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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, 2001

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.

Yes x    No 
o


As of January 31, 2002 there were 7,836,844 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                                                                 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                           
|SIGNATURES                                                                                   



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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, 2001 AND 2000
(In Thousands Except Per Share Data)
(Unaudited)

|                                                    |                                      |                              |        |            |       |            |        |       |       | 
|--------------------------------------------------- | ------------------------------------ | ---------------------------- | ------ | ---------- | ----- | ---------- | ------ | ----- | ----- | 
|                                                    |                                      |                              |        | Six Months |       | Six Months
|                                                    |                                      |                              |        | Ended      |       | Ended     
|                                                    |                                      |                              |        | 12/31/2001 |       | 12/31/2000
|                                                    |                                      |                              |        |            |       |           
|Sales                                               |                                      | $                            | 12,897 |            |       | $          | 15,019 |      
|Cost of Sales                                       |                                      |                              | 9,004  |            |       |            | 12,466 |      
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Gross Profit                                        |                                      |                              | 3,893  |            |       |            | 2,553  |      
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Expenses:                                           |                                      |                              |        |            |       |            |        |      
|                                                    | Selling, General & Administrative    |                              |        | 3,164      |       |            |        | 4,311 |      
|                                                    | Independent Research and Development |                              |        | 881        |       |            |        | 232   |      
|                                                    |                                      |                              |        |            |       |            |        |       |      
|                                                    |                                      | Total Expenses               |        |            | 4,045 |            |        |       | 4,543 | 
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Operating Income/(Loss)                             |                                      |                              | (152   | )          |       |            | (1,990 | )    
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Other Income/(Expense):                             |                                      |                              |        |            |       |            |        |      
|                                                    | Interest Income                      |                              |        | 34         |       |            |        | 57    |      
|                                                    | Interest Expense                     |                              |        | (88        | )     |            |        | (105  | )    
|                                                    | Other  Net                          |                              |        | 45         |       |            |        | 147   |      
|                                                    |                                      |                              |        |            |       |            |        |       |      
|                                                    |                                      | Total Other Income/(Expense) |        |            | (9    | )          |        |       | 99    | 
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Income/(Loss) Before Income Taxes                   |                                      |                              | (161   | )          |       |            | (1,891 | )    
|Provision for Income Taxes                          |                                      |                              |       |            |       |            | 120    |      
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Net Income/(Loss)                                   |                                      | $                            | (161   | )          |       | $          | (2,011 | )    
|                                                    |                                      |                              |        |            |       |            |        |       |      
|Income/(Loss) Per Common Share -
Basic and Diluted: |                                      |                              |        |            |       |            |        |      
|Net Income/(Loss) Per Common Share-Basic/Diluted    |                                      | $                            | (0.02  | )          |       | $          | (0.24  | )    
|                                                    |                                      |                              |        |            |       |            |        |       |      

See accompanying notes to the consolidated financial statements.

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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(In Thousands Except Per Share Data)
(Unaudited)

