and financial control, 25 in engineering and research and
development, and 13 in marketing and sales.
 
     None of its employees is covered by a collective bargaining agreement or is
represented by a labor union. PCS considers its relationship with its employees
to be satisfactory.
 
     The design and manufacture of the Company's equipment requires substantial
technical capabilities in many disparate disciplines from mechanics and computer
science to electronics and mathematics. While management believes that the
capability and experience of its technical employees compares favorably with
other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on terms deemed favorable to it, if at all.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
     On September 1, 1996, the Company entered into a lease relating to
approximately 17,300 square feet of space located at 1615A W. Nasa Blvd., Suite
E, Melbourne, Florida 32901. This space is utilized by the Company as its
principal corporate headquarters and manufacturing plant. The lease for this
space expires December 31, 2001, and provides for monthly rent payments of
$9,855 per month. This amount includes the Company's proportionate cost of
utilities, repairs, cleaning, taxes and insurance.
 
     Management believes that its new facility will meet its operational needs
for the foreseeable future. In the event that additional facilities are needed
to accommodate the continued growth in revenues and market share, it is readily
available in the immediate vicinity of the current location.
 
ITEM 3. LEGAL PROCEEDINGS
 
     In March 1996, the Company's former counsel, Cascone & Cole, rendered an
invoice to the Company in the amount of approximately $365,000 for legal fees
and expenses to which such counsel claimed to be entitled in connection with its
representation of the Company for both general corporate services and services
relating to the IPO. As the Company had made prior payments to such counsel of
$130,000, the net amount claimed to be due was approximately $235,000. The
Company has contested the invoice and accrued an estimate for the payment, if
any, of these fees. On March 27, 1996, Cascone & Cole filed an action in the
Supreme Court of the State of New York, County of New York, entitled Cascone &
Cole v. Paravant Computer Systems, Inc., Victor M. Wang, Duke & Company, Inc.,
Dean Petkanas and Eagle Group Incorporated (Index No. 96601634) against the
Company, the Underwriter and certain other defendants, alleging, among other
things, breach of contract, failure to pay attorneys fees, fraud, copyright
infringement and defamation by the Company in connection with the aforementioned
services, as well as claiming a finder's fee with respect to the Underwriter's
relationship with the Company. Plaintiff has filed an amended complaint
increasing its claim for legal services from approximately $365,000 to
approximately $415,000, claiming there is a balance due of $280,882 for legal
services. Plaintiff is also seeking punitive damages of $1 million and costs.
The Company has filed an answer denying the allegations made by plaintiff and
has asserted defenses and counterclaims against the plaintiff seeking, among
other things, recovery of amounts paid to plaintiff as well as punitive damages
and court costs.
 
     On September 18, 1996, a former controller of PCS filed an action in the
Circuit Court of the State of Florida, Brevard County, entitled, Christopher R.
Exley v. Paravant Computer Systems, Inc., Richard P. McNeight, William R.
Craven, UES of Florida, Inc. and Krishan K. Joshi (Case No. 96-15091 CA),
 
                                       16
 



<PAGE>
 
<PAGE>
against the Company and certain of its officers, directors and principal
stockholders, alleging, among other things, retaliatory personnel actions by the
defendants. Plaintiff is seeking damages in the amount of approximately $1
million, plus fees and costs. Plaintiff alleges that he was improperly
terminated in December 1994 as a result of his refusal to account for certain
transactions in a specified manner. The Company has filed a motion to dismiss
the plaintiff's amended complaint.
 
     The Company will vigorously defend itself in these matters. Management of
the Company believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company.
 
     The Company is not a party to or involved in any other pending legal
proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     The Company did not submit any matters to the vote of securityholders
during the fourth quarter of the fiscal year ended September 30, 1997.
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     A. Market Information.
 
     The shares of Common Stock of the Company commenced trading on the Nasdaq
Stock Market National Market under the symbol 'PVAT' on June 3, 1996. The range
of high and low reported closing sales prices for the Common Stock as reported
by Nasdaq since the commencement of trading were as follows:
 
<TABLE>
<CAPTION>
                                                                                     HIGH            LOW
                                                                                 ------------   --------------
 
<S>                                                                              <C>            <C>
June 3, 1996 to June 30, 1996(1)..............................................   $5 3/8         $1 7/8
July 1, 1996 to September 30, 1996(1).........................................   $6 3/8         $4 5/8
October 1, 1996 to December 31, 1996..........................................   $8             $4 15/16
January 1, 1997 to March 31, 1997.............................................   $7 3/8         $5
April 1, 1997 to June 30, 1997................................................   $7             $3
July 1, 1997 to September 30, 1997............................................   $6 5/8         $3
October 1, 1997 to December 15, 1997..........................................   $5 3/32        $3 7/16
</TABLE>
 
------------
 
(1) On July 25, 1996, the Company effected the Stock Split. Following the Stock
    Split, each holder of record of Common Stock on July 22, 1996 received two
    additional shares of Common Stock for each share held on such date. In
    connection with the Stock Split, each outstanding Warrant to purchase one
    share of Common Stock at an exercise price of $6.00 per share was converted
    into three Warrants, each to purchase one share of Common Stock at an
    exercise price of $2.00 per share. All share prices listed above are after
    giving effect to the Stock Split.
 
                            ------------------------
 
     The prices set forth above reflect inter dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
 
     B. Holders.
 
     On December 15, 1997, as reported by the Company's transfer agent, shares
of Common Stock were held by 75 persons, based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
 
     C. Dividends.
 
     The Company has not paid any dividends on its shares of Common Stock and
intends to follow a policy of retaining any earnings to finance the development
and growth of its business. Accordingly, it
 
                                       17
 



<PAGE>
 
<PAGE>
does not anticipate the payment of cash dividends in the foreseeable future.
However, the payment of dividends, if any, rests within the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, its capital requirements and its overall financial condition.
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATION
 
     The following discussion and analysis of the Company's results of
operations, liquidity and financial condition should be read in conjunction with
the Financial Statements of the Company and related notes thereto.
 
RESULTS OF OPERATIONS
 
FISCAL YEAR ENDED SEPTEMBER 30, 1997 VS. SEPTEMBER 30, 1996
 
     Revenues for fiscal 1997 were $13,209,541, an increase of $2,714,478 or 26%
over 1996 revenues of $10,495,063. This increase is primarily due to Paravant's
strong backlog ($15,242,745 at September 30, 1997) and continued full scale
production deliveries to Raytheon in support of the U.S. Marine Corps
HAWK/AVENGER Air Defense missile system upgrade and additional requirements of
Lockheed Martin's Enhanced Diagnostic Aid ('EDNA') systems for use by the U.S.
Air Force on F-16 Fighter Aircraft and the F-117A Stealth Fighter.
 
     Gross profit was $6,435,465 in 1997, or 49% of sales, compared to
$4,677,053 or 45% in 1996, a total increase of $1,758,412 or 38%. This increase
in gross profitability results primarily from the increased revenues discussed
above.
 
     Selling and administrative expenses of $4,629,122 in 1997, increased by
$1,381,737 or 43% from 1996 expenses of $3,247,385. As a percentage of sales,
selling and administrative expenses were 35% and 31% in 1997and 1996,
respectively. The increased selling and administrative costs are due primarily
to increased employee benefit expenditures, increased professional fees and
increased expenditures for Research and Development.
 
     Income from operations grew to $1,806,343 for 1997 from $1,429,668 in 1996,
an improvement of $376,675 or 26%. As a percentage of sales, income from
operations remained unchanged at 14% in 1997 and 1996. The improvement in income
from operations overall, resulted primarily from increased revenues and gross
profits, offset in part by increased selling and administrative expenses as
discussed above.
 
     Interest expense for 1997 was reduced by $261,694 or 72% to $101,262
compared to $362,956 in 1996. As a percentage of sales, interest expense
decreased to 1% in 1997 from 3% in 1996. This decrease is due to a significant
decline in outstanding credit balances made possible by the proceeds of the
Company's initial public offering of securities in June 1996.
 
