Mirror, mirror, on the wall, who's the fairest airport security checkpoint equipment manufacturer of them all?

Some investors would argue it's GE (NYSE: GE), which now owns bomb-sniffer InVision. L-3 Communications (NYSE: LLL), with its ProVision millimeter wave imaging portal, is another fave. At Motley Fool Rule Breakers, we're partial to American Science & Engineering (Nasdaq: ASEI) with its Backscatter X-ray technology. Still others prefer OSI Systems (Nasdaq: OSIS) and Rapiscan. That's the one we'll be discussing today.

OSI reported its fiscal Q2 2008 earnings on Tuesday, you see, beating analyst estimates for the fifth quarter in a row, and sending the stock up 5% in response. Ever since (if you can call two days "ever"), the stock has been doing one of the best imitations of a yo-yo I've seen in some time. Down 9% yesterday on no news. Up again 5% today on -- you guessed it -- no news. Result: OSI stock today trades at almost the same price it fetched before the company beat Wall Street's estimates.

What's up (and down) with that?
In my view, the wild gyrations in OSI's stock price derive from exceedingly mixed news within the quarterly report. Tackling the good news first:

Expected to earn $0.15 per share, OSI pulled $0.20 out of the hat on record revenue that grew 19% year over year. The firm's security division (the one I'm most interested in) contributed the bulk of that growth, bulking up by 44% in comparison with last year's Q2. CEO Deepak Chopra cited "increased activity for the Cargo and Vehicle Inspection product lines" and announced the first sale of OSI's new Rapiscan MVXi passenger checkpoint inspection system. Not only did OSI win the expectations game, but it raised expectations. OSI now expects to earn between $0.65 and $0.77 per share this year, on $590 million to $605 million in revenue.

And the bad news?
The bad news is that whatever the GAAP numbers say, OSI is still burning cash -- and faster than ever. According to the cash flow statement, OSI used more cash to fund its operations in the first half of this year than in fiscal H1 2007. It has already burned through $19.6 million in cash this year.

Reviewing the company's inventory situation, I discovered that in general, inventories are 23% higher at last report than at the same time last year -- rising faster than sales. What's most disconcerting here, though, is the types of inventories that are piling up. Raw materials are almost flat, while finished goods are stacked up 155% higher. To me, this suggests firstly that OSI is not buying components to gear up for any surge of new orders in the near future, and second, that it's tying up a lot of cash in finished products that are not selling.

Reason enough for investors to rethink their initial optimism over Tuesday's news? Yes, I suspect it is.

Are OSI's rivals faring any better? Find out in:

Fool contributor Rich Smith does not own shares of either company named above. American Science & Engineering is a Rule Breakers recommendation. The Motley Fool has a disclosure policy.