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**UNITED STATES**

**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 endedJune 30, 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’s telephone number, including areacode)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  x   No  o

 

Indicate by check 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                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

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 August 3,2009 was 8,856,631.

 

 

 

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**TABLEOF CONTENTS**

 
| **Part I —  Financial Information**                                                                                         |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1 —  Financial Statements                                                                                                   | 3      |
| Unaudited  Condensed Consolidated Balance Sheets—June 30, 2009 and March 31,  2009                                     | 3      |
| Unaudited  Condensed Consolidated Statements of Operations—For the Three Months Ended  June 30, 2009 and June 30, 2008 | 4      |
|                                                                                                                                  |   |
| Unaudited  Condensed Consolidated Statements of Cash Flows—For the Three Months Ended  June 30, 2009 and June 30, 2008 | 5      |
| Notes to Unaudited Condensed Consolidated Financial  Statements                                                                       | 6      |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             | 12     |
| Item 3 — Quantitative and Qualitative Disclosure About  Market Risk                                                              | 14     |
| Item  4 — Controls and Procedures                                                                                                | 14     |
| **Part II  — Other Information**                                                                                            |   |
| Item  1— Legal Proceedings                                                                                                       | 15     |
| Item  1A—Risk Factors                                                                                                            | 15     |
| Item 2 — Sales of Equity Securities and Use of Proceeds                                                                          | 15     |
| Item 6 —  Exhibits                                                                                                               | 15     |
| **Signatures**                                                                                                                        | 16     |

 

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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)**                                                                                                                               | ** ** | **June 30,********2009** | ** ** | **March 31,********2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| **Assets**                                                                                                                                                                            | ** ** | ** **                    | ** ** | ** **                     | ** ** |
| Current  assets:                                                                                                                                                                      |       |                          |       |                           |       |
| Cash  and cash equivalents                                                                                                                                                            |       | $                             | 70,286     |                           | $          | 105,419 |   |
| Restricted  cash and investments                                                                                                                                                      |       | 35                            |       | 35                             |       |
| Short-term  investments, at fair value                                                                                                                                                |       | 71,019                        |       | 36,384                         |       |
| Accounts  receivable, net of allowances of $306 and $286 at June 30, 2009 and  March 31, 2009, respectively                                                                 |       | 32,658                        |       | 36,956                         |       |
| Unbilled  costs and fees                                                                                                                                                              |       | 5,390                         |       | 6,316                          |       |
| Inventories                                                                                                                                                                           |       | 45,741                        |       | 47,975                         |       |
| Prepaid  expenses and other current assets                                                                                                                                            |       | 8,981                         |       | 7,224                          |       |
| Deferred  income taxes                                                                                                                                                                |       | 1,433                         |       | 1,807                          |       |
| **Total current assets**                                                                                                                                                              |       | 235,543                       |       | 242,116                        |       |
| Building,  equipment and leasehold improvements, net                                                                                                                                  |       | 19,349                        |       | 19,488                         |       |
| Deferred  income taxes                                                                                                                                                                |       | 5,427                         |       | 5,290                          |       |
| Other  assets, net                                                                                                                                                                    |       | 1,369                         |       | 1,393                          |       |
| **Total assets**                                                                                                                                                                      |       | $                             | 261,688    |                           | $          | 268,287 |   |
|                                                                                                                                                                                  |       |                          |       |                           |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                         | ** ** | ** **                    | ** ** | ** **                     | ** ** |
| Current  liabilities:                                                                                                                                                                 |       |                          |       |                           |       |
| Accounts  payable                                                                                                                                                                     |       | $                             | 10,309     |                           | $          | 10,639 |   |
| Accrued  salaries and benefits                                                                                                                                                        |       | 6,178                         |       | 10,387                         |       |
| Accrued  warranty costs                                                                                                                                                               |       | 808                           |       | 1,130                          |       |
| Accrued  income taxes                                                                                                                                                                 |       | 2,959                         |       | 63                             |       |
| Deferred  revenue                                                                                                                                                                     |       | 17,055                        |       | 28,003                         |       |
| Customer  deposits                                                                                                                                                                    |       | 19,456                        |       | 14,818                         |       |
| Current  portion of lease financing liability                                                                                                                                         |       | 1,201                         |       | 1,163                          |       |
| Other  current liabilities                                                                                                                                                            |       | 5,464                         |       | 6,893                          |       |
| **Total current liabilities**                                                                                                                                                         |       | 63,430                        |       | 73,096                         |       |
| Lease  financing liability, net of current portion                                                                                                                                    |       | 8,053                         |       | 8,377                          |       |
| Other  long term liabilities                                                                                                                                                          |       | 3,485                         |       | 4,748                          |       |
| **Total liabilities**                                                                                                                                                                 |       | 74,968                        |       | 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; 8,852,505 and  8,810,760 shares issued and outstanding at June 30, 2009 and  March 31, 2009, respectively |       | 5,901                         |       | 5,873                          |       |
| Capital  in excess of par value                                                                                                                                                       |       | 85,534                        |       | 86,477                         |       |
| Accumulated  other comprehensive income (loss) net                                                                                                                                    |       | (47                           | )          | (47                            | )          |
| Retained  earnings                                                                                                                                                                    |       | 95,332                        |       | 89,763                         |       |
| **Total stockholders’ equity**                                                                                                                                                   |       | 186,720                       |       | 182,066                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                   |       | $                             | 261,688    |                           | $          | 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)**

