<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-K
(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 1998

                                       OR

[ ]      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 of other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                            Identification Number)

2001 West Oak Ridge Road, Orlando, Florida                      32809-3803

(Address of principal executive offices )                       (Zip Code)

Registrant's telephone number, including area code (407)859-7410

Securities registered pursuant to Section 12(b) of the Act:

     Title of each class               Name of each exchange on which registered
 Common Stock, $.10 par value                       New York Stock Exchange


 Rights to purchase Series B Junior Participating
 Preferred Stock, $.10 par value                         New York Stock Exchange


           Securities registered pursuant to Section 12(g) of the Act:

                                      None

                                (Title of class)

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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES  [ ] NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of October 1, 1998, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $10,724,264. (This figure was
computed on the basis of the closing price for the Registrant's Common Stock on
October 1, 1998 using the number of shares held on October 1, 1998 by
stockholders who are not officers, directors or record holders of 10% or more of
the Registrant's outstanding Common Stock. The characterization of such
officers, directors and 10% stockholders as affiliates is for purposes of the
computation only and should not be construed as an admission for any purpose
whatsoever that any of such persons are, in fact, affiliates of the Registrant.)

As of October 1, 1998 there were 8,329,409 shares of the Registrant's Common
Stock, $0.10 par value per share, issued and outstanding.

Information with respect to directors in Item 10 and the information required by
Items 11-13 is incorporated by reference to the definitive proxy statement of
the Registrant to be filed with the Commission in connection with its Annual
Meeting of Stockholders scheduled for December 3, 1998.

The Exhibit Index is located on pages 45 through 49.
<PAGE>   2
                                     PART I

Item 1.  Business.

     (a) General Development of Business.

         (1) ECC International Corp., a Delaware corporation organized in 1969
(the "Company"), designs, manufactures, and markets computer-controlled
simulators used primarily for training personnel to perform maintenance and
operator procedures on military weapons systems. The Company's simulators
measure performance as a trainee operates the equipment, conducts equipment
tests, diagnoses programmed malfunctions, and takes corrective actions. The
Company's equipment is used by all four branches of the U.S. Department of
Defense as well as numerous foreign governments for familiarization, operator
training and maintenance training for aircraft, missiles, submarines, surface
ships, tanks, combat vehicles, and radar systems.

                  The Company's systems also have application in industrial and
vocational training programs, such as control room simulators for power plants.

                  The Company also offers training and educational products to
purchasers of its simulators and to others. These products consist of the
development of training programs and curricula, development of multi media
programs and computer-based training, preparation of training handbooks, and
instruction on the use of the Company's simulators.

                  The Company designs and manufactures substantially all of the
components of its simulator systems, with the exception of certain equipment
such as commercially available computers, CRTs, disk drives and printers, which
it purchases. The Company is not dependent on any one supplier for raw materials
or computer related equipment used in or sold as part of its systems.

                  The Company's systems are marketed through a direct sales
force and by independent international sales representatives located in 17
foreign countries.

                  On November 25, 1997 the Company completed the sale of the
fixed assets, inventory and trade receivables of the Company's vending
operation. The sale of the vending operation was accounted for as a discontinued
operation, and accordingly, the vending operations were segregated in the
accompanying Selected Financial Data and Consolidated Financial Statements of
Operations. See Note 15 to the Consolidated Financial Statements for information
concerning Discontinued Operations.

         (2) Not applicable.

     (b) Financial Information about Industry Segments.

         With the sale of the vending operation the Company operates in one
segment - training. This segment includes, design and manufacture of training
simulators and development of training programs and curricula. See Note 12 to
the Consolidated Financial Statements for information concerning sales by
geographic area and major customers.

     (c) Narrative Description of Business.

         (1)      (i)      Principal Products, Services and Revenue Sources.

                           See the information set forth above in Item 1(a) and
(b) and following in Item (c)(1)(iv).

                                                                             -2-
<PAGE>   3

                  (ii)     New Products.

                           Not applicable.

                  (iii)    Raw Materials.

                           The components used in training systems, as well as
the parts used to manufacture the computers and devices used in the Company's
systems, are purchased from original equipment manufacturers, electronics supply
firms and others. The Company has no reason to believe that it cannot continue
to obtain such components, or suitable substitutes, as it may require.

                  (iv)     Patents, Trademarks, Licenses, Franchises and
                           Concessions.

                           A Design Patent and two Utility Patents covering key
elements of the bottle vending unit were sold in conjunction with the sale of
certain assets of the vending operation. See Note 15 to the Consolidated
Financial Statements for information concerning Discontinued Operations.

                  (v)      Seasonality of Business.

                           The Company's business is not seasonal.

                  (vi)     Working Capital Practices.

                           The Company's working capital practices are similar
to other government contractors.

                  (vii)    Dependence on Customer.

                           A substantial portion of the Company's training
business is government-related and channeled to the Company through the
Department of Defense. For the fiscal year ended June 30, 1998, 13% of sales
were made directly to the U.S. Department of Defense, while an additional 62% of
sales were made to various other contractors for ultimate use by the U.S.
Department of Defense. Within the U.S. Department of Defense, there are various
agencies which are "customers" of the Company, with the largest being the U.S.
Navy. (Also see Note 12 to the Consolidated Financial Statements.)

                  (viii)   Backlog.

                           At June 30, 1998, the Company's backlog (which
represents that portion of outstanding contracts not yet included in revenue)
was approximately $65,900,000, as compared to approximately $53,100,000 at 
June 30, 1997. It is anticipated that over 80% of the backlog will be 
delivered during the fiscal year ending June 30, 1999.

                  (ix)     Renegotiation or Termination of Contracts or
                           Subcontracts at Government's Election.

                           The Company's government contracts contain standard
terms permitting termination without cause at the option of the government. In
the event of termination of such contracts, the Company is entitled to receive
reimbursement on the basis of work completed (cost incurred plus a reasonable 
profit).



                  (x)      Competitive Conditions.

                                                                             -3-
<PAGE>   4

                           The Company is in competition with a large number of
firms. Many of the Company's competitors are substantially larger and have
greater financial resources. Competition is based upon both price and
performance considerations. Positive factors pertaining to the Company's
competitive position are that the Company has a large base of installed systems
and substantially more experience than its competitors in the
computer-controlled maintenance simulation field. The Company expects to see new
competitors in its market, which the Company believes is one of the defense
segments which continues to have growth potential.

                  (xi)     Systems Development.

                           During the fiscal years ended June 30, 1998, 1997,
and 1996, approximately $2,758,000, $1,126,000 and $289,000, respectively, were
spent on Company-sponsored research activities, including manufacturing,
engineering and software development relating to the development of new products
and product enhancements. There have been no customer-sponsored research
activities within the last three years. During the fiscal year ended June 30,
1998, the Company employed the equivalent of 20 full-time professional employees
whose prime responsibility is in research and development activities. In
addition to this full-time research and development staff, from time to time the
Company utilizes the specialized skills of many of its other employees and
contract personnel on a limited engagement basis.

                  (xii)    Environment.

                           The Company has nothing to report under this caption.

                  (xiii)   Number of Persons Employed.

                           As of June 30, 1998, the Company employed
approximately 538 persons.

         (d) Financial Information about Foreign and Domestic Operations and
Export Sales.

         Export sales were immaterial to the Company's gross sales.

         Management does not believe that any material part of the business is
dependent on any one foreign contract, the loss of which would have a material
adverse effect on the business.

Item 2.  Properties.

         The Company owns its simulation development and manufacturing
facilities which are situated on 27 acres in Orlando, Florida. The main plant
facility totals 398,086 square feet. Ancillary buildings on the property total
85,460 square feet. The Company sub-leases the 72,500 square foot facility
previously used by the vending subsidiary.

                  The Company's wholly owned subsidiary, ECC Simulation Limited
has three separate leased facilities. The first lease, expiring in 2015, is for
a 25,000 square foot facility in Shoreham-by-Sea, West Sussex, England. The
second lease, expiring in July 2003, with a lease break option in 1998, is for
9,000 square feet of space in a facility near the Shoreham location. Management
exercised the lease break option for the 9,000 square foot facility in 1998. The
UK operation also has a lease for 50,000 square feet in Brighton, East Sussex,
England. This lease expires June 2016, with a lease break option in 2002.
Management intends to exercise this lease break option. (See Note 16 to the
Consolidated Financial Statements.)




                                                                             -4-
<PAGE>   5
Item 3.  Legal Proceedings.

         On April 29, 1997, the Company filed a notice of arbitration against
Teliti Computers Sdn Bhd in the Regional Centre for Arbitration in Kuala Lumpur,
Malaysia. The Company sought $1.3 million for breach of contract. Among other
things, the Company claimed that Teliti failed to furnish a letter of credit to
secure its payment obligations to the Company and failed to provide three of its
personnel to be trained by the Company for a full twelve months as specified in
a contract between the two parties. In addition, Teliti demanded that the
training materials under contract be tested and delivered to Malaysia instead of
at the Company's facility in the United States as specified in the contract.
During the fourth quarter of fiscal year 1998, the Regional Centre for
Arbitration awarded the Company a settlement of $400,000 including amounts
previously advanced to the Company. This settlement resulted in a $200,000
charge to earnings during the fourth quarter of fiscal year 1998. At June 30,
1998, $200,000 remained outstanding related to the arbitration settlement. The
remaining balance is to be paid in equal quarterly installments of $50,000
through July 1,1999. (See Note 3 to the Consolidated Financial Statements.)

         Also, during fiscal year 1997, the Company, as a subcontractor,
initiated a lawsuit in Florida State court against Raytheon Training, Inc., the
prime contractor successor to Hughes Training, Inc., under the Army's Battle
Labs Reconfigurable Simulator Initiative ("BLRSI") program. This litigation
sought recovery of approximately $191,000 in unpaid invoices and approximately
$98,000 as a settlement of the termination for convenience of the subcontract.
These amounts were included in accounts receivable at June 30, 1997. Raytheon
submitted a counterclaim in the amount of approximately $1.2 million. During the
first quarter of fiscal year 1999, the parties agreed to a settlement of all
claims in the form of a $150,000 sum payable to the Company. This settlement
resulted in a $139,000 charge to earnings during the fourth quarter of fiscal
year 1998. (See Note 3 to the Consolidated Financial Statements).

         The Company submitted a claim, during fiscal year 1996, for contract
adjustment under the Economic Price Adjustment ("EPA") provisions of a major
contract seeking approximately $950,000. The value of the claim was included as
a component of contract value for purposes of revenue recognition and
accordingly is included in costs and estimated earnings in excess of billings on
completed contracts. In the prior fiscal year, the Company also submitted a
claim for the effects of a Stop Work Order issued on one of its contracts in the
amount of $191,000, of which $150,000 was deferred in inventory as of June 30,
1997. The claim represented the cost of idle time resulting from the Stop Work
Order as well as the effect of the release of the Stop Work Order. During the
fourth quarter of fiscal year 1998, the Company was awarded $140,000 with
respect to this claim. The excess $10,000 deferred in inventory was written-off
during the fourth quarter of fiscal year 1998. (See Note 4 to the Consolidated
Financial Statements.)


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

         There was no vote of security holders during the fourth quarter of the
last fiscal year.




                                                                             -5-
<PAGE>   6
         Executive Officers and Key Management Employees of the Registrant

         Each of the following executive officers and key management employees
of the Company has been elected by the Board of Directors and serves at the
discretion of the Board.


<TABLE>
<CAPTION>
       Name                Age      Position with the Registrant               Officer Since
       ----                ---      ----------------------------               -------------
<S>                        <C>      <C>                                        <C> 
James C.  Garrett          54       President, Chief Executive                 1998
                                    Officer and Director                       
                                                                               
James B. Conyers, Jr. *    55       Vice President, Staff Operations           1987
                                                                               
Ajit W. Hirani             51       Vice President, General Manager Orlando    1986
                                    Training Simulation Division and Director  
                                                                               
Ali Kalwar *               48       Vice President, Program Management         1996
                                                                               
Jerome Pogorzelski *       57       Vice President, Manufacturing,             1991
                                    Training Systems Division                  
                                                                               
Relland Winand             43       Vice President, Finance and                1996
                                    Chief Financial Officer                    
                                    and Secretary/Treasurer                    
                                                                               
Robert Wollam *            48       Vice President, Engineering                1996
</TABLE>
                                                                              
* Key management employees who are not "officers" for purposes of Section 16 of
the Securities Exchange Act of 1934 and the rules and regulations thereunder.

         Dr. Garrett assumed his position in June 1998. Messrs. Kalwar, Winand
and Wollam assumed their current positions in fiscal year 1996. Mr. Hirani
assumed his current position in January 1995 and was elected a Director in March
1995. Messrs. Conyers and Pogorzelski assumed their current positions during
1994. With the exception of Dr. Garrett, all other officers have been with the
Company in various capacities for at least five years.

         Dr. Garrett has had an extensive career in the defense and aerospace
industries spanning over 28 years. He most recently served as Vice President and
General Manager of the Raytheon E-Systems Communications Division, a position to
which he was named in 1991, with responsibility for a broad range of projects.
During the course of a twenty-year career with Rockwell International
Corporation, he was Vice President of the Command and Control Systems, Satellite
and Secure Systems, Tactical Products and Engineering Divisions.



                                                                             -6-
<PAGE>   7
                                     PART II


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

     (a) Market Information.

