ENVIRONMENTAL TECTONICS CORP, 10KSB40, 1999-05-27

ENVIRONMENTAL TECTONICS CORP
10KSB40, 1999-05-27
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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

[x] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act Of 1934 For the fiscal year ended
February 26, 1999

[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [no fee required]

For the transition period from ____________ to ____________.

Commission File Number 1-10655

ENVIRONMENTAL TECTONICS CORPORATION
(Exact name of small business issuer in its charter)

Pennsylvania 23-1714256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

County Line Industrial Park
Southampton, Pennsylvania 18966
(Address of principal executive offices) (Zip Code)

Issuer's telephone number, including area code (215) 355-9100

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share
(Title of Class)

Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

Yes x No ___

Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[x]

As of May 17, 1999, the aggregate market value of the
Registrant's common stock held by non-affiliates of the
Registrant was approximately $33,993,000.
<PAGE 1>
As of May 17, 1999, there were 6,838,528 shares of Registrant's
common stock, $0.10 par value per share, issued and outstanding
(restated for a 2 for 1 stock split declared on February 25,
1999).

DOCUMENTS INCORPORATED BY REFERENCE. Portions of Registrant's
1999 Annual Report to Shareholders (the "Annual Report") are
incorporated by reference in Part II, Items 5, 6, 7, and 8.

Transitional Small Business Disclosure Format: Yes ___ No x
<PAGE 2>
PART I

Item 1. Description of Business

(a) Business Development

Environmental Tectonics Corporation ("ETC" or the
"Company"), a Pennsylvania corporation, incorporated in 1969, is
principally engaged in the design, manufacture and sale of
software driver products used to A) create and monitor the
physiological effects of motion on humans and the physical
effects on equipment, and B) control, modify, simulate and
measure environmental conditions. These products include aircrew
training systems, entertainment products, sterilizers,
environmental and hyperbaric chambers, and other products which
involve similar manufacturing techniques and engineering
technologies.

(b) Business of the Company

The company operates in two primary business segments,
Aircrew Training Systems and Industrial Simulation.

Aircrew Training Systems ("ATS"). This segment includes
three primary product groups.

The Company's aircrew training devices are used for medical
research, advanced flight training, and for the indoctrination
and testing of military and commercial pilots. The major devices
sold in this product area are commercial flight simulators, high
altitude decompression chambers, hyperbaric (high-pressurized
oxygen) chambers, night vision trainers, water survival training
equipment, disorientation training equipment, human centrifuges,
and ejection seat trainers. The Company provides operation and
maintenance services for installed equipment it manufactures as
well as equipment produced by others.

The Company's entertainment products consist of motion-based
simulation rides and other products.

The Company's Disaster Management Systems line includes
real-time interactive training programs that allow instruction on
various disaster situations.

The aircrew training system class of products as a whole
represented 84% and 75% of consolidated revenues of the Company
for the years ended February 26, 1999 and February 27, 1998,
respectively.

Industrial Simulation. This segment includes three primary
product groups:
<PAGE 3>
Sterilizers. The Company manufactures steam and gas
sterilizers used for various industrial and pharmaceutical
applications. The Company concentrates on marketing the larger
custom-designed sterilizers to the pharmaceutical and medical
device industries.

Environmental Systems and Other Products. The Company's
environmental systems business consists of the design and
fabrication of sampling and analysis systems, and test equipment
and systems. The simulation systems generally consist of an
enclosed chamber with instrumentation and equipment which enable
the customer to control and modify such environmental factors as
temperature, pressure, humidity, wind velocity and gas content to
produce desired conditions. These products include controlled
air systems for automotive companies and environmental chambers

Hyperbaric Products. The Company's Hyperbaric line includes
monoplace and multiplace chambers for decompression and wound
care applications.

Sales in this class of products were 16% and 25% of
consolidated revenues of the Company for the years ended
February 26, 1999 and February 27, 1998, respectively.

The Company also provides control operator repair and
maintenance service for its own and other manufacturers'
equipment.

Marketing

The Company currently markets its products and services
primarily through its officers and employees. At February 26,
1999, approximately 18 employees were committed to sales and
marketing functions. The Company uses branch offices in the
United Kingdom, the Middle East, and Asia as well as the services
of approximately 100 independent sales organizations in seeking
foreign orders for its products.

Product Development

New products and improvements in existing products are being
continually developed in response to inquiries from customers and
to management's determination that particular products should be
produced or significantly improved. Although the Company does
not have a separate research and development group, there are
technical personnel whose main activity is the development and
integration of new technologies into our existing products.
These personnel include the Vice-President of Engineering and the
Vice-President of New Product Development whose additional
activity is the introduction of product extensions and new
applications of existing technology.

Within the Aircrew Training Segment, product development
emphasizes enhancing control systems, and software graphics, and
<PAGE 4> exploring commercial possibilities. The Company's
product development efforts will be focused on two areas:

- Disaster Management Simulation. Subsequent to year-end
the company received a major contract from the City of
Chicago to develop, install and maintain a computer-
based Incident Command Simulator. The company will
continue to explore product applications and extensions
to this Intelligent Virtual Reality product.

- Gyro-Product Line. These products address the need for
a relatively low cost flight and spatial disorientation
trainer.

On April 16, 1999, the Company formed a new wholly owned
subsidiary, Entertainment Technology Corporation, to handle all
of the Company's future entertainment projects. Product
development in this class will emphasize entertainment
applications of our proven ATS simulation technology.

The Company reported research and development costs of
approximately $397,000 and $148,000 for the years ended
February 26, 1999 and February 27, 1998, respectively. However,
the majority of the Company's research and development efforts
are not separately identified and recorded. Instead, they are
expressed as part of project job costs in the cost of sales.

Supplies

The components being used in the assembly of systems and the
parts used to manufacture the Company's products are purchased
from equipment manufacturers, electronics supply firms and
others. To date, the Company has had no difficulty in obtaining
supplies. Further, all raw materials, parts, components, and
other supplies used by the Company in the manufacture of its
products can be obtained at competitive prices from alternate
sources should existing sources of supply become unavailable.

Patents and Trademarks

The Company has no patents or trademarks which it considers
significant to its operations, except a patent on the GYROLAB
Spatial Disorientation Trainer which expires in December 2004.

Customers

In the current year and recent past, it has been the
Company's experience that a substantial portion of sales are made
to a small number of customers that vary within any given year.
The Company's business does not depend upon repeat orders from
these same customers. Sales of aircrew training systems are made
principally to U.S. and foreign governmental agencies. Sales of
sterilizers and environmental systems are made to commercial and
governmental entities worldwide.
<PAGE 5>
In fiscal 1999, the Company's major customers included the
United Kingdom, which accounted for $7,005,000, or 24%, of the
Company's sales. These governmental entities do not have any
relationship with the Company other than as customers.

Foreign and Domestic Operations and Export Sales

During the years ended February 26, 1999 and February 27,
1998, approximately $1,158,000 (4.0%) and $2,936,000 (10%),
respectively, of the Company's net revenues were attributable to
contracts with agencies of the U.S. Government or with other
customers who had prime contracts with agencies of the federal
government.

During the years ended February 26, 1999 and February 27,
1998, approximately $22,876,000 (78%) and $17,490,000 (60%),
respectively, of the Company's net revenues were attributable to
export sales or sales for export. (See Note 11 to the Company's
consolidated financial statements incorporated herein by
reference to the Annual Report.) On export sales, customers'
obligations to the Company are secured by irrevocable letters of
credit based on the credit worthiness of the Customer.

The Company does not believe that the distribution of its
sales for any particular period is necessarily indicative of the
distribution expected for any other period.

A large portion of the Company's sales are under long-term
contracts requiring more than one year to complete. The Company
accounts for sales under long-term contracts on the percentage of
completion basis. (See Note 1 to the Company's consolidated
financial statements incorporated herein by reference to the
Annual Report.)

The Company's U.S. Government contracts contain standard
terms permitting termination for the convenience of the
Government. In the event of termination of such contracts, the
Company is entitled to receive reimbursement on the basis of work
completed (cost incurred plus a reasonable profit), recording the
amounts anticipated to be recovered from termination claims in
income as soon as those amounts can be reasonably determined
rather than at the time of final settlement. All costs
applicable to a termination claim are charged as an offsetting
expense concurrently with the recognition of income from the
claim.

Backlog

The Company's sales backlog at February 26, 1999 and
February 27, 1998 for work to be performed and revenue to be
recognized under written agreements after such dates was
approximately $32,141,000 and $27,523,000, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 26, 1999 and February 27, 1998 for work to be
performed and revenue to be recognized after that date under
<PAGE 6> written agreements was approximately $1,311,000 and
$2,925,000, respectively. Of the 1999 backlog, approximately
$26,380,000 is under contracts for aircrew training systems and
maintenance support. Approximately 83% of the 1999 backlog is
expected to be completed prior to February 25, 2000.

Competition

The Company's business strategy in recent years has been to
seek niche markets in which there are not numerous competitors.
However, in some areas of its business the Company competes with
well-established firms, some of which have substantially greater
financial and personnel resources.

Some competitor firms have technical expertise and
production capabilities in one or more of the areas involved in
the design and production of physiological flight training
equipment, environmental systems, and other specially designed
products, and compete with the Company for this business. The
competition for any particular project generally is determined by
the technological requirements of the project, with consideration
also being given to a bidder's reliability, product performance,
past performance, and price.

The Company faces particularly intense competition from a
number of firms in the sale of hospital sterilizers but faces
less competition in the sale of the larger custom-designed
industrial sterilizers.

The Company believes that it is a significant participant in
the markets in which it competes, especially in aircrew training
systems in which the Company believes it is a principal provider
of this type of equipment and training in its market area.

Compliance with Environmental Laws

The Company has not incurred during fiscal 1999 nor does it
anticipate incurring during fiscal 2000 any material capital
expenditures to maintain compliance with Federal, state and local
statutes, rules and regulations concerning the discharge of
materials into the environment, nor does the Company anticipate
that compliance with these provisions will have a material
adverse effect on its earnings or competitive position.

