Table of Contents

 

 

 

**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(****Mark One)**

 

| **x**                                                      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                       |
| **For  the quarterly period ended December 31, 2009** |
|                                                       |
| **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’stelephone 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 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 mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

The number of shares ofthe registrant’s common stock, $0.66 2/3 par value, outstanding as of February 3,2010 was 8,997,983.

 

 

 

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**TABLEOF CONTENTS**

 
| **Part I —  Financial Information**                                                                                                          |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 — Financial  Statements                                                                                                                    | 3      |
| Unaudited  Condensed Consolidated Balance Sheets—December 31, 2009 and  March 31, 2009                                                  | 3      |
| Unaudited  Condensed Consolidated Statements of Operations—For the Three and Nine Months  Ended December 31, 2009 and December 31, 2008 | 4      |
| Unaudited  Condensed Consolidated Statements of Cash Flows—For the Nine Months Ended  December 31, 2009 and December 31, 2008           | 5      |
| Notes to  Unaudited Condensed Consolidated Financial Statements                                                                                        | 6      |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                             | 13     |
| Item 3 —  Quantitative and Qualitative Disclosure About Market Risk                                                                               | 16     |
| Item 4 — Controls  and Procedures                                                                                                                 | 16     |
| **Part II — Other  Information**                                                                                                             |   |
| Item 1— Legal  Proceedings                                                                                                                        | 17     |
| Item 1A—Risk Factors                                                                                                                              | 17     |
| Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                                                             | 17     |
| Item 6 — Exhibits                                                                                                                                 | 17     |
| **Signatures**                                                                                                                                         | 18     |

 

Z Backscatter TM, ZBVTM,CargoSearchTM, Shaped Energy®, AS&E®, ParcelSearchTM and all AS&E productnames and the AS&E logos are either registered trademarks or trademarks ofAmerican Science and Engineering, Inc. in the United States and/or othercountries. Other product and company names mentioned herein may be thetrademarks of their respective owners.

 

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**PART I— FINANCIAL INFORMATION**

**ITEM1 — FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| **(In thousands, except share and per share amounts)**                                                                                                                                    | ** ** | **December 31,  2009** | ** ** | **March 31,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **                     | ** ** |
| Current  assets:                                                                                                                                                                          |       |                        |       |                           |       |
| Cash  and cash equivalents                                                                                                                                                                |       | $                           | 48,366     |                           | $          | 105,419 |   |
| Restricted  cash and investments                                                                                                                                                          |       | 974                         |       | 35                             |       |
| Short-term  investments, at fair value                                                                                                                                                    |       | 109,564                     |       | 36,384                         |       |
| Accounts  receivable, net of allowances of $345 and $286 at December 31, 2009 and  March 31, 2009, respectively                                                                 |       | 28,695                      |       | 36,956                         |       |
| Unbilled  costs and fees                                                                                                                                                                  |       | 2,066                       |       | 6,316                          |       |
| Inventories                                                                                                                                                                               |       | 47,305                      |       | 47,975                         |       |
| Prepaid  expenses and other current assets                                                                                                                                                |       | 10,729                      |       | 7,224                          |       |
| Deferred  income taxes                                                                                                                                                                    |       | 1,314                       |       | 1,807                          |       |
| **Total current assets**                                                                                                                                                                  |       | 249,013                     |       | 242,116                        |       |
| Restricted  cash and investments                                                                                                                                                          |       | 893                         |       | —                         |       |
| Building,  equipment and leasehold improvements, net                                                                                                                                      |       | 18,295                      |       | 19,488                         |       |
| Deferred  income taxes                                                                                                                                                                    |       | 4,534                       |       | 5,290                          |       |
| Other  assets, net                                                                                                                                                                        |       | 724                         |       | 1,393                          |       |
| **Total assets**                                                                                                                                                                          |       | $                           | 273,459    |                           | $          | 268,287 |   |
|                                                                                                                                                                                      |       |                        |       |                           |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                             | ** ** | ** **                  | ** ** | ** **                     | ** ** |
| Current  liabilities:                                                                                                                                                                     |       |                        |       |                           |       |
| Accounts  payable                                                                                                                                                                         |       | $                           | 11,477     |                           | $          | 10,639 |   |
| Accrued  salaries and benefits                                                                                                                                                            |       | 10,304                      |       | 10,387                         |       |
| Accrued  warranty costs                                                                                                                                                                   |       | 889                         |       | 1,130                          |       |
| Accrued  income taxes                                                                                                                                                                     |       | —                      |       | 63                             |       |
| Deferred  revenue                                                                                                                                                                         |       | 11,843                      |       | 28,003                         |       |
| Customer  deposits                                                                                                                                                                        |       | 10,363                      |       | 14,818                         |       |
| Current  portion of lease financing liability                                                                                                                                             |       | 1,277                       |       | 1,163                          |       |
| Other  current liabilities                                                                                                                                                                |       | 4,022                       |       | 6,893                          |       |
| **Total current liabilities**                                                                                                                                                             |       | 50,175                      |       | 73,096                         |       |
| Lease  financing liability, net of current portion                                                                                                                                        |       | 7,402                       |       | 8,377                          |       |
| Other  long term liabilities                                                                                                                                                              |       | 6,719                       |       | 4,748                          |       |
| **Total liabilities**                                                                                                                                                                     |       | 64,296                      |       | 86,221                         |       |
|                                                                                                                                                                                      |       |                        |       |                           |       |
| **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; 8,990,693 and  8,810,760 shares issued and outstanding at December 31, 2009 and  March 31, 2009, respectively |       | 5,993                       |       | 5,873                          |       |
| Capital  in excess of par value                                                                                                                                                           |       | 94,936                      |       | 86,477                         |       |
| Accumulated  other comprehensive loss, net                                                                                                                                                |       | (50                         | )          | (47                            | )          |
| Retained  earnings                                                                                                                                                                        |       | 108,284                     |       | 89,763                         |       |
| **Total stockholders’ equity**                                                                                                                                                       |       | 209,163                     |       | 182,066                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                       |       | $                           | 273,459    |                           | $          | 268,287 |   |

 

