** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

 

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**Forthe quarterly period ended June 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**Forthe transition period from      to**

**CommissionFile Number 1-6549**

**American Science and Engineering, Inc.**

(Exact name ofRegistrant as specified in its charter)

 
| **Massachusetts**                                               | **04-2240991**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **829 Middlesex Turnpike**                                      | ** **                            |
| **Billerica, Massachusetts**                                    | **01821**                             |
| (Address of principal executive offices)                        | (Zip Code)                            |

 

**(978)262-8700**(Registrant’s telephone number, including area code)

(Former name,former address and former fiscal year, if changed since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  x     No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).   Yes  o     No  x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date
| Class of Common Stock | ** ** | **Outstanding at  August 2, 2006** |
|----------------------------|------------|-----------------------------------------|
| $66 2/3 par value          |       | 9,146,349                               |

 

 

----

 

**AmericanScience and Engineering, Inc. and SubsidiaryIndex**

 
| **Part 1 — Financial  Information**                                                                                         |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item  1 — Financial Statements                                                                                                   |   | 3      |
| Unaudited Condensed Consolidated Balance Sheets—June  30, 2006 and March 31, 2006                                                |   | 3      |
| Unaudited Condensed Consolidated Statements of  Operations—for the Three Months Ended June 30, 2006 and June 30,  2005 |   | 4      |
| Unaudited Condensed Consolidated Statements of Cash  Flows—For the Three Months Ended June 30, 2006 and June 30, 2005       |   | 5      |
| Notes to Unaudited Condensed Consolidated Financial  Statements                                                                       |   | 6      |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             |   | 11     |
| Item 3 — Quantitative and Qualitative Disclosure About  Market Risk                                                              |   | 13     |
| Item  4 — Controls and Procedures                                                                                                |   | 14     |
| **Part II  — Other Information**                                                                                            |   |   |
| Item 1 —  Exhibits                                                                                                               |   | 14     |
| **Signatures**                                                                                                                        |   | 15     |

 

2

----

 

**PART I— FINANCIAL INFORMATIONItem 1 — Financial Statements**

**American Science andEngineering, Inc. and SubsidiaryCondensed Consolidated Balance Sheets (Unaudited)**

**Dollars in thousands**
| ** **                                                                                                          | ** ** | **June 30,  2006** | ** ** | **March 31,   2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                                          | ** ** | ** **              | ** ** | ** **                     | ** ** |
| Current assets:                                                                                                     |       |                    |       |                           |       |
| Cash and cash  equivalents                                                                                          |       | $                       | 51,516     |                           | $          | 50,655 |   |
| Restricted cash  and investments                                                                                    |       | 12,931                  |       | 98                             |       |
| Short-term  investments                                                                                             |       | 40,915                  |       | 43,117                         |       |
| Accounts  receivable, net of allowances of $369 and $345 at June 30, 2006 and March 31,  2006, respectively    |       | 30,807                  |       | 25,868                         |       |
| Unbilled costs  and fees, net of allowances of $36 and $36 at June 30, 2006 and March 31,  2006, respectively  |       | 3,279                   |       | 4,057                          |       |
| Inventories                                                                                                         |       | 17,476                  |       | 16,886                         |       |
| Prepaid expense  and other current assets                                                                           |       | 3,353                   |       | 9,862                          |       |
| Deferred income  taxes                                                                                              |       | 4,126                   |       | 3,381                          |       |
|                                                                                                                     |            |                         |            |                                |            |  |  |

 
|                                                                                                                                                                  |       |       |       |       |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Total  current assets**                                                                                                                                             |       | 164,403    |       | 153,924    |       |
| Building,  equipment and leasehold improvements, net                                                                                                                  |       | 19,835     |       | 18,717     |       |
| Deferred income  taxes                                                                                                                                                |       | 1,335      |       | 748        |       |
| Other assets,  net                                                                                                                                                    |       | 440        |       | —     |       |
|                                                                                                                                                                  |       |       |       |       |       |
| **Total  assets**                                                                                                                                                     |       | $          | 186,013    |       | $          | 173,389 |   |
|                                                                                                                                                                  |       |       |       |       |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                  |       |       |       |       |       |
| Accounts payable                                                                                                                                                      |       | $          | 3,717      |       | $          | 6,659 |   |
| Accrued salaries  and benefits                                                                                                                                        |       | 2,154      |       | 6,554      |       |
| Accrued warranty  costs                                                                                                                                               |       | 3,210      |       | 3,606      |       |
| Accrued income  taxes                                                                                                                                                 |       | 1,375      |       | —     |       |
| Deferred revenue                                                                                                                                                      |       | 4,447      |       | 3,331      |       |
| Customer  deposits                                                                                                                                                    |       | 14,363     |       | 6,103      |       |
| Current portion  of lease financing liability                                                                                                                         |       | 795        |       | 787        |       |
| Warrant  liability                                                                                                                                                    |       | 772        |       | —     |       |
| Other current  liabilities                                                                                                                                            |       | 2,348      |       | 1,853      |       |
|                                                                                                                                                                  |       |       |       |       |       |
| **Total  current liabilities**                                                                                                                                        |       | 33,181     |       | 28,893     |       |
| Lease financing  liability, net of current portion                                                                                                                    |       | 9,435      |       | 9,630      |       |
| Warrant  liability                                                                                                                                                    |       | —     |       | 4,038      |       |
| Other long term  liabilities                                                                                                                                          |       | 2,772      |       | 630        |       |
| **Total  liabilities**                                                                                                                                                |       | 45,388     |       | 43,191     |       |
|                                                                                                                                                                  |       |       |       |       |       |
| **Stockholders’ equity:**                                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred stock,  no par value Authorized—100,000 shares; Issued—none                                                                                       |       | —     |       | —     |       |
| Common stock,  $0.66 2/3 par value Authorized—20,000,000 shares Issued and Outstanding  9,141,850 shares at June 30, 2006 and 9,070,679 shares at March 31, 2006 |       | 6,094      |       | 6,047      |       |
| Capital in  excess of par value                                                                                                                                       |       | 96,636     |       | 94,061     |       |
| Accumulated  other comprehensive income                                                                                                                               |       | 21         |       | (16        | )          |
| Unearned  compensation                                                                                                                                                |       | —     |       | (1,773     | )          |
| Retained  earnings                                                                                                                                                    |       | 37,874     |       | 31,879     |       |
|                                                                                                                                                                  |       |       |       |       |       |
| **Total  stockholders’ equity**                                                                                                                                  |       | 140,625    |       | 130,198    |       |
|                                                                                                                                                                  |       |       |       |       |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                  |       | $          | 186,013    |       | $          | 173,389 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

