##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
 
 ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the fiscal year ended February 23, 2007
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from  to
.
 Commission File Number 1-10655
 ENVIRONMENTAL TECTONICS CORPORATION
 Pennsylvania
    
    23-1714256(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 
 (Address of principal executive offices, Zip Code)
 
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $.05 per share
    
    American Stock Exchange
  o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  (1)
    
    The information provided is not an admission that any person whose holdings are excluded
from the figure is not an affiliate or that any person whose holdings are included is an
affiliate and any such admission is hereby disclaimed. The information provided is solely for
record keeping purposes of the Securities and Exchange Commission.




---



##### 



ENVIRONMENTAL TECTONICS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
FEBRUARY 23, 2007
 TABLE OF CONTENTS
 PART I
    
    
    1Item 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART II
    
    
    16Item 5. Market for the Registrants Common Stock and Related Security Holder Matters
    
    
    16Item 6. Selected Consolidated Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 8. Financial Statements and Supplementary Data
    
    
    18Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    18Item 9A. Controls and Procedures
    
    
    18PART III
    
    
    19Item 10. Directors and Executive Officers of the Registrant
    
    
    19Item 11. Executive Compensation
    
    
    22Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    28Item 13. Certain Relationships and Related Transactions
    
    
    29Item 14. Principal Accounting Fees and Services
    
    
    30PART IV
    
    
    32Item 15. Exhibits and Financial Statement Schedules.
    
    
    32SIGNATURES
    
    
    35EXHIBIT INDEX
    
    
    36EXHIBIT 13
    
    
    1Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    2Report of
Independent Registered Public Accounting Firm
    
    
    19Consolidated Balance Sheets
    
    
    20Consolidated Statements of Operations
    
    
    21Consolidated Statements of Changes in Stockholders Equity
    
    
    22Consolidated Statements of Cash Flows
    
    
    23Notes to the Consolidated Financial Statements
    
    
    24
   (i)




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS
     
 PART I
 
 Item 1. Business
  Segments
  Training Services Group
 Integrated Aircrew Training
 Aircrew Training Systems
 Disaster Management Training and Systems
 1




---



##### Table of Contents



Entertainment Products
  Control Systems Group
 Sterilizers
 Environmental Control Systems and Other Products
 Hyperbarics
    Marketing
  Product Development
   Tactical Flight Combat and G-force / Disorientation Trainers
  2




---



##### Table of Contents



Advanced Disaster Management Simulator (ADMS)
     Subsidiaries
  Suppliers
  3




---



##### Table of Contents



Patents and Trademarks
  Patent Number
    
    Title
    
    Expiration Date5,051,094
    
    G-Force Trainer
    
    9/24/086,818,178 B2
    
    Method for High Vacuum Sterilization of Closures
    
    1/15/23
 ®
 BARA-MED®
    
    Medical Hyperbaric ChamberDATAPRINT®
    
    Digital Printer for SterilizersETC®
    
    Logo for Environmental Tectonics CorporationGAT-II®
    
    General Aviation TrainerG-LAB®
    
    Human Centrifuge/USAF TypeGYROLAB®
    
    Spatial Disorientation DeviceMRC Monster Roll Cage®
    
    Interactive Simulator in the Nature of
an Amusement Ride Machine that incorporates
Virtual Reality EffectsTHE RIDE WORKS®
    
    (Facility for) Manufacture of Amusement and
Entertainment Rides to the order and
specification of others.
 ETCs Unregistered (Ô) (SM) Trademark / Service Marks are:
 ADMSTM
    
    Advanced Disaster Management SimulatorATFSTM
    
    Authentic Tactical Fighting SystemAuthentic Tactical Fighting System
TM
    
    Authentic Tactical Fighting SystemBARA-LABTM
    
    Hyperbaric Chamber (other than medical)BARAPRESS
    
    Hyperbaric Chamber SoftwareBIG MACTM
    
    Entertainment ride based on a multi-armed Centrifuge DeviceCASTM
    
    Conditioned Air SupplyDMITM
    
    Disaster Management InstituteEAGLE-VISIONTM
    
    Visual Performance/Procedures TrainerEPCTM
    
    Engine Pressure Controller/Environmental SystemETCTM
    
    ETC Biomedical Systems (Stylized ETC with caduceus.)ETCTM
    
    Entertainment Technology Corporation (Stylized ETC and name in color)G-FETTM
    
    Human Centrifuge
(U.S. Navy type)G-FET-IITM
    
    Human Centrifuge
(Malaysian Air Force type)
 4




---



##### Table of Contents



G-MASTM
    
    Missile Avoidance System
(Centrifuge feature)G-POINTINGTM
    
    Motion control algorithm feature; namely, a feature of
Flight Simulators that duplicates G-force effects experienced
during tactical flight in Class 9.GRAPH MASTER PROGRAMMERTM
    
    Industrial Sterilizer ControlGUARDIAN MONITORING PACKAGETM
    
    GMP features for SterilizersGYRO-1TM
    
    Multi-purpose basic Instrument Flight TrainerGYRO-SATTM
    
    Situational Awareness Trainer
(feature of a Gyrolab)GYROSIMTM
    
    Gyrolab as a SimulatorLANE MASTERTM
    
    Automobile Emissions AnalyzerMACTM
    
    Entertainment Ride based on a Multi-Armed Centrifuge DeviceNASTARSMCENTER
    
    The National Aerospace Training & Research Center
(Standard Word Mark)OASISTM
    
    Software-driven tool to build Test and Training Systems and
scoring them; curriculum development, capability assessment,
etc.ProFlyerTM
    
