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, 2009.

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 and provide related services in diversified markets, including homeland security, healthcare, defense and aerospace. We have three operating divisions:
(i) Security; (ii) Healthcare; and (iii) Optoelectronics and Manufacturing.

Security Division. Through our Security division, we design, manufacture, market and service security and inspection systems worldwide for sale primarily to federal, state and local and foreign government agencies. 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 35% and 40% of our total consolidated revenues for the three months ended September 30, 2009 and 2008, respectively.

Following the September 11, 2001 terrorist attacks, worldwide spending for the development and acquisition of security and inspection systems increased in response to the attacks 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 government agencies 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, market and service patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation 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 35% and 37% of our total consolidated revenues for the three months ended September 30, 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. We also believe that the worldwide economic slowdown has caused some hospitals and healthcare providers to delay purchases of our products and services. During this period of uncertainty, we anticipate lower sales of patient monitoring, diagnostic cardiology and anesthesia systems products than we have historically experienced, resulting in a negative impact on our sales. We cannot predict when the markets will recover and therefore when this period of delayed and diminished purchasing will end. A prolonged delay could have a material adverse effect on our business, financial condition and results of operations.

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 (CT), 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 30% and 23% of our total consolidated revenues for the three months ended September 30, 2009 and 2008, respectively.

For the three months ended September 30, 2009, we reported an operating profit of $4.2 million, as compared to $1.1 million for the comparable prior year period. We realized this $3.1 million year over year increase in operating profit despite a 10% decrease in total revenue during the same periods. This improved profitability was driven primarily by a $7.5 million reduction in SG&A and R&D as a result of reducing our fixed cost structure by aggressive cost-cutting activities in fiscal 2009. This effort was initiated when it became apparent to us that the worldwide economic slowdown was going to negatively impact our businesses, and in particular our Healthcare division. In addition, in the first quarter of fiscal 2009, we recognized $0.8 million of non-recurring restructuring charges. Overall, these cost savings more than offset the $5.2 million reduction in year-over-year gross profit as a result of the lower revenues in our Security and Healthcare divisions.

Results of Operations for the Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008 (amounts in millions)

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.



                                Q1         % of         Q1         % of
(in millions)                  2009      Net Sales     2010      Net Sales     $ Change     % Change
Security division             $  58.7           40 %  $  47.3           35 %  $    (11.4 )       (19 )%
Healthcare division              54.8           37 %     47.0           35 %        (7.8 )       (14 )%
Optoelectronics and
Manufacturing division           44.9           30 %     45.8           34 %         0.9           2 %
Intersegment revenues           (10.2 )         (7 )%    (6.3 )         (4 )%        3.9          38 %
Total revenues                $ 148.2                 $ 133.8                 $    (14.4 )       (10 )%

Net revenues for the three months ended September 30, 2009, decreased $14.4 million, or 10%, to $133.8 million from $148.2 million for the comparable prior year period.

Revenues for the Security division for the three months ended September 30, 2009, decreased $11.4 million, or 19%, to $47.3 million, from $58.7 million for the comparable prior year period. The decrease was attributable to: (i) a $3.8 million decrease in sales of baggage and parcel inspection, people screening and hold baggage screening equipment; (ii) a $7.0 million decrease in sales of cargo and vehicle inspection systems primarily in North America; and (iii) a $0.6 million decrease in service revenue.

Revenues for the Healthcare division for the three months ended September 30, 2009, decreased $7.8 million, or 14%, to $47.0 million, from $54.8 million for the comparable prior year period. The decrease was primarily attributable to:
(i) a $3.7 million decrease in patient monitoring revenues; (ii) a $0.9 million decreased in our anesthesia revenues primarily in sales to other manufacturers; and (iii) a $3.2 million decrease in the revenues of other product lines such as ambulatory blood pressure monitors, pulse oximeters and clinical trials services. Such decreases were mainly a consequence of the worldwide economic slowdown that began during fiscal 2009 and continued into the three months ended September 2009, and the inability of some of our customers, who rely on the credit or equity markets for access to capital, to fund purchases of our products and services.

