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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended March 31, 2003

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number 1-6549

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AMERICAN SCIENCE AND ENGINEERING, INC.(Exact name of registrant as specified in its charter)

Massachusetts

04-2240991(State or other jurisdiction of
incorporation or organization)

(IRS Employer Identification No.)829 Middlesex Turnpike,
Billerica, Massachusetts

01821(Address of principal executive offices)

(Zip Code)


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

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Title of each class

Name of each exchange on which registeredCommon Stock ($.662/3 par value)

American Stock Exchange


Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of
1934) Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of voting stock held by non-affiliates of the registrant on
June 3, 2003 was $59,548,000.

6,890,323 shares of Registrant's Common Stock were outstanding on June 3, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended March 31, 2003. Portions of such Proxy Statement are incorporated by reference in
Part III.

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PART I

ITEM 1. BUSINESS

American Science and Engineering, Inc., a Massachusetts corporation formed in 1958 (together with its subsidiaries, the "Company" or "AS&E"), develops,
manufactures, markets, sells, and maintains and provides research, engineering and training services with respect to X-ray inspection systems.

The
Company's sophisticated X-ray inspection products are used for critical detection and security applications by seaport and border authorities, federal facilities and
military bases, airports and corporations in the United States and around the globe. These security applications include X-ray inspection and screening systems for combating terrorism,
drug and weapon smuggling, trade fraud and illegal immigration.

The
Company's objective is to distinguish itself from its competitors through technical innovations and a superior approach to detection. The Company's patented
Z® Backscatter and Shaped Energy technologies detect plastic explosives, plastic weapons, illegal drugs, and other contraband, even when concealed in complex
backgrounds by terrorists and smugglers. In addition, AS&E's new Radioactive Threat Detection (RTD) technology combats dirty bombs and nuclear devices while producing Z Backscatter and
transmission images simultaneously.

Historically,
the Company has focused its product development and marketing efforts on two broad markets: (i) the protection of high-risk government personnel and
facilities; and (ii) the inspection and clearance of cargo, trucks and cars at seaports, borders and airports. These markets are driven by domestic and global trends in terrorism; the continued
global proliferation of drug and people smuggling; and the continuing increase in global trade which creates greater incentives and opportunities to evade duties or perpetrate trade fraud by wrongly
declaring cargo shipping manifests.

In
the wake of the terrorist attacks on September 11, 2001, the proliferation of global terrorism, as well as the potential threat of terrorism posed by post-war Iraq,
homeland security and force
protection concerns have become of paramount importance in the United States and around the world. Despite delays in funding homeland defense initiatives (in fiscal year 2003), the Company believes
that homeland defense, force protection and military security initiatives will result in new revenue opportunities with increased growth in the seaports and borders, federal and military facilities,
force protection, and corporate security markets.

High Energy Systems DivisionIn August 1998 the Company established the High Energy Systems
division ("HES"). HES, located in Santa Clara, California, develops and manufactures linear accelerators for a variety of applications and products, including a proprietary high-energy
linear accelerator for the Company's Shaped Energy technology. The linear accelerators generate high-energy X-rays by accelerating electrons from energy of approximately 20 keV
to energy of several MeV using microwave fields created in an evacuated accelerating structure. The accelerated electrons either strike a heavy metal target to generate high energy X-rays,
or are extracted in air to produce a propagating high-energy electron beam for various applications. The applications for HES's linear accelerators include dense cargo screening, medical,
scientific, and military, electron beam curing, and non-destructive testing.

Technology and Products

The Company's product line utilizes a variety of technologies including proprietary Z Backscatter technology, traditional transmission X-ray, Shaped
Energy and the recently introduced Radioactive Threat Detection (RTD).

Z® Backscatter TechnologyAll of the Company's X-ray systems utilize AS&E's
patented Z Backscatter technology. Backscattered X-rays refer to those X-rays that are directed toward an object

2

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and
are scattered, rather than absorbed by that object. Z Backscatter captures these scattered X-rays and uses them to create highly readable, photo-like images. A key aspect
of Z Backscatter is that objects that are organic in content (low atomic number or "low Z"), such as drugs, explosives, plastic weapons, or people, scatter X-rays very well. These organic
items stand out as bright objects in the Z Backscatter images, making them easy to identify in even the most complex X-ray backgrounds. As a result, the Z Backscatter images show these
potential threats clearly. When used in combination with transmission X-ray technology, Z Backscatter adds significant interpretability to a transmission image, enabling an inspector to
perform a quicker and more thorough examination of the object in question.

Transmission X-ray TechnologyTransmission X-rays are used in combination
with Z Backscatter in many of the Company's products. A standard transmission X-ray
image results when X-rays are absorbed rather than scattered as they pass through the object under examination. When transmission X-rays pass through the parcel, container or
vehicle being scanned, and are viewed on the transmission monitor, they create a "shadowgram" image, similar to the result of a medical X-ray exam. Shadowgram images are generally high
resolution, and result from the X-ray beam penetrating through, and being absorbed by, objects of varying densities. With transmission technology, the more objects or clutter in the path
of the beam, the less differentiation of those objects is achieved.

The
best method for X-ray inspection is viewing Z Backscatter and transmission X-ray images simultaneously, giving inspectors more information about the contents
of the parcel or container by differentiating dense objects, such as metal, from low Z materials, such as explosives.

Shaped Energy TechnologyThis patented technology is specifically designed for use in
examining densely loaded cargo containers at seaports and border crossings, and is available in various fixed or modular system configurations. The Shaped Energy (SE) detection system combines the
penetration capability of a high-energy X-ray source (3.5 MeV) with the photo-like quality and material discrimination features of the Company's Z Backscatter
imaging technology.

An
important characteristic of Shaped Energy technology is that it allows for optimal penetration while maintaining one of the smallest footprints and radiation exclusion zones in the
industry. Historically, high-energy X-ray systems were constrained by the necessity for large exclusion zones and heavy shielding in order to protect against the hazards of
excessive radiation. The Shaped Energy linear accelerator, designed and produced by the Company's HES division, incorporates an X-ray system design that eliminates the need for cumbersome
shielding and exclusion zones.

Radioactive Threat Detection TechnologyAn AS&E cargo system enhanced with Radioactive Threat
Detection (RTD) can be used to find radioactive threats in vehicles and cargo containers. RTD is highly sensitive to both gamma rays and neutronstypically associated with dirty bomb
materials (such as Cesium 137) or fissile material such as weapons grade plutonium. RTD is particularly important in light of the potential terrorist threat of explosives packaged with radioactive
material that scatters upon deployment, commonly referred to as "dirty bombs." AS&E's RTD technology is unique as the X-ray system can perform radioactive material detection while
simultaneously producing Z Backscatter and transmission X-ray images thereby maintaining optimum throughput.

The
Company's product line currently includes 13 models. These models can be broadly grouped into two categories including the CargoSearch family and the
ParcelSearch family.

CargoSearch Inspection SystemsThe CargoSearch family of systems includes
high-energy and medium-energy non-intrusive inspection and screening devices for the X-ray scanning of trucks, cars, cargo containers, pallets and air cargo
primarily at border crossings, seaports, railroad centers, airports, and cargo and transportation hubs. These systems are designed to combat trade fraud, drug trafficking, weapons smuggling and
terrorism. In addition, the Company recently introduced the Z Backscatter Van, an effective, low-cost and high-speed X-ray inspection tool for screening vehicles
and cargo in

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crowded
environments. AS&E currently has 75 CargoSearch inspection systems deployed in 12 countries. The CargoSearch family includes:



ParcelSearch Inspection SystemsParcelSearch systems are designed for the
non-intrusive X-ray scanning of parcels, baggage and mail. They are primarily located in government, airports, and commercial office buildings, high-security
federal facilities (research facilities and military bases) and convention centers. The Model 66Zpluswas introduced in Q4 of fiscal year
2003. This system is based on the first generation Model 66Z X-ray inspection system, and offers significant hardware upgrades, as well as improved electronics and power
supply. There are currently in excess of 1,750 ParcelSearch systems deployed in over 125 countries. The ParcelSearch family includes:



In
addition the Company manufactures the BodySearch Personnel Inspection System. The BodySearch system offers a fast, safe, and non-intrusive way to screen individuals for
weapons, drugs, and illegal contraband concealed under clothing, providing a viable alternative to pat or strip searches.

Intellectual Property

The Company relies on a combination of patent, copyright, trademark, contract and trade secret laws to establish and protect its proprietary rights in its
technology. The Company has patents either issued and/or pending in the United States, Germany, Japan, the United Kingdom, China and Egypt and under the Patent Cooperation Treaty.

In
general, we pursue a policy of obtaining patent protection both in the United States and in selected foreign countries for subject matter we consider patentable and important to our
business strategy. We have 47 unexpired patents issued by, and have 14 patent applications pending with, the U.S. Patent and Trademark Office, as well as a number of international patents and patent
applications. Of our issued patents, over half have been issued in the last five years.

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Generally,
patents issued in the United States are effective for:



The
duration of foreign patents varies in accordance with applicable local law. While the duration of our patents varies, we believe that the duration of our patents is adequate relative to the
expected lives of our products.

The
Company believes that its patents, proprietary technology, know-how, and trademarks provide substantial protection for the Company's competitive position and the Company
intends to aggressively protect its intellectual property assets, by litigation or other means, as appropriate. Nevertheless, there can be no assurances that the steps taken by the Company in this
regard will be adequate to prevent misappropriation or infringement of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. Effective protection of intellectual property rights may be limited or unavailable in certain foreign countries.

Sales and Marketing

The Company's X-ray products are marketed to private and governmental organizations through a sales force that contacts potential customers and
responds to public tenders and other expressions of interest. This sales force includes Company personnel based in the United States and
abroad as well as independent representatives under contracts to sell in foreign countries who are generally compensated on a commission basis.

Many
of the Company's systems are built for existing orders, and the Company maintains an inventory of common parts and sub-assemblies for these systems in order to meet
expected customer delivery requirements and spares requirements.

Customers

The Company has a customer list consisting of government and commercial clients from both the U.S. and abroad. Domestically, the Company's primary client base is
comprised of agencies of the U.S. Government. International sales primarily to foreign governments accounted for approximately 15%, 30% and 53% of the Company's total sales in fiscal 2003, 2002 and
2001, respectively. The international market will continue to remain a high priority for the Company as part of its long-term growth strategy, however the events of
September 11th have shifted the focus of spending and efforts domestically for the short-term.

During
fiscal 2003, approximately 75% of sales of X-ray products were under (i) direct contracts with the U.S. Government, or (ii) subcontracts with prime
contractors working under direct contracts with the U.S. Government. Some of the Company's contracts with the government are on a cost reimbursement plus basis, and virtually all are cancelable at the
government's discretion. Thus far, the Company has not experienced any material losses as the result of such contractual provisions. The Company is heavily dependent upon sales to agencies of the U.S.
Government and reductions or delays in procurement of the Company's systems by these agencies may have a material adverse effect on the Company.

Notwithstanding
the longer sales cycles and project financing requirements often associated with international sales, the Company continues to focus on these sales as a means of reducing
its dependence on sales to the U.S. Government. The Company manages its overseas risk in a number of ways, including actively increasing the number of opportunities it is pursuing at any one time and
by

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working
with international funding sources to help customers finance and secure funding of these projects. The majority of international contracts are bid in U.S. dollars. For those contracts that are
bid in other currencies, the Company would consider engaging in hedging contracts to control foreign exchange risk. There were no hedging activities ongoing at March 31, 2003.

In
fiscal year 2003, the Company had sales to one major customer, an agency of the U.S. Government, which accounted for 17% of total sales. In fiscal year 2002, the Company had sales to
one major customer, an agency of the U.S. Government, which accounted for 28% of total sales.

Competition

The Company has many competitors in the X-ray product market, including several large and well-established manufacturers of security
X-ray equipment with financial and other resources greater than those of the Company. Certain X-ray security system customers select such systems based largely on price. Other
customers, notably the U.S. Government and users in countries with high levels of concern over security, tend to select systems based largely on performance and detection capability. The Company's
systems offer premium performance and have historically been priced higher than many competing systems. The Company believes that its patented and proprietary technology gives it a strong competitive
position in the sale of security systems to customers concerned with performance and detection. The Company also believes that its strategy of concentrating on differentiable products with unique
features, including Z Backscatter and Shaped Energy, and/or competitive pricing will give it a strong position to increase its sales of X-ray systems. However, a number of companies have
developed products that compete with the Company's X-ray inspection products. (See "Forward-Looking Information and Factors Affecting Future Performance").

ISO 9001 Certification

In March 2001, the Company announced that its Quality Management System had been registered under the ISO 9001 standard of the International Organization
for Standardization. ISO 9001 is an internationally recognized quality management and assurance standard. In qualifying, the Company met or exceeded the standards for preventing
non-conformity at every level of the product life cycle, from development and design, through production and installation, to service support. The audit was conducted by Zurich Quality
Management (a United Kingdom Accreditation Service auditor), which will also perform ongoing compliance audits to provide assurance of measurement systems, performance and continuous improvement.

In
August 2002, the Company announced that its west coast division, HES, had been registered under the ISO 13485 standard of the International Organization for Standardization.
ISO 13485 is the internationally recognized quality management system standard for medical devices. In April 2003, the Company announced that HES had been registered under the ISO 9001
standard. For both qualifications, HES met or exceeded the standards' requirements for development, production, and servicing industrial products and medical devices. The audits of HES were conducted
by TUV America (a Registrar Accreditation Board and an American National Standards Institute auditor) who will also perform ongoing compliance audits.

The
Company believes that demonstrating continuous quality improvement is vital for building customer satisfaction and making business processes more efficient in order to increase its
competitive edge.

Raw Material Availability

The Company has not experienced during the last year, and does not currently anticipate, any hardware delivery delays due to raw material shortages. Most procured
material is from U.S. sources. However, the Company is dependent upon certain overseas providers of important components. No

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rare
or exotic materials are utilized. Following the events of September 11, demand for X-ray system subcomponents increased significantly across the security industry. In response,
the Company has taken steps to mitigate sourcing risks by working closely with its vendors to secure future raw material availability. In some cases, the Company chooses to stock certain inventory
components to assure future availability. These efforts also included identifying and qualifying second-source providers for several critical components on all of its product lines.

Regulatory Compliance

The Company complies with applicable Health and Human Services regulations outlined under the "Regulations for the Administration and Enforcement of the Radiation
Control for Health and Safety Act of 1968" (21CFR 1020.40), published by the U.S. Department of Health and Human Services. All X-ray products of the Company comply with all applicable U.S.
Government regulatory standards.

Research and Development

The Company spent approximately $6,419,000 of its own funds for research and development during fiscal 2003, compared to $7,136,000 and $5,060,000 in fiscal 2002
and 2001, respectively. The principle focus of 2003 research and development was on new products including the Shaped Energy Gantry, the Z Backscatter Van and Radioactive Threat Detection. In addition
funds were invested to enhance existing products, to develop new applications and for conceptualization of new products.

In
addition, during fiscal 2003 and 2002, the Company conducted government-sponsored research primarily focused on technologies for the detection of illicit drugs, explosives, and other
security issues. The Company recognized revenues of $747,000 and $635,000, in fiscal 2003 and 2002, respectively for
these efforts. No government-sponsored research projects were performed in fiscal 2001. A significant amount of the Company's government sponsored research and development work is obtained via
contracts or subcontracts that typically provide for a fixed fee or a reimbursement of allowable costs plus a fixed fee. The Company's contracts in these areas are obtained by submitting research and
development proposals to various organizations, sometimes in response to requests for such proposals. The Company's contract research ranges from advances in X-ray systems and image
analysis to integrated system development for niche security inspection problems.

Personnel

As of March 31, 2003 the Company had 304 employees as compared to 373 employees at the end of the prior year. It is the Company's policy to have employees
sign nondisclosure agreements as a condition of employment. None of the Company's employees are represented by labor unions.

