**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

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**FORM10-K**
| **x**      | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES   EXCHANGE ACT OF 1934**   |
|------------|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                    |
| ** ** | ** ** | **For the  fiscal year ended March 31, 2007**                                                 |
| ** ** | ** ** | ** **                                                                                    |
| **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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**AMERICANSCIENCE AND ENGINEERING, INC.** (Exact name of registrant as specifiedin its charter)

| **Massachusetts**                         |   | **04-2240991**                     |
|-------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of          |   | (IRS Employer  Identification No.) |
| incorporation or  organization)           |   |                               |
|                                      |   |                               |
| **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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Securitiesregistered pursuant to Section 12(b) of the Act:

| **Title of each class**                |   | **Name of  each exchange on which registered** |
|----------------------------------------|--------|------------------------------------------------|
| Common Stock ($.662¤3  par value) |   | NASDAQ Stock  Exchange                         |

 

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

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

Indicate by checkmark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act: Yes  o  No  x       

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

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.    o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer (as defined in Rule12b-2 of the Securities Exchange Act of 1934)

Large accelerated filer   o                           Acceleratedfiler   x                           Non-acceleratedfiler   o

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

The aggregate market value of voting stock held by non-affiliates of theregistrant, computed using the closing sale price of common stock of $48.52 onSeptember 30, 2006, was $438,129,000.

9,190,821 shares of Registrant’s common stock were outstanding on May30, 2007.

**DOCUMENTS INCORPORATED BY REFERENCE**

**The registrant intends to file a definitive Proxy Statementpursuant to Regulation 14A within 120 days of the end of the fiscal year endedMarch 31, 2007. Portions of such Proxy Statement are incorporated by referencein Part III.**

 

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**AMERICANSCIENCE AND ENGINEERING, INC.**

**FORM 10-K**

**FOR THEPERIOD ENDED MARCH 31, 2007**

**TABLE OFCONTENTS**
|                | ** ** | ** **                                                                                                           | ** ** | **Page   Number** |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| ** **     |       |                                                                                                                 |
| **PART I**     |
| ** **     |
| ITEM  1.       |       | Business                                                                                                             |       | 3                 |
| ITEM  1A.      |       | Risk  Factors                                                                                                        |       | 8                 |
| ITEM 1B.       |       | Unresolved Staff  Comments                                                                                           |       | 13                |
| ITEM  2.       |       | Properties                                                                                                           |       | 13                |
| ITEM 3.        |       | Legal Proceedings                                                                                                    |       | 14                |
| ITEM 4.        |       | Submission of  Matters to a Vote of Security Holders                                                                 |       | 14                |
|           |       |                                                                                                                 |       |              |
| **PART II**    |
| ** **     |       |                                                                                                                 |       |              |
| ITEM 5.        |       | Market for the  Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities |       | 14                |
| ITEM 6.        |       | Selected Financial  Data                                                                                             |       | 15                |
| ITEM 7.        |       | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                          |       | 15                |
| ITEM 7A.       |       | Quantitative and  Qualitative Disclosures about Market Risk                                                          |       | 21                |
| ITEM 8.        |       | Financial Statements  and Supplementary Data                                                                         |       | 21                |
| ITEM 9.        |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                |       | 21                |
| ITEM 9A.       |       | Controls and  Procedures                                                                                             |       | 22                |
| ITEM 9B.       |       | Other Information                                                                                                    |       | 22                |
|           |       |                                                                                                                 |       |              |
| **PART III**   |
| ** **     |       |                                                                                                                 |       |              |
| ITEM 10.       |       | Directors and  Executive Officers of the Company                                                                     |       | 23                |
| ITEM 11.       |       | Executive Compensation                                                                                               |       | 23                |
| ITEM 12.       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     |       | 23                |
| ITEM 13.       |       | Certain Relationships  and Related Transactions                                                                      |       | 23                |
| ITEM 14.       |       | Principal  Accountant Fees and Services                                                                              |       | 23                |
|           |       |                                                                                                                 |       |              |
| **PART IV**    |
| ** **     |       |                                                                                                                 |       |              |
| ITEM 15.       |       | Exhibits and  Financial Statement Schedules                                                                          |       | 23                |
| SIGNATURES     |       |                                                                                                                 |       | 45                |
| EXHIBIT  INDEX |       |                                                                                                                 |       | 46                |

