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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

| **x**                                             | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                    |
|---------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                                   |
| **For the fiscal year ended March 31, 2009** |
| ** **                                        | ** **                                                                                                   |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 1-6549**

 

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**AMERICANSCIENCE AND ENGINEERING, INC.**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**                                                                                   | ** ** | **04-2240991**                    |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction ofincorporation or organization)                                       | ** ** | (IRS Employer Identification No.) |
|                                                                                                |       |                              |
| **829 Middlesex Turnpike,**

**Billerica, Massachusetts**

(Address of principal executive offices) | ** ** | **01821**

(Zip Code)             |
|                                                                                                |       |                              |
| **(978) 262-8700**

(Registrant’s telephone number, including area code)                       |

 

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Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class**                | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------|
| Common Stock ($.66 2/3 par value) |       | NASDAQ Stock Exchange                         |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

Indicateby checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act:  Yes o No x

 

Indicateby checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act:  Yes o No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 ofthe Securities Exchange Act of 1934)

 

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

Theaggregate market value of voting stock held by non-affiliates of theregistrant, computed using the closing sale price of common stock of $59.73 on September 30,2008 was $510,434,000.

 

8,839,530shares of registrant’s common stock were outstanding on May 29, 2009.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**The registrant intends to file a definitive ProxyStatement pursuant to Regulation 14A within 120 days of the end of the fiscalyear ended March 31, 2009. Portions of such Proxy Statement areincorporated by reference in Part III.**

 

 

 

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**AMERICAN SCIENCE AND ENGINEERING, INC.**

**FORM 10-K**

**FOR THE PERIOD ENDED MARCH 31, 2009**

**TABLE OFCONTENTS**

 
| ** **        | ** **                                                                                                           | **Page  Number** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|------------------|
| **PART I**   |                                                                                                                 |             |
| ITEM 1.           | Business                                                                                                             | 3                |
| ITEM 1A.          | Risk Factors                                                                                                         | 8                |
| ITEM 1B.          | Unresolved  Staff Comments                                                                                           | 14               |
| ITEM 2.           | Properties                                                                                                           | 14               |
| ITEM 3.           | Legal Proceedings                                                                                                    | 15               |
| ITEM 4.           | Submission  of Matters to a Vote of Security Holders                                                                 | 15               |
|              |                                                                                                                 |             |
| **PART II**  |                                                                                                                 |             |
| ITEM 5.           | Market for  the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 15               |
| ITEM 6.           | Selected  Financial Data                                                                                             | 17               |
| ITEM 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 18               |
| ITEM 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                          | 24               |
| ITEM 8.           | Financial  Statements and Supplementary Data                                                                         | 24               |
| ITEM 9.           | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 24               |
| ITEM 9A.          | Controls and  Procedures                                                                                             | 25               |
| ITEM 9B.          | Other Information                                                                                                    | 25               |
|              |                                                                                                                 |             |
| **PART III** |                                                                                                                 |             |
| ITEM 10.          | Directors,  Executive Officers and Corporate Governance                                                              | 25               |
| ITEM 11.          | Executive  Compensation                                                                                              | 25               |
| ITEM 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 25               |
| ITEM 13.          | Certain  Relationships and Related Transactions, and Director Independence                                           | 26               |
| ITEM 14.          | Principal  Accounting Fees and Services                                                                              | 26               |
|              |                                                                                                                 |             |
| **PART IV**  |                                                                                                                 |             |
| ITEM 15.          | Exhibits  and Financial Statement Schedules                                                                          | 26               |
| SIGNATURES        |                                                                                                                 | 50               |
| EXHIBIT INDEX     |                                                                                                                 | 51               |

 

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**CAUTIONARY STATEMENT**

 

This Annual Reportand the documents incorporated by reference contain forward-lookingstatements.  For this purpose, anystatements contained herein that are not statements of historical fact may bedeemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”,“expects”, “should” and similar expressions are intended to identifyforward-looking statements.  The factorsdiscussed under “Item 1A. Risk Factors”, among others, could cause actualresults to differ materially from those indicated by forward-looking statementsmade herein and presented elsewhere by management from time to time.  We expressly disclaim any obligation toupdate or alter our forward-looking statements, whether as a result of newinformation, future events or otherwise, except as required by law.

 

All references inthis Annual Report to “AS&E”, the “Company”, “we”, “our” and “us” meansAmerican Science and Engineering, Inc. and its subsidiary.

 

**PART I**

 

**ITEM 1.BUSINESS**

 

American Scienceand Engineering, Inc., a Massachusetts corporation formed in 1958, develops,manufactures, markets, and sells X-ray inspection and other detection solutionsfor homeland security and other targeted markets.  AS&E® provides maintenance, warranty, research,engineering, and training services related to these solutions.

 

The Companymanufactures sophisticated X-ray inspection products that can be used toinspect parcels, baggage, vehicles, pallets, cargo containers, and people.  The Company sells its products throughout theworld to a variety of customers, including:

 

·                  Authorities responsible for port andborder security;

 

·                  Military organizations;

 

·                  High threat commercial and governmentfacilities;

 

·                  Aviation security agencies; and

 

·                  Legal enforcement agencies

 

AS&E’s products areused by these customers to help combat terrorism, trade fraud, drugtrafficking, weapons smuggling, and illegal immigration.  Our products are also used for military forceprotection and general facility security.

 

Beginning with theterrorist attacks on September 11, 2001 and continuing with the proliferationof global terrorism, homeland security and force protection concerns havebecome of paramount importance around the world. The Company believes thathomeland defense, force protection and military security initiatives willcontinue to provide new opportunities, with additional growth in the seaportsand borders, federal and military facilities, and corporate security markets.

 

The Company’sobjective is to distinguish itself from its competitors by offering innovativeproducts which provide customers with superior threat detection and/or improvedoperating efficiencies. To achieve this objective, AS&E incorporates avariety of X-ray imaging and image processing technologies into itsproducts.  A number of the Company’sproducts use our patented Z BackscatterTM technology.  Z Backscatter is a unique X-ray imagingtechnique that has distinct advantages for the detection of organic or lowatomic number (Z) materials such as plastic explosives, composite weapons,and illegal drugs even when concealed by complex backgrounds.

 

**Technology**

 

The Company’sX-ray imaging products utilize several technologies including traditionaltransmission X-ray technology, our proprietary Z Backscatter technology, ShapedEnergy® technology and Radioactive Threat Detection(RTD).

 

X-ray imagingdevices contain these basic subsystems: X-ray sources, detectors andsoftware.  The source generates an X-raybeam that is directed at the object to be scanned (baggage, container, orsimilar object).  When the source X-raysencounter the object, they are either absorbed by the object, pass directlythrough the object, or scatter off of the object.  Dense (high atomic number) materials tend toabsorb X-rays.  Materials that are lessdense (low atomic number) tend to scatter X-rays.  The detectors record the intensity of thetransmitted or scattered X-rays. Software is then used to interpret the signals from the detectors and toconstruct and display X-ray images.

 

***TransmissionX-ray Technology:***** Transmission images are created from X-raysthat pass through the object that is being examined.  Medical X-ray images are a type oftransmission X-ray.  In transmissionimaging, the detector measures the relative intensity of the X-rays that passdirectly through the object.  The degreeto which X-rays are transmitted through an object is

 

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dependent upon the sizeof the X-ray source and the composition and quantity of the material in thepath of the X-ray beam.  Low energysources are used to scan smaller objects such as parcels and baggage, and highenergy sources are used for scanning large items such as trucks and cargocontainers.  Transmission X-ray imagesare useful for seeing “through” the object of interest.  A transmission image, however, represents anaggregate of all objects in the path on the beam and can therefore be difficultto interpret.

 

***ZBackscatter Technology:***   Most of theCompany’s X-ray systems utilize AS&E’s patented Z Backscattertechnology.  The term “Backscatter”refers to those X-rays that *scatter*off of the object under examination *back*toward the X-ray source.  Z Backscatterdetectors capture these scattered X-rays which are then used to create highlyreadable, photo-like images.

 

Many threat itemsare organic in nature and have low atomic numbers.  Such items include drugs, explosives,composite weapons, and stowaways.  Theseitems tend to scatter X-rays much more so than inorganic materials like steeland other metals.  As a result, theseorganic threat items tend to stand out as bright, visible objects when scannedby a Z Backscatter imaging system.

 

Z Backscatterimages complement transmission images and several of the Company’s productsemploy both technologies.  Thecombination of backscatter and transmission images gives the operator moreinformation about the contents of the baggage or container by differentiatingdense materials, such as metals, from low-Z materials such as explosives.  In addition, the two images enable aninspector to perform a quicker and more thorough examination of the object inquestion.

 

***Other Technologies:***   Two othertechnologies employed by AS&E are Shaped Energy and Radioactive ThreatDetection (RTD).  Shaped Energytechnology is a specialized form of high energy transmission X-ray which isused in AS&E’s OmniViewTM.  Radioactive Threat Detection (RTD) is atechnology which is used to find radioactive materials in vehicles and is anoption on selected AS&E detection systems.

 

**Productsand Systems**

 

The Company’sproducts and services can be grouped into five different areas includingCargoSearch Inspection Systems, Z Backscatter Systems, ParcelSearch andPersonnel Screening Inspection Systems, Contract Research and Development, andService and Support.

 

***CargoSearchInspection Systems:*** The CargoSearch family of systems includes non-intrusive inspectionproducts which are primarily used for the screening of trucks, cars, cargocontainers, pallets, and air cargo at locations including border crossings,seaports, military bases, railroad centers, airports, and cargo and transportationhubs. The CargoSearch systems are designed to combat trade fraud, drugtrafficking, weapons smuggling, and terrorism. The CargoSearch family includes:

 

*OmniView**TM** Gantry System*: a multi-view, relocatable high-energy cargo and vehicle inspectionsystem.  This system combines 6 MeVhigh-energy transmission imaging and three Z Backscatter X-ray views for left,right and top-side imaging of cargo. OmniView provides side and top-down views of the cargo in a relocatableconfiguration. OmniView utilizes AS&E’s patented Shaped Energy® technology topenetrate densely loaded cargo containers. Shaped Energy “shapes” the highenergy spectrum to filter out non-essential radiation, making the system safefor operators and staff and eliminating the need for extensive exclusionzones.  High energy 6 MeV transmissionX-rays can penetrate 14 inches (35 cm) of steel or 8.5 feet (260 cm) of oil,yet do not require heavy shielding, an exterior building, or standoff zones.   The Z Backscatter images are ideal for thedetection of organic or “low Z” materials including explosives, drugs, alcohol,and tobacco that transmission X-rays alone can miss. The System’s multiple ZBackscatter views of the cargo improve detection while facilitatinginterpretation of the X-ray image.  TheOmniView Gantry System’s scanning platform operates by moving on rails paststationary vehicles and cargo.  Thesystem is bi-directional allowing for a throughput of approximately 25 trucksper hour.  OmniView Gantry is ideal forports, borders, and high-threat facilities.

 

*Z Portal**®*:  a multi-view, high throughput, drive-throughinspection system capable of scanning cars, vans, trucks, and their cargoes forthreats and contraband.  The relocatablescreening system can be configured with one, two or three Z Backscatter X-raydetectors, allowing for left, right and/or top-side imaging of the vehicleunder examination.  The images producedby the Z Portal are ideal for the detection of organic materials includingexplosives, drugs, alcohol, tobacco, and stowaways.  The Z Portal is well-suited for scanningvehicles at border crossings, high threat facilities, and other vehicle entrycheckpoints.

 

*Z Gantry**TM*: a multi-view Z Backscatter inspectionsystem capable of scanning cars, vans, trucks, and their cargo for concealedthreats and contraband in a gantry configuration. The relocatable Z Gantryscreening system is configured with three Z Backscatter imaging modules,allowing a left, right, and top view of the vehicle under examination.  The rail-mounted Z Gantry system moves overthe top of stationary vehicles and cargo while scanning for threats and illegalgoods such as stowaways, explosives, drugs, and alcohol.

 

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***Z Backscatter Systems:***  ZBackscatter Systems include imaging systems that use Z Backscatter imaging only.

 

*Z Backscatter Van**TM** (ZBV*): a mobile X-ray screening system built into acommercially available chassis.  Itutilizes Z Backscatter X-ray technology to produce photo-like images of thecontents of a vehicle or cargo container, highlighting organic materials suchas plastic explosives or other anomalies. With one-sided, backscatter-onlyimaging, security officials can use ZBV for screening vehicles, sea containers,and other cargo for terrorist threats, trade fraud, and contraband, simply bydriving past the objects.   The ZBV canbe equipped with Radioactive Threat Detection (RTD) capability.  With RTD, the ZBV can produce Z Backscatterimages for general screening while simultaneously scanning the object for thepresence of radioactive material.  TheZBV is available on a variety of chassis in several versions, including amilitarized trailer configuration (ZBV Mil Trailer) that is designed for use bythe U.S. military.

 

***ParcelSearchand Personnel Screening Inspection Systems:*** ParcelSearch systems are designed for thenon-intrusive X-ray scanning of parcels, baggage, and mail. These systems areprimarily located in government facilities, airports, commercial officebuildings, high-security federal facilities and convention centers.

 

Personnelscreening is a crucial part of any threat detection effort.  Today, threats can take the smallest of formsand are often easily hidden on a person. With the advent of suicide bombings, personnel screening has taken on aneven more important role.  Personnelscreening is also important in the effort to intercept prohibited substances,such as drugs and alcohol.

 

*Gemini**TM*: Gemini is a parcel and baggage inspection system which combines AS&E’sZ Backscatter technology with dual-energy transmission X-ray to provideenhanced detection for a wide range of threats. Dual-energy transmission is best suited for the detection of threatssuch as guns and knives, and for identifying wires and other components ofimprovised explosive devices (IEDs). It also provides some organic and metallicdiscrimination in uncluttered environments. Z Backscatter imaging provides enhanced detection of organic materialssuch as explosives and narcotics, which may be missed by transmission-onlysystems in cluttered baggage.  Inaddition, the complementary photo-like Z Backscatter image makes it easier forsecurity officers to interpret images, thus reducing analysis time andminimizing operator fatigue. During fiscal 2009 the Company introduced twoadditional Gemini models to customers with a range of tunnel sizes to suitvarious applications.

 

*SmartCheck**TM*:  a personnelscreening system for the effective screening for contraband and threats hiddenunder a person’s clothing.  SmartChecksimultaneously detects both metallic and non-metallic objects, such as guns andknives, plastic explosives, liquid explosives, composite weapons, drugs andother hidden threats and contraband.  ItsZ Backscatter image gives the operator an easy-to-read display of where thethreat or contraband is hidden, thus eliminating the need for intrusive andtime-consuming pat-downs and strip searches. SmartCheck employs proprietary advanced image processing algorithms toenhance privacy, while maintaining a high level of threat detection.

 

***Contract Research & Development***: AS&E engages in a variety of contract research and development(CRAD) programs, mostly for agencies of the U.S. government.  AS&E pursues CRAD opportunities which itbelieves provide avenues for advancing our core technologies or developingproduct offerings for strategic customers or markets.

 

***Service and Support:***   AS&E’shighly skilled Field Service Engineers (FSEs) provide support servicesworldwide. Each FSE has a technical degree in Electrical and/or MechanicalEngineering (or equivalent experience), and is trained in the operation andrepair of electronics, hydraulics, pneumatics, mechanics, electrical systems,and computers. FSEs are available 7 days a week, 24 hours a day, and arelocated at AS&E sites in Asia, Europe, the Middle East, Africa and NorthAmerica.  In addition, Technical Supportis provided at the Company’s headquarters in Billerica, Massachusetts. AS&Eprovides comprehensive, cost-effective spare parts solutions customized foreach system.  The Company maintains aninventory of field-replaceable components in various depots around the world inorder to meet customer needs for spare parts.

 

AS&E providescomprehensive technical training on all X-ray inspection systems. Ourinstructors specialize in current threat detection techniques and employ bothclassroom theory and hands-on training to help clients become expert users ofAS&E equipment. Our technical training informs customers about detectiontechnologies and best practices through demonstrations and field activitiesthat simulate real-life threat and contraband encounters.  Technical training is included with eachsystem sale and additional training for image analysis, service and maintenancetraining, and other customized training courses are provided aftermarket tointerested customers.

 

**IntellectualProperty**

 

The Company relieson a combination of patent, copyright, trademark, and trade secret laws, andcontractual provisions to protect our intellectual property. ** **In general, theCompany pursues a policy of obtaining patent protection both in the UnitedStates and in selected foreign countries for subject matter we considerpatentable and important to our business strategy.  As of March 31, 2009, the Company has inexcess of 40 unexpired patents issued by the United States Patent and TrademarkOffice and multiple pending applications directed to a variety oftechnologies.  The Company also hasgranted patents or pending

 

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applications pursuant tothe following treaties and/or in the following countries: Patent CooperationTreaty, European Patent Convention, Gulf Cooperation Counsel, Australia,Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Greece,Hong Kong, India, Israel, Ireland, Italy, Japan, Korea, Malaysia, Mexico,Netherlands, New Zealand, Norway, Portugal, Russian Federation, Singapore,Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Arab Emirates,United Kingdom.  A significant number ofour patents have been issued in the last five years**.**

 

Generally, ifpending on June 8, 1995, a patent issued in the United States is effectivefor the longer of 17 years from the date of issue or 20 years from the UnitedStates filing date of the earliest non-provisional application upon which thepatent is based.  If filed after June 8,1995, a patent is generally effective for a term of 20 years from the UnitedStates filing date of the earliest non-provisional application upon which thepatent is based.  The duration of foreignpatents varies in accordance with applicable local law. While the duration ofour patents varies, we believe that the duration of our patents is adequaterelative to the expected lives of our products. Although the Company believesthe ownership of such patents, copyrights, and trademarks is an importantfactor in its business and that its success depends in part on the ownershipthereof, the Company relies primarily on the innovative skills, technicalcompetence, and marketing abilities of its personnel.

 

The Company alsohas various trademarks registered and pending registration with the UnitedStates Patent and Trademark Office, as well as marks registered and pendingregistration in various jurisdictions around the world.  Company patents and trademarks are carefullyreviewed regularly, and those with no foreseeable commercial value areabandoned to eliminate costly maintenance fees. The Company has ongoing research and development efforts and expects toseek additional intellectual property protection in the future.

 

In addition topatents and pending patent applications, the Company uses trade secrets andproprietary know-how in our products. Any of our know-how or trade secrets notprotected by a patent could be disclosed to, or independently developed by, acompetitor.

 

The Companybelieves that its patents, proprietary technology, trade secrets, know-how, andtrademarks provide substantial protection for the Company’s competitiveposition and the Company intends to aggressively protect its intellectualproperty assets, by litigation or other means, as appropriate.  We have periodically monitored and continueto monitor the activities of our competitors and other third parties withrespect to their use of intellectual property. In addition, we require ouremployees, consultants, outside collaborators, and certain distributors andsuppliers to execute confidentiality and, where appropriate, non-competitionagreements upon commencing employment or other relationships with us.  Nevertheless, there can be no assurances thatthe steps taken by the Company in this regard will be adequate to preventmisappropriation or infringement of its technology or that the Company’scompetitors will not independently develop technologies that are substantiallyequivalent or superior to the Company’s technology.  Effective protection of intellectual propertyrights may be limited or unavailable in certain foreign countries.  See “Item 3. Legal Proceedings” below.

 

**Sales andMarketing**

 

The Company’sproducts are marketed to corporate and governmental organizations through asales force that contacts potential customers and responds to public tendersand other expressions of interest. This sales force includes Company personnelbased in the United States and abroad, as well as independent representativesunder contracts to sell in foreign countries.

 

**Customers**

 

The Company has acustomer base consisting of government and commercial clients from both theUnited States and abroad. Domestically, the Company’s primary client base iscomprised of agencies of the U.S. Government. Approximately 56%, 55%, and 70%of the Company’s total sales in fiscal 2009, 2008, and 2007, respectively, werederived from either (i) contracting directly with the U.S. Government, or (ii) contractingwith contractors working directly with the U.S. Government. A significantnumber of the Company’s contracts with the U.S. Government provide the U.S.Government with the standard unilateral right to terminate these contracts forconvenience. As discussed under Item 7 of this Annual Report, during fiscal2009 two of the Company’s contracts with the U.S. Government were partiallyterminated for convenience by the U. S. Government.  These partial terminations did not result inany material losses to the Company.   TheCompany is heavily dependent upon sales to agencies of the U.S. Government andreductions or delays in procurement of the Company’s systems and services bythese agencies may have a material adverse effect on the Company.

 

Internationalsales, primarily to foreign governments, accounted for approximately 37%, 36%,and 27% of the Company’s total sales in fiscal 2009, 2008, and 2007respectively, and continue to be a high priority for the Company as part of itslong-term growth strategy. International sales entail longer sales cycles andproject financing requirements; however the Company continues to focus on thesesales as a means of broadening its customer base. The Company manages itsoverseas risk in a number of ways, including actively increasing the number ofopportunities it is pursuing at any one time and obtaining downpayments andletters of credit to secure its international receivables. The majority ofinternational contracts are bid in U.S.

 

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dollars. For thosecontracts that are bid in other currencies, the Company considers the need toengage in hedging contracts to control foreign exchange risk. There were nohedging activities in fiscal 2009, 2008, or 2007.

 

In fiscal 2009,the Company had sales to two major customers, one agency of the U.S. Governmentand one international government, which accounted for 18% and 16% of totalsales, respectively.  In fiscal 2008, theCompany had sales to two major customers, both agencies of the U.S. Government,which accounted for 12% and 10% of total sales. In fiscal 2007, the Company had sales to two major customers, bothagencies of the U.S. Government, which accounted for 31% and 15% of totalsales.