         The Common Stock of the Company is listed on the New York Stock
Exchange (symbol ECC). The price range of the Common Stock during the last two
fiscal years was as follows:

<TABLE>
<CAPTION>
         Quarter Ended               High        Low
         -------------               ----        ---
<S>                              <C>         <C>     
         June 30, 1998            $   3.56    $   3.06
         March 31, 1998               3.50        2.94
         December 31, 1997            4.63        3.06
         September 30, 1997           5.50        3.38
         June 30, 1997                5.63        5.25
         March 31, 1997               6.25        5.75
         December 31, 1996            8.25        8.00
         September 30, 1996           7.63        7.25
</TABLE>

         Common Stock prices shown above are the last daily sales prices on the
New York Stock Exchange.

     (b) Holders.

         As of October 1, 1998 the Company had approximately 986 stockholders of
record of its Common Stock based on the transfer agent's listings. The Company
believes its shares are beneficially held by several thousand additional
stockholders based on broker dealer demand for proxy materials in 1997.

     (c) Dividends.

         No cash dividends have been declared on the Company's common stock
during the past two years. Under the Company's amended credit agreement
(described in Note 7 to the Consolidated Financial Statements) the Company is
not permitted to pay cash dividends.




                                                                             -7-
<PAGE>   8



Item 6.  Selected Financial Data.
         (In Thousands, Except Per Share Data)

                           Fiscal Years Ended June 30

Operating Data:

<TABLE>
<CAPTION>
                                             1998             1997             1996             1995            1994
-----------------------------------       ----------        ---------        ---------        ---------       ---------
<S>                                       <C>               <C>              <C>              <C>             <C>
  Continuing Operations:                                                                                        
Net Sales ............................    $   52,618        $  72,550        $ 101,713        $  83,534       $  61,069
Operating (Loss)/Income ..............    $  (13,775)       $  (3,510)       $   7,929        $  11,592       $   9,671
Net (Loss)/Income ....................    $  (12,409)       $  (4,584)       $   4,232        $   7,236       $   5,253

  Discontinued Operations:
Net Sales ............................    $       --        $  10,540        $  15,443        $  24,073       $   2,232
Operating (Loss)/Income ..............    $       --        $  (5,830)       $  (1,922)       $     142       $  (1,913)
Net (Loss)/Income ....................    $     (407)       $  (3,951)       $  (1,354)       $      82       $  (1,324)

Per Share Data - Basic:

Weighted Average Number of Common
 Shares Outstanding ..................         8,174            7,916            7,732            7,616           6,388

(Loss)/Earnings Per Common Share
 Continuing Operations ...............    $    (1.52)       $   (0.58)       $    0.55        $    0.95       $    0.82
(Loss)/Earnings Per Common Share
 Discontinued Operations .............    $    (0.05)       $   (0.50)       $   (0.18)       $    0.01       $   (0.20)
                                          ----------        ---------        ---------        ---------       ---------
(Loss)/Earnings Per Common Share .....    $    (1.57)       $   (1.08)       $    0.37        $    0.96       $    0.62
                                          ==========        =========        =========        =========       =========

Per Share Data - Assuming Dilution:

Weighted Average Number of Common
 Shares Outstanding ..................         8,174            7,916            7,950            7,894           6,891

(Loss)/Earnings Per Common Share
 Continuing Operations ...............    $    (1.52)       $   (0.58)       $    0.53        $    0.92       $    0.76
(Loss)/Earnings Per Common Share
 Discontinued Operations .............    $    (0.05)       $   (0.50)       $   (0.17)       $    0.01       $   (0.19)
                                          ----------        ---------        ---------        ---------       ---------
(Loss)/Earnings Per Common Share .....    $    (1.57)       $   (1.08)       $    0.36        $    0.93       $    0.57
                                          ==========        =========        =========        =========       =========
</TABLE>


Earnings/(Loss) Per Common Share have been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128 "Earnings
Per Share." See Note 11 to the Consolidated Financial Statements.




                                                                             -8-
<PAGE>   9



<TABLE>
<CAPTION>
                                                    As Of June 30

Balance Sheet Data:         1998          1997          1996          1995          1994
--------------------       -------       -------       -------       -------       -------
<S>                        <C>           <C>           <C>           <C>           <C>    
Total Assets .......       $64,358       $82,034       $95,397       $89,739       $65,180
Working Capital ....       $11,385       $35,357       $44,236       $40,983       $28,154
Long-Term Debt .....       $    --       $16,640       $18,706       $16,250       $16,818
Stockholders' Equity       $33,437       $45,546       $52,875       $49,039       $34,603
</TABLE>


                                                                             -9-
<PAGE>   10
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations

(a) (1) and (2) Liquidity and Capital Resources.

         During fiscal year 1998, the Company's principal sources of cash were
the proceeds from the sale of certain assets of the vending operation as well as
billings and receipts on costs and estimated earnings in excess of billings on
uncompleted contracts. The principal uses of these funds were to make the final
payments on the term loan, pay down the revolving credit agreement, and to fund
the improvements to the Orlando facility. During fiscal year 1997, the Company's
principal sources of cash were receipts on accounts receivable, billings and
receipts on cost and estimated earnings in excess of billings on uncompleted
contracts, advances on contracts in the UK subsidiary and proceeds from the
issuance of common stock, or exercise of stock options. The principal uses of
these funds in fiscal year 1997 were to make payments on the term loan and
accounts payable and to finance acquisitions of property, plant and equipment.

         The increase in accounts receivable at June 30, 1998 was primarily due
to billings on several new contracts including Javelin Multi-year and Close
Combat Tactical Trainer Low Rate Initial Production ("CCTT LRIP") for which
payment was received in July 1998. In the prior year, accounts receivable and
costs and estimated earnings in excess of billings on completed contracts
decreased due to the completion or near completion of several contracts in the
domestic training operation.

         Costs and estimated earnings in excess of billings on uncompleted
contracts decreased at June 30, 1998 due to the completion or near completion of
several contracts in the domestic training division. This decrease was partially
offset by progress on several new domestic training division contracts which
were awarded during the third quarter of fiscal year 1998.

         Raw material inventory increased as a result of a $1.3 million charge
against the obsolescence reserve (which was included as a component of raw
material inventory for classification purposes) to write-off finished goods
inventory in the domestic training operation. The Company no longer maintains
finished goods inventory. Raw material inventory decreased during fiscal year
1997 primarily due to the allocation of common parts to contracts in progress.

         Work in process inventory decreased primarily as a result of a
reduction in the production of common parts by the Company. In addition, the
write-off of approximately $166,000 in pre-contract costs in accordance with the
adoption of Statement of Position 98-5, "Reporting on the Cost of Start-Up
Activities," contributed to the decrease. See Notes 4 and 13 to the Consolidated
Financial Statements. Work in process inventory decreased during fiscal year
1997 primarily as a result of the award of certain contracts for which pre
contract costs were included in work in process at June 30, 1996.

         Prepaid expenses and other increased during fiscal years 1998 and 1997
primarily due to a federal tax refund receivable recorded for federal net
operating losses realized during both fiscal years. In addition, in fiscal year
1997, prepaid expenses and other increased due to the deferred tax assets
resulting from accruals which were not yet deductible for tax purposes relating
to the loss on disposal of discontinued operations including the phase-out
period.

         The increase in accounts payable at June 30, 1998 was primarily the
result of an increase in material purchases as the Company progresses on its new
contracts. The decrease in accounts payable at June 30, 

                                                                            -10-
<PAGE>   11
1997 was primarily the result of a substantial slow-down in material purchases
as two of the Company's largest contracts were completed or near completion.

         Advances in long-term contracts increased at June 30, 1997 primarily as
a result of payments received in advance of work performed on contracts in the
U.K. subsidiary.

         The increase in capital in excess of par at June 30, 1998 and 1997 was
primarily the result of the purchase of stock under employee stock purchase
plans and the exercise of stock options. In addition, the tax benefit received
from the exercise of employee stock options under one of the Company's stock
option plans contributed to the increase in fiscal year 1997.

         The Company's consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying consolidated financial statements and notes, the
Company has suffered losses from continuing operations of $12.4 million and $4.6
million in fiscal years 1998 and 1997, respectively, is experiencing difficulty
generating sufficient cash flow to meet its obligations and sustain operations
and has not yet obtained a new credit facility to replace its current loan
facility, of which the balance of $11.1 million is due January 11, 1999. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.

         The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. As described in Note 7,
the Company was not in compliance with the fixed charge coverage ratio for its
revolving credit agreement and was unable to obtain waivers from the bank for
its violation. The Company has entered into a forbearance agreement with its
bank lenders which extended the expiration of the revolving credit agreement
from October 1, 1998 to January 11, 1999 and provides for the maintenance of
minimum cash balances, as well as other restrictive covenants through the
expiration date. The forbearance agreement terminates on November 30, 1998,
if the Company does not obtain a letter of commitment from a financial
institution providing for repayment in full of the obligations under the
revolving credit agreement.

         The Company is currently in the process of seeking alternative sources
of financing and implementing certain internal operating and management plans to
generate cash flow. These plans include reductions in workforce, relocation of
the Corporate Headquarters and the wind-down of the UK operation, all of which
were announced during the first quarter of fiscal year 1999.

         There can be no assurance that the Company will be successful in
generating the necessary cash flow or obtaining such financing.

         The Company anticipates spending approximately $1.5 million for new
machinery and equipment and to continue to refurbish the Orlando facility during
fiscal year 1999.

         Other than as stated above, the Company has no other material
commitments for capital expenditures.



                                                                            -11-
<PAGE>   12
(3)      Results of Operations.
         1998 Compared with 1997.

         Continuing Operations

         Net Sales decreased 27% for fiscal year 1998 as compared to fiscal year
1997. The decrease in net sales is primarily the result of several domestic
training division contracts with reduced activity as they are complete or near
completion. This decrease in net sales was partially offset by sales generated
from the award of several new contracts during the third quarter of fiscal year
1998 including: Javelin multi-year; CCTT LRIP; a Saudi VIGS contract; as well as
several additions to other ongoing contracts.

         Net Sales in the UK subsidiary also decreased as compared to fiscal
year 1997. The decrease in net sales in the UK was a result of reduced activity
on its two major contracts as they are expected to be completed during the first
half of fiscal year 1999. The UK subsidiary was awarded a contract for Cabin
Crew Training equipment from Airtours International Airways Ltd. during the
third quarter of fiscal year 1998, however, there was no other substantial new
business awarded during the year.

         Gross margin decreased as a percentage of net sales in fiscal year 1998
as compared to fiscal year 1997. This decrease was due to significant gross
margin adjustments on contracts in the UK subsidiary. The lack of new business
awards over the past year, as well as no anticipated future awards has resulted
in a business base which is not sufficient to absorb fixed costs. As a result,
the UK subsidiary recorded margin adjustments resulting from the need to
recognize additional costs on certain contracts and contract loss accruals of
approximately $2.6 million during the fourth quarter of fiscal year 1998. (See
Note 13 to the Consolidated Financial Statements).

         As a result of recurring losses in the UK operation, the Board of
Directors announced, on August 27, 1998, the approval of a plan to wind down and
discontinue the operations of the UK subsidiary by March 1999. Management
expects to record a non-recurring charge of approximately $1.7 million, relating
to severance and stay bonuses, during fiscal year 1999. A portion of the charge
relating to severance will be taken during the first quarter of fiscal year
1999. The remaining portions of the charge, principally relating to stay
bonuses, will be taken during the remainder of fiscal year 1999. Management is
in the process of evaluating options with respect to the leased facilities in
the UK including subletting the facilities or terminating the leases. Any
resulting charge will be determined after this evaluation. The potential costs
associated with the leased facilities range from $1.0 million to $5.0 million.

         Gross margin as a percentage of net sales in the domestic training
division remained relatively consistent with fiscal year 1997. Contract gross
margin levels improved as a result of the completion or near completion of many
large "cost plus" type contracts which have historically had lower gross margins
than the "fixed price" type. In addition, the Company's cost reduction
initiatives during the past fiscal year reduced overhead costs, thus improving
gross margins. The improvement in contract gross margins were offset by a change
in the method of accounting for precontract costs during the fourth quarter of
fiscal year 1998. The Company changed its method of accounting for precontract
costs from deferring costs incurred for specific anticipated contracts and
including those costs in contract sales and costs when the contract award is
assured, to expensing the costs as incurred in accordance with Statement of
Position 98-5 "Reporting on the Cost of Start-Up Activities." ("SUP 98-5") The
Statement requires that precontract costs that are start-up costs be expensed as
incurred. As a result of implementing SOP 98-5, the Company wrote-off
approximately $785,000, pre-tax of start-up costs during the fourth quarter of
fiscal year 1998 of which $199,000, after tax, related to the fourth quarter
with the balance relating to previous quarters. The first three quarters of
fiscal year 1998 were restated for this change in accounting. (See Note 13 to 
the Consolidated Financial Statements).


                                                                            -12-
<PAGE>   13

         Although management initiated several cost cutting initiatives in
fiscal year 1998, the benefit of these reductions was not proportionate to the
decrease in sales volume, thereby resulting in an overall net loss for the year.
Since fiscal year 1997, management has effected a 32% reduction in work force
consistent with the reduction in contract volume. However, costs associated
with the reduction in work force, including severance benefits and out placement
services, were incurred thereby minimizing the impact of the reduction in work
force on gross margin. All of these costs were paid during fiscal year 1998. As
a result, management has initiated further cost reduction measures in the
domestic operation including the relocation of its corporate headquarters and a
reduction in workforce. 