     As a result, the Company's net income improved by 63% to $1,141,791 in 1997
when compared to $702,153 in 1996, an increase of $439,638 in total. Net income
as a percentage of sales were 9% in 1997 and 7% in 1996. The improvement in net
income overall, resulted primarily from increased revenue, gross profits and
reduced interest expense, offset in part by increased selling and administrative
expenses as discussed above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     In June 1996, the Company completed its IPO, resulting in aggregate net
proceeds of $4,594,332 to the Company after deducting certain commissions,
expenses and offering costs. The Company used a portion of the net proceeds of
the IPO to repay certain loans referred to below in the aggregate principal
amount of $1,102,294, and paid approximately $88,000 of the net proceeds of the
IPO to reimburse UES, Inc., an affiliate of the Company which is controlled by
Krishan K. Joshi, the Company's Chairman ('UES'), for certain health insurance
and other expenses paid on the Company's behalf. Substantially all of the
remaining balance of the net proceeds of the IPO were utilized to reduce
indebtedness then outstanding under the Company's revolving credit arrangement
with National City
 
                                       18
 



<PAGE>
 
<PAGE>
Bank in Dayton, Ohio described below, resulting in increased availability under
the credit arrangement for working capital needs and general corporate purposes.
 
     The Company has a secured revolving credit arrangement with National City
Bank in Dayton, Ohio (the 'Bank') for a credit line of up to $4,000,000 that is
due on demand and bears interest at the prime rate, or 30 or 60 day LIBOR rates
plus 2.70%. All borrowings are collateralized by accounts receivable, inventory
and equipment. As of September 30, 1997, there were no borrowings outstanding
under this arrangement. The Company intends to maintain this arrangement with
the Bank for the foreseeable future, although there can be no assurance that the
Bank will not in the future demand repayment of any amounts then outstanding
under its loan arrangement. The Company also has a secured term loan provided by
the Bank bearing interest at a rate adjusted monthly to prime plus 1.5% at
September 30, 1997. Monthly principal payments of $9,167 are due through October
1998. All borrowings thereunder are secured by a lien on accounts receivable,
inventory and equipment. As of September 30, 1997, there was $119,151
outstanding under this arrangement with the Bank. The Company also has capital
lease obligations of $196,191 at September 30, 1997. These capital lease
obligations bear interest rates of 1.25% to 1.50% over the prime rate and are
expected to be satisfied within 3 years.
 
     On April 22, 1997, the Company retired a note payable to the Bank in an
aggregate principal amount of $500,000, bearing interest at the prime rate,
which note was due and payable in March 1998.
 
     In August 1995, the Company borrowed $400,000 pursuant to bridge notes
('Notes') from a group of private investors at an annual interest rate of 6%. In
addition, the Company sold to the same investors warrants to purchase 480,000
shares of Common Stock, exercisable until June 3, 2001 at an exercise price of
$2.00 per share. The Notes were paid in full on August 8, 1997.
 
     In connection with certain sales of shares of Common stock in March 1996 by
UES Florida, Inc. (a subsidiary of UES), Richard P. McNeight, the President and
Chief Operating Officer of the Company, William R. Craven, the Vice President of
Marketing of the Company, and another shareholder, loaned to the Company in
April 1996, for working capital purposes, the sums of $646,294; $78,000; $26,000
and $52,000, respectively, or an aggregate of $802,294 of the proceeds realized
from such sales, at an interest rate of 6% per annum. Such loans, plus accrued
interest thereon in an aggregate amount of $8,681, were repaid in June 1996 in
accordance with their terms from a portion of the net proceeds of the IPO.
 
     The Company has, and continues to have, a dependence upon a few major
customers for a significant portion of its revenues. This dependence for
revenues has not been responsible for any unusual fluctuations in operating
results in the past, and management does not believe this concentration will
generate fluctuations in operating results in the future. However, the potential
impact of losing a major customer without securing offsetting and equivalent
orders could result in a significant negative impact to the operating results of
the Company. The gross margin contributions of the Company's major customers are
not generally different than those from its other customers as a whole.
 
     The Company's operating cash flow was $3,448,740 for 1997. The improvement
in the Company's operating cash flow results primarily from improved net income
as more fully described in Management's Discussion and Analysis of Operations
for the fiscal year ended September 30, 1997 and improved working capital as
more fully presented in the Condensed Statements of Cash Flows for the same
period. Negative cash flows for the years ended September 30, 1996 and 1995,
$(1,426,090) and $(298,577), respectively, were primarily associated with
general increases in inventory levels and temporary increases associated with
accounts receivable, all in support of the Company's rapid increase in
operations reflected by the growth in annual revenues from $4,621,527 in fiscal
1993 to $10,495,063 in fiscal 1996, an increase of almost 127%. In addition, the
Company invested $443,066 in fiscal 1997, $127,352 in fiscal 1996 and $60,350 in
fiscal 1995 to acquire manufacturing equipment and complete leasehold
improvements, also in support of these expanded operating levels.
 
     Due to the Company's orders related to U.S. Department of Defense
procurements, the operations of the Company have been cyclical and generally
result in a significant increase in deliveries and revenues in the fourth
quarter of its fiscal year ending on September 30. Due to the Company's strong
backlog and increased revenues, this cycle is less significant in the current
fiscal year, resulting in a significant improvement in cash provided from
operations, as discussed earlier herein and less significant
 
                                       19
 



<PAGE>
 
<PAGE>
changes in inventory levels than the prior period. This change is evidenced by a
decrease in fourth quarter revenues to 38% from 65% of total revenues for the
years ended September 30, 1997 and 1996, respectively.
 
     As of September 30, 1997, management believes inventory balances are not in
excess of requirements for deliveries and normal minimum stocking levels.
 
     Generally, accounts receivable at the end of each quarter are collected
within the following quarter. However, the Company's major customer, Raytheon,
has traditionally averaged approximately 80 to 100 days in satisfaction of
outstanding accounts receivable balances. This situation is improving through
negotiation with Raytheon, and Management believes that average outstanding
balances will be reduced to more traditional levels approximating 45 days, in
the future although there can be no assurance of such. The Company's total
outstanding accounts receivable balance of $4,082,915 at September 30, 1997 has
been subsequently reduced by approximately $3,180,358 in cash collections. In
1997, the Company provided a reserve for certain older balances of $141,497.
This reserve is believed to be more than sufficient to address any uncollectible
balances outstanding as of September 30, 1997.
 
     As of September 30, 1997 and 1996, the Company's backlog was $15,242,745
and $14,617,253, respectively, consisting of firm fixed price purchase orders.
All of these purchase orders are expected to generate profits within the
Company's historical levels. The Company believes that the completion of the
orders comprising its backlog, and any new orders which may be accepted by the
Company in the future, should not result in additional liquidity pressures that
cannot be addressed in a manner consistent with the Company's past practices.
The Company presently expects to manufacture and deliver $9,724,270 of the
products in backlog within the next 12 months. The remaining $5,518,475 of
products in backlog will be completed over the next 4 years.
 
     The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the proceeds of the IPO and ongoing
stock offerings, together with the Company's existing working capital and
anticipated cash flows from the Company's operations, will be sufficient to
satisfy the Company's cash requirements for at least twelve months. As the
Company continues to grow, additional bank borrowings, other debt placements and
equity offerings may be considered, in part or in combination, as the situation
warrants. In addition, in the event the Company's plans change or its
assumptions change or prove to be inaccurate, or if projected cash flow
otherwise proves insufficient to fund operations, the Company might need to seek
other sources of financing to conduct its operations. There can be no assurance
that any such other sources of financing would be available when needed, on
commercially reasonable terms, or at all.
 
     The Company has conducted a comprehensive review of its computer systems to
identify any systems that could be affected by the 'Year 2000' issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using '00' as the year 1900 rather
than the year 2000. This could result in a major systems failure or
miscalculations. The Company has determined the Year 2000 problem will not pose
any operational problems for the Company's computer systems or result in any
material expense for the Company, as all programs currently being used have
already been modified or converted.
 