    Commercial Flight and Navigational Procedures Trainer
meeting European regulations for civilian pilot training and
certificationPRO-GENESISTM
    
    Control Unit/column for SterilizersProTrainerTM
    
    Commercial Instrument Procedures Trainer meeting FAAs PCATD requirementsSENTRY 84TM
    
    Automobile Emissions AnalyzerSMOOTH RIDETM
    
    Computer Control Profile for Hyperbaric ChambersTACModuleTM
    
    Tactical Aircraft Configuration ModuleTNET
TMand/or TRAINING NETTM
    
    Computer Software for training emergency personnel in
firefighting, disaster management, etc.TESSTM
    
    Total Emissions Suppression System, EtO SterilizerThrills Without IllsTM
    
    Describing ETCs entertainment rides, particularly those
utilizing ETCs Human Centrifuge Technology, which precludes
motion sickness commonly associated with motion-based
entertainment rides.VPT-1000TM
    
    Visual Procedures Trainer
 5




---



##### Table of Contents



Customers
   Foreign and Domestic Operations and Export Sales
        Manufacturing Facilities
  Backlog
   6




---



##### Table of Contents



Competition
     Compliance with Environmental Laws
  Compliance with Export Controls
  Employees
  7




---



##### Table of Contents



Item 1A. Risk Factors
 RISKS PARTICULAR TO OUR BUSINESS
 Our business is subject to numerous risks and uncertainties which could cause our actual operating
results and developments to be materially different from those expressed or implied in any of our
public announcements or filings including this Annual Report on Form 10-K for the year ended
February 23, 2007. These risks and uncertainties include the following items. This list is not
inclusive of all the risks and uncertainties associated with our business.
 We have major litigation and claims in process and these require a significant amount of
management time and effort. Additionally, legal costs are a major portion of our general and
administrative spending, thus redirecting funds from other operating activities.
  There is a risk of an unfavorable outcome in litigation and resulting potential negative financial
impact on our operating results.
  Our sources of revenues are not consistent; in any given fiscal year a substantial portion of our
revenues is derived from a small number of customers that may not be recurring customers in future
years.
  If our funding source does not provide us with sufficient funds to operate our business, our
results of operations and financial condition would be materially adversely affected.
  Our significant debt could adversely affect our financial resources and prevent us from satisfying
our debt service obligations.
  8




---



##### Table of Contents




    
    our ability to obtain additional financing for working capital, capital expenditures,
acquisitions or other purposes may be impaired or unavailable;
 
    
    a portion of cash flow may be required to pay interest expense, which will reduce the funds
that would otherwise be available for operations and future business opportunities;
 
    
    a substantial decrease in net operating cash flows or an increase in expenses could make it
difficult for us to meet our debt service requirements and force us to reduce or modify our
operations;
 
    
    our significant debt may make us more leveraged than our competitors, which may place us at a
competitive disadvantage;
 
    
    our significant debt may make us more vulnerable to a downturn in our business or in the
economy generally;
 
    
    some of our existing debt contains financial and restrictive covenants that limit our ability
to borrow additional funds, acquire and dispose of assets, and pay cash dividends;
 
    
    our subordinated debt bears a relatively high interest rate, reflecting the unsecured nature
and correspondingly higher risk associated with this type of financing. This results in
higher interest expense and potential use of cash; and
 
    
    although currently none of our debt bears interest at rates that vary with the prime rate of
interest, it is expected that any additional debt which we might incur would carry a floating
rate. If this were the case, any increases in the applicable prime rate of interest would
reduce our earnings.
  We do not currently have a bank facility which can be used to borrow funds for operating purposes.
    
    
    declare or pay dividends or any other distributions to our securities holders;
 
    
    redeem or repurchase capital stock;
 
    
    incur certain additional debt;
 
    
    place liens on our assets;
 
    
    make certain payments and investments;
 
    
    sell or otherwise dispose of assets; and
 9




---



##### Table of Contents




    
    acquire or be acquired by other entities.
     We are attempting to introduce a new business model in two of our divisions.
   We need to attain validation from the U.S. defense agencies of our Authentic Tactical Fighting
Systems technology.
  We have invested a significant amount of capital and resources in creating the NASTAR Center.
  Our operations involve rapidly evolving products and technological change.
  10




---



##### Table of Contents



Delays in the delivery of our products may prevent us from invoicing our costs and estimated
earnings on uncompleted contracts.
  In the event we suffer production delays, we may be required to pay certain customers substantial
liquidated damages and other penalties.
  Our fixed-price and cost-reimbursable contracts may commit us to unfavorable terms.
  Cost estimates used to account for contracts under the percentage of completion method may vary
over time and impact future performance under these contracts.
  Our contracts and subcontracts that are funded by the U.S. government or foreign governments are
subject to government regulations, audits and other requirements.
  11




---



##### Table of Contents



Our contracts that are funded by the U.S. government or foreign governments are subject to a
competitive bidding process that may affect our ability to win contract awards or renewals in the
future.
  Our commercial contracts are subject to competition and strict performance and other requirements.
    There are certain risks inherent in our international business activities, which constitute a
significant portion of our business.
  
    
    the effects of terrorism;
 
    
    exchange rate fluctuations;
 
    
    a longer and more complicated collections cycle;
 
    
    a high degree of corruption in some countries;
 
    
    a general decline in the strength of the global economy;
 
    
    the effect of foreign military or political conflicts and turmoil;
 