         On July 7, 1998 the Company announced the relocation of its corporate
headquarters staff and Instructional Systems Development Group from Wayne,
Pennsylvania to the Company's principal Systems Design and Production Center in
Orlando, Florida. The relocation was completed on September 30, 1998. Management
expects to record a non-recurring charge of approximately $800,000 during fiscal
year 1999 associated with the relocation. A majority of the charge relating to
stay bonuses and lease termination will be recorded during the first quarter of
fiscal year 1999. The remaining portion of the charge will be taken during the
second quarter of fiscal year 1999. Management expects to reduce overhead
expenditures and improve efficiencies as a result of this relocation.

         Selling, general and administrative expense increased as compared to
fiscal year 1997. This increase was a result of fees paid to international
marketing representatives, consulting fees and an increase in bid and proposal
and marketing activities. In addition, depreciation expense increased as a
result of the implementation of the new computer system on June 1, 1997.

         Systems development expense increased as compared to fiscal year 1997
primarily as a result of efforts in the domestic training division to develop or
enhance technologies and processes in order to remain competitive in the
industry. These efforts are expected to continue through fiscal year 1999.

         Other operating expenses increased as a result of an evaluation of
expected future undiscounted cash flows associated with the long lived assets in
the UK operation. As a result of this evaluation, an impairment charge of $1.3
million was recorded for plant and equipment during the fourth quarter of fiscal
year 1998. (See Note 1 to the Consolidated Financial Statements).

         Interest income decreased as compared to fiscal year 1997 as interest
due the Company based on the IRS look-back method of accounting for completed
contracts was substantially lower than the amount received in the previous
fiscal year.

         Interest expense decreased as compared to fiscal year 1997 as a result
of final payments totaling $2,250,000 on the Company's term loan during the
first quarter of fiscal year 1998 as well as payments totaling $5,500,000 on the
revolving credit facility during the second quarter of fiscal year 1998.


                                                                            -13-
<PAGE>   14
         Discontinued Operations

         On November 25, 1997 the Company completed the sale of the fixed
assets, inventory and trade receivables of the Company's vending operation.
Proceeds from the sale of the vending operation were used to reduce the
Company's debt.

         Operating results have been segregated in the accompanying consolidated
statements of operations. Net losses for fiscal year 1998 were included as a
component of discontinued operations in the Company's June 30, 1997 consolidated
statements. Discontinued operations at June 30, 1997 included management's best
estimates of amounts expected to be realized on the sale of the vending
operation, the costs directly associated with the disposal of the operation, as
well as the operating losses expected to be incurred during the phase-out
period.

         During fiscal year 1998, the Company recorded an additional provision
for the estimated loss on disposal of discontinued operations of $407,000,
after-tax. The change in the estimated loss resulted primarily from additional
costs associated with the consummation of the sale of the fixed assets,
inventory and trade receivables of the vending operation.

         1997 Compared with 1996.

         Continuing Operations

         Net Sales decreased 29% for fiscal year 1997 as compared to fiscal year
1996. The decrease in net sales is primarily the result of several domestic
training division contracts with reduced activity as they are complete or
expected to be completed during the first quarter of fiscal year 1998. Sales
volume in the UK subsidiary increased modestly over the preceding year due to
continued efforts on its two largest contracts.

         Gross margin decreased as a percentage of sales in fiscal year 1997 as
compared to fiscal year 1996. This decrease was due to gross margin adjustments
on certain contracts in the U.K. subsidiary, a reduction in sales volume in the
domestic training division as well as the continued change in contract mix in
the domestic training division.

         Gross margin in the U.K. subsidiary decreased as a result of contract
adjustments recorded during fiscal year 1997. Gross margin adjustments were
taken on its two large contracts due to protracted or delayed hardware/software
testing, re-work required on trainers and late delivery penalties imposed due to
contract delays. In addition, gross margin adjustments were taken due to a
decrease in expected future sales volume which may result in higher overhead
rates than previously anticipated. (Also See Note 13 to the Consolidated
Financial Statements.)




                                                                            -14-
<PAGE>   15
         Domestic training also experienced a decrease in gross margin compared
to the prior fiscal year. While the Company has experienced an increase in
volume on its large domestic cost plus type contracts, these contracts generally
yield lower gross margins than the fixed price type. In addition, actual sales
volume in fiscal 1997 was lower than expected due to the completion or near
completion of numerous contracts which were not replaced by new business. While
cost reduction initiatives are underway, overhead and S,G&A levels have not
decreased proportionate to the decrease in sales volume. Since fiscal year 1996
management has effected a 38% reduction in work force consistent with the
reduction in contract volume. However, costs associated with the reduction in
work force (including subcontracted labor), including severance benefits and out
placement services, were incurred thereby minimizing the impact of the reduction
in work force on gross margin. All of these costs were paid during fiscal year
1997.

         System development expense increased in fiscal year 1997 as a result of
efforts in the domestic training division to develop and/or enhance technologies
and processes in order to remain competitive in the industry.

         Interest income increased in fiscal year 1997 as a result of interest
due the Company based on the IRS look-back method of accounting for long-term
contracts.

         Interest expense increased marginally in fiscal year 1997 due to
increased borrowings under the Company's revolving credit agreement during the
first three quarters of fiscal year 1997.

         Discontinued Operations

         Operating results of the discontinued operation have been segregated in
the accompanying Consolidated Statements of Operations. Net losses of the
discontinued operation during 1997 were $4.0 million ($0.50 loss per share),
including the loss on disposal as well as provisions for operating losses during
the phase-out period of $1.1 million. This compares to $1.4 million ($0.18 loss
per share) in 1996. The vending operation experienced a reduction in gross
margin as a result of low sales volume which was not sufficient to cover
overhead costs for the year.

         1996 Compared with 1995.

         Continuing Operations

           The Company had a net income of $4.2 million from continuing
operations in fiscal year 1996, a decrease of 41.5% versus fiscal year 1995 net
income of $7.2 million. The decrease in profitability is primarily the result of
changes in contract mix and adjustments to certain domestic and UK contracts.

           Gross margin decreased as a percentage of sales in fiscal year 1996
as compared to fiscal year 1995. This decrease was due to gross margin
adjustments on certain contracts of the domestic and U.K. training operations,
as well as other factors. The decrease in the domestic training operation is
largely the result of the Company's continued change in contract mix. While the
Company has experienced an increase in volume on its large domestic cost plus
type contracts, these contracts generally yield lower gross margins than the
fixed price type. A downward adjustment was taken in gross margin on the
Company's large domestic cost plus type contract during the second half of
fiscal year 1996. This adjustment was due to revised manufacturing costs to
complete based upon the initial unit production under the contract. Also,
adjustments were taken to the gross margin of two fixed price domestic contracts
primarily due to protracted 

                                                                            -15-
<PAGE>   16
acceptance schedules which resulted in higher than previously anticipated costs.
These adjustments were partially offset by the recognition of revenue associated
with an Economic Price Adjustment Claim filed during the fourth quarter of
fiscal year 1996. (See Note 4 to the Consolidated Financial Statements).

           Gross margin of the U.K. operation decreased due to adjustments on
two major contracts. The first contract adjustment resulted from customer
requirements for extended testing on trainers. The second contract adjustment
was the result of completion of the design phase on the contract which led to a
clarification of the complexity of detailed specifications. The extended testing
on one contract and recognition of the increased complexity of the trainer on
another contract resulted in higher estimated costs than previously anticipated.

           Selling, general and administrative costs of the Company increased
14.5% or $1.6 million in fiscal year 1996 as compared to fiscal year 1995. The
increase was primarily the result of higher salaries and bid and proposal costs
of the domestic and UK training divisions in order to meet increased business
opportunities.

           Interest income decreased in fiscal year 1996 as interest due the
Company based on the IRS look-back method of accounting for completed contracts
was substantially lower than the amount received in the previous fiscal year.

           Interest expense increased marginally in fiscal year 1996 due to
higher borrowings under the Company's revolving credit agreement.




                                                                            -16-
<PAGE>   17
           Discontinued Operations

           Net losses of the discontinued operation were $1.4 million ($.18 loss
per share) in 1996 versus net income of $82,000 ($.01 per share) in 1995.

           Sales volume and gross margin decreased during fiscal year 1996 as
the discontinued vending operation completed its large vending order to a major
customer during the second/third quarter and did not replace it with another
large order. As a result, efficiencies were not achieved due to low production
volumes and fixed costs were marginally covered.

         Statements of Financial Accounting Standards Not Yet Adopted

           In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
  Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
  display of comprehensive income and its components in a full set of
  general-purpose financial statements. The Statement is effective for fiscal
  years beginning after December 15, 1997 and reclassification of financial
  standards for earlier periods provided for comparative purposes is required.
  The Company believes that the adoption of this statement will not have a
  material impact on the consolidated financial statements.

           Additionally, during June 1997, the FASB issued SFAS No. 131,
   "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
   131"). SFAS 131 establishes standards for the way that public business
   enterprises report information about operating segments in annual financial
   statements and requires that those enterprises report selected information
   about operating segments in interim financial reports issued to shareholders.
   It also establishes standards for related disclosures about products and
   services, geographic areas and major customers. The statement is effective
   for fiscal years beginning after December 15, 1997. The Company believes that
   the adoption of this statement will not have a material impact on the
   consolidated financial statements.

           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 Annual Report on Form 10-K and presented elsewhere by management
from time to time.

           A number of uncertainties exist that could affect the Company's
future operating results, including, without limitation, general economic
conditions, changes in government spending, 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.

           The Company has entered into a forbearance agreement with its bank
lenders which extended the expiration of its revolving credit agreement from
October 1, 1998 to January 11, 1999 and provides for the maintenance of minimum
cash balances as well as other restrictive covenants through the expiration
date. The forbearance agreement terminates on November 30, 1998, if the Company
does not obtain a letter of commitment from a financial institution providing
for repayment in full of the obligations under the revolving credit agreement.
There can be no assurance that the Company will be successful in generating 

                                                                            -17-
<PAGE>   18
the necessary cash flows or obtaining such financing.

           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
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.

Year 2000 Issues

         The Company, its suppliers and customers are heavily reliant upon 
computer systems for many aspects of their businesses. The calendar year 2000 
will make many current computerized systems ineffective and will require 
corrections or replacements before January 1, 2000. This situation could have a 
material adverse effect upon the Company if not adequately remedied by the 
Company, its suppliers and customers, on a timely basis. The following 
describes the Company's status regarding these issues.

         The Company has formally addressed Year 2000 issues since November
1997, when a Year 2000 Compliance Program was initiated. This program includes
continual assessments, evaluations, implementation and testing for all systems
running on a variety of computing platforms. A complete evaluation has been made
on all internal systems, including items such as voice mail, automated badge
entry, e-mail, payroll and accounting systems. There are no known problems at
this time. All network servers have been assessed and tested as Year 2000
compliant. In addition, the Company has an ongoing policy of upgrading and
testing for Year 2000 compliance, as new software packages become available.
Upgrading of the over 400 personal computers connected to this network is an
ongoing process. On a routine basis, the PC motherboards have been upgraded
with Year 2000 compliant motherboards. Currently, less than 10 personal
computers require upgrade to Year 2000 compliant status.

         The Company began assessing the Year 2000 status of its critical 
suppliers in April of 1998 by sending surveys to the suppliers. To date, the 
Company has received responses from three-quarters of these suppliers with no 
major potential problems identified. This effort will be completed by the end 
of November 1998.

         The Company is satisfied that its customer base is aware of the Year 
2000 issue and is proactively working to ensure that there are no problems 
associated with the Year 2000. ECC is aware of this because major customers 
such as Lockheed-Martin, Boeing, and the Department of Defense, have asked the 
Company for its Year 2000 status. In the process, they have revealed their Year 
2000 plans and stated that they are actively engaged in solving any problems.

         The Year 2000 Plan includes a final re-verification test of all 
systems in the second quarter of calendar year 1999 and contingency plans 
(manual backup) to be implemented and validated by the fourth quarter of 
calendar year 1999.

         As stated above, the Company expects that its systems will be fully 
operational and will not cause any material disruptions because of Year 2000 
issues. Because of the uncertainties associated with assessing preparedness of 
suppliers and customers, there is a risk of a material adverse effect on the 
Company's future results of operations if these constituencies are not capable 
of correcting their Year 2000 Issues, if any. The Company expects that its 
systems will be fully operational and will not cause any material disruption 
because of Year 2000 issues. The Company has an ongoing process to continue 
evaluation of all critical systems, products, suppliers and customers from now 
until the Year 2000 and beyond. 

Item 7.   Quantitative and Qualitative Disclosures About Market Risk.

         Not applicable.




                                                                            -18-
<PAGE>   19
Item 8.   Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements                               Page(s)

Report of Independent Accountants                                          20

Consolidated Statements of Operations for the Fiscal Years
  Ended June 30, 1998, 1997 and 1996                                       21

Consolidated Balance Sheets, June 30, 1998 and 1997                        22

Consolidated Statements of Changes in Stockholders' Equity
  for the Fiscal Years Ended June 30, 1998, 1997 and 1996                23-24

Consolidated Statements of Cash Flows for the Fiscal Years
  Ended June 30, 1998, 1997 and 1996                                     25-26

Notes to Consolidated Financial Statements                               27-44




                                                                            -19-
<PAGE>   20
                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Shareholders and 
the Board of Directors of 
ECC International Corp.



