##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|           |  |                                                                                         
|           |  | For the quarterly period ended December 31, 2002                                        
|           |  |                                                                                         
|or        
|           |  |                                                                                         
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|           |  |                                                                                         
|           |  | For the transition period from      to                                                  

Commission File Number: 001-8988

ECC International Corp.



---

(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 23-1714658                          
|                                                              
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|2001 West Oak Ridge Road, Orlando, FL                          |  | 32809-3803                          
|                                                              
|(Address of principal executive offices)                       |  | (Zip Code)                          

(407) 859-7410

(Registrants telephone number, including area code)


Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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.

[X] Yes       [   ] No

As of February 3, 2003 there were 7,881,197 shares of the Registrants
Common Stock, $.10 par value per share outstanding.





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##### 



PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In Thousands Except Per Share Data)
(Unaudited)

|                                                    |                                      |                              |        |            |       |            |        |       |       |  
|--------------------------------------------------- | ------------------------------------ | ---------------------------- | ------ | ---------- | ----- | ---------- | ------ | ----- | ----- | -
|                                                    |                                      |                              |        | Six Months |       | Six Months
|                                                    |                                      |                              |        | Ended      |       | Ended     
|                                                    |                                      |                              |        | 12/31/2002 |       | 12/31/2001
|                                                    |                                      |                              |        |            |       |           
|Sales                                               |                                      | $                            | 14,325 |            |       | $          | 12,897 |      
|Cost of Sales                                       |                                      |                              | 9,273  |            |       |            | 9,004  |      
|                                                    |                                      |                              |        |            |       |            |        |      
|Gross Profit                                        |                                      |                              | 5,052  |            |       |            | 3,893  |      
|Expenses:                                           |                                      |                              |        |            |       |            |        |      
|                                                    | Selling, General & Administrative    |                              |        | 2,673      |       |            |        | 3,164 |      
|                                                    | Independent Research and Development |                              |        | 628        |       |            |        | 881   |      
|                                                    |                                      |                              |        |            |       |            |        |      
|                                                    |                                      | Total Expenses               |        |            | 3,301 |            |        |       | 4,045 |  
|                                                    |                                      |                              |        |            |       |            |        |      
|Operating Income/(Loss)                             |                                      |                              | 1,751  |            |       |            | (152   | )    
|Other Income/(Expense):                             |                                      |                              |        |            |       |            |        |      
|                                                    | Interest Income                      |                              |        | 47         |       |            |        | 34    |      
|                                                    | Interest Expense                     |                              |        | (43        | )     |            |        | (88   | )    
|                                                    | Other  Net                          |                              |        |           |       |            |        | 45    |      
|                                                    |                                      |                              |        |            |       |            |        |      
|                                                    |                                      | Total Other Income/(Expense) |        |            | 4     |            |        |       | (9    | )
|                                                    |                                      |                              |        |            |       |            |        |      
|Income/(Loss) Before Income Taxes                   |                                      |                              | 1,755  |            |       |            | (161   | )    
|Provision for Income Taxes                          |                                      |                              |       |            |       |            |       |      
|                                                    |                                      |                              |        |            |       |            |        |      
|Net Income/(Loss)                                   |                                      | $                            | 1,755  |            |       | $          | (161   | )    
|                                                    |                                      |                              |        |            |       |            |        |      
|Income/(Loss) Per Common Share  Basic and Diluted: |                                      |                              |        |            |       |            |        |      
|Net Income/(Loss) Per Common Share  Basic/Diluted  |                                      | $                            | 0.22   |            |       | $          | (0.02  | )    
|                                                    |                                      |                              |        |            |       |            |        |      

See accompanying notes to the consolidated financial statements.

2



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##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In Thousands Except Per Share Data)
(Unaudited)