    
    U.S. foreign policy decisions;
 
    
    the extent, if any, of anti-American sentiment;
 
    
    changes in foreign governmental trade, monetary and fiscal policies and laws;
 
    
    export controls; and
 
    
    political and economic instability.
  12




---



##### Table of Contents



Legislative actions, higher director and officer insurance costs and potential new accounting
pronouncements are likely to cause our general and administrative expenses to increase and impact
our future financial condition and results of operations.
  Although up from the prior year, our fiscal 2008 opening backlog is still relatively lower than the
balance at the beginning of most comparable prior fiscal periods. Additionally, our sales backlog
is not necessarily indicative of revenues that we will actually realize in fiscal year 2008 or at
all.
  Our operations could be hurt by terrorist attacks, war, disease and other activities or occurrences
that make air travel difficult or reduce the willingness of our commercial airline customers to
purchase our simulation products.
   There is limited trading activity in our common stock which could make it difficult for our
investors to sell their shares of our common stock.
  13




---



##### Table of Contents



The market price of our common stock may be volatile.
  
    
    actual or anticipated operating results;
 
    
    changes in estimates by analysts;
 
    
    market conditions in the industry;
 
    
    announcements by competitors;
 
    
    results of litigation;
 
    
    regulatory actions; and
 
    
    general economic conditions.
  Our quarterly operating results may vary significantly from quarter to quarter.
  
    
    the number, size and scope of our projects;
 
    
    the mix of contracts (POC versus other);
 
    
    equipment purchases and other expenditures required for our business;
 
    
    the number of bid and proposal efforts undertaken;
 
    
    delays in sales or production;
 
    
    the level of employee productivity;
 
    
    the adequacy of our provisions for receivable, inventory and other losses;
 
    
    the accuracy of our estimate of resources required to complete ongoing projects; and
 
    
    general economic conditions.
  Our officers and directors own a significant amount of our common stock which permits them to exert
significant influence over the direction of our business and affairs.
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  14




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  15




---



##### Table of Contents



PART II
 
 Item 5. Market for the Registrants Common Stock and Related Security Holder Matters
     Sale PricesHigh
    
    LowFiscal 2007First Quarter
    
    $
    5.54
    
    
    $
    4.60Second Quarter
    
    
    7.39
    
    
    
    5.16Third Quarter
    
    
    6.39
    
    
    
    4.71Fourth Quarter
    
    
    4.86
    
    
    
    3.19Fiscal 2006First Quarter
    
    $
    6.05
    
    
    $
    4.70Second Quarter
    
    
    5.85
    
    
    
    4.85Third Quarter
    
    
    5.52
    
    
    
    4.89Fourth Quarter
    
    
    5.22
    
    
    
    4.75
  16




---



##### Table of Contents



Total Return To Shareholders
(Includes reinvestment of dividends)
 ANNUAL RETURN PERCENTAGEYears EndingCompany Name / Index
    
    2/28/03
    
    2/27/04
    
    2/25/05
    
    2/24/06
    
    2/23/07Environmental Tectonics Corp
    
    
    -6.98
    
    
    
    47.33
    
    
    
    -35.52
    
    
    
    -11.58
    
    
    
    -33.53American Stock Exchange Index
    
    
    -3.00
    
    
    
    51.02
    
    
    
    20.89
    
    
    
    21.37
    
    
    
    17.65Peer Group
    
    
    -19.98
    
    
    
    59.14
    
    
    
    28.45
    
    
    
    43.87
    
    
    
    11.11
 Base
    
    INDEXED RETURNSPeriod
    
    Years EndingCompany Name / Index
    
    2/22/02
    
    2/28/03
    
    2/27/04
    
    2/25/05
    
    2/24/06
    
    2/23/07Environmental Tectonics Corp
    
    
    100
    
    
    
    93.02
    
    
    
    137.05
    
    
    
    88.37
    
    
    
    78.14
    
    
    
    51.94American Stock Exchange Index
    
    
    100
    
    
    
    97.00
    
    
    
    146.49
    
    
    
    177.09
    
    
    
    214.94
    
    
    
    252.88Peer Group
    
    
    100
    
    
    
    80.02
    
    
    
    127.34
    
    
    
    163.58
    
    
    
    235.33
    
    
    
    261.48
 Peer Group CompaniesBVR SYSTEMS LTDDATAKEY INC (Included through 2004. Acqd by Safenet 1/2005)EVANS & SUTHERLAND CMP CORPRELM WIRELESS CORPROFIN SINAR TECHNOLOGIES INCSTANDARD MOTOR PRODSUNITED INDUSTRIAL CORP
 
 17




---



##### Table of Contents



Item 6. Selected Consolidated Financial Data
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
     18




---



##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  Served as DirectorName
    
    Age
    
    or Officer Since (1)
    
    Positions and OfficesWilliam F. Mitchell (2)
    
    
    65
    
    
    
    1969
    
    
    Chairman of the Board, President and DirectorHoward W. Kelley (3)
    
    
    65
    
    
    
    2002
    
    
    DirectorGeorge K. Anderson, M.D. (4)
    
    
    61
    
    
    
    2003
    
    
    DirectorH.F. Lenfest (5)
    
    
    77
    
    
    
    2003
    
    
    DirectorAlan M. Gemmill (6)
    
    
    60
    
    
    
    2006
    
    
    DirectorDuane D. Deaner (7)
    
    
    59
    
    
    
    1996
    
    
    Chief Financial Officer
 
 (1)
    
    Directors are elected for one-year terms.(2)
    
