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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, 1998
                                       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 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.  [x]

     The issuer's revenues for its most recent fiscal year were $15,507,727.

     The aggregate market value of voting stock held by non-affiliates of the
registrant on December 4, 1998 was approximately $25,455,057. On such date, the
closing price of the issuer's common stock was $2.47 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 4, 1998 was 12,293,928.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the Company's Proxy Statement in connection with its Annual
Meeting scheduled to be held on March 4, 1999 are incorporated by reference in
Part III. The Company's Proxy Statement will be filed within 120 days after
September 30, 1998.

     Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]

________________________________________________________________________________

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<PAGE>

                                 PARAVANT INC.
                          ANNUAL REPORT ON FORM 10-KSB
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

                               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.........................................................................    17
     Item  4.    Submission of Matters to a Vote of Security Holders.......................................    17

PART II
     Item  5.    Market for Common Equity and Related Stockholder Matters..................................    19
     Item  6.    Management's Discussion and Analysis of Financial Condition and Results of Operation......    19
     Item  7.    Financial Statements......................................................................    23
     Item  8.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......    23

PART III
     Item  9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
                   16(a) of the Exchange Act...............................................................    24
     Item 10.    Executive Compensation....................................................................    24
     Item 11.    Security Ownership of Certain Beneficial Owners and Management............................    24
     Item 12.    Certain Relationships and Related Transactions............................................    24
     Item 13.    Exhibits and Reports on Form 8-K..........................................................    24
</TABLE>

                                       2

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

     Paravant Inc. (the 'Company' or 'Paravant') serves the defense industry
with a range of electronic products engineered to meet applications within
aircraft support, fire control and signal intelligence. Paravant also offers
extensive customization services to modify its standard products to the specific
needs of end users. The Company's products include tactical ruggedized
computers, signal processing computer systems and custom designed helicopter
subsystems. 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, government prime contractors and medical
equipment manufacturers.

HISTORY

     In early 1983, the Company commenced its business operations and offered
only engineering services for computer applications. In this initial period,
Paravant 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, Paravant 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. During this time, the Company also began to design and build medical
devices for selected medical equipment manufacturers.

     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, Paravant and UES had
worked together on a joint development project. By mid 1990, four of its
original five founders had left Paravant'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 Paravant, 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.

     In 1996 with a portion of the proceeds from the IPO, the Company began to
focus on providing the medical market with a line of programmers, which are used
to provide programming information to medical pumps, and related devices, which
have been surgically implanted into the human body. These inserted devices
perform a wide range of functions from monitoring of the heart to providing
medication and electric stimulation for pain management.

                                       3

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<PAGE>

OCTOBER 1998 ACQUISITION

     Effective as of October 1, 1998 immediately following the period covered by
this Report, Paravant completed the acquisition (the 'EDL-STL Acquisition') of
two related electronic defense companies, Engineering Development Laboratories,
Incorporated ('EDL') and Signal Technology Laboratories, Inc., EDL's
majority-owned subsidiary ('STL' and together with EDL, 'EDL-STL') of Dayton,
Ohio. EDL provides the U.S. Special Forces with upgrades to its aircraft
including cockpit controls, flight controls and video recorders. EDL engineers
these upgrades as required and provides complete installation services when
requested. STL is a designer and producer of signal processing equipment used in
the signal intelligence community to process gathered signals. See 'MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- LIQUIDITY AND CAPITAL RESOURCES' for a more complete description of
EDL-STL and the acquisition transaction. Except as specifically set forth
therein, information with respect to Paravant set forth elsewhere in this Report
does not include information with respect to EDL-STL.

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 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
from 1990 to 1998 to downsize the military, and U.S. military spending declined.
The Company believes that increases in spending on defense electronics will
occur during the next five years.

     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 been ascertained to be less expensive and, in some
cases, better performers 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.

     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.

                                       4

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<PAGE>

     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.

     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. 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 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, Paravant designs such
boards, the computer's outer case, keyboards,

                                       5

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<PAGE>

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 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. The Company believes that many
manufacturers of implantable devices would prefer to outsource the design and
production of these programmers, because the 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
products 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

                                       6

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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, Paravant'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 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 Paravant'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, Paravant'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 Paravant'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 Paravant'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, Paravant 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,

                                       7

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performance recorders in training exercises, mission loaders and verifiers of
data and field command control systems.

     As of September 30, 1998, 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:

<TABLE>
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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 --                Laptop    Mission Loading and
                                                Texas Instruments                    Electronic Diagnostics
F-16 Fighter and Mission Loading..............  Lockheed Martin            Laptop    Electronic Diagnostics Check
</TABLE>

     In September 1996, Paravant was awarded a contract by Raytheon Company
under which Paravant 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 will continue into fiscal 1999. In
addition, in October 1996, Paravant 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 continued through fiscal 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.

     Upon completion of the EDL-STL Acquisition in October 1998, the Company
added signal processing equipment and aircraft support technology to their
family of products. In the signal processing area, the Company, through STL,
makes a standard line of digital signal processing equipment that is offered to
the signal intelligence community as standard commercial off the shelf items.
The electronic equipment is typically packaged in standard format industrial
racks. The Company works to continually upgrade the performance and capability
of its standard equipment line. The equipment can be used for a variety of
signal processing applications.

     In the area of aircraft support, the Company, through the former EDL,
designs upgrades and improvements to helicopters and fixed wing aircraft used
primarily by the U.S. Special Forces. The Company offers a wide range of
upgrades to improve and update the aircraft. Past developments have included
re-lighting the aircraft flight controls to enable the use of night vision
goggles while operating the aircraft. Other products include an in-flight video
recorder based on commercial VHS technology that is significantly less expensive
than previous military versions of video recorders. The Company has

                                       8

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also developed a highly cost-effective autopilot system that allows the pilot of
older helicopters to automatically hold altitude and position at low flight
levels.

CUSTOMIZATION

     The Company provides its customers and end-users with engineering services
that modify or adjust its standard portable computers, software, communication
interfaces or signal processing systems to their specific needs and
requirements. Virtually all of the aircraft support business involves
customization of upgrades of older aircraft. 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 Paravant 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 Paravant 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.

      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.

      With the acquisition of EDL-STL, the development of a low cost VHS
      recorder for in-flight recording on helicopters.

     In the early phase of a military program, Paravant 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 Paravant's products especially since certain of its
competitors typically do not offer any customization of the electronics. In the
fiscal years ended September 30, 1998 and 1997, revenue from engineering
services represented approximately 1% of the Company's total sales. 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. While engineering services represent a
very low percentage of total sales, the Company believes these efforts can lead
to significant production contracts. 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. The Company
expenses the associated costs as they are incurred.

NEW PRODUCTS

     The Company has new products in development targeted to certain of its
historical customer base. The products can generally be said to be faster and
lower cost than existing products. The first is the RTS, a rugged touch screen
product designed to be used in the field and on the flightline as a maintenance
support device. The RTS utilizes the latest touch-screen technology, which has
been found to be much more reliable than past technology. The RTS will enable a
maintainer to take a large database out into the field or on the flightline in
electronic form (CD-ROM or DVD). The RTS features

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a large 12.1  touch-screen that is big enough to allow the maintainer to read
electrical diagrams on the display, and which can be read in sunlight. The RTS
will be involved in a series of technical demonstrations in fiscal 1999 and the
Company expects shipments to begin in fiscal 2000.

     The Company also has an ongoing effort to upgrade the capability of its
digital signal processing systems to simultaneously process more signal input.
This enhanced capability is then made part of the standard equipment line. The
Company expects that this will be available for shipment in 1999.

     Paravant has a new system in development, which can be used either in
portable mode or in vehicles. The new product, the RNB 550, utilizes a new (new
to Paravant) case fabrication methodology that will allow Paravant to reduce its
recurring prices while bringing its rugged, reliable performance to many
applications that previously could not afford Paravant solutions.

     The Company has also designed two new medical programming devices. One
device is a highly portable handheld which allows support technicians, and in
some cases, the patients themselves, to more easily transport the device and
provide for real time monitoring of implant function. The second device is
intended to be used in a telemedicine application in which video images can be
transported from the patient location to the physician attending via
teleconference. The first device is being developed for a specific medical
implant maker while the second system has application within a number of medical
organizations.

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, Paravant has the ability to either
design or purchase the printed circuit boards depending on the customers
performance needs and price point. 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 the plants of the
board fabricators. Each of the fabricators employed by Paravant 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, Paravant 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, Paravant further
tests the completed boards and other components and then assembles the
computers. Apart from the printed circuit boards, the components that Paravant
purchases from external sources include chassis, wire harnesses, computer chips,
keyboards, displays and metal cases.

     With certain products, the Company has selected the commercial electronics
boards of other manufacturers. 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 products 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 Paravant's standards or as requested
by specific customers. Further testing of products is generally accomplished at
the end of the

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assembly process. The Company's manufacture of products is usually done pursuant
to specific purchase orders.