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)**

** **
| ** **                                                            | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| **Net sales and contract revenues:**                                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net product  sales and contract revenues                              |       | $                           | 37,035     |                        | $          | 45,810 |   | $ | 114,008 |   | $ | 107,114 |   |
| Net  service revenues                                                 |       | 17,854                      |       | 19,480                      |       | 56,821 |   | 53,963 |   |
| Total  net sales and contract revenues                                |       | 54,889                      |       | 65,290                      |       | 170,829 |   | 161,077 |   |
| ** **                                                            |       |                        |       |                        |       |   |   | ** ** |   |
| **Cost of sales and contracts:**                                      |       |                        |       |                        |       |   |   | ** ** |   |
| Cost  of product sales and contracts                                  |       | 23,206                      |       | 25,616                      |       | 63,940 |   | 63,484 |   |
| Cost  of service revenues                                             |       | 9,056                       |       | 10,914                      |       | 29,188 |   | 31,777 |   |
| Total  cost of sales and contracts                                    |       | 32,262                      |       | 36,530                      |       | 93,128 |   | 95,261 |   |
| **Gross profit**                                                      |       | 22,627                      |       | 28,760                      |       | 77,701 |   | 65,816 |   |
| ** **                                                            |       |                        |       |                        |       |   |   | ** ** |   |
| **Expenses:**                                                         |       |                        |       |                        |       |   |   | ** ** |   |
| Selling,  general and administrative expenses                         |       | 9,624                       |       | 9,132                       |       | 26,335 |   | 24,225 |   |
| Research  and development costs                                       |       | 4,152                       |       | 4,815                       |       | 14,909 |   | 12,554 |   |
| Total  operating expenses                                             |       | 13,776                      |       | 13,947                      |       | 41,244 |   | 36,779 |   |
| **Operating income**                                                  |       | 8,851                       |       | 14,813                      |       | 36,457 |   | 29,037 |   |
| ** **                                                            |       |                        |       |                        |       |   |   | ** ** |   |
| **Other income (expense):**                                           |       |                        |       |                        |       |   |   | ** ** |   |
| Interest  and investment income                                       |       | 170                         |       | 477                         |       | 473 |   | 2,113 |   |
| Interest  expense                                                     |       | (39                         | )          | (36                         | )          | (105 | ) | (110 | ) |
| Other,  net                                                           |       | 40                          |       | (252                        | )          | 152 |   | (335 | ) |
| Total  other income                                                   |       | 171                         |       | 189                         |       | 520 |   | 1,668 |   |
| **Income before provision for income taxes**                          |       | 9,022                       |       | 15,002                      |       | 36,977 |   | 30,705 |   |
| Provision  for income taxes                                           |       | 3,203                       |       | 4,943                       |       | 13,127 |   | 10,596 |   |
| **Net income**                                                        |       | $                           | 5,819      |                        | $          | 10,059 |   | $ | 23,850 |   | $ | 20,109 |   |
| **Income per share - Basic**                                          |       | $                           | 0.65       |                        | $          | 1.16 |   | $ | 2.69 |   | $ | 2.32 |   |
| **Income per share - Diluted**                                        |       | $                           | 0.64       |                        | $          | 1.13 |   | $ | 2.63 |   | $ | 2.26 |   |
| **Weighted average shares – Basic**                              |       | 8,929                       |       | 8,670                       |       | 8,868 |   | 8,679 |   |
| **Weighted average shares – Diluted**                            |       | 9,136                       |       | 8,940                       |       | 9,069 |   | 8,917 |   |
| **Dividends declared per share**                                      |       | $                           | 0.20       |                        | $          | 0.20 |   | $ | 0.60 |   | $ | 0.60 |   |

 

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 Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**                                                                         | ** ** | **December 31,  2009**             | ** ** | **December 31,******** 2008** | ** ** |
| **Cash flows from operating activities:**                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net  income                                                                                |       | $                                       | 23,850     |   | $ | 20,109 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:         |       |                                    |       |   |   |
| Depreciation  and amortization                                                             |       | 3,384                                   |       | 3,194 |   |
| Provisions  for contracts, inventory and accounts receivable reserves                      |       | 1,358                                   |       | 1,874 |   |
| Amortization  of bond (discount) premium                                                   |       | 554                                     |       | (401 | ) |
| Deferred  income taxes                                                                     |       | 1,249                                   |       | (1,954 | ) |
| Stock  compensation expense                                                                |       | 4,345                                   |       | 3,126 |   |
| Changes  in assets and liabilities:                                                        |       |                                    |       |   |   |
| Accounts  receivable                                                                       |       | 8,189                                   |       | (16,754 | ) |
| Unbilled  costs and fees                                                                   |       | 4,250                                   |       | 1,197 |   |
| Inventories                                                                                |       | (616                                    | )          | (6,648 | ) |
| Prepaid  expenses and other assets                                                         |       | (2,836                                  | )          | (3,761 | ) |
| Accounts  payable                                                                          |       | 838                                     |       | 1,298 |   |
| Accrued  income taxes                                                                      |       | (63                                     | )          | 2,198 |   |
| Customer  deposits                                                                         |       | (4,455                                  | )          | 9,702 |   |
| Deferred  revenue                                                                          |       | (14,171                                 | )          | 861 |   |
| Accrued  expenses and other liabilities                                                    |       | (2,471                                  | )          | 5,191 |   |
| Sale  of leased asset                                                                      |       | —                                  |       | 116 |   |
| Net  cash provided by operating activities                                                 |       | 23,405                                  |       | 19,348 |   |
|                                                                                       |       |                                    |       |   |   |
| **Cash flows from investing activities:**                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Purchases  of short-term investments                                                       |       | (166,998                                | )          | (50,500 | ) |
| Proceeds  from maturities of short-term investments                                        |       | 93,261                                  |       | 75,650 |   |
| Purchases  of property and equipment                                                       |       | (2,191                                  | )          | (1,270 | ) |
| Net  cash (used for) provided by investing activities                                      |       | (75,928                                 | )          | 23,880 |   |
|                                                                                       |       |                                    |       |   |   |
| **Cash flows from financing activities:**                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** |
| (Increase)  decrease in restricted cash and investments                                    |       | (1,832                                  | )          | 2,464 |   |
| Proceeds  from exercise of stock options                                                   |       | 5,761                                   |       | 4,602 |   |
| Repurchase  of shares of common stock                                                      |       | (2,922                                  | )          | (14,382 | ) |
| Repayment  of leasehold financing                                                          |       | (861                                    | )          | (849 | ) |
| Payment  of common stock dividend                                                          |       | (5,329                                  | )          | (5,267 | ) |
| Reduction  of income taxes paid due to the tax benefit from employee stock option  expense |       | 653                                     |       | 1,181 |   |
| Net  cash used for financing activities                                                    |       | (4,530                                  | )          | (12,251 | ) |
|                                                                                       |       |                                    |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                      |       | (57,053                                 | )          | 30,977 |   |
| Cash  and cash equivalents at beginning of period                                          |       | 105,419                                 |       | 52,418 |   |
| Cash  and cash equivalents at end of period                                                |       | $                                       | 48,366     |   | $ | 83,395 |   |

 

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, 2009.

 

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 ofoperations and cash flows.  These quarterly results are not necessarilyindicative of the 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**

 

For systems thatare produced in a standard manufacturing operation and have shorter order todelivery 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.  Revenues oncost reimbursable and custom long-term fixed price contracts are generallyrecorded as costs are incurred using the percentage of completion method.

 

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, 2009.  In the quarter ended December 31, 2009,the Company adopted the provisions of Accounting Standards Update No. 2009-13,*Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB EmergingIssues Task Force)*(ASU 2009-13), which amends existing accountingstandards for revenue recognition for multiple-element arrangements.  The Company adopted the provisions of ASU2009-13 in the current quarter and has applied the amendments in ASU 2009-13retrospectively from the beginning of the current fiscal year.  The adoption of these provisions did not havea material impact on our previously reported Consolidated FinancialStatements.  There have been no otherchanges to our critical accounting policies during the nine months ended December 31,2009.

 

**Comprehensive Income**

 

Comprehensiveincome is comprised of the following:

 
| ** **                         | ** ** | **Three  Months Ended**           | ** ** | **Nine  Months Ended**       | ** ** |
|------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(In thousands)**            | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
| Net  income                        |       | $                                 | 5,819      |                              | $          | 10,059 |   | $ | 23,850 |   | $ | 20,109 |   |
| Other  comprehensive income (loss) |       | (13                               | )          | 229                               |       | (3 | ) | (101 | ) |
| Comprehensive  income              |       | $                                 | 5,806      |                              | $          | 10,288 |   | $ | 23,847 |   | $ | 20,008 |   |

 

**StockRepurchase Program**

 

The Board of Directors approved a Stock RepurchaseProgram which authorized the Company to repurchase up to $35.0 million ofshares of its common stock from time to time on the open market.   During the three months ended December 31,2009, the Company did not purchase any shares under this Stock RepurchaseProgram.  During the nine months ended December 31,2009, a total of 51,299 shares were repurchased at an average price of $56.97per share.  As of December 31, 2009,the maximum dollar value of shares that may still be purchased under theprogram is $23,807,000.