 

**Competition**

 

The Company hasmany competitors in the homeland security X-ray detection market, includingseveral large and well-established manufacturers of security equipment withfinancial and other resources greater than those of the Company. Certain X-raysecurity system customers select such systems based largely on price. Othercustomers, including some agencies of the U.S. Government and certain users incountries with high levels of concern over security, tend to select systemsbased largely on detection capability. Many of the Company’s systems offer premium performance and have in somecases been priced higher than competing systems. The Company believes that itspatented and proprietary technology give it a strong competitive position inthe sale of security systems to customers concerned with performance anddetection. The Company also believes that its strategy of concentrating onproducts with unique features, including Z Backscatter and Shaped Energy,and/or competitive pricing will give it a strong position to increase its salesof X-ray inspection systems. However, a number of companies have developedproducts that compete with the Company’s X-ray inspection products. (See Item1A.  Risk Factors)

 

**ISO 9001Certification**

 

In August 2006,the Company’s Quality Management System was recertified under the ISO 9001:2000Standard of the International Organization for Standardization which it hasbeen registered under since 2003.  ISO9001 is an internationally recognized quality management and assurance standard.  In qualifying, the Company met or exceededthe standards for establishing a quality management system for preventingnon-conformity at every level of the product life cycle, from customer order,through development and production, to installation and support.  The Company believes that demonstratingcontinuous quality improvement is vital for building customer satisfaction andmaking business processes more efficient in order to increase its competitiveedge.

 

**ComponentAvailability**

 

Critical materialand subsystems are procured from both domestic suppliers and global supplypartners.  These supply sources are inseveral cases, involving key components, single sources of supply and thematerial provided can have extended lead times. In response to expanding customer demand in the global securityscreening market, the Company has taken steps to mitigate sourcing risks byworking closely with its suppliers to ensure future material and subsystemavailability to support its production plans. In some cases, the Company haschosen to stock reserve material to ensure future availability. Efforts havealso included identifying and qualifying second source suppliers for criticalmaterial and a number of key subsystems in support of its product lines. TheCompany does not expect to experience sustained difficulties in securingrequired material and subsystems to support its future business operations.

 

**Regulatory Compliance**

 

AS&E mustcomply with applicable federal regulations under Title 21 CFR Subchapter J -Radiological Health.  To the Company’sknowledge, all AS&E cabinet X-ray products comply with all applicable U.S.Government radiation safety performance standards including 21 CFR 1020.40. Tothe Company’s knowledge, all personnel inspection systems of AS&E complywith the voluntary consensus radiation safety standards adopted by the AmericanNational Standards Institute ANSI N43.17-2002.

 

**Researchand Development**

 

The Company spentapproximately $18,070,000 of its own funds for research and development duringfiscal 2009, compared to $12,306,000 and $7,184,000 in fiscal 2008 and 2007,respectively. The fiscal 2009 research and development efforts were focused onnew product development, the development of new applications, and designmodifications and enhancements to existing products.

 

In addition, theCompany conducted government-sponsored research primarily focused on advancesin X-ray systems, image analysis and integrated system development for nichesecurity inspection problems. The Company recognized revenues of $12,524,000,$13,978,000, and $6,597,000 in fiscal 2009, 2008, and 2007, respectively forthese efforts. Many of the Company’s government sponsored research anddevelopment contracts provide for a fixed fee or a reimbursement of allowablecosts plus a

 

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fixed fee. The Company’scontracts in these areas are obtained by submitting research and developmentproposals to various organizations, sometimes in response to requests for suchproposals.

 

**Personnel**

 

As of March 31,2009 the Company had 375 employees as compared to 346 employees at March 31,2008.   It is the Company’s policy tohave employees sign a non-compete and non-disclosure agreement as a conditionof employment. None of the Company’s employees are represented by labor unions.

 

**SalesBacklog**

 

The Company’s firm(signed contracts) sales backlog was $155,349,000, $99,606,000, and$105,634,000 at March 31, 2009, March 31, 2008, and March 31,2007, respectively.

 

A significantnumber of the Company’s contracts with the U.S. Government contain clausespermitting the government to terminate the contract for convenience uponcertain terms and conditions, including partial payment to the Company for workperformed. This right was exercised in fiscal 2009 by two U.S. Governmentagencies who were parties to the contract. Total contracts with U.S Government agencies and subcontractors in thebacklog were $71,545,000, $42,640,000, and $58,833,000, at March 31, 2009,2008 and 2007, respectively. It is estimated that approximately 82% of the 2009backlog will be converted within the fiscal year ending March 31, 2010.

 

**Financial Information about Foreign and DomesticOperations and Export Sales**

 

Most export salesare transacted in U.S. dollars, and most are either secured by irrevocableletters of credit or paid in advance. The following table shows the breakdownof net sales and contract revenues to international and domestic customersbased upon the customer’s country of domicile and the major regions ofinternational activity. All assets are maintained within the United States withthe exception of inventory depots, inventory in transit or awaitinginstallation and cash accounts maintained at foreign locations (approximately5.3% of the Company’s assets).

 

***Net Sales and Contract Revenues***

*** ***
| ** **                                             | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|
| **(Dollars in thousands)**                             | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Domestic                                               |       | $               | 138,240    |   | 63 | % | $ | 107,021 |   | 64 | % | $ | 111,335 |   | 73 | % |
| International                                          |       | 80,127          |       | 37 | % | 59,712 |   | 36 | % | 41,851 |   | 27 | % |
| Net Sales and Contract Revenues                        |       | $               | 218,367    |   | 100 | % | $ | 166,733 |   | 100 | % | $ | 153,186 |   | 100 | % |
|                                                   |       |            |       |   |   |   |   |   |   |   |   |   |   |
| **Percent of International Revenue by Major  Region:** |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Middle East & Africa                          |       |            |       | 85 | % |   |   | 70 | % |   |   | 66 | % |
| Pacific Rim                                            |       |            |       | 7 | % |   |   | 14 | % |   |   | 20 | % |
| Europe                                                 |       |            |       | 8 | % |   |   | 14 | % |   |   | 14 | % |
| All Other                                              |       |            |       | — | % |   |   | 2 | % |   |   | — | % |

 

**Available Information**

 

The Company’sprincipal executive offices are located at 829 Middlesex Turnpike, Billerica,MA 01821; telephone number 978-262-8700; corporate website www.as-e.com. Wemake available, free of charge through our website, our annual Form 10-K,current reports on Form 10-Q and Form 8-K, and amendments to thesereports filed or furnished pursuant to Section 13(a) of theSecurities Exchange Act of 1934 as soon as practicable. In addition, ourreports, proxy and information statements and other information filed with theSEC are available at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580,Washington, DC 20549 (1-800-SEC-0330), and are also available from the SEC’swebsite at www.sec.gov.

 

**ITEM1A.  RISK FACTORS**

 

You shouldcarefully consider the following risk factors, in addition to other informationincluded in this Annual Report on Form 10-K and other reports we file withthe Securities and Exchange Commission. If any of the following risks occur, the Company’s business, financialcondition and operating results could be materially adversely affected.

 

**TheCompany’s reliance on a small number of customers for a large portion of itsrevenues could harm its business and prospects. A number of contracts held by those customers may be terminated at thecustomer’s discretion.**

 

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The Company’sbusiness is dependent on sales to a small number of customers, which includeagencies of the United States government. During fiscal 2009, two customersaccounted for 34% of the Company’s total revenues.   During fiscal 2008, two customers accountedfor 22% of the Company’s total revenues and during fiscal 2007, two customersaccounted for 46% of the Company’s total revenues. The Company can provide noassurance that its existing customers will increase or maintain their level ofdemand for the Company’s products.

 

A significantnumber of the Company’s government contracts may be terminated at thegovernment’s discretion. During fiscal 2009, two of the Company’s contractswith the U.S. Government were partially terminated for convenience by the U.S.Government.  Although these partialterminations did not result in material losses to the Company, future contractterminations could negatively impact the Company’s results of operations.  The termination of the Company’s relationshipwith one or more of its significant customers or the reduction or delay oforders of its systems by these customers would substantially reduce the Company’srevenues, and its business and prospects may be harmed.

 

**TheCompany’s results of operations are affected by the overall economy andgovernmental spending.**

 

The Company’sresults of operations may be materially adversely affected by the conditions inthe global economy and the impact of those conditions on U.S. and foreigngovernment spending. The global economic recession has caused extremevolatility and disruptions in the capital and credit markets, including asignificant reduction in the availability of capital resources to many businessenterprises. U.S. and foreign economies have experienced and continue toexperience significant declines in employment, spending, household wealth andlending.  Businesses have faced and maycontinue to face weakened demand for their products and services, difficultyobtaining access to financing, increased funding costs, and barriers toexpanding operations. U.S. and foreign government spending for programsinvolving products such as the Company’s may be reduced or delayed, now or inthe future, due to reduced tax revenues and other spending imperatives,including financial institution support and economic stimulus programs.  Economic and market conditions may continueto worsen and could negatively impact the Company’s results of operations.

 

**TheCompany’s business is dependent upon governmental policies and appropriations.**

 

The Company’s largestcustomers are government agencies and demand for its products is dependent uponnational priorities and governmental initiatives. These priorities andinitiatives are subject to change from time to time in response to the economicand political environment.   The Companyis also exposed to budget approval and appropriation decisions and processeswhich are driven by numerous factors, including geo-political events andmacroeconomic conditions, and are beyond our control. While the overall levelof U.S. defense spending has increased in recent years for numerous reasons, wecan give no assurance that such spending will continue to grow, or not be reduced.Significant changes in defense spending could have long-term consequences forour size and structure. In addition, changes in government priorities andrequirements could impact the funding, or the timing of funding, of ourprograms which could negatively impact our results of operations and financialcondition.

 

**TheCompany’s lengthy sales cycle requires it to incur significant expenses with noassurance that it will generate revenue or recover such expenses.**

 

A substantialportion of the Company’s sales depends upon the decision of governmentalagencies to upgrade or expand security at border crossing inspection sites,existing airports, seaports and other facilities. Accordingly, a portion of theCompany’s product sales is subject to delays associated with the lengthyapproval processes that often accompany such capital expenditures. During theseapproval periods, the Company expends significant financial and managerialresources in anticipation of future orders that may not occur. If the Company failsto receive an order after expending these resources, it may be unable togenerate sufficient revenue to recover the costs incurred and its business andprospects may be harmed.

 

**TheCompany conducts its business worldwide, which exposes it to a number ofdifficulties in coordinating its international activities and dealing withmultiple regulatory environments.**

 

The Company’srevenues to international customers, including foreign governments, accountedfor approximately 37%, 36% and 27% of its net revenues for the fiscal yearsended March 31, 2009, March 31, 2008 and March 31, 2007, respectively, and a significant number ofdomestic customer orders require shipments to, and services provided in,overseas locations. In addition, the Company transacts business internationallywith a number of its key suppliers. As a result of the Company’s worldwidebusiness operations, it is subject to various risks, including:

 

· international regulatory requirements and policychanges;

 

· lengthy sales cycles;

 

· longer payment cycles by foreign customers;

 

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· difficulties in inventory management, accountsreceivable collection and the management of distributors or representatives;

 

· difficulties in staffing and managing foreignoperations;

 

· geopolitical instability;

 

· political and economic changes and disruptions;

 

· favoritism towards local suppliers;

 

· governmental currency controls;

 

· interruption to transportation flow for delivery ofparts to us and finished goods to our customers;

 

· currency exchange rate fluctuations; and

 

· tariff regulations.

 

Although theCompany’s international sales have been denominated primarily in U.S. dollars,changes in currency exchange rates that increase the relative value of the U.S.dollar may make it more difficult for the Company to compete with foreignmanufacturers on price or otherwise have a material adverse effect on its salesand operating results.

 

**Changesin governmental regulations may reduce demand for the Company’s products orincrease its expenses.**

 

The Companycompetes in markets in which the Company or its customers must comply withfederal, state, local and foreign regulations, such as health and safetyregulations. The Company develops, configures and markets its products to meetits customers’ needs created by these regulations. Any significant change inthese regulations could reduce demand for the Company’s products or increaseits costs to comply with new regulations, both of which may adversely affectits operating results.

 

**TheCompany’s reliance on a limited number of suppliers for some key components forits products could harm its business and prospects.**

 

The Company relieson a number of suppliers to provide material and subsystems for our products.The Company is reliant on a limited number of key international supply partnersfor core technology products, including subsystems with complex sub-tier supplychains.  In addition, certain material orsubsystems used in our products may be available from a sole source or limitednumber of suppliers, increasing the risk of supply disruption. Although ourproducts may be able to be redesigned to avoid using any sole source supplier,it would be expensive and time consuming to make such a change. If the Companychanges any of its suppliers, a qualification process would need to becompleted and the affected product may require redesign, creating potentialdelays in product shipments.

 

Some of oursuppliers may allocate material due to market demand for the products theyproduce or market constraints such as the global availability of raw materials.We have no guaranteed supply arrangements with our suppliers and there can beno assurance that our suppliers will continue to meet our requirements. Many ofour competitors are much larger and may be able to obtain priority allocationsfrom these shared suppliers, thereby limiting or making our sources of supplyunreliable for these components. There is also the possibility that a keysingle source supplier may be acquired by or form a strategic alignment with acompetitor, which could impact our ability to secure required materials.  If our supply of materials is disrupted, wecannot ensure that we would be able to find another supplier on a timely basis.

 

The Companydepends on its subcontractors and suppliers to deliver material that is in fullcompliance with critical quality and specification requirements. Quality issuesmay affect the reliability and performance of our products, customerconfidence, and adversely impact financial performance. Any difficulty inobtaining sufficient and timely delivery of conforming material could result indelays or reductions in product shipments that could materially and adverselyaffect our business, financial condition and consolidated results ofoperations. This in turn could also damage our reputation in the market andcause us to lose market share. The Company does not expect to experiencesustained difficulties in securing required material and subsystems to supportforward business operations.

 

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**Fluctuationsin the Company’s operating results and unanticipated contract terminations maycause its stock price to fluctuate.**

 

Given the natureof the markets in which the Company participates, and given the right of keycustomers to terminate contracts at their discretion, it cannot reliablypredict future revenue and profitability. A high proportion of the Company’scosts are fixed, due in part to its significant sales, research anddevelopment, and manufacturing costs. As a result of its fixed costs, evensmall declines in revenue could disproportionately affect the Company’soperating results and stock price at any time. Factors that may affect theCompany’s quarterly operating results and the market price of its common stockinclude:

 

· demand for and market acceptance of its X-rayinspection systems;

 

· lengthy sales cycles and the effect of large orders;

 

· termination of contracts and contractual awards atthe customer’s convenience;

 

· changes in political agendas or national priorities;

 

· adverse changes in the level of economic activity inregions in which the Company does business;

 

· political unrest in the regions where the Companytransacts business;

 

· adverse changes in industries on which the Company isparticularly dependent;

 

· competitive pressures resulting in lower sellingprices for its products;

 

· delays or problems in the introduction of newproducts;

 

· the Company’s competitors’ announcement orintroduction of new products, services or technological innovations;

 

· variations in the Company’s product mix;

 

· the timing and amount of the Company’s expendituresin anticipation of future sales;

 

· increased costs of raw materials or supplies; and

 

· changes in the volume or timing of product orders.

 

**TheCompany could incur substantial costs as a result of product liability claimsand adverse publicity if its X-ray inspection systems fail to detect bombs,explosives, weapons, contraband or other threats to personal safety.**

 

If the Company’sX-ray inspection systems fail to detect the presence of bombs, explosives,weapons, contraband or other threats to personal safety, the Company could besubject to product liability claims and negative publicity, which could resultin increased costs, reduced sales, and a decline in the market price of theCompany’s common stock. There are many factors beyond the Company’s controlthat could result in the failure of its products to detect the presence ofbombs, explosives, weapons, contraband or other threats to personal safety.Examples of these factors include operator error or misuse of or malfunction ofits equipment. The failure of the Company’s systems to detect the presence ofthese dangerous materials may lead to personal injury, loss of life, andextensive property damage and may result in potential claims against theCompany.

 

**TheCompany’s insurance may be insufficient to protect it from product liabilityclaims.**

 

The Company’sproduct liability and umbrella liability insurance may be insufficient toprotect it from product liability claims. Moreover, there is a risk thatproduct liability insurance will not continue to be available to the Company ata reasonable cost, if at all. If liability claims exceed the Company’s currentor available insurance coverage, its business and prospects may be harmed.Regardless of the adequacy of the Company’s product liability insuranceprotection, any significant claim may have an adverse affect on its industryand market reputation, leading to a substantial decrease in demand for itsproducts and reduced revenues.

 

**TheCompany may not be able to fund its research and development activities.**

 

The Companygenerates funds for its research and development activities from operations,private sources and the government. The Company may be unable to generate thefunds necessary to support its research and development activities if it doesnot generate sufficient funds from operations, other potential private sources,or the government. The Company may not successfully compete with othercompanies and research institutions for government funding and funding fromother private sources. Additionally, government-funding priorities are subjectto frequent changes. For example, in fiscal 2009, 2008, and 2007, the Companyrecorded $12,524,000, $13,978,000 and $6,597,000, respectively, forgovernment-sponsored research and

 

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development. There is noguarantee that the Company will receive funds for government-sponsored researchin the future. If the Company is unable to fund its research and developmentactivities through its operations or from outside sources, the Company may beunable to continue to innovate or bring its innovations to market on a timelyor cost effective basis, or its innovations may be surpassed by othercompetitors or new technologies.

 

**TheCompany’s success depends on new product development.**

 

The Company’scontinuing research and development program is designed to develop new productsand to enhance and improve its current products. The Company plans to expendsignificant resources on the development of its new products. The successfuldevelopment of its products and product enhancements is subject to numerousrisks, both known and unknown, including:

 

· unanticipated delays;

 

· access to capital;

 

· budget overruns;

 

· technical problems; and

 

· other difficulties that could result in theabandonment or substantial change in the design, development and commercializationof new products and product enhancements, including for example, changesrequested or required by governmental and regulatory agencies.

 

Given theuncertainties inherent with product development and introduction of X-rayinspection systems, the Company cannot assure that its product developmentefforts will be successful on a timely basis or within budget, if at all. TheCompany’s failure to develop new products and product enhancements on a timelybasis or within budget would harm its business and prospects.

 

**The Company’s successdepends upon its ability to adapt to rapid changes in technology and customerrequirements.**

 

The market for the Company’s products has been characterized by rapidtechnological changes, frequent product introductions and evolving industrystandards and customer requirements. The Company believes that these trendswill continue into the foreseeable future. The Company’s success will depend,in part, upon its ability to enhance its existing products, successfullydevelop new products that meet changing customer and regulatory requirementsand gain market acceptance. If the Company fails to do so, its products may berendered obsolete or noncompetitive by new industry standards or changingtechnology, in which case its revenue and operating results would suffer. Indeveloping any new product, the Company may be required to make a substantialinvestment before it can determine the commercial viability of the new product.If the Company fails to accurately foresee its customers’ needs and futureactivities, it may invest heavily in research and development of products thatdo not lead to significant revenue.

 

**TheCompany may not be able to compete successfully.**

 

A number of companies have developed products that compete with theCompany’s X-ray inspection products. Many of the Company’s competitors arelarger and have greater financial resources than it does. Some of itscompetitors have more extensive research, marketing and manufacturingcapabilities and greater technical and personnel resources than the Companydoes, and may be better positioned to continue to improve their technology inorder to compete in an evolving industry. The Company’s failure to competesuccessfully could decrease demand for its products or make its productsobsolete.

 

In the inspection systems market, competition is based primarily on thefollowing factors:

 

·**product performance, functionality and quality;

 

·**price;

 

·**the overall cost of ownership of the system;

 

·**prior customer relationships;

 

·**technological capabilities of the product;

 

·**certification by government authorities;

 

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·**local market presence; and

 

·**breadth of the sales and service organization.

 

To remain competitive, the Company must develop new products andperiodically enhance its existing products in a timely manner. The Companyanticipates that it may have to adjust the prices of some of its products tostay competitive. In addition, new competitors may emerge, and entire productlines may be threatened by new technologies or market trends that reduce thevalue of these product lines.

 

**The Company’s business couldbe harmed if it is unable to protect its intellectual property.**

 

The Company relies primarily on a combination of trade secrets, patents,copyrights, trademarks and confidentiality procedures to protect itstechnology. Despite its precautions, the steps the Company has taken to protectits technology may be inadequate. Existing trade secret, patent, trademark andcopyright laws offer only limited protection. The Company’s patents could beinvalidated or circumvented.  Inaddition, others may develop substantially equivalent or supersedingproprietary technology, or competitors may offer equivalent products incompetition with the Company’s products, thereby substantially reducing thevalue of the Company’s proprietary rights. The laws of some foreign countriesin which the Company’s products are or may be developed, manufactured or soldmay not protect its products or intellectual property rights to the same extentas do the laws of the United States. This may make the possibility of piracy ofthe Company’s technology and products more likely. The Company cannot assurethat the steps it has taken to protect its intellectual property will beadequate to prevent misappropriation of its technology. The Company’s inabilityto protect its intellectual property could have a negative impact on itsoperations and financial results.

 

**TheCompany’s business may be materially and adversely affected by infringementclaims initiated by the Company or its competitors.**

 

Initiating ordefending against the enforcement of the Company’s intellectual property rightsmay result in significant, protracted, and costly litigation. The Company haspreviously been and continues to be involved in various litigations involvingits intellectual property and has been successful in protecting such intereststo date. The Company expects intellectual property disputes to be an ordinarypart of its business for the foreseeable future. The Company may initiateclaims or litigation against third parties for infringement of its intellectualproperty rights, or to establish the validity of its property rights. There canbe no assurance that the Company will prevail in any such action. Litigation byor against the Company could result in significant expense and divert theefforts of technical and management personnel, whether or not such litigationresults in a favorable outcome for the Company. In the event of an adverseresult in any such litigation, the Company could be required to pay substantialdamages, cease the manufacture, use and sale of infringing products, expend significantresources to develop non-infringing technology, discontinue the use of certainprocesses, or obtain licenses for the infringing technology. If a license wererequired, the Company cannot assure that it would be able to obtain one oncommercially reasonable terms, if at all. The Company cannot assure that itwill be successful in developing non-infringing technology or that the cost ortime required to develop such technology will be reasonable.