     Paravant utilizes modern equipment for the design, engineering, assembly
and testing of its products. In recent years, the Company has acquired
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, Paravant 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 headquarters. Certain components used in its computers are obtained from
sole sources, such as Distec, Xcel and Rhinehardt. Paravant has also licensed
its software from sole sources, including Microsoft, Phoenix Technology and
Magnavox. Paravant 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 Paravant'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 and, subsequent to the acquisition of EDL and STL, also in
Dayton, Ohio. These facilities comply with certain U.S. military specifications
necessary for the manufacture and assembly of products supplied to it. In
addition, on March 27, 1998, the Company's Melbourne manufacturing and assembly
facilities were certified as being in compliance with the quality management and
assurance standards of ISO-9001, an international standard promulgated by the
International Organization of Standardization, a worldwide federation of
standards bodies from approximately 100 countries. These standards have been
adopted by the European Economic Community as their preferred quality standards
and, to some degree, by the U. S. Department of Defense and the U. S. Food and
Drug Administration (the 'FDA'). The Company believes that such certification
will enable it to increase its marketing opportunities in the domestic and
international military markets for ruggedized computers as well as in the
medical market for the Company's 'programmers,' although there can be no
assurance of such.

     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.

     Paravant 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 either 90-day or one-year warranties on all
its products covering both parts and labor although extended warranties may be
purchased by customers. At its option, Paravant 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.

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     In cases of defective products, the customer typically returns them to
Paravant'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 and several of its officers, six manufacturers' representatives in
the United States and approximately 20 distributors abroad. Its foreign
distributors operate in nearly 30 countries, including England, France, Japan,
Australia and Germany. However, sales to foreign customers for the years ended
September 30, 1998 and 1997, were only 5% and 1% of total sales, respectively.

     Paravant'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 up to 8% of the net invoice price on standard
products. In some cases, commissions will decline from 8% to 1% 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 1% to 8% in practice. The Company's manufacturers' representative
contracts are subject to certain other terms and conditions. Paravant's
manufacturers' representatives and distributors do not purchase for their own
account, but merely sell such computer products on Paravant's behalf. The loss
of certain of such representatives could have a material negative effect on
Paravant's business.

     Sales of the Company's products or services to foreign distributors are
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
15% to 35%, depending on the type or amount of products sold. In some cases,
there are minimum order requirements. Due to the custom nature of Paravant'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. Paravant 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; (vi) invest in research and
development in order to increase its product offering; and (vii) increase its
presence on the Internet web page.

     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 Paravant computers and display products as part of a fully

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configured system. Depending on customer preferences, the Paravant systems may
be sold directly by Paravant or through ITT A/CD, or the customer may opt to use
other computers. Paravant's computers are well suited to the task of
interoperation with ITT's SINCGARS radios because Paravant'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.

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, which are
subject to federal budgetary constraints. For the fiscal years ended September
30, 1998 and September 30, 1997, Raytheon's Missile Systems Division accounted
for 51% and 46% of the Company's total sales, respectively. For those same
periods, Lockheed Martin, and U. S. Navy, accounted for 22% and 36%, and 11% and
4% of the Company's total sales, respectively. The loss of any of these
customers could have a material adverse impact on Paravant'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.

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. Paravant 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, 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, Paravant
faces competition from Dolch, Allied Signal, 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. 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. 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.

     With the acquisition of EDL-STL, the Company is now competing in new
markets. In the aircraft support business, the primary competition is from the
original aircraft manufacturer such as Sikorsky. Within the Signal Intelligence
business, competitors include the former E Systems Division of Raytheon and a
specialty division of TRW.

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     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 Paravant 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 Paravant may have
difficulty complying. However, Paravant is occasionally one of only a few
companies whose products meet the required specifications designated by such
customers.

     In most cases, Paravant 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,
Paravant makes extensive modifications and refinements of its computers for its
customers pursuant to their specifications and special needs. Consequently,
Paravant'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 Paravant 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.

BACKLOG

     As of September 30, 1998, the Company's backlog was $9,929,339, as compared
with backlog of $15,242,745 as of September 30, 1997. Two customers accounted
for approximately 43% and 30% of such backlog as of September 30, 1998. As of
December 4, 1998, the Company's backlog including EDL-STL was approximately
$21,700,000, and the Company presently expects to manufacture and deliver
$20,400,000 of the products in backlog within the next 12 months. The remaining
$1,300,000 of products in backlog will be completed over the next 24 months.

     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, Paravant 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. Paravant's business requires ongoing research
and development efforts. 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.

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     The Company has continued to expand and enhance the Rugged NoteBook ('RNB')
product line. The Company is designing a new rugged notebook called the RNB 550.
This product is intended to fit between its laptops and its hand-held computers
in size, weight and price. Weighing approximately 15 lbs., it is expected to
have a full-size display and a 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, but is expected to meet the
rigorous MIL-STD 810 and MIL-STD 461 requirements.

     Management believes that there is a market for this type of ruggedized
computer in the military area. As part of a continuing effort to upgrade its
products, the Company has also completed 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, 1998 and 1997 is being reimbursed by Medtronic.

     Research and development expenses during the fiscal years ended September
30, 1998 and 1997 were $657,607 and $611,295, respectively, and represented 4.2%
and 4.6% of total sales, respectively. A substantial portion of such expenses
for those fiscal years were applied to the development of the new RNB product,
the RLT 535, the RLT Model D, a larger laptop capable of accepting both
full-size ISA and PC/104 miniaturized expansion boards, the new model RLT
keyboard, a fully sealed, full travel keyboard at lower cost and the development
of a Pentium based main board for the RLT product line.

INTELLECTUAL PROPERTY

     Proprietary information and know-how are important to the Company's
commercial success. Paravant 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. However, the majority of
Paravant employees have signed confidentiality agreements regarding Paravant's
proprietary information, but no employees have signed non-competition agreements
other than Messrs. McNeight, Craven and Zimmerman and with the EDL-STL
Acquisition, Messrs. Stefanko, Clifford, Schooley, Torresani, Oberbeck and
Lambertson.

     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
Paravant 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. Paravant 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 Paravant.

     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 Paravant
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

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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, Paravant 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.

     Paravant'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 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 4, 1998, the Company, including EDL-STL, had 153 full time
employees including its officers, of whom 60 were engaged in manufacturing and
repair services, 31 in administration and financial control, 50 in engineering
and research and development, and 12 in marketing and sales.

     None of its employees is covered by a collective bargaining agreement or is
represented by a labor union. Paravant 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 rent payments of $9,855 per
month. This amount includes the Company's proportionate cost of utilities,
repairs, cleaning, taxes and insurance.

     With the EDL-STL Acquisition on October 8, 1998, the Company acquired a
lease relating to approximately 15,550 square feet of space located at 4391
Dayton Xenia Road, Dayton, Ohio 45432. This space is utilized by the Company as
the manufacturing plant for its aircraft support and signal

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processing subsidiaries. The lease for this space expires upon completion of
11,083 square feet of additional office space currently under construction.
Construction is expected to be complete in April 1999 and a new five-year lease
will replace the current lease. The current lease provides for rent payments of
$16,595 per month and will be replaced with a lease providing for rent payments
of $24,497 per month for the first year, $26,495 per month in the second year,
$28,556 per month in the third year, $29,127 per month in the fourth year, and
$29,709 per month in the fifth year. The office space associated with both the
current and replacement lease is owned by UES, Inc., an affiliated company,
which is majority owned by Paravant's Chairman and CEO.

     Management believes that its current facilities 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 locations.

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 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 also sought punitive damages of $1 million and costs.
The Company filed an answer denying the allegations made by plaintiff and
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 December 21, 1998, the parties agreed to a settlement
of this lawsuit whereby the Company will deliver to the plaintiff cash
approximating the amount which was accrued on September 30, 1998, and the
plaintiff will deliver to the Company a general release of liability. The
settlement is expected to become final following the filing with the court
of a stipulation of discontinuance with prejudice during the first week
of January, 1999.

     On September 18, 1996, a former controller of Paravant 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),
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 this matter. Management of the Company believes that the ultimate
resolution of this matter 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

     A special meeting of the shareholders of the Company ('Special Meeting')
was held on September 17, 1998. At the Special Meeting, the shareholders of the
Company voted to approve the acquisition of all of the capital stock of EDL and
substantially all of the business and assets of STL under the terms of the
Acquisition Agreement dated March 31, 1998, and finally amended August 6, 1998
between the Company, EDL, STL and the shareholders of EDL and STL (the
'Acquisition Agreement'). Of the shares represented at the meeting, 5,060,737
shares voted 'for' the acquisition, 45,224 shares voted 'against' the
acquisition and 47,000 shares 'abstained' from voting.

                                       17

<PAGE>
<PAGE>

     In addition, the shareholders of the Company voted to approve an amendment
to the Articles of Incorporation to change the name of the Company from Paravant
Computer Systems, Inc. to Paravant Inc. Of the shares represented at the
meeting, 8,090,428 shares voted 'for' the amendment, 15,699 shares voted
'against' the amendment and 28,504 shares 'abstained' from voting.

