Forward-Looking Statements
Certain statements contained in this Management's Discussion and Analysis (MD&A), including, without limitation, statements containing the words "may," "will," "can," "anticipate," "believe," "plan," "estimate," "continue," and similar expressions constitute "forward-looking statements." These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks described in the Risk Factors sections and elsewhere in this filing. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report. The following discussion should be read in conjunction with the Risk Factors as well as our financial statements and the related notes.

Application of Critical Accounting Policies Application of our accounting policies requires management to make certain judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts could be reported if there are changes in the assumptions and estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, impairment costs, depreciation and amortization, warranty costs, taxes and contingencies. Management has identified the following accounting policies as critical to an understanding of our financial statements and/or as areas most dependent on management's judgments and estimates.

Revenue Recognition
Revenue is derived principally from the sales of the Company's products. The Company recognizes revenue when the basic criteria of Staff Accounting Bulletin No. 104 are met. Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, usually in the form of a purchase order, when shipment has occurred since its terms are FOB source, or when services have been rendered, title and risk of loss have passed to the customer, the price is fixed or determinable and collection is reasonably assured in terms of both credit worthiness of the customer and there are no post shipment obligations or uncertainties with respect to customer acceptance.

The Company sells certain of its products to customers with a product warranty that provides warranty repairs at no cost. The length of the warranty term is one year from date of shipment. The Company accrues the estimated exposure to warranty claims based upon historical claim costs. The Company's management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or as other information becomes available.

The Company does not provide price protection or general right of return. The Company's return policy only permits product returns for warranty and non-warranty repair or replacement and requires pre-authorization by the Company prior to the return. Credit or discounts, which have been historically insignificant, may be given at the discretion of the Company and are recorded when and if determined.

The Company predominantly sells directly to original equipment manufacturers with a direct sales force. The Company sells in limited circumstances through distributors. Sales through distributors represent approximately 5% of total revenue. Significant terms and conditions of distributor agreements include FOB source, net 30 days payment terms, with no return or exchange rights, and no price protection. Since the product transfers title to the distributor at the time of shipment by the Company, the products are not considered inventory on consignment.

Revenue is also derived from technology research and development contracts. We recognize revenue from these contracts as services and/or materials are provided.

Impairment of Long-Lived Assets
As of March 31, 2008 and March 31, 2009, our consolidated balance sheet included $4.6 million in goodwill. Goodwill represents the excess purchase price over amounts assigned to tangible or identifiable intangible assets acquired and liabilities assumed from our business acquisitions.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill and intangible assets that are not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of the asset with its carrying amount, as defined. SFAS 142 requires a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit's carrying amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit's goodwill with the carrying amount of the reporting unit's goodwill. If the carrying amount of the asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.

The Company's evaluation as of March 31, 2008 and March 31, 2009, indicated there were no impairments. As of March 31, 2008, our market capitalization, calculated as described above, was $31.8 million and our carrying value, including goodwill, was $19.7 million. Because market capitalization significantly exceeded our carrying value, our estimate of the control premium was not a determining factor in the outcome of step one of the impairment assessment. For FY 2009, our market capitalization calculated as described as above, had fallen to $17.1 million and our carrying value, including goodwill, had decreased to $17.9 million. We applied a 25% control premium to market capitalization to determine a fair value of $21.4 million. We believe that including a control premium at this level is supported by recent transaction data in our industry. Absent the inclusion of a control premium greater than 4% for FY 2009, our carrying value would have exceeded fair value, requiring a step two analysis which may have resulted in an impairment of goodwill.

