| **EXHIBIT 13**

**PORTIONS OF****ENVIRONMENTAL TECTONICS CORPORATION****2005****ANNUAL REPORT TO STOCKHOLDERS**

**FINANCIAL REVIEW**(amounts in thousands, except share and per share information) |
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| **Fiscal Year End**                                                 | **2005** |      | **2004** |   | **2003**  |   | **2002** |      | **2001** |   |
|---------------------------------------------------------------------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                                                     |          |      |          |   |           |   |          |      |          |   |
| Net sales                                                           | $        | 27,814    |     | $      | 25,995    |   | $        | 43,123    |     | $      | 32,527 |   | $ | 32,452 |   |
| Gross profit                                                        |     | 6,176     |     |   | 9,943     |   |     | 14,198    |     |   | 11,465 |   |   | 13,075 |   |
| Operating      (loss)/income                                        |     | (7,130    | )        |   | 131       |   |     | 4,116     |     |   | 2,873 |   |   | 4,122 |   |
| Net (loss)/income                                                   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| (Loss)/earnings                                                     |     | (8,113    | )        |   | (793      | )      |     | 2,493     |     |   | 1,741 |   |   | 2,021 |   |
| per common       share:                                             |
|           Basic   |     | (1.06     | )        |   | (.11      | )      |     | .35       |     |   | .24 |   |   | .29 |   |
|           Diluted |     | (1.06     | )        |   | (.11      | )      |     | .33       |     |   | .23 |   |   | .27 |   |
| Working capital                                                     |     | 29,818    |     |   | 29,907    |   |     | 31,216    |     |   | 30,683 |   |   | 25,070 |   |
| Long-term      obligations                                          |     | 12,087    |     |   | 12,157    |   |     | 12,643    |     |   | 16,688 |   |   | 12,778 |   |
| Total assets                                                        |     | 47,909    |     |   | 48,696    |   |     | 47,698    |     |   | 48,482 |   |   | 40,705 |   |
| Total stockholders’equity                                 |     | 24,355    |     |   | 25,054    |   |     | 25,907    |     |   | 20,782 |   |   | 18,796 |
| Weighted averagecommon shares:                                      |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
|           Basic   |     | 7,656,000 |     |   | 7,163,000 |   |     | 7,153,000 |     |   | 7,143,000 |   |   | 7,087,000 |   |
|           Diluted |     | 7,656,000 |     |   | 7,163,000 |   |     | 7,497,000 |     |   | 7,499,000 |   |   | 7,499,000 |   |

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| All earnings per share and share amounts have been restated to reflect a 2-for-1 stock split effectiveMay 28, 1999. No cash dividends have ever been paid on the Company’s common stock, and the Companyis prohibited from declaring any cash dividends on its common stock under the terms of its existingcredit facilities. |

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| **Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**FORWARD-LOOKING STATEMENTS**

                This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements are based on the Company’s current expectationsand projections about future events. These forward-looking statements are subject to known and unknownrisks, uncertainties and assumptions about the Company and its subsidiaries that may cause actualresults, levels of activity, performance or achievements to be materially different from any futureresults, levels of activity, performance or achievements expressed or implied by such forward-lookingstatements. 

                These forward-looking statements include statements with respect to the Company’s vision, mission,strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions,financial condition, results of operations, future performance and business of the company, includingbut not limited to, (i) projections of revenues, costs of raw materials, income or loss, earningsor loss per share, capital expenditures, growth prospects, dividends, capital structure, other financialitems and the effects of currency fluctuations, (ii) statements of our plans and objectives of theCompany or its management or Board of Directors, including the introduction of new products, or estimatesor predictions of actions of customers, suppliers, competitors or regulatory authorities, (iii) statementsof future economic performance, (iv) statements of assumptions and other statements about the Companyor its business, (v) statements made about the possible outcomes of litigation involving the Company;and (vi) statements preceded by, followed by or that include the words, “may,” “could,”“should,” “looking forward,” “would,” “believe,” “expect,”“anticipate,” “estimate,” “intend,” “plan,” or the negativeof such terms or similar expressions. These forward-looking statements involve risks and uncertaintieswhich are subject to change based on various important factors. Some of these risks and uncertainties,in whole or in part, are beyond the Company’s control. Factors that might cause or contributeto such a material difference include, but are not limited to, those discussed in the Company’sAnnual Report on Form 10-K, in the section entitled “Risks Particular to Our Business.” Shareholdersare urged to review these risks carefully prior to making an investment in the Company’s common stock.

                The Company cautions that the foregoing list of important factors is not exclusive. The Company doesnot undertake to update any forward-looking statement, whether written or oral, that may be madefrom time to time by or on behalf of the Company

**Overview**

                We are principally engaged in the design, manufacture and sale of software driven products used tocreate and monitor the physiological effects of motion on humans and equipment and to control, modify,simulate and measure environmental conditions. These products include aircrew training systems, entertainmentproducts, sterilizers, environmental and hyperbaric chambers and other products that involve similarmanufacturing techniques and engineering technologies. 

                The following factors had an adverse impact on our performance for the fiscal year ended February 25,2005: |
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|  | • | unfavorable global economic and political conditions;                                            |
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|  |        |                                                                                             |
|  | • | continued product development and marketing costs associated with our ATFS technology;           |
|  |        |                                                                                             |
|  | • | continuing logistics and foreign field installation cost overruns in the environmental business; |
|  |        |                                                                                             |
|  | • | higher costs of capital and amortization of deferred finance charges; and                        |
|  |        |                                                                                             |
|  | • | litigation and claims costs.                                                                     |

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|               Although saleswere up from fiscal 2004, our sales efforts continued to be hampered by unfavorable global economicand political conditions. We saw many of our potential new contracts delayed by budget constraintsand delays of our customers located throughout the world. This was especially true in our AircrewTraining Systems business, where most of the sales are to international customers. 

             In the environmentalline, we continued to experience logistics and field installation delays and cost overruns on a fewinternational projects. These projects involved large environmental control systems which could notbe factory tested in our Southampton, PA manufacturing headquarters before shipment to customer locations,so issues (parts, software modifications, etc.) which normally arise during system start-up had tobe addressed in the field. Most of these projects were completed during the year, so we expect grossmargins for this group to improve going forward.

                Fiscal 2005 saw the continuation of our education and marketing efforts to introduce our AuthenticTactical Flight Simulator (“ATFS”) to the U.S. military. The evolution of these excitingand state-of-the-art technologies is an important step in our goal of integrating flight and aeromedicaltraining in a simulator device. This technology allows a fighter pilot to practice tactical air combat |

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| maneuvers such as dodging enemy missiles, ground fire and aircraft obstacles while experiencing thereal life environment of a high-G Force fighter aircraft. These flight trainers provide a low costand extremely less risky alternative to actual air flight. We believe that armed forces agenciesof various governments will appreciate the efficiency of these technologies, especially in this timeof fiscal conservatism and budgetary constraints throughout the world.

           One of the greatest challenges weface is adequately funding the cash requirements of large, long-term multi-year projects. Althoughthese contracts normally incorporate milestone payments, the cash flows associated with productionand material requirements tend to vary significantly over time. These projects are usually cash positivein the early stages and cash negative during the production phase. Funding these contracts requiresa significant amount of operating funds and may hamper other types of business. In fiscal 2005 ourbank took certain actions which effectively eliminated our ability to borrow cash under our existingagreement to support operations. These actions also resulted in us having to issue additional commonstock warrants in consideration for a limited guarantee to secure the Company’s letter of creditbank facility which increased amortization expense associated with the deferred finance charges onthese warrants. Our liquidity and capitalization improved in fiscal 2005 when we received settlementpayments on two international claims. However, we may need to obtain additional sources of capitalin order to continue growing and operating our business. Because we have established businesses inmany markets, significant fixed assets including a building, and other business assets which canbe used for security, we believe that we will be able to locate such additional sources of capitaland that the bank actions will not have a long-term material adverse effect on our business.

In addition, we face the following challenges and business goals in order to make fiscal 2006 a successfulyear:

Aircrew Training Systems |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|  | • | Market all the aeromedical products we technologically enhanced in fiscal 2004 and 2005. |
|--|--------|------------------------------------------------------------------------------------------|
|  |        |                                                                                     |

|   |       We have heavily invested in enhancing functionality and productcapability of three ATS products: our centrifuge-based flight simulator, our General Aviation Trainer(GAT), and our Gyro-IPT. Repeat sales of these state-of-the-art simulators will allow us to recoupthe costs of our non-recurring engineering and design effort. |
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|        |                                                                                                                                                                                                                                                                                                                                                                    |

|  | • | Continue to evolve Advanced Tactical Flight Simulation (ATFS). |
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|  |        |                                                           |

|   |       Our challenge will be to find funding to continue this criticaldevelopment objective, either through U.S. government grants or a customer order. |
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|          |
|---------------|
| Entertainment |
|          |

|  | • | Develop a business model for the entertainment line which addresses the three types of contractualarrangements which are common in the amusement and educational venues: outright purchases, leasingand revenue sharing. Additionally, we will need to locate the capital required to support this typeof business structure. |
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|  |        |                                                                                                                                                                                                                                                                                                                          |
|  | • | Expand the entertainment line by repeat sales and the introduction of story line enhancements.                                                                                                                                                                                                                                |

|          |
|---------------|
| Environmental |
|          |

|  | • | Bring the environmental line back to profitability by refocusing the selling effort towards domesticcontracts for standardized products. |
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|   |
|--------|
| ADMS   |
|   |

|  | • | Develop a service business to supplant the sale of systems. During fiscal 2005 we received a contractto perform airport certification and emergency drill training using software and technology developedfor the ADMS line at the Baltimore-Washington International Airport. We believe this is a new andundeveloped market with high potential. |
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|-------------------|
| Claims/Litigation |
|              |

|  | • | Continue to pursue outstanding commercial litigation and the Company’s claim against the U.S.government. |
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|  |        |                                                                                                          |

|   | At February 25, 2005, we were involved in major commercial and government litigation which will requirea significant amount of our time and effort. These activities will potentially detract from otherbusiness issues and require significant funding. |
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|      Liquidity |
|------------------------------------|
|                               |

|  | • | We do not currently have a bank facility which can be used to borrow funds for operations. |
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           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|                        Duringfiscal 2005 our bank took certain actions which effectively eliminated our ability to borrow cashunder our existing agreement to support operations. Thus, we may need to obtain additional sourcesof capital in order to continue growing and operating our business. This capital may be difficultto obtain and the cost of this additional capital is likely to be relatively high. 

**Revenue Recognition**

                We currently market our products and services primarily through our sales offices and employees. Inaddition, we also utilize the services of approximately 100 independent sales agents and organizationsin seeking foreign orders for our products.

                We generally customize our products using our proprietary software based on specifications providedby our customers. Many of these products are capital intensive and take more than one year to manufactureand deliver to the customer. In the ATS segment, we sell our Aircrew Training Devices to militaryand commercial airline operators both in the United States and internationally. We sell our Entertainmentproducts to amusement parks, zoos and museums. We sell our Disaster Management Simulation productsto state and local governments. In our Industrial Group, we sell our sterilizers to pharmaceuticaland medical device manufacturers. We sell our Environmental systems primarily to commercial automobilemanufacturers and heating, ventilation and air conditioning (HVAC) manufacturers and our Hyperbaricproducts to the military (mainly larger chambers) and hospitals and clinics (mainly monoplace chambers).To a lesser degree, we provide upgrade, maintenance and repair services for our products and forproducts manufactured by other parties. . 

                The Company recognizes revenue using three methods:

                On long-term contracts over $250,000 in value and over six months in length the percentage of completionmethod is applied based on costs incurred as a percentage of estimated total costs. This percentageis multiplied by the total estimated revenue under a contract to calculate the amount of revenuerecognized in an accounting period. Revenue recognized on uncompleted long-term contracts in excessof amounts billed to customers is reflected as a current asset. Amounts billed to customers in excessof revenue recognized on uncompleted long-term contracts are reflected as a current liability. Whenit is estimated that a contract will result in a loss, the entire amount of the loss is accrued.The effect of revisions in cost and profit estimates for long-term contracts is reflected in theaccounting period in which the Company learns the facts which require it to revise its cost and profitestimates. Contract progress billings are based upon contract provisions for customer advance payments,contract costs incurred, and completion of specified contract milestones. Contracts may provide forcustomer retainage of a portion of amounts billed until contract completion. Retainage is generallydue within one year of completion of the contract. Revenue recognition under the percentage of completionmethod involves significant estimates. 

               Revenue forcontracts under $250,000, or to be completed in less than six months, and where there are no post-shipmentservices (such as installation and customer acceptance) is recognized on the date that the finishedproduct is shipped to the customer. 

                Revenue derived from the sale of parts and services is also recognized on the date that the finishedproduct is shipped to the customer or when the service is completed. Revenue for service contractsis recognized ratably over the life of the contract with related material costs expensed as incurred.

                In accordance with accounting principles generally accepted in the United States of America, recognizingrevenue on contract claims and disputes, related to customer caused delays, errors in specificationsand designs, and other unanticipated causes, and for amounts in excess of contract value, is generallyappropriate if it is probable that the claim will result in additional contract revenue and if theCompany can reliably estimate the amount of additional contract revenue. However, revenue recordedon a contract claim cannot exceed the incurred contract costs related to that claim. Claims are subjectto negotiation, arbitration and audit by the customer or governmental agency.

                The Company has operating subsidiaries in the United Kingdom and Poland, maintains regional officesin the Middle East, Asia and Canada, and uses the services of approximately 100 independent salesorganizations and agents throughout the world. ETC International Corporation is a holding companyestablished for federal income tax purposes and is not an operating subsidiary. The Company considersits business activities to be divided into two segments: Aircrew Training Systems (ATS) and the IndustrialGroup. |

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| **Critical Accounting Policies**

                The discussion and analysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America. The preparation ofthese financial statements requires the Company to make estimates and judgments that affect the reportedamount of assets and liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities at the date of the Company’s financial statements. Actual results may differfrom these estimates under different assumptions or conditions.

                Critical accounting policies are defined as those that reflect significant judgments and uncertainties,and potentially result in materially different results under different assumptions and conditions.The Company believes that its critical accounting policies include those described below. For a detaileddiscussion on the application of these and other accounting policies, see Note 1 to the ConsolidatedFinancial Statements, Summary of Significant Accounting Policies.

                Revenue Recognition on Long-Term Contracts

                On long-term contracts over $250,000 in value and six months in length, the percentage of completionmethod is applied based on costs incurred as a percentage of estimated total costs. This percentageis multiplied by the total estimated revenue under a contract to calculate the amount of revenuerecognized in an accounting period. Revenue recognized on uncompleted long-term contracts in excessof amounts billed to customers is reflected as a current asset. Amounts billed to customers in excessof revenue recognized on uncompleted long-term contracts are reflected as a current liability. Whenit is estimated that a contract will result in a loss, the entire amount of the loss is accrued.The effect of revisions in cost and profit estimates for long-term contracts is reflected in theaccounting period in which the Company learns the facts which require it to revise its cost and profitestimates. Contract progress billings are based upon contract provisions for customer advance payments,contract costs incurred, and completion of specified contract milestones. Contracts may provide forcustomer retainage of a portion of amounts billed until contract completion. Retainage is generallydue within one year of completion of the contract. Revenue recognition under the percentage of completionmethod involves significant estimates. 

                The Company accounts for some its largest contracts, including its contracts with the U.S. and otherforeign governments, using the percentage-of-completion method. If the Company does not accuratelyestimate the total cost to be incurred on this type of contract, or if the Company is unsuccessfulin the ultimate collection of associated contract claims, estimated gross margins may be significantlyimpacted or losses may need to be recognized in future periods. Any resulting reductions in marginsor contract losses could be material to the Company’s results of operations and financial position.

                Revenue for contracts under $250,000, or to be completed in less than six months, and where there areno post-shipment services (such as installation and customer acceptance) is recognized on the datethat the finished product is shipped to the customer or the service is completed. 

Accounts Receivable

                The Company performs ongoing credit evaluations of its customers and adjusts credit limits based onpayment history and the customer’s current creditworthiness. The Company continuously monitorscollections and payments from its customers and maintains a provision for estimated credit lossesbased on historical experience and any specific customer collection issues that have been identified.While the Company’s credit losses have historically been within its expectations and the provisionsestablished, the Company cannot guarantee that it will continue to experience the same credit lossrates that it has in the past. Additionally, as a result of the concentration of international receivables,the Company cannot predict the effect, if any, which geopolitical risk and uncertainty will haveon the ultimate collection of its international receivables. 

                In accordance with accounting principles generally accepted in the United States of America, recognizingrevenue on contract claims and disputes related to customer caused delays, errors in specificationsand designs, and other unanticipated causes, and for amounts in excess of contract value, is generallyappropriate if it is probable that the claim will result in additional contract revenue and if theCompany can reliably estimate the amount of additional contract revenue. However, revenue recordedon a contract claim cannot exceed the incurred contract costs related to that claim. Claims are subjectto negotiation, arbitration and audit by the customer or governmental agency. |
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| **Results of Operations **

**Fiscal 2005 versus Fiscal 2004** |
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| **      ($000)** | **Summary Table of Results** |   |
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|                                           |                         |   |   |   |   |   | **    ( )=unfavorable** |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                          |                         |   |   |   |   |   |   |   |   |   |   |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|      Domestic         | $                            | 11,998 |   | $ | 8,856 |   | $ | 3,142 |   |   | 35.5 | % |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|      US Gov’t    |                         | 2,904  |   |   | 1,717 |   |   | 1,187 |   |   | 69.1 |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|      Int’l       |                         | 12,912 |   |   | 15,422 |   |   | (2,510 | ) |   | (16.3 | ) |
|                                                |                              |   |  |   |  |   |  |
|                                           |                              |   |  |   |  |   |   |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Total Sales                                    |                         | 27,814 |   |   | 25,995 |   |   | 1,819 |   |   | 7.0 |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Gross Profit                                   |                         | 6,176  |   |   | 9,943 |   |   | (3,767 | ) |   | (37.9 | ) |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| SG&A Expenses                              |                         | 12,450 |   |   | 9,454 |   |   | (2,996 | ) |   | (31.7 | ) |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| R&D Expenses                               |                         | 856    |   |   | 358 |   |   | (498 | ) |   | (139. | 1) |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Interest Exp                                   |                         | 1,792  |   |   | 1,606 |   |   | (186 | ) |   | (11.6 | ) |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Other Exp., net                                |                         | 308    |   |   | 130 |   |   | (178 | ) |   | (136.9 | ) |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Income Taxes                                   |                         | (1,117 | ) |   | (810 | ) |   | 307 |   |   | 37.9 |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Minority Interest                              |                         | 0      |   |   | (2 | ) |   | (2 | ) |   | (100.0 | ) |
|                                                |                              |   |  |   |  |   |  |
|                                                |                              |        |  |  |  |  |   |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                       | $                            | (8,113 | ) | $ | (793 | ) | $ | (7,320) |   |   | (923.1 | %) |
|                                                |                              |        |  |  |  |  |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss per share      (diluted)              | $                            | (1.06  | ) | $ | $(0.11 | ) |   | (0.95 | ) |   | (863.6 | %) |
|                                                |                              |        |  |  |  |  |  |  |

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| Net Loss.

                The Company had a net loss of $8,113,000 or $1.06 per share (diluted) in 2005 versus a net loss of$793,000 or $.11 per share (diluted) in fiscal 2004. Operating loss was $7,130,000 versus an operatingincome of $131,000 in 2004. This decrease was primarily the result of reduced gross profits primarilyin sterilizers, Pilot Training Systems (PTS) and simulation coupled with higher expenses in all spendingcategories. Acting as a partial offset were the increased sales volume and a higher income tax benefit.

Sales.