Employees

On February 26, 1999, the Company had 183 full-time
employees, of whom 5 were employed in executive positions, 52
were engineers, engineering designers, or draftpeople, 39 were
administrative (sales, accounting, etc.) and clerical personnel,
and 87 were engaged principally in production and operations.
<PAGE 7>
Item 2. Description of Property

The Company owns its executive offices and principal
production facilities located on a 5-acre site in the County Line
Industrial Park, Southampton, Pennsylvania in an approximately
70,000 square foot steel and masonry building. Approximately
55,000 square feet are devoted to manufacturing, and
15,000 square feet to office space. The original building was
erected in 1969 and additions were made in 1973, 1976, 1985 and
1991. This property collateralizes the Company's revolving
credit facility.

The Company considers its machinery and plant to be in
satisfactory operating condition and adequate for the Company's
present level of business. Increases in the level of operations
beyond that expected in the current fiscal year might require the
Company to obtain additional facilities and equipment.

Item 3. Legal Proceedings

A lawsuit was commenced against the Company in April 1997 in
the United States District Court for the District of Puerto Rico
by an employee of a customer who claims to have been injured as a
result of an alleged malfunction of a sterilizer manufactured by
the Company. The plaintiff is seeking $3 million in damages.
Based on the available information, the Company believes that it
possesses meritorious defenses to such action. The Company has
up to $10 million of products liability coverage, subject to a
$100,000 deductible. The Company has notified its insurer of
the lawsuit, and the Company's insurer has engaged counsel to
defend the Company in this matter.

Certain other claims, suits and complaints arising in the
ordinary course of business have been filed or are pending
against the Company. In the opinion of management, all such
matters are reserved for or are adequately covered by insurance
or, if not so covered, are without merit or are of such kind, or
involve such amounts as would not have a significant effect on
the financial position of the Company if disposed of unfavorably.

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

None.
<PAGE 8>
PART II

Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters

See information appearing under the heading "Market for the
Registrant's Common Stock and Related Security Holder Matters" in
the Annual Report, attached hereto as Exhibit 13 and incorporated
herein by reference.

Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations

See information appearing under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report, attached hereto as Exhibit 13
and incorporated herein by reference.

Item 7. Financial Statements

See the information appearing under the headings
"Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements" in the Annual Report, attached hereto as
Exhibit 13 and incorporated herein by reference.

Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

Not applicable.
<PAGE 9>
PART III

Item 9. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act

The following table sets forth certain information with
respect to the directors of the Registrant:

<TABLE>
<CAPTION>
Served
as Principal Occupations
Director and Positions and
or Officer Offices with the
Name Age Since(1) Company
<S> <C> <C> <C>
William F. Mitchell(2) 57 1969 Chairman of the Board,
President and Director

Richard E. McAdams(3) 63 1985 Executive Vice President
and Director

Philip L. Wagner, Ph.D.(4) 63 1993 Director

Pete L. Stephens, M.D.(5) 61 1974 Director

Craig Macnab(6) 43 1997 Director

Duane D. Deaner(7) 51 1996 Chief Financial Officer
____________________
</TABLE>

(1) Directors serve one-year terms.

(2) Mr. Mitchell has been Chairman of the Board, President and
Chief Executive Officer of the Company since 1969, except
for the period from January 24, 1986 through January 24,
1987, when he was engaged principally in soliciting sales
for the Company's products in the overseas markets.

(3) Mr. McAdams has been with the Company since 1970. He became
a Vice President in 1978 with responsibility for contract
administration. Mr. McAdams became Executive Vice President
of the Company in 1990.

(4) Dr. Wagner is an organic chemist with over 30 years of
diversified experience managing research and development and
new business development at E.I. du Pont de Nemours &
Company and thereafter founded Chadds Ford Technologies,
Inc., a consulting firm. He is currently President of
Chadds Ford Technologies, Inc.

(5) Dr. Stephens has been a physician engaged in the private
practice of medicine for 30 years.

(6) Between January 1997 and March 1999, Mr. Macnab was the
President of Tandem Capital, Inc., a wholly owned subsidiary
<PAGE 10> of Sirrom Capital Corporation (now FINOVA
Mezzanine Capital ("FINOVA"). Mr. Macnab has served as a
Director of the Company since June 1997, and, until March
1999, his Board seat was as a representative of FINOVA.
Mr. Macnab now serves as an independent member of the Board
of Directors. From 1993 to 1996, Mr. Macnab served as the
general partner of MacNiel Advisors, Inc., the general
partner of three private funds that invested in the publicly
traded securities of small public companies. From 1987 to
1993, Mr. Macnab was a partner of J.C. Bradford & Co., a
regional brokerage firm, jointly responsible for the merger
and acquisition department and a private mezzanine capital
fund. From 1981 to 1987, Mr. Macnab was employed by Lazard
Freres & Co. Mr. Macnab is also a director of JDN Realty,
Smart Choice Automotive Group and Teltronics, Inc.

(7) Mr. Deaner has served as Chief Financial Officer of the
Company since January 1996. Mr. Deaner served as Vice
President of Finance for Pennfield Precision Incorporated
from September 1988 to December 1995.

Committees of the Board of Directors

During the year ended February 26, 1999, the Company had an
Audit Committee consisting of the following directors:
Messrs. Mitchell, Philip L. Wagner and Dr. Pete L. Stephens. The
independent outside directors also served on the Company's
Compensation Committee during the year ended February 26, 1999.
The Audit Committee is charged with reviewing and overseeing the
Company's financial systems and internal control procedures and
conferring with the Company's independent accountants with
respect thereto. The Compensation Committee is charged with
reviewing the compensation and incentive plans of officers and
key personnel.

During the year ended February 26, 1999, the Board of
Directors held 4 meetings and the Audit Committee and
Compensation Committee each held 1 meeting. All members of the
Board attended all of the meetings of the Board held while they
were members of the Board. All members of the Audit Committee
and Compensation Committee attended all meetings of the Committee
held while they were members thereof.

Compliance With Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and
the American Stock Exchange. Officers, directors and greater
than ten percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) Forms they
file. The rules of the SEC regarding the filing of such
<PAGE 11> statement require that "late filings" of such
statements be disclosed in the Company's proxy statement.

Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the
Company believes that, during the fiscal year ended February 26,
1999, its officers, directors and greater than ten percent
beneficial owners complied with all applicable filing
requirements.

Item 10. Executive Compensation

REMUNERATION OF DIRECTORS AND OFFICERS

The following table sets forth compensation paid by the
Company to the Chief Executive Officer for services rendered
during fiscal years 1999, 1998 and 1997. There are no other
executive officers whose total annual salary and bonus exceeds
$100,000. The footnotes to the table provide additional
information concerning the Company's compensation and benefit
programs.

SUMMARY COMPENSATION TABLE

Annual Compensation
Other
Name and Annual All Other
Principal Fiscal Compen- Compen-
Position Year Salary($) Bonus($) sation($)(1) sation($)(2)
<S> <C> <C> <C> <C> <C>
William F. Mitchell, 1999 $197,970 $ - $ - $3,876
President and Chief 1998 178,450 - - 3,876
Executive Officer 1997 113,780 - - 2,731
</TABLE>

(1) The Company's executive officers receive certain
perquisites. For fiscal years 1999, 1998 and 1997, the
perquisites received by Mr. Mitchell did not exceed the
lesser of $50,000 or 10% of his salary and bonus.

(2) These amounts represent the Company's contribution to the
Retirement Savings Plan.

Directors of the Company who are not officers of the Company
are paid $600 for Board of Directors meetings which they attend.
Additional compensation is not paid for committee meetings.

Item 11. Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth as of May 17, 1999, the
number of shares and percentage of the Company's Common Stock
owned beneficially by each director, each executive officer named
<PAGE 12> in the Summary Compensation Table, and each person
holding, to the Company's knowledge, more than 5% of the
outstanding Common Stock. The table also sets forth the holdings
of all directors and executive officers as a group. All share
amounts have been restated to reflect a 2 for 1 stock split
declared on February 25, 1999.

<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Name and Address of Beneficial Owner Ownership Class

<S> <C> <C>
William F. Mitchell (1) 1,837,898 26.9%
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966

Pete L. Stephens, M.D. (2) 663,800(3) 9.7%
1 Eleni Lane
West Chester, PA 19382

Richard E. McAdams (4) 30,802(5) 1.0%
c/o Environmental Tectonics
Corporation
County Line Industrial Park
Southampton, PA 18966

Philip L. Wagner, Ph.D. (6) 12,000(7) *
Chadds Ford Technologies, Inc.
P.O. Box 377
Chadds Ford, PA 19317

Craig Macnab 0 *
428 Westview Avenue
Nashville, TN 37205

FINOVA Mezzanine Capital 965,886(8) 13.5%
500 Church Street, Suite 200
Nashville, TN 37219

Emerald Advisors, Inc. 622,030(9) 9.1%
1857 William Penn Way
P.O. Box 10666
Lancaster, PA 17605-0666

All directors and executive
officers as a group (6 persons) 2,548,250(10) 37.2%
* less than 1%
- --------------------
</TABLE>

(1) Chairman of the Board, President and Director of the
Corporation. Shares of Common Stock include 192,000 shares
held by Mr. Mitchell's wife.

(2) Director of the Corporation.
<PAGE 13>
(3) Includes 18,000 shares held by or for the benefit of
Dr. Stephens' wife and two of his children.

(4) Director of the Corporation.

(5) Includes options to purchase 3,750 shares of Common Stock
held under the Company's Incentive Stock Option Plan which
are presently exercisable.

(6) Director of the Corporation.

(7) Includes 8,000 shares of Common Stock held by or for the
benefit of Dr. Wagner's wife.

(8) Shares listed for FINOVA Mezzanine Capital include 332,820
shares of Common Stock underlying a presently exercisable
warrant to purchase such shares.

(9) As reported in a Schedule 13G, dated January 21, 1999, filed
by Emerald Advisers, Inc. ("Emerald"). As reported in the
Schedule 13G, Emerald has sole voting power with respect to
218,725 shares of Common Stock and sole dispositive power
over 311,015 shares of Common Stock.

(10) Includes 3,750 and 3,750 shares of Common Stock which may be
acquired by Director McAdams and Duane Deaner, Chief
Financial Officer, respectively, upon the exercise of
options granted under the Company's Incentive Stock Option.

Item 12. Certain Relationships and Related Transactions

Set forth below is information concerning loans made to the
Company by certain affiliates.