3

----

 

**AmericanScience and Engineering, Inc. and SubsidiaryCondensed Consolidated Statements of Operations (Unaudited)**

**Dollars and shares in thousands,except per share amounts**
| ** **                                | ** **    | **For the Three Months Ended** | ** ** |
|-------------------------------------------|---------------|----------------------------------------------------|------------|
| ** **                                | ** **    | **June 30, 2006**                        | ** ** | **June 30, 2005** | ** ** |
|                                      |          |                                               |       |   |   |
| **Net sales and contract  revenues:**     | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Net product  sales and contract revenues  |          | $                                                  | 19,113     |   | $ | 29,513 |   |
| Net service  revenues                     |          | 10,769                                             |       | 5,649 |   |
| Total net  revenues and contract revenues |          | 29,882                                             |       | 35,162 |   |
|                                      |          |                                               |       |   |   |
| **Cost of sales and contracts:**          | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Cost of product  sales and contracts      |          | 10,741                                             |       | 17,027 |   |
| Cost of service  revenues                 |          | 5,644                                              |       | 3,543 |   |
| Total cost of  sales and contracts        |          | 16,385                                             |       | 20,570 |   |
| **Gross  profit**                         |          | 13,497                                             |       | 14,592 |   |
|                                      |          |                                               |       |   |   |
| **Expenses:**                             | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Selling, general  and administrative      |          | 5,695                                              |       | 4,138 |   |
| Research and  development                 |          | 2,249                                              |       | 2,422 |   |
| Total expenses                            |          | 7,944                                              |       | 6,560 |   |
|                                      |          |                                               |       |   |   |
| Operating income                          |          | 5,553                                              |       | 8,032 |   |
|                                      |          |                                               |       |   |   |
| **Other income (expense):**               | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Interest and  investment income           |          | 1,116                                              |       | 361 |   |
| Interest expense                          |          | (99                                                | )          | — |   |
| Other, net                                |          | 13                                                 |       | 14 |   |
| Change in  warrant valuation              |          | 2,132                                              |       | 533 |   |
| Total other  income (expense)             |          | 3,162                                              |       | 908 |   |
|                                      |          |                                               |       |   |   |
| Income before  provision for income taxes |          | 8,715                                              |       | 8,940 |   |
| Provision for  income taxes               |          | 2,720                                              |       | 1,943 |   |
|                                      |          |                                               |       |   |   |
| Net income                                |          | $                                                  | 5,995      |   | $ | 6,997 |   |
|                                      |          |                                               |       |   |   |
| Income per share                          | —Basic   |                                               | $          | 0.66 |   | $ | 0.84 |   |
|                                      | —Diluted |                                               | $          | 0.41 |   | $ | 0.78 |   |
|                                      |          |                                               |       |   |   |   |
| Weighted average  shares                  | —Basic   |                                               | 9,073      |   | 8,376 |   |
|                                      | —Diluted |                                               | 9,372      |   | 8,984 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

4

----

 

**AmericanScience and Engineering, Inc. and SubsidiaryCondensed Consolidated Statements of Cash Flows (Unaudited)**

**Dollars in thousands**
| ** **                                                                                | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **June 30, 2006**                        | ** ** | **June 30, 2005** | ** ** |
| **Cash flows from operating  activities:**                                                | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                                                  | 5,995      |   | $ | 6,997 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:        |       |                                               |       |   |   |
| Depreciation and  amortization                                                            |       | 524                                                |       | 201 |   |
| Provisions for  contracts, inventory and accounts receivable reserves                     |       | 36                                                 |       | 1,126 |   |
| Amortization of  bond discount                                                            |       | (246                                               | )          | (109 | ) |
| Deferred income  taxes                                                                    |       | (1,332                                             | )          | (1,167 | ) |
| Reversal of  deferred tax asset valuation allowance                                       |       | —                                             |       | 2,588 |   |
| Change in value  of warrants                                                              |       | (2,132                                             | )          | (534 | ) |
| Stock-based  compensation expense                                                         |       | 2,200                                              |       | 52 |   |
| Changes in assets and  liabilities:                                                       |       |                                               |       |   |   |
| Accounts receivable                                                                       |       | (4,963                                             | )          | 5,216 |   |
| Unbilled costs and fees                                                                   |       | 778                                                |       | (457 | ) |
| Inventories                                                                               |       | (602                                               | )          | 1,805 |   |
| Prepaid expenses and other assets                                                         |       | 3,974                                              |       | (306 | ) |
| Accounts payable                                                                          |       | (2,942                                             | )          | (3,912 | ) |
| Accrued income taxes                                                                      |       | 1,375                                              |       | 270 |   |
| Customer deposits                                                                         |       | 8,260                                              |       | (3,185 | ) |
| Deferred revenue                                                                          |       | 3,262                                              |       | (691 | ) |
| Accrued expenses and other current liabilities                                            |       | (4,165                                             | )          | (348 | ) |
| Non-current liabilities                                                                   |       | (4                                                 | )          | 80 |   |
| Net cash  provided by operating activities                                                |       | 10,018                                             |       | 7,626 |   |
|                                                                                      |       |                                               |       |   |   |
| **Cash flows from investing  activities:**                                                | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchases of  short-term investments                                                      |       | (17,186                                            | )          | (13,020 | ) |
| Maturities of  short-term investments                                                     |       | 19,650                                             |       | 11,330 |   |
| Purchases of  property and equipment                                                      |       | (1,642                                             | )          | (981 | ) |
| Net cash  provided by (used in) investing activities                                      |       | 822                                                |       | (2,671 | ) |
|                                                                                      |       |                                               |       |   |   |
| **Cash flows from financing  activities:**                                                | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Increase in  restricted cash                                                              |       | (12,833                                            | )          | (627 | ) |
| Proceeds from  exercise of warrants                                                       |       | 834                                                |       | 838 |   |
| Proceeds from  exercise of stock options                                                  |       | 77                                                 |       | 636 |   |
| Proceeds from  short term financing of leasehold improvement                              |       | 2,095                                              |       | 1,500 |   |
| Repayment of  lease financing                                                             |       | (187                                               | )          | — |   |
| Reduction of  income taxes paid due to the tax benefit from employee stock option expense |       | 15                                                 |       | 251 |   |
| Net cash  provided by (used in) financing activities                                      |       | (9,999                                             | )          | 2,598 |   |
|                                                                                      |       |                                               |       |   |   |
| Foreign currency  translation effect on cash                                              |       | 20                                                 |       | (11 | ) |
|                                                                                      |       |                                               |       |   |   |
| Net increase in  cash and cash equivalents                                                |       | 861                                                |       | 7,542 |   |
| Cash and cash  equivalents at beginning of period                                         |       | 50,655                                             |       | 15,418 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                                  | 51,516     |   | $ | 22,960 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