Revenues for the Optoelectronics and Manufacturing division for the three months ended September 30, 2009, increased $0.9 million, or 2%, to $45.8 million, from $44.9 million for the comparable prior year period. This growth was primarily the result of an increase in contract manufacturing sales of $5.6 million including new orders under an existing defense-industry related contract as well as new customer contracts, and was partially offset by decreases in commercial optoelectronics sales of $4.7 million. The decreases in commercial optoelectronics sales were also driven by unfavorable economic conditions. In addition, for the three months ended

September 2009, the division recorded intercompany revenue of $ 6.3 million, compared to $10.2 million for the comparable prior year period. This decrease resulted from lower sales by our Optoelectronics and Manufacturing division to both our Healthcare and Security divisions. These fluctuations in intercompany sales are directionally consistent with the underlying businesses of our Security and Healthcare divisions. Intercompany sales by our Optoelectronics and Manufacturing division to our Security and Healthcare divisions are eliminated in consolidation.

Gross Profit



                  Q1     % of Net     Q1     % of Net
(in millions)    2009     Sales      2010     Sales
Gross profit    $ 49.7       33.5 % $ 44.5       33.3 %

Gross profit decreased $5.2 million, or 10%, to $44.5 million for the three months ended September 30, 2009, from $49.7 million for the comparable prior year period, primarily as a result of the decreased revenues discussed above. Although the gross profit margin was nearly the same in the three months ended September 2009 as compared to the prior year, the gross profit margin was negatively impacted by changes in the mix of product sold, most notably the 14% decrease in revenues in our Healthcare division (products sold by our Healthcare division generally carry higher gross margins than products sold by our other divisions) and the increase in contract manufacturing sales by our Optoelectronics and Manufacturing division (contract manufacturing sales generally carry lower gross margins than other products sold by this or other divisions). These negative factors were offset by manufacturing efficiencies gained through facility consolidations and cost-cutting activities undertaken over the past several quarters.

Operating Expenses



                                Q1       % of Net      Q1       % of Net                    %
(in millions)                  2009       Sales       2010       Sales       $ Change     Change
Selling, general and
administrative                $  37.6        25.4 %  $  32.3        24.1 %  $     (5.3 )     (14 )%
Research and development         10.2         6.9 %      8.0         6.0 %        (2.2 )     (22 )%
Restructuring, and other
charges                           0.8         0.5 %        -           - %        (0.8 )       - %
Total operating expenses      $  48.6        32.8 %  $  40.3        30.1 %  $     (8.3 )     (17 )%

Selling, general and administrative expenses. Selling, general and administrative (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 September 30, 2009, SG&A expenses decreased by $5.3 million, or 14%, to $32.3 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 we have implemented company-wide, but which were most heavily focused in our Healthcare division. In addition, we continued to reduce spending in our Corporate segment by further reducing outside support related expenses. Due to our ongoing cost containment and restructuring activities as well as focus on reducing support spending, our SG&A as a percentage of sales decreased to 24.1% in the three months ended September 2009, as compared to 25.4% in the three months ended September 2008.

Research and development. Research and development (R&D) expenses include research related to new product development and product enhancement expenditures. For the three months ended September 30, 2009, such expenses decreased $2.2 million, or 22%, to $8.0 million, from $10.2 million for the comparable prior year period. As a percentage of revenues, research and development expenses were 6.0% for the three months ended September 30, 2009, compared to 6.9% for the comparable prior year period. The decrease in research and development expenses for the three month period ended September 30, 2009 was primarily attributable to cost reduction efforts in our Healthcare division and R&D grant programs in our Security division.

Restructuring, and other charges. In response to the challenging economy, we initiated an aggressive cost-cutting plan in the first quarter of fiscal 2009 to reduce our fixed cost structure. In conjunction with these efforts, we incurred restructuring charges of $0.5 million in our Healthcare division and $0.3 million in our Corporate segment for facility closure and employee severance during the first quarter of fiscal 2009.