 

**TheCompany’s success depends on its ability to attract and retain qualifiedmanagement professionals.**

 

The Company’sfuture success depends in large measure upon the continued contributions of itssenior management team and other key personnel. We cannot guarantee that we will be able to attract and retain keypersonnel or executive management in sufficient numbers, with the requisiteskills or on acceptable terms necessary or advisable to support our continuedgrowth.  If we lose professionals or areunable to attract new talent, we will not be able to maintain our position inthe market or grow our business.

 

**Existingexternal financing may not be available in the future.**

 

The Company mayrequire additional capital to finance continuing operations. The Company cannotassure that operations will continue to be profitable, that it will generatelevels of revenues and cash flows sufficient to fund operations, or, ifnecessary, that the Company will be able to obtain additional financing onsatisfactory terms, if at all. Any existing financing arrangements may not beavailable or sufficient to meet the Company’s cash needs or may not beavailable in the future, or, if available, at a cost that the Company believesis reasonable.

 

**Futuresales of the Company’s common stock by existing stockholders could depress themarket price of the Company’s common stock.**

 

Substantially allof the Company’s outstanding shares of common stock are freely tradable withoutrestriction or further registration. Affiliates must sell all shares they ownin compliance with the volume and other requirements of Rule 144.

 

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Nevertheless, sales ofsubstantial amounts of common stock by the Company’s stockholders, or even thepotential for such sales, may cause the market price of the Company’s commonstock to decline and could impair the Company’s ability to raise capitalthrough the sale of the Company’s equity securities.

 

**Thevolatility of the Company’s stock price could adversely affect an investment inthe Company’s common stock.**

 

The market priceof the Company’s common stock has been, and may continue to be, highlyvolatile. The Company believes that a variety of factors could cause the priceof the Company’s common stock to fluctuate, perhaps substantially, including:

 

·announcements of developments related to the Company’s business;

 

· quarterly fluctuations in the Company’s actual oranticipated operating results and order levels;

 

· general conditions in the worldwide economy;

 

· announcements of technological innovations;

 

· new products or product enhancements by the Companyor its competitors;

 

· developments in patents or other intellectualproperty rights and litigation; and

 

· developments in the Company’s relationships with itscustomers and suppliers.

 

In addition, inrecent years the stock market in general, and the markets for shares of smallcapitalization and “high-tech” companies in particular, have experiencedextreme price fluctuations which have often been unrelated to the operatingperformance of affected companies. Any such fluctuations in the future couldadversely affect the market price of the Company’s common stock.

 

**Provisionsin the Company’s articles of organization and the Company’s shareholder rightsplan may have the effect of discouraging advantageous offers for the Company’sbusiness or common stock, and limit the price that investors might be willingto pay in the future for shares of the Company’s common stock.**

 

Provisions in theCompany’s articles of organization and the Company’s shareholder rights planmay have the effect of discouraging or preventing a change in control. Theseprovisions could limit the price that acquirers might be willing to pay in thefuture for shares of the Company’s common stock. Specifically, the Company’sarticles of organization authorize its Board of Directors to issue up to100,000 shares of preferred stock in one or more series, to fix certain rights,preferences, privileges and restrictions granted to or imposed upon any whollyunissued shares of preferred stock, to fix the number of shares constitutingany such series, and to fix the designation of any such series, without furthervote or action by its shareholders. The terms of any series of preferred stock,which may include priority claims to assets and dividends and special votingrights, could adversely affect the rights of the holders of common stock andthereby reduce the value of the Company’s common stock. The Company has nopresent plans to issue shares of preferred stock. The Company has in place ashareholder rights plan, which was renewed in April of 2008, under whichits stockholders are entitled to purchase shares of its preferred stock undercertain circumstances. These circumstances include the purchase of 15% or moreof the outstanding shares of common stock by a person or group, or theannouncement of a tender or exchange offer to acquire 15% or more of theoutstanding common stock. The shareholder rights plan may have the effect ofimpeding or preventing certain types of transactions involving a change incontrol of the Company that could be beneficial to the stockholders.

 

**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.PROPERTIES**

 

The Company leasesan 186,000 square foot facility located in Billerica, Massachusetts which isowned by an unaffiliated real estate limited partnership and serves as theCompany’s executive offices, research, manufacturing and warehousefacilities.  The lease expires on February 29,2016. The Company believes that itsfacilities are adequate and provide sufficient production capacity for itspresent intended purposes. The Company’s facilities are currently utilizedprimarily on a one-shift basis. The Company is able to add additional capacityby adding second and third shifts if necessary.

 

The Company’sformer High Energy Systems division had leased 24,733 square feet ofmanufacturing, research and development, and office space in Mountain View,California. The lease commenced on February 1, 2004 and had an initialterm of seven years with an option to extend for an additional five-yearperiod. In January 2005, as part of the asset sale agreement

 

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with Accuray,Incorporated, the Company assigned its rights and obligations under this leaseto Accuray. The Company is secondarily liable for the lease payments in theevent of default by Accuray during the lease term, which expires in February 2011.

 

**ITEM 3.  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, this patentwas later withdrawn from the litigation. This case was settled in June of 2009 with the court holding thatthe defendants had infringed on the Company’s United States Patent No. 5,313,511.  Under the terms of the settlement agreement,the Company has granted the defendants a limited license under the patentcommencing later this year.  Other termsof the settlement agreement are confidential.

 

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

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matter wassubmitted to a vote of the Company’s security holders during the fourth quarterof the fiscal year covered by this report.

 

**PART II**

 

**ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**Market Information**

 

Our common stockis traded on the NASDAQ Global Market under the symbol ASEI. The market pricerange for the common stock for the last two fiscal years as reported on theNASDAQ Global Market is as follows:

 
| **Fiscal Year** | ** ** | **Quarter Ended**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|--------------------------|------------|----------|------------|---------|------------|
| 2009            |       | March 31, 2009      |       | $        | 83.22      |    | $          | 49.29 |   |
|            |       | December 31,  2008  |       | $        | 77.05      |    | $          | 50.26 |   |
|            |       | September 30,  2008 |       | $        | 73.99      |    | $          | 49.09 |   |
|            |       | June 30,  2008      |       | $        | 56.79      |    | $          | 42.10 |   |
|            |       |                     |       |     |       |    |       |
| 2008            |       | March 31, 2008      |       | $        | 57.99      |    | $          | 47.16 |   |
|            |       | December 31,  2007  |       | $        | 67.14      |    | $          | 46.00 |   |
|            |       | September 30,  2007 |       | $        | 73.40      |    | $          | 54.55 |   |
|            |       | June 30,  2007      |       | $        | 57.71      |    | $          | 46.67 |   |

 

**Holders**

 

As of May 29, 2009,there were approximately 626 holders of record of the Company’s common stock.

 

**Common Stock Dividends**

 

In May of2007, the Company began declaring quarterly cash dividends for its common stockshareholders.   Common stock cashdividends declared during the fiscal years ended March 31, 2009 and March 31,2008 were as follows:

 
| **Date Declared**                      | ** ** | **Dividend per common  share** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|
| May 13,  2008                     |       | $                              | 0.20       |   |
| August 8,  2008                   |       | 0.20                           |       |
| November 10,  2008                |       | 0.20                           |       |
| February 9,  2009                 |       | 0.20                           |       |
| Fiscal  year ended March 31, 2009 |       | $                              | 0.80       |   |
|                                   |       |                           |       |
| August 6,  2007                   |       | $                              | 0.20       |   |
| November 5,  2007                 |       | 0.20                           |       |
| February 11,  2008                |       | 0.20                           |       |
| Fiscal  year ended March 31, 2008 |       | $                              | 0.60       |   |

 

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On May 13, 2009, the Company declared another quarterly dividend of$0.20 for holders of record on May 26, 2009 to be paid June 4, 2009. The Company has received consent from its bank for these dividends asits credit facility restricts the payment of dividends (except in shares of theCompany’s stock).  Future dividend payments will depend on our earnings,capital requirements, financial condition and capital needs and other factorsconsidered relevant by our Board.

 

**Securities Authorized for Issuance under EquityCompensation Plans**

 

The followingtable provides information about the Company’s equity compensation plans andthe common stock that may be issued upon the exercise of options and rightsunder all existing equity compensation plans as of March 31, 2009.

 
| **Plan Category**                                                   | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options  and rights as of  March 31, 2009  (a)** | ** ** | **Weighted average  exercise price of  outstanding  options and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans as of March 31,  2009 (excluding  securities reflected in  column (a))** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1995  Combination Plan                                              |       | 11,566                                                                                                                    |       | $                                                                             | 15.76      |                                                                                                                                                                             | —     |   |
| 1999  Combination Plan                                              |       | 43,101                                                                                                                    |       | 19.58                                                                         |       | —                                                                                                                                                                           |       |
| 2000  Combination Plan                                              |       | 64,227                                                                                                                    |       | 31.26                                                                         |       | —                                                                                                                                                                           |       |
| 2002  Combination Plan                                              |       | 97,486                                                                                                                    |       | 27.58                                                                         |       | 1,300                                                                                                                                                                            |       |
| 2003  Stock Plan for Non-Employee Directors                         |       | 95,610                                                                                                                    |       | 45.40                                                                         |       | —                                                                                                                                                                           |       |
| 2005  Equity and Incentive Plan                                     |       | 338,946                                                                                                                   |       | 57.43                                                                         |       | 293,327                                                                                                                                                                          |       |
| **Equity compensation plans****not approved by security  holders:** |       |                                                                                                                      |       |                                                                          |       |                                                                                                                                                                             |       |
| 1997  Non-Qualified Option Plan                                     |       | 29,811                                                                                                                    |       | 26.11                                                                         |       | —                                                                                                                                                                           |       |
| 1998  Non-Qualified Option Plan                                     |       | 28,507                                                                                                                    |       | 43.15                                                                         |       | —                                                                                                                                                                           |       |
| **Total**                                                           |       | 709,254                                                                                                                   |       | $                                                                             | 44.47      |                                                                                                                                                                             | 294,627    |   |

 

**Purchases of Equity Securities**

 

OnMay 17, 2007, the Board of Directors approved a Stock Repurchase Programwhich authorized the Company to repurchase up to $35 million of shares of itscommon stock from time to time on the open market.  This Stock Repurchase Program was completedin the first quarter of fiscal 2009.  On May 13,2008, the Board of Directors approved an additional Stock Repurchase Programwhich authorized the Company to repurchase up to another $35 million in sharesof its common stock from time to time on the open market. As of March 31,2009, the remaining balance available under the program to purchase shares was$26,732,000.  On May 7, 2009 theBoard of Directors approved the continuation of the Stock Repurchase Programthrough fiscal 2010.

 

Thefollowing table provides information about our purchases during the quarterended March 31, 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** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| January 1 – January 31   |       | —                                  |       | —                             |       | —                                                                           |       |
| February 1 – February 28 |       | —                                  |       | —                             |       | —                                                                           |       |
| March 1 – March 31       |       | 68,300                                  |       | $                                  | 53.84      |                                                                             | 68,300     |   |
| **Total**                               | ** ** | 68,300                                  |       | $                                  | 53.84      |                                                                             | 68,300     |   |

 

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**Stock Performance Graph**

 

The following chartgraphs the performance of the cumulative total return to shareholders (stockprice appreciation plus dividends, if applicable) during the previous fiveyears in comparison to the returns of the Standard & Poor’s 500Composite Stock Price Index, the S&P SmallCap 600 Index and the Standard &Poor’s 500 Information Technology Composite Stock Price Index.

 

**Comparison of Cumulative Five Year Total Return**

 

 
| Note: | Assumes $100 invested  at the close of trading on the last trading day preceding the first day of  the fifth preceding fiscal year (and reinvestment of dividends) in the  Company’s common stock, Standard & Poor’s 500 Composite Stock Price  Index, the S&P SmallCap 600 Index and the Standard & Poor’s 500  Information Technology Composite Stock Price Index. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM 6.SELECTED FINANCIAL DATA**

 

The following selectedfinancial data is qualified by reference to, and should be read in conjunctionwith, the consolidated financial statements, including the notes thereto, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this Annual Report.

 
| **(Dollars in thousands,**       | ** ** | **Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------|------------|
| **except per share amounts)**    | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  sales and contract revenues |       | $               | 218,367    |   | $ | 166,733 |   | $ | 153,186 |   | $ | 163,604 |   | $ | 88,314 |   |
| Net  income                      |       | 28,353          |       | 17,478 |   | 24,610 |   | 29,786 |   | 11,185 | (1) |
|                             |       |            |       |   |   |   |   |   |   |   |   |
| Income  per share—diluted   |       | 3.18            |       | 1.87 |   | 2.38 |   | 3.27 |   | 1.31 |   |
| Total  assets                    |       | 268,287         |       | 235,534 |   | 221,725 |   | 173,389 |   | 98,287 |   |
| Long-term  obligations           |       | 13,125          |       | 13,298 |   | 14,610 |   | 14,298 |   | 6,727 |   |
| Stockholders’  equity       |       | 182,066         |       | 166,072 |   | 167,698 |   | 130,198 |   | 61,570 |   |
| Dividends  per common share      |       | $               | 0.80       |   | $ | 0.60 |   | $ | — |   | $ | — |   | $ | — |   |

 

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(1)          Includes a gain of $5,442,000 on the saleof certain assets of the Company’s High Energy Systems division.

 

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**ITEM7.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion should be read in conjunction with our consolidated financialstatements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.The following discussion contains forward-looking statements and should also beread in conjunction with the “Cautionary Statement” included at the beginningof this Annual Report on Form 10-K.

 

**2009Compared to 2008**

 

***Overview***    American Science andEngineering, Inc. develops and manufactures state-of-the-art X-ray inspectionsystems for homeland security and other critical defense applications. TheCompany’s primary technologies are: (1) Z Backscatter technology which isused to detect plastic explosives, illegal drugs, and other contraband evenwhen artfully concealed in complex backgrounds; and (2) Shaped EnergyX-ray inspection systems which combine the material discrimination features ofZ Backscatter with the penetration capability of high-energy X-rays for densecargos.

 

Net sales and contractrevenues for fiscal 2009 increased by 31% to $218,367,000 compared to fiscal2008 revenues of $166,733,000. The Company reported net income before taxes of$43,700,000 in fiscal 2009 compared to a net income before taxes of $27,485,000in the previous fiscal year. Net income for fiscal 2009 was $28,353,000 ($3.18per share, on a diluted basis) as compared to a net income of $17,478,000($1.87 per share, on a diluted basis) in fiscal 2008. Backlog at March 31,2009 was $155,349,000, a 56% increase from the year-end backlog of $99,606,000reported at March 31, 2008.

 

***Results of Operations***    Total net sales and contractrevenues of $218,367,000 in fiscal 2009 increased by $51,634,000 or 31% fromthe previous year. Revenues related to product sales and contracts increased by$39,766,000 or 39% due to the following factors.  Z Backscatter system revenues increased by$24,037,000 attributable to an increase in number of units sold to newinternational customers and to the U.S. Government and Department ofDefense.  CargoSearch system revenuesincreased by $13,432,000 due to primarily to one large multi-unit orderreceived during the year and an increased volume of sales of new productsintroduced in the prior year. Aftermarket parts sales increased by $5,066,000 on higher order volume.Contract research and development revenues remained relatively constant yearover year.  These revenue increases wereoffset by a decrease in ParcelSearch System sales of $3,029,000 from the prioryear as one large multi-unit order of parcel systems in the prior year was notrepeated in the current year. Service revenues increased in fiscal 2009 by$11,868,000 or 19% to $75,436,000 due primarily to large service contracts soldduring fiscal 2009 for products sold internationally in fiscal 2009 not coveredby a labor warranty and for products sold in fiscal 2008 whose warrantiesexpired during fiscal 2009.

 

In fiscal 2009, 63% ofthe Company’s revenues were from domestic (based upon customer’s country ofdomicile) customers as compared to 64% in fiscal 2008. In fiscal 2009, theCompany had sales to two customers which accounted for 34% of total sales.  In fiscal 2008, the Company had sales to twocustomers which accounted for 22% of total sales.

 

Cost of sales andcontracts of $125,402,000 in fiscal 2009 increased by $18,419,000 or 17% fromthe previous year. Cost of product sales and contracts of $83,074,000 increasedby $12,661,000 or 18% as compared to the prior year. Cost of product sales andcontracts totaled 58% of revenues in fiscal 2009 as compared to 68% of revenuesin fiscal 2008. This decrease in costs as a percentage of revenue is dueprimarily to an increase in shipments of higher margin Z Backscatter systemsover the prior year and improved margins on CargoSearch system projects withhigher per unit revenues and decreased per unit costs as the Company overcamethe learning curve and streamlined the production of the new productsintroduced in the past two years.   Thecost of service revenues increased $5,758,000 or 16% from the prior year. Costof service revenues totaled 56% of revenues in fiscal 2009 as compared to 58%of revenues in fiscal 2008.  Thisdecrease in costs as a percentage of revenue is due primarily to improvedperformance of units under contract resulting in reduced replacement materialcosts from the prior year.

 

Selling, general andadministrative expenses in fiscal 2009 increased by $6,650,000 to $32,871,000as compared to fiscal 2008 and represented 15% of revenues in fiscal 2009 ascompared to 16% of revenues in fiscal 2008. This increase in spending can beattributed to increased incentive compensation costs ($4,611,000) as theCompany achieved certain incentive compensation goals in the current year,increased payroll and payroll related costs ($1,180,000) due to increased headcountand the accrual of certain severance payments, increased marketing relatedcosts ($540,000) as the Company increased trade shows and demos to introducenew product offerings, and increased legal fees ($1,499,000) related primarilyto on-going patent litigation.  Inaddition, in fiscal 2008 there was a write-down of a note receivable of$1,608,000 that was deemed uncollectible.

 

Company-fundedresearch and development spending increased by $5,764,000 to $18,070,000 infiscal 2009, a 47% increase as compared to the $12,306,000 spent in fiscal2008.  Research and development spendingrepresented 8% of revenues in fiscal 2009 as compared to 7% of revenues infiscal 2008. Fiscal 2009 costs increased as the Company hired during the yearadditional engineering resources to focus on the Company strategic developmentefforts.  The fiscal 2009 research anddevelopment efforts were focused on new product development, the development ofnew applications, and design modifications and enhancements to existing products.

 

Other income (expense)was $1,676,000 in income in fiscal 2009 as compared to $6,262,000 in income infiscal 2008. Interest and investment income decreased by $4,454,000 due toreduced yields on all investments and a need to move to more conservative,shorter term, lower yield investments as a result of the current economicrecession.

 

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The Company reportedpre-tax income of $43,700,000 in fiscal 2009 as compared to a pre-tax income of$27,485,000 in the previous fiscal year primarily due to the items noted above.The Company recorded income tax expense of $15,347,000 in fiscal 2009 ascompared to $10,007,000 in the prior fiscal year.  The Company’s effective tax rate was 35% infiscal 2009 as compared to 36% in fiscal 2008. This decrease in rate can be attributed to the increase in manufacturingand research and development credits available in the current year due in partto the reinstatement of certain research and development tax credits duringthis fiscal year by the federal government and to a decrease in non-deductiblestock compensation expense,.

 

TheCompany reported net income of $28,353,000 in fiscal 2009 as compared to netincome of $17,478,000 in fiscal 2008.

 

**2008Compared to 2007**

 

***Results of Operations***    Total net sales and contractrevenues of $166,733,000 in fiscal 2008 increased by $13,547,000 or 9% from theprevious year. Revenues related to product sales and contracts increased by$2,025,000 or 2% due to the following factors. CargoSearch system revenuesincreased by $16,346,000 due to higher order volume on products introduced inthe past two years.  ParcelSearch andPersonnel Screening system revenues increased by $7,446,000 due primarily toone large multi-unit order received during the year.  Contract research and development revenuesalso increased $5,805,000 from the prior year attributable primarily to onelarge contract which comprised 82% of overall contract research and developmentrevenues.  These revenue increases wereoffset by a decrease in Z Backscatter System sales of $27,353,000 from theprior year attributable to a decrease in the number of units sold.  In each of the previous two years, ZBackscatter Systems contributed over 65% of overall product revenues.  The current year showed a shift in theproduct mix with a greater percentage of revenues being received from theCompany’s other product offerings. Service revenues increased in fiscal 2008 by $11,522,000 or 22% to$63,568,000 due primarily to certain new large service contracts receivedduring fiscal 2008 for products sold in fiscal 2007 whose warranties expiredduring fiscal 2008.

 

In fiscal 2008, 64% ofthe Company’s revenues were from domestic (based upon customer’s country ofdomicile) customers as compared to 73% in fiscal 2007. In fiscal 2008, theCompany had sales to two customers which accounted for 22% of total sales. Infiscal 2007, the Company had sales to two major customers which accounted for46% of total sales.

 

Cost of sales andcontracts of $106,983,000 in fiscal 2008 increased by $20,336,000 or 23% fromthe previous year. Cost of product sales and contracts of $70,413,000 increasedby $10,380,000 or 17% as compared to the prior year. Cost of product sales andcontracts totaled 68% of revenues in fiscal 2008 as compared to 59% of revenuesin fiscal 2007. This increase in costs as a percentage of revenue is dueprimarily to a decrease in the volume of shipments of higher margin ZBackscatter systems, and an increase in revenue attributable to lower margincontract research and development and CargoSearch projects.  The cost of service revenues increased$9,956,000 or 37% from the prior year. Cost of service revenues totaled 58% ofrevenues in fiscal 2008 as compared to 51% of revenues in fiscal 2007.  This increase in costs as a percentage ofrevenue is due primarily to increased material required to support outstandingservice contracts and increased overhead costs to support the increasedinternational install base.

 

Selling, general andadministrative expenses in fiscal 2008 decreased by $915,000 to $26,221,000 ascompared to fiscal 2007 and represented 16% of revenues in fiscal 2008 ascompared to 18% of revenues in fiscal 2007. This decrease in spending can beattributed to decreases in incentive compensation costs ($3,567,000) related tothe reduced bonuses and commissions earned during the period, decreases instock compensation expense ($1,199,000), and decreases in marketing relatedcosts ($560,000), offset by increased salaries and payroll related costs($1,450,000) as the Company increased its sales and marketing capabilities, thewrite-down of a note receivable from an unrelated third party ($1,608,000),increased travel related expenditures ($503,000) and increased depreciationrelated to the building and ERP system and other IT costs associated with theERP system placed in service during the year ($336,000).

