The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report.

EXECUTIVE SUMMARY
In summary, the major elements affecting fiscal 2010 first quarter net profit,
compared to fiscal 2009 first quarter net loss, were as follows (in millions):

          Net loss first quarter fiscal 2009                         $ (3.4 )

          Increase restructuring/impairment charges       $ (0.6 )
          Decreased tax expense                              0.2
          Improved gross margin on EMS programs              0.4
          Improved gross margin on DSS programs              2.7
          Improved gross margin on Medical programs          1.7
          Decreased selling and administrative expenses      0.5
          Other                                             (0.1 )

          Net change                                                    4.8

          Net profit first quarter fiscal 2010                       $  1.4

Fiscal 2010 was impacted by:
- Increased margin on DSS programs due to successful lot acceptance resulting in minimal rework costs, improved pricing and a greater mix of products sold to foreign governments.

- Increased margin on Medical programs due to favorable material costs, improved pricing, and facility consolidation.

- Increased margin on EMS programs due to cost reductions associated with the plant consolidations and disengagement with unprofitable customers.

- Decreased translation/transactions exchange gains from prior period related to the closure of the Canadian facility.

- Restructuring/impairment charges of approximately $0.9 million in fiscal 2010, $0.6 million above prior period.

- Increased pension expense of $0.3 million above the same period last year.

- Increased margin of $0.3 million resulting from disengagement agreement with one EMS aerospace customer.

- Decreased selling and administrative expenses due to closure of several production facilities and other cost reduction actions implemented in fiscal 2009.

In fiscal 2009 Sparton announced several actions that were being taken as part of the Company's turnaround strategy. Included among these actions were a reduction in force, the closure of the Jackson, Michigan and London, Ontario facilities, changes in certain employee benefit plans and the disengagement from a significant customer. Additionally, management initiated a full evaluation of our operations, including operating structure. This evaluation resulted in changes in fiscal 2010 to our analysis of how the components of Sparton's business contribute to consolidated operating results and the overall level of disaggregation of reported financial data, including the nature and number of operating segments, disclosure of segment information and the consistency of such information with internal management reports. The management discussion and analysis of operations disclosure in this report has been revised in order to be consistent with the changes that were implemented. Operating results and certain other financial information related to the Company's segments is presented in Note 11 to the Condensed Consolidated Financial Statements, which includes intercompany elimination presentation.

RESULTS OF OPERATIONS
The following table presents consolidated statement of operations data as a
percentage of net sales for the three months ended September 30, 2009 and 2008:

                                                      2009         2008
              Net sales                               100.0 %     100.0 %
              Costs of goods sold                      84.6        95.1

              Gross profit                             15.4         4.9
              Selling and administrative expenses       9.5         9.5
              Restructuring/impairment charges          1.8         0.5
              Other operating expense - net             0.3         0.2

              Operating income (loss)                   3.8        (5.3 )
              Other expense - net                      (0.8 )      (0.5 )

              Income (loss) before income taxes         3.0        (5.8 )
              Provision for income taxes                0.1         0.4

              Net income (loss)                         2.9 %      (6.2 )%

Sales for the three months ended September 30:

                             2009                              2008
  SEGMENT           Total          % of total         Total          % of total      % Change

  Medical        $ 19,556,000               41 %   $ 14,102,000               26 %          39 %
  EMS              19,223,000               40       34,541,000               64           (44 )
  DSS              13,345,000               28        8,176,000               15            63