Other Income and Expenses



                                  Q1     % of Net     Q1     % of Net                   %
(in millions)                    2009     Sales      2010     Sales       $ Change    Change
Interest expense                 $ 1.0        0.7 %  $ 0.7        0.5 %  $     (0.3 )    (30 )%
Interest income                   (0.1 )     (0.1 )%  (0.1 )     (0.1 )%          -        -
Total other income and expense   $ 0.9        0.6 %  $ 0.6        0.4 %  $     (0.3 )    (33 )%

Interest expense. For the three months ended September 30, 2009, we incurred interest expense of $0.7 million, compared to $1.0 million for the comparable prior year period. This 30% decrease in interest expense was due to both lower, market-driven interest rates and the lower levels of borrowing as a result of the generation of significant positive cash flow from our operations.

Income taxes. For the three months ended September 30, 2009, our income tax provision was $1.1 million, compared to $0.1 million for the comparable prior year period. Our effective tax rate for the three months ended September 30, 2009 was 30.2%, compared to 34.5% in the comparable prior year period. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences among countries as well as due to the impact of permanent taxable differences.

Liquidity and Capital Resources

We have financed our operations primarily through cash flow from operations, proceeds from equity issuances and our credit facilities. Cash and cash equivalents totaled $24.6 million at September 30, 2009, a decrease of $0.6 million from $25.2 million at June 30, 2009. The changes in our working capital and cash and cash equivalent balances during the three months ended September 30, 2009 are described below.

                             June 30, 2009    September 30, 2009    % Change
Working capital             $         187.6   $             185.6         (1 )%
Cash and cash equivalents              25.2                  24.6         (2 )%

Working Capital. The decrease in working capital is primarily due to decreases in inventory of $9.0 million, as a result of inventory reduction initiatives in all three divisions and timing of product shipments in our Optoelectronic and Manufacturing division, and increases in advances from customers of $4.8 million in our Security division. These decreases were partially offset by (i) a corresponding decrease in our bank lines of credit of $1.8 million; (ii) a decrease in accrued payroll and employee benefits of $5.1 million; (iii) a $1.7 million decrease in accounts payable; and (iv) a $2.1 million increase in accounts receivable partially driven by revenue growth in Contract manufacturing in our Optoelectronics and Manufacturing division.

                                          Q1       Q1
                                         2009     2010    % Change
Cash provided by operating activities   $ 14.7   $ 10.5        (29 )%
Cash used in investing activities         (2.9 )   (5.2 )      (79 )%
Cash used by financing activities         (9.9 )   (6.3 )       36 %

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 three months ended September 30, 2009 was $10.5 million, a $4.2 million reduction as compared to the $14.7 million generated in the comparable prior year period. The reduction was primarily due to the changes in working capital management in the current-year period versus the prior year period resulting in: (i) a $15.6 million decrease in cash from accounts receivable, primarily driven by the significant improvement we realized in the prior fiscal year in days-sales-outstanding; (ii) a $9.6 million decrease in cash received as advances from customers; and (iii) a $2.1 million decrease in the change in deferred revenues. These unfavorable changes in cash flow were partially offset by: (i) an $18.3 million reduction in the change in inventory;
(ii) a $4.0 million reduction in the change in prepaid expenses and other current assets; and (iii) an increase in our net income of $0.3 million after giving consideration to various adjustments to net income for non-operating cash items, including depreciation and amortization, stock-based compensation, deferred taxes and provision for losses on accounts receivable, among others, for both periods.

Cash Used in Investing Activities. Net cash used in investing activities was $5.2 million for the three months ended September 30, 2009; an increase of $2.3 million as compared to $2.9 million used for the three months ended September 30, 2008. In the three months ended September 30, 2009, we used cash to acquire RAD Electronics, Inc for $3.2 million as compared to no acquisitions in the comparable prior year period. During the three months ended September 30, 2009, we also invested $1.5 million in capital expenditures, compared to $2.2 million in capital expenditures during the comparable prior year period.

Cash Provided by Financing Activities. Net cash used in financing activities was $6.3 million for the three months ended September 30, 2009, compared to net cash used in financing activities of $9.9 million for the three months ended September 30, 2008. During the three

months ended September 30, 2009, we paid down our revolving lines of credit by $1.8 million and we also paid down our ongoing scheduled debt and capital leases by an additional $6.1 million. In the prior year period, we paid down our revolving lines of credit by $9.4 million and we also paid down our ongoing scheduled debt and capital leases by an additional $2.1 million. In addition, we received cash of $1.6 million in proceeds from the exercise of stock options, and purchase of stock under our employee stock purchase plan in both the three months ended September 30, 2009 and the comparable prior year period.