Sales Backlog

The Company's firm (under signed contracts) sales backlog was $38,765,000, $40,735,000 and $40,150,000 at March 31, 2003, March 31, 2002 and
March 31, 2001, respectively.

A
majority of the Company's contracts with the U.S. Government contain clauses permitting the government to terminate the contract for convenience upon certain terms and conditions,
including partial payment to the Company for work performed. The total of such contracts in the backlog was $17,751,000, $22,233,000 and $15,462,000 at March 31, 2003, March 31, 2002 and
March 31, 2001, respectively. It is estimated that approximately 71% of the 2003 backlog will be filled within the fiscal year ending March 31, 2004.

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Financial Information About Foreign and Domestic Operations and Export Sales

Most export sales are made in U.S. dollars, and many are either secured by irrevocable letters of credit or paid in advance. Export sales are believed by the
Company to be at least as profitable as similar domestic sales. The following chart provides information about the breakdown between domestic and export sales in dollars and percentages of total sales
for the indicated fiscal years. With the exception of small amounts of spares inventory and cash accounts maintained at foreign locations (less than 1% of the Company's assets), all assets are
maintained within the United States.

Net
Sales and Contract Revenues

|                                           |                      | Fiscal Year
|------------------------------------------ | -------------------- | -----------
|
|
|Domestic                                   |                      | $          
|Export                                     |                      | $          
|                                           |                      |            
|Net Sales and Contract Revenues            |                      | $          
|                                           |                      |            
|Percent of Export Revenue by Major Region: |                      |            
|                                           | Middle East & Africa |            
|                                           | Europe               |            
|                                           | Mexico               |            
|                                           | Pacific Rim          |            
|                                           | All Other            |            

ITEM 2. PROPERTIES

The Company's executive offices are located in Billerica, MA and its research, manufacturing and warehouse facilities are located in Billerica, MA and Santa
Clara, CA. In Billerica, the Company occupies 118,300 square feet of space in a 160,000 square foot single-story, concrete and brick building owned by an unaffiliated real estate limited partnership.
The remaining space is currently unoccupied and is available for lease from the building owner. The Company occupies the space under a long-term lease with a ten-year initial
term that commenced March 1, 1995, and an option to extend for an additional ten-year term.. In October 1999, the Company leased an additional 56,000 square feet of
manufacturing and office space in an office park near the main office. This lease has a term of five years.

Located
in Santa Clara, CA, HES leases 11,700 square feet of manufacturing, research and office space. The original lease had a term of three years that commenced on August 18,
1998.In August 2001, the Company exercised a one-year extension option to this lease and has since been on a
month-to-month lease cancelable with a 30-day notice. On June 24, 2003, the Company signed a lease for a facility in Mountain View, CA. This facility has
24,733 square feet of manufacturing, research and development, test and office space. The initial term of the lease will be seven years, with an option to extend for an additional
five-year period. The Company plans to move into its new facility in October 2003.

The
Company's facilities are currently utilized on a one-shift basis. The Company can add additional capacity by adding second and third shifts if necessary.

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ITEM 3. LEGAL PROCEEDINGS

In a decision issued December 29, 1999, the United States Court of Appeals for the Federal Circuit in Washington, D.C. ruled that the Company may pursue a
patent infringement claim against Vivid Technologies ("Vivid"), which produces X-ray detection devices used in baggage scanning equipment. The Appeals Court overturned a 1998 decision in
Vivid's favor by the Massachusetts Federal District Court. The lawsuit, filed by Vivid Technologies in May 1996, concerned whether Vivid's X-ray detection devices infringed on
AS&E's patent. The District Court had ruled that AS&E could not assert a claim that Vivid's devices infringed on AS&E's patent. The Appeals Court also reversed the district court's finding on summary
judgment that Vivid did not infringe on AS&E's patent, as well as the district court's denial of AS&E's request for discovery to oppose Vivid's summary judgment motion. Vivid was acquired by
PerkinElmer in 2000.

In
September 1998, the Company filed suit against EG&G Astrophysics Research Corp. ("EG&G") in U.S. District Court in Boston, Massachusetts alleging that EG&G infringed upon at
least two patents owned by the Company and that EG&G had misappropriated certain trade secrets of the Company. In February 1999, the Company filed a related action in the same court against the
U.S. Customs Service ("Customs") alleging that Customs had either misappropriated the Company's trade secrets or facilitated their misappropriation by EG&G and that Customs had improperly entered into
a contract with EG&G for the acquisition of a product functionally equivalent to the Company's MobileSearch X-ray inspection system. In May 1999, the Court held a
hearing on the Company's motion for a preliminary injunction against both Customs and EG&G prohibiting further performance of the contested contract and preventing EG&G from utilizing the Company's
trade secrets. In August 1999, the Court issued a ruling denying the request for the preliminary injunction. In December 1999, EG&G filed a Motion for Summary Judgment that EG&G did not
misappropriate the Company's trade secrets and in March 2000 EG&G filed a Motion for Summary Judgment that EG&G did not infringe the Company's patents. In February 2001 the Court denied
EG&G's and the Company's motions for Summary Judgment. The suit against U.S. Customs Service was subsequently dismissed.

In
a related matter, EG&G filed a request with the U.S. Patent and Trademark Office ("USPTO") for reexamination of the two patents that were at issue in the patent infringement action
described above. The Company filed oppositions to the re-examination requests and the Company was advised by the USPTO that both its MobileSearch X-ray inspection and its
Z® Backscatter X-ray inspection technology patent were upheld in all material respects on January 30, 2001.

In
June 2002, the assets of EG&G were sold by PerkinElmer to L-3 Communications.

In
March 2003 the Company entered into a Partial Settlement Agreement and Release with PerkinElmer, the parent of EG&G, with respect to the above-referenced litigation. The
Partial Settlement Agreement and Release covers claims and counter-claims in the EG&G and Vivid actions up to June 14, 2002, the date of closing on the sale of EG&G by PerkinElmer to
L-3. Certain aspects of the EG&G litigation remain pending in the District Court at this time.

The
Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. The Company currently believes that resolving these matters will not
have a material adverse impact on its financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is listed on the American Stock Exchange (ticker symbol: ASE). The market price range for the Common Stock for the last two fiscal
years follows:

Fiscal Year

Quarter Ended

High

Low2003

March 31, 2003

$
13.23

$
6.80December 31, 2002


14.25


9.10September 30, 2002


15.90


9.05June 30, 2002


23.50


13.952002

March 31, 2002

$
18.10

$
13.75December 31, 2001


25.20


17.10September 30, 2001


15.25


5.70June 30, 2001


6.35


5.50


As
of June 3, 2003, there were approximately 1,018 holders of record of the Company's Common Stock.

No
cash dividends have been declared in the two most recent fiscal years and the Board of Directors does not contemplate paying any dividends in the immediate future. The Company's
credit facility restricts the payment of dividends (except in shares of the Company's stock) without the consent of the bank.

Equity Compensation Plan Information

The following table provides the information about the Company's common stock that may be issued upon the exercise of options and rights under all existing equity
compensation plans as of March 31, 2003. The Company has the following stock option plans outstanding as of March 31, 2003: 1984 Stock Option Plan, the 1993, 1994-1995 and
1996 Stock Option Plans for Non-employee Directors; three CEO Employment Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified Option Plan; 1994-95
Stock Option Plan for New Employees, a 1999 Combination Plan, a 2000 Combination Plan and a 2002 Combination Plan.

|Plan category                                           |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights as
of March 31, 2003 |  | Weighted-average
exercise price of
outstanding
options, warrants
and rights |       | Number of securities
remaining available for future
issuance under equity
compensation plans as of
March 31, 2003 (excluding
securities reflected in column(a))
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders: |  |                                                                                                                  |  |                                                                             |       |                                                                                                                                                                
|1984 Stock Option Plan                                  |  | 2,400                                                                                                            |  | $                                                                           | 5.44  |                                                                                                                                                                
|1993 Plan for New Non-Employee Directors                |  | 5,000                                                                                                            |  | $                                                                           | 6.38  |                                                                                                                                                                
|1995 Combination Plan                                   |  | 164,066                                                                                                          |  | $                                                                           | 9.65  |                                                                                                                                                                
|1999 Combination Plan                                   |  | 460,600                                                                                                          |  | $                                                                           | 8.53  |                                                                                                                                                                
|2000 Combination Plan                                   |  | 219,504                                                                                                          |  | $                                                                           | 10.16 |                                                                                                                                                                
|2002 Combination Plan                                   |  | 258,750                                                                                                          |  | $                                                                           | 10.30 |                                                                                                                                                                
|                                                        |  |                                                                                                                  |  |                                                                             |       |                                                                                                                                                                

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|Equity compensation plans not approved by security holders:                                                          |  |           |  |   |       |  |        
|-------------------------------------------------------------------------------------------------------------------- |  | --------- |  | - | ----- |  | -------
|1994-1995 Plan for New Employees                                                                                     |  | 32,000    |  | $ | 7.25  |  |       
|1994-1995 Plan for Non-Employee Directors                                                                            |  | 28,000    |  | $ | 5.87  |  |       
|1996 Plan for Non-Employee Directors                                                                                 |  | 119,000   |  | $ | 10.52 |  | 102,833
|1997 Non-Qualified Option Plan                                                                                       |  | 141,700   |  | $ | 8.99  |  | 13,250 
|1998 Non-Qualified Option Plan                                                                                       |  | 228,840   |  | $ | 11.60 |  | 1,333  
|1996, 1999 and 2002 Employment Agreements between the Company and the former Chief Executive Officer, Ralph Sheridan |  | 500,000   |  | $ | 11.34 |  | 10,000 
|                                                                                                                     |  |           |  |   |       | 
|Total                                                                                                                |  | 2,159,860 |  | $ | 10.03 |  | 344,615
|                                                                                                                     |  |           |  |   |       | 

In addition, the Company has a common stock installment purchase plan under which the Board of Directors may grant key personnel the right to
purchase shares of the Company's common stock at fair market value and to pay the purchase price in twelve equal monthly installments. As of March 31, 2003, no shares have been reserved or
granted under this plan.

The
Company has instituted two common stock purchase plans. The Executive Equity Incentive Plan allows an executive officer of the Company to buy original issue Company common stock in
any dollar amount up to the gross amount of the annual bonus granted to the Officer and to receive half the number of shares purchased in restricted stock which vests after 3 years. If the
employee leaves the
Company prior to 3 years then the shares revert back to the Company. As of both March 31, 2003 and 2002, 2,251 shares have been reserved and restricted under this plan. The Reload Option
Plan allows any eligible employee designated by the Board of Directors to receive new stock options (at an exercise price equal to the fair market value of the common stock on the date of sale of the
stock by the employee) for every share of Company common stock sold or used to exercise stock options.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to, and should be read in conjunction with, the consolidated financial
statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report.

|Fiscal Year                      |  | 2003 |        | 2002 |   | 2001   |   | 2000 |        | 1999
|-------------------------------- |  | ---- | ------ | ---- | - | ------ | - | ---- | ------ | ----
|
|Net sales and contract revenues  |  | $    | 61,958 |      | $ | 65,396 |   | $    | 67,374 |     
|Net income (loss)                |  |      | (7,951 | )    |   | (4,512 | ) |      | 660    |     
|Income (loss) per sharediluted  |  |      | (1.20  | )    |   | (0.87  | ) |      | 0.13   |     
|Total assets                     |  |      | 47,316 |      |   | 50,241 |   |      | 44,310 |     
|Obligations under capital leases |  |      |       |      |   |       |   |      |       |     
|Stockholders' investment         |  |      | 32,358 |      |   | 23,129 |   |      | 22,634 |     

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our
consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements and
should also be read in conjunction with "Forward Looking Information and Factors Affecting Future Performance" beginning on page 19.

2003 Compared to 2002

Overview

Net sales and contract revenues for fiscal 2003 decreased by 5% to $61,958,000 compared to fiscal 2002 net sales and contract revenues of $65,396,000. The Company
had a loss before taxes of $5,495,000 in fiscal 2003 compared to a loss before taxes of $4,512,000 in the previous year. Net loss for fiscal 2003 was $7,951,000 ($1.20 per share, on a diluted basis)
as compared to a net loss of $4,512,000 ($0.87 per share, on a diluted basis) in fiscal 2002. Backlog at March 31, 2003 was $38,765,000, a 5% decrease from the backlog reported at the previous
fiscal year end.

Results of OperationsNet sales and contract revenues decreased by $3,438,000 or 5% in fiscal year
2003 as compared to fiscal 2002. The decrease in revenues was due primarily to a decrease of approximately $13,170,000 to $24,791,000 in sales of CargoSearch systems and upgrades, as numerous projects
ongoing in fiscal 2002 were completed in the current year and new engagements experienced significant delays as government agencies (both U.S. and foreign) work to determine the best solution for
security in the post-September 11th environment. In addition, a significant project to install a CargoSearch system in the Middle East was halted during the Iraqi
conflict resulting in lower than anticipated fourth quarter revenues. In contrast, ParcelSearch sales increased by $6,306,000 to $20,835,000 due to an immediate increase in demand following
September 11th that resulted in higher ParcelSearch system sales in the third and fourth quarters of fiscal 2002 and continuing through the second quarter of fiscal 2003. The
third and fourth quarters of fiscal 2003 showed slightly lower ParcelSearch revenues but still remain higher than the average pre-September 11th levels. The sale of
aftermarket parts remained relatively consistent year over year at approximately $3.0 million. Aftermarket field services revenues increased by 42% to $9,064,000 as compared to $6,387,000 in
fiscal 2002 as a result of new post-warranty service contracts on installed machines. Service revenues had previously been less than 10% of total revenues and were not separately
disclosed; however, due to the increase in the current year are now reflected separately on the Company's statement of operations. The Company earned $747,000 in contract research and engineering
revenues in fiscal 2003 as compared to $635,000 in fiscal 2002. The Company's HES division increased revenues to external customers by $711,000 to $3,615,000 fiscal 2003 as compared to $2,904,000 in
fiscal 2002. There was a shift in the geographical mix of revenues in fiscal 2003 as domestic revenues increased from 70% of total revenues in fiscal 2002 to 85% of total revenues in fiscal 2003. This
increase is due primarily to the domestic focus on homeland defense and security in the wake of the terrorist events of September 11th. One customer, an agency of the U.S.
Government, accounted for 17% of revenues during fiscal 2003.

Cost
of sales and contracts of $51,009,000 in fiscal 2003 increased by $1,652,000 or 3% from the previous year. Cost of sales and contracts represented 82% of revenues during fiscal
2003, compared to 75% in fiscal 2002. This percentage increase in the cost of sales was due primarily to $3,400,000 in provisions for inventory obsolescence recorded in fiscal 2003 and, to a lesser
extent, excess manufacturing capacity as a result of the sharp decline in CargoSearch sales. The Company, in response to the events of September 11th and the anticipated increase in demand for
security systems, had committed to significant volume purchases of raw materials in late fiscal 2002 and increased

12

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production
of CargoSearch and ParcelSearch systems. The result was a significant increase in inventory levels at the end of fiscal 2002. The events of September 11th raised
considerable interest in the Company's products and in the first quarter of fiscal 2003 the Company signed a three-year $500 million blanket purchase agreement with the U.S.
Department of Defense. This level of interest continued into the second quarter of fiscal 2003 as the first orders for three MobileSearch trucks under the blanket purchase agreement were received as
well as contracts for two Shaped Energy CargoSearch systems. Despite these facts, however, the level and product mix of orders the Company was projecting in late fiscal 2002 did not materialize to the
levels anticipated. In the third quarter of fiscal 2003 the Company experienced a sharp decline in order levels that continued through the fourth quarter and significantly impacted the fourth quarter
revenues. The Company continued to complete a certain number of systems, which were in progress despite the lack of related orders, resulting in an increase in finished goods inventory at the end of
fiscal 2003. As a result of these continued order delays and in conjunction with its 2004 budgetary process in the fourth quarter of fiscal 2003, the Company reassessed its expected inventory usage
and required reserve levels. Based upon this analysis, the Company provided a provision for inventory valued above the lower of its cost or market value or not expected to be utilized within a
reasonable period of time.

