Our two primary businesses are in the defense and transportation industries. These are high technology businesses that design, manufacture and integrate complex systems and provide essential services to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world.

Our defense segment is a diversified supplier of constructive, live and virtual military training systems, services and communication systems and products to the U.S. Department of Defense, other government agencies and allied nations. We design instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training; weapons effects simulations; laser-based tactical engagement and virtual simulation systems; and precision gunnery solutions. Our services are focused on training, mission support, computer simulation training, distributed interactive simulation, development of military training doctrine, force modernization services for NATO entrants and field operations and maintenance. Our communications products are aimed at intelligence, surveillance, and search and rescue markets.

Our transportation systems segment develops and delivers innovative fare collection systems for public transit authorities worldwide. We provide hardware, software and multi-agency, multimodal transportation integration technologies and services that allow the agencies to efficiently collect fares, manage their operations, reduce shrinkage and make using public transit a more convenient and attractive option for commuters.

Consolidated Overview

Sales for the quarter ended June 30, 2009 increased to $248.2 million compared to $232.9 million last year, an increase of 7%. Transportation systems sales increased 7% compared to the third quarter of last year, and defense sales increased by 6%. Of the increase in total sales for the quarter, $12.9 million, came from the company we acquired in late fiscal 2008, Omega Training Group (Omega), and is included in the defense segment results.

Sales increased to $735.9 million for the first nine months of the fiscal year compared to $645.9 million for the first nine months of 2008, an increase of 14%. Defense sales increased 15% and transportation systems sales increased 10% for the period. Of the increase in total sales, Omega contributed $42.6 million for the nine month period. See the segment discussions following for further analysis of segment sales.

Operating income increased 89% to $21.7 million in the quarter compared to $11.5 million in the third quarter of last year. Defense operating income increased significantly from the low level in last year's third quarter while transportation systems operating income was the same as last year. Corporate and other costs for the quarter were $1.2 million this year, compared to $1.0 million in the third quarter of last year.

Operating income for the first nine months of the fiscal year increased 52% from $42.5 million in 2008 to $64.6 million this year. Defense segment operating income was more than double the level of 2008 and transportation systems segment operating income increased 11% compared to the first nine months of 2008. Corporate and other costs were $4.8 million for the first three quarters of 2009 compared to $1.8 million in the same period last year. These costs included $2.4 million for the development and marketing of new security related technologies. See the segment discussions following for further analysis of segment operating income.

Net income for the third quarter of fiscal 2009 increased to $14.9 million, or 56 cents per share, compared to $8.5 million, or 32 cents per share last year. For the first nine months of the year, net income increased to $43.3 million, or $1.62 per share, from $28.8 million, or $1.08 per share last year. Net income increased for the quarter and first nine months of this fiscal year as a result of the increase in operating income and the tax benefits described below, partially offset by a decrease in investment income resulting from lower interest rates, despite higher cash balances available for investment in the current year.

Selling, general and administrative (SG&A) expenses increased in the third quarter this year to $30.0 million compared to $26.9 million last year. For the first nine months of the year SG&A expenses increased from $75.7 million in 2008 to $86.0 million this year. As a percentage of sales, SG&A expenses were 11.7% for the first nine months of both years. About half of the increase in SG&A expenses for the nine-month period came from Omega, including amortization of purchased intangibles of $4.2 million. In addition, the defense segment made a provision of $3.1 million in the second quarter for a receivable that is doubtful of collection, as described in the defense segment section below. Company funded research and development expenditures were lower for the third quarter and first nine months compared to last year and the focus shifted to transportation and security related projects with less invested this year in defense related technologies.