                Total sales in fiscal 2005 were $27,814,000, an increase of $1,819,000 or 7.0% over 2004, representingsignificant increases in environmental ($2,143,000 or 102.6%), hyperbaric ($1,510,000 or 81.3%) andentertainment ($1,031,000 or 308.8%) partially offset by a significant ($2,731,000 or 59.7%) decreasein sterilizer sales. ATS sales were basically flat between the years. Environmental sales benefitedfrom a $1,907,000 or 158.1% increase in domestic sales primarily for automotive applications. Hyperbaricequipment sales were up domestically primarily due to a large multi-place chamber sale from a domesticcustomer destined for a Middle Eastern navy. Entertainment sales reflected the first year ordersof our “Wild Earth” and “Monster Truck” amusement rides. The decrease in sterilizersales domestically primarily reflected reduced activity for a large Ethylene Oxide (“ETO”) |

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| project. Geographically, domestic sales were up $3,142,000 or 35.5%, and represented 43.1% of totalsales, up from 34.1% in fiscal 2004, primarily reflecting the increased activity as noted above.U.S. government sales increased to $2,904,000, as compared to $1,717,000 in fiscal 2004, and represented10.4% of total sales, up from 6.6% of total sales in fiscal 2004. International sales, includingthose from the Company’s foreign subsidiaries, were down $2,510,000 or 16.3%, and represented46.5% of total sales, down from 59.3% in fiscal 2004, primarily reflecting significantly reducedsales for ATS. Throughout the Company’s history, most of the sales for Aircrew Training Systemsproducts have been made to international customers. 

                Only one customer represented 10% or more of sales in fiscal 2005, the Royal Malaysian Air Force, whichgenerated $3,388,000 or 12.2% of total sales. In fiscal 2005, international sales totaling at least$500,000 per country were made to customers in Malaysia, the United Kingdom, Egypt, the Czech Republic,Australia, China, Italy and the United Arab Emirates. Fluctuations in sales to international countriesfrom year to year primarily reflect percentage of completion revenue recognition on the level andstage of development and production on multi-year long-term contracts. Open orders for two internationalcustomers represented 24.2% of the Company’s backlog at February 25, 2005. For a discussionof the additional risks associated with our international operations, see “Risks Particularto Our Business—There are certain risks inherent in our international business activities, whichconstitute a significant portion of our business,” in our Annual Report on Form 10-K. 

                We have historically experienced significant variability in our sales performance. This reflects theexisting sales backlog, product and the nature of contract (size and performance time) mix, the manufacturingcycle and amount of time to effect installation and customer acceptance, and certain factors notin our control such as customer delays and the time required to obtain U.S. Government export licenses.One or a few contract sales may account for a substantial percentage of our quarterly revenue. 

Domestic Sales.

                Overall, domestic sales in fiscal 2005 were $11,998,000 as compared to $8,856,000 in fiscal 2004, anincrease of $3,142,000 or 35.5%, reflecting increases in all product types except sterilizers andsimulation. Environmental benefited from a 258.1% increase in domestic sales primarily for automotiveapplications. Hyperbaric was up domestically primarily due to a large multi-place chamber sale. Entertainmentsales reflected the first year orders of “Wild Earth” and “Monster Truck”amusement rides. The decrease in sterilizer sales domestically primarily reflected reduced activityfor a largeEtOproject. Domestic sales represented 43.1% of the Company’s total sales in fiscal2005, up from 34.1% in fiscal 2004. Sales to the U.S. Government in fiscal 2005 were $2,904,000 ascompared $1,717,000 in fiscal 2004, and represented 6.4% of total sales in fiscal 2005 versus 6.6%in fiscal 2004. 

International Sales.

                International sales in fiscal 2005 were $12,912,000 as compared to $15,422,000 in the fiscal 2004,a decrease of $2,510,000 or 16.3%, and represented 46.4% of total sales as compared to 59.3% in fiscal2004. Throughout our history, most of the sales for ATS have been made to international customers.In fiscal 2005 international sales totaling at least ten percent of total international sales weremade to customers in Malaysia ($3,388,000) and Egypt ($2,309,000). In fiscal 2004 international salestotaling at least ten percent of total international sales were made to government or commercialaccounts in Malaysia ($2,874,000) and the United Kingdom ($3,658,000). Fluctuations in salesto international countries from year to year primarily reflect revenue recognition on the level andstage of development and production on multi-year long-term contracts.

Segment Sales. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Segment Sales ($000 except for %)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

|        |   |   |   |   |   |   |   |   |
|-------------|--------|--------|--------|--------|--------|--------|--------|--------|
||
|        |
| Fiscal 2005 | 16,787 |   | 60.3   |   | 11,027 |   | 39.7   |   | 27,814 |   | 100.0 |   |
|        |   |   |   |   |   |   |   |   |   |   |   |   |
| Fiscal 2004 | 15,880 |   | 61.1   |   | 10,115 |   | 38.9   |   | 25,995 |   | 100.0 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 On a segment basis, sales of the Company’s ATS products, which create and monitor the physiological effects of motion (including spatial disorientation and centrifugal forces) on humans and equipment for medical, training, research and entertainment markets, were $16,787,000 in fiscal 2005, an increase of $907,000, or 5.7% over fiscal 2004. Sales of these products accounted for 60.3% of the Company’s sales compared to 61.1% in fiscal 2004. The increase in ATS product sales primarily reflected the increased |

| 7 |
|---|

| activity in the entertainment area. Sales in the Company’s other segment, the Industrial Group,which designs and produces chambers that create environments that are used for sterilization, researchand medical applications, increased $912,000 to $11,027,000, an increase of 9.0%, and constituted39.7% of the Company’s total sales compared to 38.9% in fiscal 2004. 

                Significant claims outstanding at February 25, 2005 included a claim with the U.S. Navy for a submarinedecompression chamber ($3.0 million recorded). Significant claims outstanding at February 27, 2004included $2.9 million for the aforementioned U.S. Navy claim and $2.6 million for an internationalcustomer. Effective February 27, 2004 the Company reached an agreement totaling $10.5 million ona prior international claim. This settlement was paid to the Company in March 2004. On February 8,2005, the Company reached an agreement totaling $4.7 million on the remaining international claim.This settlement was paid to the Company in February 2005. Although recorded as a current asset inthe financial statements, all remaining claim revenues may not be received in full during fiscal2006. For a more complete discussion of outstanding claims, see “Note 3. Accounts Receivable”to our consolidated financial statements in the Annual Report to Stockholders following.

Gross Profit.

                Gross profit for fiscal 2005 decreased by $3,767,000 or 37.9% from fiscal 2004 reflecting significantreductions in most product categories, most notably sterilizer, PTS and simulation. Sterilizers sufferedfrom the aforementioned significant sales decrease and a reduction of the gross profit rate as apercent of sales on a product mix shift to smaller steam sterilizers. Although sales for PTS werebasically flat between the periods, the prior period reflected higher claims settlement revenue whichresulted in a higher gross profit rate as a percent of sales. Simulation sales were also basicallyflat between the periods although the current period included additional product development costs,both to enhance functionality of existing products and to develop product extensions, which negativelyimpacted gross profit as these costs are primarily charged directly to the cost of sales for specificorders. Acting as a partial offset was an improvement in environmental gross profit rates as a percentof sales, although additional budget revisions for cost overruns primarily for international projectsresulted in continued negative rates.

Operating Loss.

                Operating loss was $7,130,000 vs. an operating income of $131,000 in 2004. This decrease was primarilythe result of reduced gross profits primarily in sterilizers, Pilot Training Systems (PTS) and simulationcoupled with higher expenses in all spending categories. Acting as a partial offset were the increasedsales volume.

             On a segment basis, ATShad an operating loss of $4,768,000, a decrease of $5,999,000 or 487.3% from fiscal 2004, while theIndustrial Group had an operating loss of $1,518,000 in fiscal 2005, a decrease of $1,270,000 fromfiscal 2005. These segment operating results were offset, in part, by unallocated corporate expensesof $846,000, a decrease of $6,000 from fiscal 2004. 

                The decrease in operating income for the ATS segment in fiscal 2005 reflected lower gross margins,both dollar-wise and as a percent of revenues, for all product categories coupled with higher operatingexpenses, primarily legal and claims expenses. Acting as a partial offset was an increase in salesbetween the periods.

                The Industrial Group segment’s decrease in operating income in fiscal 2005 reflected lower grossmargins, primarily for sterilizers and parts and service, coupled with a slight increase in operatingexpenses. Acting as a partial offset was an improved gross profit, both dollar-wise and as a percentof revenue, for the environmental group.

Selling and Administrative Expenses.

                Selling and administrative expenses increased $2,996,000 or 31.7% from fiscal 2004. During fiscal 2005we incurred significant legal costs and claims expenses to support an international claim (whichclaim was settled on February 8, 2005) and the lawsuit against Disney, which is in the discoveryphase. Approximately 44% of selling and administrative costs in fiscal 2005 were related to legaland accounting fees, claim costs and sales commissions. In fiscal 2004, these costs comprised approximately30% of selling and administrative costs. As a percentage of sales, selling and administrative expenseswere 44.8% in fiscal 2005 compared to 36.4% in fiscal 2004.

Research and Development Expenses. 

                Research and development expenses increased $498,000 or 139.1% in fiscal 2005 as compared to fiscal2004. This increase reflected both additional spending and the timing of reimbursement for governmentgrants in our Turkish subsidiary under a government research award for two projects. Most of theCompany’s research efforts, which were and continue to be a significant cost of its business,are included in cost of sales for applied research for specific contracts, as well as research forfeasibility and technology updates. Capitalized software development costs for fiscal 2005 were $1,466,000compared to $1,716,000 in fiscal 2004. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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| 8 |
|---|

| Amortization of software costs, which was charged to cost of sales, was $988,000 and $851,000 for fiscal2005 and fiscal 2004, respectively.

Interest Expense. 

                Interest expense (net of interest income) increased $186,000 or 11.6% in fiscal 2005 from fiscal 2004primarily reflecting increased amortization of both deferred finance expenses from the Company’sFebruary 2003 refinancing and subordinated debt discount associated with the Company’s subordinateddebt. Acting as a partial offset was reduced interest expense for the Company’s subordinateddebt as the rate was temporarily reduced by two percentage points.

Bank Fees.

              Bank fees increased$72,000 or 21.9% in fiscal 2005 over fiscal 2004 primarily reflecting additional charges for bankagreement covenant violation waivers.

Letter of Credit Fees.

              Letter of creditfees decreased $76,000 or 59.8% in fiscal 2005 versus fiscal 2004 reflecting reduced internationalcontracts and the timing of letter of credit fees. 

Other Income/Expense, net. 

                Other income/expense, net, decreased 182,000 or 55.8% in fiscal 2005 versus fiscal 2004 as the priorperiod included the proceeds of an insurance reimbursement for a stolen simulator.

(Benefit from)/Provision for Income Taxes.

                The fiscal 2005 tax benefit reflects the realization of tax loss carry backs of the current year’sloss. During fiscal 2005 the Company applied for and received refunds approximating $900,000 of thesecarry backs; at February 25, 2005 an additional $536,000 remained as an income tax receivable reflectingthe balance of these carry backs. 

                Reflecting the Company’s significant losses in the current fiscal year, the Company has approximately$7.2 million of federal and $12.5 million of state net loss carry forwards available to offset futureincome taxes, expiring in 2025. However, due to the uncertain nature of their ultimate realizationbased on past performance, and the potential that sufficient taxable income may not be generatedin the near future, the Company has established a full valuation allowance of the same amount againstthese carry forward benefits and will recognize these benefits only as reassessment demonstratesthat they are realizable. Realization is entirely dependent upon future earnings in specific taxjurisdictions. While the need for this valuation allowance is subject to periodic review, if theallowance is reduced, the tax benefits of the carry forwards will be recorded in future operationsas a reduction of the Company’s income tax expense. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 9 |
|---|

| **Fiscal 2004 versus Fiscal 2003** |
|------------------------------------|
|                               |

| **      ($000)** | **Summary Table of Results** |   |
|------------------------------------------------|------------------------------|--------|
||
||
||
||
||
| Sales                                          |                         |   |   |   |   |   |   |   |   |   |   |   |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|    Domestic                     | $                            | 8,856  |   | $ | 23,692 |   | $ | (14,836 | ) |   | (62.6 | )% |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|    US Gov’t                |                         | 1,717  |   |   | 4,626 |   |   | (2,909 | ) |   | (62.9 | ) |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
|    Int’l                   |                         | 15,422 |   |   | 14,805 |   |   | 617 |   |   | (4.2 | ) |
|                                                |                         |        |   |  |   |  |   |  |
|                                                |                              |        |  |  |  |  |   |  |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Total Sales                                    |                         | 25,995 |   |   | 43,123 |   |   | (17,128 | ) |   | (39.7 | ) |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Gross Profit                                   |                         | 9,943  |   |   | 14,198 |   |   | (4,255 | ) |   | (30.0 | ) |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| SG&A Expenses                              |                         | 9,454  |   |   | 9,446 |   |   | (8 | ) |   | (0.1 | ) |
|                                                |                              |        |  |  |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| R&D Expenses                               |                         | 358    |   |   | 636 |   |   | 278 |   |   | 43.7 |   |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Interest Exp                                   |                         | 1,606  |   |   | 518 |   |   | (1,088 | ) |   | (210.0 | ) |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Other Exp.,net                                 |                         | 130    |   |   | 338 |   |   | 208 |   |   | 61.5 |   |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Income Taxes                                   |                         | (810   | ) |   | 805 |   |   | 1,615 |   |   | 200.6 |   |
|                                                |                              |        |  |  |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Minority Interest                              |                         | (2     | ) |   | (38 | ) |   | (36 | ) |   | (94.7 | ) |
|                                                |                         |        |   |  |   |  |   |  |
|                                                |                              |        |  |  |  |  |   |  |
|                                                |                              |        |  |  |
|                                                |                              |        |  |  |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| Net (Loss)/Income                              | $                            | (793   | ) | $ | 2,493 |   | $ | (3,286 | ) |   | (131.8 | )% |
|                                                |                              |        |  |  |  |  |  |  |
|                                                |                              |        |  |  |
|                                           |
|                                                |                              |        |  |  |
| Net (Loss)/Income per share                    |                         |   |   |   |   |   |   |   |   |   |   |   |
|                                           |                         |   |   |   |   |   |   |   |   |   |   |   |
| (diluted)                                      | $                            | (.11   | ) | $ | 0.33 |   | $ | (0.44 | ) |   | (133.3 | %) |
|                                                |                              |        |  |  |  |  |  |  |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Net Loss.

                The Company had a net loss of $793,000 or $.11 per share (diluted) in 2004 versus net income of $2,493,000or $.33 per share (diluted) in fiscal 2003. Operating income was $131,000, a decrease of $3,985,000or 96.8% over 2003. This decrease was primarily the result of reduced gross profits due to lowersales volume, primarily in domestic entertainment sales, partially offset by lower research and developmentexpenses.

Sales.

                Total sales in fiscal 2004 were $25,995,000, a decrease of $17,128,000 or 39.7% over 2003, representingdecreases in entertainment ($16,998,000), hyperbaric ($1,519,000) and environmental ($1,701,000).Entertainment suffered from the completion in fiscal 2003 of a large project. Hyperbaric sales reflectedreduced effort on a large U.S. government submarine decompression chamber project. Environmentalsales were down in the current period as fiscal 2003 reflected significant sales for large chamberprojects in China. Providing partial offsets were increased sales for domestic sterilizers (up $1,662,000)and higher International Aircrew |

| 10 |
|----|

| Training Systems (up $1,702,000) primarily for International Logistics Services (equipment upgrades and maintenance on various aeromedical equipment). Geographically, domestic sales were down $14,835,000 or 62.6%, and represented 34.1% of total sales, down from 54.9% in fiscal 2003, primarily reflecting decreased entertainment activity. U.S. government sales decreased to $1,717,000, as compared to $4,626,000 in fiscal 2003, and represented 6.6% of total sales, down from 10.8% of total sales in fiscal 2003. International sales, including those from the Company’s foreign subsidiaries, were up $616,000 or 4.2%, and represented 59.3% of total sales, up from 34.3% in fiscal 2003, primarily reflecting an increase in ATS sales. Throughout the Company’s history, most of the sales for Aircrew Training products have been made to international customers. 

                Customers representing 10% or more of sales in fiscal 2004 were the Royal Malaysian Air Force, $2,874,000 or 11.1%, and the United Kingdom Ministry of Defense, $2,840,000 or 10.9%. In fiscal 2004, international sales totaling at least $500,000 per country were made to customers in Malaysia, the United Kingdom, Indonesia, Venezuela, Egypt, Nigeria, Thailand, China and Norway. Fluctuations in sales to international countries from year to year primarily reflect percentage of completion revenue recognition on the level and stage of development and production on multi-year long-term contracts. Open orders for the Royal Malaysian Air Force and a foreign customer constituted 19.4% and 20.0% respectively of the Company’s backlog at February 27, 2004. For a discussion of the additional risks associated with our international operations, see “Risks Related to Our Business—There are certain risks inherent in our international business activities, which constitute a significant portion of our business,” in our Annual Report on Form 10-K.

Segment Sales ($000 except for %) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

|        | **Aircrew Training Systems** |   | **Industrial Group** |   | **Total** |   |
|-------------|------------------------------|--------|----------------------|--------|-----------|--------|
|        |
| Fiscal 2004 | 15,880                       |   | 61.1                 |   | 10,115    |   | 38.9 |   | 25,995 |   | 100.0 |   |
|        |                         |   |                 |   |      |   |   |   |   |   |   |   |
| Fiscal 2003 | 31,612                       |   | 73.3                 |   | 11,511    |   | 26.7 |   | 43,123 |   | 100.0 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 On a segment basis, sales of the Company’s ATS products, which create and monitor the physiologicaleffects of motion (including spatial disorientation and centrifugal forces) on humans and equipmentfor medical, training, research and entertainment markets, were $15,880,000 in fiscal 2004, a decreaseof $15,732,000, or 49.8% over fiscal 2003. Sales of these products accounted for 61.1% of the Company’ssales compared to 73.3% in fiscal 2003. The decrease in ATS product sales primarily reflected thecompletion in the prior period of a major entertainment contract. Sales in the Company’s othersegment, the Industrial Group, which designs and produces chambers that create environments thatare used for sterilization, research and medical applications, decreased $1,396,000 to $10,115,000,a decrease of 12.1%, and constituted 38.9% of the Company’s total sales compared to 26.7% in fiscal 2003. 

Significant claims outstanding at February 27, 2004 included a claim with the U.S. Navy for a submarinedecompression chamber ($2.9 million recorded) and a claim with an international customer ($2.6 millionrecorded). Significant claims outstanding at February 28, 2003 included $2.1 million for the aforementionedU.S. Navy claim and $9.5 million for two claims with an international customer. Effective February27, 2004 the Company reached an agreement totaling $10.5 million on one of these international claims,thus resolving all outstanding amounts related to this claim. Although recorded as a current assetin the financial statements, all claim revenues may not be received in full during fiscal 2005. 

Gross Profit.

                Gross profit for fiscal 2004 decreased by $4,255,000 or 30.0% from fiscal 2003 reflecting the aforementionedsales decrease which was partially offset by a 5.3 percentage point increase in the rate as a percentageof sales. Product development costs, both to enhance functionality of existing products and to developproduct extensions, negatively impacted gross profit as these costs are primarily charged directlyto the cost of sales for specific orders. Increased rates were evidenced in all business groups exceptenvironmental and entertainment, but the primary positive impact came from the ATS group primarilyreflecting the aforementioned settlement of an international claim. 

Operating Income.

                Operating income for fiscal 2004 was $131,000, a decrease of $3,985,000 or 96.8% over fiscal 2003.On a segment basis, ATS had an operating income of $1,231,000, a decrease of $3,748,000 or 75.3%from fiscal 2003, while the Industrial Group had an operating loss of $248,000 in fiscal 2004 comparedto an operating income of $52,000 in fiscal 2003. These segment operating results were offset, inpart, by unallocated corporate expenses of $852,000, a decrease of $63,000 from fiscal 2003. |

| 11 |
|----|

|                 The decrease in operating income for the ATS segment in fiscal 2004 reflected the aforementioned salesdecrease partially offset by higher gross margins as a percentage of sales. The segment also experiencedhigher selling and marketing expenses including commissions.