Selling,
general and administrative expenses of $12,409,000 were $344,000 lower than the previous year and represented 20% of revenues, which was consistent with the prior year. In
fiscal 2003, the Company increased its investment in marketing and sales by approximately $600,000 by adding personnel and increasing its demo, trade show and road show activities and incurred
increases in insurance and consulting costs of approximately $500,000. Offsetting these costs was a $1.6 million decrease in legal fees as the result of the settlement of a patent litigation
matter that had significant legal costs during fiscal 2002.

Company
funded research and development spending decreased to $6,419,000 in fiscal 2003, a 10% decrease compared to the $7,136,000 in spending in fiscal 2002. Research and development
spending in fiscal 2003 and fiscal 2002 was 10% and 11% of revenues, respectively. The Company had invested significantly in research and development spending in fiscal 2002 in the development of new
products and product enhancements, most notably its Shaped Energy technology, as well as product upgrades to improve manufacturability and to address vendor obsolescence issues. In fiscal 2003, the
Company worked to control its research and development spending focusing on specific initiatives such as the Shaped Energy Gantry system, the Z Backscatter Van and Radiation Threat Detection
technology.

Other
income (expenses) was $2,384,000 in income in fiscal 2003 as compared to $662,000 in expense in fiscal 2002. In May of 2002, the Company closed on a private placement offering of
common stock
and warrants. A total of 1,115,000 shares were sold to accredited investors at a price of $17.64 each. Proceeds from this offering were used in part to pay off the Company's line of credit resulting
in a decrease in interest expense of $390,000 during the year. In addition, warrants to purchase an additional 295,475 shares of common stock at a price of $23.52 were issued. These warrants included
certain conversion features that require "mark to market" adjustment that resulted in a credit to other income in the year of $2.3 million.

The
Company experienced pre-tax operating losses in the current year as a result of the decreased revenue, excess capacity and inventory reserves. The Company has reviewed
its deferred tax assets as a whole to determine what would be realized over the next three to five years in light of the historical losses incurred and has recorded a valuation reserve of $2,456,000
against its remaining deferred tax asset at March 31, 2003.

The
Company recorded a net loss of $7,951,000 for fiscal year 2003 as compared to a loss of $4,512,000 in the previous year.

13

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2002 Compared to 2001

Overview

Net sales and contract revenues for fiscal 2002 decreased by 3% to $65,396,000 versus fiscal 2001 net sales and contract revenues of $67,374,000. The Company had
a loss before taxes of $4,512,000 compared to $805,000 in income before taxes in the previous year. Net loss for fiscal 2002 was $4,512,000 ($0.87 per share, on a diluted basis) as compared to income
of $660,000 ($0.13 per share, on a diluted basis) in fiscal 2001. Backlog at March 31, 2002 was $40,735,000, a 1% increase from the backlog reported at the previous fiscal year end.

Results of OperationsNet sales and contract revenues decreased by $1,978,000 or 3% during fiscal
year 2002. The decrease in revenues was due primarily to a $7,937,000 decline in sales of CargoSearch systems and upgrades which had been experiencing declines prior to
September 11th and has experienced additional procurement delays as government agencies (both U.S. and foreign) determine the best security solution and budgets for security in
the post-September 11th environment. In contrast, ParcelSearch experienced an immediate increase in demand following September 11ththat resulted
in increased ParcelSearch system sales in the third and fourth fiscal quarters and a $4,354,000
increase in ParcelSearch system revenues for the year. In addition, aftermarket field services and parts experienced increased revenues compared to fiscal 2001 due to an increased installed base.
Service revenues totaled $6,387,000 for the fiscal year ended March 31, 2002 and parts revenue totaled $2.9 million for the fiscal year ended March 31, 2002. The Company earned
$635,000 in contract research and engineering revenues in fiscal 2002. There were no contract research and engineering revenues in fiscal 2001. The Company's High Energy Systems division decreased
revenues to external customers by $1,491,000 to $2,904,000 in fiscal 2002 as compared to $4,395,000 in fiscal 2001 due to decreased demand from its primary customer. Domestic revenues increased from
47% of total revenues in fiscal 2001 to 70% of total revenues in fiscal 2002. This increase is due primarily to the increase in domestic sales immediately following the events of
September 11th. One customer, an agency of the U.S. Government, accounted for 28% of revenues during the fiscal year ended March 31, 2002.

Cost
of sales and contracts in fiscal 2002 of $49,357,000 was $1,798,000 lower than the previous year primarily due to the decreased system revenues. Cost of sales and contracts
represented 75% of revenues during fiscal 2002, compared to 76% in fiscal 2001. This percentage decrease in the cost of sales was due to a shift in product mix as ParcelSearch sales, a higher margin
product line, made up a greater percentage of the overall revenues in fiscal 2002.

Selling,
general and administrative expenses of $12,753,000 were $3,065,000 higher than the previous year and represented 20% of revenues, compared to 14% in fiscal 2001. The increased
spending level was primarily due to $1.6 million in legal expenses incurred during the year related to the Heimann litigation and increased personnel, financing and insurance related costs.

Company
funded research and development spending increased to $7,136,000 in fiscal 2002, a 41% increase compared to the $5,060,000 in spending in fiscal 2001. Research and development
spending in fiscal 2002 and fiscal 2001 was 11% and 8% of revenues, respectively. The Company invested significantly in research and development spending in fiscal 2002 in development of new products
and product enhancements, most notably its Shaped Energy technology, as well as product upgrades to improve manufacturability to meet anticipated post-September 11th
increased demand and to address vendor obsolescence issues.

Other
expenses decreased $4,000 in the year to $662,000 in fiscal 2002 as increased borrowings under the Company's line of credit were offset by decreased interest rates during the year.

The
Company experienced pre-tax operating losses in the current year as it invested in infrastructure and research and development projects in anticipation of increased
demand that did not occur in all product lines. The Company has reviewed its deferred tax assets as a whole for realizability

14

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over
the next three to five years in light of the uncertain and variable demand seen and has recorded a valuation reserve against its deferred tax asset to bring this asset to an amount which is more
likely than not to be realized.

The
Company recorded a net loss of $4,512,000 for fiscal year 2002 as compared to income of $660,000 in the previous year.

Liquidity and Capital Resources

Cash and cash equivalents at year-end decreased by $2,006,000 to $5,585,000 at March 31, 2003, compared to $7,591,000 at March 31, 2002.
Cash flow used for operations of $4,895,000 was impacted by the following:



Cash
and cash equivalents were $7,591,000 at March 31, 2002 as compared to $1,206,000 at March 31, 2001. Cash used for operating activities of $260,000 was attributable to
the following:



Net
cash of $7.6 million was used for investing activities in fiscal 2003. Fiscal 2003 capital expenditures totaled $1.2 million versus $1.1 million for fiscal 2002.
Investments in fixed assets were comprised primarily of information technology, a new phone system and furniture and fixtures. The Company invested $4.5 million in short-term
investments during the year and at year-end had $1.9 million of restricted cash.

Net
cash provided by financing activities was $10.5 million. On November 30, 2000, the Company signed two credit agreements with HSBC Bank USA ("HSBC"). The first agreement
was for a $10.0 million domestic revolving credit facility to support the Company's routine working capital and standby letter of credit needs. The second was a $30.0 million export
credit and security agreement, guaranteed by the Export-Import Bank of the United States to support the Company's overseas contract, trade finance and working capital needs. On February 14,
2002, these credit agreements were amended to increase the domestic revolving credit facility to $20.0 million and to reduce the export credit facility to $20.0 million in anticipation
of higher domestic demand. This agreement was due to

15

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expire
on November 30, 2002. These agreements were further amended on November 28, 2002 to reduce the domestic revolving credit facility to $5 million, with maximum borrowings set
at the lower of: (a) the sum of 85% of eligible domestic accounts receivable plus the lower of: (i) 40% of eligible raw materials and work-in-process inventory;
or; (ii) $2 million, or; (b) $5 million. In addition, the interest rate and certain financial covenants were amended and the expiration date of the facility was extended to
February 28, 2003. In February 2003 and May 2003, these agreements were further amended to extend expiration to July 31, 2003. The credit facility, as amended, bears an
interest rate at the HSBC Bank USA prime rate plus 1/4% or LIBOR plus 2.0% at the Company's option (4.5% at March 31, 2003). At the end of fiscal 2003, there were no borrowings
outstanding and $4.3 million in standby letters of credit were in effect against this credit facility. No amounts have been drawn against these letters of credit. The credit agreements are
collateralized by certain assets of the Company, and contain certain restrictions, including limitations on the amount of distributions that can be made to stockholders, encumbrances of assets, and
loans that can be made to officers, and requires the maintenance of certain financial covenants. As of March 31, 2003, the Company was not in compliance with its tangible net worth and earnings
covenants, but has obtained a waiver from the bank for these non-compliances for the year-end. Given the significant losses of fiscal 2003, the Company does not expect to be in
compliance with the tangible net worth covenant in the coming year. The Company will request waivers of this covenant as required at each quarter end. If the Company is unable to obtain such waivers,
HSBC could terminate the Company's domestic revolving credit and export credit facilities. In addition, the current credit agreements expire in July of 2003 and there can be no assurance that HSBC
will renew the credit agreements or that alternative financing can be obtained. Management believes the Company's working capital requirements through March 31, 2004 can be met without the line
of credit. In addition, if the Company's credit facility were terminated, it would also preclude the Company from obtaining financing through its current secured export credit and security agreement
that could negatively impact the Company's ability to support international sales. However, management believes the Company's planned level of 2004 revenues can be achieved without access to export
credit.

On
May 28, 2002, the Company closed on a private placement offering of common stock and warrants. A total of 1,115,000 shares were sold to accredited investors at a price of
$17.64 each. Net proceeds to the Company approximated $18.4 million and were used in part to repay $9.3 million outstanding on the line of credit. In addition, warrants to purchase
additional 295,475 shares of common stock at a price of $23.52 were issued. These warrants have a five-year life, expiring in May 2007. In addition, in fiscal 2003, the Company
received $1,381,000 in proceeds from the exercise of stock options.

The
Company leases various office and manufacturing facilities under noncancelable operating leases. Future minimum rental payments under the Company's operating leases, excluding real
estate taxes, insurance and operating costs paid by the Company required over the initial terms of the leases are as follows:

Year Ending March 31,

(in thousands)2004

$
1,0062005


8722006


422007


2$
1,922


16

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Historically,
the Company has funded it operations and capital expenditures with cash generated by operations, including deposits from customers on long-term projects, or
from lines of credit available to the Company. The Company currently has no debt outstanding and believes that its cash flows from operations and cash on hand are sufficient to meet the current and
foreseeable operating requirements of the Company's business.

InflationThe Company does not believe that inflation has had a material effect on its results of
operation. There can be no assurance, however, that the Company s business will not be affected by inflation in the future.

Purchase CommitmentsIn the normal course of business, the Company enters into purchase orders with
its vendors for the purchase of materials or services to meet its production needs. Certain single source vendors or vendors producing custom material require significant lead times from order to
delivery of
their material. In response to the expected increased demand subsequent to September 11th, the Company entered into certain purchase commitments with key suppliers for this
long-lead material. Certain of these purchase orders related to these vendors contained cancellation clauses requiring the Company to pay for a portion or all of the work in process upon
cancellation of an order or to purchase a certain minimum quantities of material by a future date. Should the demand for the Company's products decline significantly, or should there be a significant
shift in the mix of products being demanded, the Company may incur cancellation charges that could be material to the Company's results of operations. To date, the Company has not experienced any
material losses related to cancellation penalties.

Critical Accounting Policies

The Company considers certain accounting policies related to revenue recognition, inventories and the related allowance for obsolete and excess inventory, warrant
liability, and income taxes to be critical policies due to the estimation processes involved in each.

Revenue recognitionThe Company derives a significant portion of its revenue from fixed-price
contracts, which require the accurate estimation of the cost, and scope of each contract. The majority of CargoSearch systems are sold under fixed-price arrangements. Revenue is recognized using
percentage of completion accounting, generally using a total costs method to measure the percent complete with revisions to estimates reflected in the period in which changes become known. If the
Company does not accurately estimate the resources required or the costs to be incurred under the contracts, then future margins may be significantly and negatively affected or losses on existing
contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations.

The
Company recognizes certain CargoSearch system sales and other product revenue, primarily ParcelSearch systems and spare parts, in accordance with SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered
and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period
could be adversely affected.

17

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The
Company's products are generally covered by a warranty for a one-year period. The Company accrues a warranty reserve for estimated costs to provide warranty services. The
Company's estimate of costs to service its warranty obligations is based on historical experience and expectation of future conditions. To the extent the Company experiences increased warranty claim
activity or increased costs associated with servicing those claims, its warranty accrual will increase resulting in decreased gross profit.

Inventories and Related Allowance for Obsolete and Excess InventoryInventories are valued at the
lower of cost or net realizable value on an average cost method. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on
the estimated forecast of product demand over the next twelve to eighteen months. As demonstrated during 2002 and 2003, demand for products can fluctuate significantly. A significant increase in the
demand for the Company's products could result in a short-term increase in inventory balances while a significant decrease in demand could result in an increase in the amount of excess
inventory quantities on hand. Additionally, estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for
excess and obsolete inventory. In the future, if inventory were determined to be overvalued, the Company would be required to recognize such costs in its cost of goods sold at the time of such
determination. Likewise, if inventory is determined to be undervalued, the Company may have over-reported costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on the value of its inventory and reported operating results.

Warrant LiabilityIn fiscal 2003, the Company issued 295,475 warrants in connection with a private
placement offering of common stock. These warrants can be exchanged for cash under certain circumstances including a merger, sale or tender offer of the Company and as such the Company recorded the
fair value of these warrants as a long-term liability on the balance sheet. The fair value of these warrants is adjusted each period with the resulting gain or loss recorded as other
income (expense) in the statement of operations. The Black-Scholes method is used to value the warrants and the calculation requires the use of estimates for stock price volatility and interest rates.
The Black-Scholes value of these warrants can fluctuate significantly based on the current fair market value of the Company's common stock, changes in interest rates or changes in the volatility of
the Company's stock price.

Income TaxesThe Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation
allowance against any net deferred tax assets if it is more likely than not that they will not be realized.

New Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies
the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has adopted the
disclosure provisions of this interpretation for the fiscal year ended March 31, 2003 and has determined that the recognition principles are not applicable.

18

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In
November 2002, the Task Force reached a consensus on Emerging Issues Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be
measured and allocated to the separate units of accounting. This guidance is effective for the Company beginning in fiscal 2005 with early application permitted. The Company is currently evaluating
the impact of this guidance on its revenue recognition policies.

In
July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146),
which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." FAS 146 requires a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the
period in which the liability is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. The
provisions of FAS 146 will be effective for the Company prospectively for exit or disposal activities initiated after December 31, 2002; however, this standard is not expected to have a
significant impact on its financial condition, results of operations, or cash flows.

In
December 2002, the FASB issued SFAS No. 148 "Accounting for Stock- Based Compensation-Transition and Disclosure- an amendment of FASB Statement No. 123"
(FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value
based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for
stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The amended disclosure provisions are effective for the fiscal years
ending after December 31, 2002 and the Company has adopted the amended disclosure provisions as of March 31, 2003. The Company has not decided whether it will voluntarily change to the
fair value based method of accounting for stock-based employee compensation at this time.

In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities and Interpretation of ARB 51 (FIN 46), which requires the
consolidation of certain entities considered to be variable interest entities (VIE's). An entity is considered to be a VIE when it has equity investors which lack the characteristics of a controlling
financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it
is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. The company adopted FIN 46 as of March 31, 2003 and such adoption did not
have an effect on the consolidated financial statements.