In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of ECC
International Corp. and its Subsidiaries (the "Company") at June 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company suffered losses from continuing
operations in fiscal years 1998 and 1997, is experiencing difficulty in
generating sufficient cash flow to meet its obligations and sustain operations
and has not yet obtained a new credit facility to replace its current loan
facility due January 11, 1999. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in the fourth quarter of
fiscal year 1998.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 12, 1998


                                                                            -20-
<PAGE>   21
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS 
For the Fiscal Years Ended June 30, 1998, 1997 and 1996

(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
                                                                     1998             1997             1996
                                                                  ---------        ---------        ---------
<S>                                                               <C>              <C>              <C>      
Net Sales .................................................       $  52,618        $  72,550        $ 101,713
Cost of Sales .............................................          48,915           63,175           81,159
                                                                  ---------        ---------        ---------
Gross Profit ..............................................           3,703            9,375           20,554
                                                                  ---------        ---------        ---------

Expenses:
     Selling, General & Administrative ....................          13,452           11,759           12,336
     Systems Development ..................................           2,758            1,126              289
     Impairment of Fixed Assets ...........................           1,268               --               --
                                                                  ---------        ---------        ---------
         Total Expenses ...................................          17,478           12,885           12,625
                                                                  ---------        ---------        ---------
Operating (Loss)/Income ...................................         (13,775)          (3,510)           7,929
                                                                  ---------        ---------        ---------

Other Income (Expense):
     Interest Income ......................................             274              432              238
     Interest Expense .....................................          (1,129)          (1,541)          (1,436)
     Other - Net ..........................................              26              (37)            (157)
                                                                  ---------        ---------        ---------
         Total Other (Expense) ............................            (829)          (1,146)          (1,355)
                                                                  ---------        ---------        ---------

(Loss)/Income from Continuing Operations
  Before Income Taxes .....................................         (14,604)          (4,656)           6,574
(Benefit)/Provision for Income Taxes ......................          (2,195)             (72)           2,342
                                                                  ---------        ---------        ---------
(Loss)/Income from Continuing Operations ..................       $ (12,409)       $  (4,584)       $   4,232
                                                                  ---------        ---------        ---------

Discontinued Operations (Note 15):
     Loss from Operations (net of income taxes
       of $1,466 in 1997 and $697 in 1996) ................              --           (2,809)          (1,354)
     Loss on Disposal, including provision of $1,126 for
       operating losses during the phase-out period (net of
       income taxes of $162 in 1998 and $596 in 1997) .....            (407)          (1,142)              --
                                                                  ---------        ---------        ---------
Net (Loss)/Income .........................................       $ (12,816)          (8,535)       $   2,878
                                                                  =========        =========        =========

(Loss)/Earnings Per Common Share
    from Continuing Operations - Basic ....................       $   (1.52)       $   (0.58)       $    0.55
Loss Per Common Share
 from Discontinued Operations - Basic .....................           (0.05)           (0.50)           (0.18)

Net (Loss)/Earnings Per Common Share - Basic ..............       $   (1.57)       $   (1.08)       $    0.37
                                                                  =========        =========        =========

(Loss)/Earnings Per Common Share
    from Continuing Operations - Diluted ..................       $   (1.52)       $   (0.58)       $    0.53
Loss Per Common Share
 from Discontinued Operations - Diluted ...................           (0.05)           (0.50)           (0.17)

Net (Loss)/Earnings Per Common Share - Diluted ............       $   (1.57)       $   (1.08)       $    0.36
                                                                  =========        =========        =========
</TABLE>


See accompanying notes to consolidated financial statements.




                                                                            -21-
<PAGE>   22



ECC International Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS as of June 30, 1998 and 1997

(In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>
                                                                       1998            1997
                                                                       ----            ----
ASSETS
     Current:
<S>                                                                  <C>             <C>     
         Cash ................................................       $  4,830        $  3,888
         Accounts Receivable, Net ............................          8,097           9,189
         Costs and Estimated Earnings in Excess of Billings on
          Uncompleted Contracts ..............................         16,391          25,497
         Inventories .........................................          5,202           9,666
         Prepaid Expenses and Other ..........................          6,868           5,406
                                                                     --------        --------
                           Total Current Assets ..............         41,388          53,646

     Property, Plant and Equipment, Net ......................         20,994          26,119
     Other Assets ............................................          1,976           2,269
                                                                     --------        --------

              Total Assets ...................................       $ 64,358        $ 82,034
                                                                     ========        ========

LIABILITIES
     Current:
         Current Portion of Long-Term Debt ...................       $ 11,132        $  2,250
         Accounts Payable ....................................          6,263           4,846
         Advances on Long-Term Contracts .....................          4,683           4,551
         Accrued Expenses and Other ..........................          7,925           6,642
                                                                     --------        --------
              Total Current Liabilities ......................         30,003          18,289
                                                                     --------        --------

     Deferred Income Taxes ...................................            918           1,559
                                                                     --------        --------

     Long-Term Debt ..........................................             --          16,640
                                                                     --------        --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
     Common Stock, $0.10 par; authorized, 20,000,000 shares;
       issued and outstanding, 1998 and 1997,
       8,318,058 and 8,046,707 shares, respectively ..........            832             805
     Preferred Stock, $0.10 par; authorized, 1,000,000
       shares; none issued and outstanding in 1998 and 1997 ..             --              --
     Notes Receivable from Stockholder .......................           (146)             --
     Capital in Excess of Par ................................         24,804          23,935
     Retained Earnings .......................................          7,933          20,749
     Cumulative Translation Adjustment .......................             14              57
                                                                     --------        --------

              Total Stockholders' Equity .....................         33,437          45,546
                                                                     --------        --------

              Total Liabilities and Stockholders' Equity .....       $ 64,358        $ 82,034
                                                                     ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.



                                                                            -22-
<PAGE>   23
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Fiscal Years Ended June 30, 1998, 1997 and 1996

(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                               Note
                                                Capital                       Cumulative       Receivable   Total
                                 Common         In Excess      Retained       Translation      From         Stockholders'
                                 Stock          of Par         Earnings       Adjustment       Stockholder  Equity
<S>                              <C>            <C>            <C>             <C>              <C>          <C>     
Balance, June 30, 1995           $    766       $ 21,822       $ 26,406        $     45             --       $ 49,039


Net Income                             --             --          2,878              --             --          2,878
Stock Issued:
   Employee Stock Purchase
    Plan - 63,285 Shares                6            517             --              --             --            523
   Exercise of Options -
   102,012 Shares                      10            272             --              --             --            282
Income Tax Reduction
 Relating to Stock Options             --            220             --              --             --            220
Translation Adjustment                 --             --             --             (67)            --            (67)
                                 --------       --------       --------        --------        -------       --------

Balance, June 30, 1996           $    782       $ 22,831       $ 29,284        $    (22)       $    --       $ 52,875
                                 --------       --------       --------        --------        -------       --------

Net Loss                               --             --         (8,535)             --             --         (8,535)
Stock Issued:
   Employee Stock Purchase
    Plan - 65,265 Shares                7            343             --              --             --            350
   Exercise of Options -
   158,299 Shares                      16            523             --              --             --            539
Income Tax Reduction
 Relating to Stock Options             --            238             --              --             --            238
Translation Adjustment                 --             --             --              79             --             79
                                 --------       --------       --------        --------        -------       --------

Balance, June 30, 1997           $    805       $ 23,935       $ 20,749        $     57        $    --       $ 45,546
                                 --------       --------       --------        --------        -------       --------
</TABLE>


                                                                    Continued...




                                                                            -23-
<PAGE>   24
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) 
For the Fiscal Years Ended June 30, 1998, 1997 and 1996

(In Thousands, Except Share Data)
 
<TABLE>
<CAPTION>
                                                                                               Note
                                                Capital                       Cumulative       Receivable    Total
                                   Common       In Excess       Retained      Translation      From          Stockholders'
                                   Stock        of Par          Earnings      Adjustment       Stockholder   Equity
<S>                               <C>            <C>            <C>             <C>             <C>             <C>     
Net Loss                                --             --       $(12,816)             --              --        $(12,816)
Stock Issued:
   Employee Stock Purchase
    Plan- 79,244 Shares           $      8       $    198             --              --              --             206
   Exercise of Options -
   7,340 Shares                          1             15             --              --              --              16
Issuance of Note Receivable
  to Stockholder                        --             --             --              --        $   (146)           (146)
Issuance of Common Stock                18            653             --              --              --             671
Income Tax Reduction
 Relating to Stock Options              --              3             --              --              --               3
Translation Adjustment                  --             --             --             (43)             --             (43)
                                  --------       --------       --------        --------        --------        --------

Balance, June 30, 1998            $    832       $ 24,804       $  7,933        $     14        $   (146)       $ 33,437
                                  ========       ========       ========        ========        ========        ========
</TABLE>


Common shares issued and outstanding at June 30, 1995 and 1996 were 7,657,846
and 7,833,143 shares, respectively.

See accompanying notes to the consolidated financial statements.






                                                                            -24-
<PAGE>   25
ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Fiscal Years Ended June 30, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                  (In Thousands)
                                                                       1998            1997            1996
                                                                     --------        --------        --------
Cash Flows From Operating Activities:
<S>                                                                  <C>             <C>             <C>     
Net (Loss)/Income ............................................       $(12,816)       $ (8,535)       $  2,878
      Items Not Requiring Cash:
        Depreciation .........................................          2,923           4,196           3,825
        Impairment of Fixed Assets ...........................          1,268              --              --
        Provision for Doubtful Accounts ......................             --             (29)             84
        Deferred Income Taxes ................................          2,171            (526)           (675)
        Provision for Discontinued Operations ................            569           1,738              --
      Changes in Certain Assets and Liabilities:
         Accounts Receivable .................................         (1,537)          1,976          (2,442)
         Costs and Estimated Earnings in Excess of Billings on
          Uncompleted Contracts ..............................          9,106           9,754           4,501
         Inventories .........................................          1,077           3,318          (2,949)
         Prepaid Expenses and Other ..........................         (1,926)         (2,565)            114
         Accounts Payable ....................................          1,417          (6,121)          3,770
         Advances on Long-Term Contracts .....................            132           3,695            (539)
         Accrued Expenses ....................................            179          (1,383)         (1,868)
                                                                     --------        --------        --------
      Net Cash Provided By Operating Activities ..............          2,563           5,518           6,699
                                                                     --------        --------        --------

Cash Flows From Investing Activities:
      Proceeds from Sale of Discontinued Operation ...........          7,881              --              --
      Additions to Property, Plant and Equipment .............         (2,323)         (3,629)         (6,504)
      Other ..................................................            342             (97)           (292)
                                                                     --------        --------        --------
      Net Cash Provided By/(Used In) Investing Activities ....          5,900          (3,726)         (6,796)
                                                                     --------        --------        --------

Cash Flows From Financing Activities:
      Proceeds From Issuance of Common Stock, Options
        Exercised and Warrants, Including Related Tax Benefit             237           1,127           1,025
      Repayments Under Term Loan .............................         (2,250)         (3,000)         (3,000)
      New Borrowings Under Revolving Credit Facilities, Net ..         (5,508)         (1,088)          3,594
                                                                     --------        --------        --------

      Net Cash (Used In)/Provided By Financing Activities ....         (7,521)         (2,961)          1,619
                                                                     --------        --------        --------

Net Increase/(Decrease) in Cash ..............................            942          (1,169)          1,522
                                                                     --------        --------        --------

Cash at Beginning of the Year ................................          3,888           5,057           3,535
                                                                     --------        --------        --------

Cash at End of the Year ......................................       $  4,830        $  3,888        $  5,057
                                                                     ========        ========        ========
</TABLE>

                                                                    Continued...


                                                                            -25-
<PAGE>   26



ECC International Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Years Ended June 30, 1998, 1997 and 1996




<TABLE>
<CAPTION>
                                                                        (In Thousands)
                                                                1998         1997         1996 
                                                               ------       ------       ------
Supplemental Disclosures of Cash Flow Information:
      Cash Paid During the Year For:
<S>                                                            <C>          <C>          <C>   
         Interest ......................................       $1,105       $1,835       $1,665
         Income Taxes ..................................       $   --       $  922       $2,766

Supplemental Schedule of
      Non Cash Financing Activities:

         Issuance of Employee Stock Incentives .........       $  421         $ --         $ --
         Issuance of Director Equity Compensation ......       $   92         $ --         $ --
         Note Receivable to Stockholder in connection 
          with issuance of common stock ................       $  146         $ --         $ --
</TABLE>


         See accompanying notes to consolidated financial statements.

                                                                            -26-
<PAGE>   27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ECC International Corp. and Subsidiaries

1.   Significant Accounting Policies.

     Consolidation.

     The consolidated financial statements include the accounts of ECC
     International Corp. and its wholly owned subsidiaries (collectively, the
     "Company"). Intercompany transactions have been eliminated in
     consolidation.

     As a result of the Company's sale of it's vending operation, the vending
     operation was reflected as a discontinued operation in the accompanying
     Consolidated Statements of Operations (See Note 15 to the Consolidated
     Financial Statements).

     Revenue and Cost Recognition.

     Contract sales and costs are recognized using the percentage of completion
     method, measured by the ratio of costs incurred to date to estimated total
     costs. Since many contracts extend over a long period of time, any
     revisions in cost and funding estimates during the progress of work have
     the effect of adjusting the current period earnings applicable to
     performance in prior periods.

     Contract costs include all direct labor and material costs and those
     indirect costs related to contract performance, such as indirect labor,
     supplies and depreciation.

     Provisions for estimated losses on uncompleted contracts are made in the
     period in which such losses are determined. Claims are included as a
     component of contract value for purposes of revenue recognition at such
     time as the amount to be recognized is reasonably determinable and
     probable.

     Costs and estimated earnings in excess of billings on uncompleted
     contracts, consists principally of contract revenue for which billings have
     not been presented, as such amounts were not billable at the balance sheet
     date. Substantially all of these amounts will be billed in the following
     fiscal year.