Original Annual
Principal Percentage
Name of Date of Amount Interest Date of
Lender(s) Loan of Loan Rate Satisfaction
<S> <C> <C> <C> <C>
Pete L. Stephens(1) 12/11/96 $100,000.00 10% 4/14/98
Pete L. Stephens(1) 01/02/97 $ 60,000.00 10% 4/14/98
Pete L. Stephens(1) 01/08/97 $100,000.00 10% 4/14/98
Pete L. and Anita Stephens(2) 01/08/97 $ 40,000.00 10% 4/14/98
Christine Walters(3) 01/08/97 $ 35,000.00 10% 03/6/98
Christine Walters(3) 01/08/97 $165,000.00 10% 03/6/98
William F. Mitchell(4) 02/07/97 $300,000.00 10% 02/9/99
</TABLE>

(1) Director of the Corporation.

(2) Dr. Stephens is a director of the Corporation.
Anita Stephens is the spouse of Doctor Stephens.

(3) Christine Walters is the daughter of William F. Mitchell,
Chairman of the Board, President and Director of the
Corporation. <PAGE 14>

(4) Mr. Mitchell is Chairman of the Board, President and
Director of the Corporation.

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits:

Number Item

3.1 Registrant's Articles of
Incorporation, as amended, were filed
as Exhibit 3.1. to Registrant's Form 10-K
for the year ended February 28, 1997 and
are incorporated herein by reference.

3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and are
incorporated herein by reference.

4.1 12% Subordinated Debenture due
March 27, 2004 was filed as
Exhibit 4.1 to Registrant's Form 10-K
for the year ended February 28, 1997
and is incorporated herein by reference.

10.1 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*

10.2 Registrant's Employee Stock
Purchase Plan was filed on July 6,
1988 as Exhibit A to the Prospectus
included in Registrant's
Registration Statement (File
No. 33-42219) on Form S-8 and is
incorporated herein by reference.*

10.3 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*

10.5 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank was filed as Exhibit 10.6 to
Registrant's Form 10-K for the year
ended February 28, 1997 and is
incorporated herein by reference.

10.6 Amendment to Revolving Credit
Agreement dated as of November 28,
1997.

10.7 Debenture Purchase Agreement, dated
March 27, 1997, between the Registrant
and Sirrom Capital Corporation was filed
as Exhibit 10.7 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.

10.8 Preferred Stock Purchase Agreement,
dated March 27, 1997, between the
Registrant and Sirrom Capital
Corporation was filed as Exhibit 10.8
to the Registrant's Form 10-KSB for
the fiscal year ended February 28,
1997 and is incorporated herein by
reference.

10.9 Stock Purchase Warrant, dated March 27,
1997, issued by the Registrant to
Sirrom Capital Corporation was filed as
Exhibit 10.9 to the Registrant's
Form 10-KSB for the fiscal year ended
February 28, 1997 and is incorporated
herein by reference.

10.10 Registrant's 1998 Stock Option Plan was
filed as Exhibit 99.1 to Registrant's
Registration Statement on Form S-8
(No. 333-65469) and is incorporated
herein by reference.*

13 Portions of Registrant's 1999 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.

21 List of subsidiaries.

23 Consent of Grant Thornton L.L.P.

27 Financial Data Schedule <PAGE 16>

- ---------------
* Represents a management contract or
a compensatory plan or arrangement.

(b) Reports on Form 8-K:

None.
<PAGE 17>
SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.

ENVIRONMENTAL TECTONICS CORPORATION

By /s/ William F. Mitchell
William F. Mitchell,
President and Chief Executive
Officer

In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.

Name Position Date

/s/ William F. Mitchell Chairman of the Board, May 27, 1999
William F. Mitchell Chief Executive Officer,
President and Director

/s/ Duane D. Deaner Chief Financial May 27, 1999
Duane D. Deaner Officer (Principal
Accounting Officer)

/s/ Richard E. McAdams Director May 27, 1999
Richard E. McAdams

/s/ Craig Macnab Director May 27, 1999
Craig Macnab

/s/ Pete L. Stephens Director May 27, 1999
Pete L. Stephens, M.D.

/s/ Philip L. Wagner Director May 27, 1999
Philip L. Wagner, Ph.D.
<PAGE 18>
EXHIBIT INDEX

Exhibit No. Item

3.1 Registrant's Articles of
Incorporation, as amended, were filed
as Exhibit 3.1 to Registrant's Form 10-K
for the year ended February 28, 1997 and
are incorporated herein by reference.

3.2 Registrant's By-Laws, as amended,
were filed as Exhibit 3(ii) to
Registrant's Form 10-K for the year
ended February 25, 1994 and are
incorporated herein by reference.

4.1 12% Subordinated Debenture due
March 27, 2004 was filed as
Exhibit 4.1 to Registrant's Form 10-K
for the year ended February 28, 1997
and is incorporated herein by reference.

10.1 Registrant's 1988 Incentive Stock
Option Plan was filed as
Exhibit 10(v) to Registrant's
Form 10-K for the year ended
February 23, 1990 and is
incorporated herein by reference.*

10.3 Registrant's Stock Award Plan
adopted April 7, 1993, filed as
Exhibit 10(ix) to the Registrant's
Form 10-K for the fiscal year ended
February 25, 1994 and is
incorporated herein by reference.*

10.4 Form of 1996 Warrant Agreement between
the Registrant and Chase Manhattan
Capital Corporation, filed as
Exhibit 10(xiv) to the Registrant's
Form 10-KSB for the fiscal year ended
February 23, 1996 and is incorporated
herein by reference.
<PAGE 19>
10.5 Revolving Credit Agreement, dated as
of March 27, 1997, between the
Registrant and First Union National
Bank was filed as Exhibit 10.6 to
Registrant's Form 10-K for the year
ended February 28, 1997 and is
incorporated herein by reference.

10.6 Amendment to Revolving Credit
Agreement dated as of November 28,
1997.

10.10 Registrant's 1998 Stock Option Plan was
filed as Exhibit 99.1 to Registrant's
Registration Statement on Form S-8
(No. 333-65469) and is incorporated
herein by reference.*

13 Portions of Registrant's 1999 Annual
Report to Shareholders which are
incorporated by reference into this
Form 10-KSB.

21 List of subsidiaries.

23 Consent of Grant Thornton L.L.P.
<PAGE 20>
27 Financial Data Schedule
- ---------------
* Represents a management contract or
a compensatory plan or arrangement. <PAGE 21>

Exhibit 13

ENVIRONMENTAL TECTONICS CORPORATION

1999

ANNUAL SHAREHOLDERS' REPORT

FINANCIAL REVIEW
($ in thousands, except share and per share data)

Fiscal Year End 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net sales $ 29,225 $ 29,284 $ 21,884 $ 15,580 $ 16,188
Gross profit 11,672 9,298 5,742 5,206 4,097
Operating income (loss) 4,759 4,208 1,196 1,492 (891)
Net income (loss) 2,170 1,794 (20) 299 (1,405)
Earnings (loss) per common
share:
Basic .32 .25 (.01) .05 (.25)
Diluted .29 .23 (.01) .05 (.25)
Working capital 13,755 11,462 10,334 7,860 9,038
Long-term obligations 4,219 4,356 6,997 5,514 7,133
Total assets 35,448 22,955 23,095 20,926 20,803
Total stockholders' equity 11,030 8,579 6,409 6,111 5,736
Weighted average common
shares:
Basic 5,861,000 5,981,000 5,930,000 5,870,000 5,748,000
Diluted 6,312,000 6,496,000 5,930,000 5,870,000 5,748,000

</TABLE>

All earnings per share and share amounts have been restated to
reflect a 2 for 1 stock split declared on February 25, 1999. No
cash dividends have ever been paid on the Company's common stock,
and the Company is currently prohibited from declaring any cash
dividends under the terms of its credit facility.
<PAGE 1>
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations

Fiscal 1999 Versus Fiscal 1998

Certain statements contained herein constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
include but are not limited to: statements regarding future
product development, technological advances and market acceptance
of products. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other
things, general economic and business conditions, competition,
technological advances, political unrest in customer countries,
contract cancellations and other risk factors that are detailed
in this document and in other periodic reports and registration
statements filed by Environmental Tectonics Corporation with the
Securities and Exchange Commission. All forward-looking
statements included in this document are based on information
available to the company on the date hereof, and the Company
assumes no responsibility to update any such forward-looking
statements. Accordingly, past results and trends should not be
used by investors to anticipate future results or trends.

The Company has a net income of $2,170,000 or $.29 per share
(diluted), versus a net income of $1,794,000, or $.23 per share
(diluted) in 1998. Operating income was $4,759,000, an increase
of $551,000, or 13.1% over 1998. These increases were primarily
the result of higher gross margins reflecting increased sales of
ATS products.

Total sales decreased slightly $59,000, .2%, from 1998 as
decreases domestically and to the U.S. Government were only
partially offset by an increase internationally and the addition
of sales from the Company's Polish subsidiary purchased in April,
1998. Domestic sales decreased $3,640,000, 41.1%, and
represented 17.9% of the Company's total sales, down from 30.2%
in the prior year. The decrease domestically primarily reflected
reduced industrial sterilizer sales coupled with decreased sales
of the Company's entertainment products. Sales to the U.S.
Government decreased $1,779,000, 60.6%, and represented 4.0% of
the Company's total sales, down from 10.0% for the prior year.
The decrease in U.S. Government sales primarily reflected the
completion in the prior year of a large chamber project.
International sales, including sales of the Company's Polish
subsidiary, increased $5,360,000, 30.6%, and represented 78.1% of
the Company's total sales. The increase internationally
primarily resulted from additional progress on two large
<PAGE 2> centrifuge projects including a Centrifuge project for
the United Kingdom Minister of Defence (the "UKMOD"). Sales in
1999 to the UKMOD were approximately $7.0 million, or 24.0%, of
the Company's total sales. Open orders for the UKMOD constituted
$11.1 million of the Company's sales backlog at February 26,
1999.