Forward-Looking Information and Factors Affecting Future Performance

Some of the statements contained in this report and in the documents incorporated by reference are forward-looking made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. In essence, forward-looking statements are predictions of future events. Although we would not make forward looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which we are
not aware. It should also be understood that we have no plans to update our forward-looking statements. Our forward-looking statements are accurate only as of the date of this report, or in the case
of forward-looking statements in documents incorporated by reference, as of the date of those documents. Certain risk factors, which might cause actual results to differ materially from those
projected or that may otherwise affect future performance, are set forth below.

19

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The Company's reliance on a small number of customers for a large portion of its revenues could harm its business and prospects.

The Company's business is heavily dependent on sales to a small number of customers, which include agencies of the United States government. During fiscal 2003,
four customers accounted for 38% of the Company's total revenues. During fiscal 2002, five customers accounted for 62% of the Company's total revenues and during fiscal 2001, three customers accounted
for 55% of total revenues. During fiscal 2003, the Company's largest customer, an agency of the U.S. government, accounted for approximately 17% of total revenues. In general, the Company's government
contracts may be terminated at the government's discretion. The termination of the Company's relationship with one or more of its significant customers or the reduction or delay of orders of its
systems by these customers would substantially reduce the Company's revenues and its business and prospects may be harmed.

The Company conducts its business worldwide, which exposes it to a number of difficulties in coordinating its international activities and dealing with multiple regulatory
environments.

The Company's international business, including sales to foreign governments, accounted for approximately 15%, 30% and 53% of its net revenues for the fiscal
years ended March 31, 2003, March 31, 2002 and March 31, 2001, respectively. Although fiscal 2003 revenues reflect a focus domestically, the Company anticipates that international
sales will account for a significant percentage of its revenues in the future. As a result of the Company's worldwide business operations, it is subject to various risks, including:



Although
the Company'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 foreign manufacturers on price or otherwise have a material adverse effect on its sales and operating results.

The Homeland Security focus has increased financial expectations that may not materialize.

Following the September 11, 2001 terrorist attacks, the United States government made it a national priority with the creation of the Office of Homeland
Security and other initiatives to increase security in airports, high-threat federal facilities, U.S. military bases, and seaports and borders. The efforts of the United States government
to revamp security in the United States have resulted in increased interest in the Company's X-ray inspection products. The Company is uncertain whether the

20

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level
of demand for its products will be as high as anticipated. The Company is uncertain what solutions, if any, ultimately will be adopted and implemented by the United States government and other
international entities to combat terrorism and whether the Company's products will be a part of the solution. Even if the Company's products are considered as part of the security solution, it is
unclear what level the Company will be involved and how quickly funding to purchase its products may be made available. The Company may incur non-recoverable expenditures in anticipation
of future demand for its products that may not materialize. All of these factors may adversely impact the Company's operations and create unpredictability in its revenues and operating results.

The Company's lengthy sales cycle requires it to incur significant expenses with no assurance that it will generate revenue or recover such expenses.

A substantial portion of the Company's sales depends in significant part upon the decision of governmental agencies to upgrade or expand security at border
crossing inspection sites, existing airports, seaports and other facilities. Accordingly, a portion of the Company's product sales is subject to delays associated with the lengthy approval processes
that often accompany such capital expenditures. During these approval periods, the Company expends significant financial and managerial resources in anticipation of future orders that may not occur.
If the Company fails to receive an order after expending these resources, it may be unable to generate sufficient revenue to recover the costs incurred and its business and prospects may be harmed.

The Company's business is dependent upon governmental policies and appropriations.

The Company's largest customers are governmental agencies and demand for its products is dependent upon national priorities and governmental initiatives. These
priorities and initiatives are subject to change from time to time in response to the economic and political environment. The Company is also exposed to the United States budget approval and
appropriation cycle, which may be subject to significant and unpredictable delays. If demand for the Company's products is reduced because of a change in economic or political conditions or if there
are delays in receiving governmental approvals and appropriations, sales of the Company's products may be adversely affected and its business and prospects may be harmed.

Changes in governmental regulations may reduce demand for the Company's products or increase its expenses.

The Company competes in markets in which the Company or its customers must comply with federal, state, local and foreign regulations, such as health and safety
regulations. The Company develops, configures and markets its products to meet its customers' needs created by these regulations. Any significant change in these regulations could reduce demand for
the Company's products or increase its costs to comply with new regulations, both of which may adversely affect its operating results.

The Company's reliance on only a limited number of suppliers for some key components for its products could harm its business and prospects.

The Company relies on only a limited number of suppliers for some key components for its products. The Company's reliance on limited supply sources reduces its
control over timely delivery, price increases, reliability, and quality of critical components. Obtaining alternative sources of supply of these key components could involve significant delays and
other costs, and may not be available to the Company on reasonable terms, if at all. If the Company changes any of its suppliers, the potential new supplier would be required to go through a
qualification process, creating potential delays or reductions in product shipments. The failure of any supplier to provide quality and timely components at an

21

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acceptable
price, or an interruption of supplies from such a supplier could result in lost or deferred sales, which would harm the Company's business and prospects.

Fluctuations in the Company's quarterly operating results may cause its stock price to decline.

Given the nature of the markets in which the Company participates, it cannot reliably predict future revenue and profitability. A high proportion of the Company's
costs are fixed, due in part to its significant sales, research and development, and manufacturing costs. As a result of its fixed costs, small declines in revenue could disproportionately affect the
Company's operating results in a quarter. Factors that may affect the Company's quarterly operating results and the market price of its Common Stock include:



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

If the Company's X-ray inspection systems fail to detect the presence of bombs, explosives, weapons, contraband or other threats to personal safety,
the Company could be subject to product liability claims and negative publicity, which could result in increased costs, reduced sales, and a decline in the market price of the Company's Common Stock.
There are many factors beyond the Company's control that could result in the failure of its products to detect the presence of bombs, explosives, weapons, contraband or other threats to personal
safety. Examples of these factors include operator error or misuse of or malfunction of its equipment. The failure of the Company's systems to detect the presence of these dangerous materials may lead
to personal injury, loss of life, and extensive property damage and resulting claims against the Company.

22

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The Company's insurance may be insufficient to protect it from product liability claims.

The Company's product liability and umbrella liability insurance may be insufficient to protect it from product liability claims. Moreover, there is a risk that
product liability insurance will not continue to be available to the Company at a reasonable cost, if at all. If liability claims exceed the Company's current or available insurance coverage, its
business and prospects may be harmed. Regardless of the adequacy of the Company's product liability insurance protection, any significant claim may have an adverse affect on its industry and market
reputation, leading to a substantial decrease in demand for its products and reduced revenues.

The Company may not be able to fund its research and development activities.

The Company generates funds for its research and development activities from operations, private sources and the government. The Company may be unable to generate
the funds necessary to support its research and development activities if it does not generate sufficient funds from operations, other potential private sources, or the government. The Company may not
successfully compete with other companies and research institutions for government funding and funding from other private sources. Additionally, government-funding priorities are subject to frequent
changes. For example, in fiscal 2003 and 2002, the Company earned $747,000 and $635,000, respectively, for government-sponsored research and development. In fiscal 2001 the Company did not receive any
funds to conduct government-sponsored research and development. There is no guarantee that the Company will receive funds for government-sponsored research in the future. If the Company is unable to
fund its research and development activities through its operations or from outside sources, the Company may be unable to
continue to innovate or bring its innovations to market on a timely or cost effective basis, or its innovations may be surpassed by other competitors or new technologies.

The Company's success depends on new product development.

The Company's continuing research and development program is designed to develop new products and to enhance and improve its current products. The Company plans
to expend significant resources on the development of its new products. The successful development of its products and product enhancements is subject to numerous risks, both known and unknown,
including:



Given
the uncertainties inherent with product development and introduction of X-ray inspection systems, the Company cannot assure that its product development efforts will be
successful on a timely basis or within budget, if at all. The Company's failure to develop new products and product enhancements on a timely basis or within budget would harm its business and
prospects.

23

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The Company's success depends upon its ability to adapt to rapid changes in technology and customer requirements.

The market for the Company's products has been characterized by rapid technological changes, frequent product introductions and evolving industry standards and
customer requirements. The Company believes that these trends will continue into the foreseeable future. The Company's success will depend, in part, upon its ability to enhance its existing products,
successfully develop new products that meet changing customer and regulatory requirements and gain market acceptance. If the Company fails to do so, its products may be rendered obsolete or
uncompetitive by new industry standards or changing technology, in which case its revenue and operating results would suffer. In developing any new product, the Company may be required to make a
substantial investment before it can determine the commercial viability of the new product. If the Company fails to accurately foresee its customers' needs and future activities, it may invest heavily
in research and development of products that do not lead to significant revenue.

The Company may not be able to compete successfully.

A number of companies have developed products that compete with the Company's X-ray inspection products. Many of the Company's competitors are larger
and have greater financial resources than it does. Some of its competitors have more extensive research, marketing and manufacturing capabilities and greater technical and personnel resources than the
Company does, and may be better positioned to continue to improve their technology in order to compete in an evolving industry. The Company's failure to compete successfully could decrease demand for
its products or make its products obsolete.

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



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

24

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The Company's business could be harmed if it is unable to protect its intellectual property.

The Company relies primarily on a combination of trade secrets, patents, copyrights, trademarks, licensing arrangements and confidentiality procedures to protect
its technology. Despite its precautions, the steps the Company has taken to protect its technology may be inadequate. Existing trade secret, patent, trademark and copyright laws offer only limited
protection. The Company's patents could be invalidated or circumvented. The laws of some foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect
its products or intellectual property rights to the same extent as do the laws of the United States. This may make the possibility of piracy of the Company's technology and products more likely. The
Company cannot assure that the steps it has taken to protect its intellectual property will be adequate to prevent misappropriation of its technology. The Company's business could be harmed if it is
unable to protect its intellectual property.

The Company's business may be materially and adversely affected by infringement claims initiated by the Company or its competitors.

Initiating or defending against the enforcement of the Company's intellectual property rights may result in significant, protracted, and costly litigation. The
Company was previously involved in civil litigation filed by a competitor seeking a declaratory judgment that the competitor's product did not infringe upon certain of the Company's patents. The
Company was successful in that action. The Company is currently involved in a civil action filed by the Company against a competitor alleging patent infringement and misappropriation of trade secrets.
The Company expects intellectual property disputes to be an ordinary part of its business for the foreseeable future. The Company may initiate claims or litigation against third parties for
infringement of its intellectual property rights, or to establish the validity of its property rights. There can be no assurance that the Company will prevail in any such action. Litigation by or
against the Company could result in significant expense to it and divert the efforts of technical and management personnel, whether or not such litigation results in a favorable outcome for the
Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the use of certain processes, or obtain licenses for the infringing technology. If a license were required, the
Company cannot assure that it would be able to obtain one on commercially reasonable terms, if at all. The Company cannot assure that it will be successful in developing non-infringing
technology or that the cost or time required to develop such technology will be reasonable.

The Company's success depends on its ability to attract and retain qualified management professionals.

Due to the recent departures of our CEO and other members of our senior management team, future operating results will be largely dependent upon our ability to
recruit and retain the services of professionals to fill these roles from a limited pool of qualified candidates. Our future success will continue to depend in large measure upon the continued
contributions of our senior management team and other key personnel. If we lose professionals or are unable to attract new talent, we will not be able to maintain our position in the market or grow
our business.

Future sales of the Company's common stock by existing stockholders could depress the market price of the Company's common stock.

Substantially all of the Company's outstanding shares of common stock are freely tradable without restriction or further registration. Affiliates must sell all
shares they own in compliance with the volume and other requirements of Rule 144, except for the holding period requirements. Nevertheless, sales of substantial amounts of common stock by the
Company's stockholders, or even the potential for such

25

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sales,
may cause the market price of the Company's common stock to decline and could impair the Company's ability to raise capital through the sale of the Company's equity securities.

Existing external financing may not be available in the future.

The Company may require additional capital to finance continuing operations. The Company cannot assure that operations will continue to be profitable, that it
will generate levels of revenues and cash flows sufficient to fund operations, or, if necessary, that the Company will be able to obtain additional financing on satisfactory terms, if at all. Any
existing financing arrangements may not be available or sufficient to meet the Company's cash needs or may not be available in the future, or, if available, at a cost that the Company believes is
reasonable.

Given
the significant losses of fiscal 2003, the Company does not expect to be in compliance with the tangible net worth covenant contained in its credit agreements with HSBC Bank USA
("HSBC") in the coming year. The Company will request waivers of this covenant as required at each quarter end. To the extent the Company is unable to obtain such waivers, HSBC could terminate the
Company's domestic revolving credit and export credit facilities. In addition, the current credit agreements expire in July of 2003 and there can be no assurance that HSBC will renew the credit
agreements or that alternative financing can be obtained. Management believes the Company's working capital requirements through March 31, 2004 can be met without the line of credit. In
addition, to the extent
the Company's credit facility is terminated, it would preclude the Company from obtaining financing through its current secured export credit and security agreement which could negatively impact the
Company's ability to support international sales. However, management believes the Company's planned level of sales in 2004 can be achieved without access to export credit.

The volatility of the Company's stock price could adversely affect an investment in the Company's common stock.

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



In
addition, in recent years the stock market in general and the markets for shares of small capitalization and "high-tech" companies in particular, have experienced extreme
price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of the Company's
common stock.

26

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Provisions in the Company's articles of organization and the Company's shareholder rights plan may have the effect of discouraging advantageous offers for the Company's
business or common stock and limit the price that investors might be willing to pay in the future for shares of the Company's common stock.

Provisions in the Company's articles of organization and the Company's shareholder rights plan may have the effect of discouraging or preventing a change in
control. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's common stock. Specifically, the Company's articles of
organization authorize its Board of Directors to issue up to 100,000 shares of preferred stock in one or more series, to fix certain rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued shares of preferred stock, to fix the number of shares constituting any such series, and to fix the designation of any such series, without further vote or action by
its shareholders. The terms of any series of preferred stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the rights of the holders of
common stock and thereby reduce the value of the Company's common stock. The Company has no present plans to issue shares of preferred stock. The Company has in place a shareholder rights plan,
adopted in 1998, under which its stockholders are entitled to purchase shares of its preferred stock under certain circumstances. These circumstances include the purchase of 15% or more of the
outstanding shares of common stock by a person or group, or the announcement of a tender or exchange offer to acquire 15% or more of the outstanding common stock. The shareholder rights plan may have
the effect of impeding or preventing certain types of transactions involving a change in control of the Company that could be beneficial to the stockholders.

Inability to obtain former auditor's, Arthur Andersen LLP, consent may limit stockholder's right of recovery under Section 11(a)(4) of the Securities Act of 1933.

Prior to July 18, 2002, Arthur Andersen LLP served as the Company's independent auditors. On March 14, 2002 Arthur Andersen was indicted on federal
obstruction of justice charges arising from the government's investigation of Enron Corporation and on June 15, 2002 Arthur Andersen was found guilty. Arthur Andersen informed the SEC that it
would cease practicing before the SEC by August 31, 2002, unless the SEC determined that another date was appropriate. On July 18, 2002, the Company dismissed Arthur Andersen and
retained PricewaterhouseCoopers as its independent auditors for its current fiscal year ended March 31, 2003. SEC rules require the Company to present historical audited financial statements in
various SEC filings, such as registration statements, along with Arthur
Andersen's consent to the Company's inclusion of Arthur Andersen's audit report in those filings. Since the Company's former engagement partner and audit manager have left Arthur Andersen and in light
of the announced cessation of Arthur Andersen's SEC practice, the Company has not be able to obtain the consent of Arthur Andersen to the inclusion of Arthur Andersen's audit report in the Company's
relevant current and future filings. The SEC recently has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the requirement to file a
consent of Arthur Andersen in certain circumstances, but purchasers of securities sold under the Company's registration statements, which were not filed with the consent of Arthur Andersen to the
inclusion of Arthur Andersen's audit report will not be able to sue Arthur Andersen pursuant to Section 11(a)(4) of the Securities Act of 1933 and therefore the purchasers' right of recovery
under that section may be limited as a result of the lack of the Company's ability to obtain Arthur Andersen's consent.