                The Industrial Group segment’s decrease in operating income in fiscal 2004 reflected the aforementionedslight reduction in sales coupled with a 2.9 percentage point drop in the gross profit rate as apercentage of sales partially offset by reduced selling and marketing expenses.

Selling and Administrative Expenses. 

                Selling and administrative expenses were flat between the two periods as increases in legal and accountingcosts and sales commissions were offset by reduced claims expenses. Approximately 41% of sellingand administrative costs in the current fiscal were related to legal and accounting fees, claim costsand sales commissions. As a percentage of sales, selling and administrative expenses were 36.4% infiscal 2004 compared to 21.9% in fiscal 2003. 

Research and Development Expenses.

                 Research and development expenses decreased $278,000 or 43.7% in fiscal 2004 as compared to fiscal2003. This decrease reflected government grants in our Turkish subsidiary under a government researchaward for work on our multi-axis centrifuge tactical flight simulator. Most of the Company’sresearch efforts, which were and continue to be a significant cost of its business, are includedin cost of sales for applied research for specific contracts, as well as research for feasibilityand technology updates. Capitalized software development costs for fiscal 2004 were $1,716,000 comparedto $1,193,000 in fiscal 2003. Amortization of software costs, which was charged to cost of sales,was $851,000 and $653,000 for fiscal 2004 and fiscal 2003, respectively. 

Interest Expense. 

                Interest expense (net of interest income) increased $1,088,000 or 210.0% in fiscal 2004 from fiscal2003 reflecting higher average borrowings at higher rates and increased amortization of both deferredfinance expenses from the Company’s February 2003 refinancing and subordinated debt discountassociated with the Company’s subordinated debt. Letter of credit and other income/expensesdecreased $208,000 or 61.5% in fiscal 2004 over fiscal 2003 reflecting reduced letter of credit feeson a lower balance and the net receipt of insurance proceeds for a stolen simulator.

Other income/Expense, net. 

                Given the Company’s pre-tax loss for the fiscal period and the impact of some large permanentbook/tax differences for some accounts, the Company experienced a domestic tax benefit based on aneffective rate of 55.4% and a consolidated rate of 50.5%. Part of the reduction in the effectiverate reflected the impact of research and experimentation tax credit refunds. The Company intendsto continue to use research and experimentation tax credits, if applicable, to reduce its federalincome tax. 

During the second quarter of fiscal 2003, the Company reached a settlement with Inland Revenue in GreatBritain which resulted in an additional tax assessment of $15,000. Additionally, during fiscal 2004the Company successfully concluded an Internal Revenue Service routine audit of the Company’sfiscal 2000 tax filing with no additional liability.

**Liquidity and Capital Resources**

                During fiscal 2005, the Company generated $9,723,000 from operating activities. Most of this cash resultedfrom the collection of two international contracts totaling approximately $15.3 million. Additionalcash resulted from reductions in costs in excess of billing on long-term contracts and inventoryand non-cash expenses such as depreciation and amortization. Cash usages included the net operatingloss and a decrease in customer deposits. 

                The Company’s investing activities used $1,557,000 in fiscal 2005 and consisted of purchases ofcapital equipment ($285,000) and capitalized software ($1,272,000). Given the nature of the Company’smarket and products, the continued development of generic control and core software and softwaretools is a critical objective of management.

                The Company’s financing activities generated $2,317,000 of cash during fiscal 2005. This primarilyreflected cash received from the exercise of common stock warrants and the issuance of common stock.Acting as a partial offset was a significant increase in restricted cash required by PNC Bank tocollateralize the Company’s outstanding long-term bonds. See “Note 7. Long-Term Obligationsand Credit Arrangements” to the Consolidated Financial Statements. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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| 12 |
|----|

|                 Refinancing

                The Company has historically financed operations through a combination of cash generated from operations,equity offerings, subordinated borrowings and bank debt. On February 19, 2003, the Company refinancedits operations (the “Refinancing”). The Refinancing was effected through the issuance ofsubordinated, convertible notes to H.F. Lenfest, an individual, and a credit agreement (the “Agreement”)with PNC Bank, National Association (“PNC”). The total proceeds from this refinancing were$29,800,000. 

                Bank Credit and Facility

                The Agreement has had numerous amendments which are discussed below. Currently, the facility is for$5,000,000 and use of the facility is restricted to the issuance of international letters of credit.This line is secured by all assets of the Company as well as a $5 million personal guarantee byMr.Lenfest.

                The PNC credit facility is secured by (i) the grant of a first and prior security interest in all ofthe personal property of the Company, Entertainment Technology Corporation (“EnTCo”), andETC Delaware, Inc. (“ETC Delaware”), each a wholly-owned subsidiary of the Company, infavor of PNC; (ii) the Company’s grant of a first and prior security interest in all of theCompany’s accounts, deposits and all other negotiable and non-negotiable instruments owned bythe Company in favor of PNC; (iii) the Company’s grant of a first and prior mortgage on allof the Company’s real property in favor of PNC; and (iv) the Company’s grant of a firstand prior security interest in all of the Company’s rights to (a) all of the shares of capitalstock of each of EnTCo and ETC Delaware and (b) 65% of the shares of capital stock owned bythe Company of each of its foreign subsidiaries in favor of PNC. In addition, the PNC credit agreementrequires that EnTCo and ETC Delaware guarantee the Company’s obligations under the PNC facility. 

                Agreement Amendments

                OnApril 30, 2003, the Agreement was amended to include: (i) a revolving credit facility in themaximum aggregate principal amount of $14,800,000 to be used for the Company’s working capitaland general corporate purposes, including capital expenditures, with a sub-limit for issuancesofletters of credit in the maximum aggregate face amount of $10,300,000, and (ii) a standby letterof credit in the face amount of $4,750,000 as credit support for the Company’s bonds. Additionally,on July 9, 2003, a second amendment to the Agreement was executed which formed an additional $1,010,000credit facility for use in financing export contracts which qualify for an EXIM (the Export-ImportBank of the United States) Bank guarantee.

                On August 24, 2004, the Agreement was amended to substantially reducethe operating facility and eliminate the associated monthly borrowing base reporting requirements.The revolving facility was reduced from $14,800,000 to $5,000,000 and use of the facility was restrictedto the issuance of letters of credit, which are frequently a requirement of international contracts.Under the amended Agreement, the Company could no longer borrow cash under the facility. The Company’slong-term bonds were left intact. As additional collateral for the revised facility, PNC requiredthe Company to keep $2,500,000 in a restricted cash account. The annual fee for letters of creditwas reduced from 1.75% to 1.0% per annum. Additionally, three of the financial covenants, the LeverageRatio, the Fixed Charge Ratio and the requirement not to report a net loss in any annual periodwereeliminated and the Tangible Net Worth requirement was reduced. All other terms and conditionsofthe revolving loan and the line of credit as set forth in the Agreement remained in effect.

                Under the August 24, 2004, amendment the EXIM Bank credit facilitywas reduced from $1,010,000 to $995,000, with all other terms and conditions remaining unchanged.Availability under the EXIM facility was determined based on a borrowing base consisting of a portionof the Company’s receivables and inventory. 

                On October 18, 2004, the Agreement was amended to require the Companyto deposit in a restricted cash account an additional amount of $285,000 to cover the next scheduledpayment of principal and interest due April 1, 2005 on the Company’s long-term bonds. TheTangibleNet Worth covenant requirement was reduced to a) $14,500,000 for the periods ended November26, 2004and February 25, 2005 and b) on the last day of any fiscal quarter ending after February25, 2005,to be at least equal to the actual Tangible Net Worth on February 25, 2005. Additionally,the feefor the PNC Letter of Credit, which backs the Company’s long-term bonds, was increasedfrom2.0% to 2.5% annually. 

                On February 22, 2005, the Agreement was again amended. This Amendmentrequired the Company to increase the deposit as security in the restricted cash account to an amountequal to 100% of the sum of the amount available to be drawn on the Bond Letter of Credit ($4,464,000at February 25, 2005). Additionally the EXIM borrowing facility was cancelled and the TangibleNetWorth covenant was reduced to $12,000,000 for all future reporting periods beginning with February25, 2005. The rate on the Reimbursement Letter of Credit which backs the Company’s long–termbonds was reduced to 0.75% per anum. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 13 |
|----|

|                 As of May 6, 2005 the Company had used approximately $1,939,000 of the facility for international lettersof credit.

                Subordinated Convertible Debt 

                In    connection with the financing provided by Mr. Lenfest on February 19, 2003,    the Company entered into a Convertible Note and Warrant Purchase Agreement    with    Mr. Lenfest    (the “Note”), pursuant to which theCompany issued to Mr. Lenfest (i) a senior subordinated convertible promissorynote in the originalprincipal amount of $10,000,000 (the “Note”) and (ii) warrantsto purchase 803,048shares of the Company’s common stock. Upon the occurrence of certain events,the Company will  be obligated to issue additional warrants to Mr. Lenfest. Thenote accrues interest at the rate of10% per annum and matures on February 18, 2009. At the Company’s option,the quarterly interest  payments may be deferred and added to the outstandingprincipal. The note entitles Mr. Lenfest toconvert all or a portion of the outstanding principal of, and accrued and unpaidinterest on, the  note into shares of common stock at a conversion price of $6.05per share. The warrants may be exercisedinto shares of common stock at an exercise price equal to the lesser of $4.00per share or two-thirds  of the average of the high and low sale prices of thecommon stock for the 25 consecutive tradingdays immediately preceding the date of exercise. 

                The obligations of the Company to Mr. Lenfest under the Convertible Note and Warrant Purchase Agreementare secured by a second lien on all of the assets of the Company, junior in rights to the lieninfavor of PNC Bank, including all real property owned by the Company.

                Prior to the consummation of the refinancing, Advanced Technology Asset Management, LLC (“ATAM”)(formerly ETC Asset Management, LLC), a shareholder of the Company and a holder of warrants to purchase332,820 shares of the Company’s common stock, consented to the transactions contemplated underthe Credit Agreement and the financing provided by Mr. Lenfest, including the below market issuanceof warrants to Mr. Lenfest. As a result of its consent, ATAM waived, solely in connection with suchissuance, the anti-dilution rights contained in its warrant. In exchange for ATAM’s consent,the Company issued to ATAM warrants to purchase an additional 105,000 shares of common stock. Exceptfor the number of shares issuable upon exercise of the warrants, the new ATAM warrants have substantiallythe same terms as the warrants issued to Mr. Lenfest. In March 2004, ATAM exercised all its warrantsand received a total of 437,820 shares of common stock of the Company. The Company received proceedsof $586,410 from the exercise of these warrants.

                As a condition of amending the Agreement on August 24, 2004, Mr.Lenfest, holder of the Company’s subordinated debt, agreed to issue to PNC on the Company’sbehalf a limited guarantee to secure up to $5,000,000 in principal amount of any letters of creditissued under the amended facility. In consideration for issuing this guarantee, Mr.Lenfest will receivea fee of 0.75% per annum of the average amount of letters of credit outstanding, payable on a quarterlybasis, and a warrant to purchase 200,000 shares of stock under the same terms and conditions as hisexisting warrant for 803,048 shares.

                On February 14, 2005, Mr. Lenfest exercised all of his outstanding warrantsand received 1,003,048 shares of common stock for approximately $3.9 million. Additionally, onFebruary14, 2005, Mr. Lenfest purchased 373,831 shares of the Company’s common stock forapproximately$2.0 million.

                Under the Note the Company must meet certain financial covenantsincluding a Leverage Ratio, a Fixed Charge Ratio and a Tangible Net Worth Ratio. At February 25,2005 the Company failed to meet any of these financial covenants but has obtained a waiver from Mr.Lenfest. This waiver applies to the period through February 28, 2006. Except as specified, the waiverdoes not constitute a modification or alteration of any other terms or conditions in the Note, ora release of any of the lender’s rights or remedies, all of which are reserved, nor does itrelease the Company or any guarantor from any of its duties, obligations, covenants or agreementsincluding the consequences of any Event of Default, except as specified.

                Long-Term Bonds

                On March 15, 2000, the Company issued approximately $5,500,000 of unregistered Taxable Variable RateDemand/Fixed Rate Revenue Bonds (Series of 2000). Net proceeds from these bonds were used to repaya $4,100,000 advance taken on the Company’s revolving credit facility and to finance constructionof an addition to the Company’s main plant in Southampton, Pennsylvania. The bonds are securedby a $5,000,000 irrevocable direct pay Letter of Credit issued by PNC which expires on February 17,2006 and which is secured by all assets of the Company. At February 25, 2005 they were also fullycash collateralized. The bonds carry a maturity date of April 1, 2020, bear a variable interest ratewhich adjusts each week to a rate required to remarket the bonds at full principal value (currentlyat 3.19% on May 6, 2005) with a cap of 17%, and are subject to mandatory redemption of $275,000 peryear for 19 years and $245,000 for the 20th year. |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14 |
|----|

|                 Liquidity

                Given the Company’s inability to borrow cash under the amendedAgreement, the Company may need to obtain additional sources of capital in order to continue growingand operating its business. This capital may be difficult to obtain and the cost of this additionalcapital is likely to be relatively high. However, because we have established businesses in manymarkets, significant fixed assets including a building, and other valuable business assets whichcan be used for security, we believe that we will be able to locate such additional capital and thatthe actions by PNC will not have a long-term material adverse effect on our business. 

                The Company believes that existing cash balances at February 25, 2005, cash generated from operatingactivities as well as future availability under its credit agreement will be sufficient to meetitsfuture obligations through at least February 25, 2006. 

                In reference to the Company’s outstanding claims with the U.S. Navy, to the extent the Companyis unsuccessful in recovering a significant portion of recorded claim contract costs, and to theextent that significant additional legal expenses are required to bring the dispute to resolution,such events could have a material adverse effect on the Company’s liquidity and results ofoperations.Historically, the Company has had a favorable experience in that recoveries have exceededrecordedclaims, including significant settlement agreements in fiscal 2003, 2004 and 2005. (SeeNote 3to the Consolidated Financial Statements, Accounts Receivable).

                The following table presents our contractual cash flow commitments on long-term debt and operatingleases. See Notes 6 and 7 to the Consolidated Financial Statements for additional information onour long-term debt and operating leases. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

|                                                                           | **Payments Due by Period (in thousands)** |   |
|--------------------------------------------------------------------------------|-------------------------------------------|--------|
|                                                                           |                                           |   |
|                                                                           | **Total**                                 |   | **Less Than 1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After 5 Years** |   |
|                                                                                |                                           |        |  |  |  |  |  |  |  |  |
|                                                                                | **(in thousands) **                  |        |  |
| Long-term debt, including current          maturities | $                                         | 12,362 |   |   | $ | 275 |   |   | $ | 8,817 |   | $ | 550 |   |   |   | 2,720 |   |   |
| Operating leases                                                               |                                      | 740    |   |   |   | 156 |   |   |   | 318 |   |   | 188 |   |   |   | 78 |   |   |
|                                                                                |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |
| Total                                                                          | $                                         | 13,102 |   |   | $ | 431 |   |   | $ | 9,135 |   | $ | 738 |   |   | $ | 2,798 |   |   |

|  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | • | Long-term debt is reported net of unamortized discount of $2,008,000 on the Company’s subordinateddebt. See “Note 7. Long-Term Obligations and Credit Arrangements” to the Consolidated FinancialStatements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|  | • | Our sales backlog at February 25, 2005 and February 27, 2004, for work to be performed and revenueto be recognized under written agreements after such dates, was $19,084,000 and $16,914,000, respectively.In addition, our training, maintenance and upgrade contracts backlog at February 25, 2005 and February27, 2004, for work to be performed and revenue to be recognized after such dates under writtenagreements,was $2,232,000 and $2,637,000, respectively. Of the February 25, 2005 backlog, we havecontractsfor approximately $15,243,000 for aircrew training systems and maintenance support, including$3,422,000for the Japanese Defense Agency and $1,746,000 for the Egyptian Air Force. We expectto completeapproximately 75% of the February 25, 2005 backlog prior to February 24, 2006, theend of our 2006fiscal year. Of the February 27, 2004 backlog, we completed approximately 79% byFebruary 25, 2005. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 The Company’s order flow does not follow any seasonal pattern as the Company receives orders ineach fiscal quarter of its fiscal year. 

**Off-Balance Sheet Arrangements**

                There were no off-balance sheet arrangements during the fiscal year ended February 25, 2005 that haveor are reasonably likely to have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity, capital expendituresor capital resources that is material to the Company’s investors.

**Recent Accounting Pronouncements Accounting for Share-Based Payments**

                In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised2004), Share-Based Payments. This statement replaces FASB Statement No. 123, Accounting for Stock-Basedcompensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This statementrequires companies to recognize in financial statements the compensation cost relating to share-basedtransactions including share options, restricted share plans, performance-based awards, share appreciationrights and employee share purchase plans. The cost of these arrangements will be measured based onthe fair value of the equity or liability instruments issued. Public companies will be required toapply Statement 123(R) as of the first |

| 15 |
|----|

| annual reporting    period that begins after June 15, 2005 based on a delay granted by the SEC    of the implementation of this pronouncement. The Company is not able at this    time to determine what impact, if any, adoption    of Statement    123(R)    will    have on the results of operations.

**Accounting for Inventory Costs**

                In November 2004, the FASB issued FASB Statement 151, Inventory Costs, an amendment of ARB No. 43,Chapter 4. While retaining the general principle that inventories are presumed to be stated at cost,Statement 151 amends ARB No. 43 to clarify that: |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|  | • | abnormal amounts of idle facilities, freight, handling costs, and spoilage should be recognized ascharges of the current period. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------|
|  |        |                                                                                                                             |
|  | • | allocation of fixed production overheads to inventories should be based on the normal capacity of theproduction facilities.      |
|  |        |                                                                                                                             |

|   | The Statement defines normal capacity as the production expected to be achieved over a number of periodsor seasons under normal circumstances, taking into account the loss of capacity resulting from plannedmaintenance.                                                                                           |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                                 |
|   | Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15,2005 and should be applied prospectively. Early application is permitted. The Company is not ableat this time to determine what impact, if any, adoption of statement 151 will have on the resultsof operations. |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Market for the Registrant’s Common Stock and Related Security Holder Matters**

                The Company’s common stock is traded on the American Stock Exchange under the symbol “ETC.”As of May 6, 2005, the Company had 282 shareholders of record. 