On a segment basis, sales of the Company's Aircrew Training
systems (ATS) products, which create and monitor the
physiological effects of motion (including spatial disorientation
and centrifugal forces) on humans and physical effects on
equipment for medical, training, research and entertainment
markets were $24,465,000 an increase of $2,410,000, or 10.9%,
over 1998. Sales of these products accounted for 83.7% of ETC's
sales compared to 75% in 1998. Sales in the Company's other
segment, Industrial Simulation, which designs and produces
chambers that create environments that are used for
sterilization, research and medical applications, decreased
$2,469,000, or 34.2%, and accounted for 16.3% of ETC's total
sales compared to 25% in 1998. Although the primary reduction
was in sterilizer sales, decreases were evidenced across all
product lines for this group.

Gross profit increased $2,374,000, or 25.5%. As a
percentage of sales, gross profit was 39.9%, an increase from
31.8% in 1998. These increases were attributable to a product
mix shift to higher margin ATS products.

Operating profit increased $551,000, or 13.1%, compared to
1998. On a segment basis, ATS has an operating profit of
$5,697,000, an increase of $1,466,000, while the Industrial
Simulation had an operating loss of $89,000 compared to an
operating profit of $691,000 in 1998. These segment operating
profits were offset, in part, by unallocated corporate expenses
of $849,000, an increase of $135,000, over 1998.

Selling and administrative expenses increased $1,574,000, or
31.8%, due principally to higher commissions expense on higher
commissionable sales, increased government claim expenses, and
the addition of selling and administrative expenses for the
Company's Polish subsidiary. As a percentage of sales, selling
and administrative expenses were 22.3% compared to 16.9% in 1998.

Research and development expenses increased $249,000, or
168.2%, from 1998. Most of the Company'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 for feasibility and technology
updates. Capitalized software development costs for 1999 were
$581,000 compared to $395,000 in 1998. Amortization of software
costs, which was charged to cost of sales, was $651,000 and
$670,000 for 1999 and 1998, respectively.

Interest expense was down $120,000, 9.6%, from 1998
reflecting a lower average interest rate. Letter of credit and
<PAGE 3> other expenses decreased $16,000 principally due to
decreased bank charges.

The Company's effective tax rate remained unchanged from the
prior year and approximated the statutory rate.

Fiscal 1998 Versus Fiscal 1997

The Company had net income of $1,794,000, or $.47 per share,
compared to a net loss of $20,000, or $.01 per share, in 1997.
Operating income was $4,208,000, an increase of $3,012,000, or
252%, over 1997. These increases were primarily the result of
increased sales which were $29,284,000, an increase of $7.4
million, or 34%, over 1997.

Domestic sales increased $4,477,000, or 102%, over 1997, and
accounted for 30% of the Company's total sales, an increase from
20% in 1997. This increase was due to the introduction of the
Company's proprietary motion-based technology into the
entertainment marketplace, as well as a $1,308,000 increase in
sales of industrial sterilizers. Sales to the U.S. Government,
principally for work on two large altitude chambers and a
continuation of our contracted operator maintenance contracts on
selected aircrew training devices, increased $854,000, or 41%,
and accounted for 10% of ETC's total sales, the same percentages
as 1997. Sales to international customers, principally
government agencies, increased $2,068,000, or 13%, over 1997, and
accounted for 60% of the Company's total sales, a decrease from
70% in 1997. The increase in international sales was due
principally to continued work on a centrifuge for Japan and a
multipurpose aircraft trainer for the UKMOD. Sales in 1998 to
UKMOD were approximately $9,226,000, or 32%, of the Company's
total sales. Open orders for UKMOD accounted for 59% of the
Company's sales backlog at February 27, 1998.

On a segment basis, sales of the Company's Aircrew Training
Systems (ATS) products, which create and monitor the
physiological effects of motion (including spatial disorientation
and centrifugal forces) on humans and physical effects on
equipment for medical, training, research and entertainment
markets were $22,055,000, an increase of $8,808,000, or 66%, over
1997. Sales of these products accounted for 75% of ETC's sales
compared to 61% in 1997. Sales in the Company's other segment,
Process Simulation, which designs and produces chambers that
create environments that are used for sterilization, research and
medical applications, decreased $1,408,000, or 16%, and accounted
for 25% of ETC's total sales compared to 39% in 1997. This
reduction was due principally to international sales of the
Company's sterilizers and environmental chambers, which were
$2,533,000 lower in 1998 compared to 1997.

Gross profit increased $3,556,000, or 62%. As a percentage
of sales, gross profit was 32%, an increase from 26% in 1997.
These increases were attributable, in part, to the higher sales
<PAGE 4> volume which improved plant capacity utilization, as
well as an increase in sales of higher-margined ATS products.

Operating profit increased $3,012,000, or 252%, compared to
1997. On a segment basis, ATS had an operating profit of
$4,321,000, an increase of 97%, while the Process Simulation had
an operating profit of $691,000 compared to an operating loss of
$304,000 in 1997. These segment operating profits were offset,
in part, by unallocated corporate expenses of $714,000, an
increase of $61,000, or 9%, over 1997.

Selling and administrative expenses increased $563,000, or
13%, due principally to higher variable costs related to the
higher sales volume, such as commissions and travel expenses. As
a percentage of sales, selling and administrative expenses were
17% compared to 20% in 1997. This improvement was due, in part,
to the fixed administrative costs being spread over the higher
sales total, as well as a reduction in accounting and legal fees.

Research and development expenses decreased $19,000, or 11%,
from 1997. The Company'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 and development for basic research for
feasibility and technology updates. Capitalized software
development costs for 1998, were $395,000 compared to $494,000 in
1997. Amortization of software costs, which were charged to cost
of sales, were $670,000 and $681,000 for 1998 and 1997,
respectively.

Interest expense was virtually unchanged from 1998. Other
expense increased during 1998, principally due to foreign
exchange charges.

The Company's provision for taxes approximates the statutory
rate.

Liquidity and Capital Resources

At February 26, 1999, the Company had a credit agreement
with a bank, which provided a credit facility of $10 million.
This agreement expires on May 31, 1999, although the Bank has
indicated its intention to extend the agreement for at least
1 year. Substantially all of the Company's short-term financing
is provided by this bank. At February 26, 1999, the Company had
$7,812,000 available under the credit agreement.

During fiscal 1999, the Company generated $7,769,000 of cash
from operating activities. This was primarily the result of net
income, non cash charges, an increase in billings in excess of
costs and estimated earnings on uncompleted long-term contracts
and customer deposits. These cash sources were partially offset
by an increase in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted long-term
contracts. Generally speaking, the net positive generation of
<PAGE 5> cash from operations reflected the very favorable
payment terms contained in the large Aeromedical equipment order
booked in February 1999.

Investing activities used $1,088,000 including the net cash
impact of purchasing the Company's Polish subsidiary in April,
1998.

Financing activities were a net use of $1,562,000 of cash.
This included paydown to zero of the Company's cash borrowings
under its credit facility, payment of dividends on preferred
stock and repayment of related party notes. A partial offset was
positive cash flow from a loan, additional paid-in-capital, and
minority interest associated with the aforementioned Polish
acquisition.

The company believes that cash generated from operating
activities as well as available borrowing under the Credit
Agreement will be sufficient to meet its future obligations.

In reference to the Company's outstanding claim with the
U.S. Government, to the extent the Company is unsuccessful in
further recovery of contract costs, such an event could have a
material adverse effect on the Company's liquidity and results of
operations. Historically, the Company has had good experience in
that recoveries have exceeded claims (see Note 3 of Notes to
Consolidated Financial Statements).

Year 2000 Disclosure

The majority of the Company's information technology and
non-information technology systems are Year 2000 compliant. The
Company presently anticipates that the remainder of the Company's
systems will be Year 2000 compliant by June 1999. The Company is
in the process of investigating its supply-chain.

The Company has expended $6,000 in the twelve-month period
ended February 26, 1999 with respect to Year 2000 compliance, and
expects to incur approximately $89,000 of additional expenses to
complete the compliance process.

The Company's most likely worst case Year 2000 scenario
would be to lose the Company's accounting and network
applications and PC's in the Company's main facility located in
Southampton, Pennsylvania. If this event occurs, the Company
will be able to continue its manufacturing activities and would
manually proceed to perform other tasks and activities. The
Company has a written contingency plan to address potential Year
2000 problems.
<PAGE 6>
Market for the Registrant's Common Stock and Related Security
Holder Matters

The Company's Common Stock (the Common Stock) is traded on
the American Stock Exchange under the symbol ETC. As of May 17,
1999, the Company had 335 shareholders of record.

The following table sets forth the quarterly ranges of high
and low sale prices, and the closing sale price, for shares of
the Common Stock for the periods indicated. Such prices
represent quotations between dealers and do not include mark-ups,
mark-downs or commissions, and may not necessarily represent
actual transactions.

Sale Prices Closing
High Low Sale Price
1999

First Quarter $11-1/4 $8-1/4 $10-1/2

Second Quarter 12-7/8 9-1/8 9-3/4

Third Quarter 11-3/4 6-5/8 11

Fourth Quarter 17 9-1/16 16-1/8

1998

First Quarter $ 9-3/8 $6-1/2 $ 9-5/16

Second Quarter 10-1/8 7-7/8 8-1/2

Third Quarter 11-3/4 8-1/2 9-1/8

Fourth Quarter 10 7-3/8 8-3/4

The Company has not paid any cash dividends on the Common
Stock in the past and does not anticipate that any cash dividends
will be declared or paid in the foreseeable future. The
Company's current line of credit facility prohibits the payment
of any dividends by the Company without the lender's prior
written consent.