     These items were the only matters voted upon at the Special Meeting.

                                       18

<PAGE>
<PAGE>

                                    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 for the last two years of trading were as follows:

<TABLE>
<CAPTION>
                                                                                    HIGH             LOW
                                                                               --------------   --------------
<S>                                                                            <C>              <C>
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 31, 1997........................................   $5 3/32          $3 3/8
January 1, 1998 to March 31, 1998...........................................   $4               $2 11/16
April 1, 1998 to June 30, 1998..............................................   $2 31/32         $1 5/8
July 1, 1998 to September 30, 1998..........................................   $3               $1 3/16
October 1, 1998 to December 4, 1998.........................................   $2 15/32         $1 1/8
</TABLE>

     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 4, 1998, as reported by the Company's transfer agent, shares of
Common Stock were held by 106 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 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, its
overall financial condition and possible restrictions on the payment of
dividends included in the Company's credit agreement utilized for the Company's
acquisition of EDL-STL. See 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- LIQUIDITY AND CAPITAL RESOURCES'.

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, 1998 VS. SEPTEMBER 30, 1997

     Revenues for fiscal 1998 were $15,507,727, an increase of $2,298,186 or 17%
over 1997 revenues of $13,209,541. 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 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. In addition,
significant sales were made to the U. S. Navy of an integrated test and
maintenance system for the Phalanx Gun System.

                                       19

<PAGE>
<PAGE>

     Gross profit was $7,900,853 in 1998, or 51% of sales, compared to
$6,435,465 or 49% in 1997, a total increase of $1,465,388 or 23%. This increase
in gross profitability results primarily from the increased revenues discussed
above.

     Selling and administrative expense of $5,798,850 in 1998, increased by
$1,169,728 or 25% from 1997 expense of $4,629,122. As a percentage of sales,
selling and administrative expense was 37% and 35% in 1998 and 1997,
respectively. The increased selling and administrative expense is due primarily
to increased sales commissions directly attributable to the increased sales
discussed earlier herein, on-going research and development projects.

     Income from operations grew to $2,102,003 for 1998 from $1,806,343 in 1997,
an improvement of $295,660 or 16%. As a percentage of sales, income from
operations remained unchanged at 14% in 1998 and 1997. The improvement in income
from operations overall, resulted primarily from increased revenues and gross
profits, offset in part by increased selling and administrative expense as
discussed above.

     Interest expense for 1998 was reduced by $81,308 or 80% to $19,954 compared
to $101,262 in 1997. As a percentage of sales, interest expense decreased to
less than 1% in 1998 from 1% in 1997. This decrease is due to a significant
decline in outstanding debt made possible by continued growth in revenues and
gross profits, offset in part by increased selling and administrative expense as
discussed above.

     As a result, the Company's net income improved by 28% to $1,459,597 in 1998
when compared to $1,141,791 in 1997, an increase of $317,806 in total. Net
income as a percentage of sales was 9% in 1998 and 1997. The improvement in net
income overall, resulted primarily from increased revenues, gross profits and
reduced interest expense, offset in part by increased selling and administrative
expense as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 1998 the Company had 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 was due on demand and bore interest at the prime
rate or the 30 or 60 day LIBOR rates plus 2.7% for secured borrowings under
prescribed levels and the prime rate plus 0.5% for other borrowings. Secured
borrowings were collateralized by accounts receivable, inventory and equipment.
As of September 30, 1998, there were no borrowings outstanding under this
arrangement.

     On October 1, 1998, the Company replaced the $4,000,000 credit line with
floating rate financing in an amount up to $14,000,000 (the 'EDL-STL Acquisition
Financing') under a revolving line of credit with a maturity date of December
31, 2001, convertible thereafter to five year term debt. Pursuant to the loan
agreement, the rate of interest is to be determined at a rate equal to the
Bank's prime rate, the Federal Funds Rate or the LIBOR rate plus a margin which
ranges from 1.5% to 2% based on the debt to tangible net worth ratio at the
beginning of the applicable LIBOR rate contract period. The Company may elect
among the rates based upon conditions on the dates upon which funds are drawn.
The EDL-STL Acquisition Financing is secured by a first security interest in
accounts, contract rights, inventory, equipment and other security reasonably
requested by the lender. The loan agreement includes various loan covenants and
restrictions of a customary nature which, while the EDL-STL Acquisition
Financing is outstanding, may under certain circumstances, limit the ability of
the Company to pay cash dividends, undertake additional acquisitions, make
certain changes in the Company's management, or otherwise limit obligations
undertaken by, or operations of, the Company.

     In addition, the Company has a secured term loan provided by the Bank
bearing interest at a rate adjusted monthly to prime plus 1.5% at September 30,
1998. 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, 1998, there was $9,147 outstanding under this
arrangement with the Bank. The Company also has capital lease obligations of
$90,741 at September 30, 1998. 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.

                                       20

<PAGE>
<PAGE>

     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.

     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 $2,049,678 and $3,473,740 for 1998
and 1997, respectively. The decrease in the Company's operating cash flow
results primarily from a $98,278 increase in accounts receivable in the current
year compared to a decrease in accounts receivable of $3,078,277 in the prior
year and a $301,201 decrease in inventory in the current year compared to a
$957,881 increase in inventory in the prior year. This decrease in cash flow
caused by changes in accounts receivable and inventory is offset by improved net
income as more fully described in Management's Discussion and Analysis of
Operations for the fiscal year ended September 30, 1998 and improved working
capital as more fully presented in the Statements of Cash Flows for the same
period.

     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 less significant changes in accounts receivable and
inventory levels than the prior period. This change is evidenced by an increase
in first, second and third quarter revenues and operating cash flows, as well as
a decrease in fourth quarter revenues to 24% from 38% of total revenues for the
years ended September 30, 1998 and 1997, respectively.

     As of September 30, 1998, 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 $4,181,193 at September 30, 1998 has
been subsequently reduced by approximately $3,749,404 in cash collections as of
December 4, 1998. The Company has provided a reserve for certain older balances
of $88,993. This reserve is believed to be sufficient to address any
uncollectible balances outstanding as of September 30, 1998.

     On June 3, 1998, the Company entered into a loan agreement with an officer
and director of the Company. The note receivable of $215,684 bears interest at
the rate of interest then applicable for borrowings by the Company under the
Company's then existing line of credit or other primary lending arrangement with
its primary lender, with interest payable annually, and matures on June 3, 2003.

     On July 2, 1998, the Company entered into a loan agreement with UES, Inc.
('UES'), an affiliate of the Company, which is controlled by the Company's
Chairman. The note receivable of $750,000 is due on December 31, 1998 and bears
interest at 7% payable monthly. The note is personally guaranteed by the
Company's Chairman.

     As of September 30, 1998 and 1997, the Company's backlog was $9,929,339 and
$15,242,745, 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

                                       21

<PAGE>
<PAGE>

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 $8,610,229
of the products in backlog within the next 12 months. The remaining $1,319,110
of products in backlog will be completed over the next 24 months.

     The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the Company's existing working
capital and anticipated cash flows from the Company's operations, are expected
to be sufficient to satisfy the Company's cash requirements for at least twelve
months. As the Company continues to grow, additional bank borrowings, such as
the EDL-STL acquisition financing described below, 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.

YEAR 2000 COMPLIANCE

     The Company recognizes that year 2000 issues could result in system
failures or miscalculations causing disruptions of operations, including, among
others, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.

     The Company has been engaged in an evaluation of its year 2000 readiness
concerning various aspects of its business. Specifically, the Company has
focused on its information technology and non-information technology systems, as
well as its production processes and products. The Company has also attempted to
analyze year 2000 issues relating to third parties with whom the Company has a
business relationship. The current status of the Company's efforts is as
follows:

      Information Technology Systems: The Company's accounting software provider
      and operating system provider have advised the Company that such software
      is year 2000 compliant.

      Non-Information Technology Systems: Although the Company does not believe
      that non-information technology systems are material to its business, the
      Company has begun reviewing and testing such systems. The Company does not
      believe that it will incur any material costs in connection with the
      review and testing of such systems or to achieve compliance with year 2000
      issues.

      Products: The Company's products are date sensitive. The Company has
      completed a review of its products and published a product list detailing
      which products are not year 2000 compliant. For products that are not year
      2000 compliant, the Company has published instructions to make those
      products year 2000 compliant. In most cases, the instructions consist of
      entering the correct date and time and rebooting the equipment. The
      Company will conduct a second review of its hardware and software to
      determine compliance with year 2000 issues during 1999 to determine the
      effectiveness of this plan. Therefore, the Company does not believe it has
      any material exposure with regard to its products as a result of the year
      2000 issue.

      Suppliers: Certain products purchased by the Company are obtained from a
      limited group of suppliers. The Company surveyed such suppliers in 1998
      regarding their year 2000 status. Absent widespread difficulties affecting
      several major vendors, the Company does not anticipate that vendors' year
      2000 issues would have a material adverse effect on the Company, because
      the Company believes alternative sources of supply are available for all
      required components.

