Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Statements in this report that are forward-looking are based on current expectations, and actual results may differ materially. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibilities that the demand for the Company's products may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive pricing and such other risks and uncertainties as are described in this report on Form 10-Q and other documents previously filed or hereafter filed by the Company from time to time with the Securities and Exchange Commission.

Results of Operations

Revenues. Revenues consist of sales of optoelectronic and pressure sensor devices, medical imaging systems and security and inspection products. Revenues are recorded net of all inter-company transactions. Revenues increased by 6.7% to $26.5 million for the three months ended December 31, 1999, compared to $24.8 million for the comparable prior year period. For the six months ended December 31, 1999, revenues increased by 11.3% to $51.5 million from $46.3 million in the comparable prior year period. Revenues for the three months ended December 31, 1999 from optoelectronic devices, subsystems and medical imaging systems were $15.0 million, or approximately 56.7% of the Company's revenues, and revenues from security and inspection products were $11.5 million, or approximately 43.3% of the Company's revenues. Revenues for the six months ended December 31, 1999 from optoelectronic devices, subsystems and medical imaging systems were $28.8 million, or approximately 55.9% of the Company's revenues, and revenues from security and inspection products were $22.7 million, or approximately 44.1% of the Company's revenues. The increase in revenues from sales of optoelectronic devices, subsystems and medical imaging systems for the quarter and six months ended December 31, 1999 was primarily due to increased sales of silicon pressure sensors through the recent acquisition of Silicon Microstructures, Inc ("SMI") and sales through the introduction of new product for the data/video projection market and was partially offset by a decrease in sales to the oil exploration industry. The increase in revenues from the sale of security and inspection products for the quarter and six months ended December 31, 1999 was primarily due to sales of walk-through metal detection systems through the recent acquisition of the security product business of Metorex International Oy ("Metorex Security").

Gross Profit. Cost of goods sold consists of material, labor and manufacturing overhead. Gross profit decreased by 4.8% to $7.1 million for the three months ended December 31, 1999, compared to $7.4 million for the comparable prior year period. For the six months ended December 31, 1999, gross profit increased by 3.1% to $14.3 million, compared to $13.8 million for the comparable prior year period. As a percentage of revenues, gross profit decreased in the quarter and six months to 26.7% and 27.7% this year, from 29.9%

and 29.9% last year, respectively. The decrease in gross profit was due to product mix and manufacturing inefficiencies due to acquisitions. The Company has entered into a new product line for the sale of data/video projectors, which has a lower gross margin and insignificant selling, general and administrative expenses and research and development expenses associated with it.

Selling, General and Administrative. Selling, general and administrative expenses consisted primarily of compensation paid to sales, marketing and administrative personnel, and professional service fees and marketing expenses. For the three months ended December 31, 1999, such expenses increased 49.2% to $5.1 million, compared to $3.4 million for the comparable prior year period. For the six months ended December 31, 1999, such expenses increased by 51.7% to $10.2 million, compared to $6.7 million for the comparable prior year period. As a percentage of revenues, selling, general and administrative expenses and increased in the quarter and six months to 19.1% and 19.9% this year, from 13.6% and 14.6% last year, respectively. The increase in expenses for the quarter and six months was due primarily to the increased legal and professional fees, increased administrative expenses, and increased marketing expenses for the sales of medical products. Selling, general and administrative expenses for the three and six months ended December 31, 1998 were offset in part by a reduction in legal expenses due to the settlement of certain material litigation and pay cuts by senior management. In addition, the increase in expenses for the six months ended December 31, 1999, was due to the increase in provision for doubtful receivables and inclusion of entire six month's, selling, general and administrative expenses of recent acquisitions. For the three and six month's ended December 31, 1999, $1.1 million and $2.2 million, compared to $1.1 million and $1.2 million, last year, respectively, of selling, general and administrative expenses of recent acquisitions were included in the Company's consolidated financials.