|                                                    |                                      |                              |       |              |       |              |       |       |       |  
|--------------------------------------------------- | ------------------------------------ | ---------------------------- | ----- | ------------ | ----- | ------------ | ----- | ----- | ----- | -
|                                                    |                                      |                              |       | Three Months |       | Three Months
|                                                    |                                      |                              |       | Ended        |       | Ended       
|                                                    |                                      |                              |       | 12/31/2002   |       | 12/31/2001  
|                                                    |                                      |                              |       |              |       |             
|Sales                                               |                                      | $                            | 6,973 |              |       | $            | 6,749 |      
|Cost of Sales                                       |                                      |                              | 4,701 |              |       |              | 4,573 |      
|                                                    |                                      |                              |       |              |       |              |       |      
|Gross Profit                                        |                                      |                              | 2,272 |              |       |              | 2,176 |      
|Expenses:                                           |                                      |                              |       |              |       |              |       |      
|                                                    | Selling, General & Administrative    |                              |       | 1,087        |       |              |       | 1,367 |      
|                                                    | Independent Research and Development |                              |       | 345          |       |              |       | 397   |      
|                                                    |                                      |                              |       |              |       |              |       |      
|                                                    |                                      | Total Expenses               |       |              | 1,432 |              |       |       | 1,764 |  
|                                                    |                                      |                              |       |              |       |              |       |      
|Operating Income/(Loss)                             |                                      |                              | 840   |              |       |              | 412   |      
|Other Income/(Expense):                             |                                      |                              |       |              |       |              |       |      
|                                                    | Interest Income                      |                              |       | 20           |       |              |       | 26    |      
|                                                    | Interest Expense                     |                              |       | (21          | )     |              |       | (64   | )    
|                                                    | Other  Net                          |                              |       | 19           |       |              |       | 1     |      
|                                                    |                                      |                              |       |              |       |              |       |      
|                                                    |                                      | Total Other Income/(Expense) |       |              | 18    |              |       |       | (37   | )
|                                                    |                                      |                              |       |              |       |              |       |      
|Income/(Loss) Before Income Taxes                   |                                      |                              | 858   |              |       |              | 375   |      
|Provision for Income Taxes                          |                                      |                              |      |              |       |              |      |      
|                                                    |                                      |                              |       |              |       |              |       |      
|Net Income/(Loss)                                   |                                      | $                            | 858   |              |       | $            | 375   |      
|                                                    |                                      |                              |       |              |       |              |       |      
|Income/(Loss)
Per Common Share  Basic and Diluted: |                                      |                              |       |              |       |              |       |      
|Net Income/(Loss) Per Common Share  Basic/Diluted  |                                      | $                            | 0.11  |              |       | $            | 0.05  |      
|                                                    |                                      |                              |       |              |       |              |       |      

See accompanying notes to the consolidated financial statements.

3



---



##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)

|                                    |                                                                             |                      |        |             |        |           |        |       |        | 
|----------------------------------- | --------------------------------------------------------------------------- | -------------------- | ------ | ----------- | ------ | --------- | ------ | ----- | ------ | 
|                                    |                                                                             |                      |        | (Unaudited) |        | (Audited)
|                                    |                                                                             |                      |        | 12/31/2002  |        | 6/30/2002
|                                    |                                                                             |                      |        |             |        |          
|ASSETS                              |                                                                             |                      |        |             |        |           |        |      
|Current Assets:                     |                                                                             |                      |        |             |        |           |        |      
|                                    | Cash                                                                        |                      | $      | 6,812       |        |           | $      | 6,280 |       
|                                    | Accounts Receivable                                                         |                      |        | 2,421       |        |           |        | 2,152 |       
|                                    | Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts |                      |        | 10,868      |        |           |        | 9,458 |       
|                                    | Inventories                                                                 |                      |        | 675         |        |           |        | 920   |       
|                                    | Prepaid Expenses and Other                                                  |                      |        | 183         |        |           |        | 274   |       
|                                    |                                                                             |                      |        |             |        |           |        |      
|                                    |                                                                             | Total Current Assets |        |             | 20,959 |           |        |       | 19,084 | 
|                                    |                                                                             |                      |        |             |        |           |        |      
|Property, Plant and Equipment  Net |                                                                             |                      | 11,536 |             |        |           | 11,823 |      
|Other Assets                        |                                                                             |                      | 22     |             |        |           | 32     |      
|                                    |                                                                             |                      |        |             |        |           |        |      
|                                    |                                                                             | Total Assets         |        | $           | 32,517 |           |        | $     | 30,939 | 
|                                    |                                                                             |                      |        |             |        |           |        |      

Continued . . .

4



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##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands Except Share and Per Share Data)