      The Company is not currently aware of the year 2000 readiness of certain
      outside services companies. Any adverse effect caused by the failure of
      these providers to be year 2000 compliant is not currently susceptible to
      quantification.

      Customers: Because the Company's customer base may change from year to
      year, the Company is unable to predict the specific identity of its major
      customers in the year 2000 and thereafter. Accordingly, the Company is
      unable to make an inquiry as to whether the customers' computer driven
      payment or purchasing processes are year 2000 compliant. A customer's year
      2000 issues could cause a delay in receipt of purchase orders or in
      payment. If year 2000 issues are

                                       22

<PAGE>
<PAGE>

      widespread among the Company's customers, the Company's sales and cash
      flow could be materially affected. However, the Company has a plan in
      place, through its contracts department, to mitigate the potential effects
      of customers' year 2000 issues.

EDL-STL ACQUISITION

     On October 8, 1998 the Company consummated the EDL-STL Acquisition,
effective October 1, 1998, acquiring all of the outstanding capital stock of EDL
and substantially all of the assets of STL, EDL's majority-owned subsidiary.
EDL-STL, which prior to the EDL-STL Acquisition were privately-held affiliated
companies, are engaged in the business of designing, developing and producing
equipment to meet U.S. and foreign government requirements. EDL, whose primary
customers include the U.S. Air force, U.S. Navy and U.S. Marines and allied
military forces specializes in designing, developing and producing avionics
equipment used to modify the airborne platforms employed by Special Operations
forces. STL, whose customers include several U.S. government agencies and
government prime contractors, designs and produces digital signal processing
hardware, digital switch matrices for signal routing purposes, and other
products for signal enhancement and modification. Pursuant to the Acquisition
Agreement, the Company paid an aggregate consideration consisting of (i) $8.7
million in cash, (ii) three-year $4.8 million notes bearing interest at the rate
of 8% and (iii) 3,950,000 shares of Common Stock. In addition, in connection
with the EDL-STL Acquisition a contingent cash earn-out will be payable by the
Company under specified circumstances over a period of up to five years based on
EDL-STL's future profits and, if paid, will be recorded as additional
compensation expense for the fiscal years ending September 30, 2000 to
September 30, 2003. The cash portion of the consideration paid by the Company in
connection with the EDL-STL Acquisition was financed under the EDL-STL
Acquisition Financing.

     In connection with the EDL-STL Acquisition, the Board of Directors has
increased the size of the Board to eight members and has appointed as additional
members of the Board three former shareholders and directors of EDL and STL.
These directors include Edward W. Stefanko, President and Chief Executive
officer of EDL, C. Hyland Schooley, President of STL and James E. Clifford,
Executive Vice President and Chief Operating Officer of STL. Messrs. Stefanko,
Schooley and Clifford will continue to serve on the Company's Board of Directors
until the next annual meeting of the Company's shareholders and until their
respective successors are duly elected and qualified.

     Mr. Clifford was a member of the Board of Directors from 1995 through
December 30, 1997. He resigned as a director to allow the negotiations for the
EDL-STL acquisition to be conducted at arm's length. Although the negotiations
began prior to Mr. Clifford's resignation, he was excused from any discussion of
the deal by the Board.

     Consistent with the long range plans of the Board of Directors to further
diversify the business activities of the Company in the defense, communications
and related electronics industry, the board recommended a change in the name of
the Company from Paravant Computer Systems, Inc. to Paravant Inc. in order to
present a corporate identity which is not limited solely to the Company's
present core business. The proposal to change the name of the company was
approved at the Special Meeting. The name change was effective on November 1,
1998.

CAUTIONARY STATEMENT

     This Report 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 filed with this Report are set
forth in a separate section commencing on page F-1.

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

     None

                                       23


<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 4, 1999, 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 4, 1999, which section is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     See the sections captioned 'Principal Shareholders of the Company' and
'Compliance with Section 16(a) of the Securities Exchange Act' included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on March 4, 1999, which section is incorporated herein by reference.

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 4, 1999, which section is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     The following exhibits are filed as part of this Annual Report on Form
10-KSB.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                             DESCRIPTION OF DOCUMENT
-------  -----------------------------------------------------------------------------------------------------------
<S>      <C>
 2.1     -- Acquisition Agreement by and among Paravant Computer Systems, Inc., Engineering Development
            Laboratories, Incorporated, Signal Technology Laboratories, Inc. James E. Clifford, Edward W. Stefanko,
            C. David Lambertson, C. Hyland Schooley, Peter Oberbeck and Leo S. Torresani (incorporated by reference
            to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated October 8, 1998).
 3(i)    -- Amended and Restated Articles of Incorporation as filed with the Florida Department of State on
            December 8, 1998.
 3(ii)   -- Amended and Restated By-laws (incorporated by reference to exhibit 3.2 of Form 10-QSB of the quarterly
            period ended June 30, 1996).
 4.1A    -- Specimen Common Stock Certificate as amended November 1, 1998.
 4.2A    -- Specimen Warrant (incorporated by reference to Exhibit 4.2 to Amendment No. 4 to Registration Statement
            on Form SB-2).
10.3B    -- Incentive Stock Option Plan, as amended March 12, 1998 (incorporated by reference to Exhibit 10.3B to
            the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1998).
10.14A   -- Non-employee Directors' Stock Option Plan, as amended March 12, 1998 (incorporated by reference to
            Exhibit 10.14A to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March
            31, 1998).
10.32    -- Agreements Granting Special Stock Option between the Registrant and John P. Singleton dated as of June
            18, 1998 (incorporated by reference to Exhibit 10.32 to the Registrant's Quarterly Report on Form 10-QSB
            for the quarterly period ended June 30, 1998).
</TABLE>

                                       24

<PAGE>
<PAGE>


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                             DESCRIPTION OF DOCUMENT
-------  -----------------------------------------------------------------------------------------------------------
<S>      <C>
10.33    -- Agreements clarifying Prior Grant of Stock Options between the Registrant and Michael F. Maguire dated
            as of June 18, 1998 (incorporated by reference to Exhibit 10.33 to the Registrant's Quarterly Report on
            Form 10-QSB for the quarterly period ended June 30, 1998).
10.34    -- Promissory Note to Registrant from Richard P. McNeight dated June 3, 1998 (incorporated by reference to
            Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
            1998).
10.35    -- Promissory Note to Registrant from UES Inc. dated July 2, 1998 (incorporated by reference to Exhibit
            10.35 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1998).
            The note is personally guaranteed by Krishan K. Joshi.
10.36    -- Credit Agreement by Registrant with National City Bank.
10.37    -- Commercial Note by Registrant with National City Bank.
10.38    -- Employment Agreement between Paravant Computer Systems, Inc. and Edward W. Stefanko dated October 1,
            1998.
10.39    -- Employment Agreement between Paravant Computer Systems, Inc. and C. Hyland Schooley dated October 1,
            1998.
10.40    -- Employment Agreement between Paravant Computer Systems, Inc. and James E. Clifford dated October 1,
            1998.
10.41    -- Non-Competition Agreement between Paravant Computer Systems, Inc. and C. Hyland Schooley dated October
            1, 1998.
10.42    -- Subordinated Note from Paravant Computer Systems, Inc. to Edward W. Stefanko dated October 1, 1998.
10.43    -- Subordinated Note from Paravant Computer Systems, Inc. to Hyland Schooley dated October 1, 1998.
10.44    -- Subordinated Note from Paravant Computer Systems, Inc. to James E. Clifford dated October 1, 1998.
10.45    -- Lease Agreement between Engineering Development Laboratories, Incorporated and UES, Incorporated, dated
            November 26, 1996 (as amended).
10.46    -- Lease Agreement between Signal Technology Laboratories, Inc. and UES, Incorporated dated August 1, 1996
            (as amended through October 1, 1997).
10.47    -- Mutual Commitment to Build and to Lease between Engineering Development Laboratories, Incorporated, UES,
            Inc. and Beavercreek Enterprises dated June 5, 1998.
10.48    -- Mutual Commitment to Build and to Lease between Signal Technology Laboratories, Inc., UES, Inc. and
            Beavercreek Enterprises dated June 5, 1998.
11       -- Statement re: computation of per share earnings (not required because the relevant computation can be
            clearly determined from material contained in the financial statements).
21       -- Subsidiaries of Paravant Inc.
27       -- Financial Data Schedule.
</TABLE>

     (b) Reports on Form 8-K

     No reports on Form 8-K were filed by the registrant during the quarter
ended September 30, 1998. However, Form 8-K, dated October 8, 1998, was filed on
October 21, 1998 reporting under Item 2 an Acquisition Agreement by and among
Paravant Computer Systems, Inc., Engineering Development Laboratories,
Incorporated, Signal Technology Laboratories, Inc., James E. Clifford, Edward W.
Stefanko, C. David Lambertson, C. Hyland Schooley, Peter Oberbeck and Leo S.
Torresani.

                                       25



<PAGE>
 


<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                          PARAVANT INC.