 

Company-funded researchand development spending increased by $5,122,000 to $12,306,000 in fiscal 2008,a 71% increase as compared to the $7,184,000 spent in fiscal 2007.  Research and development spending represented7% of revenues in fiscal 2008 as compared to 5% of revenues in fiscal 2007.Fiscal 2008 costs increased as the Company hired during fiscal 2008 additionalengineering resources to focus on the Company strategic developmentefforts.  The Company’s fiscal 2008research and development activities focused on design modifications to itsexisting products and the development of product alternatives to continue tobring innovative products to its customers.

 

Other income (expense)was $6,262,000 in income in fiscal 2008 as compared to $7,797,000 in income infiscal 2007. Interest income increased by $1,221,000 due to increased fundsavailable for investment in higher return investment vehicles.  During fiscal 2008, the Company recorded$11,000 in income related to the fair value mark to market charge associatedwith outstanding warrants. During fiscal 2007, this mark to market adjustmentresulted in $2,270,000 in income.  Allremaining outstanding warrants were exercised during the first quarter offiscal 2008 and no future mark to market adjustments will be effected.

 

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The Company reportedpre-tax income of $27,485,000 in fiscal 2008 as compared to a pre-tax income of$40,016,000 in the previous fiscal year primarily due to the items noted above.The Company recorded income tax expense of $10,007,000 in fiscal 2008 ascompared to $15,406,000 in the prior fiscal year.  The Company’s effective tax rate excludingthe impact of the warrant income was 36% in fiscal 2008 as compared to 41% infiscal 2007.  This decrease in rate canbe attributed to a reduction in state income taxes due to increasedinternational revenues during the year, a decrease in non-deductible stockcompensation expense, and the increase in manufacturing and research anddevelopment credits available in the current year.

 

TheCompany reported net income of $17,478,000 in fiscal 2008 as compared to netincome of $24,610,000 in fiscal 2007.

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents at year-end increased by $53,001,000 to $105,419,000 at March 31,2009 as compared to $52,418,000 at March 31, 2008.   In addition, the Company had $36,384,000 and$72,687,000 of short-term investments at March 31, 2009 and March 31,2008, respectively.

 

Cash flow providedby operations of $35,385,000 resulted from the following:

 

·Reported net income of $28,353,000 adjusted for the following non-cash items:

 

·Depreciation and amortization of $4,294,000.

· Stock compensation expense of$4,940,000.

· The amortization of bond discounts of $384,000 whichwas $1,894,000 less than the prior year due to the Company shifting investmentsto shorter term, lower yield instruments in response to the global economicrecession experienced in the current year.

· The provision for contracts, inventory and accountsreceivable reserves of $2,790,000 which increased from the prior year dueprimarily to an increase in reserves for excess inventory as the Companyreassessed its parts requirements for field service replacements and reservedparts not expected to be utilized in the field in the next twelve months.

 

· Anincrease in deferred revenue of $5,873,000 due to certain large servicecontracts which were billed at the outset of the contract period.  86% of the deferred revenue balance at March 31,2009 is expected to be earned in fiscal 2010.

 

· An increase in customer deposits of $8,271,000 due tothe receipt of milestone payments on certain cargo contracts during the year.

 

· An increase in accrued expenses and other liabilitiesof $6,483,000 due primarily to incentive compensation accruals as the Companyachieved its earnings based performance goals for the year.

 

These cashcontributors were offset by the following:

 

· An increase in inventories of $10,409,000 during theyear.  This increase is due to $4,600,000in inventory for three orders shipped but not yet accepted as of March 31,2009, the building of certain systems in advance of orders in order to meetanticipated order delivery deadlines, the introduction in the current year ofthe ZPortal systems which are higher cost systems recognized upon installationand/or acceptance as appropriate, and the stocking of international inventorydepots to support service contract requirements.

 

· An increase in accounts receivable of $9,622,000 fromthe prior year due primarily to the increase in fourth quarter revenues and thetiming of certain large milestone invoices in the fourth quarter of the currentyear.

 

Net cash of$34,269,000 was provided by investing activities in fiscal 2009. Fiscal 2009capital expenditures totaled $2,350,000 versus $3,270,000 for fiscal 2008.Investments in fixed assets were comprised primarily of information technologyexpenditures, leasehold improvements related to the Company’s facilitiesexpansion, and equipment used in production. The Company invested $65,347,000in short-term investments during the year, and had maturities of $101,966,000on short-term investments.  Due to thecurrent global economic recession, the Company has opted to invest itsavailable funds very conservatively and has invested a majority of these fundsin money market funds and other cash equivalents at March 31, 2009.

 

At March 31, 2009,short-term investments and cash equivalents were invested primarily incommercial paper, money market funds, treasury bills, government agency bonds,corporate debentures and certificates of deposit.  The Company does not invest in auction ratesecurities.  Although management believesour investment policy is conservative in nature, certain short-term investmentsin commercial paper can be exposed to the credit risk of the underlyingcompanies to which they relate and interest earned on these investments issubject to interest rate fluctuations. The maturities within our investmentportfolio generally range from 30 to 365 days.

 

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Net cash used forfinancing activities was $16,560,000 in fiscal 2009. Cash was used primarilyfor the payment of $18,060,000 to repurchase 349,327 shares as part of theCompany’s Stock Repurchase Program.  Inaddition, the Company issued quarterly dividend payments totaling $7,041,000during the year.  Cash provided byfinancing activities consisted primarily of the receipt of $5,903,000 inproceeds from the exercise of employee stock options.  In addition, with the increase in the Company’sbanking facility signed in November of 2008, the Company was able torelease certain restrictions on its cash previously restricted to collateralizeoutstanding letters 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 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 March 31, 2009). The credit agreement iscollateralized by certain assets of the Company and contains certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.  As of March 31, 2009, the Company was incompliance with these covenants.

 

At March 31,2009, there were no borrowings outstanding against this credit facility.  Under the terms of the credit agreement, theCompany was required to pay certain one-time facility fees which are beingamortized over the life of the facility and is required to pay a fee of 0.50%quarterly on unused amounts under the line of credits.  The unused facility fees will be waived inany quarter in which the average aggregate credit extensions (as defined in theagreement) exceed $25.0 million for such quarter. Total expenses incurredrelated to these fees were $214,000, $157,000 and $202,000 in fiscal 2009,2008, and 2007, respectively.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.  The Company had outstanding $35,282,000 instandby letters of credit against the Loan and Security Agreement with$4,718,000 remaining availability.  Theoutstanding letters of credit are primarily for guaranteeing performance oncertain international projects.   Noamounts have been drawn against these letters of credit.

 

In recent years,the Company has funded its operations and capital expenditures with cashgenerated by operations, including deposits from customers on long-termprojects and from proceeds received from option exercises. The Company currentlyhas no amounts drawn on its line of credit and believes that its cash flowsfrom operations, cash and investments on hand and available lines of credit aresufficient to meet the current and foreseeable operating requirements of theCompany’s business.

 

***ContractualObligations ***The Company leases certain facilitiesunder non-cancelable leases. In addition, in the normal course of business, theCompany enters into purchase orders with its vendors for the purchase ofmaterials or services to meet its production needs. The following tablesummarizes the Company’s contractual obligations as of March 31, 2009.

 
| **(In thousands)**                      | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|-----------------------------------------|------------|-----------|------------|----------------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| **Recorded Contractual Obligations:**   |       |      |       |                 |       |          |       |          |       |              |       |
| Lease  financing liability              |       | $         | 9,540      |                 | $          | 1,163         |       | $             | 2,623      |              | $          | 2,840 |   | $ | 2,914 |   |
| Other  long-term obligations            |       | 69        |       | 17                   |       | 35            |       | 17            |       | —            |       |
|                                    |       |      |       |                 |       |          |       |          |       |              |       |
| **Unrecorded Contractual Obligations:** |       |      |       |                 |       |          |       |          |       |              |       |
| Operating  leases                       |       | 1,288     |       | 192                  |       | 370           |       | 371           |       | 355               |       |
| Purchase  commitments                   |       | 39,427    |       | 39,242               |       | 185           |       | —        |       | —            |       |
|                                    |       |      |       |                 |       |          |       |          |       |              |       |
| Total                                   |       | $         | 50,324     |                 | $          | 40,614        |       | $             | 3,213      |              | $          | 3,228 |   | $ | 3,269 |   |

 

In addition, inconjunction with the sale of a division in fiscal 2005, the lease for thatdivision’s facility was assigned to the acquirer. The Company remainssecondarily liable for the remaining lease payments in the event of default bythe acquirer during the lease term which expires in February 2011.Remaining lease payments at March 31, 2009 totaled $764,000. No accrualfor this contingent liability has been recorded at March 31, 2009 aspayment of this expense is considered remote.

 

***Inflation ***The Company does not believe that inflation has had amaterial effect on its results of operations. There can be no assurance,however, that the Company’s business will not be affected by inflation in thefuture.

 

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**CriticalAccounting Policies**

 

The Companyconsiders certain accounting policies related to revenue recognition,inventories and related allowances for obsolete and excess inventory, andincome taxes to be critical policies due to the estimation processes involvedin each.

 

***RevenueRecognition:***  The Company recognizes certain CargoSearch, ZBackscatter and ParcelSearch and Personnel Screening system sales andafter-market part sales, in accordance with SEC Staff Accounting Bulletin (“SAB”)No. 101, Revenue Recognition in Financial Statements modified by SAB No. 104which requires that four basic criteria must be met before revenue can berecognized: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services rendered; (3) the fee is fixed and determinable;and (4) collectability is reasonably assured.

 

Certain of the Company’scontracts are multiple-element arrangements, which include standard products,custom-built systems or contract engineering projects, services (such astraining), and service and maintenance contracts. In accordance with EmergingIssues Task Force Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables,” (“EITF 00-21”) revenue arrangements that include multipleelements are analyzed to determine whether the deliverables can be divided intoseparate units of accounting or treated as a single unit of accounting. Theconsideration the Company receives is allocated among the separate units ofaccounting based on their relative fair values determined based on prices ofthese elements as sold on a stand-alone basis, and the applicable revenue recognitioncriteria are applied to each of the separate units. There currently is nocustomer right of return in the Company’s sales agreements.  Revenues are allocated to a delivered productor service when all of the following criteria are met: (1) the delivereditem has value to the customer on a standalone basis; (2) there isobjective and reliable evidence of the fair value of the undelivered item; and (3) ifthe arrangement includes a general right of return relative to the delivereditem, delivery or performance of the undelivered item is considered probableand substantially in our control.

 

Revenues forcertain long-term, custom-built systems or contract engineering projects arerecognized on a percentage of completion basis. The lengths of these contractstypically range from one to three years from order to delivery and acceptance.Percentages-of-completion are determined by relating the actual costs of workperformed to date for each contract to its estimated final costs. Revisions incosts and profit estimates are reflected in the period in which the factscausing the revision become known.

 

The Companyrecognizes sales for its systems that are produced in a standard manufacturingoperation, have minimal customer site installation requirements and haveshorter order to delivery cycles, when title passes and when other revenuerecognition criteria are met. Management believes the customer’s post-deliveryacceptance provisions and installation requirements on these systems areperfunctory and inconsequential and the costs of installation at the customer’ssite are accrued at the time of revenue recognition.  The Company has demonstrated a history ofcustomer acceptance subsequent to shipment and installation of thesesystems.  For systems which entail moresignificant installation efforts and site work and/or have non-standardcustomer acceptance provisions, revenue recognition is deferred untilinstallation is complete and customer acceptance has occurred.

 

Service revenuesare recognized on time and materials engagements as the services are provided.Service contract revenues are recognized as service is performed over thelength of the contract which reasonably approximates the period servicerevenues are earned.

 

Training andservice contracts deliverables are accounted for separately from the deliveredproduct elements as the Company’s undelivered products have value to itscustomers on a stand-alone basis and the Company has objective and reliableevidence of the fair value of such services. Accordingly, service revenue,representing the fair value of services not yet performed at the time ofproduct shipment, is deferred and recognized as such services are performed.

 

For all fixedprice and long-term contracts, if a loss is anticipated on the contract, aprovision is made in the period in which such losses are determined.

 

The Companyrecords billed shipping and handling fees and billed out-of-pocket expenses asrevenue and the associated costs as cost of goods sold in the accompanyingconsolidated statements of operations.

 

Certain contractsrequire payments from the customer upon execution of the agreement that areincluded in customer deposits. Individual customer deposits are reduced by theamount of revenue recognized on the contract until a zero balance is reached.Revenue recognized in excess of billings under the contracts is included inunbilled costs and fees in the accompanying balance sheet. Of the amounts inunbilled costs and fees at March 31, 2009, $6,242,000 (99%) is expected tobe billed and collected during fiscal 2010.

 

Under the terms of certain of its cost reimbursement contracts, the Company is not permitted to bill customers a specified portion of the contract value until completion. Such retainages result from both commercial contract retentions and government

 

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contract withholdings generally for up to 15% of fees, as well as the difference between the actual and provisional indirect cost billing rates. Retainages are included in the accompanying consolidated balance sheets as components of unbilled costs and fees. The accuracy and appropriateness of the Company’s direct and indirect costs and expenses under these cost reimbursement contracts and its accounts receivable recorded pursuant to such contracts, are subject to regulation and audit, including by the U.S.  Defense Contract Audit Agency (“DCAA”) or by other appropriate agencies of the U.S. Government.  Such agencies have the right to challenge the Company’s cost estimates or allocations with respect to any government contract.  Additionally, a portion of the payments to the Company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.  Historically, such audits have not resulted in any significant disallowed costs.  Although the Company can give no assurances, in the opinion of management,  any adjustments likely to result from inquiries or audits of its contracts will not have a material adverse impact on the Company’s financial condition or results of operations.

 

***Inventoriesand Related Allowance for Obsolete and Excess Inventory:***  Inventories consist of material, labor and manufacturing overhead andare recorded at the lower of cost or net realizable value. Excessivemanufacturing overhead costs such as idle facility expense, freight, handlingcosts and wasted material (spoilage) attributable to abnormally low volumes(levels that materially differ from budgeted production plans due primarily tochanges in customer demand) are excluded from inventory and recorded as anexpense in the period incurred. The Company regularly reviews inventoryquantities on hand and records a provision for excess and obsolete inventorybased primarily on the estimated forecast of product demand over the nexttwelve to eighteen months. Demand for products can fluctuate significantly. Asignificant increase in the demand for the Company’s products could result in ashort-term increase in inventory balances, while a significant decrease indemand could result in an increase in the amount of excess inventory quantitieson hand. Additionally, inventory reserves require estimates of future productdemand, which may materially impact the provision required for excess andobsolete inventory. In the future, if inventory were determined to beovervalued, the Company would be required to recognize such costs in its costof goods sold at the time of such determination. Likewise, if inventory isdetermined to be undervalued, the Company may have over-reported costs of goodssold in previous periods and would be required to recognize such additionaloperating income at the time of sale. Therefore, although the Company makesevery effort to ensure the accuracy of forecasts of future product demand, anysignificant unanticipated changes in demand or technological developments couldhave a significant impact on the value of its inventory and reported operatingresults.

 

***IncomeTaxes:***  The Company accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes.” Accordingly,the Company recognizes deferred income taxes based on the expected future taxconsequences of differences between the financial statement basis and the taxbasis of assets and liabilities, calculated using enacted tax rates in effectfor the year in which the differences are expected to be reflected in the taxreturn. The Company evaluates the need for a valuation allowance against itsnet deferred tax assets at year end based upon its three year cumulative incomeand its projections of future income, and records a valuation allowance againstany net deferred tax assets if it is more likely than not that they will not berealized.

 

**NewAccounting Pronouncements**

 

***SFAS No. 157***

 

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

 

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

 

***SFAS No. 162***

 

In May 2008,the FASB issued FAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS162 identifies the sources of accounting principles and the framework forselecting the principles to be used in the preparation of financial statementsof nongovernmental entities that are presented in conformity with GAAP. FAS 162is effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles”. The Company does notexpect the adoption of FAS 162 to have a material impact on the Company’sfinancial condition or results of operations.

 

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***EITFIssue No. 06-11***

 

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

 

***EITFIssue No. 03-6-1***

 

In June 2008,the FASB issued Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (“FSPEITF 03-6-1”), effective for fiscal years beginning after December 15,2008.  FSP EITF 03-6-1 clarifies that unvested share-based awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and must be included in thecomputation of EPS pursuant to the two-class method. We are currentlyevaluating the impact of adopting FSP EITF 03-6-1 on our Consolidated FinancialStatements which will become effective beginning with our first quarter offiscal 2010.

 

***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 does notexpect the adoption of EITF 07-5 to have a material impact on the Company’sfinancial condition or results of operations.

 

**ITEM 7A.QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company issubject to interest rate risk on its credit facilities which have variableinterest rates tied to the Prime Rate. As of March 31, 2009, the Companyhad no variable interest rate debt outstanding. See Note 3 of Notes toConsolidated Financial Statements for a discussion of our long-termindebtedness.

 

The cash accountsfor the Company’s operations in Hong Kong, England, and Abu Dhabi aremaintained in Hong Kong dollars, pounds sterling and dirhams, respectively. Thegains and losses from foreign currency transactions are included in thestatement of operations for the period and were immaterial. A hypothetical 10%change in foreign currency rates would not have a material impact on theCompany’s results of operations or financial position.

 

As of March 31,2009, the Company holds short-term investments and cash equivalents consistingof treasury bills, commercial paper, money market funds, corporatedebentures/bonds, agency bonds and certificates of deposit. 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 0.5% and are subject to interest raterisk. 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 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The financialstatements and supplementary financial information listed in the Index toConsolidated Financial Statements on page 27 are filed as part of thisAnnual Report on Form 10-K and are incorporated into this item by reference.

 

**ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

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**ITEM 9A.CONTROLS AND PROCEDURES**

 

**Evaluationof 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 Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2009 to ensure that information required to bedisclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiod specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Management’s Report on Internal Control overFinancial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act.  Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting using the framework in “Internal Control-IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this evaluationunder the criteria established in “Internal Control — Integrated Framework”,our management concluded that the Company’s internal control over financialreporting was effective as of March 31, 2009.  Caturano and Company, P.C., our independentregistered public accounting firm, has audited the effectiveness of ourinternal control over financial reporting as of March 31, 2009, and hasissued their report thereon which is included herein.

 

**Changesin Internal Controls over Financial Reporting**

 

There have been nochanges in our internal control over financial reporting, as such term isdefined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act,during the quarter ended March 31, 2009 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM 9B.OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

**Code ofConduct**

 

The Company hasadopted a Code of Business Conduct and Ethics that applies to our Board ofDirectors, Chief Executive Officer, Chief Financial Officer, and all employeesof the Company. The Company’s Code of Business Conduct and Ethics is posted onour website at www.as-e.com and may be accessed in the Corporate Governancesection of the Investor Information page. The Company intends to satisfy thedisclosure requirement under Item 10 of Form 8-K, regarding an amendmentto, or waiver from, our Code of Conduct, by posting such information on ourwebsite at the location specified above.

 

The otherinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 29, 2009.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2009.

 

**ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2009.

 

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**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2009.

 

**ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2009.

 

**PART IV**

 

**ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

The financialstatements listed in the Index to Consolidated Financial Statements on page 27are filed as part of this report, and such Index is incorporated in this itemby reference.

 

The exhibitslisted in the Exhibit Index on page 50 are filed as part of thisreport, and such Index is incorporated in this item by reference.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

(Submitted in answer to Item 8, Item 9A and Item 15 of Form 10-K,Securities and Exchange Commission)

 
| ** **                                                                                                                                                                                                       | **PAGE** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **CONSOLIDATED  FINANCIAL STATEMENTS**                                                                                                                                                                           |     |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                                         | 28       |
| Consolidated Balance Sheets—March 31, 2009 and  2008                                                                                                                                                   | 29       |
| Consolidated Statements of Operations for the Years  Ended March 31, 2009, 2008, and 2007                                                                                                                   | 30       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income for the Years Ended March 31, 2009, 2008, and 2007                                                                           | 31       |
| Consolidated Statements of Cash Flows for the Years  Ended March 31, 2009, 2008, and 2007                                                                                                                   | 32       |
| Notes to Consolidated Financial Statements                                                                                                                                                                       | 33       |
|                                                                                                                                                                                                             |     |
| **CONSOLIDATED  SUPPLEMENTARY FINANCIAL INFORMATION**                                                                                                                                                            |     |
| Unaudited Quarterly Consolidated Financial Data for  the Years Ended March 31, 2009 and 2008                                                                                                                | 49       |
|                                                                                                                                                                                                             |     |
| Financial statement schedules have been omitted  because of the absence of conditions under which they are required or because  the required information is given in the financial statements or notes  thereto. |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Stockholders

of American Science andEngineering, Inc.

 

We have audited theaccompanying consolidated balance sheets of American Science and Engineering, Inc.and subsidiary (“the Company”) as of March 31, 2009 and 2008 and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for each of the years ended March 31,2009, 2008 and 2007.  We also haveaudited American Science and Engineering, Inc. and subsidiary’s internalcontrol over financial reporting as of March 31, 2009, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on these financial statements andan opinion on the Company’s internal control over financial reporting based onour audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audit of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of American Science andEngineering, Inc. and subsidiary as of March 31, 2009 and 2008 andthe consolidated results of their operations, stockholders’ equity and theircash flows for each of the three years in the period ended March 31, 2009in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, American Science and Engineering, Inc.maintained, in all material respects, effective internal control over financialreporting as of March 31, 2009 based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

/s/ Caturano and Company,P.C.

 

Caturano and Company,P.C.

