EXHIBIT 13
 PORTIONS OF
ENVIRONMENTAL TECTONICS CORPORATION
2010
ANNUAL REPORT TO STOCKHOLDERS
 FINANCIAL REVIEW
(amounts in thousands, except share and per share information)
 Fiscal
year ended:February 26, 2010
    
    
    February 27, 2009Net sales
    
    $
    42,271
    
    
    $
    36,687Gross profit
    
    
    18,824
    
    
    
    11,858Operating profit (loss)
    
    
    6,600
    
    
    
    (346
    )Net income (loss)
    
    
    6,453
    
    
    
    (1,974
    )Income (loss) per common share:Basic
    
    $
    0.50
    
    
    $
    (0.32
    )Diluted
    
    $
    0.30
    
    
    $
    (0.32
    )Working capital
    
    $
    15,326
    
    
    $
    4,684Long-term obligations
    
    
    9,820
    
    
    
    22,072Total assets
    
    
    51,729
    
    
    
    37,278Total stockholders equity
(deficiency)
    
    $
    17,414
    
    
    $
    (11,710
    )Weighted average common shares:Basic
    
    
    9,069,000
    
    
    
    9,037,000Diluted
    
    
    21,235,000
    
    
    
    9,037,000
   1




---



##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
      Overview
   2




---



##### 



Significant Impacts and Transactions during Fiscal 2010
  
    
    Increased production under U.S. Government contracts
  
    
    Contract performance in our Simulation Division
  
    
    Market disruptions in our Control Systems Group
  
    
    Exchange of long term debt, establishment of additional facility, and increase in bank
line
  
    
    Positive impact of income taxes
  3




---



##### 




    
    Continued expanded use of our NASTAR Center
    
    
    Increased selling and marketing expenses.
  
    
    Charge for loss on extinguishment of debt.
  
    
    Continued capital and consulting spending to enhance and market worldwide our Authentic
Tactical Fighting Systems (ATFS) and other technologies.
  
    
    Common stock dilution.
  4




---



##### 



CRITICAL ACCOUNTING ESTIMATES
  
    
    forecasting our effective income tax rate, including our future ability to
utilize tax credits and to realize the deferred tax assets, and providing for
uncertain tax positions;
    
    legal matters;
    
    valuations of long-lived assets, including intangible assets;
    
    inventory valuation and reserves; and
    
    percentage-of-completion accounting for long-term, construction-type contracts.
   
    
    Revenue Recognition
      5




---



##### 




    
    Inventory
  
    
    Income Taxes
  6




---



##### 



Results of Operations
   Fiscal 2010 versus Fiscal 2009
 Summary Table of ResultsFiscal yearended:February 26,
    
    
    February 27,
    
    
    Variance
    
    
    Variance2010
    
    
    2009
    
    
    $
    
    
    %(amounts in thousands)Sales:Domestic
    
    $
    12,870
    
    
    $
    14,442
    
    
    $
    (1,572
    )
    
    
    (10.9
    )%US Government
    
    
    7,711
    
    
    
    3,096
    
    
    
    4,615
    
    
    
    149.1International
    
    
    21,690
    
    
    
    19,149
    
    
    
    2,541
    
    
    
    13.3Total Sales
    
    
    42,271
    
    
    
    36,687
    
    
    
    5,584
    
    
    
    15.2Gross Profit
    
    
    18,824
    
    
    
    11,858
    
    
    
    6,966
    
    
    
    58.7Selling and marketing expenses
    
    
    5,010
    
    
    
    4,670
    
    
    
    (340
    )
    
    
    (7.3
    )General and administrative expenses
    
    
    6,405
    
    
    
    6,424
    
    
    
    19
    
    
    
    0.3Research and development expenses
    
    
    809
    
    
    
    1,110
    
    
    
    301
    
    
    
    27.1Operating income (loss)
    
    
    6,600
    
    
    
    (346
    )
    
    
    6,946
    
    
    
    2,007.5Interest expense, net
    
    
    1,308
    
    
    
    1,569
    
    
    
    261
    
    
    
    16.6Other expense, net
    
    
    347
    
    
    
    67
    
    
    
    (280
    )
    
    
    (417.9
    )Loss on early extinguishment of debt
    
    
    315
    
    
    
    
    
    
    
    (315
    )
    
    
    Income tax benefit
    
    
    (1,819
    )
    
    
    
    
    
    
    1,819
    
    
    
    Minority interest
    
    
    (4
    )
    
    
    (8
    )
    
