Cautionary Statement

Certain statements contained in this quarterly report on Form 10-Q that are not related to historical results, including, without limitation, statements regarding our business strategy, objectives and future financial position, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and involve risks and uncertainties. These forward-looking statements may be identified by the use of forward-looking terms such as "anticipate," "believe," "expect," "may," "could," "likely to," "should," or "will," or by discussions of strategy that involve predictions which are based upon a number of future conditions that ultimately may prove to be inaccurate. Statements in this quarterly report on Form 10-Q that are forward-looking are based on current expectations and actual results may differ materially. Forward-looking statements involve numerous risks and uncertainties described in this quarterly report on Form 10-Q, our Annual Report on Form 10-K and other documents previously filed or hereafter filed by us from time to time with the Securities and Exchange Commission. Such factors, of course, do not include all factors that might affect our business and financial condition. Although we believe that the assumptions upon which our forward-looking statements are based are reasonable, such assumptions could prove to be inaccurate and actual results could differ materially from those expressed in or implied by the forward-looking statements. All forward-looking statements contained in this quarterly report on Form 10-Q are qualified in their entirety by this statement. We undertake no obligation other than as may be required under securities laws to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during

the reporting period. Actual results could differ from those estimates. Our critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2008. We have made no material changes to our accounting policies during the current year.

Recent Accounting Pronouncements

We describe recent accounting pronouncements in Item 1 - "Condensed Consolidated Financial Statements - Notes to Condensed Consolidated Financial Statements."

Executive Summary

We are a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. We sell our products in diversified markets, including homeland security, healthcare, defense and aerospace. We have three operating divisions: (i) Security, providing security and inspection systems; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems; and
(iii) Optoelectronics and Manufacturing, providing specialized electronic components for affiliated end-products divisions as well as for applications in the defense and aerospace markets, among others.

Security Division. Through our Security division, we design, manufacture and market security and inspection systems worldwide for sale primarily to U.S. federal, state and local government agencies as well as to foreign governments. These products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband as well as to screen people. Revenues from our Security division accounted for 40% and 36% of our total consolidated revenues for the nine months ended March 31, 2009 and 2008, respectively.

Following the September 11, 2001 terrorist attacks, government spending in the U.S. and internationally for the development and acquisition of security and inspection systems increased and has continued at high levels. This spending has had a favorable impact on our business. However, future levels of such spending could decrease as a result of changing budgetary priorities or could shift to products that we do not provide. Additionally, competition for contracts with the U.S. Government and other governments has become more intense in recent years as new competitors and technologies have entered this market.

Healthcare Division. Through our Healthcare division, we design, manufacture and market patient monitoring, diagnostic cardiology and anesthesia systems for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the hospital and provide such information, through wired and wireless networks, to physicians and nurses who may be at the patient's bedside, in another area of the hospital or even outside the hospital. Revenues from our Healthcare division accounted for 37% and 42% of our total consolidated revenues for the nine months ended March 31, 2009 and 2008, respectively.

The healthcare markets in which we operate are highly competitive. We believe that our customers choose among competing products on the basis of product performance, functionality, value and service. During the current fiscal year, many hospitals and medical centers in the U.S. have elected to delay spending on new medical equipment acquisitions, primarily due to concerns they hold about the overall health of the U.S. economy and tighter credit markets. These decisions to delay spending have negatively impacted our sales. In response, we have elected to extend certain restructuring activities that we originally initiated for this division in fiscal 2007, including headcount reductions.

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and value-added manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, computed tomography, fiber optics, telecommunications, gaming, office automation, computer peripherals and industrial automation. We also provide our optoelectronic devices and value-added manufacturing services to our own Security and Healthcare divisions. Revenues from our Optoelectronics and Manufacturing division accounted for 23% and 22% of our total consolidated revenues for the nine months ended March 31, 2009 and 2008, respectively.