                The following table sets forth the quarterly ranges of high and low sale prices for shares of the commonstock for the periods indicated. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|            | Sale Prices |   |
|-----------------|-------------|--------|
||
||
|            |             |   |  |   |
| **Fiscal 2005** |        |   |   |   |   |   |
| First Quarter   | $           | 10.05  |   | $ | 7.25 |   |
| Second Quarter  |        | 8.24   |   |   | 6.47 |   |
| Third Quarter   |        | 7.95   |   |   | 6.18 |   |
| Fourth Quarter  |        | 6.80   |   |   | 5.10 |   |
|            |
| **Fiscal 2004** |        |   |   |   |   |   |
| First Quarter   | $           | 6.00   |   | $ | 5.00 |   |
| Second Quarter  |        | 6.10   |   |   | 5.00 |   |
| Third Quarter   |        | 8.70   |   |   | 6.08 |   |
| Fourth Quarter  |        | 9.95   |   |   | 7.00 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 On May 6, 2005, the closing price of the Company’s common stock was $5.85. The Company has neverpaid any cash dividends on its common stock and does not anticipate that any cash dividends willbe declared or paid in the foreseeable future. The Company’s current credit facilities prohibitthe payment of any dividends by the Company without the lender’s prior written consent. |

| 16 |
|----|

| **Equity Compensation Plan Information** |
|------------------------------------------|
|                                     |

| Plan Category                                                       | Number of securities to be issued upon       exercise of outstanding options,       warrants and rights |         | Weighted-average exercise price of       outstanding options, warrants and       rights |        | Number of securities remaining       available       for future issuance under equity       compensation plans (excluding       securities reflected in column (a)) |   |
|---------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|---------|-----------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                     |                                                                                                         |         |                                                                                         |        |                                                                                                                                                                     |        |
|                                                                | **(a)**                                                                                                 |    | **(b)**                                                                                 |   | **(c)**                                                                                                                                                             |   |
| **Equity compensation plans approved by      security holders**     |                                                                                                    | 276,162 |                                                                                    | $      | 7.30                                                                                                                                                                |   |   | 588,850 |   |
|                                                                     |                                                                                                         |         |                                                                                         |
|                                                                |
| **Equity compensation plans not      approved by security holders** |                                                                                                    | —  |                                                                                    |   | N/A                                                                                                                                                                 |   |   | 207,813 |   |
|                                                                     |                                                                                                         |         |                                                                                         |        |                                                                                                                                                                     |        |
|                                                                     |                                                                                                         |         |                                                                                         |
| **Total**                                                           |                                                                                                    | 276,162 |                                                                                    | $      | 7.30                                                                                                                                                                |   |   | 796,663 |   |
|                                                                     |                                                                                                         |         |                                                                                         |        |                                                                                                                                                                     |        |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The following plans have not been approved by our stockholders:

Employee Stock Purchase Plan

                The Company has an Employee Stock Purchase Plan which was adopted by the Board of Directors on November 3,1987. All employees meeting service requirements, except officers, directors and 10% stockholders,are eligible to voluntarily purchase common stock through payroll deductions up to 10% of salary.The Company makes a matching contribution of 20% of the employee’s contribution. |

| 17 |
|----|

| Report of Independent Registered Public Accounting Firm

Board of Directors and ShareholdersEnvironmental Tectonics Corporation

                We have audited the accompanying consolidated balance sheets of Environmental Tectonics Corporationand Subsidiaries as of February 25, 2005 and February 27, 2004 and the related consolidated statementsof operations, changes in stockholders’ equity, and cash flows for each of the three fiscalyears in the period ended February 25, 2005. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.

                We conducted our audits in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform an audit of its internal control over financialreporting. Our audit included consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

                In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Environmental Tectonics Corporation and Subsidiariesas of February 25, 2005 and February 27, 2004, and the consolidated results of its operations andits cash flows for the each of the three fiscal years in the period ended February 25, 2005, in conformitywith accounting principles generally accepted in the United States of America.

                We have also audited the accompanying Schedule II of Environmental Tectonics Corporation and Subsidiariesas of February 25, 2005 and February 27, 2004 and for each of the three fiscal years in the periodended February 25, 2005. In our opinion, this schedule presents fairly, in all material respects,the information required to be set forth herein.

/s/ Grant Thornton LLPPhiladelphia, PennsylvaniaApril 14, 2005 |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18 |
|----|

| **Consolidated Balance Sheets (amounts in thousands, except share information)** |
|----------------------------------------------------------------------------------|
|                                                                             |

| **  **                                                                                                                                                                                                        | **February 25, 2005** | **  ** | **February 27, 2004** | **  ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|------------------|-----------------------|------------------|
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| **ASSETS**                                                                                                                                                                                                              |             |        |             |        |    |    |
| Cash and cash equivalents                                                                                                                                                                                               | $                     | 12,041           |             | $                | 1,366 |    |
| Restricted cash                                                                                                                                                                                                         |             | 4,680            |             |        | 784 |    |
| Accounts receivable, net                                                                                                                                                                                                |             | 8,018            |             |        | 19,233 |    |
| Costs and estimated earnings in excess of billings on     uncompleted long-term contracts                                                                                                      |             | 3,333            |             |        | 5,333 |    |
| Inventories                                                                                                                                                                                                             |             | 7,928            |             |        | 9,843 |    |
| Deferred tax asset                                                                                                                                                                                                      |             | 1,786            |             |        | 1,337 |    |
| Prepaid expenses and other current assets                                                                                                                                                                               |             | 1,668            |             |        | 1,949 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|      Total current assets                                                                                                                                                                      |             | 39,454           |             |        | 39,845 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Property, plant and equipment, net                                                                                                                                                                                      |             | 4,331            |             |        | 4,886 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Software development costs, net of accumulated amortization     of $8,658 and $7,670 in 2005 and 2004, respectively                                                                            |             | 3,567            |             |        | 3,089 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Goodwill, net                                                                                                                                                                                                           |             | 477              |             |        | 477 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Other assets, net                                                                                                                                                                                                       |             | 80               |             |        | 399 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |
| Total assets                                                                                                                                                                                                            | $                     | 47,909           |             | $                | 48,696 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
| **LIABILITIES**                                                                                                                                                                                                         |             |        |             |        |    |
| Current portion of long-term obligations                                                                                                                                                                                | $                     | 275              |             | $                | 317 |    |
| Accounts payable – trade                                                                                                                                                                                           |             | 2,893            |             |        | 2,431 |    |
| Billings in excess of costs and estimated earnings on     uncompleted long-term contracts                                                                                                      |             | 1,533            |             |        | 945 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Customer deposits                                                                                                                                                                                                       |             | 2,247            |             |        | 3,657 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Other accrued liabilities                                                                                                                                                                                               |             | 2,688            |             |        | 2,588 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Total current liabilities                                                                                                                                                                                               |             | 9,636            |             |        | 9,938 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
| Long-term obligations, less current portion:                                                                                                                                                                            |
|      Credit facility payable to banks                                                                                                                                                          |             | —           |             |        | 30 |    |
|      Long term bonds                                                                                                                                                                           |             | 4,095            |             |        | 4,370 |    |
|      Subordinated convertible debt                                                                                                                                                             |             | 7,992            |             |        | 7,666 |    |
|      Capitalized lease obligations                                                                                                                                                             |             | —           |             |        | 91 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
|                                                                                                                                                                                                               |             | 12,087           |             |        | 12,157 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |
| Deferred tax liability                                                                                                                                                                                                  |             | 1,786            |             |        | 1,502 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Total liabilities                                                                                                                                                                                                       |             | 23,509           |             |        | 23,597 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Commitments and contingencies                                                                                                                                                                                           |             | —           |             |        | — |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Minority interest                                                                                                                                                                                                       |             | 45               |             |        | 45 |    |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                           |
| Common stock - authorized 20,000,000 shares, $.05 par      value; 9,019,376 and 7,176,552 shares issued and      outstanding in 2005 and 2004, respectively |             | 450              |             |        | 359 |    |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
| Capital contributed in excess of par value of common stock                                                                                                                                                              |             | 16,561           |             |        | 9,430 |    |
| Accumulated other comprehensive loss                                                                                                                                                                                    |             | (137             | )                     |        | (329 | ) |
| Retained earnings                                                                                                                                                                                                       |             | 7,481            |             |        | 15,594 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |    |    |
|      Total stockholders’ equity                                                                                                                                                           |             | 24,355           |             |        | 25,054 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |
|                                                                                                                                                                                                               |             |        |             |        |
|      Total liabilities and stockholders’ equity                                                                                                                                           | $                     | 47,909           |             | $                | 48,696 |    |
|                                                                                                                                                                                                               |                       |        |                       |        |

|                                                                                  |
|---------------------------------------------------------------------------------------|
| The accompanying notes are an integral part of the consolidated financial statements. |

| 19 |
|----|

| **Consolidated Statements of Operations (amounts in thousands, except share information)** |
|--------------------------------------------------------------------------------------------|
|                                                                                       |

| **  **                                                                                                                                                                                                              | **52 Weeks EndedFebruary 25, 2005** |         | **52 Weeks EndedFebruary 27, 2004** |         | **53 Weeks EndedFebruary 28, 2003** |         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------------|-------------------------------------|--------------|-------------------------------------|--------------|
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
| Net sales                                                                                                                                                                                                                     | $                                   | 27,814       |                           | $            | 25,995                              |    | $ | 43,123 |    |
| Cost of goods sold                                                                                                                                                                                                            |                           | 21,638       |                           |    | 16,052                              |    |    | 28,925 |    |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|          Gross profit                                                                                                                                                            |                           | 6,176        |                           |    | 9,943                               |    |    | 14,198 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
| Operating expenses:                                                                                                                                                                                                           |                           |    |                           |    |                           |    |    |    |    |
|      Selling and administrative                                                                                                                                                                      |                           | 12,450       |                           |    | 9,454                               |    |    | 9,446 |    |
|      Research and development                                                                                                                                                                        |                           | 856          |                           |    | 358                                 |    |    | 636 |    |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                           | 13,306       |                           |    | 9,812                               |    |    | 10,082 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
|          Operating (loss) income                                                                                                                                                 |                           | (7,130       | )                                   |    | 131                                 |    |    | 4,116 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |
| Other expenses:                                                                                                                                                                                                               |                           |    |                           |    |                           |    |    |    |    |
|      Interest expense (net)                                                                                                                                                                          |                           | 1,791        |                           |    | 1,606                               |    |    | 518 |    |
|      Bank fees                                                                                                                                                                                       |                           | 401          |                           |    | 329                                 |    |    | 228 |    |
|      Letter of credit fees                                                                                                                                                                           |                           | 51           |                           |    | 127                                 |    |    | 154 |    |
|      Other, net                                                                                                                                                                                      |                           | (143         | )                                   |    | (326                                | )            |    | (44 | ) |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           | 2,100        |                           |    | 1,736                               |    |    | 856 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |
|          (Loss) income before (benefit from) provision              for income taxes and minority interest |                           | (9,230       | )                                   |    | (1,605                              | )            |    | 3,260 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
| (Benefit from) provision for income taxes                                                                                                                                                                                     |                           | (1,117       | )                                   |    | (810                                | )            |    | 805 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |
|          (Loss) income before minority interest                                                                                                                                  |                           | (8,113       | )                                   |    | (795                                | )            |    | 2,455 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
| Loss attributable to minority interest                                                                                                                                                                                        |                           | (0           | )                                   |    | (2                                  | )            |    | (38 | ) |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |
| Net (loss) income                                                                                                                                                                                                             | $                                   | (8,113       | )                                   | $            | (793                                | )            | $ | 2,493 |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                     |                                     |    |                                     |    |                                     |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |
| Per share information: (Loss) earnings per common share:                                                                                                                                                                      |                           |    |                           |    |                           |    |    |    |    |
|      Basic                                                                                                                                                                                           | $                                   | (1.06        | )                                   | $            | (.11                                | )            | $ | .35 |    |
|      Diluted                                                                                                                                                                                         | $                                   | (1.06        | )                                   | $            | (.11                                | )            | $ | .33 |    |
|                                                                                                                                                                                                                     |                           |    |                           |    |                           |    |    |    |    |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|                                                                                                                                                                                                                               |                                     |              |                                     |
|      Weighted average common shares:                                                                                                                                                                 |                           |    |                           |    |                           |    |    |    |    |
|          Basic                                                                                                                                                                   |                           | 7,656,000    |                           |    | 7,163,000                           |    |    | 7,153,000 |    |
|          Diluted                                                                                                                                                                 |                           | 7,656,000    |                           |    | 7,163,000                           |    |    | 7,497,000 |    |

|                                                                                  |
|---------------------------------------------------------------------------------------|
| The accompanying notes are an integral part of the consolidated financial statements. |

| 20 |
|----|

| **Consolidated Statements of Changes in Stockholders’ Equity (amounts in thousands, except shareinformation)**

For the years ended February 25, 2005, February 27, 2004 and February 28, 2003 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                |

| **  **                                                                                                                        | **Common Stock** | **  ** | **Capitalcontributedin excess ofpar value ofcommon stock** | **  ** | **Accumulatedothercomprehensiveincome (loss)** | **  ** | **Retainedearnings** | **  ** | **Totalstockholders’equity** | **  ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------------|------------------|------------------------------------------------------------|------------------|------------------------------------------------|------------------|----------------------|------------------|-----------------------------------|------------------|
| **  **                                                                                                                        |
| **  **                                                                                                                        |                  | **  ** | **  **                                           | **  ** | **  **                               | **  ** |
| **  **                                                                                                                        | **Shares**       | **  ** | **Amount**                                                 | **  ** | **  **                               | **  ** | **  **     | **  ** |
|                                                                                                                               |                  |        |                                                            |        |                                                |        |                      |        |                                   |        |  |    |
| Balance, February 22, 2002                                                                                                              | 7,142,946        |        | $                                                          | 357              |                                      | $                | 6,703                |        | $                                 | (172             | ) | $ | 13,894 |    | $ | 20,782 |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Net income for the year                                                                                                                 | —           |        |                                                  | —           |                                      |        | —               |        |                         | —           |    |    | 2,493 |    |    | 2,493 |    |
| Foreign currency translation adjustment                                                                                                 |        |        |                                                  |        |                                      |        |            |        |                         | 3                |    |    | — |    |    | 3 |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |                      |        |                         |        |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Total comprehensive income                                                                                                              |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    | 2,496 |    |
|  Value of beneficial conversion option   associated with issuance of   subordinated convertible debt | —           |        |                                                  | —           |                                      |        | 1,400                |        |                         | —           |    |    | — |    |    | 1,400 |    |
| Value of warrants issued in connection   with issuance of subordinated   convertible debt                 | —           |        |                                                  | —           |                                      |        | 1,209                |        |                         | —           |    |    | — |    |    | 1,209 |    |
| Exercise of employee stock options                                                                                                      | 14,293           |        |                                                  | 1                |                                      |        | 19                   |        |                         | —           |    |    | — |    |    | 20 |    |
|                                                                                                                               |                  |        |                                                            |        |                                                |        |                      |        |                                   |        |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Balance, February 28, 2003                                                                                                              | 7,157,239        |        |                                                  | 358              |                                      |        | 9,331                |        |                         | (169             | ) |    | 16,387 |    |    | 25,907 |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Net loss for the year                                                                                                                   | —           |        |                                                  | —           |                                      |        | —               |        |                         | —           |    |    | (793 | ) |    | (793 | ) |
| Foreign currency translation adjustment                                                                                                 |        |        |                                                  |        |                                      |        |            |        |                         | (160             | ) |    | — |    |    | (160 | ) |
|                                                                                                                               |        |        |                                                  |        |                                      |        |                      |        |                                   |        |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |
| Total comprehensive income                                                                                                              |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    | (953 | ) |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Exercise of employee stock options                                                                                                      | 19,313           |        |                                                  | 1                |                                      |        | 99                   |        |                         | —           |    |    | — |    |    | 100 |    |
|                                                                                                                               |                  |        |                                                            |        |                                                |        |                      |        |                                   |        |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |
| Balance, February 27, 2004                                                                                                              | 7,176,552        |        |                                                  | 359              |                                      |        | 9,430                |        |                         | (329             | ) |    | 15,594 |    |    | 25,054 |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Net loss for the year                                                                                                                   | —           |        |                                                  | —           |                                      |        | —               |        |                         | —           |    |    | (8,113 | ) |    | (8,113 | ) |
| Foreign currency translation adjustment                                                                                                 |        |        |                                                  |        |                                      |        |            |        |                         | 192              |    |    | — |    |    | 192 |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                                   |        |  |    |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Total comprehensive loss                                                                                                                |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    | (7,921 | ) |
| Value of warrants issued in connection with    issuance of guarantee                                                |        |        |                                                  |        |                                      |        | 571                  |        |                         |        |    |    |    |    |    | 571 |    |
| Exercise of warrants                                                                                                                    | 1,440,868        |        |                                                  | 72               |                                      |        | 4,406                |        |                         |        |    |    |    |    |    | 4,478 |    |
| Issuance of common stock                                                                                                                | 373,831          |        |                                                  | 19               |                                      |        | 1,981                |        |                         |        |    |    |    |    |    | 2,000 |    |
| Exercise of employee stock options and                                                                                                  |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
|    Board of Director’s compensation                                                                                 | 28,125           |        |                                                  | —           |                                      |        | 173                  |        |                         | —           |    |    | — |    |    | 173 |    |
|                                                                                                                               |                  |        |                                                            |        |                                                |        |                      |        |                                   |        |  |    |
|                                                                                                                               |        |        |                                                  |        |                                      |        |            |        |                         |        |    |    |    |    |    |    |    |
| Balance, February 25, 2005                                                                                                              | 9,019,376        |        | $                                                          | 450              |                                      | $                | 16,561               |        | $                                 | (137             | ) | $ | 7,481 |    | $ | 24,355 |    |
|                                                                                                                               |                  |        |                                                            |        |                                                |        |                      |        |                                   |        |  |    |

|                                                                                  |
|---------------------------------------------------------------------------------------|
| The accompanying notes are an integral part of the consolidated financial statements. |

| 21 |
|----|

| **Consolidated Statements of Cash Flows (amounts in thousands)** |
|------------------------------------------------------------------|
|                                                             |