     In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings Per Share,' SFAS No. 128 supersedes APB Opinion No. 15, 'Earnings
Per Share,' and specifies the computation, presentation, and disclosure
requirements for earnings per share ('EPS') for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to simplify the
computation of EPS. It requires dual presentation of basic and diluted EPS on
the face of the statements of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
 
     SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform to SFAS No. 128.
 
                                       20
 



<PAGE>
 
<PAGE>
CAUTIONARY STATEMENT
 
     This Annual Report of Form 10-KSB contains certain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including but not
limited to the budgetary and appropriations policies of the Company's
governmental customers, the competitive environment for the Company's products
and services, the timing of new orders and the degree of market penetration of
the Company's new products.
 
ITEM 7. FINANCIAL STATEMENTS
 
     The financial statements of the Company are set forth in a separate section
of this Annual Report on Form 10-KSB. See 'Item 13. Exhibits and Reports on Form
8-K' and the Financial Statements commencing on page F-1 of this Annual Report
on Form 10-KSB.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       21





<PAGE>
 
<PAGE>
                                    PART III
 
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
       WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     See the section captioned 'Election of Directors' included in the Company's
Proxy Statement in connection with its Annual Meeting scheduled to be held on
March 12, 1998, which section is incorporated herein by reference.
 
ITEM 10. EXECUTIVE COMPENSATION
 
     See the section captioned 'Executive Compensation' included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on March 12, 1998, which section is incorporated herein by reference.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     (a) Security Ownership of Certain Beneficial Owners
 
     See the section captioned 'Principal Shareholders of the Company' included
in the Company's Proxy Statement in connection with its Annual Meeting scheduled
to be held on March 12, 1998, which section is incorporated herein by reference.
 
     (b) Security Ownership of Directors and Officers
 
     See the section captioned 'Principal Shareholders of the Company' included
in the Company's Proxy Statement in connection with its Annual Meeting scheduled
to be held on March 12, 1998, which section is incorporated herein by reference.
 
     (c) Changes in Control
 
     The Company knows of no contractual arrangements which may, at a subsequent
date, result in a change of control of the Company.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     See the section captioned 'Certain Transactions' included in the Company's
Proxy Statement in connection with its Annual Meeting scheduled to be held on
March 12, 1998, which section is incorporated herein by reference.
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits
 
          (1) See the financial statements of the Company and the report thereon
     included in Item 7 of Part II of this Annual Report on Form 10-KSB.
 
          (2) The following exhibits are filed as part of this Annual Report on
     Form 10-KSB.
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION OF DOCUMENT
-------  ---------------------------------------------------------------------------------------------------------
<C>      <S>
  3.1    -- Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to
            the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996).
  3.2    -- Amended and Restated By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.2
            to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996).
</TABLE>
 
                                       22
 



<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION OF DOCUMENT
-------  ---------------------------------------------------------------------------------------------------------
<C>      <S>
  4.1    -- Specimen Common Stock Certificate of Registrant (incorporated by reference to Exhibit 4.1 to Amendment
            No. 4 to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-91426), as filed
            with the Securities and Exchange Commission on May 16, 1996 ('Amendment No. 4')).
  4.2    -- Specimen Warrant of Registrant (incorporated by reference to Exhibit 4.2 to Amendment No. 4).
  4.3    -- Warrant Agreement between Registrant, Duke & Co., Inc. and Warrant Agent (incorporated by reference to
            Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
            1996).
  4.4    -- Form of Lock-Up Agreement (incorporated by reference to Exhibit 4.4 to Amendment No. 3 to the
            Registrant's Registration Statement on Form SB-2 (Registration No. 33-91426), as filed with the
            Securities and Exchange Commission on March 20, 1996 ('Amendment No. 3')).
  4.5    -- Underwriter's Warrant issued to Duke & Co., Inc. (incorporated by reference to Exhibit 4.2 to the
            Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996).
 10.1    -- Employment Agreement between the Registrant and Richard P. McNeight (incorporated by reference to
            Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-91426), as
            filed with the Securities and Exchange Commission on April 21, 1995) ('Registration Statement on Form
            SB-2')).
 10.2    -- Employment Agreement between the Registrant and William R. Craven (incorporated by reference to
            Exhibit 10.2 to the Registration Statement on Form SB-2).
 10.3    -- Incentive Stock Option Plan and form of Stock Option Agreement (incorporated by reference to Exhibit
            10.3 to the Registration Statement on Form SB-2).
 10.3A   -- Amendment No. 1 to the Incentive Stock Option Plan (incorporated by reference to Exhibit 10.3A to
            Amendment No. 3).
 10.4    -- Original Office Lease and Amendment between the Registrant and Atrium Professional Centre
            (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form SB-2).
 10.5    -- Form of Registrant's Manufacturer's Representative Agreement (incorporated by reference to Exhibit
            10.5 to the Registration Statement on Form SB-2).
 10.6    -- Form of Registrant's Distributor's Agreement (incorporated by reference to Exhibit 10.6 to the
            Registration Statement on Form SB-2).
 10.7    -- Amended Licensing Agreement between the Registrant and MicroSoft Corporation (incorporated by
            reference to Exhibit 10.7 to the Registration Statement on Form SB-2).
 10.8    -- Licensing Agreement between the Registrant and Phoenix Technologies, Ltd. (incorporated by reference
            to Exhibit 10.8 to the Registration Statement on Form SB-2).
 10.9    -- Joint Development Agreement between the Registrant and MES, Inc. (incorporated by reference to Exhibit
            10.9 to the Registration Statement on Form SB-2).
 10.10   -- Joint Marketing Agreement between the Registrant and Texas Instrument Corporation (incorporated by
            reference to Exhibit 10.10 to the Registration Statement on Form SB-2).
 10.11   -- Joint Marketing Agreement between the Registrant and Raytheon Company (incorporated by reference to
            Exhibit 10.11 to the Registration Statement on Form SB-2).
 10.12   -- Licensing Agreement between Registrant and Grid Systems Corporation (incorporated by reference to
            Exhibit 10.12 to the Registration Statement on Form SB-2).
 10.13   -- Forms of (revised) Subscription Agreement and Subordinated Convertible Promissory Note (incorporated
            by reference to Exhibit 10.13 to Amendment No. 2 to the Registrant's Registration Statement on Form
            SB-2 (Registration No. 33-91426), as filed with the Securities and Exchange Commission on October 4,
            1995)).
 10.14   -- Nonemployee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.14 to Amendment No.
            3).
 10.15   -- Employment Agreement between the Registrant and Kevin J. Bartczak (incorporated by reference to
            Exhibit 10.15 to Amendment No. 3).
 10.16   -- Letter agreements between the Registrant and National City Bank (incorporated by reference to Exhibit
            10.16 to Amendment No. 3).
 10.17   -- Commercial demand note by Registrant in favor of National City Bank (incorporated by reference to
            Exhibit 10.17 to Amendment No. 3).
 10.18   -- Security agreement (accounts receivable) by Registrant in favor of National City Bank (incorporated by
            reference to Exhibit 10.18 to Amendment No. 3).
</TABLE>
 