|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |        | 
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | -- | ----------- | ------ | --------- | -- | ------ | ------ | 
|                                   |                                                                                                                                            |                                          |    | (Unaudited) |        | (Audited)
|                                   |                                                                                                                                            |                                          |    | 12/31/2002  |        | 6/30/2002
|                                   |                                                                                                                                            |                                          |    |             |        |          
|LIABILITIES & STOCKHOLDERS EQUITY |                                                                                                                                            |                                          |    |             |        |           |    |       
|Current Liabilities:               |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   | Accounts Payable                                                                                                                           |                                          |    | 2,253       |        |           |    | 2,121  |       
|                                   | Accrued Expenses and Other                                                                                                                 |                                          |    | 1,438       |        |           |    | 1,972  |       
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   |                                                                                                                                            | Total Current Liabilities                |    |             | 3,691  |           |    |        | 4,093  | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|Deferred Income Taxes              |                                                                                                                                            |                                          | 61 |             |        |           | 61 |       
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   |                                                                                                                                            | Total Liabilities                        |    |             | 3,752  |           |    |        | 4,154  | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       
|COMMITMENTS AND CONTINGENCIES      |                                                                                                                                            |                                          |    |             |        |           |    |       
|Stockholders Equity:              |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   | Preferred Stock, $.10 par; 1,000,000 shares
authorized; none issued and outstanding                                                        |                                          |    |            |        |           |    |       |       
|                                   | Common Stock, $.10 par; 20,000,000
shares authorized; issued and outstanding,
8,608,197 and 7,881,197
(8,577,608 and 7,850,608 at 6/30/02) |                                          |    | 861         |        |           |    | 858    |       
|                                   | Note Receivable from Stockholder                                                                                                           |                                          |    |            |        |           |    | (168   | )     
|                                   | Capital in Excess of Par                                                                                                                   |                                          |    | 25,547      |        |           |    | 25,493 |       
|                                   | Retained Earnings                                                                                                                          |                                          |    | 5,266       |        |           |    | 3,511  |       
|                                   | Treasury Stock, at cost (727,000 shares)                                                                                                   |                                          |    | (2,909      | )      |           |    | (2,909 | )     
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   |                                                                                                                                            | Total Stockholders Equity               |    |             | 28,765 |           |    |        | 26,785 | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   |                                                                                                                                            | Total Liabilities & Stockholders Equity |    | $           | 32,517 |           |    | $      | 30,939 | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |       

See accompanying notes to the consolidated financial statements.

5



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##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(In Thousands)
(Unaudited)

|                                                    |                                                                             |   |            |        |            |   |       |        |  
|--------------------------------------------------- | --------------------------------------------------------------------------- | - | ---------- | ------ | ---------- | - | ----- | ------ | -
|                                                    |                                                                             |   | Six Months |        | Six Months
|                                                    |                                                                             |   | Ended      |        | Ended     
|                                                    |                                                                             |   | 12/31/2002 |        | 12/31/2001
|                                                    |                                                                             |   |            |        |           
|Cash Flows From Operating Activities:               |                                                                             |   |            |        |            |   |       |       
|Net Income/(Loss)                                   |                                                                             | $ | 1,755      |        |            | $ | (161  | )     
|Items Not Requiring Cash:                           |                                                                             |   |            |        |            |   |       |       
|                                                    | Depreciation                                                                |   |            | 744    |            |   |       | 1,015  |  
|                                                    | Amortization                                                                |   |            |       |            |   |       | 50     |  
|                                                    | (Gain)/Loss on Disposal of Equipment                                        |   |            | 48     |            |   |       | (5     | )
|Changes in Certain Assets and Liabilities:          |                                                                             |   |            |        |            |   |       |       
|                                                    | Accounts Receivable                                                         |   |            | (269   | )          |   |       | 1,174  |  
|                                                    | Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts |   |            | (1,410 | )          |   |       | 2,078  |  
|                                                    | Inventories                                                                 |   |            | 245    |            |   |       | 7      |  
|                                                    | Prepaid Expenses and Other                                                  |   |            | 54     |            |   |       | 44     |  
|                                                    | Accounts Payable                                                            |   |            | 132    |            |   |       | (315   | )
|                                                    | Accrued Expenses and Other Long-Term Liabilities                            |   |            | (534   | )          |   |       | (445   | )
|                                                    |                                                                             |   |            |        |            |   |       |       
|Net Cash Provided By/(Used In) Operating Activities |                                                                             |   | 765        |        |            |   | 3,442 |       
|                                                    |                                                                             |   |            |        |            |   |       |       
|Cash Flows From Investing Activities:               |                                                                             |   |            |        |            |   |       |       
|                                                    | Proceeds from Sales of Assets                                               |   |            | 27     |            |   |       | 5      |  
|                                                    | Additions to Property, Plant and Equipment                                  |   |            | (485   | )          |   |       | (276   | )
|                                                    |                                                                             |   |            |        |            |   |       |       
|Net Cash Provided by/(Used In) Investing Activities |                                                                             |   | (458       | )      |            |   | (271  | )     
|                                                    |                                                                             |   |            |        |            |   |       |       
|Cash Flows From Financing Activities:               |                                                                             |   |            |        |            |   |       |       
|                                                    | Proceeds From Issuance of Common Stock and
Options Exercised                |   |            | 57     |            |   |       | 10     |  
|                                                    | Note Receivable from Stockholder                                            |   |            | 168    |            |   |       |       |  
|                                                    | Borrowings Under Revolving Credit Facility                                  |   |            |       |            |   |       | 4,873  |  
|                                                    | Repayments Under Revolving Credit Facility                                  |   |            |       |            |   |       | (5,030 | )
|                                                    |                                                                             |   |            |        |            |   |       |       
|Net Cash Used In Financing Activities               |                                                                             |   | 225        |        |            |   | (147  | )     
|                                                    |                                                                             |   |            |        |            |   |       |       
|Net Increase/(Decrease) in Cash                     |                                                                             |   | 532        |        |            |   | 3,024 |       
|Cash at Beginning of the Period                     |                                                                             |   | 6,280      |        |            |   | 39    |       
|                                                    |                                                                             |   |            |        |            |   |       |       
|Cash at End of the Period                           |                                                                             | $ | 6,812      |        |            | $ | 3,063 |       
|                                                    |                                                                             |   |            |        |            |   |       |       

Continued....