The Company does not plan to pay dividends on its common stock.

The Company has not declared or paid a cash dividend on its common stock in recent years and it does not expect to declare or pay any cash dividends in the
foreseeable future. The Company intends to retain all earnings, if any, in order to expand its operations. Investors should not rely on dividends from the common stock as a possible source of income.

27

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ITEM 7(A). QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to interest rate risk on its credit facilities which have variable interest rates tied to the Prime Rate or LIBOR. As of March 31,
2003, the Company had no variable interest rate debt outstanding. See Note 3 of Notes to Consolidated Financial Statements for a discussion of our long-term indebtedness.

The
cash accounts for the Company's operations in Singapore, Hong Kong, England, and Abu Dhabi are maintained in Singapore dollars, Hong Kong dollars, pounds sterling and dirhams,
respectively. Foreign currency accounts are marked to market at current rates that resulted in immaterial translation adjustments to stockholders equity. The gains and losses from foreign currency
transactions are included in the statement of operations for the period and were also immaterial. A hypothetical 10% change in foreign currency rates would not have a material impact on the Company's
results of operations or financial position.

As
of March 31, 2003, the Company holds short-term investments consisting of money market funds and U.S. government and government agency bonds. The Company s primary
objective with its investment portfolio is to invest available cash while preserving principal and meeting liquidity
needs. These investments have an average interest rate of approximately 1.7% and are subject to interest rate risk. As a result of the average maturity and conservative nature of the investment
portfolio, a sudden change in interest rates would not have a material effect on the value of these investments.

In
Fiscal 2003, the Company issued 295,475 warrants in connection with a private placement offering of common stock. These warrants can be exchanged for cash under certain circumstances
including a merger, sale or tender offer of the Company and as such a liability equal to Black-Scholes value of the warrants is recorded on the balance sheet. Changes in the fair value of the warrants
are recorded as other income (expense). The Black-Scholes value of these warrants can fluctuate significantly based on the current fair market value of the Company's common stock. A 10% change in the
fair market value of the Company's common stock, holding other assumptions constant, would have approximately a $135,000 impact on earnings.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information listed in the Index to Consolidated Financial Statements and Schedule on page 30 are filed as
part of this Annual Report on Form 10-K and are incorporated into this Item by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Information regarding the change in the Company's principal accountants was provided in the Company's Current Report on Form 8-K filed
July 18, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement relating to the 2003 Annual Meeting
of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 28, 2003.

28

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ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement relating to the 2003 Annual Meeting
of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 28, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement relating to the 2003 Annual Meeting
of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 28, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement relating to the 2003 Annual Meeting
of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 28, 2003.

ITEM 14. CONTROLS AND PROCEDURES



The
principal executive officer and principal financial officer have evaluated the disclosure controls and procedures as of a date within 90 days before the filing date of this
annual report. Based on this evaluation they conclude that the disclosure controls and procedures effectively ensure that information required to be disclosed in our filings and submissions under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.



There
have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the evaluation of the internal controls,
including any corrective actions with regard to significant deficiencies and material weaknesses.

PART IV

ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS, AND REPORTS ON FORM 8-K

Financial Statement Schedules and Exhibits

The financial statements and schedules listed in the Index to Consolidated Financial Statements and Schedule on page 30 are filed as part of this report, and such
Index is incorporated in this Item by reference.

The
exhibits listed in the Exhibit Index on page 58 are filed as part of this report, and such Index is incorporated in this Item by reference.

Reports on Form 8-K

Reports on Form 8-K. There were no reports on Form 8-K filed during the fourth quarter of the fiscal year covered by this
report.

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AMERICAN SCIENCE AND ENGINEERING, INC., AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

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

|                                                                                                               |  | PAGE
|-------------------------------------------------------------------------------------------------------------- |  | ----
|CONSOLIDATED FINANCIAL STATEMENTS                                                                              |  |     
|Report of Independent Auditors                                                                                 |  | 31  
|Consolidated Balance Sheets  March 31, 2003 and 2002                                                          |  | 33  
|Consolidated Statements of Operations For the Years Ended March 31, 2003, 2002 and 2001                        |  | 34  
|Consolidated Statements of Stockholders' Investment For the Years Ended March 31, 2003, 2002 and 2001          |  | 35  
|Consolidated Statements of Cash Flows For the Years Ended March 31, 2003, 2002 and 2001                        |  | 36  
|Notes to Consolidated Financial Statements                                                                     |  | 37  
|CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION                                                               |  |     
|Unaudited quarterly consolidated financial data for the years ended March 31, 2003 and 2002                    |  | 52  
|FINANCIAL STATEMENT SCHEDULE                                                                                   |  |     
|Report of Independent Auditors on Financial Statement Schedule                                                 |  | 53  
|Schedule II  Valuation and Qualifying Accounts and Reserves for the years ended March 31, 2003, 2002 and 2001 |  | 54  

Other
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.

30

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Report of Independent Auditors

To
the Board of Directors and
Stockholders of American Science and Engineering, Inc.:

In
our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' investment and cash flows present fairly, in all material
respects, the financial position of American Science and Engineering, Inc. and its subsidiaries at March 31, 2003, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of March 31, 2002, and
for each of the two years in the period ended March 31, 2002, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated May 31, 2002.

/s/PricewaterhouseCoopers
LLP

Boston,
MA
May 21, 2003

31

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THIS
REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2002 AND HAS
NOT BEEN REISSUED BY THAT FIRM.

Report of Independent Public Accountants

To
American Science and Engineering, Inc.:

We
have audited the accompanying consolidated balance sheets of American Science and Engineering, Inc. (a Massachusetts corporation) and subsidiaries as of March 31, 2002
and March 31, 2001 and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended March 31, 2002. These
consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Science and
Engineering, Inc. and subsidiaries as of March 31, 2002 and March 31, 2001 and the results of their operations and their cash flows for each of the three years in the period ended
March 31, 2002 in conformity with accounting principles generally accepted in the United States.

Our
audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial
statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements taken as a whole.

/s/
Arthur Andersen LLP

Boston,
Massachusetts
May 31, 2002

32

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American Science and Engineering, Inc. and Subsidiaries        Consolidated Balance Sheets        March 31, 2003 and 2002(Amounts in thousands,
except share and per share amounts)

|                                                                                                |                                                              | 2003 |         | 2002  |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---- | ------- | ----- | -
|Assets                                                                                          |                                                              |      |         |       |  
|Current assets:                                                                                 |                                                              |      |         |       |  
|Cash and cash equivalents                                                                       |                                                              | $    | 5,585   |       | $
|Restricted cash                                                                                 |                                                              |      | 1,895   |       |  
|Short-term investments                                                                          |                                                              |      | 4,538   |       |  
|Accounts receivable, net of allowances of $246 in 2003 and $111 in 2002                         |                                                              |      | 10,499  |       |  
|Unbilled costs and fees, net of allowances of $437 in 2003 and $437 in 2002                     |                                                              |      | 4,343   |       |  
|Inventories                                                                                     |                                                              |      | 15,748  |       |  
|Deferred income taxes                                                                           |                                                              |      |        |       |  
|Prepaid expenses and other current assets                                                       |                                                              |      | 822     |       |  
|                                                                                                |                                                              |      |         |       |  
|Total current assets                                                                            |                                                              |      | 43,430  |       |  
|Non-current deferred income taxes                                                               |                                                              |      |        |       |  
|Deposits                                                                                        |                                                              |      | 38      |       |  
|Equipment and leasehold improvements, net                                                       |                                                              |      | 3,714   |       |  
|Other assets                                                                                    |                                                              |      | 100     |       |  
|Patents and other intangibles, net of accumulated amortization of $405 in 2003 and $351 in 2002 |                                                              |      | 34      |       |  
|                                                                                                |                                                              |      |         |       |  
|Total assets                                                                                    |                                                              | $    | 47,316  |       | $
|                                                                                                |                                                              |      |         |       |  
|Liabilities & Stockholders' Investment                                                          |                                                              |      |         |       |  
|Current liabilities:                                                                            |                                                              |      |         |       |  
|Line of credit                                                                                  |                                                              | $    |        |       | $
|Accounts payable                                                                                |                                                              |      | 5,327   |       |  
|Accrued salaries and benefits                                                                   |                                                              |      | 1,476   |       |  
|Accrued warranty costs                                                                          |                                                              |      | 535     |       |  
|Accrued income taxes                                                                            |                                                              |      |        |       |  
|Deferred revenue                                                                                |                                                              |      | 1,928   |       |  
|Customer deposits                                                                               |                                                              |      | 2,747   |       |  
|Other current liabilities                                                                       |                                                              |      | 1,221   |       |  
|                                                                                                |                                                              |      |         |       |  
|Total current liabilities                                                                       |                                                              |      | 13,234  |       |  
|                                                                                                |                                                              |      |         |       |  
|Non-current liabilities:                                                                        |                                                              |      |         |       |  
|Warrant liability                                                                               |                                                              |      | 820     |       |  
|Deferred revenue                                                                                |                                                              |      | 751     |       |  
|Deferred compensation                                                                           |                                                              |      | 85      |       |  
|Deferred rent                                                                                   |                                                              |      | 68      |       |  
|                                                                                                |                                                              |      |         |       |  
|Total non-current liabilities                                                                   |                                                              |      | 1,724   |       |  
|                                                                                                |                                                              |      |         |       |  
|Commitments and contingencies (Notes 2 and 9)                                                   |                                                              |      |         |       |  
|Stockholders' investment:                                                                       |                                                              |      |         |       |  
|Preferred stock, no par value                                                                   |                                                              |      |         |       |  
|                                                                                                | Authorized  100,000 shares                                  |      |         |       |  
|                                                                                                | IssuedNone                                                  |      |         |      |  
|Common stock, $0.662/3 par value                                                                |                                                              |      |         |       |  
|                                                                                                | Authorized20,000,000 shares                                 |      |         |       |  
|                                                                                                | Issued 6,871,729 shares in 2003 and 5,549,478 shares in 2002 |      |         | 4,581 |  
|Capital in excess of par value                                                                  |                                                              |      | 38,780  |       |  
|Accumulated deficit                                                                             |                                                              |      | (11,003 | )     |  
|                                                                                                |                                                              |      |         |       |  
|Total stockholders' investment                                                                  |                                                              |      | 32,358  |       |  
|                                                                                                |                                                              |      |         |       |  
|Total liabilities and stockholders' investment                                                  |                                                              | $    | 47,316  |       | $
|                                                                                                |                                                              |      |         |       |  

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

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American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Operations        For the Years Ended March 31, 2003, 2002 and 2001(Amounts in thousands, except per share amounts)

|                                                |  | 2003 |        | 2002 |   | 2001   |  
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|Net sales and contract revenues:                |  |      |        |      |   |        |  
|Net product sales and contract revenues         |  | $    | 52,894 |      |   |        |  
|Net service revenues                            |  |      | 9,064  |      |   |        |  
|                                                |  |      |        |      |   |        |  
|Total net sales and contract revenues           |  |      | 61,958 |      | $ | 65,396 |  
|Cost of sales and contracts:                    |  |      |        |      |   |        |  
|Cost of product sales and contracts             |  |      | 42,610 |      |   |        |  
|Cost of service revenues                        |  |      | 8,399  |      |   |        |  
|                                                |  |      |        |      |   |        |  
|Total cost of sales and contracts               |  |      | 51,009 |      |   | 49,357 |  
|                                                |  |      |        |      |   |        |  
|Gross profit                                    |  |      | 10,949 |      |   | 16,039 |  
|                                                |  |      |        |      |   |        |  
|Expenses:                                       |  |      |        |      |   |        |  
|Selling, general and administrative             |  |      | 12,409 |      |   | 12,753 |  
|Research and development                        |  |      | 6,419  |      |   | 7,136  |  
|                                                |  |      |        |      |   |        |  
|Total expenses                                  |  |      | 18,828 |      |   | 19,889 |  
|                                                |  |      |        |      |   |        |  
|Operating income (loss)                         |  |      | (7,879 | )    |   | (3,850 | )
|                                                |  |      |        |      |   |        |  
|Other income (expense):                         |  |      |        |      |   |        |  
|Interest income                                 |  |      | 95     |      |   | 39     |  
|Interest expense                                |  |      | (86    | )    |   | (476   | )
|Other, net                                      |  |      | 2,375  |      |   | (225   | )
|                                                |  |      |        |      |   |        |  
|Total other income (expense)                    |  |      | 2,384  |      |   | (662   | )
|                                                |  |      |        |      |   |        |  
|Income (loss) before provision for income taxes |  |      | (5,495 | )    |   | (4,512 | )
|Provision for income taxes                      |  |      | 2,456  |      |   |       |  
|                                                |  |      |        |      |   |        |  
|Net income (loss)                               |  | $    | (7,951 | )    | $ | (4,512 | )
|                                                |  |      |        |      |   |        |  
|Income/(loss) per shareBasic                   |  | $    | (1.20  | )    | $ | (0.87  | )
|                                                |  |      |        |      |   |        |  
|Diluted                                        |  | $    | (1.20  | )    | $ | (0.87  | )
|                                                |  |      |        |      |   |        |  
|Weighted average sharesBasic                   |  |      | 6,627  |      |   | 5,191  |  
|                                                |  |      |        |      |   |        |  
|Diluted                                        |  |      | 6,627  |      |   | 5,191  |  
|                                                |  |      |        |      |   |        |  

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

34

---



American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Stockholders' Investment        For the Years Ended March 31, 2003, 2002 and 2001(Amounts in thousands, except share amounts)

|                                                  |  | Common Stock |  |   |       | Retained
Earnings
(Accumulated
Deficit) |   |        |  |   |        
|------------------------------------------------- |  | ------------ |  | - | ----- | --------------------------------------- | - | ------ |  | - | -------
|
|
|Balance, March 31, 2000                           |  | 4,961,874    |  | $ | 3,308 |                                         | $ | 17,907 |  | $ | 800    
|Net income                                        |  |             |  |   |      |                                         |   |       |  |   | 660    
|Exercise of stock options and related tax benefit |  | 8,158        |  |   | 5     |                                         |   | 352    |  |   |       
|Issuance of stock                                 |  | 42,720       |  |   | 29    |                                         |   | 213    |  |   |       
|                                                  |  |              |  |   |       |                                         |   |        |  |   |        
|Balance, March 31, 2001                           |  | 5,012,752    |  |   | 3,342 |                                         |   | 18,472 |  |   | 1,460  
|Net loss                                          |  |             |  |   |      |                                         |   |       |  |   | (4,512 
|Exercise of stock options                         |  | 484,116      |  |   | 323   |                                         |   | 3,491  |  |   |       
|Repayment of officer note                         |  |             |  |   |      |                                         |   |       |  |   |       
|Issuance of stock                                 |  | 52,610       |  |   | 34    |                                         |   | 519    |  |   |       
|                                                  |  |              |  |   |       |                                         |   |        |  |   |        
|Balance, March 31, 2002                           |  | 5,549,478    |  |   | 3,699 |                                         |   | 22,482 |  |   | (3,052 
|Net loss                                          |  |             |  |   |      |                                         |   |       |  |   | (7,951 
|Private placement issuance of stock               |  | 1,115,000    |  |   | 743   |                                         |   | 14,553 |  |   |       
|Exercise of stock options                         |  | 175,347      |  |   | 117   |                                         |   | 1,355  |  |   |       
|Issuance of stock                                 |  | 31,904       |  |   | 22    |                                         |   | 390    |  |   |       
|                                                  |  |              |  |   |       |                                         |   |        |  |   |        
|Balance, March 31, 2003                           |  | 6,871,729    |  | $ | 4,581 |                                         | $ | 38,780 |  | $ | (11,003
|                                                  |  |              |  |   |       |                                         |   |        |  |   |        

