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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-Q

(Mark one)

For the quarterly period ended December 31, 2003

OR

For the transition period from              to             

Commission File Number 0-23125

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices)

(310) 978-0516

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.

YES x NO ¨

Indicate by check mark the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x NO ¨

As of February 9, 2004 there were 14,607,586 shares of the registrant’s common stock outstanding.

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OSI SYSTEMS, INC.

INDEX

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PART I. FINANCIAL INFORMATION

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

See accompanying notes to consolidated financial statements

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See accompanying notes to consolidated financial statements

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OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General – OSI Systems, Inc. and its subsidiaries is a vertically integrated, worldwide provider of security and inspection systems, medical monitoring and imaging systems, and opto-electronic devices and value-added subsystems.

We design, manufacture and market security and inspection systems worldwide to end users under the “Ancore,” “Eagle,” “Metor,” “Rapiscan,” and “Secure,” brand names. These products are used to inspect people, baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband. These systems are also used for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of controlled materials.

In the medical field, we design, manufacture and market arterial hemoglobin saturation monitors and sensors, including hand-held and wireless monitoring tools under the trade names “Dolphin,” “NuCat,” “Dolphin ONE,” “Aristo,” and “Dolphin 2000”. We also design, manufacture and market peripheral bone densitometers, which are used to provide bone density measurements in the diagnosis of osteoporosis, and to assess the risk of developing osteoporosis.

Our opto-electronic devices and subsystems are used in a broad range of applications, including printed circuit board assembly and surface mounting technologies, aerospace and defense electronics, security and inspection systems, medical diagnostics, fiber optics, telecommunications, gaming, office automation, computer peripherals and industrial automation. We design and manufacture opto-electronic devices and subsystems for others through OEM arrangements, as well as for our security and medical equipment businesses.

Consolidation – The consolidated financial statements include the accounts of OSI Systems, Inc. and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The consolidated balance sheet as of December 31, 2003, consolidated statements of operations for the three and six months ended December 31, 2003 and December 31, 2002 and cash flows for the six-month periods ended December 31, 2003, and December 31, 2002 have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes for the fiscal year ended June 30, 2003 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 29, 2003. The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2004.

Recent Developments

In December 2003, we negotiated an Amended and Restated Credit Agreement with Bank of the West. The Agreement provides for a $50 million line of credit, which includes revolving line, letter of credit, acceptance, and foreign exchange facilities. In addition, we have a $3.3 million balance on an existing term loan with the same bank. Advances under the lines of credit

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bear interest at a rate equal to a variable bank reference rate plus a margin, or at our option at a fixed rate as quoted by the bank upon request for specific advances. The new credit facilities expire in November 2005. Borrowings under the agreement are secured by liens on substantially all of our assets and the assets of our U.S. subsidiaries.

The Amended and Restated Credit Agreement contains certain covenants. Among these, we are at all times required to maintain (on a consolidated basis) a tangible net worth of at least $120 million; effective tangible net worth for any fiscal year to increase by a minimum of 75% of our net income for that year; a ratio of debt to earnings before interest, tax, depreciation and amortization of not more than 2.5 to 1; a ratio of current assets to current liabilities of not less than 1.25 to 1; a debt coverage ratio of 1.5 to 1; and a minimum balance of cash and cash equivalents and marketable securities of $20 million. In addition, the Amended and Restated Credit Agreement includes certain other covenants concerning pre-approval by the bank of mergers and acquisitions, the payment of dividends on our stock, the purchase or retirement of our stock, the sale of assets outside the ordinary course of business, and capital expenditures in excess of $10 million, among others. As of December 31, 2003, we were in compliance with all the covenants under the Amended and Restated Credit Agreement. As of December 31, 2003, we had utilized $4.7 million under the letter of credit facility.

In December 2003, we entered into a Stock Purchase and Option Agreement with Conmed Corporation, whereby Conmed Corporation purchased a 10% interest in our subsidiary, Dolphin Medical, Inc. and an option to purchase all of the remaining assets and the business of Dolphin Medical, Inc. In addition, Conmed Corporation and Dolphin Medical, Inc. entered into a Distribution Agreement, which provides Conmed Corporation with distribution rights for certain Dolphin Medical, Inc. products within certain defined territories. Conmed Corporation’s option to purchase the assets and business of Dolphin Medical, Inc. expires upon the earlier of December 31, 2008 or the termination of the Distribution Agreement. Pursuant to the terms of the Stock Purchase and Option Agreement Conmed Corporation paid us $2 million, of which $1.2 million has been recorded as minority interest, based on an independent valuation of Dolphin Medical, Inc., and $0.8 million has been recorded as deferred income. The deferred income will be amortized over the life of the distribution agreement.

In December 2003, we acquired substantially all of the assets of J.D. Engineering (UK) Limited, a company registered in England and Wales. We paid approximately 367,000 pounds sterling (or approximately $649,000) including acquisition costs. A further 90,000 pounds sterling (or approximately $150,000) is payable March 22, 2004. The acquired assets comprise a business for the design, sale and manufacturing of, among other products, metal frames for x-ray scanners.

