Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                     |
| **For the quarterly period ended  June 30, 2008** |
|                                                   |                                                                                                     |
| **OR**                                                 |
|                                                   |                                                                                                     |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Forthe transition period from      to**

 

**Commission File 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 areacode)

 

 

(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 by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   Yes  x     No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o | Accelerated  filer x | Non-accelerated  filer o                        | Smaller  reporting company o |
|----------------------------|---------------------------|-------------------------------------------------|-----------------------------------|
|                       |                      | (Do not check if  a smaller  reporting company) |                              |

 

 Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Securities Exchange Act of 1934).   Yes  o      No  x

 

The number of shares ofthe registrant’s common stock, $0.66 2/3 par value, outstanding as of July 31,2008 was 8,779,202.

 

 

 

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**TABLEOF CONTENTS**

 
| **Part I — Financial Information**                                                                                          |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 — Financial Statements                                                                                                    | 3      |
| Unaudited Condensed Consolidated  Balance Sheets—June 30, 2008 and March 31, 2008                                      | 3      |
| Unaudited Condensed  Consolidated Statements of Operations—for the Three Months Ended  June 30, 2008 and June 30, 2007 | 4      |
|                                                                                                                                  |   |
| Unaudited Condensed Consolidated  Statements of Cash Flows—for the Three Months Ended June 30, 2008 and  June 30, 2007 | 5      |
|                                                                                                                                  |   |
| Notes to Unaudited Condensed  Consolidated Financial Statements                                                                       | 6      |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                            | 12     |
| Item 3 —  Quantitative and Qualitative Disclosure About Market Risk                                                              | 13     |
| Item 4 — Controls  and Procedures                                                                                                | 14     |
| **Part II — Other  Information**                                                                                            |   |
| Item 2 — Purchases of Equity Securities                                                                                          | 14     |
| Item 6 —  Exhibits                                                                                                               | 14     |
| **Signatures**                                                                                                                        | 15     |

 

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**PART I— FINANCIAL INFORMATION**

**ITEM1 — FINANCIAL STATEMENTS**

 