Our projected effective tax rate for fiscal 2009 is 37.0% and is reflected in the tax provision for the first nine months. The tax expense provided in the third quarter benefited from the expiration of statutes in the U.S. and U.K. that allowed the reversal of tax reserves amounting to $0.4 million in the quarter. The provision for the first nine months also benefited from a credit of approximately $0.8 million recorded in the first quarter that resulted from the retroactive reinstatement by the U.S. Congress of the R&E credit to January 1, 2008. The effective rate for fiscal 2009 could be affected by, among other factors, the mix of business between the U.S. and foreign jurisdictions, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

Defense Segment



                                     Nine Months Ended       Three Months Ended
                                         June 30,                 June 30,
                                      2009        2008        2009         2008
                                                   (in millions)
Defense Segment Sales
Mission support services           $    308.7    $ 234.5   $    100.1    $   86.5
Training systems                        173.7      174.8         59.1        61.4
Communications                           31.9       28.1         12.6        10.5
Tactical systems and other                1.5        9.7          0.5         4.3
                                   $    515.8    $ 447.1   $    172.3    $  162.7

Defense Segment Operating Income
Mission support services           $     19.9    $  17.3   $      6.1    $    6.6
Training systems                         13.2        7.7          3.3         1.7
Communications                            3.4      (10.9 )        1.8        (7.8 )
Tactical systems and other               (1.2 )     (0.6 )        0.1         0.4
                                   $     35.3    $  13.5   $     11.3    $    0.9

Mission Support Services

Sales from Mission Support Services increased 16% to $100.1 million in the third quarter of this year, from $86.5 million last year. For the first nine months of the year, sales increased from $234.5 million last year to $308.7 million this year, a 32% increase. Of these increases in the third quarter and first nine months of the year, $12.9 million and $42.6 million, respectively, came from Omega, the company acquired late last fiscal year. Higher sales in the nine-month period also came from an increase in activity at the Joint Readiness Training Center (JRTC) in Fort Polk, LA. and from a contract at the U.S. Army's Quartermaster Center and School.

Mission Support Services operating income decreased 8% to $6.1 million in the third quarter of this year from $6.6 million last year. The decrease came from an operating loss in the newly acquired Omega division of $0.5 million for the quarter resulting from amortization of purchased intangible assets of $1.4 million and an accrual for other acquisition-related costs of $0.1 million.

For the first nine months of the year, Mission Support Services operating income increased from $17.3 million last year to $19.9 million this year, an increase of 15%. Omega contributed $0.4 million of this increase, net of amortization of purchased intangible assets of $4.2 million and an accrual for other acquisition-related costs of $0.2 million for the period. Higher sales from the JRTC and the U.S. Army's Quartermaster Center and School contracts and higher profit margins from operations and maintenance contracts also contributed to the increase. A contract modification received in the first quarter that reimbursed us for out-of-scope costs expensed last year, also added $1.2 million to operating income for the nine-month period.

Training Systems

Training systems sales decreased 4% from $61.4 million in the third quarter of last year to $59.1 million this year. Air combat training sales were higher in the third quarter this year, but this was more than offset by lower sales from ground combat training and small arms training systems. The increase in air combat training sales came from the U.S. government P5 contract and the Joint Strike Fighter contract. Sales were lower from ground combat training systems in the U.K. and Canada and electro-optics (laser-based tactical engagement systems) contracts during the quarter. For the first nine months, training systems sales were 1% lower than last year at $173.7 million compared to $174.8 million. Higher sales of air combat training systems and small arms training systems were offset by lower sales of ground combat training systems and related electro-optic training systems.

Training systems operating income increased to $3.3 million in the third quarter this year from $1.7 million last year. Improved profit margins from electro-optic training systems and from air combat training systems in the Far East contributed to the profit improvement. The electro-optic contract that experienced cost growth and a resulting loss in the development phase last year has now transitioned to production, resulting in a profit margin from product delivered during the quarter. Lower sales of small arms training systems resulted in an operating loss from this product line for the quarter, partially offsetting these improvements.