Consolidated Results. We reported a consolidated operating profit of $4.5 million for the three months ended March 31, 2009, a reduction from the $5.5 million operating profit reported for the three months ended March 31, 2008. This $1.0 million decrease was primarily the result of the $2.0 charge recorded in the third quarter of the current fiscal year related to a non-recurring cost associated with litigation. During the three months ended March 31, 2009, gross profit decresed $6.6 million as sales declined by 8% coupled with a 1.4% decrease in gross margin primarily due to the product mix. This decrease in gross profit was offset by a $6.8 million reduction in operating expenses consistent with our cost containment and restructuring initiatives.

For the nine months ended March 31, 2009, we reported a consolidated operating profit of $12.8 million as compared to an operating profit of $9.7 million for the comparable prior year period, which represents a 32% improvement over the prior year performance. This $3.1 million improvement was driven primarily by an $11.3 million reduction in SG&A and R&D expenses following restructuring initiatives we have undertaken in the last year, as well as various other efficiencies. This reduction in operating expenses more than offset a $5.6 million decrease in gross profit resulting primarily from a 1.2% decrease in gross margin, primarily due to product mix. In addition, we incurred non-recurring restructuring and other charges of $6.0 million in the nine months ended March 31, 2009, as compared to a $3.4 million in the prior year.

Results of Operations



Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2009.



Net Revenues



The table below and the discussion that follows are based upon the way in which
we analyze our business. See Note 9 to the condensed consolidated financial
statements for additional information about our business segments.



                                 Q3         % of         Q3         % of
(in millions)                   2008      Net Sales     2009      Net Sales     $ Change     % Change
Security division              $  51.4           33 %  $  56.5           39 %  $      5.1          10 %
Healthcare division               63.6           41 %     50.4           35 %       (13.2 )       (21 )%
Optoelectronics and
Manufacturing division            53.4           34 %     48.8           34 %        (4.6 )        (9 )%
Intersegment revenues            (11.7 )         (8 )%   (11.6 )         (8 )%        0.1          (1 )%
Total revenues                 $ 156.7          100 %  $ 144.1          100 %  $    (12.6 )        (8 )%

Net revenues for the three months ended March 31, 2009, decreased $12.6 million, or 8% to $144.1 million from $156.7 million for the comparable prior year period.

Revenues for the Security division for the three months ended March 31, 2009, increased $5.1 million or 10%, to $56.5 million from $51.4 million for the comparable prior year period. The increase in revenues for our Security division was primarily attributable to a $6.1 million, or 23%, increase in sales of baggage and parcel inspection, people screening and hold baggage screening equipment and to a $1.5 million, or 15% increase in service revenue, partially offset by a $2.5 million, or 16%, decrease in sales of cargo and vehicle inspection systems equipment.

Revenues for the Healthcare division for the three months ended March 31, 2009, decreased $13.2 million or 21%, to $50.4 million from $63.6 million for the comparable prior year period. This decrease in revenues for our Healthcare division was primarily attributable to decreased patient monitoring equipment sales of $7.5 million in North America, lower cardiology equipment sales of $3.1 million, lower clinical trials services revenue of $1.2 million and a reduction in service, supplies and accessories sales of $1.3 million.

Revenues for the Optoelectronics and Manufacturing division for the three months ended March 31, 2009, decreased $4.6 million or 9%, to $48.8 million from $53.4 million for the comparable prior year period. The decrease in revenues for our Optoelectronics and Manufacturing division was primarily attributable to lower commercial optoelectronics and weapons simulation sales of $4.4 million while contract manufacturing sales and intersegment sales were virtually flat. Intersegment sales are eliminated in consolidation.

Gross Profit



                  Q3     % of Net     Q3     % of Net
(in millions)    2008     Sales      2009     Sales      $ Change    % Change
Gross profit    $ 56.4       36.0 % $ 49.8       34.6 % $     (6.6 )      (12 )%

Gross profit decreased $6.6 million, or 12%, to $49.8 million for the three months ended March 31, 2009, from $56.4 million for the comparable prior year period. The gross margin decreased to 34.0%, from the comparable prior year period of 35.9%. The decrease in gross profit is primarily a result of the 21% decrease in revenues in our Healthcare division, which generally carry higher gross margins than our other divisions.