                                       23
 



<PAGE>
 
<PAGE>
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            DESCRIPTION OF DOCUMENT
-------  ---------------------------------------------------------------------------------------------------------
<C>      <S>
 10.19   -- Security agreement (equipment) by Registrant in favor of National City Bank (incorporated by reference
            to Exhibit 10.19 to Amendment No. 3).
 10.20   -- Form of promissory note of Registrant issued in connection with stockholder loans made in April 1996
            (incorporated by reference to Exhibit 10.20 to Amendment No. 4).
 10.20A  -- Form of Common Stock Purchase Agreement for purchase of shares by selling security holders
            (incorporated by reference to Exhibit 10.20A to Amendment No. 5 to Registrant's Registration Statement
            on Form SB-2 (Registration No. 33-91426), as filed with the Securities and Exchange Commission on May
            29, 1996 ('Amendment No. 5')).
 10.21   -- Option Agreements dated as of December 16, 1991 between UES Florida, Inc. and each of Krishan K.
            Joshi, Richard P. McNeight and William R. Craven (incorporated by reference to Exhibit 10.21 to
            Amendment No. 4).
 10.22   -- Option Agreement dated as of November 23, 1994 with Richard P. McNeight (incorporated by reference to
            Exhibit 10.22 to Amendment No. 4).
 10.23   -- Warrant Agent Agreement and Warrant relating to August 1995 bridge financing (incorporated by
            reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
            ended June 30, 1996).
 10.24   -- Promissory Note dated February 19, 1993 by Richard P. McNeight (incorporated by reference to Exhibit
            10.24 to Amendment No. 5).
 10.25   -- Underwriting Agreement between Registrant and Duke & Co., Inc. (incorporated by reference to Exhibit 1
            to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996).
 10.26   -- Financial Advisory and Investment Banking Agreement (incorporated by reference to Exhibit 10.2 to the
            Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996).
 10.28   -- Lease Agreement dated September 1, 1996 between Registrant and California Microwave, Inc. and related
            agreement dated November 15, 1996 with Symetrics Industries Inc. (incorporated by reference to Exhibit
            10.28 to the Registrant's Annual Report on Form 10-KSB for the year ended September 30, 1996).
 10.29   -- Commercial Note of Registrant dated November 20, 1996 in favor of National City Bank of Dayton.
            (incorporated by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the
            year ended September 30, 1996).
 10.30   -- Security Agreement (All Personal Property and Fixtures) dated November 20, 1996 by Registrant in favor
            of National City Bank of Dayton. (incorporated by reference to Exhibit 10.30 to the Registrant's Annual
            Report on Form 10-KSB for the year ended September 30, 1996).
 10.31   -- 1997 Special Option Agreements dated November 20, 1997 between the Registrant and James E. Clifford,
            Michael F. Maguire, and John P. Singleton.
 11      -- Computation of per share earnings.
 27      -- Financial Data Schedule.
</TABLE>
 
     (b) Reports on Form 8-K
 
          The Company did not file any Reports on Form 8-K during the fourth
     quarter of the fiscal year ended September 30, 1997.
 
                                       24






<PAGE>
 
<PAGE>
                                   SIGNATURES
 
     In accordance with 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.
 
<TABLE>
<CAPTION>
                   NAME                                       TITLE                               DATE
------------------------------------------  ------------------------------------------     ------------------
 
<C>                                         <S>                                            <C>
           /s/ KRISHAN K. JOSHI             Chairman, Chief Executive Officer and          December 23, 1997
 .........................................    Director (Principal Executive Officer)
             KRISHAN K. JOSHI
 
         /s/ RICHARD P. MCNEIGHT            President and Director                         December 23, 1997
 .........................................
           RICHARD P. MCNEIGHT
 
          /s/ WILLIAM R. CRAVEN             Vice President, Director and Secretary         December 23, 1997
 .........................................
            WILLIAM R. CRAVEN
 
            /s/ KEVIN BARTCZAK              Vice President and Chief Financial             December 23, 1997
 .........................................    Officer, Treasurer (Principal Financial
              KEVIN BARTCZAK                  Officer and Principal Accounting
                                              Officer)
 
          /s/ JAMES E. CLIFFORD             Director                                       December 23, 1997
 .........................................
            JAMES E. CLIFFORD
 
          /s/ MICHAEL F. MAGUIRE            Director                                       December 23, 1997
 .........................................
            MICHAEL F. MAGUIRE
 
          /s/ JOHN P. SINGLETON             Director                                       December 23, 1997
 .........................................
            JOHN P. SINGLETON
</TABLE>
 
                                       25






<PAGE>
 
<PAGE>
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                              FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1997 AND 1996
                   WITH INDEPENDENT AUDITORS' REPORT THEREON


                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                         ------------
 
<S>                                                                                                      <C>
Independent Auditors' Report..........................................................................            F-2
Financial Statements:
     Balance Sheets...................................................................................            F-3
     Statements of Income.............................................................................            F-4
     Statements of Changes in Stockholders' Equity....................................................            F-5
     Statements of Cash Flows.........................................................................            F-6
Notes to Financial Statements.........................................................................     F-7 - F-16
</TABLE>
 
                                      F-1





<PAGE>
 
<PAGE>
                          INDEPENDENT AUDITORS' REPORT
 
Board of Directors:
PARAVANT COMPUTER SYSTEMS, INC.:
 
     We have audited the accompanying balance sheets of Paravant Computer
Systems, Inc. as of September 30, 1997 and 1996, and the related statements of
income, changes in stockholders' 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 audits.
 
     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 audits provide 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 Paravant Computer Systems,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
 
                                              KPMG Peat Marwick LLP

December 3, 1997
 
                                      F-2





<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                                 BALANCE SHEETS
                          SEPTEMBER 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                      ASSETS                                             1997           1996
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Current assets:
     Cash and cash equivalents.....................................................   $ 1,612,627    $    65,069
     Accounts receivable, net (notes 6, 8 and 18)..................................     4,082,915      7,161,192
     Employee receivables and advances.............................................        28,121         73,502
     Inventory, net (notes 2, 6 and 8).............................................     3,461,773      2,503,892
     Prepaid expenses..............................................................        97,585        141,191
     Deferred income taxes (note 14)...............................................       426,263        139,727
                                                                                      -----------    -----------
          Total current assets.....................................................     9,709,284     10,084,573
                                                                                      -----------    -----------
Property, plant and equipment, net (notes 3, 6, 8 and 9)...........................       914,439        517,515
Intangible assets, net (note 4)....................................................        64,875         89,125
Demonstration pool and custom molds, net (note 5)..................................       262,522        281,309
Other assets.......................................................................       318,980         16,136
                                                                                      -----------    -----------
          Total assets.............................................................   $11,270,100    $10,988,658
                                                                                      -----------    -----------
                                                                                      -----------    -----------
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Notes payable to bank (note 6)................................................   $   --         $   540,000
     Other notes payable (note 7)..................................................       --             100,000
     Current maturities of long-term debt (note 8).................................       110,004        110,004
     Current maturities of capital lease obligations (note 9)......................       124,839         99,346
     Accounts payable..............................................................       595,367      1,043,731
     Accrued commissions...........................................................       570,559        449,251
     Accrued expenses..............................................................       739,258        430,900
     Accrued incentive compensation................................................       262,286        140,000
     Income taxes payable..........................................................       498,955        334,993
                                                                                      -----------    -----------
          Total current liabilities................................................     2,901,268      3,248,225
                                                                                      -----------    -----------
Long-term debt, less current maturities (note 8)...................................         9,147        619,151
Capital lease obligations, less current maturities (note 9)........................        71,352         67,781
Deferred income taxes, net (note 14)...............................................        78,820          7,657
                                                                                      -----------    -----------
          Total liabilities........................................................     3,060,587      3,942,814
                                                                                      -----------    -----------
Stockholders' equity:
     Preferred stock, par value $.01 per share. Authorized 2,000,000 shares, none
      issued.......................................................................       --             --
     Common stock, par value $.015 per share. Authorized 30,000,000 shares; issued
      and outstanding 7,993,652 shares at September 30, 1997 and 7,956,038 shares
      at September 30, 1996 (notes 10, 11 and 12)..................................       119,905        119,341
     Additional paid-in capital....................................................     5,067,258      5,045,944
     Retained earnings.............................................................     3,022,350      1,880,559
                                                                                      -----------    -----------
          Total stockholders' equity...............................................     8,209,513      7,045,844
                                                                                      -----------    -----------
 Commitments and contingencies (notes 7, 9, 10 and 17)
          Total liabilities and stockholders' equity...............................   $11,270,100    $10,988,658
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                      F-3
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                              STATEMENTS OF INCOME
                FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                         1997           1996
                                                                                      -----------    -----------
 
<S>                                                                                   <C>            <C>
Revenues (note 18).................................................................   $13,209,541    $10,495,063
Cost of revenues...................................................................     6,774,076      5,818,010
                                                                                      -----------    -----------
     Gross profit..................................................................     6,435,465      4,677,053
Selling and administrative expense (note 13).......................................     4,629,122      3,247,385
                                                                                      -----------    -----------
          Income from operations...................................................     1,806,343      1,429,668
Other income (expense):
     Interest expense..............................................................      (101,262)      (362,956)
     Miscellaneous income..........................................................        30,939         11,257
                                                                                      -----------    -----------
          Income before income taxes...............................................     1,736,020      1,077,969
Income tax expense (note 14).......................................................       594,229        375,816
                                                                                      -----------    -----------
          Net income...............................................................   $ 1,141,791    $   702,153
                                                                                      -----------    -----------
                                                                                      -----------    -----------
Weighted average number of shares and common share equivalents outstanding.........    13,247,815      7,652,320
                                                                                      -----------    -----------
                                                                                      -----------    -----------
Earnings per share.................................................................          $.10           $.10
                                                                                             ----           ----
                                                                                             ----           ----
</TABLE>
 
                See accompanying notes to financial statements.
 