 

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**Dividends**

 
| ** **              | ** ** | **Three Months Ended**  | ** ** | **Nine  Months Ended**       | ** ** |
|-------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(In thousands)** | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
| Dividends  declared     |       | $                                 | 0.20       |                              | $          | 0.20 |   | $ | 0.60 |   | $ | 0.60 |   |
| Dividends  paid         |       | $                                 | 0.20       |                              | $          | 0.20 |   | $ | 0.60 |   | $ | 0.60 |   |

 

On February 9, 2010, the Company declared a cashdividend of $0.30 per share. The dividend will be paid on March 4, 2010 toall shareholders of record at the close of business on February 22,2010.  Future dividends will be declaredat the discretion of the Board of Directors and will depend upon such factorsas the Board of Directors deems relevant.

 

**Concentrationsof Credit Risk**

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, investments and accounts and unbilledreceivables.  At times, the Companymaintains cash balances in excess of insured limits. The Company maintains itscash and cash equivalents with major financial institutions.  The Company’s credit risk is managed byinvesting its cash in high quality U.S. treasury bills, high quality moneymarket funds, commercial paper, investment grade corporate debentures / bonds,U.S. Government agency bonds and certificates of deposit.

 

**RecentAccounting Changes**

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issued FASBAccounting Standards Codification (“FASB ASC”) 105,  *Generally Accepted AccountingPrinciples*, which establishes the FASB Accounting StandardsCodification as the sole source of authoritative generally accepted accountingprinciples. Pursuant to the provisions of FASB ASC 105, the Company has updatedreferences to generally accepted accounting principles (“GAAP”) in itsfinancial statements issued for the period ended December 31, 2009. Theadoption of FASB ASC 105 did not impact the Company’s financial position orresults of operations.

 

In February 2008,the FASB issued FASB ASC 820-10-65-1,*Fair Value Measurements andDisclosures*.  FASB ASC 820-10-65-1 delayed theeffective date of FASB ASC 820-10 fornonfinancial assets and nonfinancial liabilities, except for certain items thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually) until fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The Company adopted theprovisions of FASB ASC 820-10 fornonfinancial assets and nonfinancial liabilities effective April 1,2009.  The adoption of these provisionsdid not have a material impact on our Consolidated Financial Statements.

 

In June 2008,the FASB issued FASB ASC 260-10-55-76C,*Earnings per Share — Implementation Guidance*,effective for fiscal years beginning after December 15, 2008.  FASB ASC 260-10-55-55-76C clarifiesthat unvested share-based awards that contain nonforfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and must be included in the computation of EPS pursuant to thetwo-class method. The Company adopted the provisions of FASB ASC 260-10-55-55-76C effective April 1, 2009 andcalculated the impact of this adoption on prior periods.  The adoption of FASB ASC 260-10-55-55-76C did not have a material impact onreported earnings per share.

 

In June 2008,the FASB issued FASB ASC 815-40-15*Derivatives and Hedging*. FASB ASC 815-40-15 addresses the determination of whetherprovisions that introduce adjustment features (including contingent adjustmentfeatures) would prevent treating a derivative contract or an embeddedderivative on a company’s own stock as indexed solely to the company’s stock. FASB ASC 815-40-15 is effective forfiscal years beginning after December 15, 2008. The Company adopted theprovisions of FASB ASC 815-40-15effective April 1, 2009.  Theadoption of these provisions did not have a material impact on our ConsolidatedFinancial Statements.

 

In October 2009,the FASB issued Accounting Standards Update No. 2009-13, *Revenue Recognition (Topic 605) Multiple-DeliverableRevenue Arrangements (A Consensus of the FASB Emerging Issues Task Force)*(ASU2009-13), which amends existing accounting standards for revenue recognitionfor multiple-element arrangements. To the extent a deliverable within amultiple-element arrangement is not accounted for pursuant to other accountingstandards, including ASC 985-605, *Software-RevenueRecognition*, ASU 2009-13 establishes a selling price hierarchy thatallows for the use of an estimated selling price to determine the allocation ofarrangement consideration to a deliverable in a multiple element arrangementwhere neither vendor-specific objective evidence nor third-party evidence isavailable for that deliverable. ASU 2009-13 is to be applied prospectively forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010, however early adoption is permitted.The Company has decided to adopt the provisions of ASU 2009-13 in the currentquarter and has applied the amendments in ASU 2009-13 retrospectively from thebeginning of the current fiscal year. The adoption of these provisions did not have a material impact on ourpreviously reported Consolidated Financial Statements.

 

In October 2009,the FASB issued Accounting Standards Update 2009-14, *Revenue Recognition (Topic 605)—Applicability of AICPA Statement ofPosition 97-2 to Certain Arrangements That Include Software Elements*(ASU2009-14). ASU 2009-14 excludes tangible products containing software componentsand non-software components that function together to deliver the product’sessential functionality from the scope of ASC 605-985, *Software-Revenue Recognition*. ASU 2009-14shall be applied on a prospective basis to revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.

 

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Early adoption ispermitted. Upon adoption, we must apply ASU 2009-14 retrospectively to thebeginning of the fiscal year of adoption or to all periods presented. TheCompany is currently evaluating the impact of the pending adoption of ASU2009-14 on our Consolidated Financial Statements.

 

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

 

The Companyaccounts for stock based awards made to employees and its Board of Directors inaccordance with FASB ASC 718, *Compensation—Stock Compensation*, which requires themeasurement and recognition of all compensation costs for stock based awardsmade to employees and the Board of Directors based upon fair value over therequisite service period for awards expected to vest.

 

The Companyrecognized $1,687,000 and $888,000 of share-based compensation costs in theconsolidated statements of income for the three months ended December 31,2009 and December 31, 2008, respectively. The Company recognized$4,345,000 and $3,126,000 of share-based compensation costs in the consolidatedstatements of income for the nine months ended December 31, 2009 and December 31,2008, respectively. The income tax benefit recognized related to thiscompensation for the three months ended December 31, 2009 and December 31,2008 was approximately $599,000 and $273,000, respectively. The income taxbenefit related to this compensation for the nine months ended December 31,2009 and December 31, 2008 was approximately $1,539,000 and $1,061,000,respectively.

 

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

 
| ** **                                         | ** ** | **Three  Months Ended**           | ** ** | **Nine  Months Ended**       | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(In thousands)**                            | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
| Cost  of revenues                                  |       | $                                 | 285        |                              | $          | 198 |   | $ | 693 |   | $ | 448 |   |
| Selling,  general and administrative               |       | 1,402                             |       | 690                               |       | 3,652 |   | 2,678 |   |
| Total  share-based compensation expense before tax |       | $                                 | 1,687      |                              | $          | 888 |   | $ | 4,345 |   | $ | 3,126 |   |

 

The Company usesthe Black-Scholes option pricing model as the most appropriate method fordetermining the estimated fair value for the stock awards. The Black-Scholesmethod of valuation requires several assumptions: (1) the expected term ofthe stock award, (2) the expected future stock volatility over theexpected term and (3) a risk-free interest rate. The expected termrepresents the 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.