 

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**CAUTIONARY STATEMENT**

Someof the statements contained in this report and in the documents incorporated byreference are “forward-looking” statements, as defined in the PrivateSecurities Litigation Reform Act of 1995 or by the Securities and ExchangeCommission in its rules, regulations, and releases, about, among other things,our business and prospects. Our future results may differ materially from ourpast results and from those projected in the forward-looking statements due tovarious uncertainties and risks including but not limited to those set forthbelow under ITEM 1A.  RISK FACTORS,one-time events and other important factors disclosed previously and from timeto time in our other filings with the SEC. We disclaim any obligation to updateany forward-looking statements contained herein after the date of this AnnualReport.

**PART I**

**ITEM 1. BUSINESS**

AmericanScience and Engineering, Inc., a Massachusetts corporation formed in 1958(together with its subsidiary, the “Company” or “AS&E”), develops, manufactures,markets, and sells X-ray inspection and other inspection solutions for homelandsecurity and other targeted markets. AS&E provides maintenance, warranty, research, engineering, andtraining services related to these solutions.

TheCompany manufactures a range of sophisticated X-ray inspection products thatcan be used to inspect parcels, baggage, vehicles, pallets, cargo containers,and people.  The Company sells itsproducts in the U.S. and throughout the world to a variety of customers,including:

·                  Authoritiesresponsible for port and border security

·                  Aviationsecurity agencies

·                  Militaryorganizations; and

·                  Highthreat commercial and government facilities

AS&E’s products areused by these customers to help combat terrorism, trade fraud, drug trafficking,weapons smuggling, and illegal immigration. Our products are also used for military force protection and generalfacility security.

Beginningwith the terrorist attacks on September 11, 2001, and continuing with theproliferation of global terrorism, homeland security and force protectionconcerns have become of paramount importance in the United States and aroundthe world. The Company believes that homeland defense, force protection andmilitary security initiatives will continue to provide new revenueopportunities, with additional growth in the seaports and borders, federal andmilitary facilities, and corporate security markets.

TheCompany’s objective is to distinguish itself from its competitors by offeringinnovative products which provide superior threat detection. To achieve this,AS&E incorporates a variety of X-ray imaging and image processingtechnologies into its products.  A numberof the Company’s products use our patented Z BackscatterTM technology.  Z Backscatter is a unique X-ray imagingtechnique that has distinct advantages for the detection of organic, or lowatomic number (Z) materials such as plastic explosives, composite weapons, andillegal drugs even when concealed by complex backgrounds.

**Technology**

TheCompany’s X-ray imaging products utilize several technologies includingtraditional transmission X-ray technology, our proprietary Z Backscattertechnology, Shaped Energy technology and Radioactive Threat Detection (RTD).

X-rayimaging devices contain these basic subsystems: X-ray sources, detectors, andsoftware.  The source generates an X-raybeam that is directed at the object to be scanned (baggage, container,etc.).  When the source X-rays encounterthe object, they are either absorbed by the object, pass directly through theobject, or scatter off of the object. Dense (high atomic number) materials tend to absorb X-rays.  Materials that are less dense (low atomicnumber) tend to scatter X-rays.  Thedetectors record the intensity of the transmitted or scattered X-rays.  Software is then used to interpret thesignals from the detectors and to construct and display X-ray images.