 

June 10, 2009

Boston, Massachusetts

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2009 AND 2008**

(Amounts in thousands, except share and per share amounts)

 
| ** **                                                                                                         | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                               |       |       |       |       |       |
| **Assets**                                                                                                         |       |       |       |       |       |
| Current  assets:                                                                                                   |       |       |       |       |       |
| Cash  and cash equivalents                                                                                         |       | $          | 105,419    |       | $          | 52,418 |   |
| Restricted  cash and investments                                                                                   |       | 35         |       | 319        |       |
| Short-term  investments, at fair value                                                                             |       | 36,384     |       | 72,687     |       |
| Accounts  receivable, net of allowances of $286 at March 31, 2009 and $230 at  March 31, 2008            |       | 36,956     |       | 27,583     |       |
| Unbilled  costs and fees                                                                                           |       | 6,316      |       | 6,114      |       |
| Inventories                                                                                                        |       | 47,975     |       | 40,107     |       |
| Prepaid  expenses and other current assets                                                                         |       | 7,224      |       | 4,815      |       |
| Deferred  income taxes                                                                                             |       | 1,807      |       | 1,577      |       |
| **Total current assets**                                                                                           |       | 242,116    |       | 205,620    |       |
| Building,  equipment and leasehold improvements, net                                                               |       | 19,488     |       | 22,201     |       |
| Restricted  cash and investments                                                                                   |       | —     |       | 2,204      |       |
| Deferred  income taxes                                                                                             |       | 5,290      |       | 5,231      |       |
| Other  assets, net                                                                                                 |       | 1,393      |       | 278        |       |
| ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total assets**                                                                                                   |       | $          | 268,287    |       | $          | 235,534 |   |
| ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                      |       |       |       |       |       |
| Current  liabilities:                                                                                              |       |       |       |       |       |
| Accounts  payable                                                                                                  |       | $          | 10,639     |       | $          | 12,660 |   |
| Accrued  salaries and benefits                                                                                     |       | 10,387     |       | 2,935      |       |
| Accrued  warranty costs                                                                                            |       | 1,130      |       | 1,671      |       |
| Accrued  income taxes                                                                                              |       | 63         |       | —     |       |
| Deferred  revenue                                                                                                  |       | 28,003     |       | 23,120     |       |
| Customer  deposits                                                                                                 |       | 14,818     |       | 6,547      |       |
| Current  portion of lease financing liability                                                                      |       | 1,163      |       | 1,134      |       |
| Other  current liabilities                                                                                         |       | 6,893      |       | 8,097      |       |
| **Total current liabilities**                                                                                      |       | 73,096     |       | 56,164     |       |
| Lease  financing liability, net of current portion                                                                 |       | 8,377      |       | 9,540      |       |
| Other  long term liabilities                                                                                       |       | 4,748      |       | 3,758      |       |
|                                                                                                               |       |       |       |       |       |
| **Total liabilities**                                                                                              |       | 86,221     |       | 69,462     |       |
| ** **                                                                                                         |       |       |       |       |       |
| Commitments  and contingencies (Notes 2 and 9)                                                                     |       |       |       |       |       |
| Stockholders’  equity:                                                                                        |       |       |       |       |       |
| Preferred  stock, no par value                                                                                     |       |       |       |       |       |
| Authorized—100,000  shares                                                                                    |       |       |       |       |       |
| Issued—None                                                                                                   |       | —     |       | —     |       |
| Common stock, $0.662/3 par value                                                                              |       |       |       |       |       |
| Authorized—20,000,000  shares                                                                                 |       |       |       |       |       |
| Issued  and outstanding— 8,810,760 shares at March 31, 2009 and 8,945,633 shares  at March 31, 2008 |       | 5,873      |       | 5,963      |       |
| Capital  in excess of par value                                                                                    |       | 86,477     |       | 91,544     |       |
| Accumulated  other comprehensive income (loss), net                                                                |       | (47        | )          | 114        |       |
| Retained  earnings                                                                                                 |       | 89,763     |       | 68,451     |       |
| ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total stockholders’ equity**                                                                                |       | 182,066    |       | 166,072    |       |
| ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total liabilities and stockholders’ equity**                                                                |       | $          | 268,287    |       | $          | 235,534 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED MARCH 31, 2009, 2008, AND2007**

(Amounts in thousands except per share amounts)

 
| ** **                                    | ** **        | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------|-------------------|------------|------------|------------|------------|------------|------------|
| **Net sales and contract revenues:**          | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  product sales and contract revenues      |              | $          | 142,931    |       | $          | 103,165    |       | $ | 101,140 |   |
| Net  service revenues                         |              | 75,436     |       | 63,568     |       | 52,046     |       |
| **Total net sales and contract revenues**     |              | 218,367    |       | 166,733    |       | 153,186    |       |
|                                          |              |       |       |       |       |       |       |
| **Cost of sales and contracts:**              |              |       |       |       |       |       |       |
| Cost  of product sales and contracts          |              | 83,074     |       | 70,413     |       | 60,033     |       |
| Cost  of service revenues                     |              | 42,328     |       | 36,570     |       | 26,614     |       |
| **Total cost of sales and contracts**         |              | 125,402    |       | 106,983    |       | 86,647     |       |
| ** **                                    |              |       |       |       |       |       |       |
| **Gross profit**                              |              | 92,965     |       | 59,750     |       | 66,539     |       |
|                                          |              |       |       |       |       |       |       |
| **Operating expenses:**                       |              |       |       |       |       |       |       |
| Selling,  general and administrative expenses |              | 32,871     |       | 26,221     |       | 27,136     |       |
| Research  and development expenses            |              | 18,070     |       | 12,306     |       | 7,184      |       |
| **Total operating expenses**                  |              | 50,941     |       | 38,527     |       | 34,320     |       |
| ** **                                    |              |       |       |       |       |       |       |
| **Operating income**                          |              | 42,024     |       | 21,223     |       | 32,219     |       |
|                                          |              |       |       |       |       |       |       |
| **Other income (expense):**                   |              |       |       |       |       |       |       |
| Interest  and investment income               |              | 2,388      |       | 6,842      |       | 5,621      |       |
| Interest  expense                             |              | (144       | )          | (158       | )          | (353       | )          |
| Other,  net                                   |              | (568       | )          | (433       | )          | 259        |       |
| Change  in warrant valuation                  |              | —     |       | 11         |       | 2,270      |       |
| **Total other income (expense)**              |              | 1,676      |       | 6,262      |       | 7,797      |       |
| ** **                                    |              |       |       |       |       |       |       |
| **Income before provision for income taxes**  |              | 43,700     |       | 27,485     |       | 40,016     |       |
| **Provision for income taxes**                |              | 15,347     |       | 10,007     |       | 15,406     |       |
| ** **                                    |              |       |       |       |       |       |       |
| **Net income**                                |              | $          | 28,353     |       | $          | 17,478     |       | $ | 24,610 |   |
| ** **                                    |              |       |       |       |       |       |       |
| **Income per share**                          | **—Basic**   |       | $          | 3.26       |       | $          | 1.92       |   | $ | 2.70 |   |
|                                          | **—Diluted** |       | $          | 3.18       |       | $          | 1.87       |   | $ | 2.38 |   |
| ** **                                    | ** **        |       |       |       |       |       |       |   |
| **Weighted average shares**                   | **—Basic**   |       | 8,692      |       | 9,114      |       | 9,117      |   |
|                                          | **—Diluted** |       | 8,928      |       | 9,347      |       | 9,368      |   |
| ** **                                    |              |       |       |       |       |       |       |
| **Dividends declared per share**              |              | $          | 0.80       |       | $          | 0.60       |       | — |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED MARCH 31, 2009, 2008, AND2007**

(Amounts in thousands, except share amounts)

 
| ** **                                                           | ** ** | **Common  Stock  Shares** | ** ** | **Common  Stock  Par Value** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other Comp.  Income** | ** ** | **Unearned  Compensation** | ** ** | **Total**   | ** ** | **Comprehensive  Income** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|------------|----------------------------|------------|-------------|------------|---------------------------|------------|
| **Balance, March 31, 2006**                                     | ** ** | **9,070,679**             | ** ** | **$**                        | **6,047**  | ** **                           | **$**      | **94,061**             | ** ** | **$**                                | **31,879** | ** **                 | **$**      | **(16**     | **)**      | **$**                     | **(1,773** | **)** | **$** | **130,198** | ** ** | ** ** | ** ** |
| Net income                                                           |       | —                    |       | —                       |       | —                               |       | 24,610                 |       | —                               |       | —                     |       | 24,610      |       | $                         | 24,610     |   |
| Exercise of stock options and warrants                               |       | 67,130                    |       | 45                           |       | 2,912                                |       | —                 |       | —                               |       | —                     |       | 2,957       |       | —                    |       |
| Issuance of stock under employee compensation plans                  |       | 10,530                    |       | 7                            |       | 631                                  |       | —                 |       | —                               |       | —                     |       | 638         |       | —                    |       |
| Issuance of restricted stock                                         |       | 38,636                    |       | 26                           |       | (26                                  | )          | —                 |       | —                               |       | —                     |       | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                        |       | —                    |       | —                       |       | 544                                  |       | —                 |       | —                               |       | —                     |       | 544         |       | —                    |       |
| Compensation expense on stock options                                |       | —                    |       | —                       |       | 7,186                                |       | —                 |       | —                               |       | —                     |       | 7,186       |       | —                    |       |
| Compensation expense on restricted stock and  restricted stock units |       | —                    |       | —                       |       | 1,501                                |       | —                 |       | —                               |       | —                     |       | 1,501       |       | —                    |       |
| Reversal of unearned compensation upon adoption of  FAS 123(R)       |       | —                    |       | —                       |       | (1,773                               | )          | —                 |       | —                               |       | 1,773                      |       | —      |       | —                    |       |
| Other                                                                |       | —                    |       | —                       |       | —                               |       | —                 |       | 64                                   |       | —                     |       | 64          |       | 64                        |       |
| **Balance, March 31, 2007**                                     | ** ** | **9,186,975**             | ** ** | **6,125**                    | ** ** | **105,036**                          | ** ** | **56,489**             | ** ** | **48**                               | ** ** | **—**                 | ** ** | **167,698** | ** ** | **$**                     | **24,674** | ** ** |
| Net income                                                           |       | —                    |       | —                       |       | —                               |       | 17,478                 |       | —                               |       | —                     |       | 17,478      |       | 17,478                    |       |
| Repurchase of common stock                                           |       | (473,303                  | )          | (316                         | )          | (24,852                              | )          | —                 |       | —                               |       | —                     |       | (25,168     | )          | —                    |       |
| Exercise of stock options and warrants                               |       | 149,260                   |       | 99                           |       | 4,062                                |       | —                 |       | —                               |       | —                     |       | 4,161       |       | —                    |       |
| Issuance of stock under employee compensation plans                  |       | 12,091                    |       | 8                            |       | 681                                  |       | —                 |       | —                               |       | —                     |       | 689         |       | —                    |       |
| Issuance of restricted stock                                         |       | 70,640                    |       | 47                           |       | (47                                  | )          | —                 |       | —                               |       | —                     |       | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                        |       | —                    |       | —                       |       | 1,350                                |       | —                 |       | —                               |       | —                     |       | 1,350       |       | —                    |       |
| Compensation expense on stock options                                |       | —                    |       | —                       |       | 3,258                                |       | —                 |       | —                               |       | —                     |       | 3,258       |       | —                    |       |
| Compensation expense on restricted stock and  restricted stock units |       | —                    |       | —                       |       | 2,056                                |       | —                 |       | —                               |       | —                     |       | 2,056       |       | —                    |       |
| Dividends declared                                                   |       | —                    |       | —                       |       | —                               |       | (5,516                 | )          |                                 |       |                       |       | (5,516      | )          | —                    |       |
| Other                                                                |       | —                    |       | —                       |       | —                               |       | —                 |       | 66                                   |       | —                     |       | 66          |       | 66                        |       |
| **Balance, March 31, 2008**                                     | ** ** | **8,945,663**             | ** ** | **5,963**                    | ** ** | **91,544**                           | ** ** | **68,451**             | ** ** | **114**                              | ** ** | **—**                 | ** ** | **166,072** | ** ** | **$**                     | **17,544** | ** ** |
| Net income                                                           |       | —                    |       | —                       |       | —                               |       | 28,353                 |       | —                               |       | —                     |       | 28,353      |       | 28,353                    |       |
| Repurchase of common stock                                           |       | (349,327                  | )          | (233                         | )          | (17,827                              | )          | —                 |       | —                               |       | —                     |       | (18,060     | )          | —                    |       |
| Exercise of stock options                                            |       | 161,753                   |       | 108                          |       | 5,795                                |       | —                 |       | —                               |       | —                     |       | 5,903       |       | —                    |       |
| Issuance of stock under employee compensation plans                  |       | 13,117                    |       | 8                            |       | 768                                  |       | —                 |       | —                               |       | —                     |       | 776         |       | —                    |       |
| Issuances/cancellations of restricted stock, net                     |       | 39,554                    |       | 27                           |       | (27                                  | )          | —                 |       | —                               |       | —                     |       | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                        |       | —                    |       | —                       |       | 1,284                                |       | —                 |       | —                               |       | —                     |       | 1,284       |       | —                    |       |
| Compensation expense on stock options                                |       | —                    |       | —                       |       | 1,458                                |       | —                 |       | —                               |       | —                     |       | 1,458       |       | —                    |       |
| Compensation expense on restricted stock and  restricted stock units |       | —                    |       | —                       |       | 3,482                                |       | —                 |       | —                               |       | —                     |       | 3,482       |       | —                    |       |
| Dividends declared                                                   |       | —                    |       | —                       |       | —                               |       | (7,041                 | )          | —                               |       | —                     |       | (7,041      | )          | —                    |       |
| Other                                                                |       | —                    |       | —                       |       | —                               |       | —                 |       | (161                                 | )          | —                     |       | (161        | )          | (161                      | )          |
| **Balance, March 31, 2009**                                     | ** ** | **8,810,760**             | ** ** | **$**                        | **5,873**  | ** **                           | **$**      | **86,477**             | ** ** | **$**                                | **89,763** | ** **                 | **$**      | **(47**     | **)**      | **$**                     | **—** | ** ** | **$** | **182,066** | ** ** | **$** | **28,192** | ** ** |

 

The accompanying notes are anintegral part of these consolidated financial statements

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED MARCH 31, 2009, 2008, AND2007**

(Amounts in thousands)

 
| ** **                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                       |       |     |       |     |       |     |       |
| **Cash flows from operating activities:**                                                  |       |     |       |     |       |     |       |
| Net  income                                                                                |       | $        | 28,353     |     | $          | 17,478   |       | $ | 24,610 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:         |       |     |       |     |       |     |       |
| Depreciation  and amortization                                                             |       | 4,294    |       | 4,123    |       | 2,425    |       |
| Provisions  for contracts, inventory, and accounts receivable reserves                     |       | 2,790    |       | 380      |       | (203     | )          |
| Write-down  of note receivable                                                             |       | —   |       | 1,608    |       | —   |       |
| Change  in fair value of warrants                                                          |       | —   |       | (11      | )          | (2,270   | )          |
| Amortization  of bond discount                                                             |       | (384     | )          | (2,278   | )          | (1,666   | )          |
| Stock  compensation expense                                                                |       | 4,940    |       | 5,314    |       | 8,687    |       |
| Deferred  income taxes                                                                     |       | (289     | )          | (2,751   | )          | 72       |       |
| Change  in assets and liabilities:                                                         |       |     |       |     |       |     |       |
| Accounts  receivable                                                                       |       | (9,622   | )          | (4,236   | )          | 2,621    |       |
| Unbilled  costs and fees                                                                   |       | (202     | )          | (273     | )          | (1,748   | )          |
| Inventories                                                                                |       | (10,409  | )          | (20,328  | )          | (3,206   | )          |
| Prepaid  expenses and other assets                                                         |       | (2,964   | )          | 576      |       | 1,894    |       |
| Accrued  income taxes                                                                      |       | 63       |       | —   |       | —   |       |
| Accounts  payable                                                                          |       | (2,021   | )          | 4,543    |       | 1,458    |       |
| Deferred  revenue                                                                          |       | 5,873    |       | 18,326   |       | 4,591    |       |
| Customer  deposits                                                                         |       | 8,271    |       | (5,007   | )          | 5,451    |       |
| Accrued  expenses and other current liabilities                                            |       | 6,483    |       | (136     | )          | 2,154    |       |
| Sale  of leased equipment                                                                  |       | 116      |       | —   |       | —   |       |
|                                                                                       |       |     |       |     |       |     |       |
| Total  adjustments                                                                         |       | 6,939    |       | (150     | )          | 20,260   |       |
|                                                                                       |       |     |       |     |       |     |       |
| Net  cash provided by operating activities                                                 |       | 35,292   |       | 17,328   |       | 44,870   |       |
|                                                                                       |       |     |       |     |       |     |       |
| **Cash flows from investing activities:**                                                  |       |     |       |     |       |     |       |
| Proceeds  from maturities of short-term investments                                        |       | 101,966  |       | 159,725  |       | 109,345  |       |
| Purchases  of short-term instruments                                                       |       | (65,347  | )          | (163,971 | )          | (130,600 | )          |
| Issuance  of note receivable                                                               |       | —   |       | (608     | )          | (1,000   | )          |
| Purchases  of property and equipment                                                       |       | (2,350   | )          | (3,270   | )          | (4,733   | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Net  cash provided by (used for) investing activities                                      |       | 34,269   |       | (8,124   | )          | (26,988  | )          |
|                                                                                       |       |     |       |     |       |     |       |
| **Cash flows from financing activities:**                                                  |       |     |       |     |       |     |       |
| Decrease  (increase) in restricted cash and investments                                    |       | 2,488    |       | 278      |       | (2,703   | )          |
| Proceeds  from financing of leasehold improvements                                         |       | —   |       | 417      |       | 2,253    |       |
| Repurchase  of shares                                                                      |       | (18,060  | )          | (25,168  | )          | —   |       |
| Payment  of common stock dividend                                                          |       | (7,041   | )          | (5,516   | )          | —   |       |
| Repayment  of leasehold financing                                                          |       | (1,134   | )          | (1,335   | )          | (804     | )          |
| Proceeds  from exercise of warrants                                                        |       | —   |       | 509      |       | 834      |       |
| Proceeds  from exercise of stock options                                                   |       | 5,903    |       | 3,029    |       | 989      |       |
| Reduction  of income taxes paid due to the tax benefit from employee stock option  expense |       | 1,284    |       | 1,350    |       | 544      |       |
|                                                                                       |       |     |       |     |       |     |       |
| Net  cash (used for) provided by financing activities                                      |       | (16,560  | )          | (26,436  | )          | 1,113    |       |
|                                                                                       |       |     |       |     |       |     |       |
| **Net increase (decrease) in cash and cash  equivalents**                                  |       | 53,001   |       | (17,232  | )          | 18,995   |       |
| **Cash and cash equivalents at beginning of year**                                         |       | 52,418   |       | 69,650   |       | 50,655   |       |
|                                                                                       |       |     |       |     |       |     |       |
| **Cash and cash equivalents at end of year**                                               |       | $        | 105,419    |     | $          | 52,418   |       | $ | 69,650 |   |
|                                                                                       |       |     |       |     |       |     |       |
| **Supplemental disclosures of cash flow  information:**                                    |       |     |       |     |       |     |       |
| Interest  paid                                                                             |       | $        | 144        |     | $          | 158      |       | $ | 353 |   |
| Income  taxes paid                                                                         |       | $        | 13,625     |     | $          | 11,417   |       | $ | 12,495 |   |
| **Non-cash transactions:**                                                                 |       |     |       |     |       |     |       |
| Issuance  of stock for 401K match                                                          |       | $        | 776        |     | $          | 689      |       | $ | 638 |   |
| Assumption  of debt / lease financing receivable                                           |       | $        | —     |     | $          | —   |       | $ | 2,029 |   |
| Fair  value of warrants exercised                                                          |       | $        | —     |     | $          | 623      |       | $ | 1,134 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**AMERICAN SCIENCE AND ENGINEERING, INC. ANDSUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**1. NATUREOF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature of Operations and Basis of Presentation**

 

American Scienceand Engineering, Inc. (the “Company”) is engaged in the development andmanufacture of sophisticated X-ray inspection systems for critical detectionand security screening solutions for sale primarily to U.S. and foreigngovernment agencies.

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiary. All significant inter-company balances and transactions have beeneliminated in consolidation.

 

**Use ofEstimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

**Cash andCash Equivalents**

 

The Companyconsiders all investments with original maturities of 90 days or less to becash equivalents.  The Company maintainscash and cash equivalent balances with financial institutions that exceedfederally insured limits.  The Companyhas not experienced any losses related to these balances, and managementbelieves its credit risk to be minimal.

 

**RestrictedCash and Investments**

 

The Company’s loanand security agreement with its bank require certain cash and investmentbalances to be restricted as collateral against outstanding standby letters ofcredit if the Company exceeds its credit availability under this creditfacility. The restricted cash amounts with Silicon Valley Bank are typically inthe form of certificates of deposits that mature beyond 90 days.  Restrictions that mature beyond one year areclassified as long-term in the accompanying balance sheet.

 

**Short-termInvestments and Cash Equivalents**

 

Short-terminvestments and cash equivalents consist of investments in money market funds,certificates of deposit, commercial paper, corporate debentures/bonds, treasurybills and government agency bonds. These investments are classified asavailable-for-sale and are recorded at their fair values using the specificidentification method. The unrealized holding gains or losses on thesesecurities are included as a component of comprehensive income in theConsolidated Statements of Stockholders’ Equity and Comprehensive Income.