As evidenced above, our stock price and control premium are significant factors in assessing our fair value for purposes of the goodwill impairment assessment. Our stock price can be affected by, among other things, changes in industry or market conditions, changes in our results of operations, and changes in our forecasts or market expectations relating to future results. Significant turmoil in the financial markets and weakness in macroeconomic conditions globally have recently contributed to volatility in our stock price and a significant decline in our stock price during the fourth quarter of FY 2009. Our stock price has fluctuated from a high of $1.08 to a low of $0.62 during the fourth quarter of FY 2009. On numerous occasions during the fourth quarter, our stock price was high enough that our market capitalization exceeded our carrying value without giving effect to a control premium. The current macroeconomic environment, however, continues to be challenging and we cannot be certain of the duration of these conditions and their potential impact on our stock price performance. If our recent stock price decline persists and our market capitalization remains below our carrying value for a sustained period, it is reasonably likely that a goodwill impairment assessment prior to the next annual review in the fourth quarter of fiscal 2010 would be necessary and an impairment of goodwill may be recorded. A non-cash goodwill impairment charge would have the affect of decreasing our earnings or increasing our losses in such period. If we are required to take a substantial impairment charge, our operating results would be materially adversely affected in such period.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", the carrying value of long-lived assets, including amortizable intangibles and property and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management's assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value. The Company's evaluation for the fiscal year ended March 31, 2009, indicated there were no impairments.

As part our assessment of the need for a valuation allowance, we consider all available evidence, both positive and negative, including our recent operating results and our forecasting process. The Company forecasts taxable income through its budgeting and planning process each year. The process takes into account existing contracts, firm sales backlog, and projected sales based upon customer supplied forecasts of product purchases its design wins, Company resources needed to fulfill these customers' requirements, and extraordinary expenses that may be part of long-term initiatives to increase shareholder value through revenue growth and efficiency improvements leading to profit improvement. The Company has substantial history, more than 10 years in most cases, with its customers and its market on which its forecasts are based.

At March 31, 2009, our net deferred tax asset before consideration of a valuation allowance was approximately $7.3 million, mainly consisting of net operating loss carry-forwards which expire at various amounts over an approximate 20 year period. In assessing the realizability of deferred tax assets, the Company has determined that at this time it is "more likely than not" that deferred tax assets will not be realized , primarily due to uncertainties related to its ability to utilize the net operating loss carry-forwards before they expire based on the negative evidence of its recent years history of losses, including tax losses in two of the last three years and cumulative taxable losses over the past three years, outweighing the positive evidence of taxable income projections in future years. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible or within the periods before NOL carry forwards expire. As of both March 31, 2009 and 2008, the Company recorded a full valuation allowance on its net deferred tax assets.

For the year ended March 31, 2009, we incurred taxable losses that increased our net operating loss carry-forwards. In evaluating our net deferred tax assets at March 31, 2009, we considered the negative evidence that we had taxable losses in each of the past three years. Because evidence such as our operating results during the most recent historical periods is afforded more weight than forecasted results for future periods, our recent losses and cumulative loss position during our most recent three-year period represents sufficient negative evidence of the need for a full valuation allowance at March 31, 2009.

Inventories
The Company's inventories are stated at the lower of standard cost (which approximates actual cost under the first-in, first-out method) or market. Slow moving and obsolete inventories are reviewed throughout the year. To calculate a reserve for obsolescence, we begin with a review of our slow moving inventory. Any inventory, which has been slow moving within the past 12 months, is evaluated and reserved if deemed appropriate. In addition, any residual inventory, which is customer specific and remaining on hand at the time of contract completion, is reserved for at the standard unit cost. The complete list of slow moving and obsolete inventory is then reviewed by the production, engineering and/or purchasing departments to identify items that can be utilized in the near future. These items are then excluded from the analysis and the remaining amount of slow-moving and obsolete inventory is then reserved for. Additionally, non-cancelable open purchase orders for parts we are obligated to purchase where demand has been reduced may be reserved. Reserves for open purchase orders where the market price is lower than the purchase order price are also established. If a product that had previously been reserved for is subsequently sold, the amount of reserve specific to that item is then reversed.