 
| ** **                                    | ** **    | **For the Three Months Ended** | ** ** |
|-----------------------------------------------|---------------|----------------------------------------------------|------------|
| **(In thousands, except per share  amounts)** | ** **    | **June 30, 2009**                             | ** ** | **June 30, 2008** | ** ** |
| **Net sales and contract revenues:**          | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Net  product sales and contract revenues      |          | $                                                  | 34,784     |   | $ | 22,942 |   |
| Net  service revenues                         |          | 19,908                                             |       | 16,552 |   |
| Total  net revenues and contract revenues     |          | 54,692                                             |       | 39,494 |   |
|                                          |          |                                               |       |   |   |
| **Cost of sales and contracts:**              | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Cost  of product sales and contracts          |          | 18,944                                             |       | 15,786 |   |
| Cost  of service revenues                     |          | 10,128                                             |       | 9,179 |   |
| Total  cost of sales and contracts            |          | 29,072                                             |       | 24,965 |   |
| **Gross profit**                              |          | 25,620                                             |       | 14,529 |   |
|                                          |          |                                               |       |   |   |
| **Expenses:**                                 | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Selling,  general and administrative expenses |          | 8,702                                              |       | 7,699 |   |
| Research  and development costs               |          | 5,806                                              |       | 3,563 |   |
| Total  operating expenses                     |          | 14,508                                             |       | 11,262 |   |
|                                          |          |                                               |       |   |   |
| Operating  income                             |          | 11,112                                             |       | 3,267 |   |
|                                          |          |                                               |       |   |   |
| **Other income (expense):**                   | ** **    | ** **                                         | ** ** | ** ** | ** ** |
| Interest  and investment income               |          | 165                                                |       | 951 |   |
| Interest  expense                             |          | (33                                                | )          | (37 | ) |
| Other,  net                                   |          | 130                                                |       | 21 |   |
| Total  other income                           |          | 262                                                |       | 935 |   |
|                                          |          |                                               |       |   |   |
| Income  before provision for income taxes     |          | 11,374                                             |       | 4,202 |   |
| Provision  for income taxes                   |          | 4,038                                              |       | 1,513 |   |
|                                          |          |                                               |       |   |   |
| Net  income                                   |          | $                                                  | 7,336      |   | $ | 2,689 |   |
|                                          |          |                                               |       |   |   |
| Income  per share                             | —Basic   |                                               | $          | 0.83 |   | $ | 0.31 |   |
|                                          | —Diluted |                                               | $          | 0.81 |   | $ | 0.30 |   |
|                                          |          |                                               |       |   |   |
| Weighted  average shares                      | —Basic   |                                               | 8,814      |   | 8,706 |   |
|                                          | —Diluted |                                               | 9,010      |   | 8,907 |   |
| Dividends  declared per share                 |          | $                                                  | 0.20       |   | $ | 0.20 |   |

 

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

 

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

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In thousands)**                                                                             | ** ** | **June 30, 2009**                             | ** ** | **June 30, 2008** | ** ** |
| **Cash flows from operating activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net  income                                                                                    |       | $                                                  | 7,336      |   | $ | 2,689 |   |
| Adjustments  to reconcile net income to net cash provided by (used for) operating  activities: |       |                                               |       |   |   |
| Depreciation  and amortization                                                                 |       | 1,120                                              |       | 1,044 |   |
| Provisions  for contracts, inventory and accounts receivable reserves                          |       | 191                                                |       | 191 |   |
| Amortization  of bond (discount) premium                                                       |       | 67                                                 |       | (224 | ) |
| Deferred  income taxes                                                                         |       | 237                                                |       | (1,308 | ) |
| Stock  compensation expense                                                                    |       | 1,220                                              |       | 965 |   |
| Changes  in assets and liabilities:                                                            |       |                                               |       |   |   |
| Accounts  receivable                                                                           |       | 4,277                                              |       | 246 |   |
| Unbilled  costs and fees                                                                       |       | 926                                                |       | (3,729 | ) |
| Inventories                                                                                    |       | 2,064                                              |       | (4,304 | ) |
| Prepaid  expenses and other assets                                                             |       | (1,733                                             | )          | (1,792 | ) |
| Accounts  payable                                                                              |       | (330                                               | )          | (2,007 | ) |
| Accrued  income taxes                                                                          |       | 2,896                                              |       | — |   |
| Customer  deposits                                                                             |       | 4,638                                              |       | 2,727 |   |
| Deferred  revenue                                                                              |       | (12,197                                            | )          | (3,861 | ) |
| Accrued  expenses and other liabilities                                                        |       | (5,787                                             | )          | (175 | ) |
| Sale  of leased asset                                                                          |       | —                                             |       | 66 |   |
| Net  cash provided by (used for) operating activities                                          |       | 4,925                                              |       | (9,472 | ) |
|                                                                                           |       |                                               |       |   |   |
| **Cash flows from investing activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchases  of short-term investments                                                           |       | (52,267                                            | )          | (19,403 | ) |
| Proceeds  from maturities of short-term investments                                            |       | 17,565                                             |       | 36,400 |   |
| Purchases  of property and equipment                                                           |       | (981                                               | )          | (425 | ) |
| Net  cash (used for) provided by investing activities                                          |       | (35,683                                            | )          | 16,572 |   |
|                                                                                           |       |                                               |       |   |   |
| **Cash flows from financing activities:**                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Increase  in restricted cash and investments                                                   |       | —                                             |       | (13,813 | ) |
| Proceeds  from exercise of stock options                                                       |       | 543                                                |       | 214 |   |
| Repurchase  of shares of common stock                                                          |       | (2,922                                             | )          | (10,768 | ) |
| Repayment  of leasehold financing                                                              |       | (286                                               | )          | (282 | ) |
| Payment  of common stock dividend                                                              |       | (1,767                                             | )          | (1,752 | ) |
| Reduction  of income taxes paid due to the tax benefit from employee stock option  expense     |       | 57                                                 |       | 45 |   |
| Net  cash used for financing activities                                                        |       | (4,375                                             | )          | (26,356 | ) |
|                                                                                           |       |                                               |       |   |   |
| Net  decrease in cash and cash equivalents                                                     |       | (35,133                                            | )          | (19,256 | ) |
| Cash  and cash equivalents at beginning of period                                              |       | 105,419                                            |       | 52,418 |   |
| Cash  and cash equivalents at end of period                                                    |       | $                                                  | 70,286     |   | $ | 33,162 |   |