| **  **                                                                                                                                                                                                                                                                            | **52 Weeks EndedFebruary 25,2005** | **  ** | **52 Weeks EndedFebruary 27,2004** | **  ** | **53 Weeks EndedFebruary 28,2003** | **  ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------|------------------|------------------------------------|------------------|------------------------------------|------------------|
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
| Cash flows from operating activities:                                                                                                                                                                                                                                                       |                          |        |                          |        |                          |        |    |    |    |
|    Net (loss) income                                                                                                                                                                                                                                                         | $                                  | (8,113           | )                                  | $                | (793                               | )                | $ | 2,493 |    |
|    Adjustments to reconcile net (loss) income to net cash      provided by/ (used in) operating activities                                                                                                                                          |                          |        |                          |        |                          |        |    |    |    |
|      Depreciation and amortization                                                                                                                                                                                                                                 |                          | 2,414            |                          |        | 1,847                              |        |    | 1,401 |    |
|      Accretion of debt discount                                                                                                                                                                                                                                    |                          | 326              |                          |        | 275                                |        |    | — |    |
|      Increase (decrease) in allowance for accounts receivable and     inventory                                                                                                                                                           |                          | 274              |                          |        | (149                               | )                |    | (19 | ) |
|      Loss attributable to minority interest                                                                                                                                                                                                                        |                          | —           |                          |        | (2                                 | )                |    | (38 | ) |
|      Deferred income taxes (benefit)                                                                                                                                                                                                                               |                          | (165             | )                                  |        | (168                               | )                |    | 313 |    |
|      Changes in operating assets and liabilities:                                                                                                                                                                                                                  |                          |        |                          |        |                          |        |    |    |    |
|          (Increase) decrease in assets                                                                                                                                                                                                         |                          |        |                          |        |                          |        |    |    |    |
|               Accounts receivable                                                                                                                                                                                     |                          | 11,108           |                          |        | (2,973                             | )                |    | 3,590 |    |
|              Costs and estimated earnings in excess of billings on             uncompleted long-term contracts                                            |                          | 2,000            |                          |        | 108                                |        |    | 3,950 |    |
|               Inventories                                                                                                                                                                                             |                          | 1,554            |                          |        | (1,763                             | )                |    | (2,091 | ) |
|               Prepaid expenses and other current assets                                                                                                                                                               |                          | 318              |                          |        | (720                               | )                |    | 62 |    |
|               Other assets                                                                                                                                                                                            |                          | —           |                          |        | (103                               | )                |    | 32 |    |
|      Increase (decrease) in liabilities:                                                                                                                                                                                                                           |                          |        |                          |        |                          |        |    |    |    |
|               Accounts payable                                                                                                                                                                                        |                          | 462              |                          |        | 653                                |        |    | (1,660 | ) |
|               Billings in excess of costs and estimated earnings on                   uncompleted  long-term contracts |                          | 588              |                          |        | (518                               | )                |    | 964 |    |
|               Customer deposits                                                                                                                                                                                       |                          | (1,410           | )                                  |        | 657                                |        |    | (684 | ) |
|               Accrued income taxes                                                                                                                                                                                    |                          | 266              |                          |        | (247                               | )                |    | (731 | ) |
|               Other accrued liabilities                                                                                                                                                                               |                          | 101              |                          |        | 1,032                              |        |    | (2 | ) |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|      Net cash provided by (used in) operating activities                                                                                                                                                                                                           |                          | 9,723            |                          |        | (2,864                             | )                |    | 7,580 |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |
| Cash flows from investing activities:                                                                                                                                                                                                                                                       |                          |        |                          |        |                          |        |    |    |    |
|      Acquisition of equipment                                                                                                                                                                                                                                      |                          | (285             | )                                  |        | (475                               | )                |    | (215 | ) |
|      Software development costs                                                                                                                                                                                                                                    |                          | (1,272           | )                                  |        | (1,220                             | )                |    | (569 | ) |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|      Net cash used in investing activities                                                                                                                                                                                                                         |                          | (1,557           | )                                  |        | (1,695                             | )                |    | (784 | ) |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |
| Cash flows from financing activities:                                                                                                                                                                                                                                                       |                          |        |                          |        |                          |        |    |    |    |
|      Borrowings under credit facility                                                                                                                                                                                                                              |                          | —           |                          |        | 2,514                              |        |    | 26,396 |    |
|      Payments under credit facility                                                                                                                                                                                                                                |                          | (30              | )                                  |        | (3,084                             | )                |    | (37,551 | ) |
|      Payments on long-term bonds                                                                                                                                                                                                                                   |                          | (275             | )                                  |        | (275                               | )                |    | (275 | ) |
|      Proceeds from subordinated convertible debt                                                                                                                                                                                                                   |                          | —           |                          |        | —                             |        |    | 7,391 |    |
|      Deferred financing costs                                                                                                                                                                                                                                      |                          | —           |                          |        | —                             |        |    | (719 | ) |
|      (Increase) decrease in restricted cash                                                                                                                                                                                                                        |                          | (3,896           | )                                  |        | 2,405                              |        |    | (2,620 | ) |
|      Net (decrease) increase in other long-term obligations                                                                                                                                                                                                        |                          | (133             | )                                  |        | 120                                |        |    | (6 | ) |
|      Issuance of common stock/warrants                                                                                                                                                                                                                             |                          | 6,651            |                          |        | 100                                |        |    | 2,629 |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |    |    |    |
|      Net cash provided by (used in) financing activities                                                                                                                                                                                                           |                          | 2,317            |                          |        | 1,780                              |        |    | (4,755 | ) |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |    |    |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|      Effect of exchange rates on cash                                                                                                                                                                                                                              |                          | 192              |                          |        | (160                               | )                |    | 3 |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |    |    |    |
|      Net increase (decrease) in cash and cash equivalents                                                                                                                                                                                                          |                          | 10,675           |                          |        | (2,939                             | )                |    | 2,044 |    |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |    |    |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
| Cash and cash equivalents at beginning of year                                                                                                                                                                                                                                              |                          | 1,366            |                          |        | 4,305                              |        |    | 2,261 |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |    |    |    |
| Cash and cash equivalents at end of year                                                                                                                                                                                                                                                    | $                                  | 12,041           |                          | $                | 1,366                              |        | $ | 4,305 |    |
|                                                                                                                                                                                                                                                                                             |                                    |                  |                                    |
|                                                                                                                                                                                                                                                                                   |                                    |        |                                    |        |                                    |        |
|                                                                                                                                                                                                                                                                                   |                          |        |                          |        |                          |        |
| Supplemental schedule of cash flow information:                                                                                                                                                                                                                                             |                          |        |                          |        |                          |        |    |    |    |
|    Interest paid                                                                                                                                                                                                                                                             | $                                  | 909              |                          | $                | 854                                |        | $ | 480 |    |
|    Income taxes paid                                                                                                                                                                                                                                                         | $                                  | 5                |                          | $                | 78                                 |        | $ | 1,720 |    |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Supplemental information on non-cash operating, investing and financing activities:

                During the years ended February 25, 2005, and February 27, 2004, the Company reclassified $194,000and $496,000, respectively, from inventory to capitalized software. Additionally, during the yearended February 25, 2005 the Company recorded $571,000 in deferred finance charges and credited acorresponding amount to additional paid in capital associated with the issuance of a common stockpurchase warrant to H.F. Lenfest.

The accompanying notes are an integral part of the consolidated financial statements. |

| 22 |
|----|

| Notes to Consolidated Financial Statements

1.             Nature of Business:

                Environmental Tectonics Corporation (“ETC” or the “Company”) is primarily engagedin the development, marketing and manufacturing of Aircrew Training Systems (ATS) and industrialsimulation equipment. The Company utilizes its internally developed software systems in virtuallyall of its products. ETC focuses on software enhancements, product extensions, new product developmentand new marketplace applications. Sales of ATS products are made principally to U.S. and foreigngovernment agencies and to the entertainment market. Sales of industrial simulation equipment, whichincludes sterilizers, environmental systems and hypo/hyperbaric equipment, are made to both commercialcustomers and governmental agencies worldwide. 

2.             Summary of Significant AccountingPolicies:

                Principlesof Consolidation:

                The consolidated financial statements include the accounts of Environmental Tectonics Corporation,its wholly owned subsidiaries Entertainment Technology Corporation, ETC Delaware, and ETC InternationalCorporation, its 95% owned subsidiary, ETC-PZL Aerospace Industries SP. Z 0.0, and its 99% ownedsubsidiary, ETC Europe. All material inter-company accounts and transactions have been eliminatedin consolidation. The Company’s fiscal year is the 52-or 53-week annual accounting period endingthe last Friday in February.

                Use of Estimates:

                In preparing financial statements in conformity with accounting principles generally accepted in theUnited States, management is required to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dateof the financial statements, and revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant estimates are made for revenue recognition under thepercentage of completion method, claims receivable, inventories and computer software costs.

                Significant claims outstanding at February 25, 2005 included a claim with the U.S. Navy for a submarinedecompression chamber ($3.0 million recorded). Significant claims outstanding at February 27, 2004included $2.9 million for the aforementioned U.S. Navy claim and $2.6 million for an internationalcustomer. Effective February 27, 2004 the Company reached an agreement totaling $10.5 million ona prior international claim. This settlement was paid to the Company in March 2004. On February 8,2005, the Company reached an agreement totaling $4.7 million on the remaining international claim.This settlement was paid to the Company in February 2005. Although recorded as a current asset inthe financial statements, all claim revenues may not be received in full during fiscal 2006. 

                Total claims outstanding at February 25, 2005 were approximately $5.6 million based on costs incurredthrough February 2005. However, under generally accepted accounting principles, the Company had recordedonly $3.0 million or 53.6% of this amount on its books.

                RevenueRecognition:

                Revenue is recognized on long-term contracts over $250,000 in value and six months in length utilizingthe percentage of completion method based on costs incurred as a percentage of estimated total costs.Revenue recognized on uncompleted long-term contracts in excess of amounts billed to customers isreflected as a current asset. Amounts billed to customers in excess of revenue recognized on uncompletedlong-term contracts are reflected as a current liability. When it is estimated that a contract willresult in a loss, the entire amount of the loss is accrued. The effect of revisions in cost and profitestimates for long-term contracts is reflected in the accounting period in which the facts requiringthe revisions become known. Contract progress billings are based upon contract provisions for customeradvance payments, contract costs incurred and completion of specified contract milestones. Contractsmay provide for customer retainage of a portion of amounts billed until contract completion. Retainageis generally due within one year of completion of the contract. Revenue for contracts under $250,000or to be completed in less than six months, and where there are no post-shipment services includedin the contract, and revenue on parts and services, are recognized as shipped or when the serviceis provided. Under these contracts, title passes at shipment. Revenue on those types of contractswhere post-shipment services (such as installation and acceptance) are required is recognized uponcustomer acceptance. Revenue for service contracts is recognized ratably over the life of the contractwith related material costs expensed as incurred. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 23 |
|----|

| Notes to Consolidated Financial Statements

                Cash and  Cash Equivalents:

                Cash and cash equivalents include short-term deposits at market interest rates with original maturitiesof three months or less. The Company maintains cash balances at several financial institutions locatedin the Northeast United States and at some locations internationally. Accounts in each domestic institutionare insured by the Federal Deposit Insurance Corporation up to $100,000. During each fiscal year,the Company periodically has cash and cash equivalents in excess of insured amounts. However, significantportions of the Company’s funds are with one financial institution, which has had no experienceof significant customer losses to date.

                Restricted Cash

                Restricted cash represents cash deposited in an interest bearing account with PNC which serves as securityfor their irrevocable direct pay letter of credit issued in the bondholder’s favor to securethe Company’s long-term bonds. At February 25, 2005 it included an amount equivalent to 101%of the outstanding principal of the bonds plus the mandatory redemption and interest payment whichwas due and paid on April 1, 2005. 

                Inventories:

                Inventories are valued at the lower of cost or market. Cost is determined principally by the first-in,first-out method. The costs of finished goods and work-in-process inventories include material, directengineering, manufacturing labor and overhead components. The Company periodically reviews the netrealizable value of the inventory and, if necessary, writes down the recorded costs.

                Depreciationof Property, Plant and Equipment:

                Property, plant and equipment are depreciated over their estimated useful lives by the straight-linemethod for financial reporting purposes. Accelerated depreciation methods are used for tax purposes.Upon sale or retirement of property, plant and equipment, the costs and related accumulated depreciationare eliminated from the accounts. Any resulting gains or losses are included in the determinationof net income.

                Goodwill:

                Goodwill of $662,000 was recorded in fiscal 1999 for the Company’s 65% ownership purchase of ETC-PZLAerospace Industries, SP. Z O.O. On September 27, 2000, the Company purchased an additional 30% ownershipfor $300,000 cash, bringing the Company’s total ownership to 95%. Goodwill of $24,000 was recordedin fiscal 2001 for the Company’s purchase of 99% of ETC Europe. Based ona test of impairment, the Company did not reduce the net carrying values of goodwillfor fiscal years 2005 and 2004.

                 The following summarizes the goodwill and associated amortization of the elements of goodwill:

                                 (Amounts in thousands) |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                 | ETC-PZL | ETC Europe    |
|-----------------------------------------------------------------|---------|---------------|
| Goodwill                                                        | 662     | 24            |
| Amortization                                                    | 207     |   2 |
|           Net | 455     | 22            |

|                                                                                                                                                                                                                                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 On February 23, 2002, we adopted SFAS No. 142 “Goodwill and Intangible Assets” (SFAS No. 142). SFAS No. 142 includes requirements to annually test goodwill and indefinite lived intangible assets for impairment rather than amortize them. Accordingly, we no longer amortize goodwill. |

| 24 |
|----|

| Notes to Consolidated Financial Statements

                Capitalized  Software Development Costs:

                The Company capitalizes the qualifying costs of developing software contained in certain products.Capitalization of costs requires that technological feasibility has been established. When the softwareis fully documented and tested, capitalization of development costs cease and amortization commenceson a straight-line basis over a period ranging from 36 to 60 months, depending upon the life of theproduct, which, at a minimum, approximates estimated sales. Realization of capitalized software costsis subject to the Company’s ability to market the related product in the future and generatecash flows to support future operations. Capitalized software costs totaled $1,466,000 and $1,716,000respectively, for the fiscal years ended February 25, 2005 and February 27, 2004. Related softwareamortization totaled $988,000, $851,000 and $653,000, respectively, for fiscal 2005, 2004 and 2003.

                Researchand Development:

                Research and development expenses are charged to operations as incurred. During fiscal 2005, 2004 and2003, the Company incurred research and development costs of approximately $856,000, $358,000 and$636,000, respectively.

                DeferredFinancing Costs:  

             Capitalized costs relatingto the Company’s bond issuance on March 15, 2000 and costs associated with the February 2003PNC/Lenfest financing are being amortized over the relevant term. Amortization expense relating todeferred financing costs was $587,000, $321,000 and $75,000 in fiscal 2005, 2004 and 2003, respectively.At February 25, 2005 the balance of unamortized deferred finance costs was $703,000, with $624,000classified as current. 

            During fiscal 2005 the Companyrecorded $571,000 in deferred finance charges associated with the issuance of a common stock warrant.Amortization expense related to these costs was $190,000 for fiscal 2005. See “Note 7. Long-TermObligations and Credit Arrangements” to the Consolidated Financial Statements.

                Income Taxes:

                The Company accounts for income taxes using the liability method, which reflects the impact of temporarydifferences between values recorded for assets and liabilities for financial reporting purposes andvalues utilized for measurement in accordance with applicable tax laws.

                Long-LivedAssets:

                In accordance with FASB Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS 144”), the company periodicallyevaluates the period of depreciation or amortization for long-lived assets to determine whether currentcircumstances warrant revised estimates of useful lives. The company reviews its property and equipmentfor impairment whenever events or changes in circumstances indicate the carrying value of an assetmay not be recoverable. Recoverability is measured by a comparison of the carrying amount to thenet undiscounted cash flows expected to be generated by the asset. An impairment loss would be recordedfor the excess of net book value over the fair value of the asset impaired. The fair value is estimatedbased on expected discounted future cash flows.

                The results of impairment tests are subject to management’s estimates and assumptions of projectedcash flows and operating results. The company believes that, based on current conditions, materiallydifferent reported results are not likely to result from long-lived asset impairments. However, achange in assumptions or market conditions could result in a change in estimated future cash flowsand the likelihood of materially different reported results.

                Stock Options:

                The Company accounts for stock options under the alternate provisions of SFAS No. 123 (discussed below),“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, which contains afair value-based method for valuing stock-based compensation that entities may use, which measurescompensation cost at the grant date based on the fair value of the award. Compensation is then recognizedover the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permitsentities to continue accounting for employee stock options and similar equity instruments under AccountingPrinciples Board (APB) Opinion 25, “Accounting for Stock Issued to Employees.” Entitiesthat continue to account for stock options using APB Opinion No. 25 are required to make pro-formadisclosures of net income and earnings per share, as if the fair value-based method of accountingdefined in SFAS No. 123 had been applied. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 25 |
|----|

| Notes to Consolidated Financial Statements

                At February 25, 2005, the Company has one stock-based employee compensation plan, which is described  more fully in Note 10 to the Consolidated Financial Statements. The Company accounts for  this plan under the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and related Interpretations. No stock-based employee compensation cost is reflected in net income,  as all options granted under this plan had an exercise price equal to the market value of the underlying  common stock on the date of grant. The following table illustrates the effect on net income and earnings  per share if the Company had applied the fair value recognition provisions of FASB Statement No.  123, *Accounting for Stock-Based Compensation,* to stock-based employee compensation. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

|                                                                                                                                                                                            | (amounts in thousands) |    | Fiscal Year Ended |    |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|--------------|-------------------|--------------|--------------|
||
||
|                                                                                                                                                                                            |                        |    |                   |    |              |    |
| Net (loss)/income, as reported                                                                                                                                                                       | $                      | (8,113       | )                 | $            | (793         | ) | $ | 2,493 |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
| Deduct:  Total stock-based employee   compensation expense determined   under fair value based method for   all awards, net of related tax effects |              | (30          | )                 |    | (27          | ) |    | (275 | ) |
|                                                                                                                                                                                            |                        |    |                   |    |              |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
| Pro forma net (loss)/income                                                                                                                                                                          | $                      | (8,143       | )                 | $            | (820         | ) | $ | 2,218 |    |
|                                                                                                                                                                                            |                        |    |                   |    |              |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
| (Loss)/earnings per share:                                                                                                                                                                           |              |    |         |    |    |    |    |    |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
|      Basic—as reported                                                                                                                                                 | $                      | (1.06        | )                 | $            | (0.11        | ) | $ | .35 |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
|      Basic—pro forma                                                                                                                                                   | $                      | (1.06        | )                 | $            | (0.11        | ) | $ | .31 |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
|      Diluted—as reported                                                                                                                                               | $                      | (1.06        | )                 | $            | (0.11        | ) | $ | .33 |    |
|                                                                                                                                                                                            |              |    |         |    |    |    |    |    |    |
|      Diluted—pro forma                                                                                                                                                 | $                      | (1.06        | )                 | $            | (0.11        | ) | $ | .30 |    |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricingmodel with the following weighted average assumptions used for grants in fiscal 2005: expected volatilityof 30.2%; risk-free interest rate of 4.14%; and an expected life of 10 years. There were no grantsin fiscal 2003 and fiscal 2004.

                AdvertisingCosts:

                The Company expenses advertising costs, which include trade shows, as incurred. Advertising expensewas $310,000, $324,000 and $464,000 in fiscal 2005, 2004, and 2003, respectively.

                EarningsPer Common Share:

                SFAS No. 128, “Earnings Per Share,” requires presentationof basic and diluted earnings per share together with disclosure describing the computation of theper share amounts. Basic earnings per share excludes dilution and is computed by dividing incomeavailable to common shareholders by the weighted average common shares outstanding for the period.Diluted earnings per share reflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised and converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the entity.

                The following table illustrates the reconciliations of the numerators and denominators of the basicand diluted earnings per share computations. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

|                                                                                                                                                          |    | Fiscal Year ended February 25, 2005 |    |         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------|--------------|-------------------|
||
||
|                                                                                                                                                               |         |                                     |         |                   |   |  |   |
|                                                                                                                                                          |    |                           |    |         |    |    |    |    |
|                                                                                                                                                          |    | **(numerator)**                     |    | **(denominator)** |    |    |    |    |
|                                                                                                                                                          |    |                           |    |         |    |    |    |    |
| Net loss                                                                                                                                                           |    | $                                   | (8,113       | )                 |    |    |    |    |    |    |
|                                                                                                                                                          |    |                           |    |         |    |    |    |    |    |    |
| Basic loss per share                                                                                                                                               |    |                           |    |         |    |    |    |    |    |    |
|      Loss applicable to common stockholders                                                                                               |    | $                                   | (8,113       | )                 |    | 7,656,000 |    | $ | (1.06 | ) |
|                                                                                                                                                          |    |                                     |    |                   |    |  |    |
| Effective of dilutive securities                                                                                                                                   |    |                           |    |         |    |    |    |    |    |    |
|      Stock options                                                                                                                        |    |                           |    |         |    | — |    |    |    |    |
|      Convertible Debt                                                                                                                     |    |                           |    |         |    | — |    |    |    |    |
|      Stock warrants                                                                                                                       |    |                           |    |         |    | — |    |    |    |    |
|                                                                                                                                                          |    |                           |    |         |    |    |    |    |    |    |
| Diluted loss per share                                                                                                                                             |    |                           |    |         |    |    |    |    |    |    |
|      Loss applicable to common stockholders plus          effect of dilutive securities |    | $                                   | (8,113       | )                 |    | 7,656,000 |    | $ | (1.06 | ) |
|                                                                                                                                                          |    |                                     |    |                   |    |  |    |
|                                                                                                                                                                    |              |                                     |              |
|                                                                                                                                                                    |              |                                     |              |

| 26 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

| At February 25, 2005, there were stock options to purchase the Company’s common stock totaling276,162 shares that were not included in the computation of diluted loss per share as the effectof such would be anti-dilutive. Additionally, there was subordinated debt with a face value of $10,000,000,which was convertible at an exercise price of $6.05 per share, equating to 1,652,893 shares of commonstock if fully converted. Upon each conversion of the subordinated note, the holder would be entitledto receive a warrant to purchase additional shares of common stock equal to ten percent of the sharesissued pursuant to such conversion. If the entire face value of the subordinated note is convertedinto shares of common stock, then warrants to purchase an additional 165,289 shares of common stockwill be issued, bringing the total shares of common stock to be issued to 1,818,182. None of theseshares were included in the computation of diluted earnings per share as the effect would be anti-dilutive. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