     Use of Estimates.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenue and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     Inventories.

     Work in process and finished goods inventory are 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.

                                                                            -27-
<PAGE>   28
     Property, Plant and Equipment.

     Property, plant and equipment is stated at cost. Depreciation is provided
     on the straight-line method over the estimated useful lives of the
     respective assets as follows: buildings 15 to 30 years; machinery and
     equipment 3 to 10 years; and demonstration and test equipment 5 years.

     Applicable asset and accumulated depreciation accounts are reduced for the
     sale or other disposition and the resulting gain or loss is included in the
     Consolidated Statements of Operations.

     Impairment of Long Lived Assets.

     In the event that facts and circumstances indicate that the cost of
     property, plant and equipment may be impaired, an evaluation of
     recoverability would be performed. If an evaluation is required, the
     estimated future undiscounted cash flows associated with the asset would be
     compared to the asset's carrying amount to determine if a write-down is
     required.

     As a result of an evaluation of expected future undiscounted cash flows
     associated with the long lived assets in the UK operation, an impairment
     charge of $1.3 million was recorded for plant and equipment during the
     fourth quarter of fiscal year 1998.

     Income Taxes.

     The Company recognizes deferred income taxes by applying enacted statutory
     tax rates, applicable to future years, to temporary differences between the
     tax basis and financial statement carrying values of the Company's assets
     and liabilities.

     Earnings/(Loss) Per Share.

      Basic earnings/(loss) per common share is computed by dividing net
      income/(loss) available to common shareholders by the weighted-average
      number of common shares outstanding during the period. Diluted
      earnings/(loss) per share is computed by dividing net income/(loss)
      available to common shareholders 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
      had been issued. The diluted earnings/(loss) per share does not assume the
      exercise of options that would have an antidilutive effect on
      earnings/(loss) per share.

     Employee Benefit Plans.

     The Company has a profit sharing plan which covers all employees who work
     in excess of 1,000 hours per year. Minimum contributions are based on
     income before income taxes, subject to limitations based on employee
     compensation and certain other restrictions defined in the plan document.
     Contributions of $424,388, $1,323,782 and $2,698,533 were accrued and paid
     in the fiscal years ended June 30, 1998, 1997 and 1996, respectively.


     The Company also has a savings and investment plan which covers all
     employees. Employer contributions are based on a percentage of employee
     contributions and certain other 

                                                                            -28-
<PAGE>   29

     restrictions defined in the plan document. Employer contributions of
     $516,984, $657,683 and $640,354 were accrued and paid in the fiscal years
     ended June 30, 1998, 1997 and 1996, respectively.

     Statements of Financial Accounting Standards ("SFAS") Not Yet Adopted.

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standard No. 130, "Reporting
     Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
     reporting and display of comprehensive income and its components in a full
     set of general-purpose financial statements. The Statement is effective for
     fiscal years beginning after December 15, 1997 and reclassification of
     financial statements for earlier periods provided for comparative purposes
     is required. The Company believes that the adoption of this statement will
     not have a material impact on the consolidated financial statements.

     Additionally, during June 1997, the FASB issued Statement of Financial
     Accounting Standard SFAS No. 131, "Disclosures about Segments of an
     Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
     standards for the way that public business enterprises report information
     about operating segments in annual financial statements and requires that
     those enterprises report selected information about operating segments in
     interim financial reports issued to shareholders. It also establishes
     standards for related disclosures about products and services, geographic
     areas and major customers. The Statement is effective for fiscal years
     beginning after December 15, 1997. The Company believes that the adoption
     of this statement will not have a material impact on the consolidated
     financial statements.

2.   Basis of Presentation.

     The Company's consolidated financial statements have been presented on the
     basis that it is a going concern, which contemplates the realization of
     assets and the satisfaction of liabilities in the normal course of
     business. As shown in the accompanying consolidated financial statements
     and notes, the Company has suffered losses from continuing operations of
     $12.4 million and $4.6 million in fiscal years 1998 and 1997, respectively,
     is experiencing difficulty generating sufficient cash flow to meet its
     obligations and sustain operations and has not yet obtained a new credit
     facility to replace its current loan facility, of which the balance of
     $11.1 million is due January 11, 1999. These factors raise substantial
     doubt about the Company's ability to continue as a going concern.

     The consolidated financial statements do not include any adjustments
     relating to the recoverability and classification of liabilities that might
     be necessary should the Company be unable to continue as a going concern.
     As described in Note 7, the Company was not in compliance with the fixed
     charge coverage ratio for its revolving credit agreement and was unable to
     obtain waivers from the bank for its violation. The Company has entered
     into a forbearance agreement with its bank lenders which extended the
     expiration of the revolving credit agreement from October 1, 1998 to
     January 11, 1999 and provides for the maintenance of minimum cash balances,
     as well as other restrictive covenants through the expiration date. The
     forbearance agreement terminates on November 30, 1998, if the Company does
     not obtain a letter of commitment from a financial institution providing
     for repayment in full of the obligations under the revolving credit
     agreement.

                                                                            -29-
<PAGE>   30
     The Company is currently in the process of seeking alternative sources of
     financing and implementing certain internal operating and management plans
     to generate cash flow. These plans include reductions in workforce,
     relocation of the Corporate Headquarters and the wind-down of the UK
     operation, all of which were announced during the first quarter of fiscal
     year 1999.

     There can be no assurance that the Company will be successful in generating
     the necessary cash flow or obtaining such financing.

3.       Accounts Receivable.

<TABLE>
<CAPTION>
                                              (In Thousands)
                                            1998          1997
                                            ----          ----
<S>                                        <C>           <C>    
Contract Receivables, Billed Amounts       $ 7,628       $ 6,152
Commercial Vending Receivables .....            --         2,797
Other ..............................           469           346
Allowance for Doubtful Accounts ....            --          (106)
                                           -------       -------
    Total ..........................       $ 8,097       $ 9,189
                                           =======       =======
</TABLE>

     Contract receivables include amounts under long-term contracts and
     subcontracts principally with the U.S. Government, or its contractors, and
     the United Kingdom Ministry of Defense or its contractors. Commercial
     vending receivables consisted of amounts due from a variety of
     geographically disbursed vending customers.

     The provision for doubtful accounts included in Selling, General and
     Administrative expense was immaterial.

     During fiscal year 1997, the Company filed a notice of arbitration against
     Teliti Computers Sdn Bhd in the Regional Centre for Arbitration in Kuala
     Lumpur, Malaysia. The Company sought $1.3 million for breach of contract of
     which approximately $500,000 was included in costs and estimated earnings
     in excess of billings on uncompleted contracts at June 30, 1997. During the
     fourth quarter of fiscal year 1998, the Regional Centre for Arbitration
     awarded the Company a settlement of $400,000 including amounts previously
     advanced to the Company. This settlement resulted in a $200,000 charge to
     earnings during the fourth quarter of fiscal year 1998. At June 30, 1998,
     $200,000 of this settlement is included in Other Accounts Receivable and
     will be paid in equal quarterly installments of $50,000 through July
     1,1999.

     Also, during fiscal year 1997, the Company, as a subcontractor, initiated a
     lawsuit in Florida State court against Raytheon Training, Inc., the prime
     contractor successor to Hughes Training, Inc., under the Army's Battle Labs
     Reconfigurable Simulator Initiative ("BLRSI") program. This litigation
     sought recovery of approximately $191,000 in unpaid invoices and
     approximately $98,000 as a settlement of the termination for convenience of
     the subcontract. These amounts were included in accounts receivable at
     June 30, 1997. Raytheon submitted a counterclaim in the amount of
     approximately $1.2 million. During the first quarter of fiscal year 1999,
     the parties agreed to a settlement of all claims in the form of a $150,000
     sum payable to the Company. This settlement resulted in a $139,000 charge
     to earnings during the fourth quarter of fiscal year 1998.

                                                                            -30-
<PAGE>   31

4.       Inventories.

<TABLE>
<CAPTION>
                        (In Thousands)
                       1998         1997
                      ------       ------
<S>                  <C>           <C>   
Finished Goods       $     -       $2,278
Work in Process        1,053        2,326
Raw Materials .        4,149        5,062
                      ------       ------

    Total .....       $5,202       $9,666
                      ======       ======
</TABLE>

     During fiscal year 1996, the Company submitted a claim for contract
     adjustment under the Economic Price Adjustment (EPA) provisions of a major
     contract seeking approximately $950,000. The value of the claim is included
     in costs and estimated earnings in excess of billings on uncompleted
     contracts.

     The Company also submitted a claim, during fiscal year 1996, for the
     effects of a Stop Work Order issued on one of its contracts in the amount
     of $191,000, of which $150,000 was deferred in inventory as of June 30,
     1997. The claim represented the cost of idle time resulting from the Stop
     Work Order as well as the effect of the release of the Stop Work Order.
     During the fourth quarter of fiscal year 1998, the Company was awarded
     $140,000 with respect to this claim. The excess $10,000 deferred in
     inventory was written-off during the fourth quarter of fiscal year 1998.

5.       Property, Plant and Equipment.

<TABLE>
<CAPTION>
                                         (In Thousands)
                                          1998          1997
                                       -------       -------
<S>                                    <C>           <C>    
Land ...........................       $ 2,411       $ 2,411
Buildings ......................        21,106        21,726
Machinery and Equipment ........        24,292        27,702
Demonstration and Test Equipment         8,238         9,761
                                       -------       -------
    Total ......................        56,047        61,600
Less Accumulated Depreciation ..        35,053        35,481
                                       -------       -------

    Total ......................       $20,994       $26,119
                                       =======       =======
</TABLE>

     Repairs and maintenance expense for the fiscal years ended June 30, 1998,
     1997 and 1996 were $844,000, $700,000 and $942,000, respectively.

6.       Accrued Expenses and Other.

<TABLE>
<CAPTION>
                                                        (In Thousands)
                                                      1998         1997
                                                      ------       ------
<S>                                                   <C>          <C>   
Compensation ..................................       $  956       $1,785
Vacation ......................................        1,150        1,402
Accrual for Disposal of Discontinued Operations           76        1,738
Contract Loss Provisions ......................        1,455           --
Deferred Income Tax Liability .................        2,348           --
Other .........................................        1,940        1,717
                                                      ------       ------

    Total .....................................       $7,925       $6,642
                                                      ======       ======
</TABLE>

                                                                            -31-
<PAGE>   32
7.       Debt.

<TABLE>
<CAPTION>
                                                 (In Thousands)
                                               1998          1997
                                              -------       -------
<S>                                           <C>           <C>    
Revolving Credit Facility and Term Loan       $11,132       $18,890
Less Current Portion ..................        11,132         2,250
                                              -------       -------

             Total Long Term ..........       $    --       $16,640
                                              =======       =======                                                                 
</TABLE>

     On September 20, 1994, the Company entered into a revolving credit and term
     loan facility ("Loan Facility") with a bank which, as amended, was due to
     expire on October 1, 1998. The amended loan facility includes certain
     covenants related to, among other things, maintaining a minimum fixed
     charge coverage ratio, debt to equity ratio and current ratio. In addition,
     substantially all of the assets of the Company are pledged as collateral
     for the loan facility.

     Interest is payable quarterly in arrears at a rate defined in the agreement
     (ranging from 7.1% to 8.5% at June 30, 1998). The Company is also required
     to pay fees on an annual basis as calculated by the bank. The revolving
     credit commitment fee is equal to .25% per annum on the total outstanding
     balance. A Standby letter of Credit fee is equal to 1% per annum plus
     issuance costs.

     The Company did not comply with the minimum fixed charge coverage ratio
     covenant at June 30, 1998 and was unable to obtain a waiver from its bank
     lender for its violation. On October 1, 1998 the Company entered into a
     forbearance agreement with the bank which extended the expiration date of
     the revolving credit agreement from October 1, 1998 to January 11, 1999 and
     reduced the availability of credit from $13.0 million to $11.4 million. The
     forbearance agreement also provides for the maintenance of minimum cash
     balances, fixed charge coverage ratio and current ratio as well as maximum
     debt to equity ratio through the expiration date. The forbearance agreement
     terminates on November 30, 1998, if the Company does not obtain a letter of
     commitment from a financial institution providing for repayment in full of
     the obligations under the revolving credit agreement.

     The Company is currently in the process of seeking alternative sources of
     financing and anticipates obtaining this financing by November 30, 1998.
     There can be no assurance, however, that the Company will obtain such
     financing.

     Interest under the forbearance agreement is payable quarterly in arrears at
     a rate of prime plus 2.5%. In addition, the Company is required to pay a
     forbearance fee of $75,000 in three equal monthly installments beginning
     October 6, 1998.




                                                                            -32-
<PAGE>   33
8.       Income Taxes.