The accompanying notes are an integral part of these consolidated financial statements

35

---

American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Cash Flows        For the Years Ended March 31, 2003, 2002 and 2001(Amounts in thousands)

|                                                                                                    |                                                                               | 2003                                           |        | 2002   |        | 2001   |       
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ------ | ------ | ------ | ------
|Cash flows from operating activities:                                                               |                                                                               |                                                |        |        |        |        |       
|Net income (loss)                                                                                   |                                                                               | $                                              | (7,951 | )      | $      | (4,512 | )     
|Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Depreciation and amortization                                                 |                                                |        | 2,185  |        |        | 2,379 
|                                                                                                    | Provisions for contract, inventory, accounts receivable and warranty reserves |                                                |        | 4,501  |        |        | 607   
|                                                                                                    | Change in value of warrants issued                                            |                                                |        | (2,298 | )      |        |      
|                                                                                                    | Deferred (prepaid) income tax                                                 |                                                |        | 3,298  |        |        |      
|                                                                                                    | Change in assets and liabilities:                                             |                                                |        |        |        |        |       
|Accounts receivable                                                                                 |                                                                               |                                                | (3,421 | )      |        | 2,510  |       
|                                                                                                    |                                                                               | Unbilled costs and fees                        |        |        | 1,113  |        |       
|                                                                                                    |                                                                               | Inventories                                    |        |        | 1,650  |        |       
|                                                                                                    |                                                                               | Prepaid expenses, other assets, and deposits   |        |        | (71    | )      |       
|                                                                                                    |                                                                               | Accounts payable                               |        |        | (1,230 | )      |       
|                                                                                                    |                                                                               | Accrued income taxes                           |        |        | (763   | )      |       
|                                                                                                    |                                                                               | Deferred revenue                               |        |        | 958    |        |       
|                                                                                                    |                                                                               | Customer deposits                              |        |        | (2,128 | )      |       
|                                                                                                    |                                                                               | Accrued expenses and other current liabilities |        |        | (570   | )      |       
|                                                                                                    |                                                                               | Noncurrent liabilities                         |        |        | (168   | )      |       
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Total adjustments                                                             |                                                |        | 3,056  |        |        | 4,252 
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Net cash used for operating activities                                        |                                                |        | (4,895 | )      |        | (260  
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|Cash flows from investing activities:                                                               |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Increase in restricted cash                                                   |                                                |        | (1,895 | )      |        |      
|                                                                                                    | Investment in short-term instruments                                          |                                                |        | (4,538 | )      |        |      
|                                                                                                    | Purchase of property and equipment                                            |                                                |        | (1,155 | )      |        | (1,109
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Cash used in investing activities                                             |                                                |        | (7,588 | )      |        | (1,109
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|Cash flows from financing activities:                                                               |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Proceeds from (repayment of) line of credit                                   |                                                |        | (9,319 | )      |        | 3,300 
|                                                                                                    | Proceeds from issuance of common stock and warrants, net                      |                                                |        | 18,415 |        |        |      
|                                                                                                    | Repayment of officer loan                                                     |                                                |        |       |        |        | 640   
|                                                                                                    | Proceeds from exercise of stock options                                       |                                                |        | 1,381  |        |        | 3,814 
|                                                                                                    | Principal payments of capital lease obligations                               |                                                |        |       |        |        |      
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Cash provided by financing activities                                         |                                                |        | 10,477 |        |        | 7,754 
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|Net increase (decrease) in cash and cash equivalents                                                |                                                                               |                                                | (2,006 | )      |        | 6,385  |       
|Cash and cash equivalents at beginning of year                                                      |                                                                               |                                                | 7,591  |        |        | 1,206  |       
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|Cash and cash equivalents at end of year                                                            |                                                                               | $                                              | 5,585  |        | $      | 7,591  |       
|                                                                                                    |                                                                               |                                                |        |        |        |        |       
|Supplemental disclosures of cash flow information:                                                  |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Interest paid                                                                 |                                                | $      | 124    |        | $      | 481   
|                                                                                                    | Income taxes paid                                                             |                                                |        |       |        |        | 15    
|Non-cash transactions:                                                                              |                                                                               |                                                |        |        |        |        |       
|                                                                                                    | Issuance of stock and warrants in lieu of fees                                |                                                | $      | 412    |        | $      | 553   

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

36

---



American Science and Engineering, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        March 31, 2003

1.     Nature of Operations and Summary of Significant Accounting Policies

American Science and Engineering, Inc. (the "Company") is engaged in the development and manufacture of sophisticated X-ray inspection systems
for critical detection and security screening solutions for sale primarily to U.S. and foreign government agencies.

Use of Estimates:The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation:The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications:Certain amounts in the prior period financial statements have been reclassified to conform to the current
period presentation.

Cash and Cash Equivalents:The Company considers all investments with original maturities of 90 days or less to be
cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair
market value at year-end 2003 and 2002. The Company has repurchase agreements with its banks. The repurchase agreements are collateralized by investments principally consisting of U.S.
Government Agency securities in the amount of at least 100% of such obligation.

Restricted Cash:The Company's Export and Security Agreement with HSBC Bank USA requires certain cash balances to be
restricted as collateral against outstanding standby letters of credit.

Short-term Investments:Short-term investments consist of investments in money market funds and U.S
government and government agency bonds. These investments are classified as available-for-sale and are recorded at their fair market values. The unrealized holding gains or
losses on these securities were immaterial for the year ended March 31, 2003.

Inventories:Inventories consist of material, labor and manufacturing overhead and are recorded at the lower of cost or net
realizable value. Cost is determined on an average cost method.

The
components of inventories at March 31, 2003 and 2002 were as follows (dollars in thousands):

2003

2002Raw materials, completed subassemblies and spare parts

$
8,119

$
10,483Work-in-process


3,783


7,981Finished goods


3,846


2,549$
15,748

$
21,013


The
Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each particular product or product line. The Company records as a charge
to cost of sales any amounts required to reduce the carrying value to net realizable value.

37

---

Equipment and Leasehold Improvements:The Company provides for depreciation and amortization of its fixed assets on a
straight-line basis over estimated useful lives of 2-10 years. Expenditures for normal maintenance and repairs are charged to expense as incurred. Significant additions,
renewals or betterments that extend the useful lives of the assets are capitalized at cost. The cost and accumulated depreciation applicable to equipment and leasehold improvements sold or otherwise
disposed of are removed from the accounts, and any resulting gain or loss is included in the consolidated statements of operations.

Equipment
and leasehold improvements consisted of the following at March 31 (in thousands):

|                                               |  | Estimated Useful
Lives                     |  | 2003 |         | 2002 |  
|---------------------------------------------- |  | ------------------------------------------ |  | ---- | ------- | ---- | -
|Equipment                                      |  | 3-10 years                                 |  | $    | 1,948   |      | $
|Computer equipment and software                |  | 2-5 years                                  |  |      | 5,580   |      |  
|Tooling                                        |  | 3-7 years                                  |  |      | 366     |      |  
|Leasehold improvements                         |  | Lesser of 10 years or remaining lease term |  |      | 1,999   |      |  
|Furniture and fixtures                         |  | 5-7 years                                  |  |      | 1,682   |      |  
|Demo and test equipment                        |  | 3-7 years                                  |  |      | 2,647   |      |  
|Motor vehicles                                 |  | 3 years                                    |  |      | 41      |      |  
|                                               |  |                                            |  |      |         |      |  
|Total                                          |  |                                            |  |      | 14,263  |      |  
|Less accumulated depreciation and amortization |  |                                            |  |      | (10,549 | )    |  
|                                               |  |                                            |  |      |         |      |  
|Equipment and leasehold improvements, net      |  |                                            |  | $    | 3,714   |      | $
|                                               |  |                                            |  |      |         |      |  

Patents and Other Intangibles:Patents and other intangible assets are being amortized using the straight-line
method over the legal lives of the patents, not to exceed 17 years. The Company's inability to protect its intellectual property could have a significant impact on its results of operations.
Claims against others for patent infringement are not recorded until realized.

Revenue Recognition:Revenues on cost reimbursable and long-term fixed price contracts are generally recorded as
costs are incurred using the percentage of completion method. These contracts are for custom-built systems or contract engineering projects and the length of these contracts typically range from 9 to
24 months from order to delivery and acceptance. Percentages-of-completion are determined by relating the actual costs of work performed to date for each contract to its
estimated final costs. Revisions in costs and profit estimates are reflected in the period in which the facts causing the revision become known.

Certain
contracts require payments from the customer upon execution of the agreement that are included in customer deposits. Individual customer deposits are reduced by the amount of
revenue recognized on the contract until a zero balance is reached. Revenue recognized in excess of billings or customer deposits under the contracts is included in unbilled costs and fees in the
accompanying balance sheet.

For
all fixed price contracts, if a loss is anticipated on the contract, provision is made in the period in which such losses are determined.

38

---

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 $214,000 in 2003 and $85,000 in 2002) 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.

During
the fourth quarter of 2001, effective as of April 1, 2000, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." The Company recognizes sales for its systems that are produced in a standard manufacturing operation and have shorter order to deliver cycles at the time of
shipment of the system to the customer and when other revenue recognition criteria is met. The costs of installation at the customer's site are accrued at the time of shipment. Management believes the
customer's post-delivery acceptance provisions and installation are perfunctory and inconsequential. The Company has never failed to successfully complete a system installation.
Installation is non-complex and does not require specialized skills and the related costs are predictable and insignificant to the total purchase price. The Company has demonstrated a
history of customer acceptance subsequent to shipment and installation of these systems.

Service
revenues are accrued on time and materials engagements as the services are provided. Service contract revenues are recognized on a straight-line basis over the length
of the contract. Service revenues for fiscal 2003 exceeded 10% of total revenues and as such have been separately presented for the current year.

The
Company records billed shipping and handling fees and billed out-of-pocket expenses as revenue and the associated costs as cost of goods sold in the
accompanying consolidated income statement.

Included
in accounts receivable and unbilled costs and fees at March 31, 2003 and 2002 are $9,957,000 and $5,878,000, respectively, attributable to both prime and subcontracts
with the U.S. Government.

Warranty Costs:The Company generally provides a one-year parts and labor warranty with the purchase of
equipment. The anticipated cost for this one-year warranty is accrued for at the time of the sale and is recorded as accrued warranty costs and as an expense within
cost of goods sold, or is included in contract costs for contracts accounted for using the percentage of completion method.

Deferred Revenue:The Company offers to its customers extended warranty and service contracts. The coverage period of these
contracts will typically range from one to five years, and typically with advance payments that are recorded as Deferred Revenue. Revenue is recognized on a straight-line basis over the
life of the contract.

Impairment of Long-Lived Assets:Long-lived assets are reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets. Impairment is assessed by comparing the estimated undiscounted cash flows over the asset's remaining life to the carrying amount of the asset. If the estimated cash
flows are insufficient to recover the investment an impairment loss is recognized based on the fair value of the asset less any costs of disposal.

39

---

Customer Deposits:For most international orders, the Company generally includes, as part of its terms and conditions, an
advance deposit with order acceptance. For long-term international contracts, the Company will generally include milestone payments tied to a specific event and/or passage of time. These
deposit amounts are recorded as a liability under "Customer Deposits" until reduced by revenue recognized against the specific contract.

Deferred Rent:The Company has a lease for its office and manufacturing facilities, which includes escalation clauses.
Accounting principles generally accepted in the United States of America require the rental expense to be recorded on a straight-line basis over the life of the lease, resulting in
deferred rent being reflected in the accompanying consolidated balance sheets.

Research and Development:Research and development costs are expensed as incurred.

Fair Value of Financial Instruments:The Company's financial instruments consist primarily of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, debt and letters of credit. The carrying amounts of these instruments approximate fair value.

Comprehensive Income:Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
establishes standards for the reporting and display of comprehensive income
(loss) and its components in a full set of general-purpose financial statements. The Company's comprehensive income (loss) is equal to the Company's net income (loss) for each of the periods
presented.

Income Per Common and Potential Common Shares:Basic earnings per common share is computed by dividing net income available
to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share include the dilutive impact of options and warrants using the
average share price of the Company's common stock for the period. For the years ended March 31, 2003, March 31, 2002 and March 31, 2001, respectively, 403,000, 516,000 and
1,857,000 shares attributable to the exercise of outstanding options are excluded from diluted earnings per share, as their effect is anti-dilutive.

|                                                                                  |  | Year Ended
|--------------------------------------------------------------------------------- |  | ----------
|
|
|Weighted average number of common shares outstandingbasic                        |  | 6,627     
|Assumed exercise of stock options, using the treasury stock method                |  |          
|                                                                                  |  |           
|Weighted average number of common and potential common shares outstandingdiluted |  | 6,627     
|                                                                                  |  |           

Income Taxes:The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."
Accordingly, the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and
liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance against any
net deferred tax assets if it is more likely than not that they will not be realized.

40

---

Pro Forma Stock-Based Compensation Expense:As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock-based compensation plans. Had
compensation cost for awards in 2003, 2002 and 2001 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income (loss) and income (loss) per share would have been as follows:

2003

2002

2001In thousands except per share amountsNet income (loss):As reported

$
(7,951
)
$
(4,512
)
$
660Less: Stock based compensation using fair value method for all awards


(3,689
)

(3,351
)

(1,031
)Pro forma

$
(11,640
)
$
(7,863
)
$
(371
)Income (loss) per shareBasic:As reported

$
(1.20
)
$
(0.87
)
$
0.13Pro forma

$
(1.76
)
$
(1.52
)
$
(0.07
)Income (loss) per shareDiluted:As reported

$
(1.20
)
$
(0.87
)
$
0.13Pro forma

$
(1.76
)
$
(1.52
)
$
(0.07
)


The
fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free
interest rates of 5.0%, 4.53% to 5.13%, and 5.5% to 6.75% for 2003, 2002, and 2001, respectively, expected volatility of 73%, 68%, and 56% for 2003, 2002, and 2001, respectively, an expected dividend
yield of 0% and an expected life of 7 years for all three fiscal years.

New Accounting Pronouncements:In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on required disclosures by a guarantor in its financial statements
about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company has adopted the disclosure provisions of this interpretation for the fiscal year ended March 31, 2003 and has determined that the
recognition principles are not applicable.

In
November 2002, the Task Force reached a consensus on Emerging Issues Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be
measured and allocated to the separate units of accounting. This guidance is effective for the Company beginning in fiscal 2005 with early application permitted. The Company is currently evaluating
the impact of this guidance on its revenue recognition policies.

In
July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146),
which nullifies Emerging Issues Task

41

---

Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 requires a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability
is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. The provisions of FAS 146
will be effective for the Company prospectively for exit or disposal activities initiated after December 31, 2002; however, this standard is not expected to have a significant impact on its
financial condition, results of operations, or cash flows.

In
December 2002, the FASB issued SFAS No. 148 "Accounting for Stock- Based Compensation-Transition and Disclosure- an amendment of FASB Statement No. 123"
(FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value
based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for
stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The amended disclosure provisions are effective for the fiscal years
ending after December 31, 2002 and the Company has adopted the amended disclosure provisions as of March 31, 2003. The Company has not decided whether it will voluntarily change to the
fair value based method of accounting for stock-based employee compensation at this time.

In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities and Interpretation of ARB 51 (FIN 46), which requires the
consolidation of certain entities considered to be variable interest entities (VIE's). An entity is considered to be a VIE when it has equity investors which lack the characteristics of a controlling
financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it
is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. The company adopted FIN 46 as of March 31, 2003 and such adoption did not
have an effect on the consolidated financial statements.

2.     Lease Agreements

The Company leases various office and manufacturing facilities under noncancelable operating leases. Additionally, the Company entered into a sublease agreement
(as lessor) as of May 2000 in regards to certain manufacturing and office space, which was cancelled during fiscal 2002. The Company incurred $1,116,000, $1,062,000, and $1,053,000 of rent
expense in 2003, 2002, and 2001 respectively. The security deposits on these leases amount to $127,000.