Results of Operations

 Fiscal Year Ended March 31, 2009 Compared to Fiscal Year Ended March 31, 2008

Revenues
The Company predominantly operates in one industry segment, light and radiation
detection devices that it sells to multiple markets including
telecommunications, industrial sensing/NDT, military/aerospace, medical, and
homeland security. Revenues by market consisted of the following:

                                              Year ended
                               March 31, 2009             March 31, 2008
Telecommunications         $  6,003,000      21 %     $  5,247,000      22 %
Industrial Sensing/NDT       11,327,000      38 %       10,095,000      44 %
Military/Aerospace            9,215,000      31 %        4,412,000      19 %
Medical                       2,107,000       7 %        3,132,000      14 %
Homeland Security             1,023,000       3 %          329,000       1 %
Total Revenues             $ 29,675,000     100 %     $ 23,215,000     100 %

Telecommunications sales were $6.0 million, an increase of $756,000 or 14% from FY 2008. This increase was the result of increased demand for the 40G client side products. The Company's telecommunications revenues in the fourth quarter experienced a slow down as our customers responded to the recession by implementing inventory reduction programs and delaying second source initiatives for the 40G line side products. Based on customer guidance, the reduced demand was not the result of changing underlying market demand for 40G infrastructure capacity expansion and as a result we expect customer inventory reduction programs to be completed in the first quarter of FY 2010 and a return to more normal growth for the balance of the fiscal year.

Industrial Sensing/NDT market revenues were $11.3 million in FY 2009, an increase of 12% (or $1.2 million) from FY 2008 revenues of $10.1 million. The increase was due to increased sales of non-destructive testing equipment utilizing our proprietary terahertz technology. The Company's Industrial Sensing/NDT revenue in the fourth quarter experienced a slow down as our customers responded to reduced demand as the result of the recession and our customers delayed capital expenditures which delayed purchases of our terahertz products.

Military/Aerospace market revenues were $9.2 million, an increase of 109% (or $4.8 million) from the comparable prior year revenues of $4.4 million. This increase was primarily attributable to customer orders received in the current year which had been delayed from the prior year, as well as increased demand.

Medical market revenues decreased $1.0 million or 33% from the prior year of $3.1 million. This decrease was primarily a result of the Company's decision to eliminate business at a customer that did not meet its profitability criteria.

Homeland security increased 211% or $694,000, to $1,023,000, due to an increase in a THz development contract for the nuclear gauge replacement from the Department of Homeland Security.

Gross Profit
Gross Profit was $12.9 million (or 44% of revenue), compared to the prior year of $8.9 million (or 38% of revenue), an increase of 46%, The improvement in gross profit was due primarily to the increased volume and favorable product mix, combined with cost reductions achieved through our facilities consolidation.

The Company believes that gross margins in FY 2010 should continue to improve as a result of cost reductions from our facilities consolidation that was completed in FY 2009, the phase out of low margin products, increased revenue from the telecommunication market driven by our 40G and 100G products, and increased revenue from our terahertz product platform.

Operating Expenses
Research and Development expenses (R&D) -- The Company's R&D costs increased by $458,000 (or 11%) on revenue increases of 28%. R&D expenses were $4.7 million (16% of sales) during FY 2009 compared to $4.2 million (18% of sales) in FY 2008. The increase was attributable to the Company's planned increased R&D spending as we continued to focus on new opportunities in our high growth High Speed Optical Receiver and THz product platforms. The majority of this increase was funded by increased R&D contract revenue. The Company expects to continue to increase investment in the next generation 40G/100G HSOR products and THz applications in FY 2010 in order to gain HSOR market share and move THz from the laboratory to the factory floor.

General and Administrative expenses (G&A) -- G&A expenses increased by $278,000 (6%) to approximately $4.9 million (16% of sales) for FY 2009 as compared to $4.6 million (20% of sales) for FY 2008. These increases were primarily the result of higher compensation expense, terahertz royalties, and depreciation expense as the result the new company wide ERP system installed during the year, offset by increased State of Michigan refund for MEGA job creation tax credits. The ERP system was installed to improve efficiency, standardize systems between locations and assist in simplifying Sarbanes-Oxley Section 404 compliance. Currently, the Company is required to be compliant with the external reporting requirements of Section 404 by the end of fiscal year 2010. External costs required to be in compliance are therefore expected to materially increase in FY 2010.

Amortization expense was $2.1 million in FY 2009 compared to $2.0 million in FY 2008, an increase of $118,000. This increase was primarily the result of the Company's use of the estimated cash flow methodology for its intangible assets in the amount of $111,000 and an approximately $7,000 increase in patent amortization expense.