     The domestic and foreign components of (loss)/income before income taxes
are presented below:

<TABLE>
<CAPTION>
                                            (In Thousands)
                                 1998            1997            1996
                               --------        --------        --------
Continuing Operations:
<S>                            <C>             <C>             <C>     
Domestic ...............       $ (4,304)       $    (49)       $  7,036
Foreign ................        (10,300)         (4,607)           (462)
                               --------        --------        --------
     Total .............       $(14,604)       $ (4,656)       $  6,574
                               ========        ========        ========

Discontinued Operations:
Domestic ...............       $   (569)       $ (6,013)       $ (2,051)
                               --------        --------        --------
     Total .............       $(15,173)       $(10,669)       $  4,523
                               ========        ========        ========
</TABLE>


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

<TABLE>
<CAPTION>
                                                      (In Thousands)
                                            1998           1997           1996
                                           -------        -------        -------
Current:
<S>                                        <C>            <C>            <C>    
     Federal .......................       $(4,419)       $(1,608)       $ 2,207
     State .........................            --             --            140
     Foreign .......................            --             --            (27)
                                           -------        -------        -------
         Subtotal ..................        (4,419)        (1,608)         2,320
                                           -------        -------        -------
Deferred:
     Federal .......................       $ 1,929        $  (421)       $  (663)
     State .........................           133           (105)           (12)
                                           -------        -------        -------
         Subtotal ..................         2,062           (526)          (675)
                                           -------        -------        -------

(Benefit)/Provision for Income Taxes       $(2,357)       $(2,134)       $ 1,645
                                           =======        =======        =======
</TABLE>

     The (benefit)/provision for Income Taxes is included in the financial
statements as follows:

<TABLE>
<CAPTION>
                                         (In Thousands)
                               1998           1997           1996
                              -------        -------        -------
<S>                           <C>            <C>            <C>    
Continuing Operations .       $(2,195)       $   (72)       $ 2,342
Discontinued Operations          (162)        (2,062)          (697)
                              -------        -------        -------
     Total ............       $(2,357)       $(2,134)       $ 1,645
                              =======        =======        =======
</TABLE>

     The Company utilized $245,000 of Pennsylvania net operating loss
     carryforwards to reduce fiscal year 1996 Pennsylvania income taxes payable.

     The Company's current federal benefit for the fiscal year ended June 30,
     1998 results from the Company's carryback of the current years net
     operating loss.

     In addition, the Company had available at June 30, 1998, net operating loss
     carryforwards of $6.6 million and $781,000 for Florida and Pennsylvania
     state income tax purposes, respectively. The Florida net operating loss
     carryforwards expire in the year 2013. The Pennsylvania net operating loss
     carryforwards expire in the year 2001.

     The tax effects of the primary temporary differences giving rise to the
     Company's deferred tax assets and liabilities are as follows for the years
     ended June 30 (in thousands):

                                                                            -33-
<PAGE>   34

<TABLE>
<CAPTION>
                                                        1998                       1997
                                                        ----                       ----
                                                Asset        Liability       Asset        Liability
<S>                                            <C>            <C>           <C>            <C>    
Revenue Recognized on Completed
  Contract for Tax Return and on
  Percentage of Completion for
  Financial Reporting ..................       $   184        $     -       $   123        $     -

Foreign Net Operating Loss .............         4,790              -         2,015              -

Federal Operating Loss Carryforwards ...           826              -            --              -

State Tax Loss Carryforwards ...........           384              -            70              -

Difference between Book and
  Tax Depreciation .....................             -            855             -          1,496

Capitalized Bid and Proposal Expense ...           215              -           197              -

Investment in Foreign Subsidiary .......             -          2,348             -              -

Accruals Not Currently Deductible ......           195             63         1,823             63
                                               -------        -------       -------        -------

    Subtotal ...........................         6,594          3,266         4,228          1,559

Valuation Allowance ....................        (4,857)             -        (2,027)             -
                                               -------        -------       -------        -------

    Total ..............................       $ 1,737        $ 3,266       $ 2,201        $ 1,559
                                               =======        =======       =======        =======
</TABLE>

     A valuation allowance has been provided primarily for foreign net operating
     loss carryforwards which are subject to uncertainty as to their ultimate
     realization.

     These deferred tax assets and liabilities are included in/or classified as
     follows on the Consolidated Balance Sheets at June 30:

<TABLE>
<CAPTION>
                                                   1998         1997
                                                  ------       ------
<S>                                               <C>          <C>   
Prepaid Expenses and Other ................       $1,737       $2,201
Accrued Expenses and Other ................        2,348           --
Non-current Deferred Income Tax ...........          918        1,559
</TABLE>




                                                                            -34-
<PAGE>   35
     Differences between the statutory U.S. Federal Income Tax rate and the
     effective income tax rate reported in the financial statements are as
     follows for continuing operations at June 30:

<TABLE>
<CAPTION>
                                                     1998           1997           1996
                                                    ------         ------         ------
<S>                                                  <C>            <C>             <C>  
Federal Statutory Rates .....................        (34.0%)        (34.0%)         34.0%
Increase in Taxes Resulting From:
    State Income Taxes (after deducting
    federal income tax benefit) .............         (0.4%)         (1.0%)          0.8%
    Foreign Net Operating Loss Carryforward .         18.4%          33.6%           2.0%
    Other ...................................          1.0%          (0.1%)         (1.2%)
                                                    ------         ------         ------

Total (Benefit)/Provision for Income Taxes ..        (15.0%)         (1.5%)         35.6%
                                                    ======         ======         ======
</TABLE>

     The Company realized an income tax benefit of $238,000 and $220,000 during
     fiscal year 1997 and 1996, respectively, related to the exercise of certain
     employee stock options which are recognized as employee compensation for
     tax purposes, however, not for financial reporting purposes. The tax
     benefit realized from the exercise of these stock options was immaterial in
     fiscal year 1998. This tax benefit was credited to Capital in Excess of
     Par.

9.   Financial Instruments.

     Off Balance Sheet Risk.

     As collateral for leased facilities and for performance and advances on
     certain long-term contracts, the Company is contingently liable under
     standby letters of credit in the amount of $498,000 at June 30, 1998. The
     Company pays a fee to its primary lender of 1% per annum of their face
     value. If the Company were required to obtain replacement standby letters
     of credit as of June 30, 1998 for those currently outstanding, it is the
     Company's opinion that the replacement cost for such standby letters of
     credit would not significantly vary from the present fee structure.

     Concentrations of Credit Risk.

     Financial instruments which potentially subject the Company to
     concentrations of credit risk consist principally of accounts receivable.
     Except for U.S. and foreign government agencies, concentration of credit
     risk with respect to accounts receivable are limited, due to the large
     number of customers comprising the Company's customer base and their
     dispersion among many different geographies. The Company generally does not
     require collateral or other security to support customer receivables.




                                                                            -35-
<PAGE>   36
     Fair Value of Financial Instruments.

     At June 30, 1998, the carrying amounts and fair values of the Company's
financial instruments are listed below.

     (In Thousands)                  Carrying        Fair
                                       Value         Value
                                       -----         -----
     Revolving Credit Facility        11,132         11,132
     Standby Letters of Credit            --            498

     The fair value of the Company's debt is estimated based on the quoted
     market prices for the same or similar issues of debt with similar terms and
     remaining maturities.

     The fair value of Standby Letters of Credit are based on fees currently
     charged for similar agreements.

10.  Stock Compensation.

     The Company has several stock-based compensation plans, which are described
     below. The Company applies APB Opinion No. 25 and related Interpretations
     in accounting for its plans. The stock option exercise price is equal to
     the fair market value of the stock on the date of grant for its fixed stock
     option plan and equal to 85% of the fair market value on the date of
     exercise for stock issued under the employee stock purchase plan.
     Accordingly, no compensation cost has been recognized for its fixed stock
     option plans and its stock purchase plan. Had compensation cost for the
     Company's stock-based compensation plans been determined based on fair
     value at the grant dates for awards under those plans consistent with the
     method of SFAS No. 123, the Company's net (loss)/income and net
     (loss)/income per share for fiscal years 1998, 1997 and 1996 would have
     been changed to the pro forma amounts indicated below (in thousands, except
     per share data):

<TABLE>
<CAPTION>
                                                   1998              1997             1996
                                                ----------        ----------       ----------
<S>                                             <C>               <C>              <C>       
     Net (Loss)/Income                          $  (13,111)       $   (8,612)      $    2,384
     Net (Loss)/Income Per Share- Basic         $    (1.60)       $    (1.09)      $     0.31
     Net (Loss)/Income Per Share- Diluted       $    (1.60)       $    (1.09)      $     0.30
</TABLE>

     The pro forma information regarding net (loss)/income and (loss)/earnings
     per share is required by SFAS 123, and has been determined as if the
     Company had accounted for its stock-based compensation plans under the fair
     value method of that Statement. There were 335,000 and 135,000 options
     granted during fiscal years 1998 and 1996, respectively with weighted
     average a fair values of $3.67 in 1998 and $5.00 in 1996. There were no
     option grants during fiscal year 1997.

     The fair value of options were estimated at the date of grant using a
     Black-Scholes option pricing model with the following weighted average
     assumptions:

<TABLE>
<CAPTION>
                                             1998                   1996
                                            -------                -------
<S>                                         <C>                    <C>  
     Expected dividend yield ...........       0.00%                  0.00%
     Risk-free interest rate ...........       5.36%                  5.40%
     Expected volatility ...............      45.70%                 50.00%
     Expected life (in years) ..........        4.6                    5.0
</TABLE>

     Under the Company's Qualified Stock Option Plans, directors, officers and
     certain key employees may purchase the Company's Common Stock at 100% of
     the fair market value of the shares on the date of grant. Options are
     exercisable up to 10 years from the date granted.

     Under the Company's 1986 and 1991 Non-Qualified Stock Option Plans,
     directors, officers, and key employees may purchase the Company's Common
     Stock at 100% of fair market 

                                                                            -36-
<PAGE>   37
     value of the shares on the date of grant. Except as otherwise determined by
     the Board of Directors, no options granted under the Plan will be
     immediately exercisable, but, rather, will be exercisable as to twenty
     percent of the shares covered thereby after one year from the date the
     option is granted and will be exercisable as to an additional twenty
     percent each year thereafter. All options will expire upon the earlier of
     10 years and 30 days from date of grant or, with respect to shares covered
     by such options, five years from the date the option first became
     exercisable with respect to such shares.

     On April 7, 1998 the Board of Directors approved the 1998 Stock Incentive
     Plan a Non-Qualified Stock Option Plan. Under the Plan, directors,
     officers, and key employees may purchase the Company's Common Stock at an
     exercise price established by the Board of Directors at the time each
     option is granted. Options granted under the Plan are exercisable at such
     times and subject to terms as established by the Board of Directors at the
     time each option is granted. There were 600,000 shares reserved for
     the 1998 Plan and 175,000 shares issued under the 1998 Stock Incentive Plan
     as of June 30, 1998. The 1998 grants were issued with an exercise price
     equal to 100% of the fair market value of the shares on the date of grant.

     A summary of stock option transactions for the fiscal years ended June 30,
     1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                          Shares            Weighted
                                          Under             Average
                                          Option          Exercise Price
                                          ------          --------------
<S>                                      <C>              <C>       
     Balance at June 30, 1995 ...        1,043,934        $     9.37
         Options Granted ........          135,000             10.06
         Options Exercised ......          (72,012)             2.26
         Options Terminated .....          (22,750)            11.29
                                        ----------        ----------
         Balance at June 30, 1996        1,084,172              9.89
         Options Exercised ......          (75,799)             2.28
         Options Terminated .....          (98,600)            11.10
                                        ----------        ----------
         Balance at June 30, 1997          909,773             10.41
         Options Granted ........          335,000              3.32
         Options Exercised ......           (7,337)             2.19
         Options Terminated .....         (210,400)            10.69
                                        ----------        ----------

         Balance at June 30, 1998        1,027,036        $     8.02
                                        ==========        ==========
</TABLE>

     Options exercisable were 638,136 at June 30, 1998, 559,523 at June 30,
1997, and 525,372 at June 30, 1996, respectively.



     Stock options outstanding at June 30, 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                  Weighted Average  Weighted                           Weighted
  Range of           Number       Remaining         Average           Number           Average
  Exercise Prices  Outstanding    Contractual Life  Exercise Price    Exercisable      Exercise Price
<S>                <C>              <C>                <C>              <C>             <C>   
    $ 1.15-$ 2.30    23,600           2.80 years         $ 2.13           23,600          $ 2.13
    $ 2.30-$ 3.45   298,286           8.70 years         $ 3.11          115,886          $ 3.09
    $ 3.45-$ 4.60    57,000           8.50 years         $ 4.14           37,000          $ 4.01
    $ 4.60-$ 5.75    40,000           2.90 years         $ 5.50           40,000          $ 5.50
    $ 9.20-$10.35   110,000           7.60 years         $10.00          108,800          $10.00
    $10.35-$11.50   498,150           6.30 years         $11.45          312,850          $11.44
                  ---------           ----               ------          -------          ------
                  1,027,036           7.00 years         $ 8.02          638,136          $ 8.53
                  =========           ====               ======          =======          ======


</TABLE>

                                                                            -37-
<PAGE>   38


     On February 11, 1988, the Company granted each of its then four outside
     directors an option to purchase 12,500 shares of the Company's Common Stock
     at a price of $7.20 per share (the market value on that day) later reduced
     to 6,250 shares at $2.375 in fiscal year 1993 for the two directors who
     were not part of the Stock Option Committee. As of June 30, 1997 and 1996,
     12,500 and 5,000 shares of these options were exercised, respectively.
     There were no shares of these options exercised during fiscal year 1998.