Training systems operating income increased from $7.7 million in the first nine months of last year to $13.2 million this year. Higher sales of air combat training systems and small arms training systems and higher profit margins on air combat training systems in the Far East contributed to the improvement. In addition, as mentioned above, last year's results included cost growth for the development of an electro-optic training system, which totaled $7.7 million for the first nine months, compared to $3.0 million this year. The product shipments on this contract, as mentioned above, also contributed to the improved results for the nine-month period. Partially offsetting these profit improvements was a $3.1 million allowance for doubtful accounts established during the second fiscal quarter. A company through which we sold training systems products to the U.S. government in previous periods failed to pass on to us cash they collected from the government on our behalf. We were able to collect a portion of the money they owed us and have now negotiated a payment plan with them; however, the company appears to be in financial trouble and collection of the remainder continues to be doubtful. We will reverse the reserve only upon the collection of cash from them.

Communications

Communications sales increased 20% to $12.6 million in the third quarter of 2009, from $10.5 million in the same quarter last year. Sales were higher for the quarter from data links and personnel locator systems but were lower from power amplifiers. For the first three quarters of the year, communications sales were $31.9 million this year compared to $28.1 million last year, a 14% increase. A settlement agreement reached in the first quarter with the U.S. Navy on a data link development contract added $3.3 million to sales and facilitated progress toward completion of the contract, further increasing sales for the nine month period. Lower sales of power amplifiers partially offset the growth in data link sales for the first nine months of the year.

Communications operating income for the third quarter was $1.8 million, compared to an operating loss of $7.8 million in the third quarter of last year. Sales of personnel locator systems and data link spare parts contributed to the operating income this year, in addition to a contract in the U.K. to develop data link technology for unmanned aerial vehicles. This contract was restructured early this fiscal year after having incurred cost growth of $6.5 million in the third quarter last year. Another data link contract had also experienced cost growth of $1.8 million in the third quarter last year, contributing further to the operating loss in that period.

For the first nine months of the year communications operating income improved to $3.4 million from an operating loss of $10.9 million last year. Cost growth on three data link development contracts had resulted in last year's operating loss. This year two of the three contracts generated operating income due to contract restructurings and change orders received. Despite lower sales of power amplifiers this year, improved profit margins resulted in only a small decrease in profitability from the product line compared to last year.

Transportation Systems Segment



                                            Nine Months Ended        Three Months Ended
                                                June 30,                  June 30,
                                             2009        2008        2009          2008
                                                           (in millions)

Transportation Segment Sales              $    217.8    $ 198.3   $     74.8    $     69.7

Transportation Segment Operating Income   $     34.1    $  30.8   $     11.6    $     11.6

Transportation systems sales increased from $69.7 million in the third quarter of last year to $74.8 million this year, an increase of 7%. For the nine-month period, sales increased 10%, from $198.3 million to $217.8 million. Sales increased in North America from a fare collection development contract awarded last year and from the sale of spare parts. In the U.K., higher sales came primarily from contracts with Transport for London and U.K. train operating companies. A lower average exchange rate between the British Pound and the U.S. Dollar in 2009 resulted in a decrease in the dollar value of U.K. sales during the third quarter of $10.2 million compared to the rate in effect in 2008. For the nine-month period, the exchange rate difference impacted sales by $32.1 million.

Operating income from transportation systems in the third quarter was the same as last year at $11.6 million. This year we incurred increased selling costs related to a large new contract proposal; however, last year's third quarter had included an investment in new technology of $1.8 million related to a new contract in North America, which more than offset the effect of these increased expenses in the current year. Higher sales of spare parts in North America helped to increase operating income; however, operating income was also impacted in the current year by a lower exchange rate between the British Pound and the U.S. Dollar, which decreased the dollar value of U.K. operating income by $2.3 million when compared to 2008 exchange rates.

For the first three quarters of the year, transportation systems operating income improved from $30.8 million in 2008 to $34.1 million this year, an 11% increase. Higher sales of spare parts added to operating income for the first nine months and contract restructuring agreements reached during the first quarter added a net $1.6 million to operating income. As a result of one of the contract restructurings, we wrote off accounts receivable of $4.1 million against the associated allowance for doubtful accounts, resulting in no impact on operating income. The lower British Pound vs. U.S. Dollar exchange rate impacted operating income for the first three quarters of 2009 by $7.9 million, when comparing 2009 average exchange rates to 2008 rates.