                                      F-4
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                     COMMON STOCK
                                                                 --------------------   ADDITIONAL                    TOTAL
                                                                  NUMBER       PAR       PAID-IN      RETAINED    STOCKHOLDERS'
                                                                 OF SHARES    VALUE      CAPITAL      EARNINGS       EQUITY
                                                                 ---------   --------   ----------   ----------   -------------
 
<S>                                                              <C>         <C>        <C>          <C>          <C>
Balances, September 30, 1995...................................  4,500,000   $ 67,500   $  761,265   $1,178,406    $ 2,007,171
Issuance of common stock, net of offering costs................  3,450,000     51,750    4,283,324       --          4,335,074
Exercise of common stock options...............................      6,038         91        1,355       --              1,446
Net income for the year ended September 30, 1996...............     --          --          --          702,153        702,153
                                                                 ---------   --------   ----------   ----------   -------------
Balances, September 30, 1996...................................  7,956,038    119,341    5,045,944    1,880,559      7,045,844
Exercise of common stock options...............................     37,614        564       21,314       --             21,878
Net income for the year ended September 30, 1997...............     --          --          --        1,141,791      1,141,791
                                                                 ---------   --------   ----------   ----------   -------------
Balances, September 30, 1997...................................  7,993,652   $119,905   $5,067,258   $3,022,350    $ 8,209,513
                                                                 ---------   --------   ----------   ----------   -------------
                                                                 ---------   --------   ----------   ----------   -------------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                      F-5





<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                          1997           1996
                                                                                       -----------    -----------
<S>                                                                                    <C>            <C>
Cash flows from operating activities:
     Net income.....................................................................   $ 1,141,791    $   702,153
     Adjustments to reconcile net income to net cash provided by (used in) operating
      activities:
          Depreciation and amortization.............................................       348,233        266,714
          Deferred income taxes.....................................................      (215,373)        29,059
          Increase (decrease) in cash caused by changes in:
               Accounts receivable..................................................     3,078,277     (1,866,086)
               Employee receivables and advances....................................        45,381         (7,795)
               Inventory............................................................      (957,881)       (92,058)
               Costs and estimated earnings in excess of billings on uncompleted
                  contracts.........................................................       --             322,071
               Prepaid expenses.....................................................        43,606        (89,750)
               Other assets.........................................................      (302,844)         9,194
               Accounts payable.....................................................      (448,364)      (290,900)
               Amounts due to affiliate.............................................       --             (87,294)
               Accrued commissions..................................................       121,308        (64,989)
               Accrued expenses.....................................................       308,358       (413,737)
               Accrued incentive compensation.......................................       122,286        140,000
               Income taxes payable.................................................       163,962         17,328
                                                                                       -----------    -----------
                    Net cash provided by (used in) operating activities.............     3,448,740     (1,426,090)
                                                                                       -----------    -----------
Cash flows from investing activities:
     Acquisitions of property, plant and equipment..................................      (443,066)      (127,352)
     Acquisitions of intangible assets and demonstration pool and custom molds......       (67,826)      (254,979)
                                                                                       -----------    -----------
                    Net cash used in investing activities...........................      (510,892)      (382,331)
                                                                                       -----------    -----------
Cash flows from financing activities:
     Net repayments on notes payable to bank........................................      (540,000)    (2,420,000)
     Repayments on other notes payable..............................................      (100,000)      (300,000)
     Repayments on long-term debt...................................................      (610,004)      (110,004)
     Repayments on capital lease obligations........................................      (162,164)      (102,264)
     Proceeds from sale of common stock.............................................        21,878      5,103,161
     Payment of offering costs......................................................       --            (508,829)
                                                                                       -----------    -----------
                    Net cash provided by (used in) financing activities.............    (1,390,290)     1,662,064
                                                                                       -----------    -----------
                    Net increase (decrease) in cash and cash equivalents............     1,547,558       (146,357)
Cash and cash equivalents at beginning of year......................................        65,069        211,426
                                                                                       -----------    -----------
Cash and cash equivalents at end of year............................................   $ 1,612,627    $    65,069
                                                                                       -----------    -----------
                                                                                       -----------    -----------
Supplemental disclosures of cash flow information:
     Cash paid during the year for:
          Interest..................................................................   $   103,270    $   385,748
                                                                                       -----------    -----------
                                                                                       -----------    -----------
          Income taxes..............................................................   $   644,106    $   358,488
                                                                                       -----------    -----------
                                                                                       -----------    -----------
Supplemental disclosure of noncash investing and financing activities:
     The Company entered into capital lease agreements for office equipment totaling
      $191,228 and $124,473 for the years ended September 30, 1997 and 1996,
      respectively.
</TABLE>
 
                See accompanying notes to financial statements.
 
                                      F-6





<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1997 AND 1996
 
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A) BUSINESS
 
     Paravant Computer Systems, Inc., (the 'Company') is engaged in the design,
development, production and sales of computer and communication systems,
specializing in rugged, hand-held and laptop computer products. The principal
customers of the Company are United States Department of Defense contractors who
are subject to federal budgetary implications. The work is performed under
general fixed price purchase orders and on a general production basis.
 
(B) CASH AND CASH EQUIVALENTS
 
     Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less.
 
(C) ACCOUNTS RECEIVABLE
 
     Management has provided an allowance for doubtful accounts receivable in
the amount of $141,497 and $12,353 as of September 30, 1997 and 1996,
respectively.
 
(D) INVENTORY
 
     Inventory is stated at the lower of cost or market using the weighted
average cost method. The Company provides an obsolescence reserve for inventory
as it becomes unusable or obsolete.
 
(E) DEPRECIATION AND AMORTIZATION
 
     The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets ranging from 5 to 7 years using the
straight-line method. Intangible assets include exclusive rights to a printed
circuit board and certain software and are being amortized over the estimated
useful lives of the technology of five to ten years using the straight-line
method. Demonstration pool assets are being amortized over their estimated
useful lives of three years using the straight-line method. The Company also has
custom molds which are amortized over their estimated useful lives of ten years
using the straight-line method.
 
(F) REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues on product sales when the customer accepts
title, which typically occurs upon shipment. At September 30, 1997 and 1996, the
Company had product sales of $1,241,111 and $4,144,207, respectively, for which
title had been transferred to a customer although physical product remained on
Company premises at the convenience of the customer. The Company allows
customers to return products under warranty for up to one year for repair and
accrues a reserve for future warranty costs at the time of product sales. The
warranty reserve was $75,000 and $54,505 as of September 30, 1997 and 1996,
respectively.
 
(G) INCOME TAXES
 
     The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
                                      F-7
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(H) STOCK OPTION PLAN
 
     Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ('APB') Opinion
No. 25, 'Accounting for Stock Issued to Employees', and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
October 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, 'Accounting for Stock-Based Compensation', which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in the first fiscal year beginning after December 15,
1994 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
 
(I) EARNINGS PER SHARE
 
     Earnings per share have been computed by dividing adjusted net income by
the weighted average number of common shares and share equivalents outstanding.
The adjustment to net income assumes the investment of excess proceeds received
from the assumed exercise of common stock equivalents, net of related income
taxes, using the modified treasury stock method. Common equivalent shares
included in the computation represent shares issueable upon assumed exercise of
stock options and warrants. Common stock authorized, issued and outstanding as
of September 30, 1997 and 1996 reflects the effects of a 3-for-1 common stock
split authorized on July 25, 1996 by the Board of Directors.
 