     During fiscal year 1996, the Stockholders approved the 1996 Employee Stock
     Purchase Plan. The Plan is the same in all aspects as the 1990 and 1993
     Stock Purchase Plans including the number of shares reserved - 360,000
     shares. The Plan is intended to provide eligible employees with an
     opportunity to purchase the Company's Common Stock through payroll
     deductions at eighty-five percent of the market price on specified dates.
     No shares were issued under this Plan in fiscal year 1996. There were
     79,244 and 65,265 shares issued under this plan during the years ended June
     30, 1998 and 1997, respectively. There were 63,285 shares issued under the
     prior Plan during the year ended June 30, 1996. The fair value of shares
     issued during fiscal year 1998 and 1997 were $0.91 and $1.38 per share,
     respectively. The fair value of these shares was estimated using a
     Black-Scholes Option pricing model with the following weighted average
     assumptions for fiscal year's:

                                          1998           1997           1996
                                         -------        -------        -------
     Expected dividend yield .             0.00%          0.00%          0.00%
     Risk-free interest rate .             5.49%          5.40%          5.40%
     Expected Volatility .....            46.80%         61.20%         61.20%
     Expected life (in months)               6              6              6

     The Company's Compensation Committee, administers all the stock benefit
     plans of the Company.

     The Company has available 1,000,000 authorized and unissued shares of $0.10
     par value Preferred Stock. Shares may be issued from time to time in one or
     more series, each series having such special rights, privileges and
     preferences as may be determined by the Board of Directors at time of
     issuance. 

     On August 27, 1996, the Board of Directors declared a dividend distribution
     of one Right for each outstanding share of the Company's Common Stock to
     stockholders of record at the close of business on September 17, 1996. Each
     Right entitles the registered holder to purchase from the Company a unit
     consisting of one one-thousandth of a share (a "Unit") of Series B Junior
     Participating Preferred Stock, $0.10 par value per share at a purchase
     price of $40.00 per unit, subject to adjustment. The description and terms
     of the Rights are set forth in a Rights Agreement, as amended, between the
     Company and Mellon Bank, N.A. as Rights Agent.

     On July 31, 1997, the Board of Directors approved the 1997 Employee
     Incentive Plan. Under the Plan, the Board granted all of the 107,100 
     unrestricted shares of the 

                                                                            -38-
<PAGE>   39
     Company's common stock reserved for issuance under the Plan to employees
     who were not officers of the Company.

     On July 31, 1997, the Board of Directors approved the 1997 Director Equity
     Compensation Plan. Under the Plan, the members of the Company's Board of
     Directors shall receive unrestricted shares of the Company's Common Stock
     in lieu of 50% of the otherwise payable directors' fees. A total of 75,000
     shares of Common Stock are reserved for issuance under the Plan. During
     fiscal year 1998, 27,670 shares were granted under this plan. A balance of
     47,330 shares are reserved for this Plan at June 30, 1998.

     On June 15, 1998 the Company entered into a Stock Purchase Agreement with
     its Chief Executive Officer(CEO). In connection with this agreement, the
     CEO purchased 50,000 shares of common stock. The CEO paid $10,000 cash and
     issued a Promissory Note to the Company in the amount of $146,250 in
     payment of the shares. The Promissory Note bears an interest rate of 5.58%
     and is payable together with interest on June 15, 2001.

11.      Earnings Per Share.

     In 1997, the Financial Accounting Standards Board issued statement of
     Financial Accounting Standards No, 128 "Earnings per Share" (SFAS No. 128)
     which changes the presentation and calculation requirements of earnings per
     share amounts. The Company restated all prior year per share amounts
     presented in these consolidated financial statements and notes according to
     the requirements of SFAS No. 128. This restatement resulted in no material
     change from amounts previously reported. Two per share amounts are
     presented for net (loss)/income, basic and diluted. See Note 1 to the
     consolidated financial statements.


     The following is a reconciliation of the basic and diluted net
     (loss)/income per common share computations (in thousands, except per share
     amounts):

<TABLE>
<CAPTION>
                                                              1998            1997            1996
                                                            --------        --------        --------
<S>                                                         <C>             <C>             <C>     
     (Loss)/Income Continuing Operations ............       $(12,409)       $ (4,584)       $  4,232
                                                            --------        --------        --------
     Loss Discontinued Operations ...................       $   (407)       $ (3,951)       $ (1,354)
                                                            --------        --------        --------
     Weighted Average Shares Outstanding - Basic ....          8,174           7,916           7,732
                                                            --------        --------        --------
     Basic Per Share Amount Continuing Operations ...       $  (1.52)       $  (0.58)       $   0.55
                                                            --------        --------        --------
     Basic Per Share Amount Discontinued Operations .       $  (0.05)       $  (0.50)       $  (0.18)
                                                            --------        --------        --------

     (Loss)/Income Continuing Operations ............       $(12,409)       $ (4,584)       $  4,232
                                                            --------        --------        --------
     Loss Discontinued Operations ...................       $   (407)       $ (3,951)       $ (1,354)
                                                            --------        --------        --------
</TABLE>

                                                                            -39-
<PAGE>   40
<TABLE>
<S>                                                        <C>             <C>             <C>  
     Weighted Average Shares Outstanding - Diluted ..          8,174           7,916           7,732
     Dilutive Options ...............................             --              --             218
                                                            --------        --------        --------
     Total Diluted Shares ...........................          8,174           7,916           7,950
                                                            --------        --------        --------
     Diluted Per Share Amount Continuing Operations .       $  (1.52)       $  (0.58)       $   0.53
                                                            --------        --------        --------
     Diluted Per Share Amount Discontinued Operations       $  (0.05)       $  (0.50)       $  (0.17)
                                                            --------        --------        --------
</TABLE>

     In 1998 and 1997, the weighted average number of shares outstanding for the
     basic and diluted per share calculations are identical since the assumed
     exercise of outstanding options would be antidilutive.

     In 1996, additional options to purchase 787,478 shares of common stock at a
     range of prices of $10.75 to $11.50 were outstanding but were not included
     in the computation of the diluted per share amount because the options'
     exercise price was greater than the average market price of common shares.

12.      Business Segment Information.

     Due to the sale of the vending operation during fiscal year 1998, the
     Company operates in one segment - training. This segment includes the
     design and manufacture of training simulators.

     Sales by Class of Customer.

<TABLE>
<CAPTION>
                                                            (In Thousands)
                                                  1998           1997           1996
                                                --------       --------       --------
     U.S. Government
<S>                                             <C>            <C>            <C>     
         Direct .........................       $  7,067       $ 13,590       $ 24,835
         Subcontract ....................         32,504         39,933         61,742
                                                --------       --------       --------
                  Total U.S. Government .         39,571         53,523         86,577
                                                --------       --------       --------

     Foreign Governments ................         11,663         16,397         14,392
     Foreign Commercial .................            854          1,688            305
     Other ..............................            530            942            439
                                                --------       --------       --------

                  Total Foreign and Other         13,047         19,027         15,136
                                                --------       --------       --------

                  Total Sales ...........       $ 52,618       $ 72,550       $101,713
                                                ========       ========       ========
</TABLE>

     Export Sales from the U.S. were not material for the fiscal years ended
     June 30, 1998, 1997 and 1996. Export sales do not include Foreign Military
     Sales through U.S. Government agencies and prime contractors of $1,540,000,
     $4,750,000 and $14,445,000 in the fiscal years ended June 30, 1998, 1997,
     and 1996, 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.

                                                                            -40-
<PAGE>   41
     Sales by Geographic Area.

<TABLE>
<CAPTION>
                                                         (In Thousands)
                                             United         Europe and
                                             States         Middle East      Consolidated
                                             ------         -----------      ------------
<S>                                         <C>             <C>              <C>
     Revenues
     1998                                   $ 39,707          $12,911           $ 52,618
     1997                                     54,465           18,085             72,550
     1996                                     86,779           14,934            101,713
     Operating (Loss)/Income
     1998                                     (5,777)          (7,998)           (13,775)
     1997                                        702           (4,212)            (3,510)
     1996                                      7,981              (52)             7,929
     Identifiable Assets (1)
     1998                                     55,704            8,654             64,358
     1997                                     69,501           12,533             82,034
     1996                                     83,365           12,032             95,397
</TABLE>

(1)   Includes discontinued vending operations assets of  $13.8 million in 1997
      and $11.2 million in 1996.

13.  Summary of Quarterly Results (Unaudited).

<TABLE>
<CAPTION>
                                                    (In Thousands, Except Per Share Data)
                                              September       December         March           June
         1998                                    30              31              31              30
         ----                                 --------        --------        --------        --------
<S>                                           <C>             <C>             <C>             <C>
      Net Sales                               $ 12,156        $ 12,520        $ 12,378        $ 15,564
      Gross Profit/(Loss)                     $  2,498        $  1,967        $  1,921        $ (2,683)
      Operating Loss                          $ (1,097)       $ (2,187)       $ (1,937)       $ (8,554)
      Loss from Continuing Operations         $ (1,111)       $ (1,860)       $ (1,588)       $ (7,850)
      Loss from Discontinued Operations       $     --        $   (370)       $     --        $    (37)
      Net Loss                                $ (1,111)       $ (2,230)       $ (1,588)       $ (7,887)

      Loss Per Common Share - Basic and
         Assuming Dilution:
      Loss Per Common Share from
      Continuing Operations                   $  (0.14)       $  (0.23)       $  (0.19)       $  (0.96)
      Loss Per Common Share
       from Discontinued Operations           $     --        $  (0.05)       $     --        $     --
                                              --------        --------        --------        --------
      Loss Per Common Share                   $  (0.14)       $  (0.28)       $  (0.19)       $  (0.96)
                                              ========        ========        ========        ========
</TABLE>

     In the fourth quarter of fiscal year 1998, the Company changed its method
     of accounting for precontract costs from deferring costs incurred for
     specific anticipated contracts and including those costs in contract sales
     and costs when the contract award was assured to expensing the costs as
     incurred in accordance with Statement Of Position 98-5 "Reporting on the
     Cost of Start-Up Activities"("SOP 98-5"). The Statement requires that
     precontract costs that are start-up costs be expensed as incurred. The
     $106,000, after tax, cumulative effect of the change on prior years is
     included in cost of sales for fiscal year 1998. The effect of the change on
     the three month period ended September 30, 1997, was to increase net loss
     $12,000 ($0.00 per share); the effect of the change on the three months
     ended December 31, 1997, was to increase net loss $153,000 ($0.02 per
     share); the effect of the change on the three month period ended March 31,
     1998 was to increase net loss $138,000 ($0.02 per share); the effect of the
     change on the three month period ended June 30, 1998 was to increase net
     loss $199,000


                                                                            -41-
<PAGE>   42
     ($0.02) per share. These amounts are reflected in the summary of quarterly
     results presented above.

     As a result of the periodic review of estimated costs at completion and
     consideration of changes in facts and circumstances, revisions were made in
     the estimated costs to complete in the fourth quarter of fiscal year 1998
     to certain contracts. A gross margin adjustment resulting from the need to
     recognize additional cost on one of the domestic operation contracts was
     required due to delays in contract progress resulting from attrition and
     learning curve inefficiencies. The effect of this adjustment was to
     increase net loss from continuing operations by $935,000 for the fourth
     quarter and year ended June 30, 1998. The UK operation was also required to
     adjust margins and recognize additional costs to complete on all of its
     contracts. The lack of new business awards over the past year, as well as
     no anticipated future awards has resulted in a business base which is not
     sufficient to absorb fixed costs. As a result, the UK subsidiary recorded
     margin adjustments on certain contracts and contract loss accruals of
     approximately $2.6 million during the fourth quarter of fiscal year 1998.

     Additionally, during the fourth quarter of fiscal year 1998, the Company
     incurred charges relating to the impairment of fixed assets and settlement
     of claims. See Notes 1, 3 and 4 to the Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                     (In Thousands, Except Per Share Data)
                                             September       December         March            June
         1997                                   30              31              31              30
     ---------------------------------       --------        --------        --------        --------
<S>                                          <C>             <C>             <C>             <C>
     Net Sales                               $ 22,426        $ 21,153        $ 13,842        $ 15,129
     Gross Profit                            $  4,900        $  2,676        $  1,292        $    507
     Operating Income/(Loss)                 $  1,718        $   (521)       $ (1,493)       $ (3,214)
     Income/(Loss) from
       Continuing Operations                 $    740        $ (1,054)       $ (1,342)       $ (2,928)
     Loss from Discontinued Operations       $   (526)       $   (595)       $   (610)       $ (2,220)
     Net Income/(Loss)                       $    214        $ (1,649)       $ (1,952)       $ (5,148)

     Income/(Loss) Per Common Share - 
       Basic and Assuming Dilution:
     Income/(Loss) Per Common Share 
       from Continuing Operations            $   0.09        $  (0.13)       $  (0.17)       $  (0.37)
     Loss Per Common Share
       from Discontinued Operations          $  (0.06)       $  (0.08)       $  (0.08)       $  (0.28)
                                              --------        --------        --------        --------
     Income/(Loss) Per Common Share          $   0.03        $  (0.21)       $  (0.25)       $  (0.65)
                                              ========        ========        ========        ========
</TABLE>

     As a result of the periodic review of estimated costs at completion and
     consideration of changes in facts and circumstances, revisions were made in
     the estimated costs to complete in the fourth quarter of fiscal year 1997
     to certain contracts. The UK operation was required to adjust margins and
     recognize additional costs to complete on two of its largest contracts.
     Gross margin adjustments were necessary due to protracted or delayed
     hardware/software testing, re-work required on trainers and late delivery
     penalties imposed due to contract delays. In addition, gross margin
     adjustments were necessary due to a decrease in expected future sales
     volume which may result in higher overhead rates than previously
     anticipated. The effect of these adjustments was to increase the net loss
     from continuing operations by $1.5 million for the fourth quarter and year
     ended June 30, 1997.

     This reduction in gross margin was partially offset by a reduction in
     manufacturing overhead


                                                                            -42-
<PAGE>   43
     related primarily to the Company's profit sharing expense and other payroll
     related costs which during the first three quarters were accrued for in
     anticipation of a 75% contribution. However, due to the Company's lack of
     profitability for the year, the actual profit sharing contribution was
     reduced to 40%.