                                          By:        /s/ KRISHAN K. JOSHI
                                             ...................................

                                                     KRISHAN K. JOSHI,
                                              CHAIRMAN OF THE BOARD AND CHIEF
                                                    EXECUTIVE OFFICER

December 15, 1998

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                     CAPACITY                            DATE
------------------------------------------  --------------------------------------------   -------------------
<S>                                         <C>                                            <C>
           /s/ KRISHAN K. JOSHI             Chairman, Chief Executive Offer                 December 15, 1998
 .........................................    and Director (Principal Executive Officer)
             KRISHAN K. JOSHI

         /s/ RICHARD P. MCNEIGHT            President and Director                          December 15, 1998
 .........................................
           RICHARD P. MCNEIGHT

          /s/ WILLIAM R. CRAVEN             Vice President, Director                        December 15, 1998
 .........................................    and Secretary
            WILLIAM R. CRAVEN

          /s/ KEVIN J. BARTCZAK             Vice President and Chief Financial              December 15, 1998
 .........................................    Officer, Treasurer (Principal Financial
            KEVIN J. BARTCZAK                 Officer and Principal Accounting Officer)

          /s/ JAMES E. CLIFFORD             Director                                        December 15, 1998
 .........................................
            JAMES E. CLIFFORD

          /s/ MICHAEL F. MAGUIRE            Director                                        December 15, 1998
 .........................................
            MICHAEL F. MAGUIRE

          /s/ C. HYLAND SCHOOLEY            Director                                        December 15, 1998
 .........................................
            C. HYLAND SCHOOLEY

          /s/ JOHN P. SINGLETON             Director                                        December 15, 1998
 .........................................
            JOHN P. SINGLETON

          /s/ EDWARD W. STEFANKO            Director                                        December 15, 1998
 .........................................
            EDWARD W. STEFANKO
</TABLE>

                                       26





<PAGE>
 


<PAGE>

                                 PARAVANT INC.
                              FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997
                  (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-17
</TABLE>

                                      F-1

<PAGE>
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors:
PARAVANT INC.:

     We have audited the accompanying balance sheets of Paravant Inc. as of
September 30, 1998 and 1997, 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 audit 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 Inc. as of
September 30, 1998 and 1997, 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

Orlando, Florida
November 16, 1998

(except Note 17, which is as of December 21, 1998)


                                      F-2


<PAGE>
 


<PAGE>

                                 PARAVANT INC.
                                 BALANCE SHEETS
                          SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                      ASSETS                                             1998           1997
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Current assets:
     Cash and cash equivalents.....................................................   $ 1,187,788    $ 1,612,627
     Accounts receivable, net......................................................     4,181,193      4,082,915
     Employee receivables and advances.............................................        49,255         28,121
     Note receivable (note 16).....................................................       750,000        --
     Inventory, net (note 3).......................................................     3,160,572      3,461,773
     Prepaid expenses..............................................................        70,300         97,585
     Deferred income taxes (note 14)...............................................       482,620        465,177
                                                                                      -----------    -----------
          Total current assets.....................................................     9,881,728      9,748,198
                                                                                      -----------    -----------
Property, plant and equipment, net (notes 4, 7, 8 and 9)...........................     1,239,179        914,439
Intangible assets, net (note 5)....................................................        63,875         64,875
Demonstration pool and custom molds, net (note 6)..................................       252,870        262,522
Employee note receivable (note 2)..................................................       215,684        --
Other assets (note 19).............................................................     1,042,240        318,980
                                                                                      -----------    -----------
          Total assets.............................................................   $12,695,576    $11,309,014
                                                                                      -----------    -----------
                                                                                      -----------    -----------
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of long-term debt (note 8).................................   $     9,147    $   110,004
     Current maturities of capital lease obligations (note 9)......................        63,670        124,839
     Accounts payable..............................................................       380,696        595,367
     Accrued commissions...........................................................       524,036        570,559
     Accrued expenses..............................................................       804,914        739,258
     Accrued incentive compensation................................................       354,806        262,286
     Income taxes payable..........................................................        88,414        498,955
                                                                                      -----------    -----------
          Total current liabilities................................................     2,225,683      2,901,268
                                                                                      -----------    -----------
Long-term debt, less current maturities (note 8)...................................       --               9,147
Capital lease obligations, less current maturities (note 9)........................        27,071         71,352
Deferred income taxes (note 14)....................................................       207,067        117,734
                                                                                      -----------    -----------
          Total liabilities........................................................     2,459,821      3,099,501
                                                                                      -----------    -----------
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 8,343,928 shares at September 30, 1998 and 7,993,652 shares
      at September 30, 1997 (notes 10 and 11)......................................       125,159        119,905
     Additional paid-in capital (note 12)..........................................     5,628,649      5,067,258
     Retained earnings.............................................................     4,481,947      3,022,350
                                                                                      -----------    -----------
          Total stockholders' equity...............................................    10,235,755      8,209,513
                                                                                      -----------    -----------
Commitments and contingencies (notes 9 and 17)
          Total liabilities and stockholders' equity...............................   $12,695,576    $11,309,014
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>

                See accompanying notes to financial statements.

                                      F-3



<PAGE>
 

<PAGE>

                                 PARAVANT INC.
                              STATEMENTS OF INCOME
                    YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                         1998           1997
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Revenues (note 18).................................................................   $15,507,727    $13,209,541
Cost of revenues...................................................................     7,606,874      6,774,076
                                                                                      -----------    -----------
     Gross profit..................................................................     7,900,853      6,435,465
Selling and administrative expense (note 13).......................................     5,798,850      4,629,122
                                                                                      -----------    -----------
     Income from operations........................................................     2,102,003      1,806,343
Other income (expense):
     Interest expense..............................................................       (19,954)      (101,262)
     Interest income...............................................................       110,062         19,251
     Miscellaneous income..........................................................        17,524         11,688
                                                                                      -----------    -----------
          Income before income taxes...............................................     2,209,635      1,736,020
Income tax expense (note 14).......................................................       750,038        594,229
                                                                                      -----------    -----------
          Net income...............................................................   $ 1,459,597    $ 1,141,791
                                                                                      -----------    -----------
                                                                                      -----------    -----------
Basic earnings per share...........................................................          $.18           $.14
                                                                                             ====           ====
Diluted earnings per share.........................................................          $.14           $.09
                                                                                             ====           ====
Weighted average number of common shares outstanding...............................     8,174,111      7,979,293
                                                                                      -----------    -----------
                                                                                      -----------    -----------
Weighted average number of common shares and dilutive potential common shares
  outstanding......................................................................    10,451,408     12,260,992
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>

                See accompanying notes to financial statements.

                                      F-4

<PAGE>
<PAGE>

                                 PARAVANT INC.
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<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, 1996..................................  7,956,038   $119,341   $5,045,944   $1,880,559    $  7,045,844
Exercise of common stock options (note 10)....................     37,614        564       21,314       --              21,878
Net income....................................................     --          --          --        1,141,791       1,141,791
                                                                ---------   --------   ----------   ----------   -------------
Balances, September 30, 1997..................................  7,993,652    119,905    5,067,258    3,022,350       8,209,513
Exercise of underwriter's warrants for additional redeemable
  warrants (note 11)..........................................     --          --          14,881       --              14,881
Exercise of warrants for shares (note 11).....................    124,215      1,863      242,576       --             244,439
Exercise of common stock options (note 10)....................    226,061      3,391      158,285       --             161,676
Tax benefit of exercise of nonqualified stock options.........     --          --         549,091       --             549,091
Registration costs related to stock options and warrants
  (note 12)...................................................     --          --        (403,442)      --            (403,442)
Net income....................................................     --          --          --        1,459,597       1,459,597
                                                                ---------   --------   ----------   ----------   -------------
Balances, September 30, 1998..................................  8,343,928   $125,159   $5,628,649   $4,481,947    $ 10,235,755
                                                                ---------   --------   ----------   ----------   -------------
                                                                ---------   --------   ----------   ----------   -------------
</TABLE>

                See accompanying notes to financial statements.