**AMERICANSCIENCE AND ENGINEERING, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| **Dollars in thousands**                                                                                                                                                    | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| **Assets**                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **               | ** ** |
| Current assets:                                                                                                                                                                       |       |                    |       |                     |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                       | 33,162     |                     | $          | 52,418 |   |
| Restricted cash  and investments                                                                                                                                                      |       | 285                     |       | 319                      |       |
| Short-term  investments, at fair value                                                                                                                                                |       | 55,778                  |       | 72,687                   |       |
| Accounts  receivable, net of allowances of $290 and $230 at June 30, 2008 and  March 31, 2008, respectively                                                                 |       | 27,276                  |       | 27,583                   |       |
| Unbilled costs  and fees                                                                                                                                                              |       | 9,843                   |       | 6,114                    |       |
| Inventories                                                                                                                                                                           |       | 44,281                  |       | 40,107                   |       |
| Prepaid expenses  and other current assets                                                                                                                                            |       | 6,643                   |       | 4,815                    |       |
| Deferred income  taxes                                                                                                                                                                |       | 1,773                   |       | 1,577                    |       |
| **Total  current assets**                                                                                                                                                             |       | 179,041                 |       | 205,620                  |       |
| Building,  equipment and leasehold improvements, net                                                                                                                                  |       | 21,516                  |       | 22,201                   |       |
| Restricted cash  and investments                                                                                                                                                      |       | 16,052                  |       | 2,204                    |       |
| Deferred income  taxes                                                                                                                                                                |       | 6,343                   |       | 5,231                    |       |
| Other assets,  net                                                                                                                                                                    |       | 242                     |       | 278                      |       |
| **Total  assets**                                                                                                                                                                     |       | $                       | 223,194    |                     | $          | 235,534 |   |
|                                                                                                                                                                                  |       |                    |       |                     |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                        | ** ** | ** **              | ** ** | ** **               | ** ** |
| Current  liabilities:                                                                                                                                                                 |       |                    |       |                     |       |
| Accounts payable                                                                                                                                                                      |       | $                       | 10,653     |                     | $          | 12,660 |   |
| Accrued salaries  and benefits                                                                                                                                                        |       | 3,371                   |       | 2,935                    |       |
| Accrued warranty  costs                                                                                                                                                               |       | 1,711                   |       | 1,671                    |       |
| Deferred revenue                                                                                                                                                                      |       | 18,807                  |       | 23,120                   |       |
| Customer  deposits                                                                                                                                                                    |       | 9,274                   |       | 6,547                    |       |
| Current portion  of lease financing liability                                                                                                                                         |       | 1,138                   |       | 1,134                    |       |
| Other current  liabilities                                                                                                                                                            |       | 7,276                   |       | 8,097                    |       |
| **Total  current liabilities**                                                                                                                                                        |       | 52,230                  |       | 56,164                   |       |
| Lease financing  liability, net of current portion                                                                                                                                    |       | 9,254                   |       | 9,540                    |       |
| Other long term  liabilities                                                                                                                                                          |       | 4,197                   |       | 3,758                    |       |
| **Total  liabilities**                                                                                                                                                                |       | 65,681                  |       | 69,462                   |       |
|                                                                                                                                                                                  |       |                    |       |                     |       |
| **Stockholders’  equity:**                                                                                                                                                       | ** ** | ** **              | ** ** | ** **               | ** ** |
| Preferred stock,  no par value, 100,000 shares authorized; no shares issued                                                                                                           |       | —                  |       | —                   |       |
| Common stock,  $0.66 2/3 par value, 20,000,000 shares authorized; 8,782,211 and 8,945,633  shares issued and outstanding at June 30, 2008 and March 31, 2008,  respectively |       | 5,854                   |       | 5,963                    |       |
| Capital in  excess of par value                                                                                                                                                       |       | 82,294                  |       | 91,544                   |       |
| Accumulated  other comprehensive income                                                                                                                                               |       | (23                     | )          | 114                      |       |
| Retained  earnings                                                                                                                                                                    |       | 69,388                  |       | 68,451                   |       |
| **Total  stockholders’ equity**                                                                                                                                                  |       | 157,513                 |       | 166,072                  |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                  |       | $                       | 223,194    |                     | $          | 235,534 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**AMERICANSCIENCE AND ENGINEERING, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                                                                            | ** **    | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------|---------------|----------------------------------------------------|------------|
| **Dollars and shares in thousands, except per share amounts** | ** **    | **June 30, 2008**                        | ** ** | **June 30, 2007** | ** ** |
| **Net  sales and contract revenues:**                                                                 | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Net product  sales and contract revenues                                                              |          | $                                                  | 22,942     |   | $ | 28,907 |   |
| Net service  revenues                                                                                 |          | 16,552                                             |       | 15,564 |   |
| Total net  revenues and contract revenues                                                             |          | 39,494                                             |       | 44,471 |   |
|                                                                                                  |          |                                               |       |   |   |
| **Cost of  sales and contracts:**                                                                     | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Cost of product  sales and contracts                                                                  |          | 15,786                                             |       | 18,765 |   |
| Cost of service  revenues                                                                             |          | 9,179                                              |       | 8,305 |   |
| Total cost of  sales and contracts                                                                    |          | 24,965                                             |       | 27,070 |   |
| **Gross  profit**                                                                                     |          | 14,529                                             |       | 17,401 |   |
|                                                                                                  |          |                                               |       |   |   |
| **Expenses:**                                                                                         | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Selling, general  and administrative expenses                                                         |          | 7,699                                              |       | 6,483 |   |
| Research and  development costs                                                                       |          | 3,563                                              |       | 2,757 |   |
| Total expenses                                                                                        |          | 11,262                                             |       | 9,240 |   |
|                                                                                                  |          |                                               |       |   |   |
| Operating income                                                                                      |          | 3,267                                              |       | 8,161 |   |
|                                                                                                  |          |                                               |       |   |   |
| **Other  income (expense):**                                                                          | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Interest and investment  income                                                                       |          | 951                                                |       | 2,016 |   |
| Interest expense                                                                                      |          | (37                                                | )          | (40 | ) |
| Other, net                                                                                            |          | 21                                                 |       | (113 | ) |
| Change in  warrant valuation                                                                          |          | —                                             |       | 11 |   |
| Total other  income                                                                                   |          | 935                                                |       | 1,874 |   |
|                                                                                                  |          |                                               |       |   |   |
| Income before  provision for income taxes                                                             |          | 4,202                                              |       | 10,035 |   |
| Provision for  income taxes                                                                           |          | 1,513                                              |       | 3,863 |   |
|                                                                                                  |          |                                               |       |   |   |
| Net income                                                                                            |          | $                                                  | 2,689      |   | $ | 6,172 |   |
|                                                                                                  |          |                                               |       |   |   |
| Income per share                                                                                      | —Basic   |                                               | $          | 0.31 |   | $ | 0.67 |   |
|                                                                                                  | —Diluted |                                               | $          | 0.30 |   | $ | 0.66 |   |
|                                                                                                  |          |                                               |       |   |   |   |
| Weighted average  shares                                                                              | —Basic   |                                               | 8,706      |   | 9,171 |   |
|                                                                                                  | —Diluted |                                               | 8,907      |   | 9,397 |   |
| Dividends  declared per share                                                                         |          | $                                                  | 0.20       |   | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**AMERICANSCIENCE AND ENGINEERING, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Dollars in thousands**                                                            | ** ** | **June 30, 2008**                        | ** ** | **June 30, 2007** | ** ** |
| **Cash  flows from operating activities:**                                                    | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income                                                                                    |       | $                                                  | 2,689      |   | $ | 6,172 |   |
| Adjustments to  reconcile net income to net cash provided by (used for) operating activities: |       |                                               |       |   |   |
| Depreciation and  amortization                                                                |       | 1,044                                              |       | 986 |   |
| Provisions for  contracts, inventory and accounts receivable reserves                         |       | 191                                                |       | 186 |   |
| Amortization of  bond discount                                                                |       | (224                                               | )          | (463 | ) |
| Deferred income  taxes                                                                        |       | (1,308                                             | )          | (438 | ) |
| Change in value  of warrants                                                                  |       | —                                             |       | (11 | ) |
| Stock  compensation expense                                                                   |       | 965                                                |       | 1,258 |   |
| Changes in  assets and liabilities:                                                           |       |                                               |       |   |   |
| Accounts  receivable                                                                          |       | 246                                                |       | (11,613 | ) |
| Unbilled costs  and fees                                                                      |       | (3,729                                             | )          | (887 | ) |
| Inventories                                                                                   |       | (4,304                                             | )          | (5,403 | ) |
| Prepaid expenses  and other assets                                                            |       | (1,792                                             | )          | 329 |   |
| Accounts payable                                                                              |       | (2,007                                             | )          | 2,737 |   |
| Accrued income  taxes                                                                         |       | —                                             |       | 3,030 |   |
| Customer  deposits                                                                            |       | 2,727                                              |       | 600 |   |
| Deferred revenue                                                                              |       | (3,861                                             | )          | (834 | ) |
| Accrued expenses  and other liabilities                                                       |       | (175                                               | )          | (5,105 | ) |
| Sale of leased  asset                                                                         |       | 66                                                 |       | — |   |
| Net cash used  for operating activities                                                       |       | (9,472                                             | )          | (9,456 | ) |
|                                                                                          |       |                                               |       |   |   |
| **Cash  flows from investing activities:**                                                    | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchases of  short-term investments                                                          |       | (19,403                                            | )          | (46,888 | ) |
| Proceeds from  maturities of short-term investments                                           |       | 36,400                                             |       | 28,325 |   |
| Issuance of note  receivable                                                                  |       | —                                             |       | (250 | ) |
| Purchases of  property and equipment                                                          |       | (425                                               | )          | (889 | ) |
| Net cash  provided by (used for) investing activities                                         |       | 16,572                                             |       | (19,702 | ) |
|                                                                                          |       |                                               |       |   |   |
| **Cash  flows from financing activities:**                                                    | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Decrease  (increase) in restricted cash and investments                                       |       | (13,814                                            | )          | 278 |   |
| Proceeds from  exercise of warrants                                                           |       | —                                             |       | 509 |   |
| Proceeds from  exercise of stock options                                                      |       | 214                                                |       | 632 |   |
| Repurchase of  shares of common stock                                                         |       | (10,768                                            | )          | (1,337 | ) |
| Repayment of  leasehold financing                                                             |       | (282                                               | )          | (495 | ) |
| Payment of  common stock dividend                                                             |       | (1,752                                             | )          | — |   |
| Reduction of  income taxes paid due to the tax benefit from employee stock option expense     |       | 45                                                 |       | 380 |   |
| Net cash used  for financing activities                                                       |       | (26,357                                            | )          | (33 | ) |
|                                                                                          |       |                                               |       |   |   |
| Foreign currency  translation effect on cash                                                  |       | 1                                                  |       | (2 | ) |
|                                                                                          |       |                                               |       |   |   |
| Net decrease in  cash and cash equivalents                                                    |       | (19,256                                            | )          | (29,193 | ) |
| Cash and cash  equivalents at beginning of period                                             |       | 52,418                                             |       | 69,650 |   |
| Cash and cash  equivalents at end of period                                                   |       | $                                                  | 33,162     |   | $ | 40,457 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**AMERICANSCIENCE AND ENGINEERING, INC. AND SUBSIDIARY**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED 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 unauditedcondensed consolidated financial statements have been prepared in accordancewith the requirements of Form 10-Q and consequently do not include alldisclosures required by Form 10-K. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and the notes included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2008.