    
    (4
    )
    
    
    50.0Net income (loss)
    
    $
    6,453
    
    
    $
    (1,974
    )
    
    $
    8,427
    
    
    
    426.9
    %Net income (loss) per common share  basic
    
    $
    0.50
    
    
    $
    (0.32
    )
    
    $
    0.82Net Income (loss) per common share  diluted
    
    $
    0.30
    
    
    $
    (0.32
    )
    
    $
    0.73
 Net Income
  7




---



##### 



Sales
  (amounts in thousands)Fiscal year ended
    
    
    Fiscal year endedFebruary 26, 2010
    
    
    February 27, 2009Inter-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-Segment sales:
    
    Domestic
    
    
    USG
    
    
    national
    
    
    Total
    
    
    Domestic
    
    
    USG
    
    
    national
    
    
    TotalTraining Services Group:Pilot Training Services
    
    $
    93
    
    
    $
    6,261
    
    
    $
    13,101
    
    
    $
    19,455
    
    
    $
    108
    
    
    $
    2,612
    
    
    $
    14,633
    
    
    $
    17,353Simulation
    
    
    480
    
    
    
    
    
    
    
    4,384
    
    
    
    4,864
    
    
    
    553
    
    
    
    
    
    
    
    703
    
    
    
    1,256ETC-PZL and other
    
    
    440
    
    
    
    
    
    
    
    1,276
    
    
    
    1,716
    
    
    
    87
    
    
    
    
    
    
    
    1,912
    
    
    
    1,999Total
    
    $
    1,013
    
    
    $
    6,261
    
    
    $
    18,761
    
    
    $
    26,035
    
    
    $
    748
    
    
    $
    2,612
    
    
    $
    17,248
    
    
    $
    20,608Control Systems Group:Environmental
    
    $
    980
    
    
    $
    1,450
    
    
    $
    1,717
    
    
    $
    4,147
    
    
    $
    3,841
    
    
    $
    484
    
    
    $
    393
    
    
    $
    4,718Sterilizers
    
    
    5,841
    
    
    
    
    
    
    
    2
    
    
    
    5,843
    
    
    
    3,685
    
    
    
    
    
    
    
    172
    
    
    
    3,857Hyperbaric
    
    
    3,116
    
    
    
    
    
    
    
    1,062
    
    
    
    4,178
    
    
    
    4,259
    
    
    
    
    
    
    
    1,232
    
    
    
    5,491Service and spares
    
    
    1,920
    
    
    
    
    
    
    
    148
    
    
    
    2,068
    
    
    
    1,909
    
    
    
    
    
    
    
    104
    
    
    
    2,013Total
    
    
    11,857
    
    
    
    1,450
    
    
    
    2,929
    
    
    
    16,236
    
    
    
    13,694
    
    
    
    484
    
    
    
    1,901
    
    
    
    16,079Company total
    
    $
    12,870
    
    
    $
    7,711
    
    
    $
    21,690
    
    
    $
    42,271
    
    
    $
    14,442
    
    
    $
    3,096
    
    
    $
    19,149
    
    
    $
    36,687
 $
  ,
   Domestic Sales
  8




---



##### 



.
 International Sales
  Segment Sales
   Gross Profit
  Selling and marketing expenses
  General and administrative expenses
  Research and Development Expenses
   Operating Income
  $
 9




---



##### 



$ $
  Interest Expense
  Other Income/Expense, Net
  Loss on Extinguishment of Debt
  Income Taxes
    Liquidity and Capital Resources
   10




---



##### 



Net cash provided by (used for) operating activities:
   Net cash used for investing activities:
  Net cash used for financing activities:
  Outlook
   Off-Balance Sheet Arrangements
  11




---



##### 



Equity Compensation Plan Information
 Number of securitiesremaining availableNumber of securities to be
    
    
    Weighted-average exercise
    
    
    for future issuance underissued upon exercise of
    
    
    price of outstanding
    
    
    equity compensation plansoutstanding options,
    
    
    options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
Security holders
    
    
    863,519
    
    
    $
    2.23
    
    
    
    1,437,001Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    N/A
    
    
    
    187,322Total
    
    
    863,519
    
    
    $
    2.23
    
    
    
    1,624,323
  Employee Stock Purchase Plan
  12




---



##### 



Report of Independent Registered Public Accounting Firm
 
    May 27, 2010
 13




---



##### 



Environmental Tectonics Corporation
Consolidated Balance Sheets
(amounts in thousands, except share information)
 February 26,
    