 

There were 63,993 and 64,191 options granted in thenine month period ended December 31, 2009 and December 31, 2008,respectively.  The fair value of theoptions at date of grant was estimated with the following assumptions forgrants made during the period presented:

 
| ** **               | ** ** | **Nine  Months Ended**      | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| **Assumptions:**         | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Option  life             |       | 5 years                     |       | 5 years |   |
| Risk-free  interest rate |       | 2.4                         | %          | 3.0 | % |
| Stock  volatility        |       | 46                          | %          | 49 | % |
| Dividend  yield          |       | 1.24                        | %          | 1.25 | % |

 

**Stock Option and Other Compensation Plans**

 

The Company hasvarious stock option and other compensation plans for non-employee directors,officers, and employees. The Company had the following stock option and othercompensation plans outstanding as of December 31, 2009: the 1995Combination Plan, the 1997 Non-Qualified Option Plan, the 1998 Non-QualifiedOption Plan, 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 3,980,000 shares authorized under theseplans. As of December 31, 2009, 370,709 shares remain available for futureissuance under these plans.  Vestingperiods are at the discretion of the Compensation Committee of the Board ofDirectors, or their designee, and typically range between one and three years.Options under these plans are granted at fair market value and have a term offive or ten years from the date of grant.

 

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**Stock Options**

 

The followingtables summarize stock option activity for the nine months ended December 31,2009.

 
| ** **                                        | ** ** | **Number of********Shares** | ** ** | **Weighted********Average********Exercise********Price** | ** ** | **Weighted********Average********Contractual********Life** | ** ** | **Aggregate  Intrinsic********Value** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------|------------|
|                                              |       |                        |       |                                                     |       |                                                       |       |                                  |       |
| **Options outstanding at March 31, 2009**    |       | 709,254                     | ** ** | $                                                        | 44.47      |                                                       | 5.69       | ** **                            | ** ** |   |
| Grants                                            |       | 63,993                      |       | 64.28                                                    |       |                                                       |       | $                                     | 740,000    |   |
| Exercises                                         |       | (141,838                    | )          | 40.62                                                    |       |                                                       |       |                                  |       |
| Cancellations                                     |       | (450                        | )          | 53.55                                                    |       |                                                       |       |                                  |       |
| **Options outstanding at December 31, 2009** |       | 630,959                     | ** ** | $                                                        | 47.34      |                                                       | 5.36       |                                  |       |   |
| **Options exercisable at December 31, 2009** |       | 542,150                     | ** ** | $                                                        | 44.89      |                                                       |       |                                  | $          | 16,780,000 |   |

 

Informationrelated to the stock options outstanding as of December 31, 2009 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                        |       | 92,430                           |       | 3.53                                                                                |       | $                                                 | 12.70      |                                                | 92,430     |                                                                 | $          | 12.70 |   |
| $20.01  - $30.00                            |       | 68,234                           |       | 4.49                                                                                |       | 28.13                                             |       | 68,234                                              |       | 28.13                                                                |       |
| $30.01  - $40.00                            |       | 32,000                           |       | 4.92                                                                                |       | 39.07                                             |       | 32,000                                              |       | 39.07                                                                |       |
| $40.01  - $50.00                            |       | 71,000                           |       | 5.57                                                                                |       | 45.84                                             |       | 71,000                                              |       | 45.84                                                                |       |
| $50.01  - $60.00                            |       | 138,671                          |       | 5.38                                                                                |       | 53.35                                             |       | 127,086                                             |       | 53.51                                                                |       |
| $60.01  - $67.98                            |       | 228,624                          |       | 6.35                                                                                |       | 65.04                                             |       | 151,400                                             |       | 65.64                                                                |       |
| $ 6.50 - $67.98                        |       | 630,959                          |       | 5.36                                                                                |       | $                                                 | 47.34      |                                                | 542,150    |                                                                 | $          | 44.89 |   |

 

As of December 31,2009, there was approximately $1,311,000 of unrecognized compensation costsrelated to options granted. This cost is expected to be recognized over aweighted average of 1.1 years.  Non-vested common stock options are subject to the risk offorfeiture until the fulfillment of specified conditions.

 

**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 each non-employee member of the Board ofDirectors is granted restricted stock. These restricted stock awards vest inequal monthly installments for each month of service performed.  The fair value of these restricted stockawards is equal to the market price per share of the Company’s common stock onthe date of grant.

 

Non-vestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of December 31, 2009there was $4,925,000 of total unrecognized compensation cost related tonon-vested restricted stock and stock unit awards granted under the Company’sstock plans. This cost is expected to be recognized over a weighted average of1.3 years.

 

The followingtable summarizes the status of the Company’s non-vested restricted stock andstock unit awards for the nine months ended December 31, 2009:

 
| ** **                                | ** ** | **Number of********Shares** | ** ** | **Weighted Average********Grant Date********Fair Value** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Outstanding at March 31, 2009**    |       | 137,687                          | ** ** | $                                                                       | 56.74      |   |
| Granted                                   |       | 76,424                           |       | 61.59                                                                   |       |
| Vested                                    |       | (53,713                          | )          | 57.42                                                                   |       |
| Forfeited                                 |       | (200                             | )          | 55.60                                                                   |       |
| **Outstanding at December 31, 2009** |       | 160,198                          |       | $                                                                       | 58.83      | ** ** |

 

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

 

Inventoriesconsist of material, labor and manufacturing overhead and are recorded at thelower of cost, using the weighted average cost method, or net realizable value.Excessive manufacturing overhead costs attributable to idle facility expenses,freight, handling costs and wasted material (spoilage) attributable toabnormally low production volumes (levels that materially differ from budgetedproduction plans due primarily to changes in customer demand) are excluded frominventory and recorded as an expense in the period incurred.

 

The components ofinventories at December 31, 2009 and March 31, 2009 were as follows:

** **
| **(In thousands)**                                   | ** ** | **December 31,  2009** | ** ** | **March 31,********2009** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| Raw  materials, completed sub-assemblies, and spare parts |       | $                           | 23,313     |                           | $          | 20,527 |   |
| Work-in-process                                           |       | 18,258                      |       | 13,911                         |       |
| Finished  goods                                           |       | 5,734                       |       | 13,537                         |       |
| Total                                                     |       | $                           | 47,305     |                           | $          | 47,975 |   |

 

**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 restricted stock units using the average shareprice of the Company’s common stock for the period. For the three months ended December 31,2009 and December 31, 2008, common stock equivalents of 2,000 and 100,000,respectively, are excluded from diluted earnings per share, as their effect isanti-dilutive.  For the nine months endedDecember 31, 2009 and December 31, 2008, common stock equivalents of95,000 and 266,000, respectively, are excluded from diluted earnings per share,as their effect is anti-dilutive.

 
| ** **                                                                                      | ** ** | **Three  Months Ended**           | ** ** | **Nine  Months Ended**       | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(In thousands except per share amounts)**                            | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
| **Income Per Share**                                                                            | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic:**                                                                                      | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                 | 5,819      |                              | $          | 10,059 |   | $ | 23,850 |   | $ | 20,109 |   |
| Weighted  average number of common shares outstanding —basic                               |       | 8,929                             |       | 8,670                             |       | 8,868 |   | 8,679 |   |
| Net  income per share —basic                                                               |       | $                                 | 0.65       |                              | $          | 1.16 |   | $ | 2.69 |   | $ | 2.32 |   |
| ** **                                                                                      | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted:**                                                                                    | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                     |       | $                                 | 5,819      |                              | $          | 10,059 |   | $ | 23,850 |   | $ | 20,109 |   |
| Weighted  average number of common shares outstanding                                           |       | 8,929                             |       | 8,670                             |       | 8,868 |   | 8,679 |   |
| Assumed  exercise of stock options and restricted stock units, using the treasury  stock method |       | 207                               |       | 270                               |       | 201 |   | 238 |   |
| Weighted  average number of common and potential common shares outstanding—diluted         |       | 9,136                             |       | 8,940                             |       | 9,069 |   | 8,917 |   |
| Net  income per share —diluted                                                             |       | $                                 | 0.64       |                              | $          | 1.13 |   | $ | 2.63 |   | $ | 2.26 |   |

 

Note:  Earnings per share for the year may not equalthe sum of quarterly earnings per share due to changes in weighted sharecalculations.