|                                                    |                                      |                              |       |              |       |              |        |       |       |  
|--------------------------------------------------- | ------------------------------------ | ---------------------------- | ----- | ------------ | ----- | ------------ | ------ | ----- | ----- | -
|                                                    |                                      |                              |       | Three Months |       | Three Months
|                                                    |                                      |                              |       | Ended        |       | Ended       
|                                                    |                                      |                              |       | 12/31/2001   |       | 12/31/2000  
|                                                    |                                      |                              |       |              |       |             
|Sales                                               | $                                    |                              | 6,749 |              |       | $            | 7,548  |      
|Cost of Sales                                       |                                      |                              | 4,573 |              |       |              | 7,154  |      
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Gross Profit                                        |                                      |                              | 2,176 |              |       |              | 394    |      
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Expenses:                                           |                                      |                              |       |              |       |              |        |      
|                                                    | Selling, General & Administrative    |                              |       | 1,367        |       |              |        | 2,112 |      
|                                                    | Independent Research and Development |                              |       | 397          |       |              |        | 162   |      
|                                                    |                                      |                              |       |              |       |              |        |       |      
|                                                    |                                      | Total Expenses               |       |              | 1,764 |              |        |       | 2,274 |  
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Operating Income/(Loss)                             |                                      |                              | 412   |              |       |              | (1,880 | )    
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Other Income/(Expense):                             |                                      |                              |       |              |       |              |        |      
|                                                    | Interest Income                      |                              |       | 26           |       |              |        | 20    |      
|                                                    | Interest Expense                     |                              |       | (64          | )     |              |        | (61   | )    
|                                                    | Other  Net                          |                              |       | 1            |       |              |        | 21    |      
|                                                    |                                      |                              |       |              |       |              |        |       |      
|                                                    |                                      | Total Other Income/(Expense) |       |              | (37   | )            |        |       | (20   | )
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Income/(Loss) Before Income Taxes                   |                                      |                              | 375   |              |       |              | (1,900 | )    
|Provision for Income Taxes                          |                                      |                              |      |              |       |              | 120    |      
|                                                    |                                      |                              |       |              |       |              |        |       |      
|Net Income/(Loss)                                   | $                                    |                              | 375   |              |       | $            | (2,020 | )    
|                                                    |                                      |                              |       |              |       |              |       
|Income/(Loss) Per Common Share -
Basic and Diluted: |                                      |                              |       |              |       |              |        |      
|Net Income/(Loss) Per Common Share-Basic/Diluted    | $                                    |                              | 0.05  |              |       | $            | (0.25  | )    
|                                                    |                                      |                              |       |              |       |              |       

See accompanying notes the consolidated financial statements.

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

|                                    |                                                                             |                      |        |             |        |           |        |       |        | 
|----------------------------------- | --------------------------------------------------------------------------- | -------------------- | ------ | ----------- | ------ | --------- | ------ | ----- | ------ | 
|                                    |                                                                             |                      |        | (Unaudited) |        | (Audited)
|                                    |                                                                             |                      |        | 12/31/2001  |        | 6/30/2001
|                                    |                                                                             |                      |        |             |        |          
|ASSETS                              |                                                                             |                      |        |             |        |           |        |      
|Current Assets:                     |                                                                             |                      |        |             |        |           |        |      
|                                    | Cash                                                                        |                      | $      | 3,063       |        |           | $      | 39    |       
|                                    | Accounts Receivable                                                         |                      |        | 3,347       |        |           |        | 4,521 |       
|                                    | Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts |                      |        | 6,205       |        |           |        | 8,283 |       
|                                    | Inventories                                                                 |                      |        | 1,147       |        |           |        | 1,154 |       
|                                    | Prepaid Expenses and Other                                                  |                      |        | 268         |        |           |        | 307   |       
|                                    |                                                                             |                      |        |             |        |           |        |       |       
|                                    |                                                                             | Total Current Assets |        |             | 14,030 |           |        |       | 14,304 | 
|                                    |                                                                             |                      |        |             |        |           |        |       |       
|Property, Plant and Equipment  Net |                                                                             |                      | 12,614 |             |        |           | 13,352 |      
|Other Assets                        |                                                                             |                      | 61     |             |        |           | 116    |      
|                                    |                                                                             |                      |        |             |        |           |        |       |       
|                                    |                                                                             | Total Assets         |        | $           | 26,705 |           |        | $     | 27,772 | 
|                                    |                                                                             |                      |        |             |        |           |        |       |       

Continued...