***Transmission X-ray Technology:*** Transmission images are created from X-raysthat pass through the object that is being examined.  Medical X-ray images are a type oftransmission X-ray.  In transmissionimaging, the detector measures the relative intensity of the X-rays that passdirectly through the object.  The degreeto which X-rays are transmitted through an object is dependant upon the size ofthe X-ray source and the composition and quantity of the material in the pathof the X-ray beam.  Low energy sourcesare used to scan smaller objects such as parcels and baggage, and high energysources are used for scanning large items such as trucks and cargocontainers.   Transmission X-ray imagesare useful for seeing “through” the object of interest.  A transmission image, however, represents anaggregate of all objects in the path on the beam and can therefore be difficultto interpret.

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***Z Backscatter Technology:***   Many of the Company’s X-ray systems utilizeAS&E’s patented Z Backscatter technology. The term “Backscatter” refers to those X-rays that *scatter* off of the object underexamination *back* toward the X-raysource.  Z Backscatter detectors capturethese scattered X-rays which are then used to create highly readable,photo-like images.

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

ZBackscatter images complement transmission images and several of the Company’sproducts employ both technologies.  Thecombination of backscatter and transmission images gives security officialsmore information about the contents of the baggage or container bydifferentiating dense materials, such as metals, from low-Z materials such asexplosives.  In addition, the two imagesenable an inspector to perform a quicker and more thorough examination of theobject in question.

***Other******Technologies:***   Two other technologies employed by AS&Eare Shaped Energy and Radioactive Threat Detection (RTD).  Shaped Energy technology is a specializedform of high energy transmission X-ray which is used in AS&E’s OmniViewproduct line. Radioactive Threat Detection (RTD) is a technology which is usedto find radioactive materials in vehicles.

AS&Ealso employs several other X-ray imaging and image processing technologieswhich are described below.

**Productsand Systems**

TheCompany’s products and services can be grouped into six different areasincluding CargoSearchTM Inspection Systems, Z Backscatter Systems, ParcelSearchTMInspection Systems, Personnel Inspection, Contract Research and Development,and Service and Support.

**CargoSearchTM Inspection Systems:**The CargoSearch family of systems includes non-intrusive inspection productswhich are primarily used for the screening of trucks, cars, cargo containers,pallets, and air cargo.  These systemsare used at locations including border crossings, seaports, military bases,railroad centers, airports, and cargo and transportation hubs. The CargoSearchsystems are designed to combat trade fraud, drug trafficking, weaponssmuggling, and terrorism. The CargoSearch family includes:

*OmniViewTM Gantry System*:  a multi-view, relocatable high-energy cargoand vehicle inspection system.  Thissystem combines 6 MeV high-energy transmission imaging and three Z BackscatterX-ray views for left, right and top-side imaging of cargo.  OmniView provides side and top-down views ofthe cargo in a relocatable configuration. OmniView utilizes AS&E’s patented Shaped EnergyTM technology topenetrate densely loaded cargo containers. Shaped Energy “shapes” the highenergy spectrum to filter out non-essential radiation, making the system safefor operators and staff.  High energy 6.0MeV transmission X-rays can penetrate 14 inches (35 cm) of steel or 8.5 feet(260 cm) of oil, yet doesn’t require heavy shielding, an exterior building, orstandoff zones.   The ZBackscatter images are ideal for the detection of organic or “low Z” materialsincluding explosives, drugs, alcohol, and tobacco that transmissionX-rays alone can miss. The System’smultiple Z Backscatter views of the cargo improve detection while facilitatinginterpretation of the X-ray image.  TheOmniView Gantry System’s scanning platform operates by moving on rails paststationary vehicles and cargo.  Thesystem is bi-directional allowing for a throughput of approximately 25 trucksper hour.  OmniView Gantry is ideal forports, borders, and high-threat military facilities.

*Z**® PortalTM*:  amulti-view, drive-through inspection system capable of scanning cars, vans,trucks, and their cargoes for threats and contraband.  The relocatable screening system can beconfigured with one, two or three Z Backscatter X-ray detectors, allowing for left,right and/or top-side imaging of the vehicle under examination.