 

**5.   LINE OF CREDIT**

 

On November 13,2009, the Company modified its Loan and Security Agreement with Silicon ValleyBank to extend the facility through November 12, 2010 and to decrease thefacility from $40.0 million to $30.0 million to support the Company’sroutine letters of credit and working capital needs.  If the Company maintains a cash andinvestments balance of $40.0 million or greater, then the maximum amountavailable for borrowing under the facility is $30.0 million minus the amount ofall outstanding letters of credit less certain reserves, and minus theoutstanding principal balance of any advances. If the Company’s cash and investment balance falls below $40.0 millionfor a period of 30 consecutive days, then the maximum amount available forborrowings under the facility is the lesser of (i) $30.0 million, or (ii) 80%of eligible domestic accounts receivable minus the amount of outstandingletters of credits adjusted for certain reserves and minus the principalbalance of any advances.

 

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The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (4.0% at December 31, 2009). 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, and requiresthe maintenance of certain financial covenants. As of December 31, 2009, the Company was in compliance with thesecovenants.

 

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 management believes is low.   As of December 31, 2009, the Companyhad outstanding $21,351,000 in standby letters of credit against the Loan andSecurity Agreement with $8,649,000 remaining availability.  The outstanding letters of credit areprimarily for guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit. In addition at December 31, 2009, the Company had arestricted cash balance of $1,867,000 related to certain bank required depositsfor outstanding letters of credit issued and other bank related fees.

 

**6.  FAIR VALUE MEASUREMENTS**

 

The Company hascategorized our financial assets, based on the priority of the inputs to thevaluation technique, into a three-level fair value hierarchy as set forthbelow. If the inputs used to measure the financial instruments fall withindifferent levels of the hierarchy, the categorization is based on the lowestlevel input that is significant to the fair value measurement of theinstrument.

 

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 actively exchange-traded equity securities, listedderivatives, and most U.S. Government and agency securities).

 

**Level 2** - Financial assets whose values arebased on quoted prices in markets where trading occurs infrequently or whosevalues are based on quoted prices of instruments with similar attributes inactive markets.  Level 2 inputs includethe following:

 

·    Quoted prices for identical or similarassets or liabilities in non-active markets (examples include corporate andmunicipal bonds which trade infrequently);

 

·    Inputs other than quoted prices that areobservable for substantially the full term of the asset or liability (examplesinclude interest rate and currency swaps); and

 

·    Inputs that are derived principally from orcorroborated by observable market data for substantially the full term of theasset or liability (examples include certain securities and derivatives).

 

**Level 3** - Financial assets whose values are basedon 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 December 31,2009:

 
| **(In thousands)**                            | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| **Level 1 – Financial Assets**                |       |                       |       |
| U.S.  Treasury bills                               |       | $                          | 24,966     |   |
| **Level 2 – Financial Assets**                |       |                       |       |
| Corporate  debentures/bonds                        |       | 40,427                     |       |
| Money  market funds                                |       | 34,706                     |       |
| Commercial  paper                                  |       | 17,980                     |       |
| Certificates  of deposit                           |       | 16,001                     |       |
| U.S.  Government agency bond                       |       | 10,190                     |       |
| Total  Level 2 Financial Assets                    |       | 119,304                    |       |
| Total  cash equivalents and short-term investments |       | $                          | 144,270    |   |

 

These investmentsare classified as available-for-sale and are recorded at their fair marketvalue using the specific identification

 

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method. Realized gainsand losses on the sale of securities available-for-sale are determined usingthe specific identification method and are reported as a separate component ofother income in the Statements of Income. Unrealized gains and losses areincluded as a separate item in computing comprehensive income.

 
| **(In thousands)**           | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| Corporate  debentures/bonds  |       | $                   | 40,416     |                         | $          | 52                            |       | $              | (41        | ) | $ | 40,427 |   |
| Money  market funds          |       | 34,706              |       | —                       |       | —                        |       | 34,706         |       |
| U.S.  Treasury bills         |       | 24,955              |       | 20                           |       | (9                            | )          | 24,966         |       |
| Commercial  paper            |       | 17,979              |       | 1                            |       | —                        |       | 17,980         |       |
| Certificates  of deposit     |       | 16,001              |       | —                       |       | —                        |       | 16,001         |       |
| U.S.  Government agency bond |       | 10,204              |       | —                       |       | (14                           | )          | 10,190         |       |
| Total                        |       | $                   | 144,261    |                         | $          | 73                            |       | $              | (64        | ) | $ | 144,270 |   |
| ** **                   |       |                |       |                         |       |                          |       |           |       |
| Classified  as:              |       |                |       |                         |       |                          |       |           |       |
| Cash  equivalents            |       |                |       |                         |       |                          |       | $              | 34,706     |   |
| Short  term investments      |       |                |       |                         |       |                          |       | 109,564        |       |
| Total                        |       |                |       |                         |       |                          |       | $              | 144,270    |   |

 

**7.   INCOME TAXES**

 

The Companyaccounts for income taxes in accordance with FASB ASC 740,*Income Taxes* and recognizes deferredincome taxes based on the expected future tax consequences of differencesbetween the financial statement basis and the tax basis of assets andliabilities, calculated using enacted tax rates in effect for the year in whichthe differences are expected to be reflected in the tax return. The Companyevaluates the need for a valuation allowance against its net deferred taxassets at year end based upon its three year cumulative income and itsprojections of future income, and records a valuation allowance against any netdeferred tax assets if it is more likely than not that they will not berealized.

 

The Company is currentlyopen to audit under the statute of limitations by the Internal Revenue Serviceand by state taxing authorities for the fiscal years ending March 31, 2006through 2009.  The Company has recently completed an audit by the InternalRevenue Service for tax years 2006 and 2007. The results of this examinationdid not have a material impact on the Company’s financial position or resultsof operations.   The Company iscurrently under audit by the Massachusetts state taxing authorities for taxyears 2007 and 2008.  Management does notbelieve that the ultimate outcome of this examination will have a materialimpact on the Company’s financial position or results of operations.  TheCompany believes that there are no uncertain tax positions that required areserve as of December 31, 2009.