6



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##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (Continued)
(In Thousands)
(Unaudited)

|                                                        |                                          |  |            |    |            |  |   |    | 
|------------------------------------------------------- | ---------------------------------------- |  | ---------- | -- | ---------- |  | - | -- | 
|                                                        |                                          |  | Six Months |    | Six Months
|                                                        |                                          |  | Ended      |    | Ended     
|                                                        |                                          |  | 12/31/2002 |    | 12/31/2001
|                                                        |                                          |  |            |    |           
|Supplemental Disclosure of Cash Flow Information:       |                                          |  |            |    |            |  |   |   
|Cash Paid During the Year For:                          |                                          |  |            |    |            |  |   |   
|                                                        | Interest                                 |  | $          | 42 |            |  | $ | 88 | 
|Supplemental Schedule of Non Cash Financing Activities: |                                          |  |            |    |            |  |   |   
|                                                        | Issuance of Director Equity Compensation |  | $          |   |            |  | $ | 8  | 

See accompanying notes to the consolidated financial statements.

7



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##### 



ECC INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | The accompanying consolidated financial statements are unaudited and
have been prepared by ECC International Corp. (the Company) pursuant to
the rules and regulations of the Securities and Exchange Commission. The
June 30, 2002 consolidated balance sheet was derived from audited
consolidated financial statements but does not include all disclosures
required by generally accepted accounting principles in the United States
of America. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of
only normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations, comprehensive
income and cash flows for the interim presented. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto in the Companys
Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has no Comprehensive Income other than Net Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                             |  |                |     |           |  |   |       |  
|---------------------------- |  | -------------- | --- | --------- |  | - | ----- | -
|                             |  | (In Thousands)
|                             |  | 12/31/2002     |     | 6/30/2002
|                             |  |                |     |          
|Work in Process              |  | $              | 101 |           |  | $ | 187   |  
|Raw Materials                |  |                | 631 |           |  |   | 1,343 |  
|                             |  |                |     |           |  |   |       |  
|Total Gross Value            |  |                | 732 |           |  |   | 1,530 |  
|Reserves for Excess/Obsolete |  |                | (57 | )         |  |   | (610  | )
|                             |  |                |     |           |  |   |       |  
|Net Value                    |  | $              | 675 |           |  | $ | 920   |  
|                             |  |                |     |           |  |   |       |  



|   |  | Work in process inventory is valued using the specific identification cost
method, but not in excess of net realizable value. The Company values raw
materials at the lower of average cost or market. On a quarterly basis,
inventory items are evaluated to identify slow-moving, excess or obsolete
parts. An assessment of potential use on future programs including spare
parts orders, repairs and warranty work, is the basis for the establishment
of a reserve for excess and obsolete inventory.                                                                                                                                                           
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | On June 24, 1999, the Company entered into a revolving credit facility
(Credit Facility) with Mellon Bank, N.A., which was subsequently
purchased by LaSalle Business Credit, totaling $12.5 million and expiring
on June 24, 2003. The Credit Facility was amended in November 2001 to
reduce the line of credit to $5.0 million. Available borrowings are based
on a formula of receivables and property, as defined in the Credit
Facility. As of December 31, 2002, there was no outstanding balance under
the Credit Facility and the Company is in compliance with the
covenants. Based on the positive cash balance since July 13, 2001 and the
positive cash