*PalletSearchTM*:  a conveyorized X-ray inspection systemdesigned to perform non-intrusive inspection of mixed cargo shipped on largepallets or in air cargo containers.  Thesystem is especially useful for inspecting large, irregularly shaped containersand cargo.

**Z Backscatter Systems:**  Z Backscatter Systems include imaging systemsthat use Z Backscatter imaging only.

*Z Backscatter VanTM (ZBV*): a mobile X-ray screening systembuilt into a commercially available delivery van.  It utilizes AS&E’s patented Z BackscatterX-ray technology to produce photo-like images of the contents of a vehicle orcargo container, highlighting organic materials such as plastic explosives orother anomalies. With one-sided, backscatter-only imaging, security officialscan use ZBV for screening vehicles, sea containers, and other cargo forterrorist threats, trade fraud, and contraband, simply by driving past theobjects.   The ZBV can be equipped withRadioactive Threat Detection (RTD) capability. With RTD, the ZBV can produce Z Backscatter images for general screeningwhile simultaneously scanning the object for the presence of radioactivematerial.

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*Ruggedized Detection Imaging Module (RDIM):  *a relocatable Z Backscatter imagingsystem for screening vehicles at a security checkpoint or border crossing.  Security officials can screen vehicles andvehicle-borne cargo containers for terrorist threats and contraband by directingvehicles to drive past the system.  RDIMemploys Z Backscatter technology which produces photo-like images of thecontents of a vehicle, providing manifest verification information andhighlighting organic materials, such as explosives or drugs.

**ParcelSearchTM Inspection Systems:**ParcelSearch systems are designed for the non-intrusive X-ray scanning ofparcels, baggage, and mail. They are primarily located in governmentfacilities, airports, commercial office buildings, high-security federalfacilities and convention centers. The ParcelSearch family includes:

*Gemini*:  Gemini isa parcel and baggage inspection system which combines AS&E’s Z Backscattertechnology with Dual-energy transmission X-ray to provide enhanced detectionfor a wide range of threats.  Dual-energytransmission is best suited for the detection of “traditional” threats such asguns and knives, and for identifying wires and other components of IEDs. Italso provides some organic and metallic discrimination in unclutteredenvironments.  Z Backscatter imagingprovides enhanced detection of organic materials such as explosives andnarcotics, which may be missed by transmission-only systems in clutteredbaggage.  In addition, the complementaryphoto-like Z Backscatter image makes it easier for security officers tointerpret images, thus reducing analysis time and minimizing operator fatigue.

*Model 101VANTM*: a self-contained conveyor-basedparcel inspection system housed in a standard van; designed and built to therigorous specifications of U.S. Customs and Border Protection.

*Models 101ZTM, 101ZZTM, and 101XLTM*:**conveyor-basedsystems allowing rapid inspection of high volumes of luggage and otherpackages.

**Personnel Screening: **Personnel screening is acrucial part of any threat detection effort. Today, threats can take the smallest of forms and are often easilyhidden on a person.  With the advent ofsuicide bombings, personnel screening has taken on an even more importantrole.  Personnel screening is also importantin the effort to intercept prohibited substances, such as drugs and alcohol.

*SmartCheckTM*:  a personnel screening system for theeffective screening for contraband and threats hidden under a person’sclothing.  SmartCheck simultaneouslydetects both metallic and non-metallic objects, such as guns and knives,plastic explosives, liquid explosives, composite weapons, drugs and otherhidden threats and contraband.  Its ZBackscatter image gives the operator an easy-to-read display of where thethreat or contraband is hidden, thus eliminating the need for intrusive andtime-consuming pat-downs and strip searches. SmartCheck employs proprietary advanced image processing algorithms toenhance privacy, while maintaining a high level of threat detection.

**Contract Research & Development****:**  AS&E engages ina variety of contract research and development (CRAD) programs, mostly foragencies of the US government.  AS&Epursues CRAD opportunities which it believes provide avenues for advancing ourcore technologies or developing product offerings for strategic customers ormarkets.  One such important program isthe CAARS (Cargo Advanced Radiography System) program for DHS’ Domestic NuclearDetection Office (DNDO).  CAARS is aprogram under which AS&E is developing advanced detection technology forinspecting cargo containers for nuclear materials.