    
    February 27,2010
    
    
    2009ASSETSCash and cash equivalents
    
    $
    2,408
    
    
    $
    520Restricted cash
    
    
    2,751
    
    
    
    4,454Accounts receivable, net
    
    
    17,356
    
    
    
    5,100Costs and estimated earnings in excess of billings on uncompleted long-term contracts
    
    
    3,576
    
    
    
    2,460Inventories, net
    
    
    5,114
    
    
    
    4,435Deferred tax assets, current
    
    
    4,983
    
    
    
    2,350Prepaid expenses and other current assets
    
    
    545
    
    
    
    479Total current assets
    
    
    36,733
    
    
    
    19,798Property, plant and equipment, at cost, net
    
    
    13,643
    
    
    
    15,786Construction in progress
    
    
    316
    
    
    
    275Software development costs, net
    
    
    691
    
    
    
    1,013Other assets
    
    
    346
    
    
    
    406Total assets
    
    $
    51,729
    
    
    $
    37,278LIABILITIESCurrent portion of long-term debt
    
    $
    285
    
    
    $
    9Accounts payable  trade
    
    
    1,783
    
    
    
    2,105Billings in excess of costs and estimated earnings on uncompleted long-term contracts
    
    
    13,944
    
    
    
    4,155Customer deposits
    
    
    1,799
    
    
    
    2,397Accrued interest and dividends
    
    
    782
    
    
    
    4,197Other accrued liabilities
    
    
    2,814
    
    
    
    2,251Total current liabilities
    
    
    21,407
    
    
    
    15,114Long-term obligations, less current portion:Credit facility payable to bank
    
    
    9,808
    
    
    
    10,510Promissory note payable
    
    
    
    
    
    
    1,891Subordinated convertible debt
    
    
    
    
    
    
    9,664Other long-term debt
    
    
    12
    
    
    
    79,820
    
    
    
    22,072Deferred tax liabilities
    
    
    3,066
    
    
    
    2,350Unearned interest
    
    
    22
    
    
    
    152Total liabilities
    
    
    34,315
    
    
    
    39,688Commitments and contingencies
    
    
    
    
    
    
    Cumulative convertible participating preferred stock, Series B, $.05 par value,
15,000 shares authorized; 6,000 shares issued and outstanding
    
    
    
    
    
    
    6,000Cumulative convertible participating preferred stock, Series C, $.05 par value,
3,300 shares authorized, issued and outstanding
    
    
    
    
    
    
    3,300STOCKHOLDERS EQUITY (DEFICIENCY)Cumulative convertible participating preferred stock, Series D, $.05 par value,
11,000 shares authorized; 155 shares outstanding
    
    
    155
    
    
    
    Cumulative convertible participating preferred stock, Series E, $.05 par value,
25,000 shares authorized; 23,741 shares outstanding
    
    
    23,741
    
    
    
    Common stock, $.05 par value, 20,000,000 shares authorized; 9,083,573 and 9,049,351
shares issued and outstanding as February 26, 2010 and February 27,
2009, respectively
    
    
    454
    
    
    
    452Additional paid-in capital
    
    
    14,050
    
    
    
    15,399Accumulated other comprehensive loss
    
    
    (431
    )
    
    
    (557
    )Accumulated deficit
    
    
    (20,593
    )
    
    
    (27,046
    )Total stockholders equity (deficiency) before noncontrolling interest
    
    
    17,376
    
    
    
    (11,752
    )Noncontrolling interest
    
    
    38
    
    
    
    42Total stockholders equity (deficiency)
    
    
    17,414
    
    
    
    (11,710
    )Total liabilities and stockholders equity (deficiency)
    
    $
    51,729
    
    
    $
    37,278
  14




---



##### 



Environmental Tectonics Corporation
Consolidated Statements of Operations
(amounts in thousands, except share and per share information)
 Fiscal Years ended:February 26,
 2010
    
    
    February 27,
 2009Net sales
    
    $
    42,271
    
    
    $
    36,687Cost of goods sold
    
    
    23,447
    
    
    
    24,829Gross profit
    
    
    18,824
    
    
    
    11,858Operating expenses:Selling and marketing
    
    
    5,010
    
    
    
    4,670General and administrative
    
    
    6,405
    
    
    
    6,424Research and development
    
    
    809
    
    
    
    1,11012,224
    
    
    
    12,204Operating profit (loss)
    
    
    6,600
    
    
    
    (346
    )Other expenses:Interest expense
    
    
    1,308
    
    
    