    Mr. Mitchell has been our Chairman of the Board, President and Chief Executive Officer since
1969, except for the period from January 24, 1986 through January 24, 1987, when he was
engaged principally in soliciting sales for our products in the overseas markets. Mr. Mitchell
received a Bachelor of Science degree in physics from Drexel University and has completed
graduate work in mechanical and electrical engineering. He is a member of the ASME and Drexel
University engineering
advisory boards. Additionally, he is a member of the Society of Automotive/Aerospace
Engineering, the International Society of Pharmaceutical Engineering, the Undersea and
Hyperbaric Medical Society, the Aerospace Medical Association, the American Society of
Mechanical Engineering and the Institute of Environmental Sciences.(3)
    
    Mr. Kelley is President of Sally Corporation, Jacksonville, Florida, which is one of the
oldest and largest designers and fabricators of animation robotics and dark ride attractions
used worldwide in theme parks, museums and entertainment attractions. Mr. Kelley is also
Chairman of the Board of American Access Technologies, Inc. (NASDAQ:AATK). AATK is a
Florida-based manufacturer of zone cabling and wireless equipment. He previously spent over 25
years in the broadcasting industry, including ten years in television management as a news
director and later as Vice President and General Manager of Channel 12 WTLV (NBC) in
Jacksonville, Florida. He is the former Chairman of the Board of Tempus Software, a medical
software development firm located in Jacksonville, Florida. He has also previously served as
broadcast strategic planner for a major U.S. communications company and as director of several
U.S. technology firms with international business activities. In the academic arena, Mr.
Kelley serves as an executive professor at the University of North Florida College of Business
Administration, and is a college adjunct instructor on Internet technology and E-commerce on
the Internet. He is a graduate of the University of Florida and Harvard Business School PMD.(4)
    
    Dr. Anderson is an experienced physician executive. He served in the Air Force as a flight
surgeon, aerospace medicine staff officer, and commander of several medical organizations in
Korea, Germany, and United States. He retired from active duty in the grade of Major General.
Following his thirty years of military service, he transitioned to executive positions in the
private sector. He served as Chief Executive Officer of the Koop Foundation from 1997 to 1998
and as Chief Executive Officer at Oceania, Inc., a medical software company, from 1999 to
2001. A period of practice as an independent medical technology consultant was followed by his
current role as Executive Director of the Association of Military Surgeons of the United
States (AMSUS). AMSUS, the nonprofit Society of the Federal Health agencies, operates from a
headquarters located in Bethesda, Maryland.(5)
    
    Mr. Lenfest practiced law with Davis Polk & Wardwell before joining Triangle Publications,
Inc., in Philadelphia as            Associate Counsel in 1965. In 1970, Mr.
Lenfest was placed in charge of Triangles Communications Division, serving as Editorial
Director and Publisher of Seventeen Magazine and President of the CATV Operations. In 1974,
Mr. Lenfest, with the support of two investors, formed Lenfest Communications, Inc., which
purchased Suburban Cable TV Company and Lebanon Valley Cable TV Company from Triangle with a
total of 7,600 subscribers. In January 2000, Mr. Lenfest sold his cable television operations,
which by then served 1.2 million subscribers, to Comcast Corporation. Mr. Lenfest is the owner
of various other businesses and is active in many philanthropic activities including as
Chairman of the Board of the Philadelphia Museum of Art, the Curtis Institute, and the Lenfest
Foundation. Mr. Lenfest is a graduate of Washington and Lee University and Columbia Law
School. 19




---



##### Table of Contents



(6)
    
    Mr. Gemmill is a retired U.S. Navy Rear Admiral. He graduated from the University of Arizona
with a B.S. in Aerospace Engineering and was commissioned through Aviation Officer Candidate
School. He began his career flying F-4 Phantoms before graduating first in his class from
U.S. Naval Test Pilot School in Patuxent River, Maryland in 1974. After a brief stint as a
test pilot and instructor, Mr. Gemmill then served numerous positions in Fighter Squadrons and
on various ships including two deployments to the Arabian Gulf during Desert Shield and Desert
Storm. From 1995 through 1999 he served as Deputy for Readiness and Deputy for Operations for
the U.S. Pacific Command and as Assistant Deputy Chief of Staff for Aviation, U.S. Marine
Corps. He was promoted to Rear Admiral on October 30, 1997. His last assignment before
retirement from the Navy was as Head, Aircraft Carriers Program and Head, Naval Aviation
Training. Rear Admiral Gemmill has almost 4,000 flight hours and 1,000 carrier landings. He
has a Master of Science in Systems Management from the University of Southern California. His
personal decorations include the Defense Superior Service Medal, Legion of Merit, Meritorious
Service Medal, the Strike/Flight Air Medal and the Navy Commendation Medal. He is currently
Director Defense Business Services for Bearing Point of McLean, VA.(7)
    
    Mr. Deaner has served as our Chief Financial Officer since January 1996. Mr. Deaner served as
Vice President of Finance for Pennfield Precision Incorporated from September 1988 to December
1995. Mr. Deaner received an MBA in Finance from Temple University and a B.A. in Mathematics
from Millersville University in Pennsylvania. Committees of the Board of Directors
   GovernanceName of Director
    
    Independent
    
    Audit
    
    Compensation
    
    and NominatingHoward W. Kelley
    
    Yes
    
    Chair
    
    X
    
    XDr. George K. Anderson
    
    Yes
    
    X
    
    X
    
    ChairAlan Mark Gemmill
    
    Yes
    
    X
    
    Chair
    
    XNumber of Meetings
Held in Fiscal Year
    
    
    
    7
    
    3
    
    3
    Code of Ethics
  20




---



##### Table of Contents



www.etcusa.com.
  Compliance With Section 16(a) of the Exchange Act
   21




---



##### Table of Contents



Item 11. Executive Compensation
 COMPENSATION DISCUSSION AND ANALYSIS
 Objectives and Philosophy of Executive Compensation
   Primary Components of Executive Compensation
   Base Salary
  Short-term Incentive Compensation
     22