Research and Development. Research and development expenses include research related to new product development and product enhancement expenditures. For the three months ended December 31, 1999, such expenses increased 20.1% to $1.9 million, compared to $1.6 million for the comparable prior year period. For the six months ended December 31, 1999, such expenses increased 35.8% to $3.5 million, compared to $2.6 million for the comparable prior year period. As a percentage of revenues, research and development expenses increased in the three month and six month periods to 7.1% and 6.8% this year from 6.3% and 5.6% last year, respectively. The increase in expenses for the quarter and six months was due primarily to the increase in personnel costs resulting from the Company's recently acquired subsidiaries, and continued enhancement of Rapiscan x-ray systems. For the three and six months ended December 31, 1999, the Company's majority owned subsidiary, TFT, incurred $172,000 for the development of medical products with no revenues. In addition, entire six month's research and development costs of acquired companies were included in the six months ended December 31, 1999. For the three and six months ended December 31, 1999, $703,000 and $1.2 million, compared to $521,000 and $585,000, last year, respectively, of research and development expenses incurred by the acquired companies were included in the Company's consolidated financial statements.

Goodwill Amortization. Amortization of goodwill decreased to $137,000 for the three months ended December 31, 1999 from $161,000 for the three months ended December 31, 1998. Amortization of goodwill increased to $264,000 in the six months ended December 31, 1999 from $188,000 in the six months ended December 31, 1998. The decrease in amortization of goodwill in the three months ended December 31, 1999 was the net result of a one time write-off of goodwill due to the closure of the Company's Denmark facility and partially offset by the inclusion of goodwill associated with the acquisition of TFT and an additional payment associated with the acquisition of Metorex Security. The increase in amortization of goodwill for the six month's ended December 31, 1999 was due to amortization of goodwill associated with the Company's recently acquired subsidiaries. In the prior periods, goodwill amortization was included as a component of selling, general and administrative expenses.

Restructuring Costs. In August 1999, the Company decided to close the operations of Osteometer in Denmark, and relocate certain of these operations to the Company's U.S. facilities. In the quarter ended September 30, 1999, the Company recorded estimated restructuring costs of $1.9 million related to the closure of the Osteometer facility in Denmark. These costs were associated primarily with the termination of certain employees, commitments and other facility closure costs. Of that amount, $1.5 million was paid during the six months ended December 31, 1999 and $442,000 was included in other accrued expenses and current liabilities at December 31, 1999. The restructuring costs include $698,000, attributable to employee termination benefits for approximately 32 employees, of which $655,000 was paid during the six months ended December 31, 1999 and $43,000 is included in other accrued expenses and current liabilities. Based on current estimates, the Company anticipates that the current restructuring accruals are sufficient.

Gain on Marketable Securities. Gain on the sale of marketable securities for the quarter and six months ended December 31, 1999, consisted of realized gain on the sale of marketable securities available for sale.

Income (Loss) from Operations. For the three months ended December 31, 1999, the Company had income from operations of $2,000 compared to loss from operations of $263,000 for the three months ended December 31, 1998. Loss from operations for the six months ended December 31, 1999 was $1.6 million, compared to income from operations of $1.7 million for the comparable prior year period. Excluding the non-recurring restructuring costs of $1.9 million in the quarter ended September 30, 1999 and a non-recurring in-process research and development charge of $2.6 million in the quarter ended December 31, 1998, income from operations for three and six months decreased to $2,000 and $251,000 this year, from $2.3 million and $4.3 million, last year, respectively. As a percentage of revenues, income from operations decreased in the three months and six month periods to 0% and 0.5% this year, from 9.3% and 9.3% last year, respectively. Income from operations decreased due to product mix, increased selling, general and administrative expenses and increased research and development expenses.

Interest Expense (Income). For the three months ended December 31, 1999, the Company incurred net interest expense of $176,000, compared to net interest income of $83,000 for the three months ended December 31, 1998. For the six months ended December 31, 1999, the Company incurred net interest expense of $299,000, compared to net interest income of $250,000 for the six months ended December 31, 1998. The net interest expense for the three and six months ended December 31, 1999 was due to increased borrowing on the Company's lines of credit and a reduction in short term investments used for working capital and acquisitions.