    1,569Loss on extinguishment of debt
    
    
    315
    
    
    
    Other, net
    
    
    347
    
    
    
    671,970
    
    
    
    1,636Income (loss) before income taxes
    
    
    4,630
    
    
    
    (1,982
    )Income tax benefit
    
    
    1,819
    
    
    
    Income (loss) before noncontrolling interest
    
    
    6,449
    
    
    
    (1,982
    )Loss attributable to noncontrolling interest
    
    
    (4
    )
    
    
    (8
    )Net income (loss)
    
    
    6,453
    
    
    
    (1,974
    )Preferred stock dividends
    
    
    (1,885
    )
    
    
    (927
    )Income (loss) applicable to common shareholders
    
    $
    4,568
    
    
    $
    (2,901
    )Per share information:Earnings (loss) per common share:Basic
    
    $
    0.50
    
    
    $
    (0.32
    )Diluted
    
    $
    0.30
    
    
    $
    (0.32
    )Weighted average common shares:Basic
    
    
    9,069,000
    
    
    
    9,037,000Diluted
    
    
    21,235,000
    
    
    
    9,037,000
  15




---



##### 



Environmental Tectonics Corporation
Consolidated Statements of Changes in Stockholders Equity (Deficiency)
For the fiscal years ended February 26, 2010 and February 27, 2009
(amounts in thousands, except share information)
 Common Stock
    
    
    Additional Paid-in
    
    
    Accumulated other
    
    
    
    
    
    
    Total StockholdersPreferred Stock
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    comprehensive loss
    
    
    Accumulated deficit
    
    
    EquityBalance, February 29, 2008
    
    $
    
    
    
    
    9,035,355
    
    
    $
    451
    
    
    $
    16,139
    
    
    $
    (349
    )
    
    $
    (25,072
    )
    
    $
    (8,831
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,974
    )
    
    
    (1,974
    )Interest hedge valuation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168
    )
    
    
    
    
    
    
    (168
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,182
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Warrants issued with $2
million promissory note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    128Issuance of stock under
employee stock purchase
plan and Board of
Directors compensation
    
    
    
    
    
    
    13,996
    
    
    
    1
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    16Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (927
    )
    
    
    
    
    
    
    
    
    
    
    (927
    )Balance, February 27, 2009
    
    
    
    
    
    
    9,049,351
    
    
    
    452
    
    
    
    15,399
    
    
    
    (557
    )
    
    
    (27,046
    )
    
    
    (11,752
    )Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,453
    
    
    
    6,453Interest hedge valuation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    184Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,579Issuance of common shares
to Lenfest
    
    
    
    
    
    
    20,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of Series D
Preferred Stock
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Issuance of Series E
Preferred Stock
    
    
    23,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,741Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,885
    )
    
    
    
    
    
    
    
    
    
    
    (1,885
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Warrants issued to
Lenfest in connection
with line of credit
guarantee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    485Issuance of stock under
employee stock purchase
plan and Board of
Directors compensation
    
    
    
    
    
    
    14,222
    
    
    
    1
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    19Balance
before noncontrolling interest
    
    
    23,896
    
    
    
    9,083,573
    
    
    
    454
    
    
    
    14,050
    
    
    
    (431
    )
    
    
    (20,593
    )
    
    
    17,376Noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Balance, February 26, 2010
    
    $
    23,896
    
    
    
    9,083,573
    
    
    $
    454
    
    
    $
    14,050
    
    
    $
    (431
    )
    
    $
    (20,593
    )
    
    $
    17,414
  16




---



##### 



Environmental Tectonics Corporation
Consolidated Statements of Cash Flows
(amounts in thousands)
 Fiscal years endedFebruary 26,
 2010
    
    
    February 27,
 2009Cash flows from operating activities:Net income (loss)
    
    $
    6,453
    
    
    $
    (1,974
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    1,309
    
    
    
    1,797Decrease in valuation allowance for deferred tax assets
    
    
    (1,917
    )
    
    
    (38
    )Loss on extinguishment of debt
    
    
    315
    
    
    
    Accretion of debt discount and amortization of deferred finance costs
    
    
    258
    
    
    
    298Increase in allowances for accounts receivable and inventories, net
    
    
    577
    
    
    
    212Loss attributable to noncontrolling interest
    
    
    (4
    )
    
    
    (8
    )Stock option and stock compensation expense
    
    
    51
    
    
    
    44Changes in operating assets and liabilities:Accounts receivable
    
    
    (12,308
    )
    