5

----

** **

**American Science andEngineering, Inc. and SubsidiaryNotes to Unaudited Condensed Consolidated Financial Statements**

**1.   General**

The condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary. All significant intercompany transactions and balanceshave been eliminated.

The unaudited condensedconsolidated financial statements have been prepared in accordance with therequirements of Form 10-Q and consequently do not include all disclosuresrequired by Form 10-K. These condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andthe notes included in the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2006.

The unaudited condensedconsolidated financial statements, in the opinion of management, include alladjustments necessary, consisting solely of normal recurring adjustments, topresent fairly the Company’s financial position, results of operations and cashflows.  These quarterly results are not necessarily indicative of theresults to be expected for the entire year.

Nature of Operations

The Company is engaged inthe development and manufacture of sophisticated X-ray inspection systems forcritical detection and security screening solutions for sale primarily to U.S.and foreign government agencies.  The Company has only one reportingsegment, X-ray screening products.

Significant AccountingPolicies

Revenues on costreimbursable and long-term fixed price contracts are generally recorded ascosts are incurred using the percentage of completion method.  For systemsthat are produced in a standard manufacturing operation and have shorter orderto delivery cycles, the Company recognizes sales at the time of shipment of thesystem to the customer and when other revenue recognition criteria (such astransfer of risk) are met.

The Company’s Export andSecurity Agreement with Silicon Valley Bank East requires certain cash balancesto be restricted as collateral against outstanding standby letters of credit;these are separately presented as restricted cash. (See Note 5)

The other significantaccounting policies followed by the Company and its subsidiary in preparing itsconsolidated financial statements are set forth in Note 1 to the consolidatedfinancial statements included in its Form 10-K for the year endedMarch 31, 2006.  The Company has made no changes to these policiesduring the current year.

Certain amounts in theprior period financial statements have been reclassified to conform to thecurrent period presentation.

Comprehensive Income

Comprehensive income iscomprised of the following:
| ** **                                              | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                 | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005** | ** ** |
| Net income                                              |       | $                                | 5,995      |   | $ | 6,997 |   |
| Foreign currency  translation adjustments               |       | 20                               |       | (11 | ) |
| Unrealized gains  and losses from marketable securities |       | 17                               |       | 4 |   |
| Comprehensive income                                    |       | $                                | 6,032      |   | $ | 6,990 |   |

 

**2.   Accounting forStock-Based Compensation**

On April 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(R) (SFAS123(R)) “Accounting for Stock-Based Compensation”, which requires themeasurement and recognition of all compensation costs for all stock basedawards made to employees and the Board of Directors based upon fair value overthe requisite service period for awards expected to vest. Prior to adoption,the Company accounted for stock options under the intrinsic value method set inaccordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations, and provided therequired pro forma disclosures prescribed by SFAS No. 123, “Accounting forShare-based Compensation”, as amended.

SFAS 123(R) requires theCompany to estimate the fair value of share-based awards on the date of grantusing an option pricing model. The Company adopted SFAS 123(R) using themodified prospective transition method which requires the application of theaccounting standard starting April 1, 2006, the first day of Company’s fiscalyear 2007. Prior period information will not be restated to reflect the fairvalue method of expensing share-based awards.

6

----

 

Stock- based compensationcosts recognized for the three month period ended June 30, 2006, includedcompensation costs for awards granted prior to, but not yet vested as of April1, 2006 (adoption date), as well as any new grants issued after April 1, 2006. Totalcosts recognized during the three month period ended June 30, 2006 amounted to$2,014,000. The Company recognized $1,624,000 of the share-based compensationcosts in the consolidated statements of income for the three months endedJune 30, 2006 and capitalized $390,000 of compensation costs on thebalance sheet, as such costs qualified for capitalization. The income taxbenefit related to such compensation for the three months ended June 30, 2006was approximately $306,000. Total amount of options granted during the threemonths ended June 30, 2006 were 8,670.

The following tablesummarizes share-based compensation costs included in the Company’sconsolidated statement of income:
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2006**      | ** ** |
| Cost of revenues                                   |       | $                                | 665        |   |
| Selling, general  and administrative               |       | 959                              |       |
| Total  share-based compensation expense before tax |       | $                                | 1,624      |   |
|                                               |       |                             |       |

 

As of June 30, 2006,there was approximately $6,537,000 of unrecognized compensation costs relatedto options granted. The unrecognized compensation will be primarily recognizedover a period of approximately 3 years.