 

The unauditedcondensed consolidated financial statements, in the opinion of management,include all necessary adjustments, consisting solely of normal recurringadjustments, to present fairly the Company’s financial position, results of operationsand cash flows.  These quarterly results are not necessarily indicative ofthe results to be expected for the entire year.

 

**Nature of Operations**

 

The Company isengaged in the development and manufacture of sophisticated X-ray inspectionsystems for critical detection and security screening solutions for saleprimarily to U.S. and foreign government agencies.  The Company has onlyone reporting segment, X-ray screening products.

 

**Significant Accounting Policies**

 

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 Loanand Security Agreement with Silicon Valley Bank East requires certain cashbalances to be restricted as collateral against outstanding standby letters ofcredit; these are separately presented as restricted cash. (See Note 5)

 

The othersignificant accounting policies followed by the Company and its subsidiary inpreparing its consolidated financial statements are set forth in Note 1 to theconsolidated financial statements included in its Form 10-K for the yearended March 31, 2008.  The Company has made no changes to thesepolicies during the current year.

 

**Comprehensive Income**

 

Comprehensiveincome is comprised of the following:

 
| ** **                                                          | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                             | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007** | ** ** |
| Net income                                                          |       | $                                | 2,689      |   | $ | 6,172 |   |
| Foreign currency  translation adjustments, net of tax               |       | 1                                |       | 2 |   |
| Unrealized gains  and losses from marketable securities, net of tax |       | (136                             | )          | (22 | ) |
| Comprehensive  income                                               |       | $                                | 2,554      |   | $ | 6,152 |   |

 

**StockRepurchase Program**

 

During the first quarter of fiscal 2008, the Company’sBoard of Directors approved a Stock Repurchase Program which authorized theCompany to repurchase up to $35 million of shares of its common stock from timeto time on the open market.   On May 13,2008, the Board of Directors approved an additional Stock Repurchase Programwhich authorized the Company to repurchase up to another $35 million of sharesof its common stock from time to time on the open market.   During the quarter ended June 30, 2008,a total of 216,226 shares were repurchased at an average price of $49.80 pershare.

 

**Dividends**

 

On May 13, 2008, the Company’s Board of Directorsdeclared a cash dividend of $0.20 per share. The dividend was paid on June 6,2008 to all shareholders of record at the close of business on May 19,2008.   On August 8, 2008, theCompany’s Board of Directors declared a cash dividend of $0.20 per share. Thedividend is payable on September 5, 2008 to all shareholders of record atthe close of business on August 18, 2008. Future dividends will bedeclared at the discretion of the Board of Directors and will depend upon suchfactors as the Board of Directors deems relevant.

 

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**NewAccounting Pronouncements**

 

*SFAS No. 157*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a common definition for fair value to be applied, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosure about such fair valuemeasurements. The Company adopted the required provisions of SFAS 157 thatbecame effective in our first quarter of fiscal 2009. The adoption of theseprovisions did not have a material impact on our Consolidated FinancialStatements. For further information about the adoption of the requiredprovisions of SFAS 157 see Note 6.

 

In February 2008,the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certainitems that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). We are currentlyevaluating the impact of SFAS 157 on our Consolidated Financial Statements foritems within the scope of FSP 157-2, which will become effective beginning withour first quarter of fiscal 2010.

 

*SFAS No159*

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS 159”), which allows entities to choose tomeasure financial instruments and certain other items at fair value. SFAS 159became effective beginning with our first quarter of fiscal 2009. We havecurrently chosen not to adopt the provisions of SFAS 159 for our existingfinancial instruments.