 

**AccountsReceivable and Unbilled Costs and Fees**

 

Accountsreceivable are recorded at the invoiced amount. Amounts collected on tradeaccounts receivable are included in net cash provided by operating activitiesin the consolidated statements of cash flows. The Company maintains anallowance for doubtful accounts for estimated losses inherent in its accountsreceivable portfolio. The allowance for doubtful accounts reflects our bestestimate of probable losses inherent in the accounts receivable balance. Wedetermine the allowance based on known troubled accounts, historicalexperience, and other currently available evidence.  It is the Company’s policy to write offuncollectible receivables when management determines the receivable will becomeuncollectible. Activity in the allowance for doubtful accounts is as follows:

 
| **(In thousands)** | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions /   Write-offs  Charged to  Reserves** | ** ** | **Balance  at End of  Year** | ** ** |
|--------------------|------------|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------|------------|
| **2009**           |       | $                                  | 230        |                                            | $          | 249                                                 |       | $                            | 193        |   | $ | 286 |   |
| **2008**           |       | $                                  | 224        |                                            | $          | 19                                                  |       | $                            | 13         |   | $ | 230 |   |
| **2007**           |       | $                                  | 345        |                                            | $          | (119                                                | )          | $                            | 2          |   | $ | 224 |   |

 

In fiscal 2007,the Company had a net credit to bad debt expense as we collected on certainaccounts receivable balances which were significantly aged and deemed to beuncollectible at the prior year end.

 

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Included inaccounts receivable and unbilled costs and fees at March 31, 2009 and 2008are $30,233,000 and $20,822,000, respectively, attributable to both prime andsubcontracts with federal and state governments. The Company establishes areserve against unbilled costs and fees based on known troubled accounts orcontracts, historical experience, and other currently available evidence. Therewas no activity in the reserve for unbilled costs and fees during fiscal 2009and 2008.  Activity in the allowance forunbilled costs and fees for fiscal 2007 is as follows:

 
| **(In thousands)** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions/  Write-offs  Charged to  Reserves** | ** ** | **Balance at  End of  Year** | ** ** |
|--------------------|------------|------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------|------------|
| **2007**           |       | $                                  | 36         |                                            | $          | (36                                               | )          | $                            | —     |   | $ | — |   |
|                    |            |                                    |            |                                                 |            |                                                   |            |                              |            |  |  |  |  |

 

**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 March 31, 2009 and 2008 were as follows:

 
| **(In thousands)**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Raw  materials, completed subassemblies and spares parts |       | $        | 20,527     |     | $          | 18,113 |   |
| Work-in-process                                          |       | 13,911   |       | 12,163   |       |
| Finished  goods                                          |       | 13,537   |       | 9,831    |       |
| **Total**                                                |       | $        | 47,975     |     | $          | 40,107 |   |

 

The Companyperiodically reviews quantities of inventory on hand and compares these amountsto expected usage of each particular product or product line. The Companyrecords, as a charge to cost of sales, any amounts required to reduce thecarrying value to net realizable value.

 

Activity in thereserve for excess or obsolete inventory is as follows:

 
| **(In thousands)** | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions /  Write-offs  Charged to  Reserves** | ** ** | **Balance  at End of  Year** | ** ** |
|--------------------|------------|------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------|------------|
| **2009**           |       | $                                  | 2,187      |                                            | $          | 2,542                                              |       | $                            | 564        |   | $ | 4,165 |   |
| **2008**           |       | $                                  | 2,083      |                                            | $          | 361                                                |       | $                            | 257        |   | $ | 2,187 |   |
| **2007**           |       | $                                  | 2,636      |                                            | $          | 70                                                 |       | $                            | 623        |   | $ | 2,083 |   |

 

**Notes Receivable**

 

During fiscal 2008and 2007, the Company loaned a potential acquisition target $1,608,000 under aninterest bearing note receivable.  Duringfiscal 2008, the Company abandoned this activity and evaluated thecollectibility of the note to determine if there was any risk of default. TheCompany determined that there was risk of default, and during the fiscal yearended March 31, 2008, the Company wrote off this note receivable and therelated accrued interest receivable as an uncollectible debt. The write-off isincluded in general and administrative expense for the fiscal year ended March 31,2008.

 

**Building,****Equipment and LeaseholdImprovements**

 

The Companyprovides for depreciation and amortization of its fixed assets on astraight-line basis over estimated useful lives of 3-25 years or remaininglease terms. Expenditures for normal maintenance and repairs are charged toexpense as incurred. Significant additions, renewals or betterments that extendthe useful lives of the assets are capitalized at cost. The cost andaccumulated depreciation applicable to equipment and leasehold improvementssold, or otherwise disposed of, are removed from the accounts, and anyresulting gain or loss is included in the consolidated statements ofoperations.

 

Building,equipment and leasehold improvements consisted of the following at March 31:

 

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| **(In thousands)**                                   | ** ** | **Estimated Useful Lives**                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|----------|------------|
| Building  and leasehold improvements                 |       | Lesser of 25  years or remaining lease term |       | $        | 18,267     |     | $          | 18,014 |   |
| Equipment  and tooling                               |       | 3-10 years                                  |       | 2,825    |       | 2,488    |       |
| Computer  equipment and software                     |       | 3-5 years                                   |       | 16,580   |       | 15,368   |       |
| Furniture  and fixtures                              |       | 5-7 years                                   |       | 1,656    |       | 1,476    |       |
| Demo  and test equipment                             |       | 3-7 years                                   |       | 3,701    |       | 4,193    |       |
| Leased  equipment                                    |       | 1 year                                      |       | 63       |       | —   |       |
| Motor  vehicles                                      |       | 3 years                                     |       | 18       |       | 18       |       |
| Total                                                |       |                                        |       | 43,110   |       | 41,557   |       |
| Less  accumulated depreciation and amortization      |       |                                        |       | (23,622  | )          | (19,356  | )          |
| Building,  equipment and leasehold improvements, net |       |                                        |       | $        | 19,488     |     | $          | 22,201 |   |

 

**RevenueRecognition**

 

The Companyrecognizes certain CargoSearch, Z Backscatter and ParcelSearch and PersonnelScreening system sales and after-market part sales, in accordance with SECStaff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition inFinancial Statements as modified by SAB No. 104 which requires that fourbasic criteria must be met before revenue can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or servicesrendered; (3) the fee is fixed and determinable; and (4) collectibilityis reasonably assured.

 

Certain of theCompany’s contracts are multiple-element arrangements, which include standardproducts, custom-built systems or contract engineering projects, services (suchas training), and service and maintenance contracts. In accordance withEmerging Issues Task Force Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables,” (“EITF 00-21”) revenue arrangements that includemultiple elements are analyzed to determine whether the deliverables can bedivided into separate units of accounting or treated as a single unit ofaccounting. The consideration the Company receives is allocated among theseparate units of accounting based on their relative fair values determinedbased on prices of these elements as sold on a stand-alone basis, and theapplicable revenue recognition criteria are applied to each of the separateunits. There is no customer right of return in the Company’s salesagreements.  Revenues are allocated to adelivered product or service when all of the following criteria are met: (1) thedelivered item has value to the customer on a standalone basis; (2) there isobjective and reliable evidence of the fair value of the undelivered item; and (3) ifthe arrangement includes a general right of return relative to the delivereditem, delivery or performance of the undelivered item is considered probableand substantially in our control.

 

Revenues forcertain long-term, custom-built systems or contract engineering projects arerecognized on a percentage of completion basis. The lengths of these contractstypically range from one to three years from order to delivery and acceptance.Percentages-of-completion are determined by relating the actual costs of workperformed to date for each contract to its estimated final costs. Revisions incosts and profit estimates are reflected in the period in which the factscausing the revision become known.

 

The Companyrecognizes sales for its systems that are produced in a standard manufacturingoperation, have minimal customer site installation requirements and haveshorter order to delivery cycles, when title passes and when other revenuerecognition criteria are met. Management believes the customer’s post-deliveryacceptance provisions and installation requirements on these systems areperfunctory and inconsequential and the costs of installation at the customer’ssite are accrued at the time of revenue recognition.  The Company has demonstrated a history ofcustomer acceptance subsequent to shipment and installation of thesesystems.  For systems which entail moresignificant installation efforts and site work and/or have non-standardcustomer acceptance provisions, revenue recognition is deferred untilinstallation is complete and customer acceptance has occurred.

 

Service revenuesare recognized on time and materials engagements as the services are provided.Service contract revenues are recognized as service is performed over thelength of the contract which reasonably approximates the period servicerevenues are earned.

 

The Companyrecords billed shipping and handling fees and billed out-of-pocket expenses asrevenue and the associated costs as cost of goods sold in the accompanyingconsolidated statements of operations.

 

Training andservice contracts deliverables are accounted for separately from the deliveredproduct elements as the Company’s undelivered products have value to itscustomers on a stand-alone basis and the Company has objective and reliableevidence of the fair value of such services. Accordingly, service revenuerepresenting the fair value of services not yet performed at the time ofproduct shipment is deferred and recognized as such services are performed.

 

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For all fixedprice and long-term contracts, if a loss is anticipated on the contract, aprovision is made in the period in which such losses are determined.

 

Certain contractsrequire payments from the customer upon execution of the agreement that areincluded in customer deposits. Individual customer deposits are reduced by theamount of revenue recognized on the contract until a zero balance is reached.Revenue recognized in excess of billings under the contracts is included inunbilled costs and fees in the accompanying balance sheet. Of the amounts inunbilled costs and fees at March 31, 2009, $6,242,000 (99%) is expected tobe billed and collected during fiscal 2010.

 

Under the terms of certain of its cost reimbursement contracts, the Company is not permitted to bill customers a specified portion of the contract value until completion. Such retainages (approximately $74,000 at both March 31, 2009 and March 31, 2008) result from both commercial contract retentions and government contract withholdings generally for up to 15% of fees, as well as the difference between the actual and provisional indirect cost billing rates. Retainages are included in the accompanying consolidated balance sheets as components of unbilled costs and fees. The accuracy and appropriateness of the Company’s direct and indirect costs and expenses under these cost reimbursement contracts and its accounts receivable recorded pursuant to such contracts, are subject to regulation and audit, including by the U.S. Defense Contract Audit Agency (“DCAA”) or by other appropriate agencies of the U.S. Government.  Such agencies have the right to challenge the Company’s cost estimates or allocations with respect to any government contract.  Additionally, a portion of the payments to the Company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.  Historically, such audits have not resulted in any significant disallowed costs.  Although the Company can give no assurances, in the opinion of management, any adjustments likely to result from inquiries or audits of its contracts will not have a material adverse impact on the Company’s financial condition or results of operations.

 

**WarrantyCosts**

 

The Companygenerally provides on certain of its products a one year parts and laborwarranty with the purchase of domestic equipment, and a one year parts onlywarranty on international equipment. The anticipated cost for this one yearwarranty is accrued for at the time of the sale based upon historicalexperience and management’s estimates of future liabilities, and is recorded asaccrued warranty costs (See Note 5).

 

**DeferredRevenue**

 

The Company offersto its customers extended warranty and service contracts. These contractstypically have a coverage period of one to five years, and include advancepayments that are recorded as deferred revenue. Revenue is recognized asservice is performed over the life of the contract, which represents the periodover which these revenues are earned. Costs associated with these extendedwarranty and service contracts are expensed to cost of goods sold as incurred.

 

**Impairmentof Long-Lived Assets**

 

Long-lived assetsare reviewed for possible impairment whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable in accordance with SFAS No. 144, Accounting for the Impairmentand Disposal of Long-Lived Assets.

 

Impairment isassessed by comparing the estimated undiscounted cash flows over the asset’sremaining life to the carrying amount of the asset. If the estimated cash flowsare insufficient to recover the asset, an impairment loss is recognized basedon the difference between the carrying value of the asset and the fair value ofthe asset less any costs of disposal.  Noimpairment costs were recorded in the fiscal years ended March 31, 2009,2008 and 2007.

 

**AccruedSalaries and Benefits**

 

Accrued salariesand benefits at March 31, 2009 and March 31, 2008 include thefollowing:

 
| **(In thousands)**                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  payroll and payroll related taxes |       | $        | 1,137      |     | $          | 656 |   |
| Accrued  benefits                          |       | 280      |       | 236      |       |
| Accrued  incentive compensation            |       | 7,425    |       | 550      |       |
| Accrued  vacation                          |       | 1,545    |       | 1,493    |       |
| Total  accrued salaries and benefits       |       | $        | 10,387     |     | $          | 2,935 |   |

 

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**CustomerDeposits**

 

For mostinternational orders, the Company generally includes, as part of its terms andconditions, an advance deposit with order acceptance. For long-terminternational contracts, the Company will generally include milestone paymentstied to a specific event and/or passage of time. These deposit amounts arerecorded as a liability under Customer Deposits until reduced by revenuerecognized against the specific contract.

 

**Researchand Development**

 

Internally fundedresearch and development costs including direct labor, material, subcontractorexpenses and related overheads are expensed as incurred. Internally fundedresearch and development costs were $18,070,000, $12,306,000 and $7,184,000, infiscal 2009, 2008, and 2007, respectively. In addition, the Company recognized revenues of $12,524,000, $13,978,000and $6,597,000, in fiscal 2009, 2008, and 2007, respectively related togovernment-sponsored research and development earned primarily on a costreimbursement and fee basis as discussed above.

 

**FairValue of Financial Instruments**

 

The Company’sfinancial instruments consist primarily of cash and cash equivalents,short-term investments, accounts receivable, unbilled costs and fees, accountspayable, warrant liability and letters of credit. The recorded amounts of theseinstruments approximate their fair value (see Note 8).

 

**Incomeper Common and Potential Common Shares**

 

Basic earnings percommon share is computed by dividing net income available to commonstockholders by the weighted average number of shares of common stock outstandingduring the year. Diluted earnings per share include the dilutive impact ofoptions, warrants, restricted stock and restricted stock units using theaverage share price of the Company’s common stock for the period. For the yearsended March 31, 2009, 2008, and 2007, respectively, common stockequivalents of 215,000, 253,000, and 108,000 are excluded from diluted earningsper share, as their effect is anti-dilutive.

 
| **(In thousands except per share  amounts)**                                                                                | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Earnings per Share - Basic**:                                                                                             |       |                     |       |                     |       |                     |       |
| Net  income                                                                                                                 |       | $                        | 28,353     |                     | $          | 17,478                   |       | $ | 24,610 |   |
| Weighted  average number of common shares outstanding—basic                                                            |       | 8,692                    |       | 9,114                    |       | 9,117                    |       |
|                                                                                                                        |       |                     |       |                     |       |                     |       |
| Income  per Share — Basic                                                                                              |       | $                        | 3.26       |                     | $          | 1.92                     |       | $ | 2.70 |   |
|                                                                                                                        |       |                     |       |                     |       |                     |       |
| **Earnings per Share - Diluted:**                                                                                           |       |                     |       |                     |       |                     |       |
| Net  income                                                                                                                 |       | $                        | 28,353     |                     | $          | 17,478                   |       | $ | 24,610 |   |
| Adjustment  to net income for change in warrant valuation                                                                   |       | —                   |       | (11                      | )          | (2,270                   | )          |
| Adjusted  net income                                                                                                        |       | $                        | 28,353     |                     | $          | 17,467                   |       | $ | 22,340 |   |
|                                                                                                                        |       |                     |       |                     |       |                     |       |
| Weighted  average number of common shares outstanding—basic                                                            |       | 8,692                    |       | 9,114                    |       | 9,117                    |       |
| Assumed  exercise of stock options, warrants, restricted stock and restricted stock  units, using the treasury stock method |       | 236                      |       | 233                      |       | 251                      |       |
| Weighted  average number of common and potential common shares outstanding —diluted                                    |       | 8,928                    |       | 9,347                    |       | 9,368                    |       |
| Income  per share — Diluted                                                                                            |       | $                        | 3.18       |                     | $          | 1.87                     |       | $ | 2.38 |   |

 

**IncomeTaxes**

 

The Companyaccounts for income taxes in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes.” Accordingly,the Company recognizes deferred income taxes based on the expected future taxconsequences of differences between the financial statement basis and the taxbasis of assets and liabilities, calculated using enacted tax rates in effectfor the year in which the differences are expected to be reflected in the taxreturn. The Company records a valuation allowance against any net deferred taxassets if it is more likely than not that they will not be realized.

 

**Concentrationsof Credit Risk**

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, short-term investments and accounts andunbilled receivables.  At times, theCompany maintains cash balances in excess of insured limits. The Companymaintains its cash and cash equivalents with major financial institutions.  The 

 

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Company’s credit risk ismanaged by investing its cash in high quality money market funds, commercialpaper, treasury bills, investment grade corporate bonds, government agencybonds and certificates of deposit.

 

Three customers, twoagencies of the U.S. Government and one international customer accounted for60% of the accounts receivable balance at March 31, 2009.  The Company generally requires letters ofcredit and/or prepayments from higher-risk and international customers.  The Company has not experienced anysignificant losses from uncollectible accounts.

 

**Common Stock Dividends**

 

Commencing in June of 2007, the Company began declaring quarterlydividends.  Four quarterly dividends of$0.20 per common share each were declared and paid during fiscal year2009.  On May 13, 2009, the Companydeclared another quarterly dividend of $0.20 for holders of record on May 26,2009 paid on June 4, 2009.

 

**Stock-BasedCompensation**

 

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

 

SFAS 123(R) requiresthe Company to estimate the fair value of share-based awards on the date ofgrant using an option pricing model. The Company adopted SFAS 123(R) using themodified 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 years ended March 31, 2009, 2008 and2007, includes compensation costs for awards granted prior to, but not yetvested as of April 1, 2006 (adoption date), as well as any new grantsissued after April 1, 2006.  TheCompany recognized $4,940,000, $5,314,000 and $8,594,000 of stock-basedcompensation costs in the consolidated statements of income for the year ended March 31,2009, 2008 and 2007, respectively. The income tax benefit related to suchcompensation for the years ended March 31, 2009, 2008 and 2007 wasapproximately $1,724,000, $818,000 and $1,140,000, respectively.

 

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

 
| ** **                                         | ** ** | **Fiscal Year Ended**    | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|
| **(In thousands)**                                 | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
| Cost  of revenues                                  |       | $                        | 754        |   | $ | 1,478 |   | $ | 3,559 |   |
| Selling,  general and administrative               |       | 4,186                    |       | 3,836 |   | 5,035 |   |
| Total  share-based compensation expense before tax |       | $                        | 4,940      |   | $ | 5,314 |   | $ | 8,594 |   |

 

Upon adoption ofSFAS 123(R), in accordance with Staff Accounting Bulletins No. 107 and No. 110,the Company selected the Black-Scholes option pricing model as the mostappropriate method for determining the estimated fair value for the stockawards.  The Black-Scholes method ofvaluation requires several assumptions: (1) the expected term of the stockaward, (2) the expected future stock volatility over the expected term, (3) theexpected dividend yield and (4) risk-free interest rate. The expected termrepresents the expected period of time the Company believes the options will beoutstanding based on historical information. Estimates of expected future stockprice volatility are based on the historic volatility of the Company’s commonstock.  The expected dividend yield wasbased on the expectation would continue paying dividends on our common stock atthe same rate for the foreseeable future. The risk free interest rate is based on the U.S. Zero-Bond rate.  The fair value of options at date of grantwas estimated with the following assumptions:

 
| ** **               | ** ** | **Year Ended**           | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
| **Assumptions:**         |       |                     |       |   |   |   |   |
| Expected  life           |       | 5 years                  |       | 3 years |   | 3 years |   |
| Risk-free  interest rate |       | 2.99                     | %          | 4.1 | % | 4.8 | % |
| Stock  volatility        |       | 49                       | %          | 51 | % | 56 | % |
| Dividend  yield          |       | 1.3                      | %          | 1.3 | % | 0 | % |

 

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**NewAccounting Pronouncements**

 

***SFAS No. 157***

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a common definition for fair value to be applied, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosure about such fair valuemeasurements. The Company adopted the required provisions of SFAS 157 thatbecame effective in our first quarter of fiscal 2009. The adoption of theseprovisions did not have a material impact on our Consolidated FinancialStatements. For further information about the adoption of the requiredprovisions of SFAS 157, see Note 8.

 

In February 2008,the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB StatementNo. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157for nonfinancial assets and nonfinancial liabilities, except for certain itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). We are currently evaluating the impact ofSFAS 157 on our Consolidated Financial Statements for items within the scope ofFSP 157-2, which will become effective beginning with our first quarter offiscal 2010.

 

***SFAS No. 162***

 

In May 2008,the FASB issued FAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162identifies the sources of accounting principles and the framework for selectingthe principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with GAAP. FAS 162 iseffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles”. The Company does not expect the adoption of FAS162 to have a material impact on the Company’s financial condition or resultsof operations.

 

***EITFIssue No. 06-11***

 

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

 

***EITFIssue No. 03-6-1***

 

In June 2008,the FASB issued Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (“FSPEITF 03-6-1”), effective for fiscal years beginning after December 15,2008.  FSP EITF 03-6-1 clarifies thatunvested share-based awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andmust be included in the computation of EPS pursuant to the two-class method. Weare currently evaluating the impact of adopting FSP EITF 03-6-1 on ourConsolidated Financial Statements which will become effective beginning withour first quarter of fiscal 2010.

 

***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 does notexpect the adoption of EITF 07-5 to have a material impact on the Company’sfinancial condition or results of operations.

 

**2. LEASEAGREEMENTS**

 

The Company leasescertain facilities under non-cancelable operating leases with various renewaloptions. For operating leases which contain fixed escalations in rentalpayments, the Company records the total rent payable on a straight-line basisover the original lease term as defined in SFAS 98 “Accounting for Leases”. TheCompany incurred $253,000, $269,000 and $204,000 of operating rent expense inthe fiscal years ended March 31, 2009, 2008, and 2007 respectively.   In conjunction with the

 

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Company’s lease for itsheadquarters, the Company has issued security in the form of a standby letterof credit in the amount of $300,000 with an original expiration date of March 1,2006 which contains automatic extensions through May 15, 2016.

 

In March 2005,the Company renewed its lease agreement for its corporate headquarters andmanufacturing facilities in Billerica, Massachusetts.  As part of the lease agreement, the Company’slandlord agreed to certain renovations to the Billerica facility including theconstruction of additional high bay manufacturing space.  The Company was responsible for a portion ofthe construction costs and was deemed to be the owner of the building duringthe construction period under EITF 97-10 “The Effect of Lessee Involvement inAsset Construction”.  In January 2007,the Company amended this lease agreement to expand its lease to include theremaining available space in the building. During the fiscal years ended March 31, 2007 and March 31,2006, the Company capitalized $2,029,000 and $5,153,000, respectively to recordthe facility on its books with an offsetting credit to the Lease FinancingLiability.  In addition, amounts paid forconstruction were recorded as construction in progress and the landlordconstruction allowances of $5,642,000 in 2006 and $367,000 in 2008 wererecorded as additional lease financing liability.