The Company hadpreviously adopted the provisions of SFAS No. 123, “Accounting forShare-based Compensation,” as amended by SFAS No. 148, “Accounting forShare-based Compensation—Transition and Disclosure,” through disclosure only.The following table illustrates the effect on net income and earnings per sharefor the three months ended June 30, 2005 as if the Company had applied thefair value recognition provisions of SFAS No. 123 to share-based employeeawards.
| ** **                                                                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                | ** ** | **June 30, 2005**      | ** ** |
| Net income as  reported                                                                                                   |       | $                                | 6,997      |   |
| Add: Employee  compensation expense for share options included in reported net income, net  of income taxes               |       | —                           |       |
| Less: Total  employee compensation expense for share options determined under the fair  value method, net of income taxes |       | (3,976                           | )          |
| Pro forma net  income                                                                                                     |       | $                                | 3,021      |   |
| Earnings per share:                                                                                                       |       |                             |       |
| Basic—as reported                                                                                                    |       | $                                | 0.84       |   |
| Basic—pro forma                                                                                                      |       | $                                | 0.36       |   |
| Diluted—as reported                                                                                                  |       | $                                | 0.78       |   |
| Diluted—pro  forma                                                                                                   |       | $                                | 0.34       |   |

 

Upon adoption of SFAS123(R), in accordance with Staff Accounting Bulletin No. 107, the Companyselected the Black-Scholes option pricing model as the most appropriate methodfor determining the estimated fair value for the stock awards. TheBlack-Scholes method of valuation requires several assumptions: (1) theexpected term of the stock award, (2) the expected future stock volatility overthe expected term and (3) risk-free interest rate. The expected term representsthe expected period of time the Company believes the options will beoutstanding based on historical information. Estimates of expected future stockprice volatility are based on the historic volatility of the Company’s commonstock and the risk free interest rate is based on the U.S. Zero-Bond rate. Thefair value of options at date of grant was estimated with the followingassumptions:
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005** | ** ** |
| Assumptions:             |       |                             |       |   |   |
| Option life              |       | 3  years                         |       | 3  years |   |
| Risk-free  interest rate |       | 5.16%                            |       | 3.70% |   |
| Stock volatility         |       | 52.98%                           |       | 72.00% |   |
| Dividend yield           |       | -0-                              |       | -0- |   |

 

7

----

** **

**Stock Option and OtherCompensation Plans:**

Effective April 1, 2006,the Company adopted SFAS 123(R) using the modified prospective method toaccount for share-based payments to employees and the Company’s Board ofDirectors. The primary types of share-based payments currently utilized by theCompany are stock options and restricted stock.

The Company has variousstock option and other compensation plans for directors, officers, andemployees. The Company has the following stock option plans outstanding as ofJune 30, 2006: the 1995 Combination Plan, the 1996 Plan for Non-EmployeeDirectors, the 1997 Non-Qualified Option Plan, the 1998 Non-Qualified OptionPlan, the 1999 Combination Plan, the 2000 Combination Plan, the 2002Combination Plan, the 2003 Stock Plan for Non-Employee Directors and the 2005Equity and Incentive Plan. There are 3,780,000 shares authorized under theseplans. Vesting periods are at the discretion of the Board of Directors andtypically range between one and three years. Options under these plans aregranted at fair market value and have a term of five or ten years from the dateof grant.

During fiscal 2006, theCompany instituted a long term incentive plan for certain key employees. Theplan calls for the issuance of restricted stock and options which vest upon theachievement of certain performance based goals as well as service time incurred.During the three months ended June 30, 2006, a total of 34,692 shares ofrestricted stock and options to purchase an additional 8,670 shares weregranted. The fair values of these restricted awards are determined using theBlack Scholes valuation model. Compensation cost recognized for restrictedstock and options issued to certain key employees for the three months endedJune 30, 2006 amounted to $125,000. There was no compensation cost recognizedfor key employee restricted stock and options during the three months endedJune 30, 2005.

Nonvested restrictedstock awards are subject to the risk of forfeiture until the fulfillment ofspecified conditions. As of June 30, 2006, there was $2,747,000 of totalunrecognized compensation cost related to nonvested restricted stock awardsgranted under the Company’s stock plans. That is cost is expected to berecognized over a 3 year period.

Annually on January 10th the Board of Directors is granted restrictedstock. The stock vests pro-rata based on service time incurred in the upcomingcalendar year. On January 10, 2006, the Board of Directors was granted 3,413shares of restricted stock. The fair value of these restricted awards wasdetermined using the Black Scholes valuation model. Compensation cost recognizedfor restricted stock issued to the Board of Directors for the three monthsended June 30, 2006 and June 30, 2005 amounted to $62,000 and $37,500,respectively.

Thefollowing tables summarize stock option activity during the first three monthsof fiscal year 2007: 
| ** **                         | ** ** | **Options Outstanding** | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Number of  Shares**   | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Contractual Life** | ** ** |
| ** **                         | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Outstanding  at March 31, 2006** |       | 878,470                      | ** ** | $ | 36.79 |   |   |   |
| Grants                             |       | 8,670                        |       |   |   |   |   |
| Exercises                          |       | (2,600                       | )          |   |   |   |   |
| Cancellations                      |       | (9,000                       | )          |   |   |   |   |
| **Outstanding  at June 30, 2006**  |       | 875,540                      |       | $ | 36.83 |   | $ | 8.14 |   |
|                                    |            |                              |            |  |  |  |  |  |  |

 

Informationrelated to the stock options outstanding as of June 30, 2006 is as follows:
| **Range of Exercise Prices** | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Remaining  Contractual  Life (years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Exercisable  Number of  Shares** | ** ** | **Exercisable  Weighted-Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------|------------|
| $6.50 - $20.00                              |       | 259,270                    |       | 6.54                                                            |       | $                                         | 11.76      |                                    | 178,470    |                                                   | $          | 11.60 |   |
| $20.01 - $30.00                             |       | 114,150                    |       | 8.18                                                            |       | 27.21                                     |       | 92,100                                  |       | 27.74                                                  |       |
| $30.01 - $40.00                             |       | 73,041                     |       | 8.44                                                            |       | 38.95                                     |       | 7,375                                   |       | 37.96                                                  |       |
| $40.01 - $50.00                             |       | 88,199                     |       | 8.71                                                            |       | 44.88                                     |       | 16,467                                  |       | 44.74                                                  |       |
| $50.01 - $60.00                             |       | 244,480                    |       | 9.05                                                            |       | 53.63                                     |       | —                                  |       | —                                                 |       |
| $60.01 - $90.00                             |       | 96,400                     |       | 9.36                                                            |       | 64.04                                     |       | 5,000                                   |       | 66.45                                                  |       |
| $6.50 - $83.02                              |       | 875,540                    |       | 8.14                                                            |       | $                                         | 36.83      |                                    | 299,412    |                                                   | $          | 19.95 |   |

 

Options for the purchase of299,412 shares were exercisable at June 30, 2006, with a weighted-averageexercise price of $19.95.