Operating Expenses



                                 Q3       % of Net      Q3       % of Net                    %
(in millions)                   2008       Sales       2009       Sales       $ Change     Change
Selling, general and
administrative                 $  37.6        24.0 %  $  34.4        23.9 %  $     (3.2 )      (9 )%
Research and development          12.1         7.7 %      8.5         5.9 %        (3.6 )     (30 )%
Impairment, restructuring,
and other charges                  1.2         0.8 %      2.4         1.7 %         1.2       100 %
Total operating expenses       $  50.9        32.5 %  $  45.3        31.5 %  $     (5.6 )     (11 )%

Selling, general and administrative expenses. SG&A expenses consist primarily of compensation paid to sales, marketing and administrative personnel, professional service fees and marketing expenses. For the three months ended March 31, 2009, SG&A expenses decreased by $3.2 million, or 9%, to $34.4 million, from $37.6 million for the comparable prior-year period. This reduction in spending was a direct result of our ongoing cost containment initiatives and restructuring activities throughout the Company, which were heavily focused in our Healthcare division.

Research and development. Research and development expenses include research related to new product development and product enhancement expenditures. For the three months ended March 31, 2009, such expenses decreased $3.6 million, or 30%, to $8.5 million, from $12.1 million for the comparable prior-year period. The decrease in research and development expenses for the three-month period ended March 31, 2009, was primarily attributable to cost reduction efforts in our Healthcare and Security divisions and the receipt of off-setting third-party grants.

Impairment, restructuring, and other charges. In fiscal 2007, we initiated a series of restructuring activities, which were intended to align our global capacity and infrastructure with demand by our customers and thereby improve our operating efficiencies. During the three months ended March 31, 2009, we continued this initiative and realigned our operations to further increase our operating efficiency. As a result, we recorded $0.4 million in restructuring charges. These charges included $0.2 million in the Security division and $0.2 million in our Healthcare division. Such charges primarily consist of severance and costs associated with the closure of certain facilities. In addition, we recorded a non-recurring charge as a result of litigation of $2.0 million during the quarter. During the three months ended March 31, 2008, we incurred $1.2 million in restructuring charges. These charges included $0.2 million in the Security division, $0.7 million in our Healthcare division and $0.2 million in our Optoelectronics and Manufacturing division, also consisting of severance and costs associated with the closure of certain facilities.

Interest Expense. For the three months ended March 31, 2009, we incurred net interest expense of $0.6 million, which was 50% lower than the comparable prior-year period. The decrease in net interest expense was due to a lower cost of borrowing as a result of lower market-driven interest rates.

Income taxes. For the three months ended March 31, 2009, our income tax provision was $1.3 million compared to an income tax benefit of $2.6 million for the comparable prior-year period. Included within the prior year's tax benefit is a net tax benefit of $4.0 million as a result of discrete items impacting the tax provision, the largest of which was a $4.3 million tax benefit associated with the repurchase of the minority interest of Spacelabs Healthcare. Our effective income tax rate for the three months ended March 31, 2009, was 33.3% compared to a benefit of (60.1)% in the comparable prior year period. However, excluding the impact of the discrete tax benefits noted above, the effective tax rate for the three months ended March 31, 2008, was 31.7%. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences among such countries as well as due to the impact of permanent taxable differences.

Nine Months Ended March 31, 2008 Compared to Nine Months Ended March 31, 2009.



Net Revenues



The table below and the discussion that follows are based upon the way in which
we analyze our business. See Note 9 to the condensed consolidated financial
statements for additional information about our business segments.



                               YTD Q3       % of       YTD Q3       % of
(in millions)                   2008      Net Sales     2009      Net Sales     $ Change     % Change
Security division              $ 164.1           36 %  $ 182.2           40 %  $     18.1          11 %
Healthcare division              188.0           42 %    164.9           37 %       (23.1 )       (12 )%
Optoelectronics and
Manufacturing division           134.5           30 %    138.4           31 %         3.9           3 %
Intersegment revenues            (34.7 )         (8 )%   (34.2 )         (8 )%        0.5          (1 )%
Total revenues                 $ 451.9          100 %  $ 451.3          100 %  $     (0.6 )         - %

Net revenues for the nine months ended March 31, 2009, were $451.3 million, virtually unchanged from the prior year period, when the revenues were $451.9 million.