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

|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |        | 
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | -- | ----------- | ------ | --------- | -- | ------ | ------ | 
|                                   |                                                                                                                                            |                                          |    | (Unaudited) |        | (Audited)
|                                   |                                                                                                                                            |                                          |    | 12/31/2001  |        | 6/30/2001
|                                   |                                                                                                                                            |                                          |    |             |        |          
|LIABILITIES & STOCKHOLDERS EQUITY |                                                                                                                                            |                                          |    |             |        |           |    |       
|Current Liabilities:               |                                                                                                                                            |                                          |    |             |        |           |    |       
|                                   | Current Portion of Long-Term Debt                                                                                                          |                                          | $  |            |        |           | $  | 157    |       
|                                   | Accounts Payable                                                                                                                           |                                          |    | 1,514       |        |           |    | 1,829  |       
|                                   | Accrued Expenses and Other                                                                                                                 |                                          |    | 1,500       |        |           |    | 1,927  |       
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|                                   |                                                                                                                                            | Total Current Liabilities                |    |             | 3,014  |           |    |        | 3,913  | 
|Deferred Income Taxes              |                                                                                                                                            |                                          | 61 |             |        |           | 61 |       
|Other Long-Term Liabilities        |                                                                                                                                            |                                          |   |             |        |           | 26 |       
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|                                   |                                                                                                                                            | Total Liabilities                        |    |             | 3,075  |           |    |        | 4,000  | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|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,
8,563,844 and 7,836,844
(8,557,285 and 7,830,285 at 6/30/01) |                                          |    | 856         |        |           |    | 856    |       
|                                   | Note Receivable from Stockholder                                                                                                           |                                          |    | (168        | )      |           |    | (168   | )     
|                                   | Capital in Excess of Par                                                                                                                   |                                          |    | 25,459      |        |           |    | 25,441 |       
|                                   | Retained Earnings                                                                                                                          |                                          |    | 392         |        |           |    | 552    |       
|                                   | Treasury Stock, at cost (727,000 shares)                                                                                                   |                                          |    | (2,909      | )      |           |    | (2,909 | )     
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|                                   |                                                                                                                                            | Total Stockholders Equity               |    |             | 23,630 |           |    |        | 23,772 | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       
|                                   |                                                                                                                                            | Total Liabilities & Stockholders Equity |    | $           | 26,705 |           |    | $      | 27,772 | 
|                                   |                                                                                                                                            |                                          |    |             |        |           |    |        |       

See accompanying notes to the consolidated financial statements.

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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(In Thousands)
(Unaudited)

|                                                    |                                                                             |   |            |        |            |   |        |        |  
|--------------------------------------------------- | --------------------------------------------------------------------------- | - | ---------- | ------ | ---------- | - | ------ | ------ | -
|                                                    |                                                                             |   | Six Months |        | Six Months
|                                                    |                                                                             |   | Ended      |        | Ended     
|                                                    |                                                                             |   | 12/31/2001 |        | 12/31/2000
|                                                    |                                                                             |   |            |        |           
|Cash Flows From Operating Activities:               |                                                                             |   |            |        |            |   |        |       
|Net Income/(Loss)                                   |                                                                             | $ | (161       | )      |            | $ | (2,011 | )     
|Items Not Requiring Cash:                           |                                                                             |   |            |        |            |   |        |       
|                                                    | Depreciation                                                                |   |            | 1,015  |            |   |        | 1,411  |  
|                                                    | Amortization                                                                |   |            | 50     |            |   |        | 38     |  
|                                                    | (Gain)/Loss on Disposal of Equipment                                        |   |            | (5     | )          |   |        | (137   | )
|Changes in Certain Assets and Liabilities:          |                                                                             |   |            |        |            |   |        |       
|                                                    | Accounts Receivable                                                         |   |            | 1,174  |            |   |        | 3,384  |  
|                                                    | Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts |   |            | 2,078  |            |   |        | (2,378 | )
|                                                    | Inventories                                                                 |   |            | 7      |            |   |        | (535   | )
|                                                    | Prepaid Expenses and Other                                                  |   |            | 44     |            |   |        | (9     | )
|                                                    | Accounts Payable                                                            |   |            | (315   | )          |   |        | 411    |  
|                                                    | Accrued Expenses and Other Long-Term Liabilities                            |   |            | (445   | )          |   |        | (1,186 | )
|                                                    |                                                                             |   |            |        |            |   |        |       
|Net Cash Provided By/(Used In) Operating Activities |                                                                             |   | 3,442      |        |            |   | (1,012 | )     
|                                                    |                                                                             |   |            |        |            |   |        |       
|Cash Flows From Investing Activities:               |                                                                             |   |            |        |            |   |        |       
|                                                    | Proceeds from Sales of Assets                                               |   |            | 5      |            |   |        | 148    |  
|                                                    | Additions to Property, Plant and Equipment                                  |   |            | (276   | )          |   |        | (186   | )
|                                                    |                                                                             |   |            |        |            |   |        |       
|Net Cash Provided by/(Used In) Investing Activities |                                                                             |   | (271       | )      |            |   | (38    | )     
|                                                    |                                                                             |   |            |        |            |   |        |       
|Cash Flows From Financing Activities:               |                                                                             |   |            |        |            |   |        |       
|                                                    | Proceeds From Issuance of Common Stock and
Options Exercised                |   |            | 10     |            |   |        | 176    |  
|                                                    | Purchase of Treasury Stock                                                  |   |            |       |            |   |        | (2,909 | )
|                                                    | Dividends Paid                                                              |   |            |       |            |   |        | (85    | )
|                                                    | Borrowings Under Revolving Credit Facility                                  |   |            | 4,873  |            |   |        | 1,955  |  
|                                                    | Repayments Under Revolving Credit Facility                                  |   |            | (5,030 | )          |   |        | (493   | )
|                                                    |                                                                             |   |            |        |            |   |        |       
|Net Cash Used In Financing Activities               |                                                                             |   | (147       | )      |            |   | (1,356 | )     
|                                                    |                                                                             |   |            |        |            |   |        |       
|Net Increase/(Decrease) in Cash                     |                                                                             |   | 3,024      |        |            |   | (2,406 | )     
|Cash at Beginning of the Period                     |                                                                             |   | 39         |        |            |   | 2,406  |       
|                                                    |                                                                             |   |            |        |            |   |        |       
|Cash at End of the Period                           |                                                                             | $ | 3,063      |        |            | $ |       |       
|                                                    |                                                                             |   |            |        |            |   |        |       