Other operating expenses decreased $1.5 million as a result of a decrease in non-recurring wafer fabrication consolidation expenses of $1.0 million and the Wisconsin facility closure expenses of $534,000. Wafer fabrication consolidation expenses to our Ann Arbor facility were $300,000 in FY 2009 compared to $1.3 million in FY 2008.

The Company's evaluations of Intangible assets and Goodwill for the year ended March 31, 2009 resulted in no impairment adjustments. In FY 2008, the Intangible assets and Goodwill evaluation resulted in no impairment adjustments.

Financing and Other Income (Expense), net Interest income for FY 2009 decreased $68,000 to approximately $28,000, compared to $96,000 in FY 2008, due primarily to lower cash balances available for short-term investment and lower interest rates in FY 2009.

Interest expense for FY 2009 was $405,000 as compared to $2.5 million in FY 2008, a decrease of $2.1 million. This decrease was primarily attributable to a $1.9 million decrease in the interest expense and amortization of the discount related to the convertible notes which were paid off or converted to equity in Q3 2008. In addition, the Company's interest expense was $176,000 lower on the related party notes and other notes. This decrease was primarily due to reduced debt and lower interest rates.

Net loss for FY 2009 was $2.0 million, as compared to net loss of $9.6 million in FY 2008, an improvement of $7.6 million. This improvement was primarily attributable to higher gross margins of $4.1 million, the decrease in interest expense of $2.1 million, lower provision for income taxes of $1.2 million and lower wafer fabrication relocation and facility closure expenses of $1.5 million, offset by higher other operating expenses of $1.2 million. During the year ended March 31, 2008, the company recorded a full valuation allowance on its net deferred tax assets and recognized an income tax provision of approximately $1.2 million.

Liquidity and Capital Resources
At March 31, 2009, the Company had cash and cash equivalents of $2.1 million, an increase of $2.0 million from $0.1 million as of March 31, 2008, primarily attributable to cash generated from operations of $2.7 million and from investing activities of $93,000, offset by a reduction in cash from financing activities of $759,000.

Net cash used in operating activities of $3.4 million for the year ended March 31, 2008 was primarily the result of a cash net loss of $3.3 million comprised of a net loss of $9.6 million, of which $6.3 million was non-cash expenses. This net cash loss was increased by $30,000 changes in operating assets and liabilities comprised of a decrease in accounts receivable of $385,000, inventories of $308,000 and prepaid/other assets of $111,000, offset by a decrease in accounts payable and accrued expenses of $834,000.

Investing Activities
Net cash provided by investing activities was approximately $93,000 for the year ended March 31, 2009. The amount consisted of capital expenditures of approximately $722,000, and patent expenditures of $186,000, offset by a $1.0 million lower restricted cash balance required under a new bank loan agreement.

Net cash used in investing activities was approximately $1.3 million for the year ended March 31, 2008. The amount consisted of capital expenditures of approximately $1.2 million and patent expenditures were $195,000 for the 2008 fiscal year.

Financing Activities
The Company used $759,000 of net cash from financing activities in FY 2009, primarily to reduce debt, including a net reduction in bank debt and capital lease obligations of $268,000 and payments to related parties of $450,000. The net reduction in bank debt included the payoff of the capital lease obligation of $1.9 million under the prior bank agreement, financed primarily by the bank term loan of $1.7 million under the new bank agreement.

On March 6, 2007, the Company and Fifth Third Bank entered into a Revolving Line of Credit (the Loan Agreement) providing for borrowings of up to a maximum of $2.0 million at the interest rate equal to the prime rate. On November 13, 2007, the Loan Agreement was amended to increase the principal amount available to $3.0 million. At March 31, 2008, the Company did not meet the debt service coverage ratio covenant and the Loan Agreement was subsequently amended on June 30, 2008 to reduce the principal amount available to $2.5 million and to amend the interest rate to be equal to prime plus 2%.

On September 25, 2008, the Company terminated the Loan Agreement with Fifth Third Bank and established a credit facility with The PrivateBank and Trust Company. As part of this new banking relationship, the Company established a . . .