 

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 accordance withthe 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 long-term fixed price contracts are generally recorded ascosts 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.  The Company has made no changes to these policiesduring the current year.

 

**Comprehensive Income**

 

Comprehensiveincome is comprised of the following:

 
| ** **                  | ** ** | **Three months ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| **(In thousands)**     | ** ** | **June 30, 2009**           | ** ** | **June 30, 2008** | ** ** |
| Net  income                 |       | $                                | 7,336      |   | $ | 2,689 |   |
| Other  comprehensive income |       | —                           |       | (135 | ) |
| Comprehensive  income       |       | $                                | 7,336      |   | $ | 2,554 |   |

 

**StockRepurchase Program**

 

On May 13, 2008, the Board of Directors approveda Stock Repurchase Program which authorized the Company to repurchase up to$35.0 million of shares of its common stock from time to time on the openmarket.   During the quarter ended June 30,2009, a total of 51,299 shares were repurchased at an average price of $56.97per share.  As of June 30, 2009, themaximum dollar value of shares that may yet be purchased under the program is$23,807,000.

 

**Dividends**

 

On May 13, 2009, the Company’s Board of Directorsdeclared a cash dividend of $0.20 per share. The dividend was paid on June 4,2009 to all shareholders of record at the close of business on May 26,2009.   On August 6, 2009, theCompany’s Board of Directors declared a cash dividend of $0.20 per share. Thedividend is payable on September 3, 2009 to all shareholders of record atthe close of business on August 24, 2009. Future dividends will be declared at the discretion of the Board ofDirectors and will depend upon such factors as the Board of Directors deemsrelevant.

 

**Concentrationsof Credit Risk**

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash 

 

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equivalents, investmentsand accounts and unbilled receivables. At times, the Company maintains cash balances in excess of insuredlimits. The Company maintains its cash and cash equivalents with majorfinancial institutions.  The Company’scredit risk is managed by investing its cash in high quality money marketfunds, commercial paper, treasury bills and investment grade corporatedebentures / bonds.

 

**NewAccounting Pronouncements**

 

*SFAS No. 157*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 establishes a common definition forfair value to be applied, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosure about such fair value measurements. The Company adopted the requiredprovisions of SFAS 157 that became effective in our first quarter of fiscal 2009.The adoption of these provisions did not have a material impact on ourConsolidated Financial Statements. For further information about the adoptionof the required provisions of SFAS 157 see Note 6.

 

In February 2008,the FASB issued FASB Staff Position No. FAS 157-2,”Effective Date of FASBStatement No. 157”(“FSP 157-2”). FSP 157-2 delayed the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except forcertain items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually) until fiscal yearsbeginning after November 15, 2008, and interim periods within those fiscalyears. The Company adopted the provisions of SFAS 157 for nonfinancial assetsand nonfinancial liabilities effective April 1, 2009.  The adoption of these provisions did not havea material impact on our Consolidated Financial Statements.

 

*EITFIssue No. 03-6-1*

 

In June 2008,the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Grantedin Share-Based Payment Transactions Are Participating Securities” (“FSP EITF03-6-1”), effective for fiscal years beginning after December 15,2008.  FSP EITF 03-6-1 clarifies that unvested share-based awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and must be included in thecomputation of EPS pursuant to the two-class method. The Company adopted theprovisions of FSP EITF 03-6-1 effective April 1, 2009 and calculated theimpact of this adoption on prior periods. The adoption of FSP EITF 03-6-1 did not have a material impact onreported earnings per share.

 

*EITFIssue No. 07-5*

 

In June 2008,the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexedto an Entity’s Own Stock”**(“EITF07-5”). EITF 07-5 addresses the determination of whether provisions thatintroduce adjustment features (including contingent adjustment features) wouldprevent treating a derivative contract or an embedded derivative on a company’sown stock as indexed solely to the company’s stock. EITF 07-5 is effective forfiscal years beginning after December 15, 2008. The Company adopted theprovisions of EITF 07-5 effective April 1, 2009.  The adoption of these provisions did not havea material impact on our Consolidated Financial Statements.