Net sales for the three months ended September 30, 2009 totaled $48,104,000, a decrease of $5,892,000 (or 11%) from the same quarter last year. Medical sales increased $5,454,000 from the same quarter last year. This increase in sales was primarily due to increased sales volume to one customer, with several programs, whose sales increased $3,721,000 from the same period in the prior year, as this customer continued to expand its overall market. A second customer contributed $2,767,000 of sales above the same period in the prior year, as they acquired product and resumed production from a developer that was in bankruptcy. EMS decreased from the prior year by $15,318,000, primarily due to decreased sales to three customers, whose combined decrease totaled $12,987,000 from the prior year. Sparton disengaged with two of these customers as of June 30, 2009. The third customer, Honeywell, is in the process of disengagement. DSS sales were significantly above the first quarter of last year, showing an increase of $5,169,000 due to higher U.S. Navy product volume and successful sonobuoy lot acceptance testing in the current fiscal year. Sonobuoy sales to foreign governments, which were $1,195,000 above those for the same period in the prior year, also contributed to the increase. Eliminating sales result primarily from the production of intercompany circuit boards (EMS sales) that are then utilized in DSS product sales.
The majority of the Company's sales are to a small number of key strategic and large OEM customers. Sales to the six largest customers, including DSS sales, accounted for approximately 85% and 67% of net sales for the first three months of fiscal 2010 and 2009, respectively. Five of the six largest customers, including DSS, were also included in the top six customers for the same period last year. Siemens Diagnostics, a Medical customer, contributed 22% and 13% of total sales during the three months ended September 30, 2009 and 2008, respectively. One EMS customer, Goodrich, contributed 11% and 7% for the three months ended September 30, 2009 and 2008, respectively. A second EMS customer, Honeywell, with several facilities to which we supplied product, provided 8% and 18% of total sales for the three months ended September 30, 2009 and 2008, respectively. On March 16, 2009, the Company disclosed its termination of the agreements with Honeywell. Margins associated with this customer are approximately $288,000 above those for the same period in the prior year on significantly reduced sales.
Gross profit for the three months ended September 30:

                                     2009                     2008
                   SEGMENT      Total        GP%         Total        GP%

                   Medical   $ 2,982,000       15 %   $ 1,272,000        9 %
                   EMS         1,018,000        5         619,000        2
                   DSS         3,420,000       26         770,000        9

                   Totals    $ 7,420,000       15 %   $ 2,661,000        5 %

The gross profit percentage for the three months ended September 30, 2009 was 15%, a significant increase from 5% for the same period last year. Gross profit varies from period to period and can be affected by a number of factors, including product mix, production efficiencies, capacity utilization, and costs associated with new program introduction. The gross profit percentage on Medical sales increased to 15% from 9% for the three months ended September 30, 2009 and 2008, respectively. This improvement in margins on Medical sales was due to improved pricing on several existing products. In addition, favorable product mix and new product sales in fiscal 2010 included several new contracts with higher margins. Finally, changes from the recent consolidation of manufacturing operations allowed for the realization of greater operating efficiencies. The gross profit percentage on EMS sales increased to 5% from 2% for the three months ended September 30, 2009 and 2008, respectively. The improvement in gross profit was mainly attributable to the reduced overhead costs associated with the plant closings and the consolidation of EMS operations. In addition, margin was favorably impacted by improved performance and price increases to certain customers, including Honeywell, a customer with whom we are disengaging. Margin on Honeywell contracts increased by $288,000, while sales to this customer decreased $6,010,000 compared to the same three month period in the prior year. In addition, margin for the three months ended September 30, 2008 was favorably impacted by translation adjustments related to inventory and costs of goods sold, in the aggregate, amounting to a gain of $838,000. There were no translation adjustments related to inventory and costs of goods sold for the three months ended September 30, 2009. Plant closures and restructuring activities are discussed further in Note 10 of the Condensed Consolidated Financial Statements. The gross profit percentage on DSS sales increased to 26% from 9% for the three months ended September 30, 2009 and 2008, respectively. The improvement in gross margin was attributable to minimal rework as a result of successful sonobuoy drop tests. Based on the successful sonobuoy drop tests, the Company adjusted its reserve for estimated cost of rework in the quarter ended September 30, 2009, resulting in an increase to gross profit of $567,000 above the same period in prior year. In addition, margin was favorably impacted by increased foreign sonobuoy sales which generate increased margins due to an improved pricing structure.
Operating income (loss) for the three months ended September 30:

                                     2009                              2008
     SEGMENT                Total          % of sales         Total          % of sales

     Medical             $  1,912,000               10 %   $    321,000                2 %
     EMS                     (293,000 )             (2 )     (1,092,000 )             (3 )
     DSS                    2,927,000               22           49,000                1
     Other unallocated     (2,714,000 )              -       (2,131,000 )              -