Continued....

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ECC INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (Continued)
(In Thousands)
(Unaudited)

|                                                        |                                          |  |            |    |            |  |   |    | 
|------------------------------------------------------- | ---------------------------------------- |  | ---------- | -- | ---------- |  | - | -- | 
|                                                        |                                          |  | Six Months |    | Six Months
|                                                        |                                          |  | Ended      |    | Ended     
|                                                        |                                          |  | 12/31/2001 |    | 12/31/2000
|                                                        |                                          |  |            |    |           
|Supplemental Disclosure of Cash Flow Information:       |                                          |  |            |    |            |  |   |   
|Cash Paid During the Year For:                          |                                          |  |            |    |            |  |   |   
|                                                        | Interest                                 |  | $          | 88 |            |  | $ | 99 | 
|Supplemental Schedule of Non Cash Financing Activities: |                                          |  |            |    |            |  |   |   
|                                                        | Issuance of Director Equity Compensation |  | $          | 8  |            |  | $ | 8  | 

See accompanying notes to the consolidated financial statements.

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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, 2001 consolidated balance sheet was derived from audited
consolidated financial statements but does not include all disclosures
required by generally accepted accounting principles. 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, 2001.
|  
|   |  | The Company has no other Comprehensive Income other than Net Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                  |  |                |        |           |  |   |        |  
|----------------- |  | -------------- | ------ | --------- |  | - | ------ | -
|                  |  | (In Thousands)
|                  |  | 12/31/2001     |        | 6/30/2001
|                  |  |                |        |          
|Work in Process   |  | $              | 200    |           |  | $ | 97     |  
|Raw Materials     |  |                | 3,771  |           |  |   | 3,869  |  
|                  |  |                |        |           |  |   |       
|Total Gross Value |  |                | 3,971  |           |  |   | 3,966  |  
|Reserves          |  |                | (2,824 | )         |  |   | (2,812 | )
|                  |  |                |        |           |  |   |       
|Net Value         |  | $              | 1,147  |           |  | $ | 1,154  |  
|                  |  |                |        |           |  |   |       

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | Work in process inventory is valued using the specific identification cost
method, but not in excess of net realizable value. Raw materials are
valued at the lower of average cost or market. The reserve for excess and
obsolete inventory is based on an analysis of the specific parts, which
includes an assessment of their potential use on future programs.                                                                                                                                            
|  
|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. Available borrowings are based on a formula of
accounts receivables and property, as defined in the Credit Facility. As
of December 31, 2001, there was no outstanding balance under the Credit
Facility.                                                                
|  
|   |  | The Company was not in compliance with certain financial covenants required
under the Credit Facility during fiscal year 2001. On November 5, 2001,
the Credit Facility was amended whereby the Company paid a fee of $40,000
to resolve the prior non-compliance issues, adjust the future financial
covenant requirements, reduce the line of credit from $12.5 million to $5.0
million and revise the fee structure. As of December 31, 2001, the Company
is in compliance with the amended covenants. Based