8

----

 

The aggregate intrinsicvalue of the Company’s “in-the-money” outstanding and exercisable options as ofJune 30, 2006 was $10,242,000. The intrinsic value of the options exercisedduring the three months ended June 30, 2006 was $66,109. Nonvested common stockoptions are subject to the risk of forfeiture until the fulfillment ofspecified conditions.

The followingtable summarizes the status of the Company’s nonvested restricted stock awardssince March 31, 2006:
| ** **                         | ** ** | **Nonvested Restricted Stock Awards** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Number of  Shares**                           | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
| **Outstanding  at March 31, 2006** |       | 23,125                                               | ** ** | $ | 55.31 | ** ** |
| Granted                            |       | 34,692                                               |       |   |   |
| Vested                             |       | (853                                                 | )          |   |   |
| Forfeited                          |       | —                                               |       |   |   |
| **Outstanding at June 30, 2006**   |       | 56,964                                               | ** ** | $ | 54.01 | ** ** |

 

**3.   Inventories**
| **(Dollars in thousands)**                      | ** ** | **June 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Inventories consisted  of:                                |       |                        |       |                         |       |
| Raw materials,  completed sub-assemblies, and spare parts |       | $                           | 8,384      |                         | $          | 6,856 |   |
| Work-in-process                                           |       | 5,763                       |       | 6,325                        |       |
| Finished goods                                            |       | 3,329                       |       | 3,705                        |       |
| Total                                                     |       | $                           | 17,476     |                         | $          | 16,886 |   |

 

**4.   Income per Common andCommon Equivalent Share**

Basic earnings percommon share is computed by dividing net income available to commonstockholders by the weighted average number of shares of common stockoutstanding during the period.  Diluted earnings per share include thedilutive impact of options and warrants using the average share price of theCompany’s common stock for the period. For the quarter ended June 30, 2006 andJune 30, 2005, common stock equivalents of 600 and 96,626, respectively, areexcluded from diluted earnings per share, as their effect is anti-dilutive.
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands except per share amounts)**                      | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005** | ** ** |
|                                                                                      |       |                             |       |   |   |
| **Earnings Per Share Basic:**                                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                                | 5,995      |   | $ | 6,997 |   |
| Weighted average  number of common shares outstanding — basic                        |       | 9,073                            |       | 8,376 |   |
| Net income per  share — basic                                                        |       | $                                | 0.66       |   | $ | 0.84 |   |
| **Diluted:**                                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                                | 5,995      |   | $ | 6,997 |   |
| Adjustment to  net income for change in warrant valuation                                 |       | (2,132                           | )          | — |   |
| Adjusted net  income                                                                      |       | 3,863                            |       | 6,997 |   |
| Weighted average  number of common shares outstanding                                     |       | 9,073                            |       | 8,376 |   |
| Assumed exercise  of stock options and warrants, using the treasury stock method          |       | 299                              |       | 608 |   |
| Weighted average  number of common and potential common shares outstanding — diluted |       | 9,372                            |       | 8,984 |   |
| Net income per share —  diluted                                                      |       | $                                | 0.41       |   | $ | 0.78 |   |

 

**5.   Borrowings**

On November 30,2004, the Company modified its two credit agreements with Silicon Valley BankEast.  The modifications extended the credit facilities which expired onNovember 30, 2004 through November 29, 2006 and reduced the exportloan and security facility, guaranteed by the Export-Import Bank of the UnitedStates, from $20.0 million to $10.0 million.  The domestic facility is a$5.0 million domestic loan and security agreement to support the Company’sroutine working capital needs. Maximum borrowings for this facility are set atthe lower of (a) the sum of 80% of eligible domestic accounts receivableplus 10% of finished goods inventory up to $750,000, or(b) $5.0 million.

9

----

 

The credit facilitiesbear an interest rate of the greater of 4.0% or the Silicon Valley Bank primerate (8.25% at June 30, 2006). The credit agreements are collateralized bycertain assets of the Company and contain certain restrictions, includinglimitations on the amount of distributions that can be made to stockholders,and the disposition or encumbrances of assets, and require the maintenance ofcertain financial covenants.

At June 30, 2006, therewere no borrowings outstanding against these credit facilities. The Company hadoutstanding $2,160,000 in stand-by letters of credit against the domesticfacility and no stand-by letters of credit against the export facility. Of the outstanding letters of credit, $1,250,000 relates to a performance bondon an ongoing international project, $300,000 relates to the Company’s buildinglease and the remainder is guaranteeing performance on certain internationalprojects.  No amounts have been drawn against these letters of credit. Inaddition, at June 30, 2006, the Company had a restricted cash balance of$12,931,000. Of the restricted cash, $12,500,000 relates to an advance paymentguarantee associated with an ongoing international project and the remainderrelated to certain bank required deposits related to outstanding letters ofcredits, bid bonds, and other bank-related fees.

**6.   WarrantLiability**

On May 28, 2002, theCompany closed on a private placement offering of common stock and warrants. Atotal of 1,115,000 shares were sold to accredited investors at a price of$17.64 per share. In addition, warrants to purchase an additional 295,475shares of common stock at an exercise price of $23.52 per share wereissued.  The warrants were immediately vested and have a five-year lifeexpiring in May of 2007.