---



##### Table of Contents



Long-Term Incentive Compensation
  Option Grant Date Pricing
   Chief Executive Officer Employment Agreement
    Chief Financial Officer Employment Agreement
    23




---



##### Table of Contents



REPORT OF THE COMPENSATION COMMITTEE
 The information contained in this Compensation Committee Report shall not be deemed to be filed
or incorporated by reference in future filings with the Securities and Exchange Commission, except
to the extent ETC specifically incorporates it by reference into a document filed under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
  
 24




---



##### Table of Contents



FISCAL 2007 SUMMARY COMPENSATION TABLE
  Change inPension ValueandNonqualifiedNon-Equity
    
    DeferredName and Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherPosition
    
    Year
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    Compensation
    
    Total(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)William F. Mitchell1
    
    
    2007
    
    
    $
    225,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,000
    2
    
    $
    297,000Chairman of the Board,
Chief Executive Officer,
President and DirectorDuane D. Deaner 3
    
    
    2007
    
    
    $
    98,000
    
    
    $
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000
    4
    
    $
    107,000Chief Financial Officer
  
 1
    
    ETC is party to an employment agreement with
Mr. Mitchell, pursuant to which Mr. Mitchell serves as President and Chief
Executive Officer. The terms and conditions of Mr. Mitchells employment
agreement is summarized above under Primary Components of Executive
Compensation-Chief Executive Officer Employment Agreement.2
    
    Consists of $60,000 paid to Mr. Mitchell in
connection with ETCs use of Mr. Mitchells properties, $6,000 in
automobile allowance payments for Mr. Mitchells company automobile and
$6,000 in life insurance premium payments.3
    
    ETC is a party to an employment agreement
with Mr. Deaner, pursuant to which Mr. Deaner serves as Chief Financial
Officer. The terms and conditions of Mr. Deaners employment agreement
is summarized above under Primary Components of Executive
Compensation-Chief Financial Officer Employment Agreement.4
    
    Consists of ETCs contribution on
behalf of Mr. Deaner pursuant to ETCs Retirement Savings Plan. 25




---



##### Table of Contents



FISCAL 2007 GRANTS OF PLAN-BASED AWARDS
  Estimated Future Payouts Under
    
    Exercise or BaseEquity Incentive Plan Awards
    
    PriceGrant
    
    Threshold
    
    Target
    
    Maximum
    
    of Option Awards
    
    Grant Date Fair Value ofName
    
    Date
    
    (#)
    
    (#)
    
    (#)
    
    ($/Sh)
    
    Option AwardsWilliam F. Mitchell
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman of the Board,
Chief Executive
Officer,
President and DirectorDuane D. Deaner
    
    
    9/21/06
    
    
    
    
    
    
    
    642
    
    
    
    
    
    
    $
    6.07
    
    
    $
    3,897Chief Financial
Officer
  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
  Number ofSecurities
    
    Number of SecuritiesUnderlying
    
    UnderlyingUnexercised
    
    UnexercisedOptions
    
    Options
    
    Option Exercise
    
    OptionName
    
    (#) Exercisable
    
    (#) Unexercisable
    
    Price ($)
    
    Expiration Date(a)
    
    (b)
    
    (c)
    
    (e)
    
    (f)William F. Mitchell
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman of the Board,
Chief Executive Officer,
President and DirectorDuane D. Deaner
    
    
    10,000
    
    
    
    
    
    
    $
    7.81
    
    
    
    2/25/09Chief Financial Officer
    
    
    2,881
    
    
    
    
    
    
    $
    7.375
    
    
    
    1/03/113,489
    
    
    
    3,489
    
    
    $
    7.24
    
    
    
    9/15/14
    
    
    
    642
    
    
    $
    6.07
    
    
    
    9/21/16
 26




---



##### Table of Contents



FISCAL 2007 OPTION EXERCISES AND STOCK VESTED TABLE
  Potential Payments Upon Termination or Change-In-Control
   Compensation of Directors
 .
 FISCAL 2007 DIRECTOR COMPENSATION TABLE
 Change inPension ValueFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEarned
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    Nonqualifiedor Paid
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All Otherin Cash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)5
    
    ($)
    
    ($)
    
    Earnings ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)William F. Mitchell 5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    George K. Anderson, M.D. 6
    
    $
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Alan M. Gemmill7
    
    $
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000Howard W. Kelley8
    
    
    
    
    
    $
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,000H. F. Lenfest9
    
    $
    2,000
    
    
    $
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,000
 
 5
    
    ETC used the closing price of its common stock on the date of grant as reported on the American Stock Exchange to compute the value of these awards.6
    
    Mr. Mitchell did not hold any options to
purchase shares of our common stock as of February 23, 2007.7
    
    Dr. Anderson held options to purchase an
aggregate of 50,000 shares of our common stock as of February 23, 20078
    
    Mr. Gemmill held options to purchase an
aggregate of 5,000 shares of our common stock as of February 23, 2007.9
    
    Mr. Kelley held options to purchase an
aggregate of 25,000 shares of our common stock as of February 23, 2007.10
    
    Mr. Lenfest did not hold any options to
purchase shares of our common stock as of February 23, 2007. 27




---



##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  Amount andNature of
    
    PercentName and Address
    
    Beneficial
    
    ofof Beneficial Owner
    
    Ownership (1)
    
    Common StockWilliam F. Mitchell (2)
    
    
    1,066,398
    (3)
    
    
    11.8
    %c/o Environmental Tectonics Corporation
County Line Industrial Park
Southampton, PA 18966Howard W. Kelley (4)
    