     Totals              $  1,832,000                4 %   $ (2,853,000 )             (5 )%

Selling and administrative expenses for the three months ended September 30, 2009 decreased by $536,000, compared to the same period in the prior year, primarily due to decreased costs resulting from the closing of several production facilities. In addition, two reductions in force in the second half of fiscal 2009 further reduced costs in fiscal 2010.
Restructuring and impairment charges were $876,000 and $279,000 for the three months ended September 30, 2009 and 2008, respectively, of which $455,000 and $279,000 were included in the EMS operating results for those periods. For a further discussion of the restructuring activity see Note 10 to the Condensed Consolidated Financial Statements.
Interest expense of $259,000 and $369,000 for the three months ended September 30, 2009 and 2008, respectively, net of capitalized deferred financing costs of $744,000 for the three months ended September 30, 2009, decreased due to the payment of a significant portion of the Company's debt. The line-of-credit and bank term debt was paid off with available cash on August 14, 2009.
Other income (expense)-net for the three months ended September 30, 2009 was $(136,000), versus $5,000 in the first quarter of fiscal 2009. Increased other expense was primarily due to ongoing expenses at closed facilities. Translation adjustments, not related to costs of goods sold, along with gains and losses from foreign currency transactions, in the aggregate, amounted to a gain of $6,000 and $59,000 for the three months ended September 30, 2009 and 2008, respectively.
The Company is responsible for income taxes within each jurisdiction. Income tax expense of $34,000 for the quarter ended September 30, 2009, compared to expense of $221,000 for the same period in the prior year. A further discussion of taxes is included under Income Taxes later in the Critical Accounting Policies and Estimates section.
Due to the factors described above, the Company reported net income of $1,405,000 ($0.14 per share, basic and diluted) for the three months ended September 30, 2009, compared to a net loss of $3,362,000 ($(0.34) per share, basic and diluted) for the corresponding period last year.

LIQUIDITY AND CAPITAL RESOURCES
Until the past several years, the primary source of liquidity and capital resources had historically been generated from operations. In recent periods, borrowings on the Company's revolving line-of-credit facility have increasingly been relied on to provide necessary working capital in light of significant operating cash flow deficiencies sustained primarily since fiscal 2007. During fiscal 2009, the Company generated $38.2 million of operating cash flows, primarily due to reductions in inventory levels and certain DSS contracts allowing for billings to occur when certain milestones under the program are reached, independent of the amount expended as of that point. These billings reduce the amount of cash that would otherwise be required during the performance of these contracts. As of September 30 and June 30, 2009, $23.0 million and $25.1 million, respectively, of billings in excess of costs were received. The Company expects to meet its liquidity needs through a combination of sources including, but not limited to, operations, its line-of-credit, continued interim billings on certain DSS contracts, the potential proceeds from sales of closed facilities, and improved cash flow from changes in how the Company manages inventory. It is anticipated that usage of the line-of-credit and interim government billings will continue to be a component in providing Sparton's working capital. Improving operating cash flow is one of Sparton's priorities, which includes the continued focus on reducing inventory levels carried. With the above sources providing the expected cash flows, the Company believes that we will have sufficient liquidity for our anticipated needs over the next 12 months.
For the three months ended September 30, 2009, cash and cash equivalents decreased $15,543,000 to $20,718,000. Operating activities provided $5,137,000 in fiscal 2010 and used $806,000 in fiscal 2009 in net cash flows. The primary use of cash from operating activities in fiscal 2010 was the payment of accounts payable and accrued liabilities. Payables and accrued liabilities have decreased as a result of the closing of several facilities, reduced volume of inventory purchases, and pension contributions in the first quarter of fiscal 2010. The primary source of cash from operating activities in fiscal 2010 was the decrease in accounts receivable, reflective of collections on government milestone contracts, collection of receivables from disengaging customers, and the large volume of sales during the fourth quarter of fiscal 2009. The primary use of cash from operating activities in fiscal 2009 was for the payment of accounts payable and accrued liabilities, as well as funding operating losses, while the primary source of cash in fiscal 2009 was the decrease in inventories and accounts receivable.
Cash flows used in investing activities in fiscal 2010 and 2009 totaled $1,009,000 and $1,738,000, respectively, and were primarily for the payment of contingent purchase consideration to the prior owners of Astro. The purchase of property, plant and equipment in fiscal 2009 was primarily related to new roofing at one facility.
Cash flows used in financing activities in fiscal 2010 were $19,671,000. Cash flows provided by financing activities in fiscal 2009 were $1,475,000. The primary uses of cash from financing activities in fiscal 2010 and 2009 was the repayment of debt. The primary source of cash from financing activities in 2009 was from increased borrowings on the Company's bank line-of-credit facility. In the three months ended September 30, 2009, the Company paid off the existing balance on its line-of-credit facility totaling $15,500,000 and the remaining balance on its term loan with National City Bank of $3,400,000.
Historically, the Company's market risk exposure to foreign currency exchange and interest rates on third party receivables and payables was not considered to be material, principally due to their short-term nature and the minimal amount of receivables and payables designated in foreign currency. However, due to the greater volatility of the Canadian dollar, the impact of transaction and translation gains on intercompany activity and balances increased in fiscal 2009. With the closure of the Canadian facility, as discussed further below, however, it is anticipated that the impact in fiscal 2010 and future periods will decrease.
As of September 30, 2009, the Company's bank line-of-credit facility totaled $20 million, with no borrowings against the available funds. This bank debt was subject to certain customary covenants which were met at September 30, 2009. There are notes payable totaling $2.0 million outstanding to the former owners of Astro, as well as $2.1 million of Industrial Revenue Bonds. Borrowings are discussed further in Note 5 to the Condensed Consolidated Financial Statements. At September 30 and June 30, 2009, the aggregate DSS funded backlog was approximately $63 million and $69 million, respectively. Commercial backlog as of September 30 and June 30, 2009, totaled $48 million and $55 million, respectively. Commercial orders, in general, may be rescheduled or cancelled without significant penalty, and, as a result, may not be a meaningful measure of future sales. A majority of the September 30, 2009 backlog is expected to be realized in the next 12-15 months.