 

**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 and ninemonths ended December 31, 2009 and 2008 is as follows:

 
| ** **                                        | ** ** | **Three  Months Ended**     | ** ** | **Nine  Months Ended** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(In thousands)**                           | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| Warranty  accrual - beginning of period           |       | $                           | 891        |                        | $          | 2,216 |   | $ | 1,130 |   | $ | 1,671 |   |
| Accruals  for warranties issued during the period |       | 242                         |       | 538                         |       | 1,020 |   | 2,202 |   |
| Adjustment  of preexisting accrual estimates      |       | (171                        | )          | (140                        | )          | (865 | ) | (797 | ) |
| Warranty  costs incurred during the period        |       | (73                         | )          | (398                        | )          | (396 | ) | (860 | ) |
| Warranty  accrual — end of period            |       | $                           | 889        |                        | $          | 2,216 |   | $ | 889 |   | $ | 2,216 |   |

 

**9.   LEASE COMMITMENTS**

 

In March 2005,the Company renewed its lease agreement for its corporate headquarters andmanufacturing facilities in Billerica, Massachusetts.  As part of thelease agreement, the Company’s landlord agreed to certain renovations to theBillerica facility including the construction of additional high bay manufacturingspace.  The Company was responsible for a portion of the constructioncosts and was deemed to be the owner of the building during the constructionperiod under FASB ASC 840,*Leases.* In January 2007, the Company amended thislease agreement to expand its lease to include the remaining available space inthe building.  A total of $7,182,000 was capitalized to record thefacility on its books with an offsetting credit to the lease financingliability.  In addition, amounts paid for construction were capitalized tofixed assets and the landlord construction allowances of $6,009,000 wererecorded as additional lease financing liability.

 

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At the completionof the construction of the initial renovations in February 2006, the leasewas reviewed for potential sale-leaseback treatment in accordance with FASB ASC840-40,*Leases — Sale-Leaseback Transactions*. Based on this review, it was determined that the lease did not qualify forsale-leaseback treatment in accordance with FASB ASC 840-40.  As a result,building and tenant improvement and associated lease financing liabilitiesremain on the Company’s books.  The lease financing liability is beingamortized over the lease term based on the payments designated in the agreementand the building and tenant improvement assets are being depreciated on astraight line basis over the lessor of their useful lives or the lease term.

 

**10.   COMMITMENTS AND CONTINGENCIES**

 

**Lease Liability**

 

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 toAccuray, Incorporated.  The Company remains secondarily liable forthe remaining lease payments in the event of default byAccuray, Incorporated during the lease term which expires in February 2011.Total remaining lease payments at December 31, 2009 totaled$464,000.  No accrual for this contingent liability has been recorded at December 31,2009 as management believes the probability of payment of this liability islow.

 

**DeferredRevenue**

 

The Company offersto its customers extended warranty and service contracts. These contractstypically cover a period of one to five years, and include advance paymentsthat are recorded as deferred revenue. Revenue is recognized as services areperformed over the life of the contract, which represents the period over whichthese revenues are earned. Costs associated with these extended warranty andservice contracts are expensed to cost of goods sold as incurred.

 

A significantnumber of the Company’s contracts with the U.S. Government contain clausespermitting the government to terminate the contract for convenience uponcertain terms and conditions, including partial payment to the Company for workperformed. Included in deferred revenue at December 31, 2009 and March 31,2009 was $4,926,000 and $4,341,000, respectively, related to contracts with U.SGovernment agencies and subcontractors which may include these termination forconvenience clauses.

 

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

 

This QuarterlyReport on Form 10-Q contains forward-looking statements that involve risksand uncertainties. The statements contained in this report that are not purelyhistorical are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Without limiting the foregoing, the words “may,” “will,” “should,”“could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”“predicts,” “potential” and similar expressions are intended to identifyforward-looking statements. All forward-looking statements included in thisQuarterly Report on Form 10-Q are based on information available to us upto, and including, the date of this report, and we assume no obligation toupdate any such forward-looking statements. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of certain factors, including the following: significant reductions or delays or cancellation (in full or inpart) in procurements of our systemsby the United States and other governments; disruption in the supply of anysource component incorporated into our products; litigation seeking to restrictthe use of intellectual property we use; potential product liability claimsagainst us; global political trends and events which affect public perceptionof the threat presented by drugs, explosives and other contraband; globaleconomic developments and the ability of governments and private organizationsto fund purchases of our products to address such threats; the potentialinsufficiency of our resources, including human resources, capital, plant andequipment and management systems, to accommodate any future growth; futuredelays in federal funding; and other factors discussed in “Item 1A **—**Risk Factors” and elsewhere in this Form 10-Q.You should carefully review those factors and also carefully review the risksoutlined in other documents that we file from time to time with the Securitiesand Exchange Commission, or the SEC.

 

**Overview**

 

American Scienceand Engineering, Inc., which is referred to in this report as “we” or “theCompany”, develops and manufactures state-of-the-art X-ray inspection systemsfor homeland security, force protection, and other critical defenseapplications.   We provide maintenance,warranty, research, engineering, and training services related to thesesolutions.

 

Our primarytechnologies are: (1) Z Backscatter technology which is used to detectplastic explosives, illegal drugs, and other contraband even when artfullyconcealed in complex backgrounds; and (2) Shaped Energy X-ray inspectiontechnology which combine the material discrimination features of the ZBackscatter technology with the penetration capability of high-energy X-raysfor dense cargos.

 

Net sales andcontract revenues for the third quarter of fiscal 2010 decreased by 16% to$54,889,000 compared to the third

 

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quarter of fiscal 2009revenues of $65,290,000. We reported income before provision for income taxesof $9,022,000 for the third quarter of fiscal 2010 compared to income beforeprovision for income taxes of $15,002,000 for the third quarter of fiscal2009.  Net income for the third quarterof fiscal 2010 was $5,819,000 ($0.64 per share, on a diluted basis) as comparedto net income of $10,059,000 ($1.13 per share, on a diluted basis) for thethird quarter of fiscal 2009.

 

For the ninemonths ended December 31, 2009, net sales and contract revenues increasedby 6% to $170,829,000 compared to the nine months ended December 31, 2008revenues of $161,077,000. We reported income before provision for income taxesof $36,977,000 for the nine months ended December 31, 2009 compared toincome before provision for income taxes of $30,705,000 for the nine monthsended December 31, 2008 net income for the nine months ended December 31,2009 was $23,850,000 ($2.63 per share, on a diluted basis) as compared to netincome of $20,109,000 ($2.26 per share, on a diluted basis) for the nine monthsended December 31, 2008.

 

**CriticalAccounting Policies**

 

We believe thatseveral accounting policies are important to understanding our historical andfuture performance. We refer to these policies as “critical” because thesespecific areas generally require us to make judgments and estimates aboutmatters that are uncertain at the time we make the estimate, and differentestimates—which also would have been reasonable—could have been used, whichwould have resulted in different financial results.

 

The criticalaccounting policies we identified in our most recent Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009 are policies related to revenuerecognition, inventories and related allowances for obsolete and excessinventory, and income taxes. It is important that the discussion of ouroperating results that follows be read in conjunction with the criticalaccounting policies disclosed in our Annual Report on Form 10-K, as filedwith the SEC on June 15, 2009.  Inthe quarter ended December 31, 2009, the Company adopted the provisions ofAccounting Standards Update No. 2009-13, *RevenueRecognition (Topic 605) Multiple-Deliverable Revenue Arrangements (A Consensusof the FASB Emerging Issues Task Force)*(ASU 2009-13), which amendsexisting accounting standards for revenue recognition for multiple-elementarrangements.  The Company adopted theprovisions of ASU 2009-13 in the current quarter and has applied the amendmentsin ASU 2009-13 retrospectively from the beginning of the current fiscalyear.  The adoption of these provisionsdid not have a material impact on our previously reported ConsolidatedFinancial Statements.  There have been noother changes to our critical accounting policies during the nine months ended December 31,2009.