    
    30,807
    (5)
    
    
    *c/o Sally Corporation 
745 West Forsyth Street
Jacksonville, FL 32204George K. Anderson, M.D. (4)
    
    
    51,100
    (6)
    
    
    1.0
    %8 Little Harbor Way
Annapolis, MD 21403H.F. Lenfest (4)
    
    
    4,250,931
    (7)
    
    
    35.7
    %c/o The Lenfest Group
Fire Tower Bridge-Suite 460
300 Barr Harbor Drive
West Conshohocken, PA 19428Alan M. Gemmill (4)
    
    
    5,200
    (8)
    
    
    *941 Upper Hastings Way
Virginia Beach, VA 23452T. Todd Martin, III
    
    
    1,989,592
    (9)
    
    
    22.0
    %50 Midtown Park East
Mobile, AL 36606Emerald Advisors, Inc.
    
    
    725,998
    (10)
    
    
    8.0
    %1703 Oregon Pike
Suite 101
Lancaster, PA 17601Pete L. Stephens, M.D.
    
    
    653,723
    (11)
    
    
    7.2
    %31 Ribaut Drive
Hilton Head Island, SC 29926All directors and executive
officers as a group (6 persons)
    
    
    5,420,806
    (12)
    
    
    45.2
    %
 
 *
    
    less than 1%(1)
    
    Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934. Unless otherwise noted, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of our common stock
beneficially owned by them.(2)
    
    Chairman of the Board, President, Chief Executive Officer and Director of the Corporation.(3)
    
    Includes 45,200 shares of common stock held by Mr. Mitchells wife.(4)
    
    Director of the Company. 28




---



##### Table of Contents



(5)
    
    Includes 25,000 shares of common stock which may be acquired upon the exercise of options
granted under our Non-Employee Director Stock Option Plan that are presently exercisable.(6)
    
    Includes 50,000 shares of common stock which may be acquired upon the exercise of options
granted under our Non-Employee Director Stock Option Plan that are presently exercisable.(7)
    
    Includes 1,818,181 shares of common stock issuable upon conversion of a promissory note in
the principal amount of $10,000,000, 606,060 shares of common stock issuable upon conversion
of 3,000 shares of Preferred Stock issued on April 6, 2006, and 449,101 shares of common stock
issuable upon conversion of Preferred Stock issued on July 31, 2006.(8)
    
    Includes 5,000 shares of common stock which may be acquired upon the exercise of options
granted under our Non-Employee Director Stock Option Plan that are presently exercisable.(9)
    
    Includes 1,928,692 shares of common stock owned by Advanced Technology Asset Management, LLC
(formerly ETC Asset Management, LLC) (ATAM), a limited liability company of which T. Todd
Martin, III is manager. Also includes 26,900 shares owned by Allied Williams Co, Inc., a
corporation of which Mr. Martin is an officer and director, 17,000 shares owned by Equity
Management, LLC, a limited liability company of which Mr. Martin is manager, 7,000 shares
owned by trusts of which Mr. Martin is trustee, and 10,000 shares owned by Perdido Investors,
LLC, of which Mr. Martin is the manager.(10)
    
    Emerald Advisors, Inc., has sole voting power with respect to 293,048 shares of common stock
and sole dispositive power over 725,998 shares of common stock.(11)
    
    Includes 638,023 shares of common stock held jointly with Dr. Stephens wife and 15,700
shares of common stock held by Dr. Stephens children.(12)
    
    Includes 80,000 shares of common stock which may be acquired by Members of the Board upon the
exercise of options granted under our Non-Employee Director Stock Option Plan that are
presently exercisable, 1,818,181 shares of common stock issuable upon conversion of a
promissory note in the principal amount of $10,000,000, 606,060 shares of common stock
issuable upon conversion of 3,000 shares of Preferred Stock issued on April 6, 2006, and
449,101 shares of common stock issuable upon conversion 3,000 shares of Preferred Stock issued
on July 31, 2006, all of which may be acquired by Mr. Lenfest, and 16,370 shares of common
stock which may be acquired by Duane Deaner, our chief financial officer, upon the exercise of
options granted under our Incentive Stock Option Plan that are presently exercisable.  
 Item 13. Certain Relationships and Related Transactions and Director Independence
   29




---



##### Table of Contents



Item 14. Principal Accounting Fees and Services
  30




---



##### Table of Contents



FY 2007
    
    
    FY 2006Audit Fees
    
    $
    158,862
    
    
    $
    152,145Audit related fees (1)
    
    
    28,669
    
    
    
    44,276Audit and audit related fees
    
    
    187,531
    
    
    
    196,421Tax fees (2)
    
    
    29,721
    
    
    
    23,805Total fees
    
    $
    217,252
    
    
    $
    220,226
 
 (1)
    
    Audit related fees consist primarily of employee benefit plan audits.(2)
    
    Tax fees consist of tax compliance services and other consultations on
miscellaneous tax matters. 31




---



##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  Number
    
    Item3.1
    
    Registrants Articles of Incorporation, as amended, were filed as Exhibit 3.1. to
Registrants Form 10-K for the year ended February 28, 1997 and are incorporated herein
by reference.3.1(i)
    
    Statement with respect to shares of Series B Convertible Preferred Stock, filed as
Exhibit 3(i) 1, to Registrants Form 8-K dated April 6, 2006, and incorporated herein
by reference.3.2
    
    Registrants amended and restated By-Laws were filed as Exhibit 3.2 to Registrants
Form 8-K dated May 25, 2005, and are incorporated herein by reference.4.1
    