Backlog

The Company's sales backlog at February 26, 1999 and
February 27, 1998, for work to be performed and revenue to be
recognized under written agreements after such dates, was
approximately $32,141,000 and $27,523,000, respectively. In
addition, the Company's training and maintenance contracts
backlog at February 26, 1999 and February 27, 1998, for work to
be performed and revenue to be recognized after that date under
written agreements, was approximately $1,311,000 and $2,925,000,
respectively. Of the 1999 backlog, approximately $26,380,000 is
<PAGE 7> under contracts for ATS and maintenance support.
Approximately 83% of the 1999 backlog is expected to be completed
prior to February 25, 2000.
<PAGE 8>
Report of Independent Certified Public Accountants

Board of Directors
Environmental Tectonics Corporation

We have audited the accompanying consolidated balance sheets
of Environmental Tectonics Corporation and Subsidiary as of
February 26, 1999 and February 27, 1998, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 1 to the consolidated financial
statements, the Company has recorded receivables in the amount of
$4.4 million related to claims made to or against the United
States government for contract costs incurred through
February 26, 1999. The total net claims amount made is
approximately $12 million based on costs incurred through
February 26, 1999, and is subject to negotiation, arbitration and
audit by the United States government.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Environmental Tectonics
Corporation and Subsidiary as of February 26, 1999 and
February 27, 1998, and the consolidated results of their
operations and cash flows for the years then ended, in conformity
with generally accepted accounting principles.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
April 30, 1999
<PAGE 9>
Consolidated Balance Sheets
($ in thousands, except share data)

<TABLE>
<CAPTION>
February 26, February 27,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,344 $ 225
Cash equivalents restricted for letters of credit 47 5
Accounts receivable, net 9,656 8,448
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts 10,416 5,651
Inventories 3,118 3,058
Deferred tax asset 1,136 770
Prepaid expenses and other current assets 787 283
Total current assets 30,504 18,450

Property, plant and equipment, net 2,842 2,837
Software development costs, net of accumulated
amortization of $ 4,619 and $3,914 in 1999
and 1998, respectively 1,137 1,155
Other assets 965 513

Total assets $35,448 $22,955

LIABILITIES
Current portion of long-term obligations $ 121 $ 148
Convertible notes payable - related parties - 800
Accounts payable - trade 1,554 1,424
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 6,775 1,145
Customer deposits 5,696 1,373
Accrued income taxes 920 984
Other accrued liabilities 1,683 1,114
Total current liabilities 16,749 6,988

Long-term obligations, less current portion:
Credit facility payable to banks - 467
Subordinated debt 4,124 3,730
Other 95 159
4,219 4,356
Deferred tax liability 702 702

Total liabilities 21,670 12,046

Redeemable cumulative convertible preferred
stock, $100 par and redemption value:
25,000 shares authorized; 25,000 shares
issued and outstanding 2,372 2,330

Minority Interest 376 -

STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares,
$.10 par value; 3,083,206 and 3,006,596 shares
issued and outstanding in 1999 and 1998,
respectively 308 300
Capital contributed in excess of par value of
common stock 3,240 2,671
<PAGE 10>
Accumulated other comprehensive income 21 -
Retained earnings 7,461 5,608

Total stockholders' equity 11,030 8,579

Total liabilities and stockholders' equity $35,448 $22,955

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE 11>
Consolidated Statements of Operations
($ in thousands, except share data)

<TABLE>
<CAPTION>
Year Ended Year Ended
February 26, February 27,
1999 1998
<S> <C> <C>
Net sales $ 29,225 $ 29,284

Cost of goods sold 17,553 19,986

Gross profit 11,672 9,298

Operating expenses:
Selling and administrative 6,516 4,942
Research and development 397 148

6,913 5,090

Operating income 4,759 4,208

Other expenses:
Interest expense 1,124 1,244
Letter of credit fees 26 58
Other, net 162 146

1,312 1,448

Income before provision for income taxes
and minority interest 3,447 2,760

Provision for income taxes 1,201 966

Income before minority interest $ 2,246 $ 1,794

Income attributable to minority interest 76 -

Net income $ 2,170 $ 1,794

Per share information
Earnings per common share:
Basic $ .32 $ .25
Diluted $ .29 $ .23

Income available to common stockholders $ 1,853 $ 1,502

Weighted average common shares:
Basic 5,861,000 5,981,000
Diluted 6,312,000 6,496,000

</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE 12>
Consolidated Statements of Changes in Stockholders' Equity
($ in thousands, except share data)

For the years ended February 26, 1999 and February 27, 1998

<TABLE>
<CAPTION>
Capital
contributed Accumulated
in excess of other
par value of compre- Total
Common stock common hensive Retained stockholders'
Shares Amount stock income earnings equity
-------- --------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1997 $2,963,083 $ 296 $ 2,007 $ - $ 4,106 $ 6,409

Net income for the year - - - - 1,794 1,794
Value of warrants issued in
connection with issuance of
subordinated debt - - 499 - - 499
Accretion of preferred stock - - - - (38) (38)
Dividends on preferred stock - - - - (254) (254)
Shares issued in connection with
employee stock purchase and
stock option plans 41,550 3 146 - - 149
Shares issued in connection with
employee stock award 1,963 1 19 - - 20
---------- ------ ------- ------ ------- -------
Balance, February 27, 1998 3,006,596 300 2,671 - 5,608 8,579

Net income for the year - 2,170 2,170
Stock issued in connection with
with acquisition 55,000 6 489 - 495
Accretion of preferred stock - - - - (42) (42)
Dividends on preferred stock - - - - (275) (275)
Shares issued in connection with
employee stock purchase and
stock option plans 21,610 2 80 - - 82
Other comprehensive income - - - 21 - 21
---------- ------ ------- ------ ------- -------

Balance, February 26, 1999 $3,083,206 $ 308 $ 3,240 $ 21 $ 7,461 $11,030
========== ====== ======= ====== ======= =======
</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE 13>
Consolidated Statements of Cash Flows
($ in thousands)

<TABLE>
<CAPTION>
Year Ended Year Ended
February 26, February 27,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,170 $ 1,794
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,642 1,463
Increase (decrease) in allowance for
accounts receivable and inventory (409) 527
Minority interest 76 -
Changes in operating assets and liabilities:
Accounts receivable (1,202) 2,762
Costs and estimated earnings in excess of
billings on uncompleted long-term contracts (4,765) (2,306)
Inventories 623 (882)
Prepaid expenses and other current assets (530) (44)
Other assets 12 (35)
Increase (decrease) in liabilities:
Accounts payable 112 (375)
Billings in excess of costs and estimated
earnings on uncompleted long-term contracts 5,630 (1,543)
Customer deposits 4,323 264
Accrued income taxes (64) 713
Other accrued liabilities 637 (414)
Payments under settlement agreements (120) (120)
Decrease in deferred income taxes (366) (157)

Net cash provided by operating activities 7,769 1,647

Cash flows from investing activities:
Acquisition of equipment (567) (670)
Software development costs capitalized (581) (395)
Purchase of subsidiary, net of cash acquired 60 -

Net cash used in investing activities (1,088) (1,065)

Cash flows from financing activities:
Net payments under credit facility (467) (6,247)
Net proceeds from subordinated debt - 3,730
Net proceeds from preferred stock - 2,292
Payment of dividends on preferred stock (275) (254)
Deferred financing costs - (876)
(Increase) decrease in cash equivalents
restricted for letters of credit (32) 650
Decrease in notes payable - related party (800) (500)
Net decrease in other long-term obligations (70) (9)
Proceeds from issuance of common stock/warrants 82 668

Net cash used in financing activities (1,562) (546)

Net increase in cash and cash equivalents 5,119 36

Cash and cash equivalents at beginning of year 225 189

Cash and cash equivalents at end of year $ 5,344 $ 225

Supplemental schedule of cash flow information: <PAGE 14>
Interest paid $ 925 $ 1,123
Income taxes paid 1,357 434

Supplemental information on noncash operating
and investing activities:
The Company reclassed $-0- and $158 of
inventory to property, plant and equipment
during the years ended February 26, 1999
and February 27, 1998, respectively.
</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE 15>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)

1. Summary of Significant Accounting Policies:

Nature of Business

Environmental Tectonics Corporation (ETC or the Company) is
primarily engaged in the development, marketing and manufacturing
of Aircrew Training Systems (ATS) and Industrial Simulation
equipment. The Company utilizes its internally developed
software systems in virtually all of its products. ETC focuses
on software enhancements, product extensions, new product
development and new marketplace applications. Sales of ATS
products are made principally to U.S. and foreign government
agencies and to the entertainment market. Sales of Industrial
Simulation equipment, which includes sterilizers, environmental
systems, and hypo/hyperbaric equipment are made for commercial
and governmental agencies worldwide.

Stock Split: On February 25, 1999, the Board of Directors
declared a 2-for-1 stock split for stockholders of record on
May 17, 1999. All earnings per share and share amounts in the
financial statements for all years presented, have been restated
to reflect the 2-for-1 split.

Principles of Consolidation:

The consolidated financial statements include the accounts
of ETC, its wholly owned subsidiary, ETC International
Corporation and its 65% owned subsidiary, ETC-PZL Aerospace
Industries SP. Z 0.0. All material intercompany accounts and
transactions have been eliminated. The Company's fiscal year is
the 52- or 53-week annual accounting period ending the last
Friday in February.

Use of Estimates:

In preparing financial statements in conformity with
generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements,
and revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates
are made for revenue recognition under the percentage of
completion method (see Note 1, Revenue Recognition), claims
receivable, inventory, and computer software costs.

The Company has recorded receivables in the amount of
$4.4 million for claims made to or against the United States
government for contract costs incurred through February 26, 1999.
The total net claims amount made is approximately $12.0 million
<PAGE 16> based on costs incurred through February 26, 1999, and
is subject to negotiation, arbitration and audit by the United
States government.

Revenue Recognition:

Revenue is recognized on long-term contracts utilizing the
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 is reflected as an asset. Amounts billed to customers
in excess of revenue recognized on uncompleted long-term
contracts are reflected as a liability. When it 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 the accounting
period in which the facts requiring the revisions become known.
Contract progress billings are based upon contract provisions for
customer advance payments, contract costs incurred, and
completion of specified contract objectives. Contracts may
provide for customer retainage of a portion of amounts billed
until contract completion. Retainage is generally due within one
year of completion of the contract. Revenue for contracts under
$100 or to be completed in less than one year, and revenue on
parts and services, are recognized as shipped. Revenue for
service contracts is recognized ratably over the life of the
contract. Related material costs are expensed as incurred.

Cash and Cash Equivalents:

Cash and cash equivalents include short-term deposits at
market interest rates with original maturities of three months or
less. The Company maintains cash balances at several financial
institutions located in the Northeast. Accounts in each
institution are insured by the Federal Deposit Insurance
Corporation up to $100. Uninsured balances aggregate
$4.7 million at February 26, 1999.

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, direct engineering, manufacturing labor, and overhead
components. The Company periodically reviews the net realizable
value of the inventory and, if necessary, writes down the
recorded costs.