                                      F-5

<PAGE>
<PAGE>

                                 PARAVANT INC.
                            STATEMENTS OF CASH FLOWS
                    YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                          1998           1997
                                                                                       -----------    -----------
<S>                                                                                    <C>            <C>
Cash flows from operating activities:
     Net income.....................................................................   $ 1,459,597    $ 1,141,791
     Adjustments to reconcile net income to net cash provided by operating
      activities:
          Depreciation and amortization.............................................       444,995        348,233
          Deferred income taxes.....................................................        71,890       (215,373)
          Increase (decrease) in cash caused by changes in:
               Accounts receivable..................................................       (98,278)     3,078,277
               Employee receivables and advances....................................       (21,134)        45,381
               Inventory............................................................       301,201       (957,881)
               Prepaid expenses.....................................................        27,285         43,606
               Other assets.........................................................      (171,410)      (277,844)
               Accounts payable.....................................................      (214,671)      (448,364)
               Accrued commissions..................................................       (46,523)       121,308
               Accrued expenses.....................................................        65,656        308,358
               Accrued incentive compensation.......................................        92,520        122,286
               Income taxes payable.................................................       138,550        163,962
                                                                                       -----------    -----------
                    Net cash provided by operating activities.......................     2,049,678      3,473,740
                                                                                       -----------    -----------

Cash flows from investing activities:
     Acquisitions of property, plant and equipment..................................      (628,778)      (443,066)
     Acquisitions of intangible assets, demonstration pool and custom molds.........      (103,290)       (67,826)
     Notes receivable...............................................................      (965,684)       --
     Payment of acquisition costs...................................................      (551,850)       (25,000)
                                                                                       -----------    -----------
                    Net cash used in investing activities...........................    (2,249,602)      (535,892)
                                                                                       -----------    -----------
Cash flows from financing activities:
     Net repayments on notes payable to bank........................................       --            (540,000)
     Repayments on other notes payable..............................................       --            (100,000)
     Repayments on long-term debt...................................................      (110,004)      (610,004)
     Repayments on capital lease obligations........................................      (132,465)      (162,164)
     Proceeds from exercise of warrants.............................................       259,320        --
     Proceeds from exercise of common stock options.................................       161,676         21,878
     Payment of registration costs..................................................      (403,442)       --
                                                                                       -----------    -----------
                    Net cash used in financing activities...........................      (224,915)    (1,390,290)
                                                                                       -----------    -----------
                    Net increase (decrease) in cash and cash equivalents............      (424,839)     1,547,558
Cash and cash equivalents at beginning of year......................................     1,612,627         65,069
                                                                                       -----------    -----------
Cash and cash equivalents at end of year............................................   $ 1,187,788    $ 1,612,627
                                                                                       -----------    -----------
                                                                                       -----------    -----------
Supplemental disclosures of cash flow information:
     Cash paid during the year for:
          Interest..................................................................   $    19,704    $   103,270
                                                                                       -----------    -----------
                                                                                       -----------    -----------
          Income taxes..............................................................   $   539,598    $   644,106
                                                                                       -----------    -----------
                                                                                       -----------    -----------
Supplemental disclosure of noncash investing and financing activities:
     The Company entered into capital lease agreements for factory and office
      equipment.....................................................................   $    27,015    $   191,228
                                                                                       -----------    -----------
                                                                                       -----------    -----------
Supplemental disclosure of noncash financing activities:
     The Company had a tax benefit from the exercise of nonqualified stock
      options.......................................................................   $   549,091    $   --
                                                                                       -----------    -----------
                                                                                       -----------    -----------
</TABLE>

                See accompanying notes to financial statements.

                                      F-6





<PAGE>
 

<PAGE>

                                 PARAVANT INC.
                         NOTES TO FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1998 AND 1997

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BUSINESS

     Paravant 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 with primarily military
applications. The Company has expanded into the medical market and now provides
a line of programmers which are used to provide programming information to
medical pumps and related devices. 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 $88,993 and $141,497 as of September 30, 1998 and 1997,
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, 1998 and 1997, the
Company had product sales of $43,996 and $1,241,111, 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 $78,000 and $75,000 as of September 30, 1998 and 1997,
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 INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

(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 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 disclosures of SFAS No. 123.

(i) BASIC AND DILUTED EARNINGS PER SHARE

     On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, 'Earnings per Share'. SFAS No.
128 superseded APB Opinion No. 15, 'Earnings per Share', and specifies the
computation, presentation, and disclosure requirements for earnings per share
for entities with publicly held common stock or potential common stock. It also
requires that prior period earnings per share be restated to conform to the
requirements of SFAS No. 128.

     Basic earnings per share for the years ended September 30, 1998 and 1997
has been computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share for the years ended
September 30, 1998 and 1997 has been computed by dividing net income by the
weighted average number of common shares and dilutive potential common shares
outstanding.

     A reconciliation of the weighted average number of shares outstanding used
in the computation of basic and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
                                                              1998          1997
                                                           ----------    ----------
<S>                                                        <C>           <C>
Basic:
     Weighted average number of common shares
       outstanding......................................    8,174,111     7,979,293
                                                           ----------    ----------
                                                           ----------    ----------
Diluted:
     Weighted average number of common shares
       outstanding......................................    8,174,111     7,979,293
     Dilutive stock options.............................      482,065       755,700
     Dilutive warrants..................................    1,795,232     3,525,999
                                                           ----------    ----------
                                                           10,451,408    12,260,992
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>

     Options to purchase 643,750 and 214,000 shares of common stock were
excluded from the calculation of diluted earnings per share for the years ended
September 30, 1998 and 1997, respectively, because their exercise prices
exceeded the average market price of common shares for the period.

(j) FINANCIAL INSTRUMENTS

     The fair values of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate their carrying amounts due to the short
maturity of those instruments. The fair values of notes receivable, long-term
debt and capital lease obligations approximate their carrying amounts because
these financial instruments bear interest at borrowing rates currently available
to the Company for similar issues or leases with similar terms and maturities.

                                      F-8

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

(k) 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.

(2) EMPLOYEE NOTE RECEIVABLE

     The Company holds an unsecured note receivable of $215,684 from an officer
and director of the Company. The note was originated in June 1998, bears
interest at the prime rate currently available under the Company's existing line
of credit and matures in June 2003.

(3) INVENTORY

     The following is a summary of inventory at September 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                              1998          1997
                                                           ----------    ----------
<S>                                                        <C>           <C>
Raw materials...........................................   $3,142,646    $2,149,401
Work in process.........................................      394,212     1,490,621
Finished goods..........................................       52,714       263,516
                                                           ----------    ----------
                                                            3,589,572     3,903,538
Reserve for obsolete inventory..........................     (429,000)     (441,765)
                                                           ----------    ----------
                                                           $3,160,572    $3,461,773
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>

(4) PROPERTY, PLANT AND EQUIPMENT

     The following is a summary of property, plant and equipment at September
30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                              1998          1997
                                                           ----------    ----------
<S>                                                        <C>           <C>
Office equipment........................................   $1,050,343    $  980,019
Factory equipment.......................................      776,841       596,412
Leasehold improvements..................................      231,760       199,945
                                                           ----------    ----------
          Total cost....................................    2,058,944     1,776,376
Less accumulated depreciation...........................     (819,765)     (861,937)
                                                           ----------    ----------
                                                           $1,239,179    $  914,439
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>

     Depreciation and amortization expense on these assets amounted to $331,053
and $237,370 for the years ended September 30, 1998 and 1997, respectively.

(5) 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, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                               1998         1997
                                                             ---------    ---------
<S>                                                          <C>          <C>
Cost......................................................   $ 302,500    $ 272,500
Accumulated amortization..................................    (238,625)    (207,625)
                                                             ---------    ---------
                                                             $  63,875    $  64,875
                                                             ---------    ---------
                                                             ---------    ---------
</TABLE>

                                      F-9

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

     Total amortization expense on these assets was $31,000 and $29,250 for the
years ended September 30, 1998 and 1997, respectively.

(6) 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, 1998
and 1997 are as follows:

<TABLE>
<CAPTION>
                                                               1998         1997
                                                             ---------    ---------
<S>                                                          <C>          <C>
Cost......................................................   $ 480,403    $ 762,549
Accumulated amortization..................................    (227,533)    (500,027)
                                                             ---------    ---------
                                                             $ 252,870    $ 262,522
                                                             ---------    ---------
                                                             ---------    ---------
</TABLE>

     Total amortization expense on these assets was $82,942 and $81,613 for the
years ended September 30, 1998 and 1997, respectively.

(7) NOTE 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, 1998, bears interest at the prime rate or
the 30 or 60 day LIBOR rate plus 2.70% for secured borrowings under prescribed
levels and the prime rate plus .50% for other borrowings. Secured borrowings are
collateralized by accounts receivable, inventory and equipment. There were no
borrowings outstanding under this credit agreement at September 30, 1998 and
1997. The credit agreement does not contain any material financial covenants.

(8) LONG-TERM DEBT

     The following is a summary of long-term debt at September 30, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                          1998        1997
                                                                         -------    ---------
<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.............   $ 9,147    $ 119,151
Less current maturities...............................................    (9,147)    (110,004)
                                                                         -------    ---------
          Long-term debt, less current maturities.....................   $ --       $   9,147
                                                                         -------    ---------
                                                                         -------    ---------
</TABLE>

(9) LEASES

     The Company is obligated under various capital leases for office equipment
and building improvements. At September 30, 1998 and 1997, respectively,
property, plant and equipment included net capital lease assets of $256,347 and
$293,096.

     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 $147,409 and
$185,306 for the years ended September 30, 1998 and 1997, respectively.