Revenues for the Security division for the nine months ended March 31, 2009, increased by $18.1 million, or 11%, to $182.2 million from $164.1 million for the comparable prior year period. The increase in revenues for our Security division was primarily attributable to a $18.5 million, or 24%, increase in sales of baggage and parcel inspection, people screening and hold baggage screening equipment, and to a $7.0 million, or 25%, increase in service revenue, partially offset by a $7.4 million, or 13%, decrease in sales of cargo and vehicle inspection systems equipment.

Revenues for the Healthcare division for the nine months ended March 31, 2009, decreased by $23.1 million, or 12%, to $164.9 million from $188.0 million for the comparable prior year period. The decrease in revenues for our Healthcare division was primarily attributable to: (i) decreased patient monitoring equipment sales of $17.1 million in North America, (ii) decreased clinical trials services sales of approximately $4.0 million, (iii) lower cardiology equipment sales of $3.1 million, and (iv) lower service, supplies and accessories sales of $0.6 million. These decreases were partially offset by growth in anesthesia equipment sales of $1.9 million.

Revenues for the Optoelectronics and Manufacturing division for the nine months ended March 31, 2009, increased $3.9 million, or 3%, to $138.4 million from $134.5 million for the comparable prior year period. The increase in revenues for our Optoelectronics and Manufacturing division was primarily attributable to an increase in contract manufacturing sales of $11.5 million, partially offset by decreases in commercial optoelectronics sales and weapons simulation sales of $3.2 million and $4.4 million, respectively. The increase in contract manufacturing revenues is primarily due to the fulfillment of a significant defense-industry related contract that is expected to continue through the end of fiscal 2009 and into fiscal 2010. In addition, for the nine months ended March 31, 2009, the Optoelectronics and Manufacturing division recorded intersegment sales of $34.2 million, compared to $34.7 million in the comparable prior-year period. Such sales are eliminated in consolidation.

Gross Profit



                YTD Q3    % of Net   YTD Q3    % of Net
(in millions)    2008      Sales      2009      Sales      $ Change    % Change
Gross profit    $ 159.5       35.3 % $ 153.9       34.1 % $     (5.6 )       (4 )%

Gross profit decreased $5.6 million, or 4%, to $153.9 million for the nine months ended March 31, 2009, from $159.5 million for the comparable prior year period. The gross margin decreased to 34.1%, from 35.3% over the comparable prior year period. The decrease in gross profit is primarily a result of a 12% decrease in revenues in our Healthcare division, which generally carry higher gross margins than our other divisions, and an increase in contract manufacturing sales by our Optoelectronics and Manufacturing division, which generally carry lower gross margins than most of our other product offerings.

Operating Expenses



                               YTD Q3     % of Net    YTD Q3     % of Net                    %
(in millions)                   2008       Sales       2009       Sales       $ Change     Change
Selling, general and
administrative                 $ 112.9        25.0 %  $ 107.6        23.8 %  $     (5.3 )      (5 )%
Research and development          33.5         7.4 %     27.5         6.1 %        (6.0 )     (18 )%
Impairment, restructuring,
and other charges                  3.4         0.7 %      6.0         1.4 %         2.6        76 %
Total operating expenses       $ 149.8        33.1 %  $ 141.1        31.3 %  $     (8.7 )      (6 )%

Selling, general and administrative expenses. For the nine months ended March 31, 2009, SG&A expenses decreased by $5.3 million, or 5%, to $107.6 million, from $112.9 million for the comparable prior-year period. As a percentage of revenues, SG&A expenses for the nine months ended March 31, 2009, decreased to 23.8%, from 25.0% for the prior year. This reduction in spending was a direct result of our ongoing cost containment initiatives and restructuring activities throughout the Company, which were heavily focused in our healthcare division.