 

**2.   ACCOUNTINGFOR STOCK-BASED COMPENSATION**

 

On April 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS123(R)) “Accounting for Stock-Based Compensation”, which requires themeasurement and recognition of all compensation costs for stock based awardsmade to employees and the Board of Directors based upon fair value over therequisite service period for awards expected to vest.

 

SFAS 123(R) requiresthe Company to estimate the fair value of share-based awards on the date ofgrant using an option pricing model. The Company adopted SFAS 123(R) usingthe modified prospective transition method which required the application of theaccounting standard starting April 1, 2006, the first day of the Company’sfiscal year 2007. Prior period information was not restated to reflect the fairvalue method of expensing share-based awards.

 

Stock-basedcompensation costs recognized for the three month period ended June 30,2009 and June 30, 2008, included compensation costs for awards grantedprior to, but not yet vested as of April 1, 2006 (adoption date), as wellas any new grants issued after April 1, 2006. The Company recognized$1,220,000 and $965,000 of share-based compensation costs in the consolidatedstatements of income for the quarter ended June 30, 2009 and June 30,2008, respectively. The income tax benefit related to this compensation for thethree months ended June 30, 2009 and June 30, 2008 was approximately$430,000 and $337,000, respectively.

 

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

 
| ** **                                         | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                            | ** ** | **June 30, 2009**           | ** ** | **June 30, 2008** | ** ** |
| Cost  of revenues                                  |       | $                                | 209        |   | $ | 55 |   |
| Selling,  general and administrative               |       | 1,011                            |       | 901 |   |
| Total  share-based compensation expense before tax |       | $                                | 1,220      |   | $ | 965 |   |

 

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Upon adoption ofSFAS 123(R), in accordance with Staff Accounting Bulletin No. 107, theCompany selected the Black-Scholes option pricing model as the most appropriatemethod for determining the estimated fair value for the stock awards. TheBlack-Scholes method of valuation requires several assumptions: (1) theexpected term of the stock award, (2) the expected future stock volatilityover the expected term and (3) a risk-free interest rate. The expectedterm represents the expected period of time the Company believes the optionswill be outstanding based on historical information. Estimates of expectedfuture stock price volatility are based on the historic volatility of theCompany’s common stock and the risk free interest rate is based on the U.S.Zero-Bond rate.

 

There were 18,993 options granted in the three month period ended June 30,2009.  The fair value of the options atdate of grant was estimated with the following assumptions for grants madeduring the period presented:

 
| ** **               | ** ** | **Three months ended********June 30, 2009** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| **Assumptions:**         | ** ** | ** **                                       | ** ** |
| Option  life             |       | 5 years                                          |       |
| Risk-free  interest rate |       | 2.3                                              | %          |
| Stock  volatility        |       | 49                                               | %          |
| Dividend  yield          |       | 1.3                                              | %          |

 

**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 plansoutstanding as of June 30, 2009: the 1995 Combination Plan, the 1997Non-Qualified Option Plan, the 1998 Non-Qualified Option Plan, the 1999Combination Plan, the 2000 Combination Plan, the 2002 Combination Plan, the2003 Stock Plan for Non-Employee Directors and the 2005 Equity and IncentivePlan. There are 3,730,000 shares authorized under these plans. As of June 30,2009, 167,290 shares remain available for future issuance under theseplans.  Vesting periods are at thediscretion of the Compensation Committee of the Board of Directors, or theirdesignee, and typically range between one and three years. Options under theseplans are granted at fair market value and have a term of five or ten yearsfrom the date of grant.

 

**Stock Options**

 

The followingtables summarize stock option activity for the first quarter of fiscal 2010:

 
| ** **                                     | ** ** | **Number of********Shares** | ** ** | **Weighted********Average********Exercise********Price** | ** ** | **Weighted********Average********Contractual********Life  (years)** | ** ** | **Aggregate   Intrinsic********Value** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------|------------|
|                                           |       |                        |       |                                                     |       |                                                                |       |                                   |       |
| **Options outstanding at March 31, 2009** |       | 709,254                     | ** ** | $                                                        | 44.47      |                                                                | 5.69       | ** **                             | ** ** |   |
| Grants                                         |       | 18,993                      |       | 61.40                                                    |       |                                                                |       | $                                      | 147,000    |   |
| Exercises                                      |       | (15,675                     | )          | 34.66                                                    |       |                                                                |       |                                   |       |
| Cancellations                                  |       | —                      |       | —                                                   |       |                                                                |       |                                   |       |
| **Options outstanding at June 30, 2009**  |       | 712,572                     | ** ** | $                                                        | 45.13      |                                                                | 5.51       |                                   |       |   |
| **Options exercisable at June 30, 2009**  |       | 615,837                     | ** ** | $                                                        | 42.27      |                                                                |       |                                   | $          | 16,535,000 |   |

 