 

**Results of Operations**

 

Net revenues forthe third quarter ended December 31, 2009 decreased by $10,401,000 to$54,889,000 compared to the corresponding period a year ago.  Thisdecrease is attributable primarily to a decrease of $8,775,000 in productsales.  Factors contributing to theproduct sales decrease include: 1) a $6,035,000 decrease in shipments of ZBackscatter systems, 2) a decrease of $3,158,000 in contract research anddevelopment revenues as compared to the corresponding prior year periodattributable to the termination for convenience of one research and developmentcontract which contributed $3,097,000 in revenues in the prior period; and 3) adecrease of $2,330,000 in aftermarket spare parts sales on lower volume.  These decreases were offset in part by anincrease of $2,414,000 in CargoSearch system revenues as several systemscompleted installation and were accepted in the period, and an increase of$333,000 in ParcelSearch systems revenues as compared to the prior year.  Service revenues decreased by $1,626,000 to$17,854,000 compared to the third quarter of fiscal 2009 due primarily tocertain service contracts not being renewed in the current period as theequipment under contract was decommissioned or taken out of service at the endof the contract term.

 

Net revenues forthe nine months ended December 31, 2009 increased by $9,752,000 to$170,829,000 compared to the corresponding period a year ago.  Thisincrease is attributable primarily to an increase of $6,894,000 in productsales.  Product sales increases wererecognized for Z Backscatter systems whose revenues increased $10,253,000 onincreased shipments and for CargoSearch systems whose revenues increased$5,818,000 as compared to the corresponding prior year period as a number ofunits recognized on a completed contract basis were accepted in theperiod.  These increases were offset by adecrease of $6,846,000 in contract research and development revenues ascompared to the corresponding prior year period attributable to the terminationfor convenience of one research and development contract which contributed$7,029,000 in revenues in the prior period; a decrease of $3,917,000 inParcelSearch system revenues due to a decrease in the volume of shipments inthe period and a decrease of $2,749,000 in aftermarket spare parts sales onlower volume. Service revenues increased by $2,858,000 to $56,821,000 comparedto the nine months ended December 31, 2008 due primarily to an increase inthe volume of service contracts over the prior year related to the increase ininstall base over the prior year.

 

Total cost ofsales and contracts for the third quarter of fiscal 2010 decreased by $4,268,000to $32,262,000 as compared to the corresponding period a year ago. Cost ofsales and contracts related to product revenues decreased by $2,410,000 to$23,206,000 as compared to the corresponding period a year ago.  Cost ofproduct sales and contract revenues represented 63% of revenues versus 56% ofrevenues for the corresponding period last year.  The resultant decreasein gross margin percentage from the prior year is due primarily to the mix ofproducts sold in the quarter. In the three months ended December 31, 2009,44% of product revenues were derived from our higher margin Z BackscatterSystems products as compared to 49% for the three months ended December 31,2008.  This product line historicallyexperiences higher margins due to manufacturing and installationefficiencies.   In addition, in the

 

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current quarter, certainCargoSearch projects experienced some installation cost overruns impacting themargin on these projects.  The cost ofservice revenues for the third quarter ended December 31, 2009 decreasedby $1,858,000 to $9,056,000 as compared to the corresponding period a yearago.  Cost of service revenues represented 51% of revenues versus 56% forthe corresponding period last year.  Thisincrease in gross margin percentage from the prior year is due primarily to areduction in material costs required to service systems under contract from theprior year as well as a decrease in freight costs as the Company had incurredsignificant freight costs in the prior fiscal period while establishing certaininternational spare parts depots.

 

Total cost ofsales and contracts for the nine months ended December 31, 2009 decreasedby $2,133,000 to $93,128,000 as compared to the corresponding period a yearago. Cost of sales and contracts related to product revenues increased by$456,000 to $63,940,000 as compared to the corresponding period a yearago.  Cost of product sales and contract revenues represented 56% ofrevenues versus 59% of revenues for the corresponding period last year. The resultant increase in gross margin percentage from the prior year is dueprimarily to the mix of products sold in the period and to our successfullycontrolling unit production costs on new builds. In the nine months ended December 31,2009, 56% of product revenues were derived from our higher margin Z BackscatterSystems products as compared to 50% for the nine months ended December 31,2008.  These product lines experiencedhigher margins due to manufacturing and installation efficiencies and costreductions efforts expended in this past fiscal year.  The cost of service revenues for the ninemonths ended December 31, 2009 decreased by $2,589,000 to $29,188,000 ascompared to the corresponding period a year ago.  Cost of service revenuesrepresented 51% of revenues versus 59% for the corresponding period lastyear.  This increase in gross marginpercentage from the prior year is due primarily to a reduction in materialcosts required to service systems under contract from the prior year as well asa decrease in freight costs as the Company had incurred significant freightcosts in the prior fiscal period while establishing certain international spareparts depots.

 

Selling, generaland administrative expenses for the third quarter of fiscal 2010 increased by$492,000 to $9,624,000 as compared to the corresponding period a yearago.  Selling, general and administrative expenses represented 18% ofrevenues in the current period compared to 14% for the corresponding periodlast year.   The increase in selling,general and administrative expenses costs over the prior period was primarilythe result of an increase in incentive and stock compensation expense($953,000) and an increase in sales and marketing related expenses ($143,000).These expenses were partially offset by a decrease in legal fees ($790,000)associated with the patent litigation described under “Item 1 – Legal Proceedings”in Part II of this quarterly report, which was settled during the firstquarter of this fiscal year.

 

Selling, generaland administrative expenses for the nine months ended December 31, 2009increased by $2,110,000 to $26,335,000 as compared to the corresponding perioda year ago.  Selling, general and administrative expenses remainedconstant at 15% of total revenues for both periods reported. The increase inselling, general and administrative expenses costs over the prior period wasprimarily the result of an increase in incentive and stock compensation expense($1,685,000), an increase in sales and marketing related expenses ($203,000)and an increase in salaries and benefits associated primarily with increasedheadcount ($259,000). These expenses were partially offset by a decrease inlegal fees ($495,000) associated with the patent litigation described under “Item1 – Legal Proceedings” in Part II of this quarterly report, which wassettled during the first quarter of this fiscal year.

 

Company fundedresearch and development expenses for the third quarter of fiscal 2010decreased by $663,000 to $4,152,000 as compared to the corresponding periodlast year.  Research and development expenses represented 8% of revenuesin the current quarter compared to 7% for the corresponding period lastyear.  This decrease in research and development expenses in the quarterwas a result of engineering efforts being expended in the quarter in existingproduct support and process improvement initiatives.

 

Company fundedresearch and development expenses for the nine months ended December 31,2009 increased by $2,355,000 to $14,909,000 as compared to the correspondingperiod last year.  Research and development expenses represented 9% ofrevenues in the nine months ended December 31, 2009 compared to 8% for thecorresponding period last year.  This year over year increase wasattributable to planned expenditures in research and development activity as wecontinue to focus on new product development and product enhancements as aprimary strategic goal.

 

Other income was$171,000 for the third quarter of fiscal 2010 as compared to $189,000 for thecorresponding period a year ago.  This decrease in other income isattributable primarily to a decrease in interest and investment incomeattributable to lower interest rates and returns on investments as compared tothe prior period.

 

Other income was$520,000 for the nine months ended December 31, 2009 as compared to$1,668,000 for the corresponding period a year ago.  This decrease inother income is attributable primarily to a decrease in interest and investmentincome attributable to lower interest rates and returns on investments ascompared to the prior period.