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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | on the positive cash balance since July 13, 2001 and the
positive cash projections for the balance of fiscal year 2002, 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 2021. In
addition, the Company had available at June 30, 2001, cumulative net
operating loss carryforwards of $12.8 million for Florida state income tax
purposes, which expire between 2019 and 2021. No tax provision was
recorded for the three-month period ended December 31, 2001, as the Company
anticipates utilization of the net operating loss carryforwards with a
reduction in the valuation allowance.
|  
|5. |  | Unusual Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | During fiscal year 2001, the Company reduced its operating costs by
eliminating approximately 45 employees or 15% of the total number of
employees during the first quarter and 60 employees or 24% of the total
number of employees during the second quarter. Termination benefits
associated with the reductions were approximately $517,000 in the first
quarter and approximately $901,000 in the second quarter. Annual
compensation costs associated with these actions were $1.5 million and $2.8
million, respectively.                      
|  
|   |  | On September 27, 2001, the Company further reduced its operating costs by
eliminating approximately 35 employees or 20% of the total remaining
employees. Annual compensation costs associated with these actions were
approximately $2.2 million. The employee termination benefits associated
with the reduction in workforce totaled approximately $272,000, of which
approximately $253,000 was recorded to cost of sales and $19,000 to
selling, general and administrative expenses.                                                            
|  
|   |  | 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 6/30/01  |  | $ | 105  |  
|Cash Payments                                     |  |   | (93  | )
|Employee Termination Benefits Incurred            |  |   | 272  |  
|                                                  |  |   |      |  
|Accrued Employee Termination Benefits at 9/30/01  |  |   | 284  |  
|Cash Payments                                     |  |   | (275 | )
|                                                  |  |   |      |  
|Accrued Employee Termination Benefits at 12/31/01 |  | $ | 9    |  
|                                                  |  |   |      |  

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|   |  |                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------
|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
|                           |             |  |                  |        |                   
|                           |             |  | 12/31/2001       |        | 12/31/2000         |  | 12/31/2001 |        | 12/31/2000
|                           |             |  |                  |        |                    |  |            |        |           
|U.S. Department of Defense |             |  |                  |        |                    |  |            |        |            |  |   |       |  |  |   |      
|                           | Direct      |  | $                | 3,250  |                    |  | $          | 5,765  |            |  | $ | 1,679 |  |  | $ | 3,504 | 
|                           | Subcontract |  |                  | 9,647  |                    |  |            | 9,254  |            |  |   | 5,070 |  |  |   | 4,044 | 
|                           |             |  |                  |        |                    |  |            |        |            |  |   |       |  |  |   |      
|                           | Total Sales |  | $                | 12,897 |                    |  | $          | 15,019 |            |  | $ | 6,749 |  |  | $ | 7,548 | 
|                           |             |  |                  |        |                    |  |            |        |            |  |   |       |  |  |   |      

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | Export Sales from the U.S. were not material for the three-month and
six-month periods ended December 31, 2001 and December 31, 2000. There
were no Foreign Military Sales for the three-month and six-month periods
ended December 31, 2001 and December 31, 2000, 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 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, 16,397 dilutive potential common
shares were included for the quarter ended December 31, 2001. The number
of potentially dilutive common shares for the six-month period ended
December 31, 2001, and the three-month and six-month periods ended December
31, 2000, were 29,817, 64,505, and 60,200, respectively. These shares were
not included in computing earnings per share since they would have an
anti-dilutive effect.                                                                                                                                                                            