    $10,000,000 Senior Subordinated Convertible Note, dated February 18, 2003, issued by
the Registrant in favor of H.F. Lenfest was filed on February 25, 2003 as Exhibit 4.1
to Form 8-K and is incorporated herein by reference.10.1
    
    Registrants 1998 Stock Option Plan was filed on October 8, 1998 on Form S-8 and is
incorporated herein by reference. *10.2
    
    Registrants Employee Stock Purchase Plan was filed on July 6, 1988 as Exhibit A to the
Prospectus included in Registrants Registration Statement (File No. 33-42219) on Form
S-8 and is incorporated herein by reference. *10.3
    
    Registrants Stock Award Plan adopted April 7, 1993, was filed as Exhibit 10(ix) to the
Registrants Form 10-K for the fiscal year ended February 25, 1994 and is incorporated
herein by reference. *10.4
    
    Credit Agreement, dated as of February 18, 2003 between the Registrant and PNC Bank,
National Association was filed on February 25, 2003 as Exhibit 10.1 to Form 8-K and is
incorporated herein by reference.10.5
    
    Amendment to Credit Agreement, dated as of April 30, 2003, between the Registrant and
PNC Bank was filed as Exhibit 10.6 to the Registrants Form 10-K for the fiscal year
ended February 28, 2003 and is incorporated herein by reference.10.6
    
    Amended and Restated Revolving Credit Note, dated April 30, 2003, issued by the
Registrant in favor of PNC Bank was filed as Exhibit 10.6 to the Registrants Form 10-K
for the fiscal year ended February 28, 2003 and is incorporated herein by reference.10.7
    
    Security Agreement, made and entered into as of February 18, 2003, by and between the
Registrant, Entertainment Technology Corporation, ETC Delaware, Inc. and PNC Bank was
filed on February 25, 2003 as Exhibit 10.3 to Form 8-K and is incorporated herein by
reference.10.8
    
    Pledge Agreement, dated as of February 18, 2003, made by the Registrant in favor of PNC
Bank was filed on February 25, 2003 as Exhibit 10.4 to Form 8-K and is incorporated
herein by reference.10.9
    
    Pledge Agreement (Bank Deposits), dated as of February 18, 2003, made by the Registrant
in favor of PNC Bank was filed on February 25, 2003 as Exhibit 10.5 to Form 8-K and is
incorporated herein by reference.10.10
    
    Guaranty, dated as of February 18, 2003, made by Entertainment Technology Corporation
and ETC Delaware, Inc. in favor of PNC Bank was filed on February 25, 2003 as Exhibit
10.6 to Form 8-K and is incorporated herein by reference.10.11
    
    Open-End Mortgage and Security Agreement, made as of February 18, 2003, by the
Registrant in favor of PNC Bank was filed on February 25, 2003 as Exhibit 10.7 to Form
8-K and is incorporated herein by reference.10.12
    
    Convertible Note and Warrant Purchase Agreement, dated February 18, 2003, by and
between the Registrant and Lenfest was filed on February 25, 2003 as Exhibit 10.8 to
Form 8-K and is incorporated herein by reference.10.13
    
    Registration Rights Agreement, dated as of February 18, 2003, by and between the
Registrant and H.F. Lenfest was filed on February 25, 2003 as Exhibit 10.9 to Form 8-K
and is incorporated herein by reference.10.14
    
    Security Agreement, made and entered into as of February 18, 2003, by and among the
Registrant, Entertainment Technology Corporation, ETC Delaware, Inc. and H.F. Lenfest
was filed on February 25, 2003 as Exhibit 10.10 to Form 8-K and is incorporated herein
by reference.10.15
    
    Guaranty, dated as of February 18, 2003, made by Entertainment Technology Corporation
and ETC Delaware, Inc. in favor of H.F. Lenfest was filed on February 25, 2003 as
Exhibit 10.11 to Form 8-K and is incorporated herein by reference.
 32




---



##### Table of Contents



Number
    
    Item10.16
    
    Open-End Mortgage and Security Agreement, made as of February 18, 2003, by the
Registrant in favor of H.F. Lenfest was filed on February 25, 2003 as Exhibit 10.12 to
Form 8-K and is incorporated herein by reference.10.17
    
    Subordination and Intercreditor Agreement, dated as of February 18, 2003, among PNC
Bank, H.F. Lenfest and the Registrant was filed on February 25, 2003 as Exhibit 10.13
to Form 8-K and is incorporated herein by reference.10.18
    
    Amendment to Credit Agreement, dated as of August 24, 2004, between the Registrant and
PNC Bank, National Association, was filed on September 10, 2004 as Exhibit 10.1 to Form
8-K and is incorporated herein by reference.10.19
    
    Second Amended and Restated Revolving Credit Note, dated as of August 24, 2004, between
the Registrant and PNC Bank, National Association, was filed on September 10, 2004 as
Exhibit 10.2 to Form 8-K and is incorporated herein by reference.10.20
    
    Limited Guaranty Agreement, dated as of August 24, 2004, of H.F. Lenfest in favor of
PNC Bank, National Association, was filed on September 10, 2004 as Exhibit 10.3 to Form
8-K and is incorporated herein by reference.10.21
    
    Amendment to Credit Agreement, dated as of October 18, 2004, between the Registrant and
PNC Bank, National Association, was filed on January 10, 2005 as Exhibit 10.1 to Form
10-Q and is incorporated herein by reference.10.22
    
    Subscription Agreement, dated as of February 14, 2005, between the Registrant and H.F.
Lenfest, was filed on February 16, 2005 as Exhibit 10.1 to Form 8-K and is incorporated
herein by reference.10.23
    