|                                                                                                                                                                                              |    | Fiscal Year ended February 27, 2004 |    |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------|--------------|--------------|
||
||
||
||
||
||
| Net loss                                                                                                                                                                                               |         | $                                   | (793         | )            |   |   |   |   |   |   |
|                                                                                                                                                                                              |    |                           |    |    |    |    |    |    |    |    |
| Basic loss per share                                                                                                                                                                                   |    |                           |    |    |    |    |    |    |    |    |
|        Loss applicable to common stockholders                                                                                                                       |         | $                                   | (793         | )            |   | 7,163,000 |   | $ | (.11 | ) |
|                                                                                                                                                                                              |    |                                     |    |              |    |  |    |
| Effective of dilutive securities                                                                                                                                                                       |    |                           |    |    |    |    |    |    |    |    |
|        Stock options                                                                                                                                                |         |                                |    |    |    | — |    |    |    |    |
|        Convertible Debt                                                                                                                                             |    |                           |    |    |    | — |    |    |    |    |
|        Stock warrants                                                                                                                                               |    |                           |    |    |    | — |    |    |    |    |
|                                                                                                                                                                                                   |         |                                |         |         |  |   |   |   |   |
|                                                                                                                                                                                              |    |                           |    |    |    |    |    |    |    |    |
| Diluted loss per share                                                                                                                                                                                 |    |                           |    |    |    |    |    |    |    |    |
|        Loss applicable to common stockholders              plus effect of dilutive securities |         | $                                   | (793         | )            |   | 7,163,000 |   | $ | (.11 | ) |
|                                                                                                                                                                                              |    |                                     |    |              |    |  |    |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| At February 27, 2004, there were stock options to purchase the Company’s common stock totaling 376,002 shares that were not included in the computation of diluted loss per share as the effect of such would be anti-dilutive. Additionally, there was subordinated debt with a face value of $10,000,000, which was convertible at an exercise price of $6.05 per share, equating to 1,652,893 shares of common stock if fully converted. Upon each conversion of the subordinated note, the holder would be entitled to receive a warrant to purchase additional shares of common stock equal to ten percent of the shares issued pursuant to such conversion. If the entire face value of the subordinated note is converted into shares of common stock, then warrants to purchase an additional 165,289 shares of common stock will be issued, bringing the total shares of common stock to be issued to 1,818,182. Additionally, at February 27, 2004, there were outstanding warrants to   purchase the Company’s stock totaling 1,240,868 shares. None of these shares were included in the computation of diluted earnings per share as the effect would be anti-dilutive. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

|                                                                                                                                                           | **Fiscal Year ended February 28, 2003** |          |                 |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|--------------------|---------------------------|--------------------|
|                                                                                                                                                                |                                         |               |                      |               |
|                                                                                                                                                      | **Income(amounts in thousands)**        |     | **Weightedaverageshares** |     | **Per shareamount** |     |
|                                                                                                                                                           |                                         |          |                           |          |  |    |
|                                                                                                                                                           |                               |          |                 |          |    |    |
|                                                                                                                                                           | **(numerator)**                         |          | **(denominator)**         |          |    |    |
|                                                                                                                                                           |                               |          |                 |          |    |    |
| Net income                                                                                                                                                          | $                                       | 2,493              |                      |               |   |   |   |   |   |
|                                                                                                                                                           |                               |          |                 |          |    |    |    |    |    |
| Basic earnings per share                                                                                                                                       |                               |          |                 |          |    |    |    |    |    |
|      Income available to common stockholders                                                                                               | $                                       | 2,493              |                      |               | 7,153,000 |   | $ | .35 |   |
|                                                                                                                                                           |                                         |          |                           |          |  |    |
| Effective of dilutive securities                                                                                                                                    |                               |          |                 |          |    |    |    |    |    |
|      Stock options                                                                                                                         |                                    |          |                 |          | 22,717 |    |    |    |    |
|      Convertible Debt                                                                                                                      |                               |          |                 |          | 4,151 |    |    |    |    |
|      Stock warrants                                                                                                                        |                               |          |                 |          | 317,407 |    |    |    |    |
|                                                                                                                                                           |                               |          |                 |                    |    |    |    |    |
|                                                                                                                                                           |                               |          |                 |          |    |    |    |    |    |
| Diluted earnings per share                                                                                                                                          |                               |          |                 |          |    |    |    |    |    |
|      Income available to common stockholders          plus effect of dilutive securities | $                                       | 2,493              |                 |          | 7,497,275 |    | $ | .33 |    |
|                                                                                                                                                           |                                         |          |                           |          |  |    |

| 27 |
|----|

| Notes to Consolidated Financial Statements

At February 28, 2003, options to purchase the Company’s common stock totaling 421,614 shares were outstanding, 341,314 of which were not included in the computation of diluted earnings per share as the effect of such inclusion would be anti-dilutive.

3.             Accounts Receivable:  

                The components of accounts receivable at February 25, 2005 and February 27, 2004 are as follows: |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|                                                                                                                                       | (amounts inthousands) |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|--------------|
||
|                                                                                                                                            |                       |         |  |   |
| U.S. government receivables billed     and unbilled contract costs     subject to negotiation | $                     | 3,202        |   | $ | 3,128 |   |
| U.S. commercial receivables billed                                                                                                              |             | 2,331        |    |    | 1,508 |    |
| International receivables billed and unbilled contract costs subject to negotiation                                                        |                  | 2,971        |   |   | 14,976 |   |
|                                                                                                                                            |                       |         |  |   |
|                                                                                                                                       |
|                                                                                                                                       |             | 8,504        |    |    | 19,612 |    |
| Less allowance for doubtful accounts                                                                                                            |             | (486         | ) |    | (379 | ) |
|                                                                                                                                            |                       |         |  |   |
|                                                                                                                                       |
|                                                                                                                                       | $                     | 8,018        |    | $ | 19,233 |    |
|                                                                                                                                            |                       |         |  |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 U.S. government receivables billed and unbilled contract costs subject to negotiation: 

                Unbilled contract costs subject to negotiation as of February 25, 2005, represent claims made againstthe U.S. Government under a contract for a submarine rescue decompression chamber project. Thesecosts totaling $3,004,000 were recorded beginning in fiscal year 2002 and include $1,691,000 recordedduring fiscal 2003, $833,000 recorded during fiscal year 2004 and $105,000 recorded during fiscalyear 2005. In November 2003, the U.S. Government completed an audit of the claim, rejecting mostof the items due to audit or engineering reasons. The Company was not provided a copy of the Government’sTechnical Report that questioned approximately half of the claim costs. The Company has submitteda written rebuttal to the draft report and has formally requested a copy of the Technical Report.On July 22, 2004, the U.S. Government’s Contracting Officer issued a final decision on the claim,denying the claim in full. The Company is currently updating the claim for additional costs expendedon the claim items after the initial submission and preparing a supplemental claim for additionalclaim issues. The updated original claim will be converted to a complaint to be filed in the Courtof Federal Claims by early July 2005. 

                This U. S. Government claim has followed the typical process of claim notification, preparation, submittal,government audit and review by the contracting officer. Historically, the Company’s experiencehas indicated that most claims are initially denied in part or in full by the contracting officer(or no decision is forthcoming, which is then taken to be a deemed denial) which then forces theCompany to seek relief in a court of law. 

                The Company considers the recorded costs to be realizable due to the fact that the costs relate tocustomer caused delays, errors and changes in specifications and designs, disputed liquidated damagesand other out of scope items. In the first quarter of fiscal 2005, the Company submitted a supplementto the claim incorporating additional cost items. The U.S. Government, citing failure to deliverthe product within contract terms, has assessed liquidated damages but has not offset or withheldany progress payments due to the Company under the contract. The Company disputes the basis for theseliquidated damages, noting that applicable U.S. Government purchasing regulations allow for a waiverof these charges if the delay is beyond the control and not due to the fault or negligence of theCompany. However, following accounting principles generally accepted in the United States of America,the Company has reduced contract values and corresponding revenue recognition for an estimated amountof $330,000 to cover a delay through the extended delivery period. 

International receivables billed and unbilled contract costs subject to negotiation: |

| 28 |
|----|

| Notes to Consolidated Financial Statements

                International receivables billed include $700,000 at February 25, 2005 and February 27, 2004, respectively,  related to a contract with the Royal Thai Air Force (“RTAF”).

                In October 1993, the Company was notified by the RTAF that the RTAF was terminating a $4,600,000 simulatorcontract with the Company. Although the Company had performed in excess of 90% of the contract, theRTAF alleged a failure to completely perform. In connection with this termination, the RTAF madea call on a $230,000 performance bond, as well as a draw on an approximately $1,100,000 advancepayment letter of credit. Work under this contract had stopped while under arbitration, but on October1, 1996, the Thai Trade Arbitration Counsel rendered its decision under which the contract was reinstatedin full and the Company was given a period of nine months to complete the remainder of the work.Except as noted in the award, the rights and obligations of the parties remained as stated in theoriginal contract including the potential invoking of penalties or termination of the contract fordelay. On December 22, 1997, the Company successfully performed acceptance testing and the unit passedwith no discrepancy reports. Although the contract was not completed in the time allotted, the Companyhas requested an extension on the completion time due to various extenuating circumstances, includingallowable “force majeure” events, one of which was a delay in obtaining an export licenseto ship parts required to complete the trainers. On August 30, 2001, the Company received a paymentof $230,000 representing the amount due on the performance bond.

                The open balance of $700,000 due on the contract represents the total net exposure to the Company onthis contract. On June 16, 2003, the Company filed for arbitration in Thailand seeking recoveryof the open balance of $700,000 due on this contract. On October 8, 2003, the Thai governmentfiled their defense with the Thai Arbitration Institute (TAI). Subsequent to year-end all arbitratorshad been chosen, including a third (umpire) arbitrator. The Company is currently preparing witnessstatements in anticipation of the arbitration hearings which are expected to begin in the next fewmonths.

                Since the circumstances that caused a delay are commonly considered “force majeure” events,and since the contract under question allows for consideration of “force majeure” events,the Company believes that the open balance related to this contract is collectible and will continueto treat this balance as collectible until a final unappealable legal decision is rendered by a competentThai tribunal. The Company continues to enjoy a favorable relationship with the RTAF. It currentlyhas both maintenance and upgrade contracts with the RTAF for trainers that are the subject of thedispute and has sold a significant amount of additional equipment to the RTAF since this disputebegan. Thus, we do not feel the initiation of legal action against the RTAF has affected our abilityto obtain additional contracts with the RTAF. At this point, the Company is not able to determinewhat, if any, impact the extended completion period will ultimately have upon the receipt of final payment.

                Unbilled contract costs subject to negotiation represent a claim ($2,600,000 recorded as of November26, 2004) made against an international customer for a contract covering the period from 1997 tothe present. On February 8, 2005 the Company reached an agreement totaling $4.7 million on this claimand these funds were paid to the Company prior to the end of February 2005.

                Effective February 27, 2004, the Company reached an agreement totaling $10.5 million with the sameinternational customer on another claim, thus resolving all outstanding amounts related to that claim.These proceeds were received on March 16, 2004.

                Historically, the Company has had positive experience with regard to its contract claims in that recoverieshave exceeded the carrying value of claims. However, there is no assurance that the Company willalways have positive experience with regard to recoveries for its contract claims. 

                Claim bookings and settlements in fiscal 2005 reduced operating income by $1,124,000 and in fiscal2004 increased operating income by $1,802,000, respectively. Claim bookings in fiscal 2003 decreasedoperating income by $675,000. All amounts are net of associated manufacturing costs and legal expenses.

                Net claims receivables were $3,004,000 and $5,508,000 at February 25, 2005 and February 27,2004, respectively.

4.             Costs and Estimated Earningson Uncompleted Contracts: 

                Unbilled costs

                Amounts not billed or not yet billable totaled $11,098,000 at February 25, 2005. Under most of theCompany’s contracts, invoices are issued upon the attainment of certain contract milestones,for example upon receipt of order, upon engineering drawing submittal, upon design acceptance, orupon shipment. Service contracts are billed monthly or quarterly. Parts and service are billed asshipped or completed. 

                The following is a summary of long-term contracts in progress at February 25, 2005 and February 27,2004: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 29 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

|                                         | (amounts inthousands) |    |
|---------------------------------------------------|-----------------------|--------------|
||
|                                              |                       |         |  |   |
| Costs incurred on uncompleted long-term contracts | $                     | 31,884       |    | $ | 28,802 |    |
| Estimated earnings                                |             | 6,824        |    |    | 5,508 |    |
|                                              |                       |         |  |   |
|                                         |             | 38,708       |    |    | 34,310 |    |
| Less billings to date                             |             | (36,908      | ) |    | (29,922 | ) |
|                                              |                       |         |  |   |
|                                         | $                     | 1,800        |    | $ | 4,388 |    |
|                                              |                       |         |  |   |
|                                              |                  |         |   |   |

|                                                                                                                                                          | 2005         |    | 2004         |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|
|                                                                                                                                                               |              |         |              |         |
| Included in accompanying balance sheets under the following captions:                                                                                              |    |    |    |    |    |    |
|      Costs and estimated earnings in excess of billings        on uncompleted long-term contracts | $            | 3,333        |         | $            | 5,333 |   |
|      Billings in excess of costs and estimated earnings on        uncompleted long-term contracts |         | (1,533       | )            |         | (945 | ) |
|                                                                                                                                                               |              |         |              |         |
|                                                                                                                                                          | $            | 1,800        |    | $            | 4,388 |    |
|                                                                                                                                                               |              |         |              |         |

|   |                                                                                                                                                                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Included in billings in excess of costs and estimated earnings on uncompleted long-term contracts isa provision for anticipated losses on contracts of $200,000 in fiscal 2005, 2004 and 2003. |

|                                                                                                                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5.             Inventories:   

                Inventories consist of the following: |
|                                                                                                                                                                                                                                   |

|         | (amounts inthousands) |    |
|-------------------|-----------------------|--------------|
||
|              |                       |         |  |   |  |   |  |   |
| February 25, 2005 | $                     | 290          |   | $ | 5,293 |   | $ | 2,345 |   | $ | 7,928 |   |
| February 27, 2004 |                  | 311          |   |   | 7,803 |   |   | 1,729 |   |   | 9,843 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Inventory is presented above net of an allowance for obsolescence of $731,000 and $564,000 in fiscal2005 and 2004, respectively. 

6.             Property, Plant and Equipment: 

                The following is a summary of property, plant and equipment, at cost, and estimated useful lives atFebruary 25, 2005 and February 27, 2004:  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|                                                        | (amounts in thousands) |    | Estimatedusefullives |    |
|------------------------------------------------------------------|------------------------|--------------|----------------------|--------------|
||
||
|                                                        |                        |    |                      |    |    |    |
|                                                        |              |    |            |    |    |    |
| Land                                                             | $                      | 100          |            | $            | 100 |    |   |    |
| Building and building additions                                  |              | 3,763        |            |    | 3,763 |    | 40 years |    |
| Machinery and equipment                                          |              | 9,304        |            |    | 9,019 |    | 3-5 years |    |
| Office furniture and equipment                                   |              | 1,195        |            |    | 1,195 |    | 10 years |    |
| Building improvements                                            |              | 1,460        |            |    | 1,460 |    | 5-10 years |    |
|                                                        |                        |    |                      |    |    |    |
|                                                        |              |    |            |    |    |    |    |    |
|                                                        |              | 15,822       |            |    | 15,537 |    |    |    |
| Less accumulated depreciation                                    |              | (11,491      | )                    |    | (10,651 | ) |    |    |
|                                                        |                        |    |                      |    |    |    |
|                                                        |              |    |            |    |    |    |
|      Property, plant and equipment, net | $                      | 4,331        |            | $            | 4,886 |    |    |    |
|                                                        |                        |    |                      |    |    |    |

|                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Depreciation expense for the fiscal years ended February 25, 2005, February 27, 2004 and February 28, 2003 was $840,000, $675,000 and $673,000, respectively. |

| 30 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|

| 7.             Long-Term Obligations andCredit Arrangements:

                Long-term obligations at February 25, 2005 and February 27, 2004 consist of the following: |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                 |

|                                                                                                                                            | (amounts in thousands) |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|--------|
||
|                                                                                                                                            |                        |   |  |   |
| Credit facility payable to banks                                                                                                                | $                      | — |   | $ | 30 |   |
| Long term bonds                                                                                                                                 |                   | 4,370  |   |   | 4,645 |   |
| Subordinated convertible debt, net of unamortized discount of$2,008 and $2,334 for 2005 and 2004, respectively                                  |                   | 7,992  |   |   | 7,666 |   |
| Term loans payable, accruing interest at between 9% and 9.9%     collateralized by priority liens on certain equipment |                   | — |   |   | 6 |   |
| Capitalized lease obligations                                                                                                                   |                   | — |   |   | 127 |   |
|                                                                                                                                            |                        |   |  |   |
|                                                                                                                                            |                   | 12,362 |   |   | 12,474 |   |
| Less current portion                                                                                                                            |                   | (275   | ) |   | (317 | ) |
|                                                                                                                                            |                        |   |  |   |
|                                                                                                                                            | $                      | 12,087 |   | $ | 12,157 |   |
|                                                                                                                                            |                        |   |  |   |

|                                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 The amounts of future long-term obligations maturing in each of the next five fiscal years are as follows(amounts in thousands): |
|                                                                                                                                                                                                                             |

|               2006                | $      | 275    |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|--------|
|               2007                |   | 8,267  |   |
|               2008                |   | 275    |   |
|               2009                |   | 275    |   |
|               2010 and thereafter |   | 3,270  |   |
|                                                                                                    |        |   |
| Total future obligations                                                                                | $      | 12,362 |   |
|                                                                                                    |        |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 The approximate average loan balance, maximum aggregate borrowings outstanding at any month-end payableunder the credit facility and subordinated debt during the fiscal years, and weighted average interestrate computed by the day’s outstanding method as of February 25, 2005 and February 27, 2004are as follows (amounts in thousands): |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |

| **  **                 | **2005** | **  ** | **2004** | **  ** |
|----------------------------------|----------|------------------|----------|------------------|
|                             |          |             |          |             |
| Approximate average loan balance |     | 10,001           |     |             | 10,401 |   |
| Maximum aggregate                |     | 10,030           |     |             | 11,200 |   |
| Weighted average interest rate   |     | 7.85             | %*       |             | 8.45 | % |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                * The weightedaverage interest rate calculation for fiscal 2005 and 2004 reflects the impact of the $10,000 seniorsubordinated debt obtained as part of the February 19, 2003 financing. 

                Refinancing

                The company has historically financed operations through a combination of cash generated from operations,equity offerings, subordinated borrowings and bank debt. On February 19, 2003, the Company refinancedits operations (the “Refinancing”). This refinancing was effected through the issuanceof subordinated, convertible notes with H.F. Lenfest, an individual, and a credit agreement (the“Agreement”) with PNC Bank, National Association (“PNC”). The total proceedsfrom this refinancing were $29,800,000. 

                Bank Credit and Facility

                The Agreement has had numerous amendments which are discussed below. Currently, the facility is for$5,000,000 and use of the facility is restricted to the issuance of international letters of credit.This line is secured by all assets of the Company as well as a $5 million personal guarantee byMr.Lenfest.

                The PNC credit facility is secured by (i) the grant of a first and prior security interest in all ofthe personal property of the Company, Entertainment Technology Corporation (“Entertainment”),and ETC Delaware, Inc. (“ETC Delaware”), each a wholly- |

| 31 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

| owned subsidiary of the Company, in favor of PNC; (ii) the Company’s grant of a first and priorsecurity interest in all of the Company’s accounts, deposits and all other negotiable and non-negotiableinstruments owned by the Company in favor of PNC; (iii) the Company’s grant of a first and priormortgage on all of the Company’s real property in favor of PNC; and (iv) the Company’sgrant of a first and prior security interest in all of the Company’s rights to (a) all of theshares of capital stock of each of Entertainment and ETC Delaware and (b) 65% of the sharesof capital stock owned by the company of each of its foreign subsidiaries in favor of PNC. In addition,the PNC credit agreement requires that Entertainment and ETC Delaware guarantee the Company’sobligations under the PNC facility. 