Informationrelated to the stock options outstanding as of June 30, 2009 is asfollows:

 
| **Range of Exercise Prices** | ** ** | **Number of********Shares** | ** ** | **Weighted-  Average********Remaining********Contractual********Life (years)** | ** ** | **Weighted-  Average******** Exercise Price** | ** ** | **Exercisable******** Number of******** Shares** | ** ** | **Exercisable******** Weighted-  Average********Exercise Price** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| $ 6.50  - $20.00                       |       | 120,720                          |       | 3.84                                                                                |       | $                                                       | 12.43      |                                                            | 120,720    |                                                                       | $          | 12.43 |   |
| $20.01  - $30.00                            |       | 70,384                           |       | 5.21                                                                                |       | 28.15                                                   |       | 70,384                                                          |       | 28.15                                                                      |       |
| $30.01  - $40.00                            |       | 54,606                           |       | 5.43                                                                                |       | 39.07                                                   |       | 54,606                                                          |       | 39.07                                                                      |       |
| $40.01  - $50.00                            |       | 95,333                           |       | 6.26                                                                                |       | 45.46                                                   |       | 95,333                                                          |       | 45.46                                                                      |       |
| $50.01  - $60.00                            |       | 157,548                          |       | 5.93                                                                                |       | 53.53                                                   |       | 145,963                                                         |       | 53.68                                                                      |       |
| $60.01  - $74.72                            |       | 213,981                          |       | 5.94                                                                                |       | 64.39                                                   |       | 128,831                                                         |       | 64.01                                                                      |       |
| $6.50  - $74.72                             |       | 712,572                          |       | 5.51                                                                                |       | $                                                       | 45.13      |                                                            | 615,837    |                                                                       | $          | 42.27 |   |

 

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As of June 30,2009, there was approximately $1,042,000 of unrecognized compensation costsrelated to options granted. The unrecognized compensation will be primarilyrecognized over a period of a weighted average of 1.6 years.   Non-vested common stock options aresubject to the risk of forfeiture until the fulfillment of specifiedconditions.

 

**Restricted Stock and Restricted Stock Units**

 

The Company hasinstituted long term incentive plans for certain key employees. These planscall for the issuance of restricted stock which vests upon the achievement ofcertain performance based goals as well as service time incurred.  Restricted stock and restricted stock unitsmay also be granted to other employees with vesting periods that range from oneto three years.  In addition, annually onJanuary 10th each non-employee member of the Board ofDirectors is granted restricted stock. These restricted stock awards vest on apro-rata basis on service time performed over a one-year period.  The fair value of these restricted stock awardsis equal to the market price per share of the Company’s common stock on thedate of grant.

 

Non-vestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of June 30, 2009 therewas $7,059,000 of total unrecognized compensation cost related to non-vestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a weighted average of 1.8 years.

 

The followingtable summarizes the status of the Company’s non-vested restricted stock awardsfor the first quarter of fiscal 2010:

 
| ** **                             | ** ** | **Number of******** Shares** | ** ** | **Weighted Average********Grant Date********Fair Value** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------------------|------------|
| **Outstanding at March 31, 2009** |       | 137,687                                | ** ** | $                                                                       | 56.74      |   |
| Granted                                |       | 75,070                                 |       | 61.45                                                                   |       |
| Vested                                 |       | (47,854                                | )          | 56.52                                                                   |       |
| Forfeited                              |       | (200                                   | )          | 55.60                                                                   |       |
| **Outstanding at June 30, 2009**  |       | 164,703                                |       | $                                                                       | 58.95      | ** ** |

 

**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 June 30, 2009 and March 31, 2009 were as follows:

** **
| **(In thousands)**                                   | ** ** | **June 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| Raw  materials, completed sub-assemblies, and spare parts |       | $                      | 22,922     |                    | $          | 20,527 |   |
| Work-in-process                                           |       | 15,084                 |       | 13,911                  |       |
| Finished  goods                                           |       | 7,735                  |       | 13,537                  |       |
| Total                                                     |       | $                      | 45,741     |                    | $          | 47,975 |   |

 

**4.   INCOME PER COMMONAND COMMON 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, restricted stock and restricted stock units usingthe average share price of the Company’s common stock for the period. For thefiscal quarters ended June 30, 2009 and June 30, 2008, common stockequivalents of 154,000 and 483,000, respectively, are excluded from dilutedearnings per share, as their effect is anti-dilutive.

 
| ** **                                                                                                        | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands except per share amounts)**                                              | ** ** | **June 30, 2009**           | ** ** | **June 30,  2008** | ** ** |
| **Earnings Per Share - Basic:**                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  income                                                                                                       |       | $                                | 7,336      |   | $ | 2,689 |   |
| Weighted  average number of common shares outstanding — basic                                                |       | 8,814                            |       | 8,706 |   |
| Net  income per share — basic                                                                                |       | $                                | 0.83       |   | $ | 0.31 |   |
| **Earnings Per Share - Diluted:**                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net  income                                                                                                       |       | $                                | 7,336      |   | $ | 2,689 |   |
|                                                                                                              |       |                             |       |   |   |
| Weighted  average number of common shares outstanding                                                             |       | 8,814                            |       | 8,706 |   |
| Assumed  exercise of stock options, restricted stock and restricted stock units, using  the treasury stock method |       | 196                              |       | 201 |   |
| Weighted  average number of common and potential common shares outstanding — diluted                         |       | 9,010                            |       | 8,907 |   |
| Net  income per share — diluted                                                                              |       | $                                | 0.83       |   | $ | 0.31 |   |

 

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**5.   LINE OF CREDIT**

 

On November 14,2008, the Company modified its Loan and Security Agreement with Silicon ValleyBank to extend the facility through November 13, 2009 and to increase thefacility from $20.0 million to $40.0 million to support the Company’sroutine letters of credit and working capital needs.  If the Company maintains a cash andinvestments balance of $60.0 million or greater, then the maximum amountavailable for borrowing under the facility is $40.0 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 $60.0 millionfor a period of 30 consecutive days, then the maximum amount available forborrowings under the facility is the lesser of (i) $40.0 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.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (4.0% at June 30, 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, andrequires the maintenance of certain financial covenants.  As of June 30, 2009, the Company was incompliance with these covenants.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations; the probability of which management believes is low.   As of June 30, 2009, the Company hadoutstanding $38,431,000 in standby letters of credit against the Loan andSecurity Agreement with $1,569,000 remaining availability.  The outstanding letters of credit areprimarily for guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit.