                                      F-10

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

     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 for capital lease obligations as of September 30, 1998:

<TABLE>
<CAPTION>
                                                                         CAPITAL     OPERATING
YEAR ENDING SEPTEMBER 30,                                                LEASES       LEASES
---------------------------------------------------------------------   ---------    ---------
<S>                                                                     <C>          <C>
1999.................................................................   $  68,968    $ 149,916
2000.................................................................      22,741      139,940
2001.................................................................       6,132      121,510
2002.................................................................      --            7,210
                                                                        ---------    ---------
          Total minimum lease payments...............................      97,481      418,576
                                                                                     ---------
                                                                                     ---------
Less amounts representing interest...................................      (7,100)
                                                                        ---------
          Present value of net minimum lease payments................      90,741
Less current maturities..............................................     (63,670)
                                                                        ---------
Capital lease obligations............................................   $  27,071
                                                                        ---------
                                                                        ---------
</TABLE>

(10) STOCK OPTIONS

     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.

     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 provided that the options were
exercisable through November 22, 2004. These options were exercised on April 28,
1998.

     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 and on March 12, 1998, the Company increased the options
reserved under the qualified plan from 1,455,000 to 2,955,000. 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'). On March 12, 1998, the Company increased the
options reserved under the directors nonqualified plan from 45,000 to 135,000.
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 and on the date of each of the Board's annual meetings
thereafter.

                                      F-11

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

     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.

     On June 18, 1998, the Company granted special options to one nonemployee
director (1998 special option plan) exercisable for ten years from the date of
issuance for the purchase of 9,000 shares at an exercise price of $1.719 per
share, the market price of the shares at the date of issuance. Although not
granted under the existing directors' nonqualified plan, the 1998 special option
plan is subject to terms substantially similar to those applicable to options
granted under the directors nonqualified plan. The 1998 special options are
evidenced by a stock option agreement between the Company and the director.

     At September 30, 1998, there were 1,530,042 and 78,000 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 1998 where exercise
price equals the market price of the stock on the grant date and exercise price
is greater than the market price of the stock on the grant date was $3.86 and
$4.68, respectively. 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 following weighted average assumptions were used:

<TABLE>
<CAPTION>
                                                                        1998           1997
                                                                     ----------      ---------
<S>                                                                  <C>             <C>
Exercise price equal to market price on grant date
     Expected risk-free interest rate.............................         5.75%          6.13%
     Expected life................................................      7.9 years      8.0 years
     Expected volatility..........................................       110.90%        122.72%
     Expected dividend yield......................................         0.00%          0.00%
Exercise price greater than market price on grant date
     Expected risk-free interest rate.............................         5.78%        --
     Expected life................................................      5.0 years       --
     Expected volatility..........................................       110.00%        --
     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 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:

<TABLE>
<CAPTION>
                                                                               1998          1997
                                                                            ----------    ----------
<S>                  <C>                                                    <C>           <C>
Net income           As reported.........................................   $1,459,597    $1,141,791
                     Pro forma...........................................      413,014       629,758
Basic earnings per   As reported.........................................         0.18          0.14
  share
                     Pro forma...........................................         0.05          0.08
</TABLE>

                                      F-12

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

     Pro forma net income reflects only options granted in 1998, 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, 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
     Granted.............................................................     461,500           4.13
     Exercised...........................................................    (226,061)           .72
     Forfeited...........................................................     (18,650)          4.95
                                                                            ---------
Outstanding at September 30, 1998........................................   1,386,543           2.68
                                                                            ---------
                                                                            ---------
</TABLE>

     At September 30, 1998, the range of exercise prices and weighted-average
remaining contractual lives of outstanding options was $.24 to $.72 for 251,943
shares; $.73 to $.79 for 120,000 shares; $1.33 to $1.72 for 389,500 shares; and
$3.56 to $6.00 for 625,100 shares at 5.75 years, 1.15 years, 6.26 years and 7.61
years, respectively.

     At September 30, 1998 and 1997, the number of options exercisable was
731,711 and 597,754, respectively, and the weighted-average exercise price of
those options was $1.60 and $.97, respectively.

(11) WARRANTS

     In connection with the Company's initial public offering (IPO) of common
stock in June of 1996, the Company issued 4,830,000 warrants ('redeemable
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 closing
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. During the year ended September 30, 1998, this condition was met
as the closing sale price of the Company's common stock exceeded $2.83 per share
from December 1, 1997 through March 26, 1998 and these warrants are callable. As
of September 30, 1998, 112,215 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 to purchase redeemable warrants at $.04 per warrant. The
underwriter's warrants are exercisable during the four-year period commencing
June 3, 1997. As of September 30, 1998, 12,000 underwriter's warrants have been
exercised and 372,018 underwriter's warrants to purchase warrants have been
exercised. Upon exercise, the underwriter's warrants to purchase warrants
increase the number of redeemable warrants outstanding.

     In connection with the Company's bridge financing in August 1995, the
Company sold to a group of investors, warrants ('bridge warrants'), to purchase
480,000 shares of common stock, exercisable until June 3, 2001 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 bridge warrants, may
redeem the bridge warrants at a price of $.0167 per bridge warrant provided that
the average of the closing bid prices of the Company's common stock on the
Nasdaq National Market has exceeded $2.00 for any consecutive

                                      F-13

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

20 trading days, and then only upon written notice of not less than 30 days,
given within 60 days of this period. As of September 30, 1998, no bridge
warrants have been exercised.

     On April 15, 1998, the Company issued warrants to The Equity Group, Inc. to
purchase 45,000 unregistered shares of common stock. These warrants are
exercisable until April 14, 2003 at an exercise price of $2.75 per share,
subject to adjustment in certain circumstances. The Equity Group, Inc. is the
Company's financial public relations and investor relations consultant and the
warrants were issued in conjunction with the signing of a one year contract.

(12) REGISTRATION COSTS

     The Company incurred $403,442 of registration costs related to the
registration of shares under its qualified, directors nonqualified, 1997 special
and 1998 special option plans and its redeemable warrants, underwriter warrants
and bridge warrants. These costs have been reflected as a reduction of
additional paid-in capital in the accompanying financial statements.

(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
$657,607 and $611,295 for the years ended September 30, 1998 and 1997,
respectively.

(14) INCOME TAXES

     The components of income tax expense (benefit) for the years ended
September 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                           CURRENT     DEFERRED      TOTAL
                                                           --------    ---------    --------
<S>                                                        <C>         <C>          <C>
1998:
     Federal............................................   $640,691       61,383     702,074
     State..............................................     37,457       10,507      47,964
                                                           --------    ---------    --------
                                                           $678,148       71,890     750,038
                                                           --------    ---------    --------
                                                           --------    ---------    --------
1997:
     Federal............................................   $683,579     (184,143)    499,436
     State..............................................    126,026      (31,230)     94,793
                                                           --------    ---------    --------
                                                           $809,602     (215,373)    594,229
                                                           --------    ---------    --------
                                                           --------    ---------    --------
</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, 1998
and 1997:

<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                         --------    --------
<S>                                                                      <C>         <C>
Computed 'expected' tax expense.......................................   $751,276     590,247
Increase (decrease) in income taxes resulting from:
     State income taxes, net of federal income tax benefit............     30,125      52,358
     Nondeductible meals and entertainment expense....................      3,250       7,200
     Research and experimentation credit..............................      --        (31,951)
     Other, net.......................................................    (34,613)    (23,625)
                                                                         --------    --------
                                                                         $750,038     594,229
                                                                         --------    --------
                                                                         --------    --------
</TABLE>

                                      F-14

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

     Deferred income taxes as of September 30, 1998 and 1997 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, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                          1998         1997
                                                                        ---------    --------
<S>                                                                     <C>          <C>
Gross deferred tax liabilities:
     Capitalized costs...............................................   $(113,416)    (36,392)
     Accumulated depreciation........................................     (93,651)    (81,342)
                                                                        ---------    --------
          Total gross deferred tax liabilities.......................    (207,067)   (117,734)
                                                                        ---------    --------
Gross deferred tax assets:
     Inventory.......................................................     287,993     255,166
     Accounts receivable.............................................      33,488      53,245
     Accrued warranty costs..........................................      29,351      28,223
     Accrued vacation and sick leave.................................      84,347      54,996
     Accrued incentive compensation..................................      39,149      26,341
     Deferred revenue................................................       8,292       8,292
     Research credits................................................      --          38,914
                                                                        ---------    --------
          Total gross deferred tax assets............................     482,620     465,177
                                                                        ---------    --------
          Total net deferred tax assets..............................   $ 275,553     347,443
                                                                        ---------    --------
                                                                        ---------    --------
</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 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, 1998 and
1997, no valuation allowance has been recognized in the accompanying financial
statements for the deferred tax assets because the Company believes that
sufficient 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 $80,558 and $53,597 for the years ended
September 30, 1998 and 1997, respectively.

(16) RELATED PARTY TRANSACTION

     On July 2, 1998, the Company entered into a loan agreement with UES, Inc.
('UES'), an affiliate of the Company which is controlled by the Company's
chairman. The loan agreement, which expires on December 31, 1998, totals
$750,000, is due on demand and bears interest at 7%, payable monthly. The note
is personally guaranteed by the Company's chairman and is collateralized by
UES's shares of the Company in the amount of 1,448,775 common shares.