 

*EITFIssue No. 06-11*

 

In June 2007,the FASB ratified Emerging Issues Task Force Issue No. 06-11, “Accountingfor Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF06-11”), which requires income tax benefits from dividends or dividendequivalents that are charged to retained earnings and are paid to employees forequity classified nonvested shares, nonvested equity share units andoutstanding equity share options to be recognized as an increase in additionalpaid-in capital and to be included in the pool of excess tax benefits availableto absorb potential future tax deficiencies on share-based payment awards. Theadoption of EITF 06-11, which became effective in the first quarter of fiscal2009, did not have a material impact on our Consolidated Financial Statements.

 

 *EITF Issue No. 03-6-1*

 

In June 2008,the FASB issued Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (FSPEITF 03-6-1), effective for fiscal years beginning after December 15,2008.  FSP EITF 03-6-1 clarifies that unvested share-based awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and must be included in thecomputation of EPS pursuant to the two-class method. We are currentlyevaluating the impact of adopting FSP EITF 03-6-1 on our Consolidated FinancialStatements.

 

**2.  ACCOUNTING FOR STOCK-BASED COMPENSATION**

 

On April 1,2006, the Company 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, “Accountingfor Stock 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) requiresthe Company to estimate the fair value of share-based awards on the date ofgrant using an option pricing model. The Company adopted SFAS 123(R) usingthe modified prospective transition method which requires the application ofthe accounting standard starting April 1, 2006, the first day of theCompany’s fiscal year 2007. Prior period information was not restated toreflect the fair value method of expensing share-based awards.

 

Stock-basedcompensation costs recognized for the three month period ended June 30,2008 and June 30, 2007, included compensation costs for awards grantedprior to, but not yet vested as of April 1, 2006 (adoption date), as wellas any new grants issued after April 1, 2006. The Company recognized$965,000 and $1,258,000 of share-based compensation costs in the consolidatedstatements of income for the quarter ended June 30, 2008 and June 20,2007, respectively. The income tax benefit related to this compensation for thethree months ended June 30, 2008 and June 30, 2007 was approximately$337,000 and $225,000, respectively.

 

The followingtable summarizes share-based compensation costs included in the Company’sconsolidated statement of income:

 

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| ** **                                         | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                            | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007** | ** ** |
| Cost of revenues                                   |       | $                                | 55         |   | $ | 427 |   |
| Selling, general  and administrative               |       | 910                              |       | 831 |   |
| Total  share-based compensation expense before tax |       | $                                | 965        |   | $ | 1,258 |   |

 

Upon adoption ofSFAS 123(R), in accordance with Staff Accounting Bulletin No. 107, theCompany selected the Black-Scholes option pricing model as the most appropriatemethod for 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 volatilityover the expected term and (3) a risk-free interest rate. The expectedterm represents the expected period of time the Company believes the optionswill be outstanding based on historical information. Estimates of expectedfuture stock price volatility are based on the historic volatility of theCompany’s common stock and the risk free interest rate is based on the U.S.Zero-Bond rate.

There were 12,407 options granted in the three month period ended June 30,2008.  The fair value of options at dateof grant was estimated with the following assumptions for grants made duringthe period presented:

 
| ** **               | ** ** | **Three months ended   June 30, 2008** | ** ** |
|--------------------------|------------|-----------------------------------------------------------------|------------|
| **Assumptions:**         | ** ** | ** **                                                      | ** ** |
| Option life              |       | 5 years                                                         |       |
| Risk-free  interest rate |       | 3.5                                                             | %          |
| Stock volatility         |       | 49                                                              | %          |
| Dividend yield           |       | 1.6                                                             | %          |

 

**Stock Option and Other Compensation Plans**

 

The Company hasvarious stock option and other compensation plans for directors, officers, andemployees. The Company had the following stock option plans outstanding as of June 30,2008: the 1995 Combination Plan, the 1997 Non-Qualified Option Plan, the 1998Non-Qualified Option Plan, the 1999 Combination Plan, the 2000 CombinationPlan, the 2002 Combination Plan, the 2003 Stock Plan for Non-Employee Directorsand the 2005 Equity and Incentive Plan. There are 3,480,000 shares authorizedunder these plans. As of June 30, 2008, 85,792 shares remain available forfuture issuance under these plans.  Vestingperiods are at the discretion of the Board of Directors and typically rangebetween one and three years. Options under these plans are granted at fairmarket value and have a term of five or ten years from the date of grant.

 

**Stock Options**

 

The followingtables summarize stock option activity during the first three months of fiscalyear 2009:

 
| ** **                              | ** ** | **Options Outstanding**     | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted    Average   Contractual   Life   (years)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
| ** **                              | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Outstanding  at March 31, 2008** |       | 828,063                          |       | $ | 41.70 |   | 6.80 |   |   |   |
| Grants                                  |       | 12,407                           |       | 51.56 |   |   |   | $ | — |   |
| Exercises                               |       | (7,911                           | )          | 27.01 |   |   |   |   |   |
| Cancellations                           |       | (2,666                           | )          | 56.06 |   |   |   |   |   |
| **Outstanding  at June 30, 2008**  |       | 829,893                          |       | $ | 41.94 |   | 6.53 |   |   |   |
| **Exercisable  at June 30, 2008**  |       | 709,962                          |       | $ | 38.87 |   |   |   | $ | 10,385,000 |   |

 

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Informationrelated to the stock options outstanding as of June 30, 2008 is asfollows:

 
| **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                              |       | 165,593                          |       | 4.71                                                                              |       | $                                               | 11.96      |                                                | 165,593    |                                                               | $          | 11.96 |   |
| $20.01 - $30.00                             |       | 97,563                           |       | 6.14                                                                              |       | 27.56                                           |       | 97,563                                              |       | 27.56                                                              |       |
| $30.01 - $40.00                             |       | 60,981                           |       | 6.43                                                                              |       | 38.93                                           |       | 60,981                                              |       | 38.93                                                              |       |
| $40.01 - $50.00                             |       | 126,866                          |       | 7.18                                                                              |       | 45.74                                           |       | 125,666                                             |       | 45.77                                                              |       |
| $50.01 - $60.00                             |       | 211,283                          |       | 6.91                                                                              |       | 53.52                                           |       | 181,954                                             |       | 53.69                                                              |       |
| $60.01 - $74.72                             |       | 167,607                          |       | 7.61                                                                              |       | 63.55                                           |       | 78,205                                              |       | 64.39                                                              |       |
| $6.50 - $74.72                              |       | 829,893                          |       | 6.53                                                                              |       | $                                               | 41.94      |                                                | 709,962    |                                                               | $          | 38.87 |   |