 

At the completionof the construction of the initial renovations in February 2006, the leasewas reviewed for potential sale-leaseback treatment in accordance with SFAS No. 98. Based on this review, it was determinedthat the lease did not qualify for sale-leaseback treatment in accordance withSFAS No. 98.  As a result, buildingand tenant improvements and associated lease financing liabilities remained onthe Company’s books.  The Lease FinancingLiability is being amortized over the lease term based on the paymentsdesignated in the agreement and the building and tenant improvement assets arebeing depreciated on a straight line basis over their useful lives.

 

Future minimumrental payments under the Company’s non-cancelable leases, excluding realestate taxes, insurance and operating costs paid by the Company, required overthe initial terms of the leases are as follows (in thousands):

 
| **Year Ending March 31,**                      | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| 2010                                                |       | $                    | 192        |               | $          | 1,291 |   |
| 2011                                                |       | 185                  |       | 1,412              |       |
| 2012                                                |       | 185                  |       | 1,412              |       |
| 2013                                                |       | 185                  |       | 1,424              |       |
| 2014                                                |       | 186                  |       | 1,542              |       |
| Thereafter                                          |       | 355                  |       | 2,956              |       |
| Total  payments                                     |       | $                    | 1,288      |               | 10,037     |   |
| Imputed  interest                                   | ** ** | ** **           |       | (497               | )          |
| Lease  financing liability                          | ** ** | ** **           |       | 9,540              |       |
| Less:  Current portion of lease financing liability | ** ** | ** **           |       | 1,163              |       |
| Lease  financing liability, net of current portion  | ** ** | ** **           |       | $                  | 8,377      |   |

 

**3. LINEOF 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 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 March 31, 2009). The credit agreement iscollateralized by certain assets of the Company and contains certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.  As of March 31, 2009, the Company was incompliance with these covenants.

 

At March 31,2009, there were no borrowings outstanding against this credit facility.  Under the terms of the credit agreement, theCompany was required to pay certain one-time facility fees which are beingamortized over the life of the facility and is required to pay a fee of 0.50%quarterly on unused amounts under the line of credit.  The unused facility fees will be waived inany quarter in which the average aggregate credit extensions (as defined in theagreement) exceed $25.0 million for such quarter. Total expenses incurredrelated to these fees were $214,000, $157,000 and $202,000 in fiscal 2009,2008, and 2007, respectively.

 

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In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.  The Company had outstanding $35,282,000 instandby letters of credit against the Loan and Security Agreement with$4,718,000 remaining availability.  Theoutstanding letters of credit are primarily for guaranteeing performance oncertain international projects.   Noamounts have been drawn against these letters of credit.

 

**4. INCOMETAXES**

 

The provision forincome taxes for the years ended March 31, 2009, 2008, and 2007 consistedof the following:

 
| **(In thousands)**          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                    |       |     |       |     |       |     |       |
| Federal                     |       | $        | 14,470     |     | $          | 12,040   |       | $ | 13,909 |   |
| State                       |       | 1,108    |       | 680      |       | 1,419    |       |
| Foreign                     |       | 40       |       | 40       |       | 30       |       |
|                        |       | 15,618   |       | 12,760   |       | 15,358   |       |
| Deferred:                   |       |     |       |     |       |     |       |
| Federal                     |       | (227     | )          | (2,713   | )          | (204     | )          |
| State                       |       | (44      | )          | (40      | )          | 252      |       |
|                        |       | (271     | )          | (2,753   | )          | 48       |       |
| Provision  for income taxes |       | $        | 15,347     |     | $          | 10,007   |       | $ | 15,406 |   |

 

The differencebetween the total expected provision for income taxes computed by applying thestatutory federal income tax rate to income before provision for income taxesand the recorded provision for income taxes for the three years in the periodended March 31, is as follows:

 
| **(In thousands)**                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provision  for income taxes at statutory rate |       | $        | 15,295     |     | $          | 9,620    |       | $ | 14,005 |   |
| State  tax provision net of federal effect    |       | 692      |       | 416      |       | 1,085    |       |
| Permanent  tax differences for stock warrant  |       | —   |       | (4       | )          | (795     | )          |
| Stock  based compensation                     |       | 286      |       | 242      |       | 1,369    |       |
| Research  tax credits                         |       | (395     | )          | (191     | )          | (30      | )          |
| Effect  of ETI exclusion                      |       | —   |       | —   |       | (229     | )          |
| Qualifying  manufacturing credits             |       | (539     | )          | (179     | )          | (206     | )          |
| Other                                         |       | 8        |       | 103      |       | 207      |       |
| Provision  for income taxes                   |       | $        | 15,347     |     | $          | 10,007   |       | $ | 15,406 |   |

 

The significantcomponents of the net deferred tax assets at March 31, 2009 and 2008 areas follows:

 
| ** **                                       | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(In thousands)**                               | ** ** | **Current**             | ** ** | **Non-current**         | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| Deferred  tax assets (liabilities):              |       |                    |       |                    |       |   |   |   |   |
| Accounts  receivable and unbilled costs and fees |       | $                       | —     |                    | $          | 104 |   | $ | — |   | $ | 84 |   |
| Inventory                                        |       | 109                     |       | 1,521                   |       | 104 |   | 797 |   |
| Deferred  revenue                                |       | —                  |       | 1,235                   |       | — |   | 1,522 |   |
| Accrued  vacation                                |       | 508                     |       | —                  |       | 489 |   | — |   |
| Accrued  warranty costs                          |       | 413                     |       | —                  |       | 620 |   | — |   |
| Depreciation                                     |       | —                  |       | (321                    | )          | — |   | 304 |   |
| Unearned  compensation                           |       | 735                     |       | 2,751                   |       | 343 |   | 2,524 |   |
| Other                                            |       | 42                      |       | —                  |       | 21 |   | — |   |
| Deferred  income tax assets                      |       | 1,807                   |       | 5,290                   |       | 1,577 |   | 5,231 |   |
| Valuation  allowance                             |       | —                  |       | —                  |       | — |   | — |   |
| Net  deferred income taxes                       |       | $                       | 1,807      |                    | $          | 5,290 |   | $ | 1,577 |   | $ | 5,231 |   |

 

In June 2006,the FASB issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement 109” (“FIN 48”). Thisstatement clarifies the criteria that an individual tax position must satisfyfor some or all 

 

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of the benefits ofthat position to be recognized in a company’s financial statements. FIN 48prescribes a recognition threshold of more-likely-than-not, and a measurementattribute for all tax positions taken or expected to be taken on a tax return,in order for those tax positions to be recognized in the financialstatements.  Effective April 1,2007, the Company adopted the provisions of FIN 48 and there has been nomaterial effect on the financial statements. With the adoption of FIN 48 the Company has adopted the expensing ofinterest and penalties in other income and expenses.  There was no cumulative effect related to adoptingFIN 48 and no interest or penalties related to uncertain tax positions wasaccrued.

 

The Company iscurrently open to audit under the statute of limitations by the InternalRevenue Service and state taxing authorities for the years ending March 31,2006 through 2009.  The Company is underexamination currently by the Internal Revenue Service for tax years ended March 31,2006 and 2007.  Management does notbelieve that the ultimate outcome of this examination will have a materialimpact on the Company’s financial position or results of operations.   The Company believes that there are nouncertain tax positions that required a reserve as of March 31, 2009.

 

**5.WARRANTY OBLIGATIONS**

 

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 years ended March 31, 2009 and 2008is as follows:

 
| **(In thousands)**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Warranty  accrual at beginning of period          |       | $        | 1,671      |     | $          | 1,997 |   |
| Accruals  for warranties issued during the period |       | 2,487    |       | 2,826    |       |
| Adjustment  of preexisting accrual estimates      |       | (1,879   | )          | (2,020   | )          |
| Warranty  costs incurred during period            |       | (1,149   | )          | (1,132   | )          |
| Warranty  accrual at end of period                |       | $        | 1,130      |     | $          | 1,671 |   |

 

**6. STOCKHOLDERS’ EQUITY**

 

**Preferred Stock**

 

The Company’sarticles of organization authorize its Board of Directors to issue up to100,000 shares of preferred stock in one or more series, to determine and fixcertain relative rights and preferences of the shares of any series, to fix thenumber of shares constituting any such series, and to fix the designation ofany such series, without further vote or action by its shareholders. TheCompany has no present plans to issue shares of preferred stock. In 1998, theCompany designated a series of Preferred Stock (the “Series A PreferredStock”) to be issued upon the exercise of Rights issued under the Company’sShareholder Rights Plan. Under the Shareholder Rights Plan, adopted in 1998 andreissued upon its expiration in April 2008, its stockholders are entitledto purchase shares of its Series A Preferred Stock under certaincircumstances. These circumstances include the purchase of 15% or more of theoutstanding shares of common stock by a person or group, or the announcement ofa tender or exchange offer to acquire 15% or more of the outstanding commonstock.

 

**Common Stock and Warrant Offering**

 

On May 28,2002, the Company closed on a private placement offering of common stock andwarrants. A total of 1,115,000 shares were sold to accredited investors at aprice of $17.64 each. In addition, warrants to purchase an additional 295,475shares of common stock at a price of $23.52 were issued. Proceeds to theCompany approximated $18.4 million, net of approximately $1.3 million ofissuance costs of which $3.1 million was assigned to the warrants issued. Thewarrants were immediately vested and had a five-year life which expired in May of2007. Due to certain conversion features of these warrants that provided thatthe holder could opt for a cash settlement in certain instances, including amerger, a sale of all or substantially all of the Company’s assets, or a tenderoffer or exchange offer of shares of the Company’s stock, a liability equal tothe Black-Scholes valuation of the warrants at the deal closing date wasrecorded on the Company’s balance sheet. The “mark to market” change in thewarrants valuation of ($11,000) and ($2,270,000) was recorded as other (income)expense for the years ended March 31, 2008 and March 31, 2007,respectively. In May of 2007, all remaining warrants were exercised and noliability for these warrants remains at March 31, 2009.

 

During fiscal 2008and 2007, warrants to purchase 21,625 and 35,450 shares of common stock wereexercised resulting in total proceeds received of $509,000 and $834,000,respectively.  The fair market value ofthe warrants at the date of exercise totaled $623,000 and $1,134,000 in fiscal2008 and 2007, respectively. The cash proceeds and the fair value of theliability were recorded as additional paid in capital at March 31, 2008.

 

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**Share Repurchase Program**

 

OnMay 17, 2007, the Board of Directors approved a Stock Repurchase Programwhich authorized the Company to repurchase up to $35 million of shares of itscommon stock from time to time on the open market.  This Stock Repurchase Program was completedin the first quarter of fiscal 2009.  On May 8,2008 the****Board of Directorsapproved an additional Stock Repurchase Program which authorizes the Company torepurchase up to $35 million of shares of its common stock from time to time onthe open market.  During the fiscal yearended March 31, 2009, the Company repurchased 349,327 shares of commonstock at an average price of $51.70.  Asof March 31, 2009, the remaining balance available under the program topurchase shares was $26,732,000.

 

**StockOption and Other Compensation Plans**

 

The Company hasvarious stock option and other compensation plans for directors, officers, andemployees. The Company had the following stock option plans outstanding as of March 31,2009: the 1995 Combination Plan, the 1997 Non-Qualified Option Plan, the 1998Non-Qualified Option Plan, the 1999 Combination Plan, the 2000 CombinationPlan, the 2002 Combination Plan, the 2003 Stock Plan for Non-Employee Directorsand the 2005 Equity and Incentive Plan. There are 3,980,000 shares authorizedunder these plans and there are 294,629 shares remaining available to begranted at March 31, 2009 under these plans. Vesting periods are at thediscretion of the Board of Directors and typically range from one to threeyears. Certain of the options granted vest upon the achievement of certainperformance based goals as well as service time incurred.  Options under these plans are granted at fairmarket value and have a term of ten years from the date of grant.

 

***StockOptions:*****   **A summary of the Company’s stock optionactivity is as follows:

 
| ** **                                                                | ** ** | **2009**              | ** ** | **2008**                               | ** ** | **2007**              | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Options  outstanding, beginning of year                                   |       | 828,063               |       | $                                      | 41.70      |                  | 887,573    |   | $ | 37.43 |   | 878,470 |   | $ | 36.79 |   |
| Options  granted                                                          |       | 64,191                |       | 64.13                                  |       | 76,970                |       | 63.21 |   | 60,670 |   | 48.23 |   |
| Options  exercised                                                        |       | (161,753              | )          | 36.49                                  |       | (127,635              | )          | 23.73 |   | (31,680 | ) | 31.23 |   |
| Options  canceled or expired                                              |       | (21,247               | )          | 56.58                                  |       | (8,845                | )          | 59.71 |   | (19,887 | ) | 51.94 |   |
| Options  outstanding, end of year                                         |       | 709,254               |       | $                                      | 44.47      |                  | 828,063    |   | $ | 41.70 |   | 887,573 |   | $ | 37.43 |   |
| Options  exercisable, end of year                                         |       | 625,646               |       | $                                      | 41.90      |                  | 712,356    |   | $ | 38.74 |   | 639,219 |   | $ | 33.88 |   |
| Options  available for grant                                              |       |                  |       |                                   |       | 145,691               |       |   |   | 320,865 |   |   |   |
| Weighted  average fair value per share of options granted during the year |       |                  |       | $                                      | 26.54      |                  |       |   | $ | 22.60 |   |   |   | $ | 20.09 |   |

 

The followingsummarizes certain data for options outstanding and exercisable at March 31,2009:

 
|                  |   | **Number  of  Shares** |   | **Range of    Exercise Prices** |             | **Weighted    Average Exercise  Price** |   | **Weighted    Average Remaining Contractual Life** |   |
|-----------------------|--------|------------------------|--------|---------------------------------|------------------|-----------------------------------------|--------|----------------------------------------------------|--------|
| Options  outstanding: |   | 125,845                |   | $                               | 6.50–$20.00 |                                    | $      | 12.27                                              |   | 3.98 |   |
|                  |   | 71,984                 |   | 20.01–30.00                |             | 28.15                                   |   | 5.46                                               |   |
|                  |   | 54,606                 |   | 30.01–40.00                |             | 39.07                                   |   | 5.68                                               |   |
|                  |   | 98,533                 |   | 40.01–50.00                |             | 45.47                                   |   | 6.42                                               |   |
|                  |   | 163,298                |   | 50.01–60.00                |             | 53.53                                   |   | 6.18                                               |   |
|                  |   | 194,988                |   | 60.01–67.98                |             | 64.69                                   |   | 6.10                                               |   |
|                  |   | 709,254                |   | $                               | 6.50-$67.98      |                                    | $      | 44.47                                              |   | 5.69 |   |
| Options  exercisable: |   | 125,845                |   | $                               | 6.50–$20.00 |                                    | $      | 12.27                                              |   |   |   |
|                  |   | 71,984                 |   | 20.01–30.00                |             | 28.15                                   |   |                                               |   |
|                  |   | 54,606                 |   | 30.01–40.00                |             | 39.07                                   |   |                                               |   |
|                  |   | 98,533                 |   | 40.01–50.00                |             | 45.47                                   |   |                                               |   |
|                  |   | 151,463                |   | 50.01–60.00                |             | 53.68                                   |   |                                               |   |
|                  |   | 123,215                |   | 60.01–67.98                |             | 64.13                                   |   |                                               |   |
|                  |   | 625,646                |   |                            |             | $                                       | 41.90  |                                               |   |   |

 

The totalintrinsic value, representing the difference between market value on the dateof exercise and the option price, of stock options exercised during fiscal2009, 2008 and 2007 was $5,265,000, $4,892,000 and $904,000, respectively.   Nonvested stock option awards are subject tothe risk of forfeiture until the fulfillment of specified conditions. As of March 31,2009 there 

 

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was $1,009,000 oftotal unrecognized compensation cost related to nonvested stock option awardsgranted under the Company’s stock plans. This cost is expected to be recognizedover a weighted average of 1.1 years.

 

The Companyrealizes a tax deduction upon the exercise of non-qualified stock options anddisqualifying dispositions of incentive stock options due to the recognition ofcompensation expense in the calculation of its taxable income. The amount ofthe compensation recognized for tax purposes is based on the difference betweenthe market value of the common stock and the option price at the date theoptions are exercised and/or sold. These tax benefits are credited toadditional paid-in capital if it is considered more likely than not that theywill be realized. During fiscal 2009, 2008 and 2007, a tax benefit of$1,284,000, $1,350,000 and $544,000, respectively, was recorded to additionalpaid-in capital for exercises and/or sales of stock options or stock.

 

***RestrictedStock and Restricted Stock Units: ***The Company has instituted long termincentive plans for certain key employees. These plans call for the issuance ofrestricted stock which vest upon the achievement of certain performance basedgoals as well as service time incurred. Restricted stock and restricted stock units may also be granted to otheremployees with vesting periods that range from one to three years.  In addition, annually on January 10th the Board ofDirectors is granted restricted stock. These restricted stock shares vest on apro-rata basis on service time performed over a one-year period.  The fair values of these restricted stockawards are equal to the market price per share of the Company’s common stock onthe date of grant.

 

Nonvestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of March 31, 2009 therewas $3,232,000 of total unrecognized compensation cost related to nonvestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a weighted average of 1.4 years.

 

A summary of the Company’srestricted stock and stock unit activity is as follows:

 
| ** **                                                          | ** ** | **2009**              | ** ** | **2008**                               | ** ** | **2007**              | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Unvested  restricted stock and units outstanding, beginning of year |       | 110,301               |       | $                                      | 58.34      |                  | 49,538     |   | $ | 54.52 |   | 23,125 |   | $ | 54.92 |   |
| Granted                                                             |       | 53,259                |       | 53.69                                  |       | 72,970                |       | 60.80 |   | 49,538 |   | 54.52 |   |
| Vested                                                              |       | (9,194                | )          | 56.59                                  |       | (9,807                | )          | 56.77 |   | (23,125 | ) | 54.92 |   |
| Forfeited                                                           |       | (16,679               | )          | 57.64                                  |       | (2,400                | )          | 60.62 |   | — |   | — |   |
| Unvested  restricted stock and units outstanding, end of year       |       | 137,687               |       | $                                      | 56.74      |                  | 110,301    |   | $ | 58.34 |   | 49,538 |   | $ | 54.52 |   |

 

**7.BUSINESS SEGMENT INFORMATION**

 

In accordance withthe provisions of SFAS No. 131 “Disclosures about Segments of anEnterprise and Related Information,” the Company has determined that it hasonly one operating segment, the X-ray product segment. This includes X-raydetection and imaging products used primarily for the detection of illegaldrugs, weapons and explosives, and smuggled goods. The equipment is purchasedby sophisticated government and commercial clients focused on the detection oforganic material in complex backgrounds and the ability to see the contents ofcontainers with precision.

 

**Geographical Data**

 

All of the Company’sexport sales originate from the United States. At March 31, 2009, approximately 5.3% of the Company’s assets werein foreign countries.  The foreign assetswere comprised of cash in foreign banks, and inventory in international depotsfor field replacements or systems shipped internationally but not accepted byfiscal year end.

 

The followingtable shows the breakdown of net sales and contract revenues to internationaland domestic customers based upon customer’s country of domicile and the majorregions of international activity:

 

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***Net Sales and Contract Revenues***

*** ***
| ** **                                             | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|
| **(Dollars in thousands)**                             | ** ** | **2009**        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Domestic                                               |       | $               | 138,240    |   | 63 | % | $ | 107,021 |   | 64 | % | $ | 111,335 |   | 73 | % |
| International                                          |       | 80,127          |       | 37 | % | 59,712 |   | 36 | % | 41,851 |   | 27 | % |
| Net Sales and Contract Revenues                        |       | $               | 218,367    |   | 100 | % | $ | 166,733 |   | 100 | % | $ | 153,186 |   | 100 | % |
| ** **                                             |       |            |       |   |   |   |   |   |   |   |   |   |   |
| **Percent of International Revenue by Major  Region:** |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Middle East & Africa                          |       |            |       | 85 | % |   |   | 70 | % |   |   | 66 | % |
| Pacific Rim                                            |       |            |       | 7 | % |   |   | 14 | % |   |   | 20 | % |
| Europe                                                 |       |            |       | 8 | % |   |   | 14 | % |   |   | 14 | % |
| All Other                                              |       |            |       | — | % |   |   | 2 | % |   |   | — | % |

 

***MajorCustomers:***  Sales to major customers (representing inexcess of 10% of consolidated revenues) consisted of the following:

 

*Fiscal2009****:***   $39,187,000 and $34,635,000, respectively,to two customers.

 

*Fiscal2008****:***   $20,325,000 and $16,602,000, respectively,to two customers.

 

*Fiscal2007****:***   $48,142,000 and $22,894,000, respectively,to two customers.

 

Domestically, theCompany’s primary client base is comprised of agencies of the U.S. Government.Approximately 56%, 55% and 70%, of the Company’s sales in fiscal 2009, 2008,and 2007 respectively, were derived from either (i) contracting directlywith the U.S. Government, or (ii) contracting with contractors workingdirectly with the U.S. Government. Certain of the Company’s contracts with theU.S. Government provide the U.S. Government with the standard unilateral rightto terminate these contracts for convenience. During fiscal 2009, two of theCompany’s contracts with the U.S. Government were partially terminated forconvenience by the U.S. Government. These partial terminations of these contracts did not result in materiallosses to the Company in the fiscal year ended March 31, 2009.

 

Three customers atMarch 31, 2009 had accounts receivable balances representing in excess of10% of consolidated accounts receivable. These customers, two agencies of theU.S. Government and one international customer, had receivables totaling$22,447,000 (60% of total receivables) at March 31, 2009.  One customer at March 31, 2008 hadaccounts receivable balances representing in excess of 10% of consolidatedaccounts receivable. This customer, an agency of the U.S. Government, hadreceivables totaling $6,726,000 (24%) at March 31, 2008.