     Fully diluted earnings per common share amounts did not differ from amounts
computed under the primary computation for the years ended September 30, 1997
and 1996.
 
(J) USE OF ESTIMATES
 
     The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
(K) FUTURE APPLICATION OF ACCOUNTING STANDARDS
 
     In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, 'Earnings Per Share.' SFAS No. 128 supersedes APB Opinion No. 15, 'Earnings
Per Share,' and specifies the computation, presentation, and disclosure
requirements for earnings per share ('EPS') for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to simplify the
computation of EPS. It requires dual presentation of basic and diluted EPS on
the face of the statements of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
 
     SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform to SFAS No. 128.
 
                                      F-8
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(2) INVENTORY
 
     The following is a summary of inventory at September 30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                              1997          1996
                                                           ----------    ----------
 
<S>                                                        <C>           <C>
Raw materials...........................................   $2,149,401    $1,835,286
Work in process.........................................    1,490,621       474,940
Finished goods..........................................      263,516       269,243
                                                           ----------    ----------
                                                            3,903,538     2,579,469
Reserve for obsolete inventory..........................     (441,765)      (75,577)
                                                           ----------    ----------
                                                           $3,461,773    $2,503,892
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>
 
(3) PROPERTY, PLANT AND EQUIPMENT
 
     The following is a summary of property, plant and equipment at September
30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                              1997          1996
                                                           ----------    ----------
 
<S>                                                        <C>           <C>
Office equipment........................................   $1,305,028    $  930,332
Factory equipment.......................................      271,403       209,833
Leasehold improvements..................................      199,945        14,307
                                                           ----------    ----------
          Total cost....................................    1,776,376     1,154,472
Less accumulated depreciation...........................     (861,937)     (636,957)
                                                           ----------    ----------
                                                           $  914,439    $  517,515
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>
 
     Depreciation and amortization expense on these assets amounted to $237,370
and $196,757 for the years ended September 30, 1997 and 1996, respectively.
 
(4) INTANGIBLE ASSETS
 
     These assets consist of exclusive rights to a printed circuit board and
certain software. Cost and accumulated amortization of these assets at September
30, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                               1997         1996
                                                             ---------    ---------
 
<S>                                                          <C>          <C>
Cost......................................................   $ 272,500    $ 267,500
Accumulated amortization..................................    (207,625)    (178,375)
                                                             ---------    ---------
                                                             $  64,875    $  89,125
                                                             ---------    ---------
                                                             ---------    ---------
</TABLE>
 
     Total amortization expense on these assets was $29,250 and $28,500 for the
years ended September 30, 1997 and 1996, respectively.
 
(5) DEMONSTRATION POOL AND CUSTOM MOLDS
 
     These assets consist of equipment held in the demonstration pool and custom
molds. Cost and accumulated amortization of these assets at September 30, 1997
and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                               1997         1996
                                                             ---------    ---------
 
<S>                                                          <C>          <C>
Cost......................................................   $ 762,549    $ 699,723
Accumulated amortization..................................    (500,027)    (418,414)
                                                             ---------    ---------
                                                             $ 262,522    $ 281,309
                                                             ---------    ---------
                                                             ---------    ---------
</TABLE>
 
     Total amortization expense on these assets was $81,613 and $41,457 for the
years ended September 30, 1997 and 1996, respectively.
 
                                      F-9
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(6) NOTES PAYABLE TO BANK
 
     The Company has a line of credit with a bank totaling $4,000,000 which is
due on demand and, at September 30, 1997, bears interest at the prime rate for
secured borrowings under prescribed levels or the 30 or 60 day LIBOR rates plus
2.70% and the prime rate plus .50% for other borrowings. Secured borrowings are
collateralized by accounts receivable, inventory and equipment. The amount
outstanding under these credit agreements at September 30, 1997 and 1996 was
$-0- and $540,000, respectively. The credit agreements do not contain any
material financial covenants.
 
(7) OTHER NOTES PAYABLE
 
     In August 1995, the Company issued subordinated, convertible promissory
notes payable ('Notes') in the principal amount of $400,000. The Notes also had
480,000 warrants attached for $.003 per warrant exercisable at $2.00 per share.
A portion of these notes totaling approximately $98,000 were manditorily
convertible into 120,000 shares of the Company's common stock at a conversion
price of $.82 in the event the Company completed a public offering of its common
stock prior to January 1, 1996. The Company did not complete the public offering
prior to January 1, 1996 and the conversion feature expired. The Notes, which
bore interest at 6%, had an outstanding balance of $-0- and $100,000 at
September 30, 1997 and 1996, respectively.
 
     In regard to the above financing, the Company may be deemed to have
incurred a technical violation of a provision of the Securities Act of 1933, as
amended. Accordingly, there may be a contingent liability associated with such
matter. The maximum amount of such liability is estimated at the amount of
converted debt in such financing of $98,000. However, management believes that
there was no such violation and the possibility of such related liability is
remote.
 
(8) LONG-TERM DEBT
 
     The following is a summary of long-term debt at September 30, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                                                         1997         1996
                                                                       ---------    ---------
 
<S>                                                                    <C>          <C>
Note payable to bank bearing an initial interest rate of 7.25%;
  interest rate adjusted monthly to 1.50% above the prime rate;
  interest and principal due in sixty monthly installments including
  principal of $9,167 per payment; final payment due October of
  1998; secured by accounts receivable, inventory and equipment.....   $ 119,151    $ 229,155
Note payable to bank bearing interest at the prime rate; interest
  due monthly, principal balance due March 31, 1998; secured by
  accounts receivable, inventory and equipment......................      --          500,000
Less current maturities.............................................    (110,004)    (110,004)
                                                                       ---------    ---------
     Long-term debt, less current maturities........................   $   9,147    $ 619,151
                                                                       ---------    ---------
                                                                       ---------    ---------
</TABLE>
 
     Scheduled principal payments for future periods are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S>                                                              <C>
1998..........................................................   $110,004
1999..........................................................      9,147
                                                                 --------
                                                                 $119,151
                                                                 --------
                                                                 --------
</TABLE>
 
     The carrying amount of the Company's long-term debt approximates its fair
value because the debt bears interest at borrowing rates currently available to
the Company for bank loans with similar terms and maturities.
 
                                      F-10
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(9) LEASES
 
     The Company is obligated under various capital leases for office equipment
and building improvements. At September 30, 1997 and 1996, respectively,
property, plant and equipment included net capital lease assets of $293,096
and $197,423.
 
     The Company also has several noncancellable operating leases. Under these
arrangements, the Company leases its current office facilities at a rate of
$9,176 per month. In addition, the Company leases a residential unit from a
related partnership under a month-to-month lease at a rate of $1,000 per month.
The Company also leases automobiles and equipment with lease terms into June of
1999. Rent expense under operating lease agreements totaled $185,306 and
$151,924 for the years ended September 30, 1997 and 1996, respectively.
 
     The following is a schedule by years of future minimum lease payments under
capital and operating leases together with the present value of the net minimum
lease payments as of September 30, 1997:
 
<TABLE>
<CAPTION>
                                                                         CAPITAL     OPERATING
YEAR ENDING SEPTEMBER 30,                                                LEASES       LEASES
------------------------                                                ---------    ---------
 
<S>                                                                     <C>          <C>
1998.................................................................   $ 137,340    $ 137,960
1999.................................................................      60,229      126,619
2000.................................................................      14,675      116,946
2001.................................................................      --          110,117
2002.................................................................      --           27,529
                                                                        ---------    ---------
          Total minimum lease payments...............................     212,244    $ 519,171
                                                                                     ---------
                                                                                     ---------
Less amounts representing interest...................................     (16,053)
                                                                        ---------
          Present value of net minimum lease payments................     196,191
Less current maturities..............................................    (124,839)
                                                                        ---------
Capital lease obligations............................................   $  71,352
                                                                        ---------
                                                                        ---------
</TABLE>
 
     The carrying value of the Company's capital lease obligations approximates
its fair value because the leases bear interest at borrowing rates currently
available to the Company for leases with similar terms and maturities.
 