    2005 Non-employee Director Stock Option Plan, incorporated by reference to Annex A of
Registrants Definitive Proxy Statement on Schedule 14A filed on August 16, 2005 and
incorporated herein by reference. *10.24
    
    Preferred Stock Purchase Agreement between the Registrant and H.F. Lenfest, dated as of
April 6, 2006, filed as Exhibit 10.1 to Registrants Form 8-K dated April 6, 2006, and
incorporated herein by reference.10.25
    
    Registration Rights Agreement between the Registrant and H.F. Lenfest, dated as of
April 6, 2006, filed as Exhibit 10.2 to Registrants Form 8-K dated April 6, 2006, and
incorporated herein by reference.10.26
    
    Amendment to Credit Agreement, dated as of May 18, 2006, between the Registrant and PNC
Bank, National Association, was filed on May 23, 2006 as Exhibit 10.1 to Form 8-K and
is incorporated herein by reference.10.27
    
    Amendment to Credit Agreement, dated as of June 28, 2006, between the Registrant and
PNC Bank, National Association, was filed on June 29, 2006 as Exhibit 10.2 to Form 8-K
and is incorporated herein by reference.10.28
    
    Letter Agreement, dated as of November 16, 2006, between the Registrant and PNC Bank,
National Association, was filed on November 20, 2006 as Exhibit 10.1 to Form 8-K and is
incorporated herein by reference.10.29
    
    Reimbursement Agreement, dated as of November 16, 2006, between the Registrant and PNC
Bank, National Association, was filed on November 20, 2006 as Exhibit 10.2 to Form 8-K
and is incorporated herein by reference.10.30
    
    Restated Subordination and Intercreditor Agreement, dated as of November 16, 2006,
between the Registrant and H.F. Lenfest, was filed on November 20, 2006 as Exhibit 10.3
to Form 8-K and is incorporated herein by reference.10.31
    
    Restated Limited Guaranty Agreement, dated as of November 16, 2006, between the
Registrant and H.F. Lenfest, was filed on November 20, 2006 as Exhibit 10.4 to Form 8-K
and is incorporated herein by reference.10.32
    
    Unsecured Promissory Note, dated as of November 16, 2006, between the Registrant and
H.F. Lenfest, was filed on November 21, 2006 as Exhibit 10.1 to Form 8-K and is
incorporated herein by reference.10.33
    
    Employment Agreement, dated as of November 1, 2005, between Registrant and Duane D.
Deaner, Chief Financial Officer. (Filed herewith)*10.34
    
    Agreement between Registrant and H.F. Lenfest, dated as of May 9, 2007. (Filed herewith)10.35
    
    Employment Agreement, dated as of July 24, 2006, between Registrant and William F.
Mitchell , was filed on July 24, 2006 as Exhibit 10.1 to Form 8-K and is incorporated
herein by reference.*13
    
    Portions of Registrants 2006 Annual Report to Shareholders which are incorporated by
reference into this Form 10-K. (Filed herewith)14
    
    Code of Ethics. (Filed herewith)21
    
    Subsidiaries of the Registrant. (Filed herewith)
 33




---



##### Table of Contents



Number
    
    Item23
    
    Consent of Grant Thornton LLP. (Filed herewith)31.1
    
    Certification dated May 24, 2007 pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 made by William F. Mitchell, Chief Executive Officer. (Filed herewith)31.2
    
    Certification dated May 24, 2007 pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 made by Duane D. Deaner, Chief Financial Officer. (Filed herewith)32
    
    Certification dated May 24, 2007 pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 made by William F. Mitchell, Chief
Executive Officer and Duane D. Deaner, Chief Financial Officer. (Filed herewith)
 
 *
    
    Represents a management contract or a compensatory plan or arrangement. 34




---



##### Table of Contents



SIGNATURES
  ENVIRONMENTAL TECTONICS CORPORATIONBy /s/ William F. MitchellWilliam F. Mitchell,President and Chief Executive Officer  Name
    
    Position
    
    Date/s/ William F. Mitchell
    
    Chairman of the Board,
    
    May 24, 2007William F. Mitchell
    
    Chief
Executive Officer,President and Director (PrincipalExecutive Officer)/s/ Duane D. Deaner
    
    Chief Financial Officer
    
    May 24, 2007Duane D. Deaner
    
    (Principal
Financial andAccounting Officer)/s/ Howard W. Kelley
    
    Director
    
    May 24, 2007Howard W. Kelley/s/ H.F. Lenfest
    
    Director
    
    May 24, 2007H.F. Lenfest/s/ George K. Anderson
    
    Director
    
    May 24, 2007George K. Anderson, M.D./s/ Alan M. Gemmill
    
    Director
    
    May 24, 2007Alan M. Gemmill
 35




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Item10.33
    
    Employment Agreement, dated as of November 1, 2005, between Registrant and Duane D. Deaner, Chief FinancialOfficer.10.34
    
    Agreement between Registrant and H.F. Lenfest, dated as of May 9, 2007.13
    
    Portions of Registrants 2007 Annual Report to Shareholders which are incorporated by reference into this Form 10-K.14
    
    Code of Ethics21
    
    Subsidiaries of the Registrant.23
    
    Consent of Grant Thornton LLP.31.1
    
    Certification dated May 24, 2007 pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 made byWilliam F. Mitchell, Chief Executive Officer.31.2
    
    Certification dated May 24, 2007 pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 made by DuaneD. Deaner, Chief Financial Officer.32
    
    Certification dated May 24, 2007 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 made by William F. Mitchell, Chief Executive Officer and Duane D. Deaner, ChiefFinancial Officer.