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| |  |                                                                                                  
| |  | -------------------------------------------------------------------------------------------------
| |  | The weighted-average number of common shares outstanding for each period
presented is as follows:

|        |  |                  |           |                    |  |            |           |            |  |  |           |  |  |  |           | 
|------- |  | ---------------- | --------- | ------------------ |  | ---------- | --------- | ---------- |  |  | --------- |  |  |  | --------- | 
|        |  | Six Months Ended |           | Three Months Ended
|        |  |                  |           |                   
|        |  | 12/31/2001       |           | 12/31/2000         |  | 12/31/2001 |           | 12/31/2000
|        |  |                  |           |                    |  |            |           |           
|Basic   |  |                  | 7,830,965 |                    |  |            | 8,223,757 |            |  |  | 7,831,630 |  |  |  | 8,067,825 | 
|Diluted |  |                  | 7,830,965 |                    |  |            | 8,223,757 |            |  |  | 7,848,027 |  |  |  | 8,067,825 | 

|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 24
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
$500,000 will be recorded in the event the Company is sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|9. |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets (SFAS 143), and
Statement of Financial Accounting Standards No. 144, Asset Impairment and
Disposal Issues (SFAS 144). SFAS 143 addresses the diversity in practice
for recognizing asset retirement obligations. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. SFAS 144 supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of and amends Accounting Principles Board
Opinion No. 30 (APB 30) Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The Company does not
expect a significant impact on future financial results as a result of
adopting these standards.

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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 three-month and six-month periods ended December 31, 2001, the
Companys principal source of cash was from operations. The Companys
cash balance increased by $3,024,000 since fiscal year end 2001 primarily
due to collections on accounts receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Liquidity and Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Company was not in compliance with certain financial covenants
required under the Credit Facility during fiscal year 2001. On November
5, 2001, the Credit Facility was amended whereby the Company paid a fee of
$40,000 to resolve the prior non-compliance issues, adjust the future
financial covenant requirements, reduce the line of credit from $12.5
million to $5.0 million and revise the fee structure. As of December 31,
2001, there was no outstanding balance under the Credit Facility and
the Company was in compliance with the amended covenants. Based on
the positive cash balance since July 13, 2001 and the positive cash
projections for the balance of fiscal year 2002, management believes that
operational cash requirements can be funded internally.                                                           
|  
|   |  | The Company considers the capacity of its Orlando, Florida facilities to
exceed its present needs and is in the process of attempting to sell the
facilities to a third party with a long term leaseback of 75,000 square
feet. The Company is also considering selling the facility and moving to
a new location. At this time, the Company has engaged a broker in an
exclusive arrangement to assist in the sale but has no other agreements,
commitments or understandings with respect to the sale of the facility.                                                                                                                                                                                                                                                                                                                           
|  
|   |  | During the remainder of fiscal year 2002, the Company currently
anticipates spending approximately $250,000 for refurbishment of the
Orlando facility and new machinery and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | During fiscal year 2001, the Company reduced its operating costs by
eliminating approximately 105 employees or 35% of the total number of
employees. Termination benefits associated with the reductions were
approximately $1.4 million and annual                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | compensation costs associated with these actions were $4.3 million. All employee termination benefits were paid by June 30, 2001, with the exception of $105,000.                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | On September 27, 2001, the Company further reduced its operating costs by
eliminating approximately 35 employees or 20% of the total remaining
employees. Annual compensation costs associated with these actions were
approximately $2.2 million. The employee termination benefits associated
with the reduction in workforce totaled approximately $272,000, of which
approximately $253,000 was recorded to cost of sales and $19,000 to
selling, general and administrative expenses.                                                                                 
|  
|   |  | 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 decreased 11% or $0.8 million and 14% or $2.1 million for the
three-month and six-month periods ended December 31, 2001, respectively,
compared to the same periods ended December 31, 2000. The reduction in
sales is primarily due to the completion of the Javelin Multi-year 1 and
F-18 E/F maintenance trainer programs which was not offset by increased
revenues on new programs. The 15.6 million Javelin Field
Tactical Trainer contract which was awarded this quarter is expected
to contribute significantly to sales for the balance of the fiscal
year.
|  
|   |  | Gross profit as a percentage of sales increased to 32% and 30% for the
three-month and six-month periods ended December 31, 2001, compared to 5%
and 17% for the same periods ended December 31, 2000. The increase in
gross profit is primarily due to improvements in gross margins due to
performance efficiencies on several programs including CCTT and Javelin
FTT Direct. Overhead expenses were also reduced in fiscal year 2002 due
to decreased severance expenses and the reductions in workforce that took
place in the first half of fiscal year 2001.        
|  
|   |  | Selling, general and administrative expenses decreased 35% and 27% or
$745,000 and $1.1 million, during the three-month and six-month periods
ended December 31, 2001, respectively, compared to the same periods ended
December 31, 2000. The decrease in SG&A was primarily due to decreased
bid and proposal activity and the reductions in workforce that took place
during fiscal year 2001 and the first quarter of fiscal year 2002.                                                                                                                                
|  
|   |  | Independent research and development (IR&D) expenses increased 145% and 280% or
$235,000 and $649,000, respectively, compared to the same periods ended
December 31, 2000. The increase in IR&D expenses was primarily due to
increased research in the area of new simulation products and technologies
for potential application to the Companys products.                                                                                                                                                                                                              