(10) STOCKHOLDERS' EQUITY
 
     Common stock authorized, issued and outstanding as of September 30, 1997
and 1996 reflects the effects of a 3-for-1 common stock split effected on July
25, 1996 by the Board of Directors.
 
     The Company entered into an agreement with an underwriter in connection
with its initial public offering ('IPO') which was consummated in June 1996. The
agreement provides for monthly consulting fees for the underwriter of $3,500 per
month. The agreement also provides a 5.00% fee of the cost of an acquisition to
be paid to the underwriter on any merger or acquisition for a period extending
two years subsequent to the IPO date.
 
(11) STOCK OPTIONS
 
     Common stock options and related exercise prices have been adjusted below,
where applicable, to reflect the effects of the aforementioned 3-for-1 common
stock split effected on July 25, 1996.
 
     On December 22, 1993, the Company granted options under a nonqualified
stock option plan ('nonqualified plan') to employees to purchase 74,799 shares
of the Company's common stock at an exercise price of $.24 per share. The terms
of these options provide that the options may be exercised during a period
beginning December 22, 1994 and ending six years from the date the options were
granted. The Company terminated the nonqualified plan on November 22, 1994.
 
                                      F-11
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
     On November 22, 1994, the Company granted options to a key officer to
purchase 182,977 shares of the Company's common stock at an exercise price of
$.72 per share. The terms of these options provide that the options are
exercisable through November 22, 2004.
 
     On November 22, 1994, the Company reserved 900,000 shares of common stock
for its qualified incentive stock option plan ('qualified plan'). On March 14,
1996 the Company increased the options reserved under the qualified plan from
900,000 to 1,455,000. The terms of these options provide that the options are
exercisable at 33% per year and expire ten years after the date of grant. The
qualified plan is administered by the Company's Board of Directors or a
committee thereof. The qualified plan gives broad powers to the Board of
Directors to administer and interpret the Plan, including the authority to
select the individuals to be granted options and to prescribe the particular
form and conditions of each option granted. All options are granted at an
exercise price equal to the fair market value or 110 percent of the fair market
value of the Company's common stock on the date of the grant. Awards may be
granted pursuant to the qualified plan through November 22, 2004. The qualified
plan may be terminated earlier by the Board of Directors at its sole discretion.
 
     On March 14, 1996, the Company reserved 45,000 shares under a plan to
benefit the nonemployee directors under terms similar to the qualified plan
('directors nonqualified plan'). The terms of these options provide that the
options are exercisable on the date of grant and expire ten years after the date
of grant. The directors nonqualified plan provides that each nonemployee
director be granted options to purchase 7,500 shares at the fair market value on
the date of the director's election to the Board.
 
     At September 30, 1997, there were 519,357 and 15,000 additional shares
available for grant under the qualified plan and directors nonqualified plan,
respectively. Using the Black Scholes option-pricing model, the per share
weighted-average fair value of stock options granted during 1997 where exercise
price equals the market price of the stock on the grant date was $4.85. The per
share weighted-average fair value of stock options granted during 1996 where
exercise price equals the market price of the stock on the grant date or
exercise price is greater than the market price of the stock on the grant date
was $1.30 and $1.21 respectively.
 
     The following weighted average assumptions were used:
 
<TABLE>
<CAPTION>
                                                                        1997           1996
                                                                     ----------      ---------
 
<S>                                                                  <C>             <C>
Exercise price equal to market price on grant date
     Expected risk-free interest rate.............................         6.13%          5.58%
     Expected life................................................    8.0 years      8.0 years
     Expected volatility..........................................       122.72%        113.38%
     Expected dividend yield......................................         0.00%          0.00%
Exercise price greater than market price on grant date
     Expected risk-free interest rate.............................       --               5.58%
     Expected life................................................       --          8.0 years
     Expected volatility..........................................       --             113.38%
     Expected dividend yield......................................       --               0.00%
</TABLE>
 
     The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements for stock options granted. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
 
                                      F-12
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                 1997         1996
                                                                              ----------    --------
 
<S>                  <C>                                                      <C>           <C>
Net income           As reported...........................................   $1,141,791    $702,153
                     Pro forma.............................................   $  629,758    $571,507
Earnings per share   As reported...........................................   $     0.10    $   0.10
                     Pro forma.............................................         0.06        0.09
</TABLE>
 
     Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 3 years and compensation cost for options granted prior to October 1,
1995 is not considered.
 
     Stock option activity during the periods indicated is as follows:
 
<TABLE>
<CAPTION>
                                                                            NUMBER OF    WEIGHTED- AVERAGE
                                                                             SHARES       EXERCISE PRICE
                                                                            ---------    ----------------
 
<S>                                                                         <C>          <C>
Outstanding at September 30, 1995........................................     639,777         $  .68
     Granted.............................................................     381,000           1.45
     Exercised...........................................................      (6,038)           .31
     Forfeited...........................................................     (14,763)           .78
                                                                            ---------
Outstanding at September 30, 1996........................................     999,976            .98
     Granted.............................................................     223,000           5.18
     Exercised...........................................................     (37,614)           .60
     Forfeited...........................................................     (15,608)          3.16
                                                                            ---------
Outstanding at September 30, 1997........................................   1,169,754           1.76
                                                                            ---------
                                                                            ---------
</TABLE>
 
     At September 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.24 to $.72 for 467,504
shares; $.72 to $.79 for 120,000 shares; and $1.33 to $6.00 for 582,250 shares
at 5.17 years, 7.15 years and 8.54 years, respectively.
 
     At September 30, 1997 and 1996, the number of options exercisable was
597,754 and 365,628, respectively, and the weighted-average exercise price of
those options was $.97 and $.65, respectively.
 
(12) WARRANTS
 
     In connection with the Company's IPO of common stock in June of 1996, the
Company issued 4,830,000 warrants exercisable for a period of five years
commencing November 30, 1997 at an exercise price of $2.00 per share, subject to
adjustment in certain circumstances. The Company, at its option during the
exercise period of the warrants, may redeem the warrants, after November 30,
1997, upon notice of not less than 30 days, at a price of $.0167 per warrant
provided that the last sale price of the Company's common stock on the Nasdaq
National Market has exceeded $2.83 per share (subject to adjustment) for a
period of 30 consecutive trading days. As of September 30, 1997, no warrants
have been exercised. In addition, in connection with the IPO, the Company issued
warrants to the underwriter to purchase up to 300,000 shares of common stock at
$2.00 per share and up to 420,000 warrants at $.04 per warrant. The
underwriter's warrants are exercisable during the four-year period commencing
June 3, 1997.
 
(13) RESEARCH AND DEVELOPMENT
 
     Research and development costs are expensed when incurred and are included
in selling and administrative expense. The amounts charged to expense were
$611,295 and $382,750 for the years ended September 30, 1997 and 1996,
respectively.
 