8



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##### 





|   |  | projections for the balance of fiscal year 2003, management
believes that operational cash requirements can be funded internally.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Credit Facility includes a subjective acceleration clause as well as a
lockbox requirement under the control of the lender, whereby all
collections of trade receivables are used to immediately reduce any
outstanding balance under the Credit Facility.                                                                                                                                                                                                                                                                                                                                                        
|  
|4. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company has approximately $12.3 million of cumulative federal net
operating loss carryforwards, which expire between 2019 and 2022. In
addition, the Company had available at June 30, 2002, cumulative net
operating loss carryforwards of $18.0 million for Florida state income tax
purposes, which expire between 2019 and 2022. This amount is prior to an
impact due to current year profit. A 100% valuation allowance is
recorded against these deferred tax assets due to the uncertainty of
their ultimate realization.                                                                                 
|  
|5. |  | Unusual Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Dr. James C. Garrett, former President and Chief Executive Officer of the
Company resigned in June 2002. Severance costs totaling approximately $255,000
were recorded in June 2002, and are included in Accrued Expenses and Other.
These costs will be paid during fiscal year 2003. On July 1, 2002, Dr.
Garrett repaid in full an outstanding Promissory Note owed the Company,
which included the principal balance of $146,250 and accrued interest
through June 30, 2002 of $33,000 for a total of $179,250.                                                                                                   
|  
|   |  | In July 2002, the Company reduced its operating cost by eliminating 15
employees or 11% of the employees. The employee termination benefits
associated with the reductions were approximately $202,000 and were
recorded in the first quarter of fiscal year 2003. Annual compensation
savings associated with these actions were approximately $1.2 million.                                                                                                                                                                                                                                                         
|  
|   |  | During the first quarter of fiscal year 2003, retention agreements were
implemented in order to temporarily retain 11 key employees whose jobs will
be outsourced due to the consolidation of the workforce into a smaller
space. Severance payments and retention bonuses totaling $106,400 will be
recorded as the employees are terminated based on the employees remaining
with the Company through completion dates ranging from November 2002
through March 2003. As of December 31, 2002, five of these key employees
left the Company and severance payments and retention bonuses totaling
$44,374 were paid.

9



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##### 





| |  | The following table sets forth the details and the cumulative activity
associated with the accrual of these termination costs (In Thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|                                                  |  |   |      |  
|------------------------------------------------- |  | - | ---- | -
|Accrued Employee Termination Benefits at 6/30/02  |  | $ | 255  |  
|Cash Payments                                     |  |   | (193 | )
|Employee Termination Benefits Incurred            |  |   | 202  |  
|                                                  |  |   |      |  
|Accrued Employee Termination Benefits at 9/30/02  |  |   | 264  |  
|Cash Payments                                     |  |   | (129 | )
|                                                  |  |   |      |  
|Accrued Employee Termination Benefits at 12/31/02 |  | $ | 135  |  
|                                                  |  |   |      |  



|6. |  | Business Segment Information                                                                                          
|-- |  | ----------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company operates in one segment-training. This segment includes the
design and manufacture of training simulators.
|  
|   |  | Sales by Class of Customer (In Thousands):                                                                            

|                           |             |             |   |                  |        |                    |   |            |        |            |   |       |       |  |   |       |       | 
|-------------------------- | ----------- | ----------- | - | ---------------- | ------ | ------------------ | - | ---------- | ------ | ---------- | - | ----- | ----- |  | - | ----- | ----- | 
|                           |             |             |   | Six Months Ended |        | Three Months Ended
|                           |             |             |   |                  |        |                   
|                           |             |             |   | 12/31/2002       |        | 12/31/2001         |   | 12/31/2002 |        | 12/31/2001
|                           |             |             |   |                  |        |                    |   |            |        |           
|U.S. Department of Defense |             |             |   |                  |        |                    |   |            |        |            |   |       |       |  |   |      
|                           | Direct      |             | $ | 6,072            |        |                    | $ | 3,250      |        |            | $ | 3,695 |       |  | $ | 1,679 |      
|                           | Subcontract |             |   | 8,253            |        |                    |   | 9,647      |        |            |   | 3,278 |       |  |   | 5,070 |      
|                           |             |             |   |                  |        |                    |   |            |        |            |   |       |       |  |   |      
|                           |             | Total Sales |   | $                | 14,325 |                    |   | $          | 12,897 |            |   | $     | 6,973 |  |   | $     | 6,749 | 
|                           |             |             |   |                  |        |                    |   |            |        |            |   |       |       |  |   |      



|   |  | Export Sales from the U.S. were not material for the three-month and
six-month periods ended December 31, 2002 and December 31, 2001. Export sales
do not include Foreign Military Sales through U.S. Government Agencies and
prime contractors of $157,000 and $240,000 during the three-month and
six-month periods ended December 31, 2002, respectively.                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Since a substantial portion of the Companys revenues are attributable to
long-term contracts with various government agencies, any factor affecting
procurement of long-term government contracts such as changes in
government spending, cancellation of weapons programs and delays in
contract awards could have a material impact on the Companys financial
condition and results of operations.
|  
|   |  | Sales by Geographic Area                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | All of the Companys Revenues, Operating Income and Long-Lived Assets are
within the United States.                                                                                                                                                                                                                                                                                                   
|  
|7. |  | Earnings/(Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Basic earnings/(loss) per common share is computed by dividing net
earnings/(loss) available to common stockholders by the weighted-average
number of common shares outstanding during
the period. Diluted earnings/(loss) per share is computed by dividing net
earnings/(loss) available
to common stockholders by the weighted-average number of common shares
outstanding during the              