Depreciation of Property, Plant and Equipment:

Property, plant and equipment are depreciated over their
estimated useful lives by the straight-line method 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 depreciation are
<PAGE 17> eliminated from the accounts. Any resulting gains or
losses are included in the determination of net income.

Amortization of Goodwill:

The Company amortizes costs in excess of fair values of net
assets of the businesses acquired using the straight-line method
over a period not to exceed 20 years. The Company periodically
reviews the value of its goodwill to determine if an impairment
has occurred.

Goodwill of $662 was recorded for the Company's purchase of
ETC-PZL Aerospace Industries, Ltd. Amortization expense was $25
in fiscal 1999 and accumulated amortization as of February 26,
1999 was $25.

Amortization of 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 software is fully documented and tested, capitalization
of development costs cease and amortization commences over a
period ranging from 36 to 60 months (dependent upon the life of
the product) on a straight-line basis which, at a minimum,
approximates estimated sales. Realization of capitalized
software costs is subject to the Company's ability to market the
related product in the future and generate cash flows to support
future operations. Capitalized software costs and related
amortization totalled $581 and $651, respectively, for the year
ended February 26, 1999. Capitalized software costs and related
amortization totalled $395 and $670, respectively, for the year
ended February 27, 1998.

Amortization of Deferred Financing Costs:

Capitalized costs relating to the recapitalization of the
Company are amortized over the term of the credit facility.
Amortization expense relating to deferred financing costs was
$181 and $241 in 1999 and 1998, respectively (see note 7).

Income Taxes:

The Company accounts for income taxes using the liability
method, which reflects the impact of temporary differences
between values recorded for assets and liabilities for financial
reporting purposes and values utilized for measurement in
accordance with tax laws.
<PAGE 18>
Long-Lived Assets:

The Company accounts for stock options in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," which provides guidance on when
to recognize and how to measure impairment losses of long-lived
assets and certain identifiable intangibles, and how to value
long-lived assets to be disposed of. The adoption of SFAS
No. 121 had no material effect on the Company's consolidated
financial position or results of operations.

Stock Options:

The Company accounts for stock options in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which
contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period which is
usually the vesting period. Alternatively, the standard permits
entities to continue accounting for employee stock options and
similar instruments under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method
of accounting defined in SFAS No. 123 had been applied (see
note 12). The Company's Incentive Stock Option Plan is accounted
for under APB Opinion No. 25.

Advertising Costs:

The Company expenses advertising costs as incurred.
Advertising expense was $294 and $210 for the years ended
February 26, 1999 and February 27, 1998, respectively.

Earnings Per Common Share:

The Company has adopted SFAS No. 128, "Earnings Per Share,"
which is effective for financial statements issued after
December 15, 1997. The new standard eliminates primary and fully
diluted earnings per share and requires presentation of basic and
diluted earnings per share together with disclosure of how the
per share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income available 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 other
contracts to issue common stock were exercised and converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.

The following table illustrates the reconciliation of the
numerators and denominators of the basic and diluted earnings per
<PAGE 19> share computations. All earnings per share and share
amounts have been restated to reflect a 2 for 1 stock split
declared February 25, 1999.

<TABLE>
<CAPTION>
Year ended February 26, 1999
Weighted
average Per share
Income shares amount
(numerator) (denominator)
<S> <C> <C> <C>
Net income $2,170
Less preferred stock dividends (275)
Less accretion of preferred stock (42)

Basic earnings per share
Income available to common stock-
holders $1,853 5,861,377 $ .32

Effective of dilutive securities
Stock options 38,641
Stock warrants 412,007

Diluted earnings per share
Income available to common stock-
holders plus effect of dilutive
securities $1,853 6,312,025 $ .29

</TABLE>

There were conversion provisions of preferred stock totaling
666,666 shares of common stock which were not included in the
computation of diluted earnings per share because the effect of
assumed conversions was antidilutive. These conversion
provisions were still outstanding at February 26, 1999 (see also
footnote 15).
<PAGE 20>
<TABLE>
<CAPTION>
Year ended February 27, 1998
Weighted
average Per share
Income shares amount
(numerator) (denominator)
<S> <C> <C> <C>
Net income $1,794
Less preferred stock dividends (254)
Less accretion of preferred stock (38)

Basic earnings per share
Income available to common stock-
holders $1,502 5,980,688 $ .25

Effective of dilutive securities
Stock options 70,634
Stock warrants 444,289

Diluted earnings per share
Income available to common stock-
holders plus effect of dilutive
securities $1,502 6,495,611 $ .23

</TABLE>

There were conversion provisions of convertible notes
payable and preferred stock totalling 800,000 shares of common
stock which were not included in the computation of diluted
earnings per share because the effect of assumed conversions was
antidilutive. These conversion provisions were still outstanding
at February 26, 1999.

Reporting Comprehensive Income:

In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards to
provide prominent disclosure of comprehensive income items.
Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. SFAS No. 130 is effective
for all periods beginning after December 15, 1997. Other
comprehensive income consists of foreign currency translation
adjustments. The adoption of SFAS No. 130 did not have a
material impact on the Company's consolidated financial position
or results of operations.

Business Segment Presentation:

In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS
No. 131 requires that public business enterprises report certain
information about operating segments in complete sets of
financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain
information about their products and services, the geographic
areas in which they operate, and their major customers. SFAS
<PAGE 21> No. 131 is effective for all periods beginning after
December 15, 1997. The adoption of SFAS No. 131 had no impact on
the Company's consolidated financial position or results of
operations.

Reclassifications:

Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.

2. Acquisition of ETC-PZL Aerospace Industries SP. Z 0.0.

On April 21, 1998, ETC acquired a 65% ownership of MP-PZL
Aerospace Industries, Ltd. ("MP-PZL"), a simulation and advanced
training device manufacturing company located in Warsaw, Poland
for $375 in cash, an 8% interest-only three-year note payable for
$350 and 55,000 shares of ETC's common stock amounting to $495.
MP-PZL was subsequently renamed ETC-PZL Aerospace Industries,
Ltd. ("ETC-PZL"). ETC's cost for this acquisition was $1,220 and
has been recorded in the accompanying balance sheet under the
purchase method of accounting for business combinations. In
connection with the acquisition, the Company has recorded
goodwill of $662 and a minority interest of $300.

ETC-PZL's fiscal period ends December 31, 1998. The results
of ETC-PZL for the period May 1, 1998 through December 31, 1998
have been included in ETC's results of operations for the twelve
months ended February 26, 1999. On a pro forma basis, had the
Company consolidated the results of ETC-PZL in the prior fiscal
period, the following comparisons would result:

<TABLE>
<CAPTION>
Twelve months
ended
February 26, February 27, February 27,
1999 1998 1998
(as reported) (pro forma)
<S> <C> <C> <C>
Net sales $ 29,225 $ 29,284 $ 31,391

Gross profit 11,672 9,298 9,944

Operating income 4,759 4,208 4,521

Net income 2,170 1,794 1,922

Per share information
Income available to common
shareholders 1,853 1,502 1,603
Income per share: basic 0.32 0.25 0.27
Income per share: diluted 0.29 0.23 0.26
Number of shares: basic 5,861,000 5,981,000 5,981,000
Number of shares: diluted 6,312,000 6,496,000 6,496,000
</TABLE>

<PAGE 22>
3. Accounts Receivable:

The components of accounts receivable at February 26, 1999
and February 27, 1998, are as follows:

1999 1998

U.S. Government receivables billed
and unbilled contract costs
subject to negotiation $ 4,529 $ 4,563
U.S. commercial receivables billed 598 1,071
International receivables billed 4,914 3,193
10,041 8,827
Less allowance for doubtful accounts (385) (379)

$ 9,656 $ 8,448

U.S. Government receivables billed and unbilled contract
costs subject to negotiation:

Unbilled contract costs subject to negotiation represent
claims made or to be made against the U.S. Government under a
contract for a centrifuge. These costs were recorded during
fiscal years 1994, 1995 and 1998. The Company has recorded
claims, amounting to $2.75 million, including $150 recorded in
the first quarter of fiscal 1998, to the extent of contract costs
incurred. These costs have been incurred in connection with U.S.
Government caused delays, errors in specifications and designs,
and other unanticipated causes, and may not be received in full
during fiscal 2000. In accordance with generally accepted
accounting principles, revenue recorded by the Company from a
claim does not exceed the incurred contract costs related to the
claim. The Company currently has approximately $12.0 million in
claims filed with the U.S. Government. The U.S. Government has
responded to the claims with either denials or deemed denials
that the Company has appealed. In February 1999, the U.S.
Government made an unsolicited offer for settlement which the
Company deemed inadequate. Such claims are subject to
negotiation and audit by the U.S. Government.

In November 1996, the Company invoiced the balance due under
a contract with the U.S. Government. At February 26, 1999,
approximately $1.6 million was included in U.S. Government
receivables. Collectibility of these amounts may be dependent
upon the resolution of the above claims.

International receivables billed:

International receivables billed included $0.9 million
(February 26, 1999) and $1.8 million (February 27, 1998) related
to a certain contract with the Royal Thai Air Force.

In October 1993, the Company was notified by the Royal Thai
Air Force (RTAF) that the RTAF was terminating a certain
<PAGE 23> $4.6 million simulator contract with the Company.
Although the Company had performed in excess of 90% of the
contract, the RTAF alleged a failure to completely perform. In
connection with the termination, the RTAF made a call on a $229
performance bond, as well as a draw on an approximately
$1.1 million advance payment letter of credit. Work under this
contract had stopped while under arbitration, but on October 1,
1996, the Thai Trade Arbitration Counsel rendered its decision
under which the contract was reinstated in 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 remain as per the original contract
including the potential invoking of penalties or termination of
the contract for delay. On December 22, 1997, the Company
successfully performed acceptance testing and the unit passed
with no discrepancy reports. Although the contract was not
completed in the time allotted, the Company has requested an
extension on the completion time due to various extenuating
circumstances, including allowable "force majeure" events. The
balance due on the contract is still under review. However, the
Company is not able to determine what, if any, impact the
extended completion period and the current economic condition in
Thailand will have upon the receipt of final payment.

