OSI's stock rising as concerns over terrorism increase.

The alleged terrorist plot in Britain sent shivers down the spines of air travelers, but it put some backbone in the stock of one local security company.

Investors are betting that the federal Transportation Security Administration may invest in systems that detect liquid explosives designed by OSI Systems Inc., which is testing its technology at Heathrow International Airport.

Since the terrorist plot was first reported in early August, shares of the Hawthorne company have risen about 10 percent to $19.27 a share after drifting down from a March high of $23.

Indeed, there has been plenty of chatter among analysts to try and determine which company may benefit from the new focus on liquid explosives. OSI is one of only two companies with equipment that detects liquid explosives and one of four companies that specialize in baggage and people scanners.

Though analysts agree that no company is likely to get a bump in sales anytime soon, in the long term the most likely beneficiary may be OSI, since its Rapiscan Systems Inc. subsidiary already has contracts with the TSA and the Defense Department. Rapiscan's Secure1000 product currently is being tested at the London airport.

The low-cost backscatter X-ray device is a body scanner that tests the presence of knives, plastic guns--and liquid explosives and gels. Four of the devices have been deployed at Heathrow as a secondary screening device after traditional X-ray machines. More than 100 are being used by the Defense Department to screen suicide bombers at undisclosed locations around the world.

"They're basically waiting for a "go/no go" decision," said Joshua Jabs, an analyst at Roth Capital Partners, which makes a market in OSI's stock and has the highest price target, at $34 a share, among the six analysts that cover the company. "We expect a decision any day now."

Terrorist plot

OSI began working with the Defense Department in 1996 to create a liquid threat detection system after a terrorist plot was uncovered by authorities in the Philippines. At that time, the foiled plot aimed to destroy 11 airplanes flying over the Pacific Ocean. It was the fast known terrorist plot in which liquid explosives were planned to be used to blow up an airplane.

Peter Kant, Rapiscan's vice president of government affairs, said OSI invented several baggage and air cargo screening products that use neutrons, or sub-atomic particles, to detect molecular compounds in liquid explosives and other hazardous materials. The systems simply flash a red light when such materials are found.

"We work in a very event-driven business," said Kant, who estimates his company has been referenced in 300 news articles since the alleged plot to use liquid explosives was foiled in Britain. "Because we make the broadest array of technologies, our stock always gets a bump" after a terrorist event.

The company also has three products for baggage and cargo systems that can identify certain materials without the need for individual screeners to inspect cargo.

The company recently launched another device, the QXR1000, that attaches to existing X-ray machines and can identify liquids and sheet explosives. Each device costs roughly $150,000. OSI is waiting for the Defense Department to purchase the devices for airports and other highsecurity areas. In January, George Bush Intercontinental Airport in Houston will begin testing its air cargo inspection system.

However, analysts say cost pressures have largely prevented TSA from adopting measures to screen air cargo. The agency has been under pressure to reduce costs and has relied almost exclusively on individual screeners, rather than technology, to do the job.

But that may now change in light of the terrorist plot authorities say they foiled in Britain, which so far has resulted in 24 arrests.

"The question is whether any of these technologies really grab the attention of policymakers," said Kant.

Cost pressures, though, have not been the only issue. Jabs, the Roth analyst, said one of the problems is that the company had to develop a filter so the technology did not show details of "what a person looks like under their clothes."

And Brian Ruttenbur, an analyst at Morgan Keegan Co., believes that an issue for OSI's explosive-detecting machines is that they produce too many false alarms.

Rapiscan already has about 1,000 traditional X-ray machines in the nation's 429 airports, or roughly half of the checkpoints in the United States. Its competitors in the screening of baggage and cargo include American Science & Engineering Inc., of Billerica, Mass., and New York-based L-3 Communications Holdings Inc. But analysts say only General Electric Co.'s InVision Technologies Inc. unit has a device designed to detect liquid explosives.

Rapiscan also has its systems installed in Romania and countries throughout Asia.

OSI is not a one trick pony, though.

The Rapiscan division supplies only 34 percent of revenue, while its Spacelabs Healthcare contributes 46 percent and OSI Optoectronics, a supplier of circuit boards, lasers and lenses, accounts for the remaining 20 percent. (Last year, Chairman and Chief Executive Deepak Chopra reorganized the company into the three units.)

Spacelabs Healthcare sells medical monitoring and anesthesia products, and recently sold 20 percent of its shares on the London Stock Exchange's Aim Exchange. It has been a good performer.

OSI Systems Inc. (Nasdaq: OSIS)

Stock Prices

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Quarterty Net Income (millions)

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YEAR (June 30)                           2005     2004

Revenue (millions)                       $385      247
Total Expenses (millions)               392.2    234.9
Operating Income (loss) (millions)      (7.2)     12.1
Net Income (loss) (millions)            (2.4)       10
Earnings (loss) Per Share             ($0.15)    $0.65

SUMMARY

Business: Provides security & inspection.(too long)
Headquarters: Hawthorne
CEO: Deepak Chopra
Market Cap: $322.6 million    Dividend Yield: N/A
Total Liabilities: $103 million    P/E Ratio: N/A
Long-Term Debt: $5.4 million