42

---

Future
minimum rental payments under the Company's operating leases, excluding real estate taxes, insurance and operating costs paid by the Company required over the initial terms of the
leases are as follows:

Year Ending March 31,

(in thousands)2004

$
1,0062005


8722006


422007


2$
1,922


3.     Line of Credit

On November 30, 2000, the Company signed two credit agreements with HSBC Bank USA ("HSBC"). The first agreement was for a $10.0 million domestic
revolving credit facility to support the Company's routine working capital and standby letter of credit needs. The second was a $30.0 million export credit and security agreement, guaranteed by
the Export-Import Bank of the United States to support the Company's overseas contract, trade finance and working capital needs.

On
February 14, 2002, these credit agreements were amended to increase the domestic revolving credit facility to $20.0 million and to reduce the export credit facility to
$20.0 million in anticipation of higher domestic demand. This agreement was due to expire on November 30, 2002. These agreements were further amended on November 28, 2002 to
reduce the domestic revolving credit facility to $5 million, with maximum borrowings set at the lower of: (a) the sum of 85% of eligible domestic accounts receivable plus the lower of:
(i) 40% of eligible raw materials and work-in-process inventory; or; (ii) $2 million, or; (b) $5 million. In addition, the interest rate and
certain financial covenants were amended and the expiration date of the facility was extended to February 28, 2003. In February 2003 and May 2003, these agreements were further
amended to extend expiration to July 31, 2003. The credit facility, as amended, bears an interest rate at the HSBC Bank USA prime rate plus 1/4% or LIBOR plus 2.0% at the
Company's option (4.5% at March 31, 2003). At the end of fiscal 2003, there were no borrowings outstanding and $4.3 million in standby letters of credit, guaranteeing performance on
certain large international cargo projects, were in effect against this credit facility. No amounts have been drawn against these letters of credit.

The
credit agreements are collateralized by certain assets of the Company, and contain certain restrictions, including limitations on the amount of distributions that can be made to
stockholders, encumbrances of assets, and loans that can be made to officers, and requires the maintenance of certain financial covenants. As of March 31, 2003, the Company was not in
compliance with its tangible net worth and earnings covenants, but has obtained a waiver from the bank for these non-compliances for the year-end.

Given
the significant losses of fiscal 2003, the Company does not expect to be in compliance with the tangible net worth covenant in the coming year. The Company will request waivers of
this covenant as required at each quarter end. If the Company is unable to obtain such waivers, HSBC could terminate the Company's domestic revolving credit and export credit facilities. In addition,
the current credit agreements expire in July of 2003 and there can be no assurance that HSBC will renew the credit agreements or that alternative financing can be obtained. If the Company's credit
facility were

43

---

terminated,
it would preclude the Company from obtaining financing through its current secured export credit and security agreement that could negatively impact the Company's ability to support
international sales.

4.     Income Taxes

The provision (benefit) for income taxes for the years ended March 31, 2003, 2002 and 2001 consisted of the following:

2003

2002

2001(in thousands)Current:Federal

$
(840
)
$


$
165State


(2
)




20(842
)




185Deferred/(Prepaid):Federal


3,066





(37
)State


232





(3
)3,298





(40
)Total

$
2,456

$


$
145


The
difference between the total expected provision (benefit) for income taxes computed by applying the statutory federal income tax rate to income before provision (benefit) for income
taxes and the recorded provision (benefit) for income taxes for the three years in the period ended March 31, 2003 follows:

2003

2002

2001(in thousands)Provision (benefit) for income taxes at statutory rate

$
(2,703
)
$
(1,534
)
$
274State tax provision net of federal effect


154


13


13Permanent tax differences for non-deductible expenses/non-taxable income


(759
)

31


30Expiration of tax credits





8


6Change in valuation allowance


5,764


1,282


Effect of FSC and EIE exclusion





(86
)

(206
)Other





286


28$
2,456

$


$
145


44

---

The
significant components of the net deferred tax asset at March 31, 2003 and 2002 follow:

|                                                |  | 2003 |        | 2002 |  
|----------------------------------------------- |  | ---- | ------ | ---- | -
|
|
|Assets:                                         |  |      |        |      |  
|Net operating loss carry forwards               |  | $    |       |      | $
|Accounts receivable and unbilled costs and fees |  |      | 266    |      |  
|Inventory                                       |  |      | 693    |      |  
|Deferred revenue                                |  |      |       |      |  
|Accrued vacation                                |  |      | 291    |      |  
|Accrued warranty costs                          |  |      | 208    |      |  
|Research & development and other tax credits    |  |      |       |      |  
|Depreciation                                    |  |      |       |      |  
|Other                                           |  |      | 82     |      |  
|                                                |  |      |        |      |  
|Deferred income tax assets                      |  |      | 1,540  |      |  
|Valuation Allowance                             |  |      | (1,540 | )    |  
|                                                |  |      |        |      |  
|Net deferred income taxes                       |  | $    |       |      | $
|                                                |  |      |        |      |  

The
Company has available general business and other credits of approximately $1.8 million expiring at various times through 2018. As of March 31, 2003, the Company had
federal and state net operating loss carryforwards of approximately $18,656,000 and $12,228,000, respectively expiring at various times from 2015 through 2023.

The
Company has established a full valuation reserve in accordance with the provisions of SFAS No. 109. The Company continually reviews the adequacy of valuation allowances and
releases these allowances when it is determined that is more likely than not that the benefits will be realized. During fiscal 2003 and 2002, the valuation allowance was increased by $8,958,000 and
$2,739,000, respectively due to the Company's continued historical losses and the lack of persuasive evidence that these benefits would more likely than not be realized. In fiscal 2003
$6.2 million was charged to income tax expense, $0.5 million was attributable to net operating losses generated by deductions for stock options and the remainder was attributable to
adjustments and reclassifications of deferred tax balances resulting in an increase of $8,958,000.

45

---



5.     Warranty Obligations

The Company's parcel product line carries a one-year warranty, the costs of which are accrued for at time of shipment. Accrual rates are based upon
historical experience over the preceding twelve months and the adequacy of the warranty reserve is evaluated monthly. Warranty experience for the year ended March 31, 2003 is as follows:

(in thousands)Warranty accrual beginning of period

$
196Accruals for warranties issued during the period


519Accruals related to pre-existing warranties


153Warranty costs incurred during period


(333
)Balance at end of period

$
535


6.     Stockholders' Investment

Preferred Stock:The Company's articles of organization authorize its Board of Directors to issue up to 100,000 shares of
preferred stock in one or more series, to determine and fix certain relative rights and preferences of the shares of any series, to fix the number of shares constituting any such series, and to fix
the designation of any such series, without further vote or action by its shareholders. The Company has no present plans to issue shares of preferred stock. In 1998, the Company designated a series of
Preferred Stock as Series A Junior Participating Cumulative Preferred Stock (the "Series A Preferred Stock") to be issued upon the exercise of Rights issued under the Company's
Shareholders Rights Plan. Under the Shareholder Rights Plan, adopted in 1998, under which its stockholders are entitled to purchase shares of its Series A Preferred Stock under certain
circumstances. These circumstances include the purchase of 15% or more of the outstanding shares of common stock by a person or group, or the announcement of a tender or exchange offer to acquire 15%
or more of the outstanding common stock.

Common Stock and Warrant Offering:On May 28, 2002, the Company closed on a private placement offering of common stock
and warrants. A total of 1,115,000 shares were sold to accredited investors at a price of $17.64 each. In addition, warrants to purchase an additional 295,475 shares of common stock at a price of
$23.52 were issued. Proceeds to the Company approximated $18.4 million, net of approximately $1.3 million of issuance costs of which $3.1 million was assigned to the warrants
issued. The warrants were immediately vested and have a five-year life expiring in May of 2007. Due to certain conversion features of these warrants, that provide that the holder may opt
for a cash settlement in certain instances, including a merger, a sale of all or substantially all of the Company's assets, or a tender offer or exchange offer of shares of the Company's stock, a
liability equal to the Black-Scholes valuation of the warrants at the deal closing date was recorded on the Company's balance sheet. The "mark to market" change in the warrants value at
March 31, 2003 of $2,299,000 was recorded as other income for the year ended March 31, 2003. The liability of $820,000 associated with the warrants is recorded as a
non-current liability on the March 31, 2003 balance sheet. The fair market value of the warrants was determined using the Black Scholes pricing model and an assumed volatility of
68% to 72%, an interest rate of 5% and the remaining life of the warrants.

46

---

Stock Option and Other Compensation Plans:The Company has various stock option and other compensation plans for directors,
officers, and employees. The Company has the following stock option plans outstanding as of March 31, 2003: the 1984 Stock Option Plan, the 1993, 1994-1995 and 1996 Stock Option
Plans for Non-employee Directors; three CEO Employment Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified Option Plan; 1994-95 Stock Option Plan
for New Employees, a 1999 Combination Plan, a 2000 Combination Plan and a 2002 Combination Plan. There were 3,293,000 shares authorized under these plans. Vesting periods on these plans range from
immediate vesting to four years. Options under these plans are granted at fair market value and generally become exercisable within one to two years of the grant date and terminate ten years from the
date of grant. In addition, the Company has a common stock installment purchase plan under which the Board of Directors may grant key personnel the right to purchase shares of the Company's common
stock at fair market value and to pay the purchase price in twelve equal monthly installments. As of March 31, 2003, no shares have been reserved or granted under this plan.

The
Company has instituted two common stock purchase plans. The Executive Equity Incentive Plan allows an executive officer of the Company to buy original issue Company common stock in
any dollar amount up to the gross amount of the annual bonus granted to the Officer and to receive half the number of shares purchased in restricted stock which vests after 3 years. If the
employee leaves the Company prior to 3 years, then the shares revert back to the Company. As of both March 31, 2003 and 2002, 2,251 shares have been reserved and restricted under this
plan. The Reload Option Plan allows any eligible employee designated by the Board of Directors to receive new stock options (at an exercise price equal to the fair market value of the common stock on
the date of sale of the stock) for every share of Company common stock sold or used to exercise stock options. There have been no issuances of stock options under the Reload Option Plan.

Stock Option Activity

A summary of the Company's stock option activity is as follows:

|                                                                         |  | 2003      |   | 2002 |       | 2001
|------------------------------------------------------------------------ |  | --------- | - | ---- | ----- | ----
|
|Options outstanding, beginning of year                                   |  | 1,739,657 |   | $    | 9.50  |     
|Options granted                                                          |  | 704,100   |   |      | 11.13 |     
|Options exercised                                                        |  | (175,347  | ) |      | 8.39  |     
|Options expired                                                          |  | (108,550  | ) |      | 9.14  |     
|                                                                         |  |           |   |      |       |     
|Options outstanding, end of year                                         |  | 2,159,860 |   | $    | 10.03 |     
|                                                                         |  |           |   |      |       |     
|Options exercisable                                                      |  | 1,350,246 |   | $    | 9.78  |     
|                                                                         |  |           |   |      |       |     
|Options available for grant                                              |  | 344,615   |   |      |       |     
|                                                                         |  |           |   |      |       |     
|Weighted average fair value per share of options granted during the year |  |           |   | $    | 7.84  |     

47

---

The following summarizes certain data for options outstanding and exercisable at March 31, 2003:

|                     |  | Number of
Shares |  | Range of
Exercise Prices |  | Weighted
Average
Exercise
Price |       | Weighted
Average
Remaining
Contractual
Life
|-------------------- |  | ---------------- |  | ------------------------ |  | ------------------------------- | ----- | -------------------------------------------
|Options outstanding, |  |                  |  |                          |  |                                 |       |                                            
|End of year:         |  | 353,970          |  | $3.25$7.00              |  | $                               | 5.93  |                                            
|                     |  | 436,100          |  | 7.0110.25               |  |                                 | 7.71  |                                            
|                     |  | 1,314,090        |  | 10.2614.00              |  |                                 | 11.62 |                                            
|                     |  | 50,200           |  | 14.0117.50              |  |                                 | 16.26 |                                            
|                     |  | 5,500            |  | 17.5122.00              |  |                                 | 18.86 |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|                     |  | 2,159,860        |  |                          |  | $                               | 10.03 |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|Options Exercisable: |  | 272,971          |  | $3.25$7.00              |  | $                               | 5.88  |                                            
|                     |  | 417,100          |  | 7.0110.25               |  |                                 | 7.64  |                                            
|                     |  | 631,308          |  | 10.2614.00              |  |                                 | 12.61 |                                            
|                     |  | 25,867           |  | 14.0117.50              |  |                                 | 15.32 |                                            
|                     |  | 3,000            |  | 17.5122.00              |  |                                 | 19.10 |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|                     |  | 1,350,246        |  |                          |  | $                               | 9.78  |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            

On
April 15, 1998, the Company announced that its Board of Directors adopted a Shareholders' Rights Plan (the Plan) and declared a dividend of one preferred stock purchase right
for each outstanding share of common stock. The dividend was payable to all holders of record of shares of common stock as of the close of business on April 17, 1998. The rights become
exercisable ten days after a person or group acquires 15% or more of the Company's common stock, and in certain other situations described in the Plan. As of March 31, 2003, no options have
been granted or exercised under this plan.

The
Company realizes a tax deduction upon the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options due to the recognition of
compensation expense in the calculation of its taxable income. The amount of the compensation recognized for tax purposes is based on the difference between the market value of the common stock and
the option price at the date the options are exercised. These tax benefits are credited to additional paid-in capital if it is considered more likely than not that they will be realized.
No tax benefits were recorded in fiscal 2003 or 2002.

7.     Note Receivable from Officer

In January 1994, the Company's former Chief Executive Officer ("CEO") purchased 160,000 shares of common stock at a price of $4.00 per share (the fair
market value) financed under a note agreement for $640,000 from the Company. This note was secured by the stock and the personal assets of the CEO and accrued interest at a rate of 6.26%. In
December 2001 this note was repaid in full.

8.     Business Segment Information

In accordance with the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", the Company has determined that it
has only one operating segment, the

48

---

X-ray
product segment. This includes X-ray detection and imaging products used primarily for the detection of illegal drugs, terrorist explosives, and smuggled goods. The
equipment is purchased by sophisticated government and commercial clients who place a premium on the detection of organic material in complex backgrounds and the ability to see the contents of
containers with precision.

Geographical Data:All of the Company's export sales originate from the U.S. Less than 1% of the Company's assets are in any
foreign country. The following table shows the breakdown of Net sales and contract revenues to foreign and domestic customers and the major regions of export activity based upon customer country of
domicile.

|                                           |                      | 2002 |        | 2001 |     | 2000 |  
|------------------------------------------ | -------------------- | ---- | ------ | ---- | --- | ---- | -
|
|Domestic                                   |                      | $    | 52,834 |      | 85  | %    | $
|Export                                     |                      | $    | 9,124  |      | 15  | %    | $
|                                           |                      |      |        |      |     |      |  
|Net sales and contract revenues            |                      | $    | 61,958 |      | 100 | %    | $
|                                           |                      |      |        |      |     |      |  
|Percent of Export Revenue by Major Region: |                      |      |        |      |     |      |  
|                                           | Middle East & Africa |      |        | 70.6 | %   |      |  
|                                           | Europe               |      |        | 16.8 |     |      |  
|                                           | Mexico               |      |        |     |     |      |  
|                                           | Pacific Rim          |      |        | 11.7 |     |      |  
|                                           | All Other            |      |        | 0.9  |     |      |  

Major Customers:Sales to major customers (representing in excess of 10% of consolidated revenues) consisted of
X-ray product sales of the following:

Fiscal 2003:$10,768,000 to one customer.

Fiscal 2002:$18,199,000 to one customer.

Fiscal 2001:$16,768,000, $12,155,000 and $7,850,000 to three customers.