At June 30, 2006, 21,625warrants remain outstanding.   Due to certain conversion features ofthese warrants that provide that the holder may opt for a cash settlement incertain instances, including a merger, a sale of all or substantially all ofthe Company’s assets, or a tender offer or exchange offer of shares of theCompany’s stock, a liability equal to the fair value of the warrants at thedeal closing date was recorded on the Company’s balance sheet. This liabilityis remeasured each quarter and marked to market.  The “mark to market”change in the warrants valuation of $2,132,000 and $533,000 was recorded asother income for the three months ended June 30, 2006 and June 30, 2005,respectively.  The liability of $772,000 and $4,038,000 representing thefair market value of outstanding warrants at period end is recorded as a currentliability at June 30, 2006 and as a non-current liability as of March 31,2006, respectively. The fair market value of the warrants was determined usingthe Black-Scholes pricing model with an assumed volatility of 53% and 49% atJune 30, 2006 and March 31, 2006, respectively, an interest rate of 5.24% and4.60% at June 30, 2006 and March 31, 2006, respectively and a life equal to theremaining term of the warrants at each period end.

**7.   IncomeTaxes**

The Company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” Accordingly, the Company recognizes deferred income taxes based on theexpected future tax consequences of differences between the financial statementbasis and the tax basis of assets and liabilities, calculated using enacted taxrates in effect for the year in which the differences are expected to bereflected in the tax return. The Company evaluates the need for a valuationallowance against its net deferred tax assets at year end based upon its threeyear cumulative income and its projections of future income, and records avaluation allowance against any net deferred tax assets if it is more likelythan not that they will not be realized.

On November 10, 2005, theFinancial Accounting Standards board (“FASB”) issued FASB Staff Position No.FAS 123(R) “Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards” that allows for a simplified or Long-Haul Method toestablish the beginning balance of the additional paid-in-capital pool (“APICpool”) related to the tax effects of employee stock-based compensation, and todetermine the subsequent impact on the APIC pool and Consolidated Statements ofCash Flows of the tax effects of employee stock-based compensation awards thatare outstanding upon adoptions of SFAS 123(R). The Company has elected to usethe Long-Haul Method of calculating the APIC pool.

10

----

**8.   Guarantees**

Certain of the Company’sparcel and cargo products carry a one-year warranty, the costs of which areaccrued for at time of shipment or delivery.  Accrual rates are based uponhistorical experience over the preceding twelve months and management’sjudgment of future exposure.  Warranty experience for the three monthsended June 30, 2006 and June 30, 2005 is as follows:
| **(in thousands)**                           | ** ** | **Three months   ended June 30,  2006** | ** ** | **Three months   ended June 30,   2005** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Warranty accrual at  beginning of period          |       | $                                                           | 3,606      |                                                              | $          | 2,322 |   |
| Accruals for warranties  issued during the period |       | 59                                                          |       | 814                                                               |       |
| Warranty costs incurred  during period            |       | (455                                                        | )          | (368                                                              | )          |
| Warranty accrual at end of period                 |       | $                                                           | 3,210      |                                                              | $          | 2,768 |   |

 

In conjunction with thesale of certain assets and contracts of the Company’s High Energy SystemsDivision in January of 2005, the lease for the California operations ofthe High Energy Systems Division was assigned to Accuray, Inc.  TheCompany remains secondarily liable for the remaining lease payments in the eventof default by Accuray, Inc. during the lease term which expires inFebruary 2011. Total remaining lease payments at June 30, 2006 totaled$1,725,000.  No accrual for this contingent liability has been recorded atJune 30, 2006 as payment of this liability is considered remote.

**9.   LeaseCommitments**

In March 2005, theCompany renewed its lease agreement for its corporate headquarters andmanufacturing facilities in Billerica, Massachusetts. As part of the leaseagreement, the Company’s landlord agreed to certain renovations to theBillerica facility including the construction of additional high baymanufacturing space. The Company was responsible for a portion of theconstruction costs and was deemed to be the owner of the building during theconstruction period under EITF 97-10, “The Effect of Lessee Involvement inAsset Construction”. During the year ended March 31, 2006, the Companycapitalized $5,153,000 to record the facility on its books with an offsettingcredit to the lease financing liability. In addition, amounts paid forconstruction were recorded as construction in progress and the landlordconstruction allowances of $5,642,000 (of which $208,000 was a receivable atJune 30, 2006) were recorded as additional lease financing liability.

At the completion of theconstruction in February 2006, the lease was reviewed for potentialsale-leaseback treatment in accordance with SFAS No. 98. Based on thisreview, it was determined that the lease did not qualify for sale-leasebacktreatment. As a result, building and tenant improvements and associated leasefinancing liabilities remain on the Company’s books. The lease financingliability is being amortized over the lease term based on the paymentsdesignated in the agreement and the building and tenant improvement assets arebeing depreciated on a straight line basis over their useful lives.

**Item2 — Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

Results of Operations

Net revenues for thefirst quarter of fiscal 2007 decreased by $5,280,000 to $29,882,000 compared tothe corresponding period a year ago.  This decrease is attributableprimarily to a decrease of $10,400,000 in product sales, $4,981,000 whichrelates to decreased shipments of Z Backscatter systems.   Inaddition, there was a decrease of $2,614,000 in CargoSearch system revenues dueprimarily to the completion of two large CargoSearch projects which wereongoing last fiscal year and a decrease of $1,918,000 in ParcelSearch systemrevenues attributable to lower unit sales from the prior year.  Service revenues increased by $5,120,000 to$10,769,000 compared to the first quarter of fiscal 2006 due primarily to theincreased volume of service contracts related to increased system deliveriesover the past 12-18 months.

Total cost of sales andcontracts for the first quarter of fiscal 2007 decreased by $4,185,000 to$16,385,000 as compared to the corresponding period a year ago. Cost of salesand contracts related to product revenues decreased by $6,286,000 to $10,741,000as compared to the corresponding period a year ago.  Cost of product salesand contract revenues represented 56% of revenues versus 58% of revenue, forthe corresponding period last year.  This improvement in gross margin isdue primarily to the mix of products sold in the period, improved absorption offixed overhead costs due to the reduction of direct costs of certain productsthrough improved supplier agreements and a reduction of internal labor costsper system due to operating efficiencies.  In addition, included in fiscal2007 cost of revenues is $665,000 of stock-based compensation recorded as aresult of adopting SFAS 123(R).  Included in fiscal year 2006 is an increase in reserves for excess andobsolete inventory of $1,100,000.  TheCost of service revenues for the first quarter ended June 30, 2006 increased by$2,101,000 to $5,644,000 as compared to the corresponding period a yearago.  Cost of service revenues represented 52% of revenues versus 63% forthe corresponding period last year.  This margin improvement is dueprimarily to comparatively lower costs incurred on certain service contractsduring the period.