                Agreement Amendments

                   OnApril 30, 2003, the Agreement was amended to include: (i) a revolving credit facility in themaximum aggregate principal amount of $14,800,000 to be used for the Company’s working capitaland general corporate purposes, including capital expenditures, with a sub-limit for issuancesofletters of credit in the maximum aggregate face amount of $10,300,000, and (ii) a standby letterof credit in the face amount of $4,750,000 as credit support for the Company’s bonds. Additionally,on July 9, 2003, a second amendment to the Agreement was executed which formed an additional $1,010,000credit facility for use in financing export contracts which qualify for an EXIM (the Export-ImportBank of the United States) Bank guarantee.

                     On August 24, 2004, the Agreement was amended to substantially reducethe operating facility and eliminate the associated monthly borrowing base reporting requirements.The revolving facility was reduced from $14,800,000 to $5,000,000 and use of the facility was restrictedto the issuance of letters of credit, which are frequently a requirement of international contracts.Under the amended Agreement, the Company could no longer borrow cash under the facility. The Company’slong-term bonds were left intact. As additional collateral for the revised facility, PNC requiredthe Company to keep $2,500,000 in a restricted cash account. The annual fee for letters of creditwas reduced from 1.75% to 1.0% per annum. Additionally, three of the financial covenants, the LeverageRatio, the Fixed Charge Ratio and the requirement not to report a net loss in any annual periodwereeliminated and the Tangible Net Worth requirement was reduced. All other terms and conditionsofthe revolving loan and the line of credit as set forth in the Agreement remained in effect.

                      Under the August 24, 2004, amendment the EXIM Bank credit facilitywas reduced from $1,010,000 to $995,000, with all other terms and conditions remaining unchanged.Availability under the EXIM facility was determined based on a borrowing base consisting of a portionof the Company’s receivables and inventory and conditions as his existing warrant for 803,048shares. 

                     On October 18, 2004, the Agreement was amended to require the Companyto deposit in a restricted cash account an additional amount of $285,000 to cover the next scheduledpayment of principal and interest due April 1, 2005 on the Company’s long-term bonds. TheTangibleNet Worth covenant requirement was reduced to a) $14,500,000 for the periods ended November26, 2004and February 25, 2005 and b) on the last day of any fiscal quarter ending after February25, 2005,to be at least equal to the actual Tangible Net Worth on February 25, 2005. Additionally,the feefor the PNC Letter of Credit, which backs the Company’s long-term bonds, was increasedfrom2.0% to 2.5% annually. 

                     On February 22, 2005, the Agreement was again amended. This Amendmentrequired the Company to increase the deposit as security in the restricted cash account to an amountequal to 100% of the sum of the amount available to be drawn on the Bond Letter of Credit ($4,464,000at February 25, 2005). Additionally the EXIM borrowing facility was cancelled and the TangibleNetWorth covenant was reduced to $12,000,000 for all future reporting periods beginning with February25, 2005. The rate on the Reimbursement Letter of Credit which backs the Company’s long–termbonds was reduced to 0.75% per anum. 

                As of May 6, 2005 the Company had used approximately $1,939,000 of the facility for international lettersof credit.

                Subordinated Convertible Debt 

                 In connection with the financing provided by Mr. Lenfest, the Company entered into a ConvertibleNote and Warrant Purchase Agreement with Mr. Lenfest, pursuant to which the Company issued to Mr.Lenfest (i) a senior subordinated convertible promissory note in the original principal amountof $10,000,000 and (ii) warrants to purchase 803,048 shares of the Company’s common stock.Upon the occurrence of certain events, the Company will be obligated to issue additional warrantsto Mr. Lenfest. The note accrues interest at the rate of 10% per annum and matures on February 18,2009. At the Company’s option, the quarterly interest payments may be deferred and added tothe outstanding principal. The note entitles Mr. Lenfest to convert all or a portion of the outstandingprincipal of, and accrued and unpaid interest on, the note into shares of common stock at a conversionprice of $6.05 per share. The warrants may be exercised into shares of common stock at an exerciseprice equal to the lesser of $4.00 per share or two-thirds of the average of the high and low saleprices of the common stock for the 25 consecutive trading days immediately preceding the date of exercise. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32 |
|----|

| Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 The obligations of the Company to Mr. Lenfest under the Convertible Note and Warrant Purchase Agreement are secured by a second lien on all of the assets of the Company, junior in rights to the lien in favor of PNC Bank, including all real property owned by the Company.

                Subordinated Convertible Debt Discount

                During fiscal 2003, the Company had recorded $2,609,000 in additional paid-in capital representing an allocation of the proceeds from the convertible debt element of its financing with PNC and Lenfest. This allocation represents the value assigned to the beneficial conversion option of the Lenfest promissory note and the value of the associated warrants. Such values were derived pursuant to an independent appraisal of these financial instruments obtained by the Company. Accreted interest expense related to the beneficial conversion option and the warrants was $326,000 in fiscal 2005 and $275,000 in fiscal 2004.

                The following table summarizes the subordinated convertible debt as of February 25, 2005 (amounts in thousands): |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

| Face Value                          | $            |  10,000            |    |
|-------------------------------------|--------------|-------------------------|--------------|
|                           |    |               |    |
| Less: Value of conversion feature   |    | (1,400                  | )            |
|                           |    |               |    |
| Less: Value of warrants             |    | (1,209                  | )            |
|                                     |              |                         |
|                           |    |               |    |
|                           |    | 7,391                   |    |
|                           |    |               |    |
| Accretion 2005:                     |    | (326                    | )            |
|                           |    |               |    |
| Accretion 2004:                     |    | (275                    | )            |
|                                     |    |                         |              |
|                           |    |               |    |
| Carrying value at February 25, 2005 | $            |    7,992 |    |
|                           |              |               |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 Interest expense recorded for these notes was $800,000 and $963,000 for fiscal 2005 and 2004, respectively.

                Prior to the consummation of the refinancing, Advanced Technology Asset Management, LLC (“ATAM”)(formerly ETC Asset Management, LLC), a shareholder of the Company and a holder of warrants to purchase332,820 shares of the Company’s common stock, consented to the transactions contemplated underthe Credit Agreement and the financing provided by Mr. Lenfest, including the below market issuanceof warrants to Mr. Lenfest. As a result of its consent, ATAM waived, solely in connection with suchissuance, the anti-dilution rights contained in its warrant. In exchange for ATAM’s consent,the Company issued to ATAM warrants to purchase an additional 105,000 shares of common stock. Exceptfor the number of shares issuable upon exercise of the warrants, the new ATAM warrants have substantiallythe same terms as the warrants issued to Mr. Lenfest. In March 2004, ATAM exercised all its warrantsand received a total of 437,820 shares of common stock of the Company. The Company received proceedsof $586,000 from the exercise of these warrants.

                      As a condition of amending the Agreement on August 24, 2004, Mr.Lenfest, holder of the Company’s subordinated debt, agreed to issue to PNC on the Company’sbehalf a limited guarantee to secure up to $5,000,000 in principal amount of any letters of creditissued under the amended facility. In consideration for issuing this guarantee, Mr. Lenfest willreceive a fee of 0.75% per annum of the average amount of letters of credit outstanding, payableon a quarterly basis, and a warrant to purchase 200,000 shares of stock under the same terms andconditions as his existing warrant for 803,048 shares.

                     On February 14, 2005, Mr. Lenfest exercised all of his outstanding warrantsand received 1,003,048 shares of common stock for approximately $3.9 million. Additionally, onFebruary14, 2005, Mr. Lenfest purchased 373,831 shares of the Company’s common stock forapproximately$2.0 million.

                      Under the Note the Company must meet certain financial covenantsincluding a Leverage Ratio, a Fixed Charge Ratio and a Tangible Net Worth Ratio. At February 25,2005 the Company failed to meet any of these financial covenants but has obtained a waiver from Mr.Lenfest. This waiver applies to the period through February 28, 2006. Except as specified, the waiverdoes not |

| 33 |
|----|

| Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| constitute a modification or alteration of any other terms or conditions in the Note, or a release of any of the lender’s rights or remedies, all of which are reserved, nor does it release the Company or any guarantor from any of its duties, obligations, covenants or agreements including the consequences of any Event of Default, except as specified.

                Long-Term Bonds

                On March 15, 2000, the Company issued approximately $5,500,000 of unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds (Series of 2000). Net proceeds from these bonds were used to repay a $4,100,000 advance taken on the Company’s revolving credit facility and to finance construction of an addition to the Company’s main plant in Southampton, Pennsylvania. The bonds are secured by a $5,000,000 irrevocable direct pay Letter of Credit issued by the Company’s main lender which expires on February 17, 2006 and which is secured by all assets of the Company. The bonds carry a maturity date of April 1, 2020, bear a variable interest rate which adjusts each week to a rate required to remarket the bonds at full principal value (currently at 3.19% on May 6, 2005) with a cap of 17%, and are subject to mandatory redemption of $275,000 per year for 19 years and $245,000 for the 20th year.

                The following table summarizes the Company’s long-term bonds as of February 25, 2005 (amounts in thousands): |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

| Twenty year variable rate bonds                                                    | $            | 5,500        |    |
|------------------------------------------------------------------------------------|--------------|--------------|--------------|
|                                                                          |    |    |    |
| Redemption (mandatory)                                                             |    | (1,130       | )            |
|                                                                                    |              |              |
|                                                                          |    |    |    |
|          Balance at February 25, 2005 | $            | 4,370        |    |
|                                                                          |              |    |
|                                                                                    |              |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 Fair Value

                The carrying value of these financial instruments approximates their fair values at February 25, 2005.

                Liquidity

                      Given the Company’s inability to borrow cash under the amendedAgreement, the Company may need to obtain additional sources of capital in order to continue growingand operating our business. This capital may be difficult to obtain and the cost of this additionalcapital is likely to be relatively high. Because we have established businesses in many markets,significant fixed assets including a building and other valuable business assets which can be usedfor security, we believe that we will be able to locate such additional capital and that the actionsby PNC will not have a long-term material adverse effect on our business. 

                The Company believes that existing cash balances at February 25, 2005, cash generated from operatingactivities as well as future availability under its credit agreement will be sufficient to meetitsfuture obligations through at least February 25, 2006. 

                In reference to the Company’s outstanding claims with the U.S. Navy, to the extent the Companyis unsuccessful in recovering a significant portion of recorded claim contract costs, and to theextent that significant additional legal expenses are required to bring the dispute to resolution,such events could have a material adverse effect on the Company’s liquidity and results ofoperations.Historically, the Company has had a favorable experience in that recoveries have exceededrecordedclaims, including significant settlement agreements in fiscal 2003, 2004 and 2005. (SeeNote 3to the Consolidated Financial Statements, Accounts Receivable).

8.             Leases:  

                OperatingLeases

                The Company leases certain premises and office equipment under operating leases, which expire overthe next five years. Future minimum rental payments required under noncancellable operating leaseshaving a remaining term expiring after one fiscal year as of February 25, 2005 are $156,000 in 2006;$118,000 in 2007; $106,000 in 2008; $94,000 in 2009; and $266,000 in 2010 and thereafter.

                Total rental expense for all operating leases for the fiscal years ended February 27, 2005, February28, 2004 and February 22, 2003 was $198,000, $241,000 and $255,000, respectively. |

| 34 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

| 9.             Income Taxes:  

                Thecomponents of the provision for income taxes are as follows: |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                        |

|                                 |                                            |              |                                            |
|---------------------------------|--------------------------------------------|--------------|--------------------------------------------|
|                       | **(amounts in thousands)**                 |    |
|                            | **52 Weeks Ended       February 25, 2005** |         | **52 Weeks Ended       February 27, 2004** |   | **53 Weeks Ended       February 28, 2003** |   |
|                            |                                            |         |                                            |   |  |   |
| Currently (receivable)/payable: |                                  |    |                                  |    |    |    |    |    |    |
| Federal                         | $                                          | (909         | )                                          | $ | (738 | ) | $ | 285 |   |
| State                           |                                       | —       |                                       |   | — |   |   | 188 |   |
| Foreign taxes                   |                                       | (44          | )                                          |   | 96 |   |   | 19 |   |
|                            |                                            |         |                                            |   |  |   |
|                            |                                       | (953         | )                                          |   | (642 | ) |   | 492 |   |
|                            |                                            |         |                                            |   |  |   |
| Deferred:                       |
| Federal                         |                                       | (199         | )                                          |   | (101 | ) |   | 282 |   |
| State                           |                                       | 34           |                                       |   | (67 | ) |   | 31 |   |
|                            |                                            |         |                                            |   |  |   |
|                            |                                       | (165         | )                                          |   | (168 | ) |   | 313 |   |
|                            |                                            |         |                                            |   |  |   |
|                            | $                                          | (1,118       | )                                          | $ | (810 | ) | $ | 805 |   |
|                            |                                            |         |                                            |   |  |   |

|                                                                                               |
|----------------------------------------------------------------------------------------------------|
| A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows: |
|                                                                                               |

|                                                                                   |                                            |        |                                            |
|-----------------------------------------------------------------------------------|--------------------------------------------|--------|--------------------------------------------|
|                                                                              | **52 Weeks Ended       February 25, 2005** |   | **52 Weeks Ended       February 27, 2004** |   | **53 Weeks Ended       February 28, 2003** |   |
|                                                                              |                                            |   |                                            |   |  |   |
| Statutory income tax                                                              | (34.0                                      | )%     | (34.0                                      | )% | 34.0 | % |
| State income tax, net of federal tax benefit                                      | 0.2                                        |   | (4.1                                       | ) | 3.7 |   |
| Benefit of foreign sales corporation   and extraterritorial income | (0.0                                       | )      | (9.1                                       | ) | (4.5 | ) |
| Research and experimentation and   other tax credits               | (1.6                                       | )      | (9.2                                       | ) | (5.0 | ) |
| Benefit of foreign and foreign-source   income or loss             | (0.3                                       | )      | (0.0                                       | ) | (0.0 | ) |
| Change in valuation allowance                                                     | 24.3                                       |   | 0.0                                        |   | 0.0 |   |
| Other, net                                                                        | (0.8                                       | )      | 6.0                                        |   | (3.5 | ) |
|                                                                              |                                            |   |                                            |   |  |   |
|                                                                              | (12.2                                      | %)     | (50.4                                      | )% | 24.7 | % |
|                                                                              |                                            |   |                                            |   |  |   |

|                                                                 |
|----------------------------------------------------------------------|
| The tax effects of the primary temporary differences are as follows: |

| 35 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|

|        |
|--------|
|   |

|        |                                                                                                           |        |        |
|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|
|   |                                                                                                      |   |   | **(amounts in thousands)** |   |   |
|   |                                                                                                      |   |   | **2005** |   | **2004** |   | **2003** |   |   |
|        |                                                                                                           |        |        |  |  |  |  |
|   | Deferred tax assets:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
|   |    Net products liability settlement                                                       |   |   |   | — |   |   | — |   |   | 75 |   |   |
|   |    Vacation reserve                                                                        |   |   |   | 51 |   |   | 44 |   |   | 44 |   |   |
|   |    Inventory reserve                                                                       |   |   |   | 214 |   |   | 212 |   |   | 244 |   |   |
|   |    Receivable reserve                                                                      |   |   |   | 8 |   |   | 8 |   |   | 168 |   |   |
|   |    Warranty reserve                                                                        |   |   |   | 184 |   |   | 142 |   |   | 47 |   |   |
|   |                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
|   |    Compensation reserves                                                                   |   |   |   | 136 |   |   | — |   |   | — |   |   |
|   |                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
|   |    Net operating loss and credits                                                          |   |   |   | 3,172 |   |   | 302 |   |   | — |   |   |
|   |    Other, net                                                                              |   |   |   | 252 |   |   | 629 |   |   | 111 |   |   |
|   |                                                                                                           |   |        |   |  |   |   |
|   |                                                                                                      |   |   |   | 4,017 |   |   | 1,337 |   |   | 689 |   |   |
|   |                                                                                                           |   |        |   |  |   |   |
|   |            Valuation Reserve                       |   |   |   | (2,231 | ) |   | — |   |   | — |   |   |
|   |                                                                                                           |   |        |   |  |   |   |
|   |                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
|   |            Total current deferred tax asset        |   |   | $ | 1,786 |   | $ | 1,337 |   | $ | 689 |   |   |
|   |                                                                                                           |   |        |   |  |   |   |
|   | Deferred tax liabilities:                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
|   |    Amortization of capitalized software                                                    |   |   | $ | 1,419 |   | $ | 1,166 |   | $ | 724 |   |   |
|   |    Depreciation                                                                            |   |   |   | 367 |   |   | 336 |   |   | 298 |   |   |
|   |                                                                                                           |   |        |   |  |   |   |
|   |            Total noncurrent deferred tax liability |   |   | $ | 1,786 |   | $ | 1,502 |   | $ | 1.022 |   |   |
|   |                                                                                                           |   |        |   |  |   |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 Reflecting the Company’s significant losses in the current fiscal year, the Company has approximately$7.2 million of federal and $12.5 million of state net loss carry forwards available to offset futureincome tax liabilities, expiring in 2025. However, due to the uncertain nature of their ultimaterealization based on past performance, and the potential that sufficient taxable income may not begenerated in the near future, the Company has established a full valuation allowance of the sameamount against these carry forward benefits and will recognize these benefits only as reassessmentdemonstrates that they are realizable. Realization is entirely dependent upon future earnings inspecific tax jurisdictions. While the need for this valuation allowance is subject to periodic review,if the allowance is reduced, the tax benefits of the carry forwards will be recorded in future operationsas a reduction of the Company’s income tax expense.