 

Included inunbilled costs and fees at March 31, 2009 was $5,177,000 related to fourcustomers, which is expected to be billed and collected during fiscal 2010.Included in unbilled costs and fees at March 31, 2008 was $5,783,000related to five customers, which was billed and collected during fiscal 2009.

 

**8. 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 include thefollowing:

 

·             Quoted prices for identical or similar assets orliabilities in non-active markets (examples include corporate and municipalbonds which trade infrequently);

 

·             Inputs other than quoted prices that are observablefor substantially the full term of the asset or liability (examples includeinterest rate and currency swaps); and

 

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

 

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

 

The followingtable presents the financial assets and liabilities we measure at fair value ona recurring basis, based on the fair value hierarchy as of March 31, 2009:

 
| **(In thousands)**                            | ** ** | **March 31, 2009** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| **Level 1 – Financial Assets**                |       |                    |       |
| U.S.  Treasury bills                               |       | $                       | 8,978      |   |
| **Level 2 – Financial Assets**                |       |                    |       |
| Government  agency bond                            |       | 4,026                   |       |
| Certificates  of deposit                           |       | 3,200                   |       |
| Commercial  paper                                  |       | 31,976                  |       |
| Money  market funds                                |       | 76,618                  |       |
| Corporate  debentures/bonds                        |       | 12,489                  |       |
| Total  Level 2 Financial Assets                    |       | 128,309                 |       |
| Total  cash equivalents and short-term investments |       | $                       | 137,287    |   |

 

These investmentsare classified as available-for-sale and are recorded at their fair marketvalues using the specific identification method. The unrealized holding gainsor losses on these securities are included as a component of comprehensiveincome in the Consolidated Statements of Stockholders’ Equity and ComprehensiveIncome.

 
| ** **                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized   Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|---------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------|------------|
| **2009:**                   |       |                |       |                          |       |                          |       |           |       |
| Money  market funds         |       | $                   | 76,618     |                          | $          | —                        |       | $              | —     |   | $ | 76,618 |   |
| Certificates  of deposit    |       | 3,200               |       | —                        |       | —                        |       | 3,200          |       |
| Commercial  paper           |       | 31,976              |       | —                        |       | —                        |       | 31,976         |       |
| Corporate  debentures/bonds |       | 12,507              |       | 3                             |       | (21                           | )          | 12,489         |       |
| Treasury  bills             |       | 8,972               |       | 7                             |       | (1                            | )          | 8,978          |       |
| Government  agency bonds    |       | 4,002               |       | 24                            |       | —                        |       | 4,026          |       |
| Total                       |       | $                   | 137,275    |                          | $          | 34                            |       | $              | (22        | ) | $ | 137,287 |   |
| ** **                  |       |                |       |                          |       |                          |       |           |       |
| Classified  as:             |       |                |       |                          |       |                          |       |           |       |
| Cash  equivalents           |       |                |       |                          |       |                          |       | $              | 100,903    |   |
| Short  term investments     |       |                |       |                          |       |                          |       | 36,384         |       |
| ** **                  |       |                |       |                          |       |                          |       | $              | 137,287    |   |
| ** **                  |       |                |       |                          |       |                          |       |           |       |
| **2008:**                   |       |                |       |                          |       |                          |       |           |       |
| Money  market funds         |       | $                   | 33,340     |                          | $          | —                        |       | $              | —     |   | $ | 33,340 |   |
| Certificates  of deposit    |       | 7,000               |       | 2                             |       | —                        |       | 7,002          |       |
| Commercial  paper           |       | 45,098              |       | 37                            |       | —                        |       | 45,135         |       |
| Corporate  debentures/bonds |       | 32,495              |       | 99                            |       | (56                           | )          | 32,538         |       |
| Total                       |       | $                   | 117,933    |                          | $          | 138                           |       | $              | (56        | ) | $ | 118,015 |   |
|                        |       |                |       |                          |       |                          |       |           |       |
| Classified  as:             |       |                |       |                          |       |                          |       |           |       |
| Cash  equivalents           |       |                |       |                          |       |                          |       | $              | 45,328     |   |
| Short  term investments     |       |                |       |                          |       |                          |       | 72,687         |       |
|                        |       |                |       |                          |       |                          |       | $              | 118,015    |   |

 

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**9.COMMITMENTS AND CONTINGENCIES**

 

**Deferred Compensation**

 

The Company had anunfunded deferred compensation plan, originally adopted in 1976 and amended atvarious times, for certain retired directors. This plan is closed such that no other directors are qualified forcompensation under this plan.  This planprovides for periodic payments beginning at age 65, the amount of which dependson the director’s length of service. The Company paid $19,000, $17,000 and$17,000 in the years ended March 31, 2009, 2008 and 2007, respectively,under this deferred compensation plan. At March 31, 2009 and March 31,2008, $69,000 and $61,000, respectively, was accrued for under this plan.

 

**Lease Liability**

 

In conjunctionwith the sale of the High Energy Systems division in fiscal 2005, the lease forthe California operations of the High Energy Systems Division was assigned toAccuray. The Company remains secondarily liable for the remaining leasepayments in the event of default by Accuray during the lease term which expiresin February 2011. Remaining lease payments at March 31, 2009 totaled$764,000. No accrual for this contingent liability has been recorded at March 31,2009 as payment of this expense is considered remote.

 

**Litigation**

 

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, this patent was later withdrawn fromthe litigation. This case was settled in June of 2009 with the courtholding that the defendants had infringed on the Company’s United States PatentNo. 5,313,511.  Under the terms ofthe settlement agreement, the Company has granted the defendants a limitedlicense 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 that theresolution of these matters will not have a material adverse impact on itsfinancial condition, results of operations or cash flows.

 

**Purchase Commitments**

 

In the normalcourse of business, the Company enters into purchase orders with its vendorsfor the purchase of materials or services to meet its production needs. At March 31,2009, the Company had $39,427,000 of open purchase orders which are expected tobe fulfilled primarily within the next 2 years. Certain single source vendorsor vendors producing custom material require significant lead times from orderto delivery of their material. Should the demand for the Company’s productsdecline significantly, or should there be a significant shift in the mix ofproducts being demanded, the Company may incur cancellation charges related tothese commitments, that could be material to the Company’s results ofoperations. To date, the Company has not experienced any material lossesrelated to cancellation penalties.

 

**Employment Agreements**

 

On February 7,2008, the Company entered into a new employment agreement with its ChiefExecutive Officer.  Under this agreement,the Company’s Chief Executive Officer, in the event termination pursuant to achange of control, is eligible to receive a payment equal to 2.9 times his basesalary in effect on the date of termination plus his annual target bonus, thecontinuation of health benefits for a period of three years, the vesting of alloptions and restricted stock and the continuation of certain life insurancebenefits.  In the event of a qualifyingtermination not pursuant to a change of control, the Chief Executive Officer iseligible for a payment equal to two times his base salary in effect at the dateof termination plus his annual target bonus, the continuation of healthbenefits for a period of eighteen months and the continuation of certain lifeinsurance benefits.  On July 29,2008 the Company entered into new Change in Control and Severance BenefitAgreements with members of its executive staff including its Chief FinancialOfficer. Under these agreements, these executives, in the event of a change ofcontrol, are eligible to receive a payment equal to two times the highestannual rate of base salary payable to the executive during the one-year periodending on the change of control date plus his or her target Short TermIncentive bonus, the continuation of health benefits for a period of threeyears and the vesting of all options and restricted stock.   In the event of qualifying termination notpursuant to a change of control, the members of the executive staff areeligible to receive a payment equal to one times his or her highest annual rateof base salary payable to the executive during the one-year period ending onthe termination date and the continuation of health benefits for one year.

 

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**Retirement Savings Plan**

 

The Companymaintains a 401(k) Retirement Savings Plan for all employees.   Employees are eligible to participate on thefirst of the month following date of employment.  The Plan is funded by elective employeecontributions of up to 100% of their compensation up to IRS limits. Under thePlan the Company at its discretion matches 50% of the first 6% of employeecontributions for each participant in the form of Company common stock.Expenses under the Plan, consisting of Company contributions which were made inCompany stock and Plan administrative expenses paid by the Company, totaled$789,000, $731,000 and $660,000, in 2009, 2008, and 2007 respectively.

 

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

**UNAUDITEDQUARTERLY CONSOLIDATED FINANCIAL DATA**

**FOR THE YEARS ENDED MARCH 31,2009 AND MARCH 31, 2008**

(In thousands, except pershares amounts)

 
|                             |   | **2009 by quarter** |       | **2008 by quarter** |       |
|----------------------------------|--------|---------------------|------------|---------------------|------------|
|                             |   | **1st**             | ** ** | **2nd**             | ** ** | **3rd** | ** ** | **4th** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
|                             |   |                |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  sales and contract revenues |   | $                   | 39,494     |                | $          | 56,293 |   | $ | 65,290 |   | $ | 57,290 |   | $ | 44,471 |   | $ | 37,627 |   | $ | 42,615 |   | $ | 42,020 |   |
| Gross  profit                    |   | 14,529              |       | 22,527              |       | 28,760 |   | 27,149 |   | 17,401 |   | 14,078 |   | 15,184 |   | 13,087 |   |
| Operating  income                |   | 3,267               |       | 10,957              |       | 14,813 |   | 12,987 |   | 8,161 |   | 5,454 |   | 4,427 |   | 3,181 |   |
| Net  income                      |   | 2,689               |       | 7,361               |       | 10,059 |   | 8,244 |   | 6,172 |   | 4,515 |   | 4,002 |   | 2,789 |   |
| Net  income per share            |   |                |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| —Basic                      |   | $                   | 0.31       |                | $          | 0.85 |   | $ | 1.16 |   | $ | 0.94 |   | $ | 0.67 |   | $ | 0.49 |   | $ | 0.44 |   | $ | 0.31 |   |
| —Diluted                    |   | $                   | 0.30       |                | $          | 0.83 |   | $ | 1.13 |   | $ | 0.92 |   | $ | 0.66 |   | $ | 0.48 |   | $ | 0.43 |   | $ | 0.30 |   |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                       | AMERICAN SCIENCE  AND ENGINEERING, INC. |
|----------------------------|-----------------------------------------|
|                       |                                    |
| DATED: June 10,  2009 | By:                                     |   /s/ ANTHONY  R. FABIANO |
|                       |                                    |   |
|                       |                                    | Anthony R. Fabiano |
|                       |                                    | President and Chief  Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Company and in thecapacities and on the dates indicated:

 
| **Signature**          | ** ** | **Title**                                          | ** ** | **Date**           |
|------------------------|------------|----------------------------------------------------|------------|--------------------|
|                   |       |                                               |       |               |
| /s/ ANTHONY R. FABIANO |       | Director and President and Chief Executive Officer |       | June 10, 2009 |
| Anthony R. Fabiano     |       | (Principal Executive Officer)                      |       |               |
|                   |       |                                               |       |               |
| /s/ KENNETH J.GALAZNIK |       | Senior Vice President, Chief Financial Officer     |       | June 10, 2009 |
| Kenneth J. Galaznik    |       | and Treasurer (Principal Financial Officer)        |       |               |
|                   |       |                                               |       |               |
| /s/ DENIS R. BROWN     |       | Chairman of the Board, Director                    |       | June 10, 2009 |
| Denis R. Brown         |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ JOHN A. GORDON     |       | Director                                           |       | June 10, 2009 |
| John A. Gordon         |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ ROGER P. HEINISCH  |       | Director                                           |       | June 10, 2009 |
| Roger P. Heinisch      |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ HAMILTON W. HELMER |       | Director                                           |       | June 10, 2009 |
| Hamilton W. Helmer     |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ ERNEST J. MONIZ    |       | Director                                           |       | June 10, 2009 |
| Ernest J. Moniz        |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ MARK S. THOMPSON   |       | Director                                           |       | June 10, 2009 |
| Mark S. Thompson       |       |                                               |       |               |
|                   |       |                                               |       |               |
| /s/ CARL W. VOGT       |       | Director                                           |       | June 10, 2009 |
| Carl W. Vogt           |       |                                               |       |               |

 

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**EXHIBITINDEX**

 
| **Exhibit********Number** | ** ** | **Description of Exhibit (and Statement)********of Incorporation by Reference, If Applicable)**                                                                                                                                       | ** ** | **Page********Number********(If Filed)** |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                                                                         | ** ** | ** **                                    |
| 3.1                       |       | Restated  Articles of Organization of the Company (filed as an Exhibit to the  Company’s Annual Report on Form 10-K for the year ended  September 30, 1967 and incorporated herein by reference)                                                               |       |                                          |
| 3.2                       |       | Articles  of Amendment to Restated Articles of Organization of Company (filed as  Exhibit 2(a)(ii)(B) to the Company’s Registration Statement on  Form S-7, No. 2-56452, filed May 25, 1976 and incorporated  herein by reference)                   |       |                                          |
| 3.3                       |       | Articles  of Amendment to Restated Articles of Organization of Company (filed as  Exhibit 12 to the Company’s Annual Report on Form 10-K for the year  ended March 31, 1976, and incorporated herein by reference)                                             |       |                                          |
| 3.4                       |       | By-laws  of Company, as amended (filed as Exhibit 2(a)(iii) to the Company’s  Registration Statement on Form S-7, No. 2-56452, filed May 25,  1976 and incorporated herein by reference)                                                             |       |                                          |
| 3.5                       |       | Amended  and Restated By-laws of the Company (filed as Exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2003, and incorporated herein by reference)                                                             |       |                                          |
| 4.1                       |       | Shareholder  Rights Agreement, dated April 17, 1998, between the Company and American  Stock Transfer & Trust Company (filed as Exhibit 1 to the  Company’s filing on Form 8-A12B filed on April 15, 1998 and  incorporated herein by reference) |       |                                          |
| 4.2                       |       | Rights  Agreement, dated April 17, 2008, between the Company and American Stock  Transfer & Trust Company (filed as Exhibit 4.1 to the Company’s  filing on Form 8-A12B filed on April 18, 2008 and incorporated  herein by reference)           |       |                                          |
| 10.1                      |       | 1997  Non-Qualified Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-27927, filed on  May 28, 1997 and incorporated herein by reference)                                                         |       |                                          |
| 10.2                      |       | 1998  Non-Qualified Stock Option Plan (filed as Exhibit (10)(b)(xiii) to the  Company’s Annual Report on Form 10-K for the year ended March 31,  1998 and incorporated herein by reference)                                                                    |       |                                          |
| 10.3                      |       | Lease  of Billerica property (filed as Exhibit 10(c) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 1995 and  incorporated herein by reference)                                                                                |       |                                          |
| 10.4                      |       | Amendment  to Lease of Billerica property (filed as Exhibit 10(c)(ii) to the  Company’s Annual Report on Form 10-K for the year ended March 28,  1997 and incorporated herein by reference)                                                               |       |                                          |
| 10.5                      |       | 1999  Combination Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-91801, filed on  November 30, 1999 and incorporated herein by reference)                                                      |       |                                          |
| 10.6                      |       | 2000  Combination Stock Option Plan (filed as Exhibit A to the Definitive  Proxy Statement on Schedule 14A filed on August 18, 2000 and  incorporated herein by reference)                                                                                               |       |                                          |
| 10.7                      |       | 2002  Combination Stock Option Plan (filed as Exhibit 99.1 to the Company’s  Registration Statement on Form S-8, No. 333-102338, filed on  January 3, 2003 and incorporated herein by reference)                                                          |       |                                          |
| 10.8                      |       | Lease  of Mountain View, California facility for High Energy Systems Division (filed  as Exhibit 10(c)(xv) to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2003 and incorporated herein by  reference)                          |       |                                          |
| 10.9*                     |       | Employment  Offer Letter between the Company and Anthony R. Fabiano dated August 21,  2003 (filed as Exhibit 10(c)(xv) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2003 and incorporated  herein by reference)    |       |                                          |
| 10.10                     |       | Second  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(vii) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2004 and incorporated  herein by reference)               |       |                                          |
| 10.11                     |       | Amendment  of 2002 Combination Stock Option Plan (filed as Exhibit 99.1 to the  Company’s Registration Statement on Form S-8, No. 333-102338, filed  on January 3, 2003 and incorporated herein by reference)                                             |       |                                          |
| 10.12                     |       | 2003  Stock Plan for Non-Employee Directors (filed as Exhibit 4.1 to the  Company’s Registration Statement on Form S-8, File No. 333-117843,  filed on July 30, 2004 and incorporated herein by reference)                                                |       |                                          |
| 10.13                     |       | Amendment  to 2003 Stock Plan for Non-Employee Directors (filed as  Exhibit 10(c)(xx) to the Company’s Annual Report on Form 10-K for  the year ended March 31, 2005 and incorporated herein by reference)                                                     |       |                                          |
| 10.14                     |       | 2005  Equity and Incentive Plan (filed as Exhibit 4.1 to the Company’s  Registration Statement on Form S-8, No. 333-129851, filed on  November 21, 2005 and incorporated herein by reference)                                                             |       |                                          |
| 10.15*                    |       | Change  in Control & Severance Benefit Agreement between the Company and  Anthony Fabiano dated November 3, 2005 (filed as Exhibit 10(c)(xxii)  to the Company’s Annual Report                                                                             |       |                                          |

 

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|    |   | on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                                                                                                                                                                                                                                                |   |   |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.16*  |   | Form of  Change in Control & Severance Benefit Agreement between the Company  and Named Executives (filed as Exhibit 10(c)(xxiii) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                       |   |   |
| 10.17   |   | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10(c)(xxiv) to the Company’s Annual  Report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                               |   |   |
| 10.18   |   | Form of  Stock Option Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10(c)(xxv) to the Company’s Annual  Report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                                    |   |   |
| 10.19   |   | Form of  Stock Option Agreement (ISO) under the AS&E 2005 Equity and Incentive  Plan (filed as Exhibit 10(c)(xxvi) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                                                                           |   |   |
| 10.20   |   | Form of  Stock Option Agreement (NQ) under the AS&E 2005 Equity and Incentive Plan  (filed as Exhibit 10(c)(xxvi) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                                                                            |   |   |
| 10.21   |   | Third  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(xxviii) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2007 and incorporated herein  by reference)                                                                                        |   |   |
| 10.22*  |   | Employment  Agreement between the Company and Anthony R. Fabiano dated February 2,  2008 (filed as Exhibit 10(c)(xxix) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2008 and incorporated herein  by reference)                                                                           |   |   |
| 10.23   |   | American  Science and Engineering, Inc. Amended and Restated Equity and Incentive  Plan (filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2008 and incorporated  herein by reference)                                                                         |   |   |
| 10.24   |   | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference)                                                            |   |   |
| 10.25   |   | Form of  Incentive Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference)                                                             |   |   |
| 10.26*  |   | Form of  Long-Term Incentive Plan Agreement — Cash Component (filed as  Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2008 and incorporated herein by reference)                                                                                               |   |   |
| 10.27*  |   | Form of  Change in Control and Severance Benefit Agreement between the Company and  Named Executives (filed as Exhibit 10.5 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference)                                                            |   |   |
| 10.28   |   | American  Science and Engineering, Inc. 401(k) and Profit Sharing Plan (filed  as Exhibit 4.1 to the Company’s Registration Statement on Form S-8  dated July 25, 2008 and incorporated herein by reference)                                                                                                      |   |   |
| 10.29   |   | American  Science and Engineering, Inc. Amended and Restated 2005 Equity and  Incentive Plan (filed as Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 dated November 7, 2008 and incorporated  herein by reference)                                                                                  |   |   |
| 10.30   |   | Loan  and Security Agreement between the Company and Silicon Valley Bank East dated  August 11, 2003 (filed as Exhibit 10(d)(xi) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2003 and incorporated herein by reference)                                                       |   |   |
| 10.31   |   | Export  Import Bank Loan and Security Agreement between the Company and Silicon  Valley Bank East dated August 11, 2003 (filed as Exhibit 10(d)(xii)  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003 and incorporated herein by reference)                                   |   |   |
| 10.32** |   | Asset  Purchase Agreement between Accuray Incorporated and the Company dated  December 11, 2004 (filed as Exhibit 10(d)(xiii) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 2005 and  incorporated herein by reference)                                                                    |   |   |
| 10.33   |   | Third  Loan Modification Agreement between Silicon Valley Bank and the Company dated  November 15, 2006 (filed as Exhibit 10(d)(xiii) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended December 31,  2006 and incorporated herein by reference)                                                   |   |   |
| 10.34   |   | First  Loan Modification Agreement dated as of June 30, 2004 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.1 to the Company’s  report on Form 8-K dated November 14, 2008 and incorporated herein  by reference)      |   |   |
| 10.35   |   | Second  Loan Modification Agreement dated as of November 30, 2004 between the Company  and Silicon Valley Bank and guaranteed by the Company’s subsidiary, AS&E  Global, Inc. (filed as Exhibit 10.2 to the Company’s filing on  Form 8-K dated November 14, 2008 and incorporated herein by  reference) |   |   |
| 10.36   |   | Third  Loan Modification Agreement dated as of November 16, 2006 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.3 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference)  |   |   |
| 10.37   |   | Fourth  Loan Modification Agreement dated as of November 14, 2008 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc.                                                                                                                                                |   |   |

 

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|   |   | (filed  as Exhibit 10.4 to the Company’s filing on Form 8-K dated  November 14, 2008 and incorporated herein by reference)                                                                                                                            |   |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.38  |   | Consent  to Stock Repurchase Program dated as of November 14, 2008 between the  Company and Silicon Valley Bank. (filed as Exhibit 10.5 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference)      |   |   |
| 21.1   |   | Identification  of Company’s subsidiary, AS&E Global, Inc., incorporated in  Massachusetts (filed as Exhibit 22.1 to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2003 and incorporated herein  by reference) |   |   |
| 23.1   |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                 |   |   |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                 |   |   |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                 |   |   |
| 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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* Contract withManagement

** The Registrantagrees to furnish a supplemental copy of the schedules to this agreement to theSEC upon request

 

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