4. Costs and Estimated Earnings on Uncompleted Contracts:

The following is a summary of long-term contracts in
progress at February 26, 1999 and February 27, 1998:

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Costs incurred on uncompleted long-term contracts $24,926 $23,420
Estimated earnings 18,529 10,027
43,455 33,447
Less billings to date (39,814) (28,941)

$ 3,641 $ 4,506
</TABLE>

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted long-term contracts $10,416 $ 5,651
Billings in excess of costs and estimated earnings
on uncompleted long-term contracts 6,775 (1,145)

$ 3,641 $ 4,506
</TABLE>

Included in billings in excess of costs and estimated
earnings on uncompleted long-term contracts is a provision for
<PAGE 24> anticipated losses on contracts of $206 and $198 in
1999 and 1998, respectively.

5. Inventories:

Inventories consist of the following:

Raw Work in
material process Total

February 26, 1999 $ 388 $2,730 $3,118
February 27, 1998 404 2,654 3,058

Inventory is presented net of an allowance for obsolescence
of $625 and $1,040 in 1999 and 1998, respectively.

6. Property, Plant and Equipment:

The following is a summary of property, plant and equipment,
at cost, and estimated useful lives at February 26, 1999 and
February 27, 1998:

<TABLE>
<CAPTION>
Estimated
useful
1999 1998 lives
<S> <C> <C> <C>
Land $ 100 $ 100
Building and building additions 1,811 1,811 40 years
Machinery and equipment 6,652 6,084 3-5 years
Office furniture and equipment 956 759 10 years
Building improvements 850 812 5-10 years

10,369 9,566
Less accumulated depreciation (7,527) (6,729)

Property, plant and equipment, net $ 2,842 $ 2,837

</TABLE>

Depreciation expense for the years ended February 26, 1999
and February 27, 1998, was $ 707 and $482, respectively.

7. Long-Term Obligation and Credit Arrangements:

Long-term obligations at February 26, 1999 and February 27,
1998, consist of the following:

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Credit facility payable to banks $ - $ 467
Subordinated debt, net 4,124 3,730
Products liability settlement (net of
unamortized discount of $71 and $105 <PAGE 25>
in 1999 and 1998, respectively, based
on imputed rate of 11%) 134 220
Term loans payable accruing interest at
between 9% and 9.9% collateralized by
priority liens on certain equipment 82 87
4,340 4,504
Less current portion (121) (148)

$ 4,219 $ 4,356
</TABLE>

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

2000 $ 159
2001 119
2002 359
2003 -
2004 and thereafter 4,000

Total future obligations 4,637
Unamortized discounts or financing
cost associated with obligations (297)

$ 4,340

The approximate average loan balance, maximum aggregate
borrowings outstanding at any month-end payable under the credit
facility and subordinated debt during the fiscal years, and
weighted average interest rate computed by the days outstanding
method as of February 26, 1999 and February 27, 1998, are as
follows:

Approximate average loan balance $ 4,578 $ 3,024
Maximum aggregate $ 7,000 $ 5,134
Weighted average interest rate 7.87% 8.37%
</TABLE>

Interest is charged on direct borrowings at the bank's prime
rate or adjusted LIBOR in 1999 and 1998. The interest rates were
7.5% and 8.25% at February 26, 1999 and February 27, 1998,
respectively.

The Company's letter of credit limit is $5.0 million,
provided that the cumulative of all outstanding trade letters of
credit does not exceed $2.5 million. The balances outstanding
under these provisions at February 26, 1999, were $2.2 million.
Fees on letters of credit outstanding was 1.5% at February 26,
1999 and February 27, 1998, respectively.
<PAGE 26>
Recapitalization:

On March 27, 1997, the Company entered into a revolving
credit agreement (the Credit Agreement) with a new financial
institution, establishing a credit facility of $10 million. The
Credit Agreement is collateralized by substantially all of the
Company's assets. The Company is prohibited from declaring any
cash dividends under the terms of the Credit Agreement. This
facility bears interest at the bank's prime lending rate or
adjusted LIBOR and expires on May 31, 1999. A commitment fee of
0.2% is charged for unused available funds. The credit facility
includes certain covenants related to, among other things,
prohibitions on incurring additional debt, change in ownership
of certain officers, payment of dividends and maintenance, on a
quarterly basis, of a current ratio not less than 1.0 to 1, a
leverage ratio of 1 to 1, and a funds flow coverage ratio of 1.10
to 1. Substantially all of the Company's short-term financing is
provided by this bank. The Company incurred $357 of financing
fees related to origination of the Credit Agreement. This amount
is included in prepaid expenses and other assets and will be
charged to interest expense over the term of the Credit
Agreement. The Company had $7.8 million available under the
Credit Agreement at February 26, 1999.

Additionally, the Company issued $4 million of subordinated
debentures, bearing interest at 12% per annum, due March 27,
2004, to a financial institution, a director of which has been
subsequently appointed and elected to the Company's Board of
Directors. In connection with the subordinated debentures,
warrants were issued to acquire 332,820 shares of the Company's
common stock at an exercise price of $.50 per share; $499 of the
proceeds from the sale of the debentures was allocated to the
warrants and credited to capital contributed in excess of par
value of common stock. This amount, along with financing fees of
$311, which were netted against the proceeds, will be amortized
to interest expense over the term of the debentures, which is
seven years.

The Company also issued 25,000 shares of 11% redeemable
convertible preferred stock for $2.5 million. Each share of
convertible stock is convertible, at the option of the
shareholder, into 26.66 shares of the Company's common stock at a
price of $3.75 per share. Financing fees for the preferred stock
were approximately $208, which were netted against the proceeds
and will be accreted to retained earnings over five years. The
preferred stock is mandatorily redeemable by the Company
beginning in 2002 at a rate of one-third per year (see also
footnote 15.

Total financing fees associated with the recapitalization
were approximately $876. The proceeds from these transactions
were used to repay, in full, amounts outstanding with a prior
lender.
<PAGE 27>
The components of the subordinated debt and preferred stock
at February 26, 1999, are as follows:

Subordinated Preferred
debt stock

Face value $ 4,000 $ 2,500
Deferred financing costs (311) (208)
Accretion of preferred stock - 80
Amortization of financing costs 85 -
3,774 2,372
Debt issued for acquisition 350 -

Balance at February 26, 1999 $ 4,124 $ 2,372

As a condition to the extension of the prior credit facility
through March 31, 1997, warrants were issued to purchase 200,000
shares of the Company's common stock at a price equal to $2.59.
The warrants will be exercisable through 2001. If the holder
desires to sell or transfer any of its warrants, the Company has
the right of first refusal. A deferred charge of $202 was
assigned to the warrants and amortized to profit and loss during
the year ended February 28, 1997. Warrants issued provide for
adjustments of the exercise price and the number of shares
issuable thereunder, in the event that the Company issues
additional shares of common stock or rights to purchase common
stock at a price less than the current warrant price or current
market price, whichever is greater.

Product Liability Settlement:

During June 1995, the Company entered into a settlement with
the employee of a customer who brought a products liability claim
against the Company. The settlement of $1,195 will be satisfied
with (i) funds of $547 (including accrued interest) previously
deposited by the Company's products liability insurance carrier
with the U.S. District Court, and (ii) a settlement payable to
the plaintiff for the remaining amount of $648. The Company paid
$53 by July 20, 1995 and $100 on April 20, 1996. In
September 1996, the Company renegotiated the payment schedule.
For the period beginning October 1996, the company will pay $10
per month. The claimant did reserve the right to pursue
additional payment amounts as per the original settlement
agreement of July 29, 1995. The Company has recorded a discount
of $71 on this settlement based on an imputed interest rate of
11%, which is amortized over the term of the settlement.

The carrying value of the aforementioned financial
instruments approximates their fair values at February 26, 1999.
<PAGE 28>
8. Related Parties:

Convertible Notes Payable:

Notes payable at February 27, 1998 represented amounts due
to directors, executive officers and their affiliates. These
notes were paid in full during 1999.

ETC Europe:

The Company transacts its business in Europe through ETC
Europe, an affiliated entity which is 99% owned by the president
of the Company. Sales through ETC Europe were $ 1,957 and $4,932
in 1999 and 1998, respectively. Amounts due from ETC Europe as
of February 26, 1999 and February 27, 1998, were $ 56 and $-0-,
respectively (see also footnote 15).

Subordinated Debt and Preferred Stock:

During 1999 a director of ETC was also a director of one of
its creditors (see note 7 and note 15).

9. Leases:

Operating Leases:

The Company leases certain premises and office equipment
under operating leases which expire over the next five years.
Future minimum rental payments required under noncancellable
operating leases having a remaining term expiring after one
fiscal year as of February 26, 1999, are $60 in 2000; $27 in
2001; $17 in 2002; $6 in 2003; and $-0- in 2004.

Total rental expense for all operating leases for the years
ended February 26, 1999 and February 27, 1998, was approximately
$69 and $106, respectively.