10



---



##### 





| |  | period adjusted for the number of shares that would
have been outstanding if the dilutive potential common shares resulting
from the exercise of stock options had been issued. The diluted
earnings/(loss) per share does not assume the exercise of stock options
that would have an antidilutive effect on earnings/(loss) per share.                                                                                                                                                                                                                                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys dilutive potential common shares consist of stock options.
In calculating diluted earnings per share, 49,363 and 20,680 dilutive
potential common shares were included for the three-month and the six-month
periods ended December 31, 2002, respectively, and 16,397 dilutive
potential common shares were included for the three-month period ended
December 31, 2001, respectively. The number of potentially dilutive common
shares for the six-month period ended December 31, 2001 was 29,817. These
shares were not included in computing earnings per share since they would
have an anti-dilutive effect.
|
| |  | The number of shares outstanding for each period presented is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|        |  |                  |           |                    |  |            |           |            |  |  |           |  |  |  |           | 
|------- |  | ---------------- | --------- | ------------------ |  | ---------- | --------- | ---------- |  |  | --------- |  |  |  | --------- | 
|        |  | Six Months Ended |           | Three Months Ended
|        |  |                  |           |                   
|        |  | 12/31/2002       |           | 12/31/2001         |  | 12/31/2002 |           | 12/31/2001
|        |  |                  |           |                    |  |            |           |           
|Basic   |  |                  | 7,864,567 |                    |  |            | 7,830,965 |            |  |  | 7,878,227 |  |  |  | 7,831,630 | 
|Diluted |  |                  | 7,885,247 |                    |  |            | 7,830,965 |            |  |  | 7,927,590 |  |  |  | 7,848,027 | 



|8. |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During fiscal year 2001, the Company announced the formation of a strategic
planning committee to evaluate various strategic alternatives for enhancing
stockholder value including a potential sale of the Company. In order to
retain critical employees, retention agreements were implemented with 28
key employees whereby an incentive of 15-20% of their salaries would be
payable in two increments: half at the date of the sale of the Company and
half six months after the close of the sale. These payments totaling
$420,000 will be recorded in the event the Company is sold on or before
March 11, 2003.
|  
|   |  | During the first quarter of fiscal year 2003, retention agreements were
implemented in order to temporarily retain 11 key employees whose jobs will
be outsourced due to the consolidation of the workforce into a smaller
space. Severance payments and retention bonuses totaling $106,400 will be
recorded as the employees are terminated based on the employees remaining
with the Company through completion dates ranging from November 2002
through March 2003. As of December 31, 2002, five of these key employees
left the Company and severance payments and retention bonuses totaling
$44,374 were paid.   
|  
|   |  | The Company is party to various legal proceedings arising from normal
business activity. Management believes that the ultimate resolution of
these matters will not have an adverse material effect on the Companys
financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                       

11



---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



|   |  | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, and Section 27A of the Securities Act of 1933, as amended.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates,
plans, expects, and similar expressions are intended to identify
forward-looking statements. There are a number of factors that could
cause the Companys actual results to differ materially from those
indicated by such forward-looking statements. These factors include,
without limitation, those set forth below under the caption Certain
Factors That May Affect Future Operating Results.
|  
|a) |  | Material Changes in Financial Condition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | During the six-month period ended December 31, 2002, the Companys
principal source of cash was from operations. The Companys cash balance
increased by $0.5 million since fiscal year end 2002 due primarily to
lower working capital requirements to support operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Liquidity and Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | As of December 31, 2002, the Company is in compliance with the credit
facility covenants. See Note 3 of the Notes to Consolidated Financial
Statements for more information on the Credit Facility. Based on the
positive cash balance since July 13, 2001 and the positive cash
projections for the balance of fiscal year 2003, management believes that
operational cash requirements can be funded internally through the
next fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | During the six-month period ended December 31, 2002, the Company spent
approximately $350,000 to consolidate into 90,000 square feet of the
Orlando facility and to purchase new machinery and equipment. No material
additional funds are expected to be spent on this effort during the
remainder of the fiscal year. The Company is continuing to offer the real
estate for sale with a partial leaseback and is also evaluating the
prospect of upgrading the vacant portion of the facility and leasing it to
potential tenants.                                                                                                                                                                                                                                                                                                              
|  
|   |  | Dr. James C. Garrett, former
President and Chief Executive Officer of the
Company resigned in June 2002. Severance costs totaling approximately $255,000
were recorded in June 2002, and are included in Accrued Expenses and
Other. These costs will be paid during fiscal year 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In July 2002, the Company reduced its operating cost by eliminating 15
employees or 11% of the employees. The employee termination benefits
associated with the reductions were approximately $202,000 and were
recorded in the first quarter of fiscal year 2002. Annual compensation
savings associated with these actions were approximately $1.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