 

As of June 30,2008, there was approximately $1,180,000 of unrecognized compensation costsrelated to options granted. The unrecognized compensation will be primarilyrecognized over a period of a weighted average of two years.   Non-vested common stock options aresubject to the risk of forfeiture until the fulfillment of specifiedconditions.

 

**Restricted Stock and Restricted Stock Units**

 

The Company hasinstituted long term incentive plans for certain key employees. These planscall for the issuance of restricted stock which vests upon the achievement ofcertain performance based goals as well as service time incurred.  Restricted stock and restricted stock unitsmay also be granted to other employees with vesting periods that range from oneto three years.  In addition, annually onJanuary 10th the Board of Directors is granted restricted stock.These restricted stock awards vest on a pro-rata basis on service time incurredin the upcoming calendar year.  The fairvalues of these restricted stock awards are equal to the market price per shareof the Company’s common stock on the date of grant.

 

Nonvestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of June 30, 2008 therewas $5,924,000 of total unrecognized compensation cost related to non-vestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a weighted average two year period.

 

The followingtable summarizes the status of the Company’s non-vested restricted stock awardsduring the first three months of fiscal 2008:

 
| ** **                              | ** ** | **Non-vested Restricted Stock Awards** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **Number of   Shares**                      | ** ** | **Weighted Average   Grant Date   Fair Value** | ** ** |
| **Outstanding  at March 31, 2008** |       | 110,301                                               |       | $ | 58.34 |   |
| Granted                                 |       | 46,120                                                |       | 51.56 |   |
| Vested                                  |       | (2,184                                                | )          | 54.89 |   |
| Forfeited                               |       | (7,618                                                | )          | 59.40 |   |
| **Outstanding  at June 30, 2008**  |       | 146,619                                               |       | $ | 56.21 |   |

 

**3.****       ****INVENTORIES**

** **
| **(Dollars in thousands)**                      | ** ** | **June 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Inventories  consisted of:                                |       |                        |       |                         |       |
| Raw materials,  completed sub-assemblies, and spare parts |       | $                           | 20,352     |                         | $          | 18,113 |   |
| Work-in-process                                           |       | 16,261                      |       | 12,163                       |       |
| Finished goods                                            |       | 7,668                       |       | 9,831                        |       |
| Total                                                     |       | $                           | 44,281     |                         | $          | 40,107 |   |

 

**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, warrants, restricted stock and restricted stockunits using the average share price of the Company’s common stock for theperiod. For the quarters ended June 30, 2008 and June 30, 2007,common stock equivalents of 483,000 and 356,000, respectively, are excludedfrom diluted earnings per share, as their effect is anti-dilutive.

 

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| ** **                                                                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands except per share amounts)**                                                        | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007** | ** ** |
| **Earnings  Per Share Basic:**                                                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                                                  |       | $                                | 2,689      |   | $ | 6,172 |   |
| Weighted average  number of common shares outstanding — basic                                                          |       | 8,706                            |       | 9,171 |   |
| Net income per  share — basic                                                                                          |       | $                                | 0.31       |   | $ | 0.67 |   |
| **Diluted:**                                                                                                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                                                  |       | $                                | 2,689      |   | $ | 6,172 |   |
| Adjustment to  net income for change in warrant valuation                                                                   |       | —                           |       | (11 | ) |
| Adjusted net  income                                                                                                        |       | 2,689                            |       | 6,161 |   |
| Weighted average  number of common shares outstanding                                                                       |       | 8,706                            |       | 9,171 |   |
| Assumed exercise  of stock options, warrants, restricted stock and restricted stock units,  using the treasury stock method |       | 201                              |       | 226 |   |
| Weighted average  number of common and potential common shares outstanding — diluted                                   |       | 8,907                            |       | 9,397 |   |
| Net income per  share — diluted                                                                                        |       | $                                | 0.30       |   | $ | 0.66 |   |

 

**5.   LINE OF CREDIT**

 

On November 16,2006, the Company modified its Loan and Security Agreement with Silicon ValleyBank East which was scheduled to expire on November 29, 2006.  The Company increased this facility from$5.0 million to $20.0 million to support the Company’s routine workingcapital needs.  The Company’s $10.0million export loan and security facility, guaranteed by the Export-Import Bankof the United States, expired as of November 29, 2006. The maximumamount available for borrowings under the domestic facility is (a) if theCompany’s unrestricted cash is greater than or equal to $30.0 million, $20.0million minus the amount of all outstanding letters of credit less certainreserves, and minus the outstanding principal balance of any advances or (b) ifthe Company’s unrestricted cash is less than $30.0 million for a period of 30consecutive days, the lesser of (i) $20.0 million, or (ii) 85% ofeligible domestic accounts receivable minus the amount of outstanding letters of credits adjusted for certainreserves and minus the principal balance of any advances.  The modification of the Loan and SecurityAgreement extended this credit facility through November 14, 2008.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (5.00% at June 30, 2008). The credit agreement iscollateralized by certain assets of the Company and contains certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.  As of June 30, 2008, the Company was incompliance with these covenants.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.  The Company had outstanding $19,870,000 instand-by letters of credit against the domestic facility with $130,000remaining availability.  The outstandingletters of credit are primarily for guaranteeing performance on certaininternational projects.   No amounts havebeen drawn against these letters of credit. In addition at June 30, 2008,the Company had a restricted cash balance of $16,337,000 related to certainbank required deposits for outstanding letters of credit issued in excess ofamounts available under its loan facility, and other bank-related fees.