10. Income Taxes:

The components of the provision (benefit) for income taxes
are as follows:

Year Ended Year Ended
February 26, February 27,
1999 1998
Currently payable:
Federal $ 1,272 $ 1,099
State 184 24
Foreign taxes 111 -
1,567 1,123

Deferred:
Federal (333) (142)
State (33) (15)
(366) (157)
<PAGE 29>

$ 1,201 $ 966

A reconciliation of the statutory federal income tax
(benefit) to the effective tax is as follows:

Year Ended Year Ended
February 26, February 27,
1999 1998

Statutory income tax 34.0% 34.0%
State income tax, net of federal tax
benefit and state net operating
loss carryforwards in 1998 3.9 (0.6)
Foreign sales corporation (4.4) (4.9)
Other 1.5 6.5
35.0% 35.0%

The tax effects of the primary temporary differences are as
follows:
1999 1998
Deferred tax assets:
Net arbitration award against Company $ 446 $ -
Net products liability settlement 161 70
Vacation reserve 45 43
Inventory reserve 236 389
Receivable reserve 145 142
Warranty reserve 44 44
Other, net 59 82

Total current deferred tax asset $ 1,136 $ 770

Deferred tax liabilities:

Amortization of capitalized
software $ 407 $ 432
Depreciation 295 270

Total noncurrent deferred tax
liability $ 702 $ 702
<PAGE 30>
11. Business Segment Information:

The Company primarily manufactures, under contract, various
types of high-technology equipment which it has designed and
developed. The Company considers its business activities to be
divided into two segments: ATS and Industrial Simulation. The
ATS business produces devices which create and monitor the
physiological effects of motion, including spatial disorientation
and centrifugal forces for medical, training, research and
entertainment markets. The Industrial Simulation business
produces chambers that create environmental situations that are
used for sterilization, research and medical applications. The
following segment information reflects the accrual basis of
accounting:

<TABLE>
<CAPTION>
Industrial
ATS Simulation Total
1999
<S> <C> <C> <C>
Net sales $ 24,465 $ 4,760 $ 29,225
Interest expense 711 84 795
Depreciation and amortization 1,289 353 1,642
Operating income (loss) 5,697 (89) 5,608
Income tax provision (benefit) 1,745 (61) 1,684
Identifiable assets 22,470 2,644 25,114
Expenditures for segment assets 438 26 464

1998

Net sales $ 22,055 $ 7,229 $ 29,284
Interest expense 808 158 966
Depreciation and amortization 1,048 415 1,463
Operating income (loss) 4,231 691 4,922
Income tax provision (benefit) 1,198 187 1,385
Identifiable assets 14,902 2,917 17,819
Expenditures for segment assets 435 85 520

<CAPTION>
1999 1998
<S> <C> <C>
Reconciliation to consolidated amounts:
Segment operating income $ 5,608 $ 4,922
Less interest expense (795) (966)
Less income taxes (1,684) (1,385)

Total profit for segments 3,129 2,571

Corporate home office expense (849) (714)
Interest and other expenses (517) (482)
Income tax benefit 483 419
Minority interest (76) -

Net income $ 2,170 $ 1,794

</TABLE>

Segment operating income (loss) consists of net sales less
applicable costs and expenses relating to these revenues.
Unallocated general corporate expenses, letter of credit fees,
<PAGE 31> interest expense, 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 are used
in each of the segments.
<PAGE 32>
12. Business Segment Information (Continued):

Approximately 24% of sales totalling $7,005 in 1999 were
made to one international customer in the ATS segment.
Approximately 19%, 11%, and 10% of sales in 1998 were made to two
international customers and one domestic commercial account,
totalling sales of $5,492, $3,266, and $3,013, respectively, in
the ATS segment.

Included in the segment information for the year ended
February 26, 1999 are export sales of $22,876. Of these amounts,
there are sales to or relating to governments in Europe ($7,005)
and the Middle East ($3,140) for the sales of ATS equipment.
Sales to the U.S. Government and its agencies aggregate $1,158
for the year ended February 26, 1999.

Included in the segment information for the year ended
February 27, 1998 are export sales of $17,490. Of these amounts,
there are sales to or relating to governments or commercial
customers of Europe ($6,197), the Middle East ($2,457) and Asia
($3,456) for the sales of ATS equipment. Sales to the U.S.
Government and its agencies aggregated $2,936 for the year ended
February 27, 1998.

13. Stock Options:

In August, 1999 the Company adopted an Incentive Stock
Option Plan to replace the 1998 Incentive Stock Option Plan which
expired in August, 1998. The plan authorizes a committee of the
Board of Directors to grant options for the purchase of up to
500,000 shares of common stock to qualifying officers and other
key employees. The Plan provides that option price shall not be
less than 100% (or in the case of a ten percent owner 110%) of
the current market price of the stock on the date of the grant.
Options may be exercised on a cumulative basis at the rate of 25%
per year commencing one year after the date of grant. The Plan
will terminate on August 1, 2008. At February 26, 1999, there
were 321,500 shares available to be granted under the Plan.

Since the exercise price of each option is not less than
100% of the current market price of the Company's stock on the
date of grant, no compensation cost has been recognized for the
Plan. Had compensation cost for the Plan been determined based
on the fair value of the options at the grant dates consistent
with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below. Reported amounts reflect the 2 for 1
stock split declared by the Company on February 25, 1999 (see
note 1).
<PAGE 33>
1999 1998

Net income:
As reported $ 2,170 $ 1,794
Pro forma $ 2,073 $ 1,765

Basic earnings per share:
As reported $ .32 $ .25
Pro forma $ .30 $ .24

Diluted earnings per share:
As reported $ .29 $ .23
Pro forma $ .28 $ .22

The fair value of each option grant is estimated on the date
of grant using the Black-Scholes options-pricing model with the
following weighted average assumptions used for grants in 1999
and 1998: dividend yield of 0% and 0%; expected volatility of 54%
and 60%; risk-free interest rate of 5.47% and 6.2%; and expected
life of five and four years.

A summary of the status of the Plan as of February 26, 1999
and February 27, 1998, and changes during the years ending on
those dates is presented below.

<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 92,350 $ 1.99 197,620 $ 1.88
Granted 490,000 7.05 - -
Exercised (38,650) 1.78 (79,670) 1.58
Forfeited - - (25,600) 2.25
Outstanding at end of year 543,700 6.57 92,350 1.99

Options exercisable at year end 26,850 22,288
Weighted average fair value of
options granted during the year $ 3.72 $ -

</TABLE>

The following information applies to options outstanding at
February 26, 1999:

<TABLE>
<CAPTION>
Options outstanding Options exercisable

Weighted
Number average Weighted Number Weighted
Outstanding at remaining average exercisable at average
February 26, contractual exercise February 26, exercise
Range of exercise prices 1999 life (years) price 1999 price
<S> <C> <C> <C> <C> <C>
$1.75 to $2.25 53,700 7.5 years $2.21 26,850 $2.21
$5.00 to $7.81 490,000 9.8 years $7.05 - -
</TABLE> <PAGE 34>

14. Claims and Litigation:

A lawsuit was commenced against the Company in April 1997 in
the United States District Court for the District of Puerto Rico
by an employee of a customer who claims to have been injured as a
result of an alleged malfunction of a sterilizer manufactured by
the Company. The plaintiff is seeking $3 million in damages.
The Company has up to $10 million of products liability coverage,
subject to a $100 deductible. The outcome of this litigation is
not currently predictable.

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

14. Employee Benefit Plan

The Company maintains a retirement savings 401(k) plan for
eligible employees. The Company's contributions to the plan are
based on a percentage of the employees' qualifying contributions.
The Company's contributions totalled $103 and $91 in 1999 and
1998, respectively.

15. Subsequent Events:

ETC Europe: Effective March 1, 1999, the Company signed an
agreement to purchase 99% of ETC Europe from the President of the
Company. The sale price was approximately $100. On May 8, 1999,
a deposit payment of $35 was made; the balance will be paid upon
receipt of audited financial statements.

New Subsidiary: On April 16, 1999, the company formed a new
wholly owned subsidiary, Entertainment Technology Corporation.
This subsidiary will handle all of the Company's future
entertainment projects.

Conversion of Preferred Stock: On February 26, 1999, the
Company issued a redemption notice to redeem the outstanding
25,000 shares of Series A Preferred Stock in their entirety. On
March 25, 1999, the Company received notice that Sirrom Capital
Corporation had exercised its conversion privilege under the
terms of the agreement to convert its 25,000 shares of Series A
Preferred Stock into the Company's common shares. Consequently,
on April 19, 1999, the series A Preferred was retired and 666,666
shares of common stock were issued to Sirrom Capital. Concurrent
with this transaction the company reclassed approximately $2.4
million of Preferred Stock value to common stock at par and
additional paid in capital.
<PAGE 35>
16. Quarterly Consolidated Financial Information (Unaudited):

Financial data for the interim periods of 1999 and 1998 were
as follows:

Quarter Ended

Fiscal Year 1999 May August November February
29 28 27 26

Net sales $ 7,460 $ 5,996 $ 7,475 $ 8,294
Gross profit 2,749 2,283 2,648 3,992
Operating income 999 829 1,003 1,928
Income before income taxes 712 441 597 1,697
Minority interest 61 (10) 25
Net income 464 234 399 1,073
Earnings per common share:
Basic .07 .03 .05 .17
Diluted .07 .02 .05 .15

Quarter Ended

Fiscal Year 1998 May August November February
30 29 28 27

Net sales $ 6,644 $ 7,181 $ 7,639 $ 7,820
Gross profit 1,960 2,358 2,467 2,513
Operating income 790 1,095 1,143 1,180
Income before income taxes 546 631 755 828
Net income 360 406 491 537
Earnings per common share:
Basic .05 .05 .07 .08
Diluted .05 .05 .06 .07
<PAGE 36>

EXHIBIT 21

List of Subsidiaries

<TABLE>
<CAPTION>
Jurisdiction in Percent of Company's
Name of Entity Which Organized Equity Interest
<S> <C> <C>
ETC International Corp. U.S. Virgin Islands 100%

Entertainment Technology
Corp. Pennsylvania 100%

Environmental Tectonics
(Europe) Limited Great Britain, UK 99%

</TABLE>

Exhibit 23

Consent of Independent Certified Public Accountants

We have issued our report dated April 30, 1999, accompanying
the consolidated financial statements incorporated by reference
or included in the Annual Report of Environmental Tectonics
Corporation and Subsidiary on Form 10-KSB for the year ended
February 26, 1999. We hereby consent to the incorporation by
reference in the Registration Statement of Environmental
Tectonics Corporation and Subsidiary of Form S-8 (File No.
333-65469, effective October 8, 1998), Form S-8 (File No.
2-92407, effective August 14, 1984), Form S-8 (File No. 33-31211,
effective September 22, 1989) and on Form S-3 (File No. 33-42219,
effective September 4, 1991).

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
April 30, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-26-1999
<PERIOD-END> FEB-26-1999
<CASH> 5,391
<SECURITIES> 0
<RECEIVABLES> 10,041
<ALLOWANCES> 385
<INVENTORY> 3,118
<CURRENT-ASSETS> 30,504
<PP&E> 10,369
<DEPRECIATION> 7,527
<TOTAL-ASSETS> 35,448
<CURRENT-LIABILITIES> 16,749
<BONDS> 0
0
2,372
<COMMON> 3,548
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,448
<SALES> 29,225
<TOTAL-REVENUES> 29,225
<CGS> 17,553
<TOTAL-COSTS> 6,913
<OTHER-EXPENSES> 188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,124
<INCOME-PRETAX> 3,447
<INCOME-TAX> 1,201
<INCOME-CONTINUING> 2,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,246
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.29

</TABLE>