Backlog



                                 June 30,     September 30,
                                   2009           2008
                                        (in millions)
Total backlog
Transportation systems           $   679.5   $         480.6
Defense:
Mission support services             940.2             880.0
Training systems                     447.1             363.6
Communications and electronics        46.0              45.9
Tactical systems and other             3.6               2.4
Total defense                      1,436.9           1,291.9
Total                            $ 2,116.4   $       1,772.5

Funded backlog
Transportation systems           $   679.5   $         480.6
Defense:
Mission support services             200.2             180.6
Training systems                     447.1             363.6
Communications and electronics        46.0              45.9
Tactical systems and other             3.6               2.4
Total defense                        696.9             592.5
Total                            $ 1,376.4   $       1,073.1

As reflected in the table above, total backlog increased $343.9 million at June 30, 2009 compared to September 30, 2008. Transportation systems backlog increased $198.9 million and defense backlog increased $145.0 million during the first nine months of the fiscal year.A new contract awarded by Transport for London added approximately $280 million (£170 million) to transportation systems backlog during the period, however, a lower exchange rate between the British Pound and the U.S. Dollar as of June 30, 2009 decreased backlog by approximately $21 million compared to September 30, 2008. Funded backlog increased $303.3 million during the period, with transportation systems increasing $198.9 million and defense funded backlog increasing by $104.4 million.

In defense, the difference between total backlog and funded backlog represents options under multi-year service contracts. Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally exercised annually. Options for the purchase of additional systems or equipment are not included in backlog until exercised nor are indefinite delivery, indefinite quantity contracts until an order is received.

Liquidity and Capital Resources

Operating activities provided cash of $49.5 million for the third quarter and $134.6 million for the first nine months of the fiscal year. In addition to net income for the period, customer advances and reductions in accounts receivable contributed to the positive cash flows. Positive operating cash flows came from both the transportation systems and defense segments, with the greater portion coming from the defense segment.

Investing activities for the nine-month period consisted of capital expenditures of $3.9 million, acquisition of a small transportation business in Australia for $1.8 million, and the final payment related to our fiscal year 2008 acquisition of Omega, amounting to $6.1 million. Financing activities for the nine-month period consisted of scheduled payments on our long-term debt of $5.8 million, and dividends paid to our shareholders of $2.4 million.

A rebound in the exchange rate between several foreign currencies, especially the British Pound, and the U.S. Dollar resulted in an increase of $14.8 million to our cash balance as of June 30, 2009 compared to March 31, 2009. Accumulated Other Comprehensive Income also improved in the quarter by $11.5 million due to foreign exchange changes.

While our pension plans in the U.S. and U.K. have ample funds to meet benefit payments, current market conditions have negatively impacted asset values, which decreased about 12% from September 30, 2008 to June 30, 2009. Future funding requirements will depend upon the funded status of the plans as of the next actuarial valuation date and for the U.S. plan will be partially mitigated by temporary funding relief provided by the Worker, Retiree and Employer Recovery Act of 2008, enacted into law in December 2008. We are not legally required to make any contributions to our U.S. plan and no significant additional contributions to our U.K. plan during fiscal 2009. However, we did make an additional voluntary contribution of $6.5 million to our U.S. plan in the third quarter in order to improve the funded status of the plan, and may make additional voluntary contributions to the U.S. or U.K. plans in the fourth quarter. Based on current conditions, it is likely that our pension expense for fiscal 2010 will increase over the current level.

Our financial condition remains strong with working capital of $322.1 million and a current ratio of 2.4 to 1 at June 30, 2009. We expect that cash on hand and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future.

Critical Accounting Policies, Estimates and Judgments

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2008.

This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to the "safe harbor" created by those sections. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or our future financial and/or operating performance are not historical and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "may," "will," "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "predict," "potential," "opportunity" and similar words or phrases or the negatives of these words or phrases. These statements involve estimates, assumptions and uncertainties, including those discussed in "Risk Factors" in the Company's annual report on Form 10-K for the year ended September 30, 2008, and throughout this filing that could cause actual results to differ materially from those expressed in these statements.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.