 

**6.  FAIR VALUE MEASUREMENTS**

 

SFAS 157 definesand establishes a framework for measuring fair value and expands disclosuresabout fair value measurements. In accordance with SFAS 157, we have categorizedour financial assets, based on the priority of the inputs to the valuationtechnique, into a three-level fair value hierarchy as set forth below. If theinputs used to measure the financial instruments fall within different levelsof the hierarchy, the categorization is based on the lowest level input that issignificant to the fair value measurement of the instrument.

 

Financial assetsrecorded on the Condensed Consolidated Balance Sheets are categorized based onthe inputs to the valuation techniques as follows:

 

**Level 1** - Financial assets whose values arebased on unadjusted quoted prices for identical assets or liabilities in anactive market that the Company has the ability to access at the measurementdate (examples include active exchange-traded equity securities, listedderivatives, and most U.S. Government and agency securities).  The Company currently does not have any Level1 financial assets or liabilities.

 

**Level 2** - Financial assets whose values arebased on quoted prices in markets where trading occurs infrequently or whosevalues are 

 

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based on quoted prices ofinstruments with similar attributes in active markets.  Level 2 inputs include the following:

 
| · | Quoted prices for  identical or similar assets or liabilities in non-active markets (examples  include corporate and municipal bonds which trade infrequently);                                        |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                   |
| · | Inputs other than  quoted prices that are observable for substantially the full term of the  asset or liability (examples include interest rate and currency swaps); and                               |
|   |                                                                                                                                                                                                   |
| · | Inputs that are derived  principally from or corroborated by observable market data for substantially  the full term of the asset or liability (examples include certain securities  and derivatives). |

 

**Level 3** - Financial assets whose values arebased on prices or valuation techniques that require inputs that are bothunobservable and significant to the overall fair value measurement. Theseinputs reflect management’s own assumptions about the assumptions a marketparticipant would use in pricing the asset or liability. The Company currentlydoes not have any Level 3 financial assets or liabilities.

 

The followingtable presents the financial assets and liabilities we measure at fair value ona recurring basis, based on the fair value hierarchy as of June 30, 2008:

 

*Level 2 –Financial Assets*

* *
| **(in thousands)**     | ** ** | **June 30, 2008** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| Certificates of  deposit    |       | $                           | 3,194      |   |
| Commercial Paper            |       | 21,103                      |       |
| Corporate  debentures/bonds |       | 31,481                      |       |
| Short-term  investments     |       | $                           | 55,778     |   |

 

**7.   INCOME TAXES**

 

The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes.” Accordingly, the Company recognizes deferred income taxes basedon the expected future tax consequences of differences between the financialstatement basis and the tax basis of assets and liabilities, calculated usingenacted tax rates in effect for the year in which the differences are expectedto be reflected in the tax return. The Company evaluates the need for avaluation allowance against its net deferred tax assets at year end based uponits three year cumulative income and its projections of future income, andrecords a valuation allowance against any net deferred tax assets if it is morelikely than not that they will not be realized.

 

On November 10,2005, the Financial Accounting Standards Board (“FASB”) issued FASB StaffPosition No. FAS 123(R), “Transition Election Related to Accounting forTax Effects of Share-Based Payment Awards” that allows for a simplified orLong-Haul Method to establish the beginning balance of the additionalpaid-in-capital pool (“APIC pool”) related to the tax effects of employeestock-based compensation, and to determine the subsequent impact on the APICpool and Consolidated Statements of Cash Flows of the tax effects of employeestock-based compensation awards that are outstanding upon adoption of SFAS123(R). The Company has elected to use the Long-Haul Method of calculating theAPIC pool.

 

In June 2006,the FASB issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement 109” (“FIN 48”). Thisstatement clarifies the criteria that an individual tax position must satisfyfor some or all of the benefits of that position to be recognized in a company’sfinancial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not,and a measurement attribute for all tax positions taken or expected to be takenon a tax return, in order for those tax positions to be recognized in thefinancial statements. Effective April 1, 2007, the Company adopted theprovisions of FIN 48 and there has been no material effect on the financialstatements. As a result, there was no cumulative effect related to adopting FIN48 and no interest or penalties related to uncertain tax positions was accrued.

 

The Company iscurrently open to audit under the statute of limitations by the InternalRevenue Service and state taxing authorities for the years ending March 31,2005 through 2008.  There are no federalor state income tax examinations that are currently being performed. TheCompany believes that there are no uncertain tax positions as of June 30,2008.

 

**8.     GUARANTEES**

 

Certain of theCompany’s products carry a one-year warranty, the costs of which are accruedfor 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, 2008 and June 30, 2007 is as follows:

 

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| **(in thousands)**                           | ** ** | **Three months    ended June 30,   2008** | ** ** | **Three months    ended June 30,    2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Warranty accrual  at beginning of period          |       | $                                                                       | 1,671      |                                                                          | $          | 1,997 |   |
| Accruals for  warranties issued during the period |       | 509                                                                     |       | 733                                                                           |       |
| Adjustment of  preexisting accrual estimates      |       | (202                                                                    | )          | (623                                                                          | )          |
| Warranty costs  incurred during period            |       | (267                                                                    | )          | (159                                                                          | )          |
| Warranty accrual  at end of period                |       | $                                                                       | 1,711      |                                                                          | $          | 1,948 |   |

 

In conjunctionwith the sale of certain assets and contracts of the Company’s High EnergySystems Division in January of 2005, the lease for the Californiaoperations of the High Energy Systems Division was assigned to Accuray, Inc. The Company remains secondarily liable for the remaining lease payments in theevent of default by Accuray, Inc. during the lease term which expires in February 2011.Total remaining lease payments at June 30, 2008 totaled $1,047,000. No accrual for this contingent liability has been recorded at June 30,2008 as payment of this liability is considered remote.