**Service and Support: **AS&E’s Field Service Engineers(FSEs) provide support services on most of AS&E’s X-ray inspection systemsworldwide. FSEs are located at AS&E offices in Asia, Europe, the MiddleEast and North America. In addition, Technical Support is provided at theCompany’s headquarters in Billerica, Massachusetts. AS&E providescomprehensive, cost-effective spare parts solutions customized for eachsystem.  The Company maintains aninventory of field-replaceable components in order to meet customer needs forspare parts.

AS&E provides comprehensive technical training onall X-ray inspection systems. Our instructors specialize in current threatdetection techniques and employ both classroom theory and hands-on training tohelp clients become expert users of AS&E equipment. Our technical training informs customersabout detection technologies and best practices through demonstrations andfield activities that simulate real-life threat and contraband encounters.  Technical training is included with eachsystem sale and additional training for image analysis, service and maintenancetraining, and other customized training courses are provided aftermarket tointerested customers.

**IntellectualProperty**

TheCompany relies on a combination of patent, copyright, trademark, contract andtrade secret laws to establish and protect its proprietary rights in itstechnology. The Company has patents either issued and/or pending in the UnitedStates, Germany, Japan, the United Kingdom, China, Austria, France, Ireland,Italy, Switzerland, Australia, Canada, Hong Kong, India, Israel, The 

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Republic of Korea, NewZealand, Mexico, Norway, The Russian Federation, Ukraine, Singapore, UnitedArab Emirates, Malaysia, Thailand and Egypt, and under the Gulf CooperationCouncil and the Patent Cooperation Treaty.

Ingeneral, the Company pursues a policy of obtaining patent protection both inthe United States and in selected foreign countries for subject matter weconsider patentable and important to our business strategy. The Company has 54 unexpiredpatents issued by, and 63 patent applications pending with, the U.S. Patent andTrademark Office, as well as with the respective patent offices of the foreigncountries noted above. Over half of our issued patents have been issued in thelast five years.

Generally,patents issued in the United States are effective for the longer of 17 yearsfrom the date of issue or 20 years from the earliest effective filing date ofthe corresponding patent application if filed prior to June 8, 1995. Theduration of foreign patents varies in accordance with applicable local law.While the duration of our patents varies, we believe that the duration of ourpatents is adequate relative to the expected lives of our products.

TheCompany believes that its patents, proprietary technology, know-how, andtrademarks provide substantial protection for the Company’s competitiveposition and the Company intends to aggressively protect its intellectualproperty assets, by litigation or other means, as appropriate. Nevertheless,there can be no assurances that the steps taken by the Company in this regardwill be adequate to prevent misappropriation or infringement of its technologyor that the Company’s competitors will not independently develop technologiesthat are substantially equivalent or superior to the Company’s technology.Effective protection of intellectual property rights may be limited orunavailable in certain foreign countries. See Item 3: Legal Proceedings below.

**Sales andMarketing**

TheCompany’s X-ray products are marketed to private and governmental organizationsthrough a sales force that contacts potential customers and responds to publictenders and other expressions of interest. This sales force includes Companypersonnel based in the United States and abroad, as well as independentrepresentatives under contracts to sell in foreign countries.

**Customers**

TheCompany has a customer base consisting of government and commercial clientsfrom both the United States and abroad. Domestically, the Company’s primary clientbase is comprised of agencies of the U.S. Government. Approximately 70%, 77%,and 75% of the Company’s sales in fiscal 2007, 2006 and 2005, respectively,were derived from either (i) contracting directly with the U.S. Government, or(ii) contracting with contractors working directly with the U.S. Government.Certain of the Company’s contracts with the U.S. Government provide the U.S.Government with the standard unilateral right to terminate these contracts forconvenience. To date, the Company has not experienced any material losses as aresult of this contractual provision. The Company is heavily dependent uponsales to agencies of the U.S. Government and reductions or delays inprocurement of the Company’s systems by these agencies may have a materialadverse effect on the Company.