Provision (Benefit) for Income Taxes. Provision for income taxes decreased to $78,000 for the three months ended December 31, 1999, compared to $423,000 for the three months ended December 31, 1998. For the six months ended December 31, 1999, the Company had an income tax benefit of $313,000 compared to a provision for income taxes of $933,000 for the six months ended December 31, 1998. Excluding a majority owned subsidiary loss of $220,000 in the three months ended December 31, 1999, as a percentage of income before provision for income taxes, provision for income taxes was 22.0% for the three months ended December 31, 1999 compared to 17.6% for the three months ended December 31, 1998. Excluding the non-recurring, in-process research and development charge of $2.6 million in the six months ended December 31, 1998, as a percentage of loss before benefit for income taxes, the benefit for income taxes was 22.1% for the six months ended December 31, 1999 compared to a provision for income taxes of 20.4% as a percentage of income before provision of income taxes for the six months ended December 31, 1998. The change in the Company's effective tax rate was due to a mix in income from U.S. and foreign operations.

Net Income (Loss). For the reasons outlined above, the Company had a net income of $155,000 and net loss of $1.2 million for the three and six months ended December 31, 1999, compared to a net loss of $603,000 and net income of $1.1 million for the three and six months ended December 31, 1998, respectively. Six months ended December 31, 1999 included non-recurring restructuring costs of $1.9 million ($1.5 million net of income taxes) and three and six months ended December 31, 1998 included a non-recurring in process research and development charges of $2.6 million.

Liquidity and Capital Resources

The Company's operations used net cash of $3.8 million during the six months ended December 31, 1999. The amount of net cash used by operations reflects increases in accounts receivable, other receivables, inventory, prepaid expenses, and reductions in accrued payroll and related expenses, and advances from customers. Net cash used in operations was offset in part by an increase in accounts payable, income taxes payable, and other accrued expenses and current liabilities. The increase in accounts receivable is mainly due to the increased sales, timing of shipments of certain large contracts and increase in inventory is due to increase in shipments and product mix.

Net cash used in investing activities was $358,000 and $19.4 million for the six months ended December 31, 1999 and 1998, respectively. In the six month period ended December 31, 1999, net cash used in investing activities reflects primarily cash used in business acquisitions and the purchase of property and equipment and was offset in part by the sale of marketable securities. In the six months ended December 31, 1998, the net cash used in investing activities reflects primarily cash used in business acquisitions and the purchase of property and equipment.

Net cash provided by financing activities was $4.9 million and $11.4 million for the six months ended December 31, 1999 and 1998, repectively. During the six months ended December 31, 1999, net cash provided by financing activities resulted primarily from borrowings under the Company's term loan and working capital lines of credit and was offset in part by the purchase of treasury stock.

In October 1999, the Company borrowed $3.0 million from its term loan facility with Sanwa Bank. The term loan amortizes over seven years and is payable monthly over five years. The balance is due in one balloon payment after five years. In November 1999, the Company converted $8.5 million of borrowings from its acquisition line of credit to a term loan, for a period of 48 months. For the six months ended December 31, 1998, net cash provided by financing activities resulted primarily from the Company's acquisition and working capital lines of credit.

The March 1999, the Company announced a stock repurchase program of up to 2,000,000 shares of its common stock. Through February 10, 2000, the Company repurchased 490,500 shares at an average price $4.60 per share. The stock repurchase program did not have a material effect on the Company's liquidity and is not expected to have a material effect on liquidity in subsequent quarters.

The Company anticipates that current cash balances, anticipated cash flows from operations and current borrowing arrangements will be sufficient to meet its working capital and capital expenditure needs for the foreseeable future.

Foreign Currency Translation. The accounts of the Company's operations in Singapore, Malaysia, England, Norway, Denmark, Finland and Canada are maintained in Singapore dollars, Malaysian ringgits, U.K. pounds sterling, Norwegian kroner, Danish kroner, Finnish markka and Canadian dollars, respectively. Foreign currency financial statements are translated into U.S. dollars at current rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. Gains and losses resulting from foreign currency transactions are included in income, while those resulting from translation of financial statements are excluded from income and accumulated as a component of accumulated other comprehensive income. Net transaction loss of approximately $67,000 and $284,000 were included in income for the six months ended December 31, 1999 and 1998, respectively.

Inflation. The Company does not believe that inflation has had a material impact on its results of operations for the six months ended December 31, 1999.

Year 2000 Compliance

The Company experienced no business operation interruptions due to computer or related system failures during the roll-over period from the year 1999 to the year 2000. The Company has to date experienced no delay in payments, receipt of materials or interruption of services due to year 2000 difficulties experienced by its customers, trading partners and vendors.