On June 17, 2008, Sparton announced its commitment to close the Albuquerque, New Mexico facility of Sparton Technology, Inc., a wholly-owned subsidiary of Sparton. The Albuquerque facility primarily produced circuit boards for the customers operating in the EMS market. The closure of this plant was in October 2008. The land and building in Albuquerque is currently marketed for sale. The majority of the other assets and equipment were relocated to other Sparton facilities. The net book value of the land and building to be sold, which as of September 30, 2009 totaled $5,022,000, is reported as held for sale on the Company's balance sheet as a current asset at that date, and reflects a $787,000 facility impairment charge in fiscal 2009 against its carrying amount. Depreciation on these assets ceased in October 2008.
On February 6, 2009, the Sparton announced a reduction in force. The reduction involved 6% of the approximately 1,000 employees employed at that time. Approximately $248,000 of severance cost related to this reduction in force was incurred during the third quarter of fiscal 2009, as the employees received severance packages consistent with Company policy.
On March 4, 2009, Sparton announced the closing of its Jackson, Michigan manufacturing operations. Products manufactured in Jackson were transferred to the Company's production facilities in Brooksville, Florida, and Ho Chi Minh City, Vietnam. Customer orders were not affected by the transfer to other facilities. The closing affected 39 salaried and 167 hourly employees who received severance packages consistent with Company policy. Production has ceased, with the closing of the facility substantially complete. In October 2009, the land and building was listed for sale.
On March 30, 2009, Sparton announced the closing of its London, Ontario, Canada, production facility. The closing was in response to market and economic conditions that have resulted in the facility being underutilized because of significantly decreased customer volumes. Twenty-four salaried and 63 hourly employees were affected, and received severance packages consistent with Company policy. Remaining customer business was transferred to Sparton's Brooksville, Florida, facility. The closure has been completed. In October 2009, the land and building was listed for sale.
Both the closure of the Jackson, Michigan and London, Ontario, Canada facilities, as well as a second reduction in force in April 2009 in addition to . . .