One
customer, an agency of the U.S. Government, at March 31, 2003 had an accounts receivable balance (representing in excess of 10% of consolidated accounts receivable) of
$2,730,000.

9.     Commitments and Contingencies

Deferred Compensation:The Company has an unfunded deferred compensation plan, originally adopted in 1976 and amended at
various times, for certain retired directors. This plan provides for periodic payments beginning at age 65, the amount of which depends on length of service. The Company paid $24,000 in 2003, $16,000
in 2002, and $50,000 in 2001 under this deferred compensation plan.

Litigation:In a decision issued December 29, 1999, the United States Court of Appeals for the Federal Circuit in
Washington, D.C. ruled that the Company may pursue a patent infringement claim against Vivid Technologies ("Vivid"), which produces X-ray detection devices used in baggage scanning
equipment. The Appeals Court overturned a 1998 decision in Vivid's favor by the Massachusetts Federal District Court. The lawsuit, filed by Vivid Technologies in May 1996, concerned whether
Vivid's X-ray detection devices infringed on AS&E's patent. The District Court had ruled that AS&E could not assert a claim that Vivid's devices infringed on AS&E's patent. The Appeals
Court also reversed

49

---

the
district court's finding on summary judgment that Vivid did not infringe on AS&E's patent, as well as the district court's denial of AS&E's request for discovery to oppose Vivid's summary judgment
motion. Vivid was acquired by PerkinElmer in 2000.

In
September 1998, the Company filed suit against EG&G Astrophysics Research Corp. ("EG&G") in U.S. District Court in Boston, Massachusetts alleging that EG&G infringed upon at
least two patents owned by the Company and that EG&G had misappropriated certain trade secrets of the Company. In February 1999, the Company filed a related action in the same court against the
U.S. Customs Service ("Customs") alleging that Customs had either misappropriated the Company's trade secrets or facilitated their misappropriation by EG&G and that Customs had improperly entered into
a contract with EG&G for the acquisition of a product functionally equivalent to the Company's MobileSearch X-ray inspection system. In May 1999, the Court held a
hearing on the Company's motion for a preliminary injunction against both Customs and EG&G prohibiting further performance of the contested contract and preventing EG&G from utilizing the Company's
trade secrets. In August 1999, the Court issued a ruling denying the request for the preliminary injunction. In December 1999, EG&G filed a Motion for Summary Judgment that EG&G did not
misappropriate the Company's trade secrets and in March 2000 EG&G filed a Motion for Summary Judgment that EG&G did not infringe the Company's patents. In February 2001 the Court denied
EG&G's and the Company's motions for Summary Judgment. The suit against U.S. Customs Service was subsequently dismissed.

In
a related matter, EG&G filed a request with the U.S. Patent and Trademark Office ("USPTO") for reexamination of the two patents that were at issue in the patent infringement action
described above. The Company filed oppositions to the re-examination requests and the Company was advised by the USPTO that both its MobileSearch X-ray inspection and its
Z® Backscatter X-ray inspection technology patent were upheld in all material respects on January 30, 2001.

In
June 2002, the assets of EG&G were sold by PerkinElmer to L-3 Communications.

In
March 2003 the Company entered into a Partial Settlement Agreement and Release with PerkinElmer, the parent of EG&G, with respect to the above-referenced litigation. The
Partial
Settlement Agreement and Release covers claims and counter-claims in the EG&G and Vivid actions up to June 14, 2002, the date of closing on the sale of EG&G by PerkinElmer to L-3.

The
Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. The Company currently believes that resolving these matters will not
have a material adverse impact on its financial condition or results of operations.

Purchase Commitments:In the normal course of business, the Company enters into purchase orders with its vendors for the
purchase of materials or services to meet its production needs. Certain single source vendors or vendors producing custom material require significant lead times from order to delivery of their
material. In response to the expected increased demand subsequent to September 11th, the Company entered into certain purchase commitments with key suppliers for this
long-lead material. Certain of these purchase orders related to these vendors contain cancellation clauses requiring the Company to pay for a portion or all of the work in process upon
cancellation of an order or to purchase a certain minimum quantity of material by a future date. Should the demand for the Company's products decline significantly, or should there be a significant
shift in the mix of products being demanded, the Company may incur cancellation charges that could be material to the

50

---

Company's
results of operations. To date, the Company has not experienced any material losses related to cancellation penalties.

Employment Agreements:The Company has employment agreements with certain executives that provide for severance payments of
up to one years base salary and the continuation of certain benefits for a period not to exceed one year if terminated pursuant to a change in control of the Company.

Retirement Savings Plan:The Company maintains a 401(k) Retirement Savings Plan for all employees with more than
500 hours and 6 months of credited service annually. The Plan is funded by elective employee contributions of up to 15% of their compensation. Under the Plan the Company matches 3% of
employee contributions for each participant in the form of Company common stock. Expense under the Plan, consisting of Company contributions and Plan administrative expenses paid by the Company,
totaled $420,711, $393,512, and $189,930 in 2003, 2002 and 2001, respectively.

51

---



American Science and Engineering, Inc. and Subsidiaries  Unaudited Quarterly Consolidated Financial Data  For the years ended March 31, 2003 and March 31, 2002

|                                |          | 2003 by quarter |        | 2002 by quarter |  
|------------------------------- | -------- | --------------- | ------ | --------------- | -
|
|
|Net sales and contract revenues |          | $               | 14,918 |                 | $
|Gross profit                    |          |                 | 3,490  |                 |  
|Operating income (loss)         |          |                 | (1,548 | )               |  
|Net income (loss)               |          |                 | (909   | )               |  
|Net income per share            |          |                 |        |                 |  
|                                | Basic   |                 | $      | (0.15           | )
|                                | Diluted |                 | $      | (0.15           | )

---

52

---

Report of Independent Auditors on  Financial Statement Schedule

To
the Board of Directors
of American Science and Engineering, Inc.:

Our
audit of the March 31, 2003 consolidated financial statements referred to in our report dated May 21, 2003 appearing in this Annual Report on
Form 10-K of American Science and Engineering, Inc. also included an audit of the March 31, 2003 financial statement schedule listed in the index to consolidated
financial statements and schedule of this Form 10-K. In our opinion, this 2003 financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements.

/s/
PricewaterhouseCoopers LLP

Boston,
MA
May 21, 2003

53

---

SCHEDULE II

AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the years ended March 31, 2003, March 31, 2002, and March 31, 2001

DescriptionAllowance for Doubtful Accounts

|     |  | Balance at
Beginning of
Year |     | Charged to
Costs and
Expenses |   | Deductions
from
Reserves |  | Balance
At End
of Year
|---- |  | ---------------------------- | --- | ----------------------------- | - | ------------------------ |  | ----------------------
|
|2003 |  | $                            | 111 |                               | $ | 138                      |  | $                     
|2002 |  | $                            | 134 |                               | $ |                         |  | $                     
|2001 |  | $                            | 250 |                               | $ | 110                      |  | $                     

DescriptionAllowances for Unbilled Cost and Fees

|     |  | Balance at
Beginning of
Year |     | Charged to
Costs and
Expenses |   | Deductions
from
Reserves |  | Balance
At End
of Year
|---- |  | ---------------------------- | --- | ----------------------------- | - | ------------------------ |  | ----------------------
|
|2003 |  | $                            | 437 |                               | $ |                         |  | $                     
|2002 |  | $                            | 437 |                               | $ |                         |  | $                     
|2001 |  | $                            | 447 |                               | $ |                         |  | $                     

54

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | AMERICAN SCIENCE AND ENGINEERING, INC.
|-------------------- |  | --------------------------------------
|DATED: June 30, 2003 |  | By:                                   
|                     |  |                                       

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the
dates indicated:

|Signature                                 |  | Title                                                                                    |  | Date         
|----------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | -------------
|                                          |  |                                                                                          |  |              
|/s/ROGER P. HEINISCHRoger P. Heinisch     |  | Director and Interim President and Chief Executive Officer (Principal Executive Officer) |  | June 30, 2003
|/s/PAUL THEODORE OWENSPaul Theodore Owens |  | Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)      |  | June 30, 2003
|/s/HAMILTON W. HELMERHamilton W. Helmer   |  | Director                                                                                 |  | June 30, 2003
|/s/DONALD J. MCCARRENDonald J. McCarren   |  | Director                                                                                 |  | June 30, 2003
|/s/ERNEST J. MONIZErnest J. Moniz         |  | Director                                                                                 |  | June 30, 2003
|/s/WILLIAM E. ODOMWilliam E. Odom         |  | Chairman of the Board, Director                                                          |  | June 30, 2003
|/s/RALPH S. SHERIDANRalph S. Sheridan     |  | Director                                                                                 |  | June 30, 2003
|/s/CARL W. VOGTCarl W. Vogt               |  | Director                                                                                 |  | June 30, 2003

55

---



CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER  Section 302 Certification

I, Roger P. Heinisch, certify that:

|Date: June 30, 2003 |  | /s/ROGER P. HEINISCHRoger P. Heinisch Interim President and Chief
Executive Officer |  | 
|------------------- |  | ----------------------------------------------------------------------------------- |  | 

56

---

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER  Section 302 Certification

I, Paul Theodore Owens, certify that:

|Date: June 30, 2003 |  | /s/PAUL THEODORE OWENSPaul Theodore Owens Vice-President, Treasurer and
Chief Financial Officer |  | 
|------------------- |  | ----------------------------------------------------------------------------------------------- |  | 

57

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EXHIBIT INDEX

|Exhibit
Number |  | Description of Exhibit (and Statement
of Incorporation by Reference, If Applicable)                                                                                                                                             |  | Page Number
(If Filed)
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------
|(3)(a)         |  | Restated Articles of Organization of the Company (filed as an Exhibit to Company's Annual Report on Form 10-K for the year ended September 30, 1967, and incorporated herein by reference)                                      |  |                       
|(3)(b)         |  | 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)(c)         |  | 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)(d)         |  | By-laws of Company, as amended (filed as Exhibit 2(a)(iii) to Company's Registration Statement on Form S-7, No. 2-56452, filed May 25, 1976, and incorporated herein by reference)                                              |  |                       
|(4)            |  | Shareholders Rights Plan (filed as Exhibit to the Company's filing on Form dated , 1992 and incorporated herein by references)                                                                                                  |  |                       
|(10)(a)(iv)    |  | Amendment to Deferred Compensation Plans for Ismael Escobar and Herman Feshbach (filed as Exhibit 7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1980, and incorporated herein
by reference) |  |                       
|(10)(a)(v)     |  | Deferred Compensation Plan for Marie Spaulding (filed as Exhibit (10)(a)(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference)                                |  |                       
|(10)(b)(ix)    |  | 1996 Stock Plan For Non-Employee Directors (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-09257, filed on July 31, 1996, and incorporated herein by
reference)                          |  |                       
|(10)(b)(x)     |  | Executive Equity Incentive Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-27929, filed on May 28, 1997 and incorporated herein by reference)                                       |  |                       
|(10)(b)(xi)    |  | Reload Option Plan (filed as Exhibit (10)(b)(xi) to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference)                                                            |  |                       
|(10)(b)(xii)   |  | 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)(b)(xiii)  |  | 1998 Non-Qualified Stock Option Plan (filed as Exhibit (10) (b) (xiii) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference)                                               |  |                       
|(10)(b)(xv)*   |  | Employment Agreement between the Company and Dr. Joseph Callerame dated May 6, 1998, (filed as Exhibit (10) (b) (xv) to the Annual Report on Form 10-K for the year ended March 31, 1998, and
incorporated herein by reference) |  |                       
|               |  |                                                                                                                                                                                                                                 |  |                       

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|(10)(c)(i)     |  | 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)(c)(ii)    |  | Amendment to Lease of Billerica property (filed as to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference)                                                               |  | 
|(10)(c)(iii)   |  | Lease of 33 Manning Road, Billerica, MA                                                                                                                                                                                              |  | 
|(10)(c)(iv)    |  | 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)(c)(v)     |  | 2000 Combination Stock Option Plan (filed as Exhibit 99 to the Company's Registration Statement, filed as Exhibit A to the Definitive Proxy Statement on Schedule 14A filed on August 18, 2000 and
incorporated herein by reference) |  | 
|(10)(c)(vi)    |  | 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)(c)(vii)*  |  | Employment Agreement between the Company and Edwin L. Lewis dated February 3, 2000.                                                                                                                                                  |  | 
|(10)(c)(viii)  |  | Sub-lease from the Company of 30 Manning Road, Billerica, Massachusetts (filed as Exhibit (10)(c)(viii) to the Annual Report on Form 10-K for the year ended March 31, 2000, and incorporated herein by
reference).                  |  | 
|(10)(c)(ix)*   |  | Employment Agreement between the Company and Richard Mastronardi dated August, 2000                                                                                                                                                  |  | 
|(10)(c)(x)*    |  | Employment Agreement between the Company and Andrew R. Morrison dated May 30, 2001                                                                                                                                                   |  | 
|(10)(c)(xi)*   |  | Employment Agreement between the Company and Reed Clark dated July 23, 2001                                                                                                                                                          |  | 
|(10)(c)(xii)*  |  | Employment Agreement between the Company and Ralph Foose dated February 11, 2002                                                                                                                                                     |  | 
|(10)(c)(xiii)* |  | Employment Agreement between the Company and Ralph Sheridan dated July 11, 2002                                                                                                                                                      |  | 
|(10)(c)(xiv)*  |  | Employment Agreement between the Company and Paul Theodore Owens dated December 12, 2002                                                                                                                                             |  | 
|(10)(d)(i)     |  | Export Credit and Security Agreement between American Science & Engineering and HSBC Bank USA                                                                                                                                        |  | 
|(10)(d)(ii)    |  | Revolving Loan and Security Agreement between American Science & Engineering, Inc. and HSBC Bank USA                                                                                                                                 |  | 
|(10)(d)(iii)   |  | Amendment No. 1 to the Export Credit and Security Agreement between American Science and Engineering and HSBC Bank USA dated February 14, 2002                                                                                       |  | 
|               |  |                                                                                                                                                                                                                                      |  | 

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|(10)(d)(iv) |  | Amendment No. 1 to the Revolving Loan and Security Agreement between American Science and Engineering and HSBC Bank USA dated February 14, 2002                                                                                       |  | 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|10(d)(v)    |  | Amendment No. 2 to the Revolving Loan and Security Agreement between American Science and Engineering, Inc. and HSBC bank dated November 28, 2002                                                                                     |  | 
|10(d)(vi)   |  | Amendment No. 2 to the Export Credit and Security Agreement between American Science and Engineering, Inc. and HSBC bank dated November 28, 2002                                                                                      |  | 
|10(d)(vii)  |  | Amendment No. 3 to the Export Credit and Security Agreement between American Science and Engineering, Inc. and HSBC bank dated February 28, 2003                                                                                      |  | 
|10(d)(viii) |  | Amendment No. 3 to the Revolving Loan and Security Agreement between American Science and Engineering, Inc. and HSBC bank dated February 28, 2003                                                                                     |  | 
|(22)        |  | Identification of Company's subsidiary, AS&E Radiography, Inc., incorporated in Massachusetts (filed as Exhibit (22) to Company's Annual Report on Form 10-K for the year ended March 31, 1988, and
incorporated herein by reference) |  | 
|(22.1)      |  | Identification of Company's subsidiary, AS&E Global, Inc., incorporated in Massachusetts                                                                                                                                              |  | 
|(23.1)      |  | Consent of Independent Accountants                                                                                                                                                                                                    |  | 
|(23.2)      |  | Notice Regarding Arthur Andersen LLP                                                                                                                                                                                                  |  | 
|(99-1)      |  | 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                                                                                     |  | 
|(99-2)      |  | 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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The
Company's principal executive offices are located at 829 Middlesex Turnpike, Billerica, MA 01821; telephone number 978-262-8700; corporate web site
www.as-e.com. We make 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 these reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically
file such material with, or furnish it to the Securities and Exchange Commission.

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