12



---



##### 





|   |  | During the first quarter of fiscal year 2003, retention agreements were
implemented in order to temporarily retain 11 key employees whose jobs
will be outsourced due to the consolidation of the workforce into a
smaller space. Severance payments and retention bonuses totaling $106,400
will be recorded as the employees are terminated based on the employees
remaining with the Company through completion dates ranging from November
2002 through March 2003. As of December 31, 2002, five of these key
employees left the Company and severance payments and retention bonuses
totaling $44,374 were paid.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Managements plans to improve future profitability include: (1) a
continuation of both direct and indirect cost reduction initiatives and
improvement of operating performance, (2) an aggressive focus on
obtaining follow-on awards to existing business, and (3) the
implementation of strategies to procure new business and penetrate new
markets.                                                                                                                                                                                                                                                               
|  
|   |  | Other than as stated above, the Company currently has no other material
commitments for capital expenditures. Management believes that with the
funds available under its projected cash flows, the Company will have
sufficient resources to meet planned operating commitments for the
foreseeable future.                                                                                                                                                                                                                                                                                                          
|  
|b) |  | Material Changes in Results of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Sales increased 3% or $223,000 and 11% or 1.4 million, respectively, for
the three-month and six month periods ended December 31, 2002, compared to
the same periods ended December 31, 2001 due primarily to higher
volume on the Javelin and EST 2000 programs, and the sales from the two
new SIMNET contracts. These increases were partially offset by less
volume on the CCTT and C-17 programs.                                                                                                                                                                                                                
|  
|   |  | Gross margins for the
three-month periods were relatively consistent at 33% and 32% in
fiscal year 2003 and 2002, respectively. For the six-month periods,
gross margins improved from 30% in fiscal year 2002 to 35% in fiscal
year 2003 due primarily to the higher sales volume as well as
continuing aggressive cost reduction actions.                                                                                                                                                                                                                                                                           
|  
|   |  | Selling, general and administrative expenses decreased 20% or $280,000 and
16% or $491,000, respectively, during the three-month and six month
periods ended December 31, 2002, compared to the same period ended
December 31, 2001, due primarily to the recovery of a previously
reserved receivable that reduced bad debt expense by $153,000 and to workforce and other costs
reduction actions that took place during fiscal year 2002 and early fiscal
year 2003.                                                                                                                                               
|  
|   |  | Independent research and development expenses decreased 13% or $52,000 and
29% or $252,000, respectively, for the three-month and six month periods
ended December 31, 2002, compared to the same periods ended December 31,
2001, due primarily to reduced activities related to the EST 2000 program.                                                                                                                                                                                                                                                                                                               
|  
|c) |  | Certain Factors That May Affect Future Operating Results                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements
made in this Quarterly Report on Form
10-Q and presented elsewhere by management from time to time. All
forward-looking statements included in this Form 10-Q are based on
information available to the Company on
the date hereof, and the Company assumes no obligation to update such
forward-looking statements.                                                                                                                                                
|  
|   |  | A number of uncertainties exist that could affect the Companys future
operating results including, without limitation, general economic
conditions, changes in government spending, borrowing availability under
and compliance with the Credit Facility, cancellation of weapons programs,                                                                                                                                                                                                                                                                                                                          

13



---



##### 





| |  | delays in contract awards, delays in the acceptance process of contract deliverables, the Companys continued
ability to develop and introduce products, the introduction of new
products by competitors, pricing practices of competitors, the cost and
availability of parts and the Companys ability to control costs.                                                                                                                                                                             
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | To date, a substantial portion of the Companys revenues have been
attributable to long-term contracts with various government agencies. As
a result, any factor adversely affecting procurement of long-term
government contracts could have a material adverse effect on the
Companys financial condition and results of operations.                                                                                                                                                                
|
| |  | Because of these and other factors, past financial performance should not
be considered an indication of future performance. The Companys future
quarterly operating results may vary significantly. Investors should not
use historical trends to anticipate future results and should be aware
that the trading price of the Companys Common Stock may be subject to
wide fluctuations in response to quarterly variations in operating
results and other factors, including those discussed above.

Critical Accounting Policies

The Company considers that certain accounting policies are critical due to the
estimation process involved in each of them. The assumptions and judgement
utilized in developing these estimates are based on the information available
at the time including an assessment of the risks and uncertainties. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the periods presented. The significant accounting policies,
which the Company believes are the most critical to aid in fully understanding
and evaluating our reported financial results, include the following:



| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Contract sales and anticipated profits are recognized using the percentage
of completion method measured by the ratio of costs incurred to date to
estimated total costs. The Company reevaluates the estimated costs to
complete on the entire contract on a quarterly basis. Any revisions in
estimated costs or contract value during the progress of the work may
affect the estimated gross margin percentage for the contract. Estimated
costs may be adjusted favorably or unfavorably based on projected changes
in areas such as labor efficiencies, material price negotiations, supplier
delivery schedules, design and development progress and overhead rate
projections. Changes in gross margin percentages have the effect of
adjusting the current period earnings applicable to performance in prior
periods.
|
| |  | Anticipated losses on contracts in progress are recorded in the period in
which the losses are identified. Claims would be included as a component
of contract value for purposes of revenue recognition at such time as the
amount is reasonably determinable and probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company values raw materials at the lower of average cost or market.
On a quarterly basis, inventory items are evaluated to identify
slow-moving, excess or obsolete parts. An assessment of potential use on
future programs including spare parts orders, repairs and warranty work,
is the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