 

**6.   FAIRVALUE MEASUREMENTS**

 

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

 

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

 

**Level 1** - Financial assets whose values arebased on unadjusted quoted prices for identical assets or liabilities in anactive market that the Company has the ability to access at the measurementdate (examples include active exchange-traded equity securities, listedderivatives, and most U.S. Government and agency securities).

 

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

 

**Level 3** - Financial assets whose values arebased on prices or valuation techniques that require inputs that are bothunobservable and 

 

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significant to theoverall fair value measurement. These inputs reflect management’s ownassumptions about the assumptions a market participant would use in pricing theasset or liability. The Company currently does not have any Level 3 financialassets or liabilities.

 

The followingtable presents the financial assets and liabilities we measure at fair value ona recurring basis, based on the fair value hierarchy as of June 30, 2009:

 
| **(In thousands)**                            | ** ** | **June 30, 2009** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| **Level 1 – Financial Assets**                |       |                   |       |
| U.S.  Treasury bills                               |       | $                      | 23,974     |   |
| **Level 2 – Financial Assets**                |       |                   |       |
| Commercial  paper                                  |       | 41,565                 |       |
| Money  market funds                                |       | 54,770                 |       |
| Corporate  debentures/bonds                        |       | 9,187                  |       |
| Total  Level 2 Financial Assets                    |       | 105,522                |       |
| Total  cash equivalents and short-term investments |       | $                      | 129,496    |   |

 

These investmentsare classified as available-for-sale and are recorded at their fair marketvalue using the specific identification method. Realized gains and losses onthe sale of securities available-for-sale are determined using the specificidentification method and are reported as a separate component of other incomein the Statements of Income. Unrealized gains and losses are included as aseparate item in computing comprehensive income.

 
| **(In thousands)**          | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------|------------|
| Money  market funds         |       | $                    | 54,770     |                           | $          | —                          |       | $              | —     |   | $ | 54,770 |   |
| Commercial  paper           |       | 41,565               |       | —                         |       | —                          |       | 41,565         |       |
| Corporate  debentures/bonds |       | 9,188                |       | 14                             |       | (15                             | )          | 9,187          |       |
| Treasury  bills             |       | 23,961               |       | 13                             |       | —                          |       | 23,974         |       |
| Total                       |       | $                    | 129,484    |                           | $          | 27                              |       | $              | (15        | ) | $ | 129,496 |   |
| ** **                  |       |                 |       |                           |       |                            |       |           |       |
| Classified  as:             |       |                 |       |                           |       |                            |       |           |       |
| Cash  equivalents           |       |                 |       |                           |       |                            |       | $              | 58,477     |   |
| Short  term investments     |       |                 |       |                           |       |                            |       | 71,019         |       |
| Total                       |       |                 |       |                           |       |                            |       | $              | 129,496    |   |

 

**7.   INCOME TAXES**

 

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

 

The Company is currentlyopen to audit under the statute of limitations by the Internal Revenue Serviceand state taxing authorities for the fiscal years ending March 31, 2005through 2008.  The Company is underexamination currently by the Internal Revenue Service for tax years 2006 and2007. Management does not believe that the ultimate outcome of this examinationwill have a material impact on the Company’s financial position or results ofoperations.  The Company believes that there are no uncertain taxpositions that required a reserve as of June 30, 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 upon historicalexperience over the preceding twelve months and management’s judgment of futureexposure.  Warranty experience for the three months ended June 30,2009 and June 30, 2008 is as follows:

 

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| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| **(In thousands)**                           | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Warranty  accrual at beginning of period          |       | $                      | 1,130      |   | $ | 1,671 |   |
| Accruals  for warranties issued during the period |       | 308                    |       | 509 |   |
| Adjustment  of preexisting accrual estimates      |       | (455                   | )          | (202 | ) |
| Warranty  costs incurred during period            |       | (175                   | )          | (267 | ) |
| Warranty  accrual at end of period                |       | $                      | 808        |   | $ | 1,711 |   |

 

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 June 30, 2009 totaled $664,000.  Noaccrual for this contingent liability has been recorded at June 30, 2009as payment of this liability is considered remote.

 

**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 baymanufacturing space.  The Company was responsible for a portion of theconstruction costs and was deemed to be the owner of the building during the constructionperiod under EITF 97-10 “The Effect of Lessee Involvement in Asset Construction”. In January 2007, the Company amended this lease agreement to expand itslease to include the remaining available space in the building.  A totalof $7,182,000 was capitalized to record the facility on its books with anoffsetting credit to the lease financing liability.  In addition, amountspaid for construction were capitalized to fixed assets and the landlordconstruction allowances of $6,009,000 were recorded as additional leasefinancing liability.