     The income/(loss) per share amounts presented in the summary of quarterly
     results above have been restated to conform to SFAS No. 128. See Note 11 to
     the consolidated financial statements.

14.  Commitments and Contingencies.

     The Company and its subsidiaries lease certain office facilities and
     equipment under operating leases. Future minimum lease payments under all
     noncancellable operating leases as of June 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                    (In Thousands)
<S>                                                                   <C>
                  1999 ........................................        $    887
                  2000 ........................................             734
                  2001 ........................................             709
                  2002 ........................................             701
                  Remaining Years .............................           5,765
                                                                       --------
                  Total Minimum Lease Payments..................       $  8,796
                                                                       ========
</TABLE>

     Rent expense under all operating leases was approximately $1,142,000,
     $1,806,000, and $1,633,000 for the fiscal years ended June 30, 1998, 1997
     and 1996, respectively.

15.  Discontinued Operations.

     On November 25, 1997, the Company completed the sale of the fixed assets,
     inventory and trade receivables of the Company's vending operation.
     Proceeds from the sale of the vending operation were used to reduce the
     Company's debt.

     The vending operation was accounted for as a discontinued operation
     beginning in fiscal year 1997, and accordingly, the vending operation was
     segregated in the accompanying Consolidated Statements of Operations and
     prior years were reclassified. However, the Consolidated Balance Sheets and
     Consolidated Statements of Cash Flows were not reclassified.

     Discontinued operations at June 30, 1997 included management's best
     estimates of the amounts expected to be realized on the sale of the vending
     operation, the costs directly associated with the disposal of the
     operation, as well as the operating losses expected to be incurred during
     the phase-out period. 

     Revenues of the discontinued vending operation were $10.5 million, and
     $15.4 million in fiscal years 1997 and 1996, respectively. The results of
     the discontinued vending operation also reflect corporate interest expense
     allocations of $183,000, and $133,000 in fiscal years 1997 and 1996,
     respectively. The amount of interest allocated to the phase-out period was
     $36,000. Interest expense was allocated based on the ratio of net assets of
     the vending operation to the sum of consolidated stockholders' equity and
     consolidated debt less debt directly attributable to other operations.

     Assets (excluding inter-company) attributable to the discontinued operation
     were as follows at June 30, 1997:

<TABLE>
<CAPTION>
                                                   (In Thousands)
<S>                                                <C>
     Current Assets .....................             $10,295
</TABLE>


                                                                            -43-
<PAGE>   44
<TABLE>
<S>                                                <C>

     Property, Plant and Equipment, net .               3,176
     Other Assets .......................                 311
                                                      -------
         Assets of Discontinued Operation             $13,782
                                                      =======
</TABLE>

     During fiscal year 1998, the Company recorded an additional provision for
     the estimated loss on disposal of discontinued operations of $407,000,
     after-tax. This change in estimated loss resulted primarily from additional
     costs associated with the consummation of the sale of the fixed assets,
     inventory and trade receivables of the vending operation.

16.  Subsequent Events.

     On July 7, 1998 the Company announced the relocation of its corporate
     headquarters staff and Instructional Systems Development Group from Wayne,
     Pennsylvania to the Company's principal Systems Design and Production
     Center in Orlando, Florida. The relocation was completed on September 30,
     1998.

     Management expects to record a non-recurring charge of approximately
     $800,000 during fiscal year 1999 associated with this relocation. A
     majority of the charge principally relating to stay bonuses and lease
     termination will be recorded during the first quarter of fiscal year 1999.
     The remaining portion of the charge will be taken during the second quarter
     of fiscal year 1999.

     On August 27, 1998, the Board of Directors announced the approval of a
     plan to wind down and discontinue the operations of the UK subsidiary by
     March 1999. Management expects to record a non-recurring charge of
     approximately $1.7 million relating to severance and stay bonuses during
     fiscal year 1999. A portion of the charge relating to severance will be
     taken during the first quarter of fiscal year 1999. The remaining portions
     of the charge, principally relating to stay bonuses, will be taken during
     the remainder of fiscal year 1999. Management is in the process of
     evaluating options with respect to the leased facilities in the UK
     including subletting the facilities or terminating the leases. Any
     resulting charge will be determined after the evaluation. The potential
     costs associated with the leased facilities range from $1.0 million to
     $5.0 million.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

     The Company has nothing to report under this item.


                                                                            -44-
<PAGE>   45
                                    PART III


   Pursuant to Instruction G(3) to Form 10-K, the information required in Items
10 - 13 (except for the information set forth at the end of Part I with respect
to Executive Officers of the Company) is incorporated by reference to the
Company's definitive proxy statement which is expected to be filed pursuant to
Regulation 14A on or before October 28, 1998.

                                     PART IV


Item 14.      Exhibits, Financial Statement Schedules
              and Reports on Form 8-K.

   (a)        (1) and (2)  Financial Statements

              The financial statements filed as part of this Annual Report are
listed in the Index to Consolidated Financial Statements on page 19. Schedules
other than those so listed are omitted for the reason that they are either not
applicable or not required or because the information required is contained in
the consolidated financial statements or notes thereto.

   (3)        Exhibits

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.   Description
-----------   -----------
<S>           <C>
3.1           Certificate of Incorporation (5)

3.2           By-Laws (2)

4.1           Form of Common Stock Certificate (5)

10.1 *            Educational Computer Corporation
                  1981 Incentive Stock Option Plan (5)

10.2 *            Educational Computer Corporation
                  1986 Incentive Stock Option Plan (5)

10.3 *            Educational Computer Corporation
                  1986 Non-Qualified Stock Option Plan (5)

10.4 *            ECC International Corp. 1991 Option Plan (4)
</TABLE>


                                                                            -45-
<PAGE>   46
<TABLE>
<S>           <C>
10.5 *        Form of Stock Option Agreement for outside directors (7)

10.6          Term Loan and Revolving Credit Agreement dated as of September 20,
              1994 by and among First Fidelity Bank, National Association and
              ECC International Corp. (7)

10.7          Guaranty and Surety Agreement dated as of September 20, 1994 to
              induce First Fidelity Bank, N.A. to make loans or other financial
              accommodations to ECC Simulation Limited. (7)

10.8 *        Form of Director's and Officer's Agreement to Defend and
              Indemnify. (3)

10.9          First Amendment dated as of April 6, 1995 to the Term and
              Revolving Credit Agreement dated as of September 20, 1994 by and
              among First Fidelity Bank, National Association and ECC
              International Corp. (10)

10.10         Overdraft Facility dated as of April 3, 1995 by and among ECC
              Simulation Limited and First Fidelity Bank, N.A. London Branch.
              (10)

10.11         Second Amendment dated as of October 13, 1995 to the Term and
              Revolving Credit Agreement dated as of September 20, 1994 by and
              among First Fidelity Bank, National Association and ECC
              International Corp. (6)

10.12         Lease between ECC International Corp. and State of Wisconsin
              Investment Board for the premises 2900 Titan Row, Orlando,
              Florida. (6)

10.13         Lease between ECC Simulation Limited, ECC International Corp. and
              G.J. King & Son Limited for the premises Unit 1 Home Farm Business
              Centre, Brighton, England. (6)

10.14         Lease between ECC Simulation Limited, ECC International Corp. and
              G.J. King & Son Limited for the premises Unit 3A Home Farm
              Business Centre, Brighton, England. (6)

10.15         Lease between ECC Simulation Limited, ECC International Corp. and
              G.J. King & Son Limited for the premises Unit 2 Home Farm Business
              Centre, Brighton, England. (6)

10.16 *       ECC International Corp. Executive Savings Plan. (6)
</TABLE>


                                                                            -46-
<PAGE>   47
<TABLE>
<S>           <C>
10.17         Third Amendment dated as of June 19, 1996 to the Term and
              Revolving Credit Agreement dated as of September 20, 1994 between
              ECC International Corp; ECC Simulation Limited and First Union
              National Bank (Successor by merger to First Fidelity Bank,
              National Association). (1)

10.18         Rights Agreement dated August 27, 1996 between ECC International
              Corp. and Mellon Bank, N.A. (9)

10.19         Amendment No. 1 to Rights Agreement, dated as of March 25, 1997,
              between ECC International Corp. and Mellon Bank, N.A. (8)

10.20         Amendment dated as of November 13, 1997 to the Term and Revolving
              Credit Agreement dated as of September 20, 1994 by and among the
              Company and First Fidelity Bank, N.A. (11)

10.21         Amendment dated as of December 19, 1997, to the Term and Revolving
              Credit Agreement dated as of September 20, 1994 by and among the
              Company and First Fidelity Bank, N.A. (11)

10.22         Asset Purchase Agreement, dated as of November 25, 1997, by and
              among Dixie- Narco, Inc., ECC International Corp. and ECC Vending
              Corp. (12)

10.23*        Director Equity Compensation Plan (13)

10.24         Amendment dated as of January 30, 1998, to the Term and Revolving
              Credit Agreement dated as of September 20, 1994 by and among the
              Company and First Fidelity Bank, N.A. (14)

10.25         Amendment dated as of February 17, 1998, to the Term and Revolving
              Credit Agreement dated as of September 20, 1994 by and among the
              Company and First Fidelity Bank, N.A. (14)

10.26         Amendment dated as of March 16, 1998, to the Term and Revolving
              Credit Agreement dated as of September 20, 1994 by and among the
              Company and First Fidelity Bank, N.A. (14)

10.27         Amended and Restated Revolving Credit Note, dated February 17,
              1998 (14)

10.28*        1998 Stock Incentive Plan

10.29*        Employment Agreement, dated as of June 15, 1998, by and between
              the Company and James C. Garrett

10.30*        Stock Purchase Agreement, dated as of June 15, 1998, by and
              between the Company and James C. Garrett

</TABLE>

                                                                            -47-
<PAGE>   48
<TABLE>
<S>           <C>
10.31*        Promissory Note, dated as of June 15, 1998, by and between the
              Company and James C. Garrett

10.32*        Consulting Agreement dated as of April 1, 1998, by and between the
              Company and George W. Murphy

10.33*        Non-Competition and Non-Solicitation Agreement, dated as of April
              1, 1998, by and between the Company and George W. Murphy

21            Subsidiaries of the Registrant (15)

23            Consent of PricewaterhouseCoopers LLP

27            Financial Data Schedule
</TABLE>


*     Management contract or other compensatory plan or arrangement.

1     Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1996.  (Commission File No. 001-8988)

2     Incorporated by reference to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended December 31, 1996. (Commission File No.
      001-8988)

3     Incorporated by reference to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1996. (Commission File No. 001-8988)

4     Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1991. (Commission File No. 001-8988)

5     Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1993. (Commission File No. 001-8988)

6     Incorporated by reference to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended December 31, 1995. (Commission File No.
      001-8988)

7     Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1994. (Commission File No. 001-8988)

8     Incorporated by reference to the Registrant's Current Report on Form 8-K
      dated March 25, 1997.  (Commission File No. 001-8988)

9     Incorporated by reference to the Registrant's Registration Statement on
      Form 8-A dated September 4, 1996.  (Commission File No. 001-8988)


                                                                            -48-
<PAGE>   49
10    Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1995. (Commission File No. 001-8988)

11    Incorporated by reference to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended December 31, 1997 (Commission File No.
      001-8988)

12    Incorporated by reference to the Registrant's Current Report on Form 8-K
      dated November 25, 1997 (Commission File No. 001-8988)

13    Incorporated by reference to Annex A of the Registrants Definitive
      Schedule 14A file with the SEC on October 27, 1997 (Commission File No.
      001-8988)

14    Incorporated by reference to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended March 31, 1998 (Commission File No. 001-8988)

15    Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the year ended June 30, 1997 (Commission File No. 001-8988)

   (b) Reports on Form 8-K

      On June 17, 1998, the Company filed a Current Report on Form 8-K, dated
June 15, 1998, to report under Item 5 (Other Events) that the Company had named
James C. Garrett as President, Chief Executive Officer and a member of the Board
of Directors.


                                                                            -49-
<PAGE>   50
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.

                                          By:   /s/ Relland Winand
                                                --------------------------------
                                                Relland Winand
                                                Vice President, Finance

Date: October 13, 1998



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated, by a majority of the Board of
Directors.


/s/ James C. Garrett                                )
--------------------------------------------        )
James C. Garrett, President, Chief Executive        )
  Officer and Principal Executive Officer           )
                                                    )
/s/ Relland Winand                                  )
--------------------------------------------        )
Relland Winand, Vice President, Finance             )
  and Principal Financial and Accounting Officer    )
                                                    )
/s/ Ajit W. Hirani                                  )
--------------------------------------------        )
Ajit W. Hirani, Director                            )
                                                    )
/s/ Bruce A. Beda                                   )
--------------------------------------------        )
Bruce A. Beda, Director                             )
                                                    )
/s/ Julian Demora                                   )           October 13, 1998
--------------------------------------------        )
Julian Demora, Director                             )
                                                    )
/s/ Martin S. Kaplan                                )
--------------------------------------------        )
Martin S. Kaplan, Director                          )
                                                    )
/s/ Jesse Krasnow                                   )
--------------------------------------------        )
Jesse Krasnow, Director                             )
                                                    )
/s/ Thomas E. McGrath                               )
--------------------------------------------        )
Thomas E. McGrath, Director                         )
                                                    )
/s/ Merrill A. McPeak                               )
--------------------------------------------        )
Merrill A. McPeak, Director                         )


                                                                             
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