    
    (1,483
    )Costs and estimated earnings in excess of billings on uncompleted long-term contracts
    
    
    (1,116
    )
    
    
    962Inventories
    
    
    1,735
    
    
    
    1,740Prepaid expenses and other assets
    
    
    506
    
    
    
    11Accounts payable
    
    
    (322
    )
    
    
    (955
    )Billings in excess of costs and estimated earnings on uncompleted long-term contracts
    
    
    9,789
    
    
    
    (2,336
    )Customer deposits
    
    
    (598
    )
    
    
    (592
    )Other accrued liabilities
    
    
    544
    
    
    
    1,583Net cash provided by (used in) operating activities
    
    
    5,272
    
    
    
    (739
    )Cash flows from investing activities:Acquisition of equipment
    
    
    (1,603
    )
    
    
    (1,566
    )Capitalized software development costs
    
    
    (221
    )
    
    
    (342
    )Net cash used in investing activities
    
    
    (1,824
    )
    
    
    (1,908
    )Cash flows from financing activities:(Repayments) borrowings under lines of credit, net
    
    
    (702
    )
    
    
    1,700(Repayment) issuance of note payable, Lenfest
    
    
    (2,000
    )
    
    
    2,000(Decrease) increase in restricted cash from notes payable, Lenfest
    
    
    2,000
    
    
    
    (2,000
    )Issuance of common stock
    
    
    2
    
    
    
    16Borrowings (payments) of other debt obligations
    
    
    281
    
    
    
    (9
    )Payment of dividends
    
    
    (970
    )
    
    
    Payment of claim settlement costs
    
    
    
    
    
    
    (2,275
    )(Decrease) increase in restricted cash
    
    
    (297
    )
    
    
    2,072Net cash (used in) provided by financing activities
    
    
    (1,686
    )
    
    
    1,504Effect of exchange rate changes on cash
    
    
    126
    
    
    
    (208
    )Net increase (decrease) in cash
    
    
    1,888
    
    
    
    (1,351
    )Cash at beginning of period
    
    
    520
    
    
    
    1,871Cash at end of period
    
    $
    2,408
    
    
    $
    520Supplemental schedule of cash flow information:Interest paid
    
    $
    982
    
    
    $
    475Income taxes paid
    
    
    
    
    
    
    Supplemental information on non-cash operating and investing activities:Accrued dividends on preferred stock
    
    $
    319
    
    
    $
    927
    17




---



##### 



Environmental Tectonics Corporation

Notes to the Consolidated Financial Statements
 1. Nature of Business:
  Training Services Group
 Control Systems Group
    Business segment:Geographic area:
    
    TSG
    
    
    CSG
    
    
    Total
    
    
    %Domestic
    
    $
    210
    
    
    $
    3,772
    
    
    $
    3,982
    
    
    
    4.1
    %US Government
    
    
    49,111
    
    
    
    48
    
    
    
    49,159
    
    
    
    51.0International
    
    
    36,244
    
    
    
    7,579
    
    
    
    43,823
    
    
    
    44.9Total
    
    $
    85,565
    
    
    $
    11,399
    
    
    $
    96,964
    
    
    
    100.0
    %% of total
    
    
    88.2
    %
    
    
    11.8
    %
    
    
    100.0
    %
  2. Summary of Significant Accounting Policies:
 Basis of Presentation:
  Use of Estimates:
  18




---



##### 



Environmental Tectonics Corporation

Notes to the Consolidated Financial Statements, continued
 Fair Value of Financial Instrument:
  
    
    Level 1: Observable inputs such as quoted prices in active markets for identical assets
of liabilities;
    
    Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly; these include quoted prices for similar assets or
liabilities in active markets and quoted prices or identical assets or liabilities in
markets that are not active;
    
    Level 3: Unobservable inputs that are supported by little or no market activity, which
require the reporting entitys judgment or estimation.
  Fair Value Measurement atFebruary 26, 2010 using:Liabilities
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(amounts in thousands)Credit facility payable to bank
    
    $
    
    
    
    $
    
    
    
    $
    10,551
    
    
    $
    10,551ETC-PZL contract financing
    
    
    
    
    
    
    
    
    
    
    453
    
    
    
    453Interest rate swap agreements
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Total
    
    $
    
    
    
    $
    85
    
    
    $
    11,004
    
    
    $
    11,089
   Revenue Recognition:
   19




---



##### 



Environmental Tectonics Corporation

Notes to the Consolidated Financial Statements, continued
   Cash and Cash Equivalents:
  Restricted Cash:
   Accounts Receivable and Concentration of Credit Risk
  Inventories:
   20