Borrowings

Outstanding lines of credit and current and long-term debt totaled $44.4 million at September 30, 2009, a decrease of $8.0 million from $52.4 million at June 30, 2009.

We maintain a credit agreement with certain lenders allowing for initial borrowings of up to $124.5 million. The credit agreement consists of a $74.5 million, five-year, revolving credit facility (including a $45 million sub-limit for letters-of-credit) and a $50 million five-year term loan. Borrowings under the agreement bear interest at either (i) the London Interbank Offered Rate (LIBOR) plus between 2.00% and 2.50% or (ii) the bank's prime rate plus between 1.00% and 1.50%. The rates are determined based on our consolidated leverage ratio. As of September 30, 2009, the weighted-average interest rate under the credit agreement was 3.1%. Our borrowings under the credit agreement are guaranteed by our domestic subsidiaries and are secured by substantially all of our and our subsidiary guarantors' assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this type, including restrictions on our ability to pay cash dividends. As of September 30, 2009, $37.4 million was outstanding under the term loan, $2.0 million was outstanding under the revolving credit facility, and $29.1 million was outstanding under the letter-of-credit facility.

Several of our foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies, to meet short-term working capital requirements and for the issuance of letters-of-credit. As of September 30, 2009, $18.8 million was outstanding under these letter-of-credit facilities, while no debt was outstanding. As of September 30, 2009, the total amount available under these credit facilities was $26.1 million, with a total cash borrowing sub-limit of $6.0 million.

In fiscal 2005, we entered into a bank loan of $5.3 million to fund the acquisition of land and buildings in the U.K. The loan is payable over a 20-year period. The loan bears interest at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of September 30, 2009, $3.4 million remained outstanding under this loan at an interest rate of 1.7% per annum.

Our long-term debt consisted of the following (in thousands):

                                           June 30,     September 30,
                                             2009           2009
Five-year term loan due in fiscal 2013     $  42,763   $        37,431
Twenty-year term loan due in fiscal 2024       3,533             3,356
Capital leases                                 1,354             1,187
Other                                            710               390
                                              48,360            42,364
Less current portion of long-term debt         8,557             8,497
Long-term portion of debt                  $  39,803   $        33,867

We anticipate that existing cash borrowing arrangements and future access to capital markets should be sufficient to meet our cash requirements for the foreseeable future. However, our future capital requirements will depend on many factors, including future business acquisitions, litigation, stock repurchases and levels of research and development spending, among other factors and the adequacy of available funds will depend on many factors, including the success of our businesses in generating cash, continued compliance with financial covenants contained in our credit facility, and the capital markets in general, among other factors.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program under which we can repurchase up to 3,000,000 shares of our common stock. During the three months ended September 30, 2009, we did not repurchase any shares under this program and 711,205 shares were available for additional repurchase under the program as of September 30, 2009.

Dividend Policy

We have not paid cash dividends on our common stock in the past and have no plans to do so in the foreseeable future.

Contractual Obligations

Under the terms and conditions of the purchase agreements associated with the following acquisitions, we may be obligated to make additional payments:

In August 2002, we purchased a minority equity interest in CXR Limited. In June 2004, we increased our equity interest to approximately 75% and in December 2004, we acquired the remaining 25%. As compensation to the selling shareholders for this remaining interest, we agreed to make certain royalty payments during the 18 years following the acquisition of its remaining interest. Royalty payments are based on the license of, or sales of products containing technology owned by CXR Limited. As of September 30, 2009, no royalty payments had been earned.

In January 2004, we acquired Advanced Research & Applications Corp. During the seven years following the acquisition, contingent consideration is payable based on net revenues of products developed prior to the acquisition, provided certain requirements are met. The contingent consideration is capped at $30.0 million. As of September 30, 2009, no contingent consideration had been earned.

In July 2005, we acquired InnerStep, B.S.E., Inc. During the seven years following the acquisition, contingent consideration is payable based on its profits before interest and taxes, provided certain requirements are met. The contingent consideration is capped at $6.0 million. As of September 30, 2009, no . . .