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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  | The tax provision recorded during the three-month period ended December
31, 2000, is due to a valuation allowance for an alternative minimum tax
credit of $120,000 paid for the fiscal year ended June 30, 2000. This
valuation allowance was recorded due to the uncertainty as to the ultimate
realization of the tax credit. In addition, the Company has approximately
$12.3 million of cumulative federal net operating loss carryforwards, which expire in
2019 and 2021. No tax provision was recorded for the three-month period
ended December 31, 2001, as the Company anticipates utilization of the net
operating loss carryforwards with a reduction in the valuation allowance.
|  
|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, 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.                                                                                                                                                                                       

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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. Submission of Matters to a Vote of Security Holders

At the Companys Annual Meeting of Stockholders held on November 30, 2001, the
following proposals were adopted by the vote specified below:

|    |  |                                                                                                                                                              |                        |  |          |           |              |  |         |         |                 |  |  |       |  |  |  |         | 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------- |  | -------- | --------- | ------------ |  | ------- | ------- | --------------- |  |  | ----- |  |  |  | ------- | 
|    |  |                                                                                                                                                              | Proposal               |  | VotesFor |           | VotesAgainst |  | Abstain |         | BrokerNon Votes
|   
|(1) |  | To elect the Board of Directors                                                                                                                             
|   
|    |  |                                                                                                                                                              | Julian J. Demora       |  |          | 6,869,693 |              |  |         | 1,913   |                 |  |  |      |  |  |  | 20,869 
|    |  |                                                                                                                                                              | James C. Garrett       |  |          | 6,192,847 |              |  |         | 678,759 |                 |  |  |      |  |  |  | 697,715
|    |  |                                                                                                                                                              | James R. Henderson     |  |          | 6,863,134 |              |  |         | 8,472   |                 |  |  |      |  |  |  | 27,428 
|    |  |                                                                                                                                                              | Jesse L. Krasnow       |  |          | 6,826,374 |              |  |         | 45,232  |                 |  |  |      |  |  |  | 64,188 
|    |  |                                                                                                                                                              | Warren G. Lichtenstein |  |          | 6,869,855 |              |  |         | 1,751   |                 |  |  |      |  |  |  | 20,707 
|    |  |                                                                                                                                                              | Merrill A. McPeak      |  |          | 6,824,998 |              |  |         | 46,608  |                 |  |  |      |  |  |  | 65,564 
|    |  |                                                                                                                                                              | Robert F. Mehmel       |  |          | 6,863,456 |              |  |         | 8,150   |                 |  |  |      |  |  |  | 27,106 
|   
|(2) |  | To ratify the appointment of PricewaterhouseCoopers, LLP as the Companys independent certified
public accountants for the fiscal year ending June 30, 2002.
|   
|    |  |                                                                                                                                                              |                        |  |          | 6,869,034 |              |  |         | 11,994  |                 |  |  | 9,534 |  |  |  | 939,723

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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, 2002 |  | /s/ Melissa Van Valkenburgh                    
|     |                   |  |                                                
|     |                   |  | Melissa Van Valkenburgh
Chief Financial Officer

16