---



##### 



Environmental Tectonics Corporation

Notes to the Consolidated Financial Statements, continued
 Property, Plant and Equipment:
  Capitalized Software Development Costs:
  Research and Development:
  Income Taxes:
   Long-Lived Assets:
  21




---



##### 



Environmental Tectonics Corporation

Notes to the Consolidated Financial Statements, continued
 Share-Based Compensation:
    Advertising Costs:
  Earnings Per Common Share:
   
    
    Series D Preferred Stock of $55,000 at $0.94 per share, equating to 58,511 shares of
common stock, issued in April 2009;
    
    Series D Preferred Stock of $100,000 at $1.11 per share, equating to 90,090 shares of
common stock, issued in July 2009;
    
    Series E Preferred Stock of $23,741,000 at $2.00 per share, equating to 11,870,500
shares of common stock, issued in July 2009.
  22




---



##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
  Fiscal year endedFebruary 26, 2010Income
    
    
    Weighted
    
    
    Per(amounts in
    
    
    average
    
    
    sharethousands)
    
    
    shares
    
    
    amountNet income
    
    $
    6,453Less preferred stock dividends
    
    
    (1,885
    )Basic earnings per share:Basic earnings available to common shareholders
    
    $
    4,568
    
    
    
    9,069,000
    
    
    $
    0.50Effect of dilutive securities:Preferred stock
    
    
    
    
    
    
    12,019,000Stock warrants
    
    
    
    
    
    
    147,000Diluted earnings per share:Basic earnings available to common shareholders
    
    $
    4,568Add: Preferred stock dividend
    
    
    1,885Income available to common shareholders plus effect of
Dilutive securities
    
    $
    6,453
    
    
    
    21,235,000
    
    
    $
    0.30
 23




---



##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 3. Accounts Receivable:
  February 26,
 2010
    
    
    February 27,
 2009(amounts in thousands)U.S. government
    
    $
    438
    
    
    $
    551U.S. commercial
    
    
    1,403
    
    
    
    1,002International
    
    
    15,930
    
    
    
    3,91117,771
    
    
    
    5,464Less allowance for doubtful accounts
    
    
    (415
    )
    
    
    (364
    )Accounts receivable, net
    
    $
    17,356
    
    
    $
    5,100
 4. Costs and Estimated Earnings on Uncompleted Contracts:
   February 26,
 2010
    
    
    February 27,
 2009(amounts in thousands)Cost incurred on uncompleted long-term contracts
    
    $
    18,936
    
    
    $
    26,777Estimated earnings
    
    
    18,535
    
    
    
    16,91137,471
    
    
    
    43,688Less billings to date
    
    
    (47,839
    )
    
    
    (45,383
    )$
    (10,368
    )
    
    $
    (1,695
    )
 February 26,
 2010
    
    
    February 27, 
2009(amounts in thousands)Included in accompanying balance sheets under the
following captions:Costs and estimated earnings in excess of billings
on uncompleted long-term contracts
    
    $
    3,576
    
    
    $
    2,460Billings in excess of costs and estimated
earnings on uncompleted long-term contracts
    
    
    (13,944
    )
    
    
    (4,155
    )$
    (10,368
    )
    
    $
    (1,695
    )
  24




---



##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
 5. Inventories:
  February 26,
    
    
    February 27,2010
    
    
    2009(amounts in thousands)Raw material
    
    $
    
    
    
    $
    92Work in process
    
    
    4,764
    
    
    
    3,564Finished goods
    
    
    350
    
    
    
    779Total inventory, net
    
    $
    5,114
    
    
    $
    4,435
 $
  6. Property, Plant and Equipment:
  February 26,
    
    
    February 27,2010
    
    
    2009(amounts in thousands)Land
    
    $
    100
    
    
    $
    100Buildings and building additions
    
    
    3,851
    
    
    
    3,851Machinery and equipment
    
    
    20,792
    
    
    
    22,426Office furniture and equipment
    
    
    1,194
    
    
    
    1,194Building improvements
    
    
    2,746
    
    
    
    2,48928,683
    
    
    
    30,060Less accumulated depreciation
    
    
    (15,040
    )
    
    
    (14,274
    )Property, plant and equipment, net
    
    $
    13,643
    
    
    $
    15,786
   7.
    