 

We reportedpre-tax income of $9,022,000 in the three months ended December 31, 2009as compared to pre-tax income of $15,002,000 in the corresponding period a yearago and pre-tax income of $36,977,000 in the nine months ended December 31,2009 as compared to pre-tax income of $30,705,000 in the corresponding period ayear ago due to the factors described above.

 

Our projectedeffective tax rate for the nine months ended December 31, 2009 was 35.5%as compared to 34.5% for the corresponding periods a year ago.  In thethird quarter of fiscal 2009, our effective tax rate dropped to 33% for thequarter as a result of increases in stock option exercises for which wereceived a tax deduction and the reinstatement in the third quarter of fiscal2009 of

 

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certain research anddevelopment tax credits.

 

We had net incomeof $5,819,000 for the third quarter of fiscal 2010 as compared to net income of$10,059,000 in the third quarter of fiscal 2009.   For the nine months ended December 31,2009, we had net income of $23,850,000 as compared to net income of $20,109,000for the corresponding period last year. The significant factors contributing tothese results are noted in the above sections.

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents decreased by $57,053,000 to $48,366,000 at December 31, 2009compared to $105,419,000 at March 31, 2009. This decrease is attributableprimarily to a net increase of $73,737,000 in short-term investments as wetransferred maturing cash equivalents into short-term investments during theyear.  We also expended $2,922,000 torepurchase outstanding shares of common stock as part of our Stock RepurchaseProgram and paid $5,329,000 in dividends to shareholders as part of ourquarterly dividend program.  Offsettingthis was $23,405,000 in net cash provided by operating activities due mainly tothe net income earned in the period offset by certain non-cash items anddecreases in accounts receivable and unbilled costs and fees of $12,439,000 dueto the timing of certain milestone invoices and payments.   These operating cash inflows were offset bydecreases in deferred revenue of $14,171,000 attributable primarily to revenueearned on prepaid system orders and other prepaid service contracts in theperiod, decreases in customer deposits of $4,455,000 as revenue was earnedagainst deposits received in prior periods and decreases in accrued expenses of$2,471,000 attributable primarily to the payment of incentive compensation andthe payment of certain project related costs, both of which had been accruedfor at year end.

 

On November 13,2009, we modified our Loan and Security Agreement with Silicon Valley Bank toextend the facility through November 12, 2010 and to decrease the facilityfrom $40.0 million to $30.0 million to support our routine letters ofcredit and working capital needs.  If wemaintain a cash and investments balance of $40.0 million or greater, then themaximum amount available for borrowing under the facility is $30.0 millionminus the amount of all outstanding letters of credit less certain reserves,and minus the outstanding principal balance of any advances.  If our cash and investment balance fallsbelow $40.0 million for a period of 30 consecutive days, then the maximumamount available for borrowings under the facility is the lesser of (i) $30.0million, or (ii) 80% of eligible domestic accounts receivable minus theamount of outstanding letters of credit adjusted for certain reserves and minusthe principal balance of any advances.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (4.0% at December 31, 2009). The credit agreement iscollateralized by certain of our assets and contains certain restrictions,including limitations on the amount of distributions that can be made tostockholders, and the disposition or encumbrances of assets, and requires themaintenance of certain financial covenants. As of December 31, 2009, we were in compliance with thesecovenants.

 

In the normalcourse of business, we may provide certain customers and potential customerswith performance guarantees, which are generally backed by standby letters ofcredit. In general, we would only be liable for the amount of these guaranteesin the event of default in the performance of our obligations; the probabilityof which management believes is low.   Asof December 31, 2009, we had outstanding $21,351,000 in standby letters ofcredit against the Loan and Security Agreement with $8,649,000 remainingavailability.  The outstanding letters ofcredit are primarily for guaranteeing performance on certain internationalprojects.   No amounts have been drawnagainst these letters of credit. In addition, at December 31, 2009, theCompany had a restricted cash balance of $1,867,000 related to certain bankrequired deposits for certain outstanding letters of credit and other bankrelated fees.

 

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

 

The cash accountsfor our operations in Hong Kong, England, the Netherlands, and Abu Dhabi aremaintained in Hong Kong dollars, pounds sterling, Euros and dirham,respectively. The gains and losses from foreign currency transactions areincluded in the statements of operations for the period and were immaterial. Ahypothetical 10% change in foreign currency rates would not have a materialimpact on our results of operations or financial position.

 

As of December 31,2009, we held short-term investments consisting of U.S. treasury bills, moneymarket funds, commercial paper, corporate debentures/bonds, U.S. governmentagency bonds and certificates of deposit. Our primary objective with ourinvestment portfolio is to invest available cash while preserving principal andmeeting liquidity needs. These investments have an average interest rate ofapproximately 0.449% 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.  To minimize thisrisk, we maintain a significant portion of our cash balances in money marketfunds. In general, money market funds are not subject to interest rate risk becausethe interest paid on such funds fluctuates with the prevailing interest rate.

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

a)  Evaluation of disclosure controls and procedures

 

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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, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective to providereasonable assurance that information required to be disclosed by the Companyin the reports filed and submitted by it under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and to providereasonable assurance that information required to be disclosed by the Companyin such reports is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

 

b)  Changes in internal control over financial reporting

 

There have been nochanges in our internal control 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 control overfinancial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1 — LEGAL PROCEEDINGS**

 

On October 3,2007, the Company commenced litigation in the United States District Court forthe Eastern District of Virginia against AutoClear, LLC, and its affiliatesControl Screening, LLC, and Scan-Tech Security, LP, for infringement of theCompany’s United States Patent No. 5,313,511, seeking relief, including aninjunction.  This case was settled in June of2009 with the court holding that the defendants had infringed on the Company’sUnited States Patent No. 5,313,511. Under the terms of the settlement agreement, the Company has granted thedefendants a limited license under the patent. Other terms of the settlement agreement are confidential.

 

The Company isalso subject to various legal proceedings and claims that arise in the ordinarycourse of business.  At the present time, it is not possible to predictthe outcome of these matters; however, the Company currently believes thatresolving these matters will not have a material adverse impact on itsfinancial condition, results of operations or cash flows.

 

**ITEM1A — RISK FACTORS**

 

You shouldcarefully review and consider the information regarding certain factors whichcould materially affect our business, financial condition or future results setforth under Item 1A. “Risk Factors” in our Form 10-K for the yearended March 31, 2009. There have been no material changes from the factorsdisclosed in our Form 10-K for the year ended March 31, 2009,although we may disclose changes to such factors or disclose additional factorsfrom time to time in our future filings with the Securities and ExchangeCommission.

 

**ITEM 2 –UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The****Board of Directorsapproved a Stock Repurchase Program which authorizes the Company to repurchaseup to $35 million of shares of its common stock from time to time on the openmarket.  As of December 31, 2009,the maximum dollar value of shares that may yet be purchased under this programis $23,807,000.

 

During the quarter ended December 31, 2009, the Company did notpurchase any securities under this Stock Repurchase Program.

 

**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: February 9,  2010 | /s/ Kenneth J. Galaznik                                       |
|                         | Kenneth J. Galaznik                                           |
|                         | Senior Vice President,  Chief Financial Officer and Treasurer |

 

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**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Description  of Exhibits**                                                                                                                                                                                                                                                                     |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                             |
| 10.1                      |       | Fifth Loan Modification  Agreement dated November 13, 2009 between the registrant and Silicon  Valley Bank (filed as Exhibit 99.1 to the registrant’s Current Report on  Form 8-K (File No. 001-06549) on November 18, 2009 and incorporated  herein by reference) |
|                      |       |                                                                                                                                                                                                                                                                                             |
| 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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