10.           Business Segment Information:  

                The Company primarily manufactures, under contract, various types of high-technology equipment whichit has designed and developed. The Company considers its business activities to be divided into twosegments: Aircrew Training Systems (ATS) and the Industrial Group. The ATS business produces deviceswhich create and monitor the physiological effects of motion, including spatial disorientation andcentrifugal forces for medical, training, research and entertainment markets. The Industrial Groupbusiness produces chambers that create environments that are used for sterilization, research andmedical applications. The following segment information reflects the accrual basis of accounting. |

| 36 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

|                                                    |        |        |                            |
|----------------------------------------------------|--------|--------|----------------------------|
|                                               |   |   | **(amounts in thousands)** |   |
|                                               |   |   | **ATS**                    |   | **Industrial      Group** |   | **Total** |   |
|                                                    |        |        |                            |  |  |  |
| **Fiscal 2005**                                    |   |   |                       |   |   |   |   |   |   |   |   |
| Net sales                                          |   |   | $                          | 16,788 |   | $ | 11,026 |   | $ | 27,814 |   |
| Interest expense                                   |   |   |                       | 1,189 |   |   | 602 |   |   | 1,791 |   |
| Depreciation and amortization                      |   |   |                       | 1,337 |   |   | 1,078 |   |   | 2,415 |   |
| Operating loss                                     |   |   |                       | 4,768 |   |   | 1,518 |   |   | 6,286 |   |
| Income tax benefit                                 |   |   |                       | 715 |   |   | 254 |   |   | 969 |   |
| Goodwill                                           |   |   |                       | 477 |   |   | — |   |   | 477 |   |
| Identifiable assets                                |   |   |                       | 14,899 |   |   | 7,947 |   |   | 22,846 |   |
| Expenditures for segment assets                    |   |   |                       | 228 |   |   | 57 |   |   | 285 |   |
| **Fiscal 2004**                                    |   |   |                       |   |   |   |   |   |   |   |   |
| Net sales                                          |   |   | $                          | 15,880 |   | $ | 10,115 |   | $ | 25,995 |   |
| Interest expense                                   |   |   |                       | 1,293 |   |   | 313 |   |   | 1,606 |   |
| Depreciation and amortization                      |   |   |                       | 881 |   |   | 966 |   |   | 1,847 |   |
| Operating income/(loss)                            |   |   |                       | 1,231 |   |   | (248 | ) |   | 983 |   |
| Income tax provision/(benefit)                     |   |   |                       | 62 |   |   | (318 | ) |   | (256 | ) |
| Goodwill                                           |   |   |                       | 477 |   |   | — |   |   | 477 |   |
| Identifiable assets                                |   |   |                       | 30,002 |   |   | 7,496 |   |   | 37,498 |   |
| Expenditures for segment assets                    |   |   |                       | 380 |   |   | 95 |   |   | 475 |   |
| **Fiscal 2003**                                    |   |   |                       |   |   |   |   |   |   |   |   |
| Net Sales                                          |   |   | $                          | 31,612 |   | $ | 11,511 |   | $ | 43,123 |   |
| Interest expense                                   |   |   |                       | 423 |   |   | 95 |   |   | 518 |   |
| Depreciation and amortization                      |   |   |                       | 1,136 |   |   | 265 |   |   | 1,401 |   |
| Operating income                                   |   |   |                       | 4,979 |   |   | 52 |   |   | 5,031 |   |
| Income tax provision/(benefit)                     |   |   |                       | 1,139 |   |   | (11 | ) |   | 1,128 |   |
| Goodwill                                           |   |   |                       | 477 |   |   | — |   |   | 477 |   |
| Identifiable assets                                |   |   |                       | 26,481 |   |   | 6,348 |   |   | 32,829 |   |
| Expenditures for segment assets                    |   |   |                       | 406 |   |   | 35 |   |   | 441 |   |
|                                               |   |   |                       |   |   |   |   |   |
|                                               |   |   | **2005**                   |   | **2004** |   | **2003** |   |
|                                                    |        |        |                            |  |  |  |
| Reconciliation to consolidated amounts:            |   |   |                       |   |   |   |   |   |   |   |   |
|    Corporate assets                 |   |   |                       | 25,063 |   |   | 10,721 |   |   | 14,869 |   |
|                                                    |        |        |                            |  |  |  |
|    Total assets                     |   |   | $                          | 47,909 |   | $ | 48,696 |   | $ | 47,698 |   |
|    Segment operating (loss)/income  |   |   | $                          | (6,286 | ) | $ | 983 |   | $ | 5,031 |   |
|    Less interest expense            |   |   |                       | (1,791 | ) |   | (1,606 | ) |   | (518 | ) |
|    Income taxes (benefit)/provision |   |   |                       | (969 | ) |   | (256 | ) |   | 1,128 |   |
|                                               |        |   |                            |   |  |   |
|                                               |   |   |                       |   |   |   |   |   |   |   |   |
| Total (loss)/income for segments                   |   |   |                       | (7,108 | ) |   | (367 | ) |   | 3,385 |   |
|                                               |   |   |                       |   |   |   |   |   |   |   |   |
| Corporate home office expense                      |   |   |                       | (846 | ) |   | (852 | ) |   | (915 | ) |
| Interest and other expenses                        |   |   |                       | (308 | ) |   | (130 | ) |   | (338 | ) |
| Income tax benefit                                 |   |   |                       | 149 |   |   | 554 |   |   | 323 |   |
| Minority interest                                  |   |   |                       | — |   |   | 2 |   |   | 38 |   |
|                                               |        |   |                            |   |  |   |
|                                               |   |   |                       |   |   |   |   |   |   |   |   |
| Net (loss)/income                                  |   |   | $                          | (8,113 | ) | $ | (793 | ) | $ | 2,493 |   |
|                                               |        |   |                            |   |  |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 Segment operating income consists of net sales less applicable costs and expenses relating to theserevenues. Unallocated expenses including general corporate expenses, letter of credit fees, interestexpense, and income taxes have been excluded from the determination of the total profit for segments.General corporate expenses are primarily central administrative office expenses. Property, plant,and equipment are not identified with specific business segments because most of these assets areused in each of the segments. 

                Approximately 20% of sales totaling $5,697,000 in 2005 were made to two international customers inthe ATS segment. Approximately 22% of sales totaling $5,714,000 in 2004 were made to two internationalcustomers in the ATS segment. Approximately 57% of sales totaling $24,471,000 in fiscal 2003 weremade to one international and one domestic customer in the ATS segment.

                 Included in the segment information for the year ended February 25, 2005, are export sales of$12,912,000. Of this amount, there are sales to or relating to governments or commercial accountsin Malaysia of $3,388,000 and Egypt of $2,309,000. Sales to the U.S. government and its agenciesaggregated $2,904,000 for the year ended February 25, 2005. |

| 37 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

|                 Included in the segment information for the year ended February 27, 2004, are export sales of $15,421,000.Of this amount, there are sales to or relating to governments or commercial accounts in Malaysiaof $2,874,000 and the United Kingdom of $2,840,000. Sales to the U.S. government and its agenciesaggregated $1,717,000 for the year ended February 27, 2004.

                Included in the segment information for the year ended February 28, 2003 are export sales of $14,805,000.Of this amount, there are sales to or relating to governments or commercial accounts in Malaysiaof $7,203,000. Sales to the U.S. government and its agencies aggregated $4,626,000 for the year endedFebruary 28, 2003.

11.           Stock Options:

A summary of the status of the Incentive Stock Option Plan as of and for the fiscal years ended: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|                                                                                  |        |                       |          |                                                    |        |                       |
|----------------------------------------------------------------------------------|--------|-----------------------|----------|----------------------------------------------------|--------|-----------------------|
|                                                                             |   | **February 25, 2005** |     | **February 27, 2004**                              |   | **February 28, 2003** |   |
|                                                                             |        |                  |          |                                               |        |                  |
|                                                                             |   | **Shares**            |     | **Weighted      average      exercise      price** |   | **Shares**            |   | **Weighted      average      exercise      price** |   | **Shares** |   | **Weighted      average      exercise      price** |   |
|                                                                             |        |                  |          |                                               |        |                  |  |   |  |   |  |   |
|                                                                             |   |                  |     |                                               |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year                                                 |   |                  | 376,002  |                                               | $      | 7.21                  |   |   | 421,614 |   | $ | 7.20 |   |   | 448,514 |   | $ | 7.04 |   |
| Granted                                                                          |   |                  | 33,586   |                                               |   | 7.24                  |   |   | — |   |   | — |   |   | — |   |   | — |   |
| Exercised                                                                        |   |                  | (25,700  | )                                                  |   | 6.35                  |   |   | (17,800 | ) |   | 5.12 |   |   | (4,150 | ) |   | 4.73 |   |
| Forfeited                                                                        |   |                  | (107,726 | )                                                  |   | 7.18                  |   |   | (27,812 | ) |   | 7.74 |   |   | (22,750 | ) |   | 4.52 |   |
|                                                                                  |        |                       |     |                                                    |        |                       |   |  |  |  |   |  |
| Outstanding at end of year                                                       |   |                  | 276,162  |                                               |   | 7.30                  |   |   | 376,002 |   |   | 7.21 |   |   | 421,614 |   |   | 7.20 |   |
|                                                                                  |        |                       |     |                                                    |        |                       |   |  |  |  |   |  |
| Options exercisable at year end                                                  |   |                  | 242,576  |                                               |   |                  |   |   | 370,564 |   |   |   |   |   | 408,981 |   |   |   |   |
| Weighted average fair value of    options granted during the year |   |                  |     |                                               | $      | 3.58                  |   |   |   |   |   | — |   |   |   |   |   | — |   |

|                                                                                                                                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 The following information applies to options outstanding at February 25, 2005: |
|                                                                                                                                                                           |

|                              |        |        |                                                              |        |                                                                                |
|------------------------------|--------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
|                         |   |   | **Options outstanding**                                      |   |                                                                           |   | **Options exercisable** |   |
|                         |   |   |                                                              |   |                                                                           |   |  |   |
| **Range of exercise prices** |   |   | **Number       Outstanding at       February 25,      2005** |   | **Weighted       average       remaining       contractual      life (years)** |   | **Weighted      average       exercise       price** |   | **Number       exercisable at      February 25,    2005** |   | **Weighted      average       exercise      price** |   |
|                              |   |   |                                                              |   |                                                                                |   |  |   |  |   |  |   |
|                         |   |   |                                                         |   |                                                                           |   |   |   |   |   |   |   |
| $2.25 to $3.38               |   |   |                                                         |   | 2,000                                                                          |   |   |   | 1.45 years |   |   |   | $  2.25 |   |   |   | 2,000 |   |   |   | $  2.25 |   |
| $5.00 to $7.50               |   |   |                                                         |   | 85,162                                                                         |   |   |   | 6.2 years |   |   |   | $  6.29 |   |   |   | 51,576 |   |   |   | $  5.67 |   |
| $ 7.81                       |   |   |                                                         |   | 189,000                                                                        |   |   |   | 4.00 years |   |   |   | $  7.81 |   |   |   | 189,000 |   |   |   | $  7.81 |   |
|                         |   |   |                                                         |        |                                                                           |   |   |   |   |   |   |   |   |  |   |   |   |   |
|    Total      |   |   |                                                         |   | 276,162                                                                        |   |   |   |   |   |   |   |   |   |   |   | 242,576 |   |   |   |   |   |

| 38 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

| 12           Commitments and Contingencies: |
|-----------------------------------------------------------------------------------------------|
|                                                                                          |

|   |                  Claims and Litigation: |
|--------|------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 In April 2003, Boenning & Scattergood, Inc. (“B&S”) filed suit against the Companyin the Court of Common Pleas in Philadelphia, Pennsylvania, seeking payment of $902,000 for financingfees allegedly due to B&S pursuant to the terms of an agreement for investment banking serviceswhich was entered into with a predecessor of B&S (the “B&S Agreement). B&S allegedthat it contacted the investors in the Company’s February 2003 financing transaction and thatit earned the claimed financing fees pursuant to the terms of the B&S agreement. The Companyresponded to the complaint and also filed a counterclaim for breach of contract and professionalmalpractice. The Company believes that it has valid defenses to each of the claims of B&S andintends to vigorously defend itself against these claims. B&S and the Company have had some settlementdiscussions but, as of the date of the filing of this Report on Form 10-K, no agreement had beenreached. At this time, the Company is unable to predict the outcome of this matter.

                In June 2003, Associated Mezzanine investors, LLC (“AMI”) filed suit against the Companyin the United States District Court for the Eastern District of Pennsylvania seeking payment of $196,000for costs, fees and expenses allegedly due to AMI pursuant to the terms of an agreement which theCompany entered into with AMI (the “AMI Agreement”). AMI claimed that it located suitableinvestors for the Company’s February 2003 financing transaction and that it earned the claimedfees and is entitled to reimbursement of the claimed costs and expenses pursuant to the terms ofthe AMI Agreement. In March 2004, this suit was settled without any material impact on the Company’sresults of operations.

                In    June 2003, Entertainment Technology Corporation (“EnTCo”), our    wholly-owned subsidiary,  filed suit against Walt Disney World Co. and other    entities (“Disney”) in the United StatesDistrict Court for the Eastern District of Pennsylvania, alleging breach of contract    for, among other  things, failure to pay all amounts due under contract for    the design and production of the amusementpark ride “Mission: Space” located in Disney’s Epcot Center. Inresponse, in August 2003,Disney filed counterclaims against both EnTCo and the Company (under a guarantee)for, among otherthings, alleged failures in performance and design in the contract. Disney isseeking damages in excess of $65 million plus punitive damages. EnTCo and theCompany believe that they have valid defensesto each of Disney’s counterclaims and intend to vigorously defend againstthese counterclaims.  At this time, discovery is completed, summary judgmentmotions have been filed, and the case is scheduledto be placed in the trial pool on June 27, 2005. EnTCo and the Company are unableto predict theoutcome of this matter. 

                Certain other claims, suits, and complaints arising in the ordinary course of business have been filedor are pending against the Company. In the opinion of management, after consultation with legal counselhandling these specific maters, all such matters are reserved for or adequately covered by insuranceor, if not so covered, are without merit or are of such kind, or involve such amounts, as would nothave a significant effect on the financial position or results of operations of the Company if disposedof unfavorably.

13.           Employee Benefit Plan:

                The Company maintains a retirement savings 401(k) plan for eligible employees. The Company’s contributionsto the plan are based on a percentage of the employees’ qualifying contributions. The Company’scontributions totaled $106,000, $107,000 and $112,000 in fiscal 2005, fiscal 2004, and fiscal 2003,respectively.

                The Company has an Employee Stock Purchase Plan which was adopted by the Board of Directors on November3, 1987. All employees meeting service requirements, except officers, directors and 10% shareholders,are eligible to voluntarily purchase common stock through payroll deductions up to 10% of salary.The Company makes a matching contribution of 20% of the employee’s contribution. The Companyhas reserved 270,000 shares for issuance under the plan.

14.           Quarterly Consolidated Financial Information(Unaudited):

                Financial data for the interim periods of fiscal 2005, 2004 and 2003 were as follows (amounts in thousands): |

|        |                                       |        |                   |        |
|--------|---------------------------------------|--------|-------------------|--------|
|   |                                  |   | **Quarter Ended** |   |
|   |                                  |   |                   |   |
|   | **Fiscal Year 2005**                  |   | **May 28**        |   | **August 27** |   | **November 26** |   | **February 25** |   |
|   |                                  |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | Net sales                             |   | $                 | 6,175  |   | $ | 6,523 |   | $ | 7,751 |   | $ | 7,365 |   |
|   | Gross profit                          |   |              | 994    |   |   | 1,021 |   |   | 1,637 |   |   | 2,524 |   |
|   | Operating loss                        |   |              | 1,645  |   |   | 2,392 |   |   | 2,757 |   |   | 336 |   |
|   | Loss before income taxes              |   |              | 2,074  |   |   | 2,819 |   |   | 3,254 |   |   | 1,082 |   |
|   | Minority interest                     |   |              | 1      |   |   | — |   |   | (1 | ) |   | — |   |
|   | Net loss                              |   |              | 1,461  |   |   | 1,984 |   |   | 3,249 |   |   | 1,419 |   |
|   | Loss per common share:                |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   |      Basic   |   |              | .19    |   |   | .26 |   |   | .43 |   |   | .18 |   |
|   |      Diluted |   |              | .19    |   |   | .26 |   |   | .43 |   |   | .18 |   |

| 39 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

|        |                                       |        |                   |        |
|--------|---------------------------------------|--------|-------------------|--------|
|   |                                  |   | **Quarter Ended** |   |
|   |                                  |   |                   |   |
|   | **Fiscal Year 2004**                  |   | **May 30**        |   | **August 29** |   | **November 28** |   | **February 27** |   |
|   |                                  |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | Net sales                             |   | $                 | 6,130  |   | $ | 4,752 |   | $ | 7,115 |   | $ | 7,998 |   |
|   | Gross profit                          |   |              | 2,287  |   |   | 1,786 |   |   | 1,774 |   |   | 4,096 |   |
|   | Operating income (loss)               |   |              | 520    |   |   | (395 | ) |   | (700 | ) |   | 706 |   |
|   | Income (loss) before income taxes     |   |              | 133    |   |   | (862 | ) |   | (987 | ) |   | 111 |   |
|   | Minority interest                     |   |              | (4     | ) |   | (2 | ) |   | (3 | ) |   | 6 |   |
|   | Net income (loss)                     |   |              | 70     |   |   | (622 | ) |   | (704 | ) |   | 463 |   |
|   | Earnings (loss) per common share:     |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   |      Basic   |   |              | .01    |   |   | (.09 | ) |   | (.10 | ) |   | .06 |   |
|   |      Diluted |   |              | .01    |   |   | (.09 | ) |   | (.10 | ) |   | .06 |   |

|        |                            |        |                   |        |
|--------|----------------------------|--------|-------------------|--------|
|   |                       |   | **Quarter Ended** |   |
|   |                       |   |                   |   |
|   | **Fiscal Year 2003**       |   | **May 24**        |   | **August 23** |   | **November 22** |   | **February 23** |   |
|   |                       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | Net sales                  |   | $                 | 11,207 |   | $ | 11,041 |   | $ | 12,162 |   | $ | 8,713 |   |
|   | Gross profit               |   |              | 3,583  |   |   | 3,263 |   |   | 3,579 |   |   | 3,773 |   |
|   | Operating income           |   |              | 1,075  |   |   | 1,108 |   |   | 874 |   |   | 1,059 |   |
|   | Income before income taxes |   |              | 831    |   |   | 936 |   |   | 584 |   |   | 909 |   |
|   | Minority interest          |   |              | (27    | ) |   | (5 | ) |   | (6 | ) |   | — |   |
|   | Net income                 |   |              | 585    |   |   | 736 |   |   | 436 |   |   | 736 |   |
|   | Earnings per common share: |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | Basic                      |   |              | .08    |   |   | .10 |   |   | .06 |   |   | .10 |   |
|   | Diluted                    |   |              | .08    |   |   | .10 |   |   | .06 |   |   | .10 |   |

| 40 |
|----|

| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

| **ENVIRONMENTAL TECTONICS CORPORATION AND SUBSIDIARIES SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS**(amounts in thousands) |
|-----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                        |

|                                                                                                 |        |        |                                               |        |
|-------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------|--------|
| **Column A**                                                                                    |   |   | **Column B**                                  |   | **Column C** |   | **Column D** |   | **Column E** |   |
|                                                                                                 |   |   |                                               |   |  |   |  |   |  |   |
|                                                                                            |
| **Description**                                                                                 |   |   | **Balance at       Beginning      of Period** |   | **Charges/      (Credits)       to Costs/       Expenses** |   | **Reductions (1)** |   | **Balance At      End of       Period** |   |
|                                                                                                 |   |   |                                               |   |  |   |  |   |  |   |
|                                                                                            |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Year ended February 25, 2005:                                                                   |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|     Valuation and qualifying accounts related to:                           |   |   |
|            Accounts receivable           |   |   | $                                             | 379    |   | $ | 126 |   | $ | 19 |   | $ | 486 |   |
|            Inventory                     |   |   | $                                             | 564    |   | $ | 300 |   | $ | 133 |   | $ | 731 |   |
|            Property, plant and equipment |   |   | $                                             | 10,651 |   | $ | 840 |   | $ | — |   | $ | 11,491 |   |
|            Software development costs    |   |   | $                                             | 7,670  |   | $ | 988 |   | $ | — |   | $ | 8,658 |   |
|            Other assets                  |   |   | $                                             | 434    |   | $ | 587 |   | $ | — |   | $ | 1,021 |   |
|                                                                                            |   |   |
| Year ended February 27, 2004:                                                                   |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|     Valuation and qualifying accounts related to:                           |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|            Accounts receivable           |   |   | $                                             | 446    |   | $ | 43 |   | $ | 110 |   | $ | 379 |   |
|            Inventory                     |   |   | $                                             | 646    |   | $ | 200 |   | $ | 282 |   | $ | 564 |   |
|            Property, plant and equipment |   |   | $                                             | 9,976  |   | $ | 675 |   | $ | — |   | $ | 10,651 |   |
|            Software development costs    |   |   | $                                             | 6,819  |   | $ | 851 |   | $ | — |   | $ | 7,670 |   |
|            Other assets                  |   |   | $                                             | 113    |   | $ | 321 |   | $ | — |   | $ | 434 |   |
|                                                                                            |   |   |
| Year ended February 28, 2003                                                                    |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|     Valuation and qualifying accounts related to:                           |   |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|            Accounts receivable           |   |   | $                                             | 373    |   | $ | 137 |   | $ | 64 |   | $ | 446 |   |
|            Inventory                     |   |   | $                                             | 738    |   | $ | 108 |   | $ | 200 |   | $ | 646 |   |
|            Property, plant and equipment |   |   | $                                             | 9,303  |   | $ | 673 |   | $ | — |   | $ | 9,976 |   |
|            Software development costs    |   |   | $                                             | 6,166  |   | $ | 653 |   | $ | — |   | $ | 6,819 |   |
|            Other assets                  |   |   | $                                             | 113    |   | $ | — |   | $ | — |   | $ | 113 |   |

|                               |
|------------------------------------|
| (1) Amounts written off or retired |

| 41 |
|----|