The acquisition was made through our wholly owned subsidiary, Rapiscan Security Products Limited. The following table shows the preliminary allocation of the purchase price (in thousands):

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In November 2003, we acquired substantially all of the remaining assets of Schwartz Electro-Optics, Inc. in a bankruptcy-court supervised auction. We paid approximately $1.6 million, including acquisition costs. The acquired assets comprise a business for the design, sale and manufacturing of laser-based systems used in traffic and toll management, precision agricultural management, and precision mapping and surveying. The business, located in Orlando, Florida now operates under the name OSI Laserscan. The acquisition was made through our wholly owned subsidiary, OSI Defense Systems, LLC. We have not yet completed the allocation of the purchase price between goodwill and identifiable intangible assets. The final determination may result in asset fair values and useful lives that are different from the preliminary estimates of these amounts. The following table shows the preliminary allocation of the purchase price (in thousands):

In October 2003, we acquired the assets of a manufacturing services company specializing in surface mount technology lines and PC board assembly operations for approximately $4.4 million including acquisition costs. The acquisition was made through a wholly owned subsidiary, OSI Electronics, Inc. The purchase price has been allocated to the assets acquired of $5.3 million and liabilities assumed of $1.0 million, based on the estimated fair values of the assets and liabilities at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired of $157,000 was allocated to intangible assets consisting of the value of customer relationships, based on a preliminary independent valuation of those assets. We have not yet completed the allocation of the purchase price between goodwill and identifiable intangible assets. The final determination may result in asset fair values and useful lives that are different from the preliminary estimates of these amounts. The following table shows the preliminary allocation of purchase price (in thousands):

In August 2003, we acquired certain assets representing the military laser-based training business of Schwartz Electro-Optics, Inc. The acquisition was made through a newly formed, wholly owned subsidiary, OSI Defense Systems, LLC. The acquired business now develops and manufactures tactical engagement simulation systems, man worn laser detectors, small arms transmitters, controller guns and a variety of targeting systems for the defense industry. The excess of the purchase price over the fair value of the net assets acquired of $3.6 million was allocated between tangible assets, goodwill and identifiable intangible assets, based on an independent valuation of those assets. The following table shows the purchase price allocation (in thousands).

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Supplemental pro-forma disclosures of results of operations for the three and six months ended December 31, 2002 and 2001, as though the above business combinations had been completed as of July 1, 2002, are as follows (in thousands except per share amounts):

Subsequent Events

In January 2004, we announced a definitive agreement to purchase Issaquah, Washington based Spacelabs Medical from GE Medical Systems for approximately $57 million in cash. The final purchase price is subject to closing adjustments. Spacelabs Medical is a leading global manufacturer and distributor of patient monitoring products, an area in which we have considerable interest as it represents a natural extension of our engineering, product and manufacturing expertise. Their installed base of patient monitoring systems consists of approximately 100,000 units worldwide, with 60,000 in the United States, 30,000 in Europe and 10,000 in Asia. Spacelabs’ trailing 12 months unaudited revenues were over $150 million. This agreement is subject to regulatory approvals in Europe and South America and there is no assurance that it will be consummated.

In January 2004, we completed the acquisition of Advanced Research & Applications Corporation (“ARACOR”), a privately held company located in Sunnyvale, California. Consideration for the acquisition consisted of an initial cash payment of approximately $17.3 million (net of cash acquired), including acquisition costs. Furthermore, during the seven years after the close, contingent consideration is payable based on ARACOR’s net revenues, provided certain requirements are met. The contingent consideration is capped at $30 million. ARACOR broadens our security product portfolio through its mobile x-ray inspection system, the Eagle, which is designed for container scanning at busy ports.

New Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities and how arrangement considerations should be measured and allocated to the separate units of accounting in the arrangement. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on our financial position or result of operations.

In January 2003, the FASB issued Interpretation Number 46, Consolidation of Variable Interest Entities (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51. FIN 46 requires that variable interest entities be consolidated by a company if that company absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding a variable interest. In December 2003, the FASB issued FIN 46R, which made certain amendments to FIN 46. The provisions of FIN 46R are effective for the first interim or annual period ending after March 15, 2004 when certain conditions are met by a variable interest entity. We anticipate that our adoption of FIN 46R will require that we consolidate our investment in an overseas-based research and development venture focused on security technologies, which are currently accounted for under the equity method.

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Derivative Instruments

Our use of derivatives consists of foreign exchange contracts used to manage foreign exchange risk, together with interest rate swaps on a variable interest rate term loan used to manage interest rate risk. We purchase foreign exchange contracts to hedge foreign exchange exposure related to commitments to acquire inventory for sale and accounts receivable and do not use the contracts for trading purposes. There were no foreign exchange contracts outstanding as of December 31, 2003.