                                      F-13
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(14) INCOME TAXES
 
     The components of income tax expense (benefit) for the years ended
September 30, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                           CURRENT     DEFERRED      TOTAL
                                                           --------    ---------    --------
<S>                                                        <C>         <C>          <C>
1997:
     Federal............................................   $683,579    $(184,143)   $499,436
     State..............................................    126,023      (31,230)     94,793
                                                           --------    ---------    --------
                                                           $809,602    $(215,373)   $594,229
                                                           --------    ---------    --------
                                                           --------    ---------    --------
1996:
     Federal............................................   $292,008    $  26,620    $318,628
     State..............................................     54,749        2,439      57,188
                                                           --------    ---------    --------
                                                           $346,757    $  29,059    $375,816
                                                           --------    ---------    --------
                                                           --------    ---------    --------
</TABLE>
 
     Following is a reconciliation of the expected income tax expense computed
by applying the U.S. federal income tax rate of 34% to income before income
taxes and the actual income tax provision for the years ended September 30, 1997
and 1996:
 
<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                         --------    --------
<S>                                                                      <C>         <C>
Computed 'expected' tax expense.......................................   $590,247    $366,509
Increase (decrease) in income taxes resulting from:
     State income taxes, net of federal income tax benefit............     52,358      36,134
     Nondeductible meals and entertainment expense....................      7,200       6,270
     Research and experimentation credit..............................    (31,951)    (12,372)
     Other, net.......................................................    (23,625)    (20,725)
                                                                         --------    --------
                                                                         $594,229    $375,816
                                                                         --------    --------
                                                                         --------    --------
</TABLE>
 
     Deferred income taxes as of September 30, 1997 and 1996 reflect the impact
of 'temporary differences' between amounts of assets and liabilities for
financial statement purposes and such amounts as measured by tax laws. The
temporary differences give rise to deferred tax assets and liabilities which are
summarized below as of September 30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                          1997         1996
                                                                        ---------    --------
<S>                                                                     <C>          <C>
Gross deferred tax liabilities:
     Capitalized costs...............................................   $ (36,392)      --
     Accumulated depreciation........................................     (81,342)   $(46,426)
                                                                        ---------    --------
          Total gross deferred tax liabilities.......................    (117,734)    (46,426)
                                                                        ---------    --------
Gross deferred tax assets:
     Inventory.......................................................     255,166      61,972
     Accounts receivable.............................................      53,245       --
     Warranty expense................................................      28,223      20,510
     Accrued vacation and sick leave.................................      54,996      45,956
     Accrued incentive compensation..................................      26,341      11,289
     Deferred revenue................................................       8,292       --
     Net operating loss carryforwards................................      --           1,554
     Research credits................................................      38,914      37,215
                                                                        ---------    --------
          Total gross deferred tax assets............................     465,177     178,496
                                                                        ---------    --------
          Total net deferred tax assets..............................   $ 347,443    $132,070
                                                                        ---------    --------
                                                                        ---------    --------
</TABLE>
 
     A valuation allowance for deferred tax assets is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Realization is dependent upon the
 
                                      F-14
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
generation of future taxable income or the reversal of deferred tax liabilities
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. As of September 30, 1997 and 1996, no valuation allowance has been
recognized in the accompanying financial statements for the deferred tax assets
because the Company believes that sufficient projected future taxable income
will be generated to fully utilize the benefits of these deductible amounts.
 
(15) RETIREMENT PLAN
 
     The Company has a defined contribution retirement plan covering
substantially all employees who have completed 1,000 hours of service.
Retirement expense incurred was $53,597 and $19,098 for the years ended
September 30, 1997 and 1996, respectively.
 
(16) RELATED PARTY TRANSACTIONS
 
     In March 1996, prior to the 3-for-1 common stock split authorized on July
25, 1996 by the Board of Directors, certain stockholders of the Company sold an
aggregate of 308,581 shares of common stock to private investors at a purchase
price of $4 per share. A portion of the proceeds from these sales totaling
$802,294 was advanced to the Company in April 1996 pursuant to promissory notes
having an interest rate of 6% per annum. Such amounts, plus accrued interest
thereon, were due and payable on the earlier of April 15, 1997 or the date which
is ten days after the consummation of the Company's IPO. All amounts borrowed by
the Company under these promissory notes were repaid prior to September 30,
1996.
 
(17) CONTINGENCIES
 
     In March 1996, the Company's former counsel rendered an invoice to the
Company totaling approximately $365,000 for legal fees and expenses representing
both general corporate services as well as services relating to the Company's
IPO. The Company contested the invoice and accrued an estimate for the
settlement, if any, of these fees. In March 1996, the Company's former counsel
filed an action against the Company, its current underwriter and certain other
defendants, alleging, among other things, breach of contract, failure to pay
attorneys fees, fraud, copyright infringement and defamation by the Company in
connection with the aforementioned services as well as claiming a finder's fee
with respect to the underwriter's relationship with the Company. In September
1997, the plaintiff filed an amended complaint increasing his claim for legal
services from approximately $365,000 to approximately $415,000. The plaintiff is
also seeking punitive damages of $1,000,000 from the Company. The Company filed
an answer denying the claims asserted by plaintiff and has asserted defenses and
counterclaims against the plaintiff seeking recovery of amounts paid to the
plaintiff, punitive damages and court costs.
 
     In September 1996, a former Company employee filed an action against the
Company and certain other defendants alleging retaliatory personnel actions
instituted by the defendants against the plaintiff. The Plaintiff is seeking
from the defendants an amount of $950,000 plus interest, related costs and
attorneys fees. The Company has filed a motion to dismiss the plaintiff's
amended complaint and intends to vigorously defend this lawsuit.
 
     Management, after consultation with counsel, is of the opinion that the
ultimate resolution of these matters will not have a material adverse effect on
future operations of the Company. Management has not accrued any liability
relating to the tortious portion of these lawsuits as it believes the Company
will prevail. In the event a court finds in favor of the plaintiffs, additional
costs will be incurred.
 
                                      F-15
 



<PAGE>
 
<PAGE>
                        PARAVANT COMPUTER SYSTEMS, INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1997 AND 1996
 
(18) CONCENTRATION OF CREDIT RISK
 
     The Company has a high concentration of sales to a few customers who
accounted for 89% and 95% of revenue for the years ended September 30, 1997 and
1996, respectively. A summary of sales and accounts receivable to the customers
that exceed 10% of sales or accounts receivable for the years ended September
30, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                  1997                     1996
                                                          ---------------------    ---------------------
                                                            SALES       % TOTAL      SALES       % TOTAL
                                                          ----------    -------    ----------    -------
 
<S>                                                       <C>           <C>        <C>           <C>
Customer A.............................................   $6,094,617       46%     $5,094,104       49%
Customer B.............................................    4,684,013       36       2,255,433       21
Customer C.............................................      871,468        7          --         --
Customer D.............................................       --         --         1,609,725       15
Customer E.............................................       --         --         1,079,408       10
</TABLE>
 
<TABLE>
<CAPTION>
                                                           ACCOUNTS                 ACCOUNTS
                                                          RECEIVABLE    % TOTAL    RECEIVABLE    % TOTAL
                                                          ----------    -------    ----------    -------
 
<S>                                                       <C>           <C>        <C>           <C>
Customer A.............................................   $1,556,040       37%     $4,982,408       70%
Customer B.............................................    1,663,296       39       1,009,630       14
Customer C.............................................      657,596       16          --         --
Customer D.............................................       --         --           906,966       13
</TABLE>
 
(19) FOURTH QUARTER RESULTS
 
     Adjustments were made to increase inventory during the fourth quarter of
the years ended September 30, 1997 and 1996 in the amounts of $195,975 and
$433,000, respectively, before related income taxes. These adjustments were made
to adjust perpetual records to physical counts. The Company was not able to
determine the amount of the adjustments that related to the fourth quarter or
the prior quarters.
 
     In addition, another adjustment was made in the fourth quarter of the year
ended September 30, 1996 to record accrued incentive compensation in the amount
of $140,000 before related taxes. The accrued compensation was discretionary and
was substantially related to fourth quarter sales.
 
(20) SUBSEQUENT EVENT
 
     On November 20, 1997, the Company granted options under its qualified plan
to employees to purchase 226,000 shares of the Company's common stock at an
exercise price of $4.25 per share which was the market price of the shares at
the date of issuance.
 
     On November 20, 1997, the Company granted special options to the three
nonemployee directors (1997 special option plan) exercisable for ten years from
the date of issuance for the purchase of an aggregate of up to 24,000 shares at
an exercise price of $4.25 per share, the market price of the shares at the date
of issuance. Although not granted under the existing directors' nonqualified
plan, the 1997 special option plan is subject to terms substantially similar to
those applicable to options granted under the directors' nonqualified plan. The
1997 special options are evidenced by stock option agreements between the
Company and the subject directors.
 
     In October of 1997, the Company announced that it entered into negotiations
related to an acquisition. The terms of the acquisition, including price and
acquisition date, have not yet been determined.
 
                                      F-16


<PAGE>