14



---



##### 





| |  | basis for the establishment of a reserve for excess and obsolete
inventory. Potential usage assessments may be impacted favorably or
unfavorably by changes in the Companys projected contracts, parts
obsolescence and level of spares and repairs.                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Deferred Tax Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The Company has provided a full valuation reserve against its deferred tax
assets. In the future, if sufficient evidence of the Companys ability to
generate future taxable income becomes apparent, the Company may reduce
its valuation allowances resulting in income tax benefits in the Companys
consolidated statement of operations. Management evaluates the
realizability of the deferred tax assets quarterly and assesses the
valuation allowance quarterly.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to interest rate risk on its borrowings under the
Credit Facility. The Credit Facility has a floating interest rate based on
prevailing market rates. Accordingly, the carrying value of the debt is
generally not affected by fluctuations in interest rates. However, such
changes in interest rates could affect future interest expense and hence
earnings and cash flows.

ITEM 4. Controls and Procedures

Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Companys Chief Executive Officer and Chief Financial Officer
have concluded the Companys disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

15



---



##### 



PART II. OTHER INFORMATION
ECC INTERNATIONAL CORP.

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

At the Companys Annual Meeting of Stockholders held on December 13, 2002, the
following proposals were adopted by the vote specified below:

|         |  |                                                                                                                                                             |                        |         |           |           |       |           |        |         |  |  |        |   |  |  |         |         | 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | --------- | --------- | ----- | --------- | ------ | ------- |  |  | ------ | - |  |  | ------- | ------- | 
|         |  |                                                                                                                                                             |                        |         | Votes     |           | Votes |           |        |         |  |  | Broker
|Proposal |  | For                                                                                                                                                         |                        | Against |           | Abstain   |       | Non Votes
|         |  |                                                                                                                                                             |                        |         |           |           |       |          
|(1)      |  | To elect the Board of Directors                                                                                                                            
|         |  |                                                                                                                                                             | Julian J. Demora       |         |           | 7,447,500 |       |           |        | 3,419   |  |  |        |  |  |  |         | 37,760  | 
|         |  |                                                                                                                                                             | James R. Henderson     |         |           | 6,943,852 |       |           |        | 507,067 |  |  |        |  |  |  |         | 541,408 | 
|         |  |                                                                                                                                                             | Jesse L. Krasnow       |         |           | 7,449,550 |       |           |        | 1,369   |  |  |        |  |  |  |         | 35,710  | 
|         |  |                                                                                                                                                             | Warren G. Lichtenstein |         |           | 7,449,951 |       |           |        | 968     |  |  |        |  |  |  |         | 35,309  | 
|         |  |                                                                                                                                                             | Merrill A. McPeak      |         |           | 7,447,901 |       |           |        | 3,018   |  |  |        |  |  |  |         | 37,359  | 
|         |  |                                                                                                                                                             | Robert F. Mehmel       |         |           | 6,944,849 |       |           |        | 506,070 |  |  |        |  |  |  |         | 540,411 | 
|(2)      |  | To approve the Companys 2002 Employee
Stock Purchase Plan                                                                                                 
|         |  |                                                                                                                                                             |                        |         | 7,359,577 |           |       |           | 79,432 |         |  |  | 46,251 |   |  |  | 392,970 |        
|(3)      |  | To ratify the appointment of
PricewaterhouseCoopers, LLP as the
Companys independent certified
public accountants for the fiscal
year ending June 30, 2003
|         |  |                                                                                                                                                             |                        |         | 7,427,404 |           |       |           | 36,267 |         |  |  | 21,589 |   |  |  | 392,970 |        

ITEM 6. Exhibits and Reports on Form 8-K



| | a. |  | Exhibits
| | -- |  | --------

|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|99.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002    
|     |  |                                                                                                       
|99.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002    
|     |  |                                                                                                       
|99.3 |  | Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     |  |                                                                                                       
|99.4 |  | Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



| | b. |  | Reports on Form 8-K
| | -- |  | -------------------
|
| |    |  | None               

16



---



##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                            
|----------------------- |  | ---------------------------
|                        |  | ECC INTERNATIONAL CORP.    
|                        |  |                            
|Date: February 14, 2003 |  | /s/ Melissa Van Valkenburgh
|                        |  |                            
|                        |  | Melissa Van Valkenburgh    
|                        |  | Chief Financial Officer    

17