11

----

 

Selling, general andadministrative expenses for the first quarter of fiscal 2007 of $5,695,000 were$1,557,000 higher than the corresponding period a year ago.  Selling,general and administrative expenses represented 19% of revenues in the currentperiod as compared to 12% for the corresponding period last year.  Theincrease in costs was primarily the result of $959,000 of stock-basedcompensation expense recorded in accordance with SFAS 123(R) and a $520,000increase in marketing and travel related costs due to increased sales activity.

Company funded researchand development expenses of $2,249,000 for the first quarter of fiscal 2007decreased by $173,000 compared to the corresponding period last year.  Research and development expenses represented8% of revenues in the current quarter compared to 7% for the correspondingperiod last year.  These expendituresdecreased as the Company limited research and development initiatives in orderto focus engineering efforts on revenue producing programs during the quarter.

Other income was$3,162,000 in income for the first quarter of fiscal 2007 as compared to$908,000 in income for the corresponding period a year ago.  Otherincome for the quarter ended June 30, 2006 and June 30, 2005 include $2,132,000and $533,000, respectively of warrant income due to the reductions of thewarrant liability as a result of changes to the fair value.  In addition,in the quarter ended June 30, 2006, the Company earned $1,116,000 in income oninvestments held as compared to $361,000 in the quarter ended June 30, 2005 dueto increases in the Company’s cash and investments balances, and a 1.49%increase in the average interest rate when compared to the prior year.

The Company reportedpre-tax income of $8,715,000 in the quarter ended June 30, 2006 as compared topre-tax income of $8,940,000 in the corresponding period a year ago due to thefactors described above.

The Company’s projectedeffective tax rate, excluding the income effect of the warrants which is apermanent item, for fiscal year 2007 increased to 41.3% from 30.8% as of March31, 2006.  This increase is due to theCompany’s recognition of tax carryforward benefits during fiscal 2006 whichreduced taxable income as well as changes in other permanent tax items.

The Company had netincome of $5,995,000 during the first quarter of fiscal 2007 as compared to netincome of $6,997,000 in the first quarter of fiscal 2006.  The significantfactors contributing to these results are noted in the above sections.

Liquidity and CapitalResources

Cash and cash equivalentsincreased by $861,000 to $51,516,000 at June 30, 2006 compared to $50,655,000at March 31, 2006. This increase in cash and cash equivalents is due tocash provided by operations generated primarily from profits earned during theperiod, a $2,200,000 increase in non-cash stock compensation expense dueprimarily to the adoption of SFAS 123(R), and a $2,095,000 payment receivedfrom the landlord for leasehold improvements.   These increases wereoffset by capital expenditures of $1,642,000 related primarily to the Company’songoing ERP system implementation and construction related costs on a buildingexpansion project, a $4,165,000 reduction in accrued liabilities primarilyassociated with the payment of incentive compensation, and a $2,942,000decrease in outstanding accounts payable.

On November 30, 2004,the Company modified its two credit agreements with Silicon Valley BankEast.  The modifications extended the credit facilities which expired onNovember 30, 2004 through November 29, 2006 and reduced the exportloan and security facility, guaranteed by the Export-Import Bank of the UnitedStates, from $20.0 million to $10.0 million.  The domestic facility is a$5.0 million domestic loan and security agreement to support the Company’sroutine working capital needs. Maximum borrowings for this facility are set atthe lower of (a) the sum of 80% of eligible domestic accounts receivableplus 10% of finished goods inventory up to $750,000, or(b) $5 million.

The credit facilitiesbear an interest rate of the greater of 4.0% or the Silicon Valley Bank primerate (8.25% at June 30, 2006). The credit agreements are collateralized bycertain assets of the Company and contain certain restrictions, includinglimitations on the amount of distributions that can be made to stockholders,and the disposition or encumbrances of assets, and require the maintenance ofcertain financial covenants.

At June 30, 2006, therewere no borrowings outstanding against these credit facilities. The Company hadoutstanding $2,160,000 in stand-by letters of credit against the domestic facilityand no stand-by letters of credit against the export facility.  Of theoutstanding letters of credit, $1,250,000 relates to a performance bond on anongoing international project, $300,000 relates to the Company’s building leaseand the remainder is guaranteeing performance on certain internationalprojects.  No amounts have been drawn against these letters of credit. Inaddition, at June 30, 2006, the Company had a restricted cash balance of$12,931,000.  Of the restricted cash,$12,500,000 related to an advance payment guarantee associated with an ongoinginternational project and the remainder related to certain bank requireddeposits related to outstanding letters of credits, bid bonds, and otherbank-related fees.

12

----

**NewAccounting Pronouncements:**

In December 2004,the FASB issued SFAS No. 123(R), which establishes accounting standardsfor all transactions in which an entity exchanges its equity instruments forgoods and services. SFAS 123(R) revises SFAS No. 123, “Accounting forStock-Based Compensation”, supersedes Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” and amends FinancialAccounting Standard No. 95, “Statement of Cash Flows”. SFASNo. 123(R) generally requires the Company to measure the cost of employeeservices received in exchange for an award of equity instruments based on thefair value of the award on the date of the grant. The standard requires thefair value on the grant date to be estimated using either an option-pricingmodel which is consistent with the terms of the award or a market observedprice, if such a price exists. The resulting cost must be recognized over theperiod during which an employee is required to provide service in exchange forthe award, which is usually the vesting period. The adoption of FAS 123(R)required the Company to record compensation expense for the value of its equityinstruments given to employees.  As aresult of implementation of this accounting pronouncement, the Company recorded$1,624,000 of compensation expense before tax in the consolidated statement ofincome for the three months ended June 30, 2006.  See Note 2 for further discussion.