(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

                                      F-15

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

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 also
sought punitive damages of $1,000,000 from the Company. On December 21, 1998,
the parties agreed to a settlement of this lawsuit whereby the Company
will deliver to the plaintiff cash approximating the amount which was
accrued on September 30, 1998, and the plaintiff will deliver to the
Company a general release of liability. The settlement is expected to become
final following the filing with the court of a stipulation of discontinuance
with prejudice during the first week of January 1999.

     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 this matter 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 this lawsuit as it believes the Company will prevail. In the event
a court finds in favor of the plaintiffs, additional costs will be incurred.

(18) CONCENTRATION OF CREDIT RISK

     The Company has a high concentration of sales to a few customers who
accounted for 87% and 89% of revenues for the years ended September 30, 1998 and
1997, respectively. A summary of sales and accounts receivable to the customers
that exceed 10% of sales or accounts receivable as of or for the years ended
September 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                  1998                     1997
                                                          ---------------------    ---------------------
                                                            SALES       % TOTAL      SALES       % TOTAL
                                                          ----------    -------    ----------    -------
<S>                                                       <C>           <C>        <C>           <C>
Customer A.............................................   $7,888,760       51%     $6,094,617       46%
Customer B.............................................    3,368,953       22       4,684,013       36
Customer C.............................................    1,754,976       11         463,242        4%
Customer D.............................................      488,750        3          --         --
Customer E.............................................       54,691     --           871,468        7
</TABLE>

<TABLE>
<CAPTION>
                                                           ACCOUNTS                 ACCOUNTS
                                                          RECEIVABLE    % TOTAL    RECEIVABLE    % TOTAL
                                                          ----------    -------    ----------    -------
<S>                                                       <C>           <C>        <C>           <C>
Customer A.............................................   $2,813,017       69%     $1,556,040       37%
Customer B.............................................       33,126        1       1,663,296       39
Customer C.............................................      308,482        8         143,975        4%
Customer D.............................................      431,250       11          --         --
Customer E.............................................       44,728        1         657,596       16
</TABLE>

(19) SUBSEQUENT EVENTS

(a) STOCK OPTIONS GRANTED

     On November 19, 1998, the Company granted options under its qualified plan
to employees to purchase 244,609 shares of the Company's common stock at an
exercise price of $1.938 per share which was the market price of the shares at
the date of issuance. In addition, the Company granted options under its
qualified plan to one employee to purchase 8,333 shares of the Company's common
stock at an exercise price of $2.132 per share which was 110% of the market
price of the shares at the date of issuance. The Company also granted 17,791 and
16,667 nonqualified options at exercise prices of $1.938 and $2.132,
respectively.

                                      F-16

<PAGE>
<PAGE>

                                 PARAVANT INC.
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                          SEPTEMBER 30, 1998 AND 1997

(b) ACQUISITION

     On March 31, 1998, the Company entered into an agreement ('Acquisition
Agreement') to buy the common stock of Engineering Development Laboratories,
Incorporated ('EDL') and substantially all of the business and operating assets
of Signal Technology Laboratories, Inc. ('STL' and together with EDL,
'EDL-STL'). On October 8, 1998, the Company, through its wholly owned
subsidiary, STL of Ohio ('New STL'), purchased substantially all of STL's
operating assets and all of the outstanding common stock of EDL. Certain assets
of STL were excluded from the sale, including certain cash, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted contracts
on its active contracts. New STL simultaneously entered into an agreement to
subcontract the completion of all remaining contracts with STL. The subcontract
agreement provides for New STL to pay STL a management fee of 2% of subcontract
revenues.

     In connection with this Acquisition Agreement, the Company simultaneously
entered into an agreement with its primary lender to enable the Company, EDL and
New STL to collectively borrow up to $14,000,000 at a variable rate of interest
tied to the prime rate, which at October 8, 1998, was 7.50%.

     Under the terms of the Acquisition Agreement, the Company paid to the
shareholders of EDL-STL approximately $8.7 million in cash; an 8%, three year,
$4.8 million note; 3,950,000 shares of the Company's common stock; and a
contingent cash earn-out payable over five years based on New STL's future
profits. In addition, on November 19, 1998, the Company paid $180,298 to its
financial advisor for services rendered in association with the acquisition.

     The following is a summary of certain combined financial information for
EDL-STL for the year ended September 30, 1998;

<TABLE>
<S>                                                                     <C>
Total assets.........................................................   $15,991,700
Total working capital................................................    11,984,721
Total equity.........................................................    12,399,831
Total revenues.......................................................    35,744,176
</TABLE>

     At September 30, 1998, the Company has capitalized approximately $577,000
in costs associated with this acquisition. These capitalized costs are included
in other assets in the accompanying financial statements.

                                      F-17

<PAGE>
 


<PAGE>


                                 PARAVANT INC. 
            Index to Exhibits with form 10-KSB dated December 23, 1998


<TABLE>
<CAPTION>
EXHIBIT                                         DESCRIPTION OF EXHIBIT
-------  -----------------------------------------------------------------------------------------------------------
<S>      <C>
 2.1     -- Acquisition Agreement by and among Paravant Computer Systems, Inc., Engineering Development
            Laboratories, Incorporated, Signal Technology Laboratories, Inc. James E. Clifford, Edward W. Stefanko,
            C. David Lambertson, C. Hyland Schooley, Peter Oberbeck and Leo S. Torresani (incorporated by reference
            to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated October 8, 1998).
 3(i)    -- Amended and Restated Articles of Incorporation as filed with the Florida Department of State on
            December 8, 1998.
 3(ii)   -- Amended and Restated By-laws (incorporated by reference to exhibit 3.2 of Form 10-QSB of the quarterly
            period ended June 30, 1996).
 4.1A    -- Specimen Common Stock Certificate as amended November 1, 1998.
 4.2A    -- Specimen Warrant (incorporated by reference to Exhibit 4.2 to Amendment No. 4 to Registration Statement
            on Form SB-2).
10.3B    -- Incentive Stock Option Plan, as amended March 12, 1998 (incorporated by reference to Exhibit 10.3B to
            the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1998).
10.14A   -- Non-employee Directors' Stock Option Plan, as amended March 12, 1998 (incorporated by reference to
            Exhibit 10.14A to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March
            31, 1998).
10.32    -- Agreements Granting Special Stock Option between the Registrant and John P. Singleton dated as of June
            18, 1998 (incorporated by reference to Exhibit 10.32 to the Registrant's Quarterly Report on Form 10-QSB
            for the quarterly period ended June 30, 1998).
10.33    -- Agreements clarifying Prior Grant of Stock Options between the Registrant and Michael F. Maguire dated
            as of June 18, 1998 (incorporated by reference to Exhibit 10.33 to the Registrant's Quarterly Report on
            Form 10-QSB for the quarterly period ended June 30, 1998).
10.34    -- Promissory Note to Registrant from Richard P. McNeight dated June 3, 1998 (incorporated by reference to
            Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
            1998).
10.35    -- Promissory Note to Registrant from UES Inc. dated July 2, 1998 (incorporated by reference to Exhibit
            10.35 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1998).
            The note is personally guaranteed by Krishan K. Joshi.
10.36    -- Credit Agreement by Registrant with National City Bank.
10.37    -- Commercial Note by Registrant with National City Bank.
10.38    -- Employment Agreement between Paravant Computer Systems, Inc. and Edward W. Stefanko dated October 1,
            1998.
10.39    -- Employment Agreement between Paravant Computer Systems, Inc. and C. Hyland Schooley dated October 1,
            1998.
10.40    -- Employment Agreement between Paravant Computer Systems, Inc. and James E. Clifford dated October 1,
            1998.
10.41    -- Non-Competition Agreement between Paravant Computer Systems, Inc. and C. Hyland Schooley dated October
            1, 1998.
10.42    -- Subordinated Note from Paravant Computer Systems, Inc. to Edward W. Stefanko dated October 1, 1998.
10.43    -- Subordinated Note from Paravant Computer Systems, Inc. to Hyland Schooley dated October 1, 1998.
10.44    -- Subordinated Note from Paravant Computer Systems, Inc. to James E. Clifford dated October 1, 1998.
10.45    -- Lease Agreement between Engineering Development Laboratories, Incorporated and UES, Incorporated, dated
            November 26, 1996 (as amended).
10.46    -- Lease Agreement between Signal Technology Laboratories, Inc. and UES, Incorporated dated August 1, 1996
            (as amended through October 1, 1997).
10.47    -- Mutual Commitment to Build and to Lease between Engineering Development Laboratories, Incorporated, UES,
            Inc. and Beavercreek Enterprises dated June 5, 1998.
10.48    -- Mutual Commitment to Build and to Lease between Signal Technology Laboratories, Inc., UES, Inc. and
            Beavercreek Enterprises dated June 5, 1998.
11       -- Statement re: computation of per share earnings (not required because the relevant computation can be
            clearly determined from material contained in the financial statements).
21       -- Subsidiaries of Paravant Inc.
27       -- Financial Data Schedule.
</TABLE>


<PAGE>