In February 2001 and August 2001, we entered into interest rate swaps. The purpose of the swaps is to convert a portion of our variable interest rate debt into a fixed rate liability. The notional amount of the swaps was $2.9 million at December 31, 2003, and $4.2 million at June 30, 2003. The fair value of the swaps before income taxes was ($18,000) at December 31, 2003 and ($90,000) at June 30, 2003. The change in the fair value from the previously reported period is recorded in other comprehensive income (loss), due to the swaps meeting the criteria of an effective cash flow hedge. The swaps expire in June 2004.

Inventory

Inventory is stated at the lower of cost or market; cost is determined on the first-in, first-out method. Inventory consisted of the following (in thousands):

Accounts Receivable

Accounts receivable consisted of the following (in thousands):

We expect to bill and collect the unbilled costs and accrued profits at December 31, 2003 during the next twelve months.

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Goodwill and Other Intangible Assets:

The changes in carrying value of goodwill for the six months ended December 31, 2003 is as follows (in thousands):

Other intangible assets consisted of the following (in thousands):

Amortization expense for the six months ended December 31, 2003 was approximately $524,000. At December 31, 2003, estimated future amortization expense is as follows (in thousands):

Stock Based Compensation

We apply the intrinsic value-based method of accounting prescribed by APBO No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for our stock options. Under this method, compensation expense is generally recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. We have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, which was released in December of 2002 as an amendment to SFAS No. 123. These statements establish accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 and SFAS No. 148, we elected to continue to apply the intrinsic value-based method of accounting described above.

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We account for option grants to non-employees using the guidance of SFAS No. 123, as amended by SFAS No. 148, and EITF No. 96-18, whereby the fair value of such options is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee’s performance is complete or a performance commitment is reached.

In accordance with the intrinsic value method, no compensation cost has been recognized for our stock option grants in the accompanying financial statements. If the fair value-based method had been applied in measuring stock compensation expense under SFAS No. 123, as amended by SFAS No. 148, the pro forma effect on net earnings and net earnings per share would have been as follows (in thousands, except share and per share amounts):

Earnings per Share

We have reflected the provisions of SFAS No.128, “Earnings per Share”, in the accompanying consolidated financial statements for all periods presented. Earnings per common share are computed using the weighted-average number of shares outstanding during the period. Earnings per common share, assuming dilution, are computed using the weighted-average number of shares outstanding during the period plus the dilutive effect of potential common stock. Potential common stock types are stock options and purchase rights.

Stock options and rights to purchase a total of 1,170,250 and 1,191,048 shares were outstanding for the three and six months ended December 31, 2003, but were not included in diluted earnings per common share because to do so would have been anti-dilutive. Stock options and rights to purchase rights totaling 1,426,462 shares were outstanding for the three and six months ended December 31, 2002, but were not included in diluted earnings per common share because to do so would have been anti-dilutive. The following table reconciles the numerator and denominator used in calculating earnings per common share and earnings per common share-assuming dilution.

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Comprehensive Income

Comprehensive income is computed as follows (in thousands):

Contingencies

We are involved in various claims and legal proceedings arising out of the conduct of our business. In the opinion of our management after consultation with outside legal counsel, the ultimate disposition of such proceedings will not have a material adverse effect on our financial position, future results of operations or cash flows.

Provision for Warranties - We offer our customers warranties on products sold to them. These warranties typically provide for repairs and maintenance of our products for a specified time period. Concurrent with the sale of products, a provision for estimated warranty expenses is recorded with a corresponding increase in cost of goods sold. This provision is adjusted periodically based on historical and anticipated experience. Actual expenses of repairs under warranty, including parts and labor, are charged to this provision when incurred.

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For the six months ended December 31, 2003, the changes in warranty provisions were as follows (in thousands):

Segment Information

We have adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). We have reflected the provisions of SFAS No. 131 in the accompanying financial statements for all periods presented. We operate in two identifiable industry segments, (a) security and inspection products and (b) opto-electronic devices and subsystems and medical monitoring and imaging systems. Revenues for the three months ended December 31, 2003 from the sale of security and inspection products were $29.0 million compared to $27.7 million for the comparable prior year period and revenues from the sale of opto-electronic devices and subsystems and medical monitoring and imaging systems for the three months ended December 31, 2003, were $22.1 million compared to $16.0 million for the comparable prior year period. For the six months ended December 31, 2003 revenues from the sale of security and inspection products were $52.7 million compared to $51.8 million for the comparable prior year period and revenues from the sale of optoelectronic devices and subsystems and medical monitoring and imaging systems were $37.0 million compared to $29.0 million for the comparable prior year period.

Segment information is provided by geographic area. We are vertically integrated and we share common resources and facilities. Therefore, with the exception of external revenues, meaningful information by industry or product segment is not available.

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Our operating locations include North America (Canada and the United States), Europe (Finland, Norway, and the United Kingdom) and Asia (India, Malaysia, and Singapore). Revenue and income from operations generated in a particular geographic segment can be significantly affected by changes in prices or mix of inter-company product sales. Our operations by geographical areas are as follows (in thousands):

Three months ended December 31, 2003