In December 2004,the FASB issued SFAS No.151, “Inventory Costs*,*”which amends part of ARB 43, “Inventory Pricing,” concerning the treatment ofcertain types of inventory costs. The provisions of ARB No. 43 providedthat certain inventory-related costs, such as double freight and re-handling,might be “so abnormal” that they should be charged against current earningsrather than be included in the cost of inventory. As amended by SFASNo. 151, the “so-abnormal” criterion has been eliminated. Thus, all suchabnormal costs are required to be treated as current-period charges under allcircumstances. In addition, fixed production overhead should be allocated basedon the normal capacity of the production facilities, with unallocated overheadcharged to expense when incurred. SFAS 151 is required to be adopted for fiscalyears beginning after June 15, 2005. The Company adopted SFAS 151 duringthe quarter and the adoption did not have a material impact on its results ofoperations, financial position or cash flows.

In December 2004,the FASB issued a FASB Staff Position (FSP) 109-1 Application of FASB 109 tothe Tax Deduction on Qualified Production Activities provided by the AmericanJobs Creation Act of 2004. The new act provides for a special tax deduction onqualified production activities income that effectively reduces the Company’stax rate. The FASB has decided that these amounts should be recorded as aspecial deduction, and recorded in the year earned. The Company does notbelieve that the adoption of this FSP statement will have a material impact onthe Company’s consolidated financial statements.

In July 2006, the FASB issuedFASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN48”).  FIN 48 is an interpretation of FASB StatementNo. 109.  “Accounting for Income Taxes,”and it seeks to reduce the diversity in practice associated with certain aspectsof measurement and recognition in accounting for income taxes.  In addition, FIN 48 requires expandeddisclosure with respect to the uncertainty in income taxes and is required tobe adopted for fiscal years beginning after December 15, 2006.  The Company is currently evaluating theimpact, if any, that FIN 48 will have on its financial statements.

**Item3 - Quantitative and Qualitative Disclosures about Market Risk**

The cash accounts for theCompany’s operations in Singapore, Hong Kong, England, and Abu Dhabi aremaintained in Singapore dollars, Hong Kong dollars, pounds sterling and dirham,respectively. Foreign currency accounts are marked to market at current ratesthat resulted in immaterial translation adjustments to stockholders’ equity.The gains and losses from foreign currency transactions are included in thestatements of operations for the period and were also immaterial. Ahypothetical 10% change in foreign currency rates would not have a materialimpact on the Company’s results of operations or financial position.

As of June 30, 2006, theCompany held short-term investments consisting of money market funds and U.S.government and government agency bonds. The Company’s primary objective withits investment portfolio is to invest available cash while preserving principaland meeting liquidity needs. These investments had an average interest rate ofapproximately 4.83% and are subject to interest rate risk. As a result of theaverage maturity and conservative nature of the investment portfolio, a suddenchange in interest rates would not have a material adverse effect on the valueof these investments.

In fiscal 2003, theCompany issued 295,475 warrants in connection with a private placement offeringof common stock.  As of June 30, 2006, 21,625 of these warrants remainoutstanding.  These warrants can be exchanged for cash under certaincircumstances including a merger, sale or tender offer of the Company, and assuch a liability equal to the fair value of the warrants is recorded on thebalance sheet. Changes in the fair value of the warrants are recorded as otherincome (expense). The Black-Scholes value of these warrants can fluctuatesignificantly based on the current fair market value of the Company’s commonstock. A 10% change in the fair market value of the Company’s common stock,holding other assumptions constant, would have approximately a$123,000 positive or negative impact on earnings.

13

----

 

**Item4 - Controls and Procedures**

a)   Evaluation ofdisclosure controls and procedures.

As of the end of theperiod covered by this report, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, the Company reviewed and evaluated the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiod specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

b)   Changes ininternal controls

There have been nochanges in our internal controls over financial reporting as such term is definedin Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Actof 1934 during the period covered by this report that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlsover financial reporting.

**PART II— OTHER INFORMATION**

**Item 1 - Exhibits**
| (a)    | ** ** | **Exhibits**                                                                                                                                                  | ** ** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|   |       |                                                                                                                                                          |       |
| 31.1   |       | Certification by Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                      |       |
|   |       |                                                                                                                                                          |       |
| 31.2   |       | Certification by Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                      |       |
|   |       |                                                                                                                                                          |       |
| 32.1   |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       |
|   |       |                                                                                                                                                          |       |
| 32.2   |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       |

 

The information requiredby Exhibit Item 11 (Statement re: Computation of Income per Common andCommon Equivalent Share) may be found in Footnote No. 3.

14

----

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned hereunto dulyauthorized.
|                           | AMERICAN SCIENCE AND ENGINEERING, INC. |
|---------------------------|----------------------------------------|
|                      |                                   |
| Date  August 9, 2006 | /s/ Kenneth J. Galaznik                |
|                      | Kenneth J. Galaznik                    |
|                      | Chief Financial Officer and Treasurer  |

 

*SafeHarbor Statement*

*Theforegoing 10-Q contains statements concerning the Company’s financialperformance and business operations, which may be considered “forward-looking”under applicable securities laws.*

*TheCompany wishes to caution readers of this Form 10-Q that actual resultsmight differ materially from those projected in any forward-looking statements.*

*Factorswhich might cause actual results to differ materially from those projected inthe forward-looking statements contained herein include the following:significant reductions or delays in procurements of the Company’s systems bythe United States and other governments; disruption in the supply of any sourcecomponent incorporated into AS&E’s products; litigation seeking to restrictthe use of intellectual property used by the Company; potential productliability claims against the Company; global political trends and events whichaffect public perception of the threat presented by drugs, explosives and othercontraband; global economic developments and the ability of governments andprivate organizations to fund purchases of the Company’s products to addresssuch threats; and the potential insufficiency of Company resources, includinghuman resources, capital, plant and equipment and management systems, toaccommodate any future growth and any future delays in federal funding. Theseand certain other factors which might cause actual results to differ materiallyfrom those projected are more fully set forth in the Company’s Annual Report onForm 10-K for the fiscal year ended March 31, 2006 under Item 1A “Risk Factors.”  Please also refer to our other filings withthe Securities and Exchange Commission.*

15

----