    Long-Term Obligations and Credit Arrangements:
 Lenfest Financing Transaction
  25




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
  Lenfest Credit Facility
  Exchange of Existing Instruments for Series E Preferred Stock
     BalanceuponDescription
    
    exchangeSubordinated convertible note
    
    $
    10,000,000Accrued interest on subordinated convertible note
    
    
    2,275,000Series B Preferred stock
    
    
    6,000,000Series C Preferred Stock
    
    
    3,300,000Accrued dividends on preferred stock, Series B and C
    
    
    2,166,000Series E Preferred Stock issued in exchange
    
    $
    23,741,000
  26




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
  Lenfest Promissory Note
   Bank Credit and Facility
 Increased PNC Bank Credit Facility and Issuance of New Guarantee
       27




---



##### 



Environmental Tectonics Corporation  Notes to the Condensed Consolidated Financial Statements, continued
   Amendment to the Credit Agreement
     Dedicated Line of Credit Agreement with PNC Bank
    28




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 Subordinated Convertible Debt
   ETC-PZL Project Financing
   February 26,
2010
    
    
    February 27, 
2009(amounts in thousands)Note payable to bank
    
    $
    9,600
    
    
    $
    10,510ETC-PZL project financing
    
    
    486
    
    
    
    Automobile loan
    
    
    7
    
    
    
    16Other
    
    
    
    
    
    
    Promissory note, net of unamortized discount of $109
    
    
    
    
    
    
    1,891Subordinated convertible debt, net of unamortized discount $336
    
    
    
    
    
    
    9,664Total debt obligations
    
    
    10,093
    
    
    
    22,081Less current maturities
    
    
    285
    
    
    
    9Long-term obligations, net of current maturities
    
    $
    9,808
    
    
    $
    22,072
  2010
    
    $
    2852011
    
    
    9,8082012 and thereafter
    
    
    Total future obligations
    
    $
    10,093
 29




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 9. Leases:
   10. Income Taxes:
    (in thousands)Fiscal Year Ended
    
    
    Fiscal Year EndedFebruary 26, 2010
    
    
    February 27, 2009$
    
    
    
    $Currently (receivable) payableFederal
    
    
    133
    
    
    
    State
    
    
    
    
    
    
    Foreign (benefits) taxes
    
    
    23
    
    
    
    156
    
    
    
    Deferred:Federal
    
    
    (1,598
    )
    
    
    State
    
    
    (377
    )
    
    
    Foreign benefit
    
    
    
    
    
    
    (1,975
    )$
    (1,819
    )
    
    $
    
 30




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
 Fiscal year
    
    
    Fiscal yearended
    
    
    endedFebruary 26,
    
    
    February 27,2010
    
    
    2009Statutory income tax (benefit)
    
    
    34.0
    %
    
    
    (34.0
    )%State income tax, net of federal tax benefit
    
    
    3.8
    
    
    
    (2.5
    )Research and experimentation and other tax credits
    
    
    (3.1
    )
    
    
    (7.3
    )Benefit of foreign and foreign-source income or loss
    
    
    .6
    
    
    
    5.5Change in valuation allowance
    
    
    (73.4
    )
    
    
    32.8Effect of change in effective tax rate
    
    
    
    
    
    
    4.0Other, net
    
    
    (1.1
    )
    
    
    1.5(39.2
    )%
    
    
    
    %
   February 26, 
2010
    
    
    February 27, 
2009(amounts in thousands)Deferred tax assets:Net operating loss and credits
    
    $
    15,607
    
    
    $
    16,520Vacation reserve
    
    
    80
    
    
    
    74Inventory reserve
    
    
    880
    
    
    
    676Receivable reserve
    
    
    156
    
    
    
    135Warranty reserve
    
    
    117
    
    
    
    63Compensation and other reserves
    
    
    32
    
    
    
    76Stock options
    
    
    
    
    
    
    96Other, net
    
    
    74
    
    
    
    7416,946
    
    
    
    17,714Valuation Reserve
    
    
    (11,963
    )
    
    
    (15,364
    )Total current deferred tax asset
    
    
    4,983
    
    
    
    2,350Deferred tax liabilities:Amortization of capitalized software
    
    
    350
    
    
    
    462Depreciation
    
    
    2,716
    
    
    
    1,888Total non-current deferred tax liability
    
    
    3,066
    
    
    
    2,350Net deferred tax asset
    
    $
    1,917
    
    
    $
    
  31




---



##### 



Environmental Tectonics Corporation  Notes to the Consolidated Financial Statements, continued
 11. Business Segment Information:
   Training
    
    
    ControlServices Group
    
    
    Systems Group
    
    
    