 

**9.   LEASE COMMITMENTS**

 

In March 2005,the Company renewed its lease agreement for its corporate headquarters and manufacturingfacilities in Billerica, Massachusetts.  As part of the lease agreement,the Company’s landlord agreed to certain renovations to the Billerica facilityincluding the construction of additional high bay manufacturing space. The Company was responsible for a portion of the construction costs and wasdeemed to be the owner of the building during the construction period underEITF 97-10 “The Effect of Lessee Involvement in Asset Construction”.  In January 2007,the Company amended this lease agreement to expand its lease to include theremaining available space in the building.  A total of $7,182,000 wascapitalized to record the facility on its books with an offsetting credit tothe Lease Financing Liability.  In addition, amounts paid for constructionwere capitalized to fixed assets and the landlord construction allowances of$6,009,000 were recorded as additional Lease Financing Liability.

 

At the completionof the construction of the initial renovations in February 2006, the leasewas reviewed for potential sale-leaseback treatment in accordance with SFAS No. 98. Based on this review, it was determined that the lease did not qualify forsale-leaseback treatment in accordance with SFAS No. 98.  As aresult, building and tenant improvement and associated lease financingliabilities remain on the Company’s books.  The Lease Financing Liabilityis being amortized over the lease term based on the payments designated in theagreement and the building and tenant improvement assets are being depreciatedon a straight line basis over the lessor of their useful lives or the leaseterm.

 

**ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

Net revenues forthe first quarter of fiscal 2009 decreased by $4,977,000 to $39,494,000compared to the corresponding period a year ago.  This decrease isattributable primarily to a decrease of $5,965,000 in product sales, of which$4,789,000 relates to decreased shipments of Z Backscatter systems.  In addition, there was a decrease of $3,428,000 in CargoSearch system revenuesdue primarily to a comparative decrease in the volume of CargoSearch projectsrecognized on a percent complete basis from the prior year.  These decreases were offset by an increase of$1,116,000 in ParcelSearch revenues due to increased volume of shipments and anincrease of $365,000 in contract research and development revenues as comparedto the prior period attributable primarily to one large research anddevelopment contract.  Service revenuesincreased by $988,000 to $16,552,000 compared to the first quarter of fiscal2008 due primarily to an increase in the volume of service contracts over theprior year.

 

Total cost ofsales and contracts for the first quarter of fiscal 2009 decreased by$2,105,000 to $24,965,000 as compared to the corresponding period a year ago.Cost of sales and contracts related to product revenues decreased by $2,979,000to $15,786,000 as compared to the corresponding period a year ago.  Costof product sales and contract revenues represented 69% of revenues versus 65%of revenue, for the corresponding period last year.  The resultantdecrease in gross margin percentage is due primarily to the mix of productssold in the period with a greater percentage of revenues derived from lowermargin parcel and contract research and development projects.   The cost of service revenues for the firstquarter ended June 30, 2009 increased by $874,000 to $9,179,000 ascompared to the corresponding period a year ago.  Cost of service revenuesrepresented 55% of revenues versus 53% for the corresponding period lastyear.  This increase in costs is dueprimarily to increased costs to service systems under fixed price servicecontracts during the period.

 

Selling, generaland administrative expenses for the first quarter of fiscal 2009 increased by$1,216,000 to $7,699,000 as compared to the corresponding period a yearago.  Selling, general and administrative expenses represented 19% ofrevenues in the current period as compared to 15% for the corresponding periodlast year.  The increase in costs was primarily the result of an increasein salaries and benefits associated primarily with increased headcount($247,000), increased incentive and stock compensation expense ($294,000), increasedtravel related costs ($149,000) related primarily to sales activities,increased insurance related costs ($143,000), increased marketing andtrade-show related costs ($309,000) and increased consulting costs ($358,000).  These increases were offset somewhat by a$357,000 decrease in ERP system related costs as the Company entered its secondyear post implementation.

 

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Company fundedresearch and development expenses for the first quarter of fiscal 2009increased by $806,000 to $3,563,000 as compared to the corresponding periodlast year.  Research and development expenses represented 9% of revenuesin the current quarter compared to 6% for the corresponding period lastyear.  This increase in research and development activity is attributablean increase in the number of research and development projects being developedand an increase in the number of engineering resources available to focus onresearch and develop efforts.

 

Other income was$935,000 in income for the first quarter of fiscal 2009 as compared to$1,874,000 in income for the corresponding period a year ago.  Thisdecrease in other income is attributable primarily to a decrease in interestincome attributable to lower interest rates as compared to the prior period anda reduced cash balance available for short term investment.

 

The Companyreported pre-tax income of $4,202,000 in the quarter ended June 30, 2008as compared to pre-tax income of $10,035,000 in the corresponding period a yearago due to the factors described above.

 

The Company’sprojected effective tax rate for the quarter ended June 30, 2008 decreasedto 36% from 38% for the corresponding period a year ago.  This decrease isdue to primarily to an increase in the percentage of international salesrevenue as compared to the prior period.

 

The Company hadnet income of $2,689,000 during the first quarter of fiscal 2009 as compared tonet income of $6,172,000 in the first quarter of fiscal 2008.  Thesignificant factors contributing to these results are noted in the abovesections.

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents decreased by $19,256,000 to $33,162,000 at June 30, 2008compared to $52,418,000 at March 31, 2008. This decrease is attributableprimarily to an increase of $13,814,000 in restricted cash to collateralizecertain outstanding letters of credit. The Company also expended $10,768,000 to repurchase outstanding sharesof its common stock as part of its Stock Repurchase Program.  In addition, the Company had $9,472,000 innet cash used for operating activities due mainly to increases in unbilledaccounts receivable of $3,729,000, increases in inventory of $4,304,000attributable to inventory builds to meet orders received and decreased deferredrevenue of $3,861,000 due to revenue earned on prepaid service contracts.  These usages of cash were offset in part bynet proceeds from maturities of short term investments of $16,997,000.