Research and development. Research and development expenses include research related to new product development and product enhancement expenditures. For the nine months ended March 31, 2009, such expenses decreased $6.0 million, or 18%, to $27.5 million, from $33.5 million for the prior year. The decrease in research and development expenses for the nine month period ended March 31, 2009, was primarily attributable to cost reduction efforts in our Healthcare and Security divisions and the receipt of off-setting third-party grants.

Impairment, restructuring, and other charges. In fiscal 2007, we initiated a series of restructuring activities that were intended to align our global capacity and infrastructure with demand by our customers and thereby improve our operating efficiencies. During the nine months ended March 31, 2009, we continued this initiative to further increase our operating efficiency. As a result, we recorded total restructuring charges of $4.0 million. These charges included $0.4 million in the Security division, $3.2 million in our Healthcare division, $0.1 million in our Optoelectronics and Manufacturing division and $0.3 million in our Corporate segment, primarily relating to facility closure and employee severance costs. In addition, we recorded a non-recurring charge as a result of litigation of $2 million during the period. During the nine months ended March 31, 2008, we recorded restructuring charges of $3.4 million. These charges included $2.1 million in the Security division, $0.9 million in our Healthcare division and $0.3 million in our Optoelectronics and Manufacturing division, primarily relating to severance, manufacturing relocation costs and costs associated with the closure of certain facilities.

Interest Expense. For the nine months ended March 31, 2009, we incurred net interest expense of $2.4 million, compared to $3.4 million for the comparable prior-year period. The decrease in interest expense was primarily attributable to a lower cost of borrowing, as a result of lower market-driven interest rates, which was partially offset by higher average levels of debt. We incurred higher levels of debt in connection with the repurchase of all outstanding shares of Spacelabs Healthcare for $15.8 million during fiscal 2008, as well as repurchasing $7.4 million of our common stock during the nine months ended March 31, 2009.

Income taxes. For the nine months ended March 31, 2009, our income tax provision was $3.5 million, compared to a tax benefit of $2.0 million for the comparable prior-year period. Included within the prior year's tax benefit is a net tax benefit of $4.0 million as a result of discrete items impacting the tax provision, the largest of which was a $4.3 million tax benefit associated with the repurchase of the minority interest of Spacelabs Healthcare. The effective income tax rate for the nine months ended March 31, 2009 was 34.0% as compared to a benefit of (31.5)% in the comparable prior year period. However, excluding the impact of the discrete tax benefits noted above, the effective tax rate for the prior year was 32.8%. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences among such countries as well as due to the impact of permanent taxable differences.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash flow from operations, proceeds from equity issuances and our credit facilities. Cash and cash equivalents totaled $28.7 million at March 31, 2009, an increase of $10.5 million from $18.2 million at June 30, 2008. The changes in our working capital and cash and cash equivalent balances during the nine months ended are described below.

(in millions)                June 30, 2008     March 31, 2009     $ Change    % Change
Working capital             $         195.0   $          177.9   $    (17.1 )       (9 )%
Cash and cash equivalents              18.2               28.7         10.5         58 %

Working Capital. The decrease in working capital is primarily due to decreases in accounts receivable of $36.4 million, partially as a result of our ongoing focus on collections. This decrease in working capital was partially offset by:
(i) a $10.5 million increase in cash and (ii) a $9.7 million decrease in our bank lines of credit.

                                        YTD Q3    YTD Q3
(in millions)                            2008      2009      $ Change
Cash used in operating activities       $  (9.9 ) $  40.1   $     50.0
Cash used in investing activities         (24.2 )   (12.4 )       11.8
Cash provided by financing activities      32.5     (18.5 )      (51.0 )

Cash Used in Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, tax timing differences, and other items can significantly impact cash flows. Net cash provided by operations for the nine months ended March 31, 2009 was $40.1 million, an increase of $50.0 million from the $9.9 million used in the comparable prior-year period. This improvement was partially due to an increase in our net income, after giving consideration to non-cash operating items including depreciation and amortization, stock-based compensation, deferred . . .