    
    
    
    Company(TSG)
    
    
    (CSG)
    
    
    Corporate
    
    
    Total(amounts in thousands)Fiscal 2010Net sales
    
    $
    26,035
    
    
    $
    16,236
    
    
    $
    
    
    
    $
    42,271Interest expense
    
    
    1,023
    
    
    
    285
    
    
    
    
    
    
    
    1,308Depreciation and amortization
    
    
    728
    
    
    
    581
    
    
    
    
    
    
    
    1,309Operating income (loss)
    
    
    6,128
    
    
    
    1,727
    
    
    
    (1,255
    )
    
    
    6,600Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (1,819
    )
    
    
    (1,819
    )Identifiable assets
    
    
    31,177
    
    
    
    4,928
    
    
    
    15,624
    
    
    
    51,729Expenditures for segment assets
    
    
    1,206
    
    
    
    358
    
    
    
    378
    
    
    
    1,824Fiscal 2009Net sales
    
    $
    20,608
    
    
    $
    16,079
    
    
    $
    
    
    
    $
    36,687Interest expense
    
    
    1,161
    
    
    
    408
    
    
    
    
    
    
    
    1,569Depreciation and amortization
    
    
    616
    
    
    
    1,181
    
    
    
    
    
    
    
    1,797Operating income (loss)
    
    
    2,431
    
    
    
    (1,497
    )
    
    
    (1,280
    )
    
    
    (346
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiable assets
    
    
    19,545
    
    
    
    5,046
    
    
    
    12,687
    
    
    
    37,278Expenditures for segment assets
    
    
    1,550
    
    
    
    358
    
    
    
    
    
    
    
    1,908
 2010
    
    

2009Reconciliation to
consolidated net income (loss):Operating income (loss)
    
    $
    6,600
    
    
    $
    (346
    )Interest expense
    
    
    (1,308
    )
    
    
    (1,569
    )Loss on extinguishment of debt
    
    
    (315
    )
    
    
    Other, net
    
    
    (347
    )
    
    
    (67
    )Income tax benefit
    
    
    1,819
    
    
    
    Noncontrolling interest
    
    
    4
    
    
    
    8Net income (loss)
    
    $
    6,453
    
    
    $
    (1,974
    )
  32




---



##### 



Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
    12. Stock Options:
  February 26, 2010
    
    
    February 27, 2009Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageShares
    
    
    Exercise price
    
    
    Shares
    
    
    exercise priceOutstanding at beginning of year
    
    
    157,652
    
    
    $
    5.90
    
    
    
    371,928
    
    
    $
    6.70Granted
    
    
    113,000
    
    
    
    2.64
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,467
    )
    
    
    6.07
    
    
    
    (214,276
    )
    
    
    Outstanding at end of year
    
    
    269,185
    
    
    
    4.53
    
    
    
    157,652
    
    
    
    5.90Options exercisable at year end
    
    
    156,185
    
    
    
    
    
    
    
    157,652Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    2.64
    
    
    
    
    
    
    $
    
  Options outstanding
    
    
    Options exercisableWeighted
    
    
    
    
    
    
    NumberNumber
    
    
    average
    
    
    Weighted
    
    
    Exercisable
    
    
    Weightedoutstanding
    
    
    Remaining
    
    
    Average
    
    
    at
    
    
    Averageat February
    
    
    Contractual
    
    
    Exercise
    
    
    February
    
    
    ExerciseFiscal 2010
    
    26, 2010
    
    
    Life (years)
    
    
    Price
    
    
    26, 2010
    
    
    PriceRange of exercise prices:$2.64
    
    
    113,000
    
    
    
    9.75
    
    
    
    2.64
    
    
    
    
    
    
    $
    2.64$5.12
    
    
    80,000
    
    
    
    7.00
    
    
    
    5.12
    
    
    
    80,000
    
    
    
    5.12$6.07 to $7.35
    
    
    76,185
    
    
    
    5.07
    
    
    
    6.71
    
    
    
    76,185
    
    
    
    6.71Total
    
    
    269,185
    
    
    
    
    
    
    
    
    
    
    
    156,185
    33




---



##### 



Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
    13. Other Related Party Transactions
    14. Commitments and Contingencies
 Mends International, Ltd.
  Administrative Agreement with U.S. Navy
  34




---



##### 



Environmental Tectonics Corporation
Notes to the Consolidated Financial Statements, continued
 Other Matters
  15. Employee Benefit Plans:
   16. Subsequent Events:
  35