 

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

 

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

 

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 in procurements of our systems by theUnited States and other governments; disruption in the supply of any sourcecomponent incorporated into our products; litigation seeking to restrict theuse of intellectual property we use; potential product liability claims againstus; global political trends and events which affect public perception of thethreat presented by drugs, explosives and other contraband; global economicdevelopments and the ability of governments and private organizations to fundpurchases of our products to address such threats; the potential insufficiencyof our resources, including human resources, capital, plant and equipment andmanagement systems, to accommodate any future growth and any future delays infederal funding; and other factors discussed in “Item 1A. Risk Factors”and elsewhere in this Form 10-Q. You should carefully review those factorsand also carefully review the risks outlined in other documents that we filefrom time to time with the Securities and Exchange Commission.

 

**Overview**

 

American Scienceand Engineering, Inc. develops and manufactures state-of-the-art X-rayinspection systems for homeland security and other critical defenseapplications.   The Company providesmaintenance, warranty, research, engineering, and training services related tothese solutions.

 

The Company’sprimary technologies are: (1) Z Backscatter technology which is used todetect plastic explosives, illegal drugs, and other contraband even whenartfully concealed in complex backgrounds; and (2) Shaped Energy X-rayinspection systems which combine the material discrimination features of ZBackscatter with the penetration capability of high-energy X-rays for densecargos.

 

Net sales andcontract revenues for the first quarter of fiscal 2010 increased by 38% to$54,692,000 compared to the first quarter of fiscal 2009 revenues of$39,494,000. The Company reported net income before taxes of $11,374,000 forthe first quarter of fiscal

 

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2010 compared to a netincome before taxes of $4,202,000 for the first quarter of fiscal 2009.  Net income for the first quarter of fiscal2010 was $7,336,000 ($0.81 per share, on a diluted basis) as compared to netincome of $2,689,000 ($0.30 per share, on a diluted basis) for the firstquarter of fiscal 2009.

 

**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 critical accounting policies we identified in ourmost recent Annual Report on Form 10-K for the fiscal year ended March 31,2009 are policies related to revenue recognition, inventories and relatedallowances for obsolete and excess inventory, and income taxes. It is importantthat the discussion of our operating results that follows be read in conjunctionwith the critical accounting policies disclosed in our Annual Report on Form 10-K,as filed with the SEC on June 15, 2009. There have been no changes to ourcritical accounting policies during the three months ended June 30, 2009.

 

**Results of Operations**

 

Net revenues forthe first quarter of fiscal 2010 increased by $15,198,000 to $54,692,000compared to the corresponding period a year ago.  This increase isattributable primarily to an increase of $11,842,000 in product sales, of which$9,600,000 relates to increased shipments of Z BackscatterTMsystems.   In addition, there was an increase of $7,980,000 inCargoSearchTM system revenues due to the acceptance in the current quarter of anumber of systems recognized on a completed contract basis.  These increases were offset by a decrease of$2,901,000 in ParcelSearchTM system revenues due to a decrease in the volume ofshipments in the period and a decrease of $2,494,000 in contract research anddevelopment revenues as compared to the prior period attributable to the terminationfor convenience of one research and development contract which contributed$2,332,000 in revenues in the prior period. Service revenues increased by $3,356,000 to $19,908,000 compared to thefirst quarter of fiscal 2009 due primarily to an increase in the volume ofservice contracts over the prior year related to the increase in install baseover the prior year.

 

Total cost ofsales and contracts for the first quarter of fiscal 2010 increased by$4,107,000 to $29,072,000 as compared to the corresponding period a year ago.Cost of sales and contracts related to product revenues increased by $3,158,000to $18,944,000 as compared to the corresponding period a year ago.  Costof product sales and contract revenues represented 55% of revenues versus 69%of revenues for the corresponding period last year.  The resultantincrease in gross margin percentage from the prior year is due primarily to themix of products sold in the quarter and to our successfully controlling unitproduction costs on new builds. In the quarter ended June 30, 2009, 92% ofproduct revenues were for our higher margin cargo and ZBV products as comparedto 63% for the quarter ended June 30, 2008.   The cost of service revenues for the firstquarter ended June 30, 2009 increased by $949,000 to $10,128,000 ascompared to the corresponding period a year ago.  Cost of service revenuesrepresented 51% of revenues versus 56% for the corresponding period lastyear.  This increase in gross margin percentagefrom the prior year is due primarily to a reduction in material costs requiredto service systems under contract from the prior year.

 

Selling, generaland administrative expenses for the first quarter of fiscal 2010 increased by$1,003,000 to $8,702,000 as compared to the corresponding period a yearago.  Selling, general and administrative expenses represented 16% ofrevenues in the current period as compared to 19% for the corresponding periodlast year.  The increase in costs was primarily the result of an increasein legal fees ($726,000) associated with the patent litigation described under “Item1 — Legal Proceedings” in Part II of this quarterly report, which wassettled during the quarter, an increase in salaries and benefits associatedprimarily with increased headcount ($178,000), and an increase in incentive andstock compensation expense ($217,000). These increases were offset slightly by decreased marketing and tradeshow costs ($99,000) from the prior period.

 

Company fundedresearch and development expenses for the first quarter of fiscal 2010increased by $2,243,000 to $5,806,000 as compared to the corresponding periodlast year.  Research and development expenses represented 11% of revenuesin the current quarter compared to 9% for the corresponding period last year. This increase was a planned expenditure in research and development activity aswe continue to focus on new product development and product enhancements as aprimary strategic goal.