 

On November 16,2006, the Company modified its Loan and Security Agreement with Silicon ValleyBank East which was scheduled to expire on November 29, 2006.  The Company increased this facility from$5.0 million to $20.0 million to support the Company’s routine workingcapital needs.  The Company’s $10.0million export loan and security facility, guaranteed by the Export-Import Bankof the United States, expired as of November 29, 2006. The maximumamount available for borrowings under the domestic facility is (a) if theCompany’s unrestricted cash is greater than or equal to $30.0 million, $20.0million minus  the amount of alloutstanding letters of credit less certain reserves, and minus the outstandingprincipal balance of any advances or (b) if the Company’s unrestrictedcash is less than $30.0 million for a period of 30 consecutive days, the lesserof (i) $20.0 million, or (ii) 85% of eligible domestic accountsreceivable minus the amount of outstanding letters of credits adjusted forcertain reserves and minus the principal balance of any advances.  The modification of the Loan and SecurityAgreement extended this credit facility through November 14, 2008.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (5.00% at June 30, 2008). The credit agreement iscollateralized by certain assets of the Company and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants.  As of June 30, 2008, the Company was incompliance with these covenants.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.   The Company had outstanding $19,870,000 instand-by letters of credit against the domestic facility with $130,000remaining availability.   The outstandingletters of credit are primarily for guaranteeing performance on certaininternational projects.   No amounts havebeen drawn against these letters of credit. In addition at June 30, 2008,the Company had a restricted cash balance of $16,337,000 related to certainbank required deposits for outstanding letters of credit issued in excess ofamounts available under its domestic facility, bid bonds, and otherbank-related fees.

 

**ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

The cash accountsfor the Company’s operations in Hong Kong, England, and Abu Dhabi aremaintained in Hong Kong dollars, pounds sterling and dirham, respectively.Foreign currency accounts are marked to market at current rates that resultedin immaterial translation adjustments to stockholders’ equity. The gains andlosses from foreign currency transactions are included in the statements ofoperations for the period and were also immaterial. A hypothetical 10% changein foreign currency rates would not have a material impact on the Company’sresults of operations or financial position.

 

As of June 30,2008, the Company held short-term investments consisting of money market funds,certificates of deposit, 

 

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commercial paper andcorporate debentures/bonds. The Company’s primary objective with its investmentportfolio is to invest available cash while preserving principal and meetingliquidity needs. These investments had an average interest rate ofapproximately 3.27% 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.

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

a)  Evaluation of disclosure controls and procedures

 

As of the end ofthe period covered by this report, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure 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 required disclosure.

 

b)  Changes in internal controls

 

There have been nochanges in our internal controls over financial reporting as such term isdefined in Rule 13a-15(f) and 15d-15(f) of the Exchange Actduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 2 —PURCHASES OF EQUITY SECURITIES**

 

On May 17, 2007, the Board of Directors approved a Stock RepurchaseProgram which authorized the Company to repurchase up to $35 million of sharesof its common stock from time to time on the open market.  This Repurchase Program was completed duringthe quarter ended June 30, 2008.**  **On May 8, 2008 the****Board of Directors approved another StockRepurchase Program which authorizes the Company to repurchase up to $35 millionof shares of its common stock from time to time on the open market.  As of June 30, 2008, the maximum dollarvalue of shares that may yet be purchased under this program is $34,030,000.

 

The following table provides information about our purchases during thequarter ended June 30, 2008 of equity securities that are registered by uspursuant to Section 12 of the Exchange Act.

 
| **2008**                           | ** ** | **Total   Number of   Shares   Purchased** | ** ** | **Average Price   Paid per   Share** | ** ** | **Total Number of   Shares Purchased   as Part of   Publicly   Announced   Programs** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 –  April 30 |       | 104,945                                                        |       | $                                                        | 51.14      |                                                                                                                                    | 104,945    |   |
| May 1 –  May 31     |       | 109,147                                                        |       | 48.51                                                    |       | 109,147                                                                                                                                 |       |
| June 1 –  June 30   |       | 2,134                                                          |       | 49.93                                                    |       | 2,134                                                                                                                                   |       |
| **Total**                          |       | 216,226                                                        |       | $                                                        | 49.80      |                                                                                                                                    | 216,226    |   |

 

**ITEM 6 — EXHIBITS**

 

See the exhibit indexfollowing the signature page to this quarterly report.

 

The information requiredby Exhibit Item 11 (Statement re: Computation of Income per Common andCommon Equivalent Share) may be found in Note 4 to the Unaudited CondensedConsolidated Financial Statements in this quarterly report.

 

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**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 11,  2008 | /s/ Kenneth J. Galaznik                                       |
|                        | Kenneth J. Galaznik                                           |
|                        | Senior Vice President,  Chief Financial Officer and Treasurer |

 

 

*Safe Harbor 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 the Company’s products; litigation seeking torestrict the use of intellectual property used by the Company; potentialproduct liability claims against the Company; global political trends andevents which affect public perception of the threat presented by drugs,explosives and other contraband; global economic developments and the abilityof governments and private organizations to fund purchases of the Company’sproducts to address such threats; and the potential insufficiency of Companyresources, including human resources, capital, plant and equipment andmanagement systems, to accommodate any future growth and any future delays infederal funding. These and certain other factors which might cause actualresults to differ materially from those projected are more fully set forth inthe Company’s Annual Report on Form 10-K for the fiscal year ended March 31,2008 under Item 1A “Risk Factors”.  Please also refer to our other filingswith the Securities and Exchange Commission.*

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description of 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 |

 

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