 

Other income was$262,000 for the first quarter of fiscal 2010 as compared to $935,000 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 as compared to the prior period.

 

We reportedpre-tax income of $11,374,000 in the quarter ended June 30, 2009 ascompared to pre-tax income of $4,202,000 in the corresponding period a year agodue to the factors described above.

 

Our projectedeffective tax rate for the quarter ended June 30, 2009 decreased to 35.5%from 36.0% for the corresponding period a year ago.  This decrease is dueprimarily to our receiving the benefit of certain research and developmentcredits reinstated by the Internal Revenue Service in October of 2008.

 

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We had net incomeof $7,336,000 during the first quarter of fiscal 2010 as compared to net incomeof $2,689,000 in the first quarter of fiscal 2009.  The significantfactors contributing to these results are noted in the above sections.

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents decreased by $35,133,000 to $70,286,000 at June 30, 2009compared to $105,419,000 at March 31, 2009. This decrease is attributableprimarily to a net increase of $34,635,000 in short-term investments as theCompany shifted some maturing cash equivalents into short-term investmentsduring the quarter.  The Company alsoexpended $2,922,000 to repurchase outstanding shares of its common stock aspart of its Stock Repurchase Program and paid $1,767,000 in dividends toshareholders as part of the Company’s quarterly dividend program.  Offsetting this was $4,925,000 in net cashprovided by operating activities due mainly to the net income earned in thequarter, decreases in accounts receivable of $4,277,000 and increases incustomer deposits of $4,638,000.  Theseoperating cash inflows were offset by decreases in deferred revenue of$12,197,000 attributable primarily to revenue earned on prepaid system ordersand other prepaid service contracts in the period and decreases in accruedexpenses of $5,787,000 attributable primarily to the payment of incentivecompensation which had been accrued for at our fiscal year end.

 

On November 14,2008, the Company modified its Loan and Security Agreement with Silicon ValleyBank to extend the facility through November 13, 2009 and to increase thefacility from $20.0 million to $40.0 million to support the Company’sroutine letters of credit and working capital needs.  If the Company maintains a cash andinvestments balance of $60.0 million or greater, then the maximum amountavailable for borrowings under the facility is $40.0 million minus the amountof all 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 $60.0 millionfor a period of 30 consecutive days, then the maximum amount available forborrowings under the facility is the lesser of (i) $40.0 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.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (4.0% at June 30, 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, andrequires the maintenance of certain financial covenants.  As of June 30, 2009, the Company was incompliance with these covenants.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations; the probability of which management believes is low.  As of June 30, 2009 the Company hadoutstanding $38,431,000 in standby letters of credit against the Loan andSecurity Agreement with $1,569,000 remaining availability.  The outstanding letters of credit areprimarily for guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit.

 

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

 

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

 

As of June 30,2009, the Company held short-term investments consisting of money market funds,commercial paper, treasury bills and corporate debentures/bonds. The Company’sprimary objective with its investment portfolio is to invest available cashwhile preserving principal and meeting liquidity needs. These investments havean average interest rate of approximately 0.26% and are subject to interestrate risk. As a result of the average maturity and conservative nature of theinvestment portfolio, a sudden change in interest rates would not have amaterial adverse effect on the value of these investments.  To minimize this risk, we maintain asignificant portion of our cash balances in money market funds. In general,money market funds are not subject to interest rate risk because the interestpaid on such funds fluctuates with the prevailing interest rate.

 

**ITEM 4 – CONTROLS AND PROCEDURES**

 

a)  Evaluation of disclosure controls and procedures

 

As of the end ofthe period covered by this report, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective to providereasonable assurance that 

 

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information required tobe disclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

b)  Changes 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.  The Company subsequentlyadded United States Patent No. 6,546,072 to the complaint; however, thispatent was later withdrawn from the litigation. 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 commencing later this year.  Other terms of the settlement agreement areconfidential.

 

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**

 

On May 8, 2008, the****Boardof Directors approved a Stock Repurchase Program which authorizes the Companyto repurchase up to $35 million of shares of its common stock from time to timeon the open market.  As of June 30,2009, the maximum dollar value of shares that may yet be purchased under thisprogram is $23,807,000.

 

The following table provides information about our purchases during thequarter ended June 30, 2009 of equity securities that are registered by uspursuant to Section 12 of the Exchange Act.

 
| **2009**                          | ** ** | **Total Number   of Shares   Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total Number of   Shares Purchased   as Part of Publicly  Announced   Programs** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| April 1 – April 30 |       | 43,799                                   |       | $                                  | 56.47      |                                                                                    | 43,799     |   |
| May 1 – May 31     |       | 7,500                                    |       | 59.86                              |       | 7,500                                                                                   |       |
| June 1 – June 30   |       | —                                   |       | —                             |       | —                                                                                  |       |
| **Total**                         |       | 51,299                                   |       | $                                  | 56.97      |                                                                                    | 51,299     |   |

 

**ITEM 6 — EXHIBITS**

 

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

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 
|                       | AMERICAN SCIENCE AND  ENGINEERING, INC.                       |
|----------------------------|---------------------------------------------------------------|
|                       |                                                          |
| Date: August 6,  2009 | /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**                                                                                                                                  |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                          |
| 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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