Internationalsales, primarily to foreign governments, accounted for approximately 27%, 14%and 15%, of the Company’s total sales in fiscal 2007, 2006 and 2005,respectively, and continue to be a high priority for the Company as part of itslong-term growth strategy. International sales entail longer sales cycles andproject financing requirements; however the Company continues to focus on thesesales as a means of broadening its customer base and reducing its dependency onsales to the U.S. Government. The Company manages its overseas risk in a numberof ways, including actively increasing the number of opportunities it ispursuing at any one time, working with international funding sources to helpcustomers finance and secure funding of these projects, and obtainingdownpayments and letters of credit to secure its international receivables. Themajority of international contracts are bid in U.S. dollars. For thosecontracts that are bid in other currencies, the Company considers the need toengage in hedging contracts to control foreign exchange risk. There were nohedging activities in fiscal 2007, 2006 or 2005.

In fiscal 2007, the Company had sales to two majorcustomers, both agencies of the U.S. Government, which accounted for 31% and15% of total sales.  In fiscal 2006,these same customers accounted for 26% and 30% of total sales. In fiscal 2005,the Company had sales to three major customers, two of which were agencies ofthe U.S. Government and the third a subcontractor to a U.S. Government agency,which accounted for 17%, 13%, and 13% of total sales.

**Competition**

TheCompany has many competitors in the homeland security X-ray detection market,including several large and well-established manufacturers of security equipmentwith financial and other resources greater than those of the Company. CertainX-ray security system customers select such systems based largely on price.Other customers, including some agencies of the U.S. Government and certainusers in countries with high levels of concern over security, tend to selectsystems based largely on detection capability. Many of the Company’s systems offer premium performance and have in somecases been priced higher than many competing systems. The Company believes thatits patented and proprietary technology give it a strong competitive positionin the sale of security systems to customers concerned with performance anddetection. The Company also believes that its strategy 

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of concentrating onproducts with unique features, including Z Backscatter and Shaped Energy,and/or competitive pricing will give it a strong position to increase its salesof X-ray systems. However, a number of companies have developed products thatcompete with the Company’s X-ray inspection products. (See “Forward-LookingInformation and Factors Affecting Future Performance”)

**ISO 9001Certification**

InAugust 2006, the Company’s Quality Management System  was recertified under the ISO 9001:2000Standard of the International Organization for Standardization which it hasbeen registered under since 2003.  ISO9001 is an internationally recognized quality management and assurancestandard.

Inqualifying, the Company met or exceeded the standards for establishing aquality management system for preventing non-conformity at every level of theproduct life cycle, from customer order, through development and production, toinstallation and support.

TheCompany believes that demonstrating continuous quality improvement is vital forbuilding customer satisfaction and making business processes more efficient inorder to increase its competitive edge.

**ComponentAvailability**

TheCompany has not experienced during the last year, and does not currentlyanticipate, any product delivery delays due to component shortages. Themajority of procured components are from U.S. sources. However, the Company isdependent upon certain overseas providers of important components. No rare orexotic materials are utilized. Following the events of September 11, 2001,demand for X-ray system subcomponents increased significantly across thesecurity industry. In response, the Company took steps to mitigate sourcingrisks by working closely with its vendors to secure future componentavailability. In some cases, the Company has chosen to stock certain inventorycomponents to assure future availability. These efforts also includedidentifying and qualifying second-source providers for a number of criticalcomponents of its product lines.

**RegulatoryCompliance**

AS&Ecomplies with applicable federal regulations under Title 21 CFR Subchapter J -Radiological Health.  All AS&Ecabinet X-ray products comply with all applicable U.S. Government radiationsafety performance standards including 21 CFR 1020.40. All personnel inspectionsystems of AS&E comply with the voluntary consensus radiation safetystandards adopted by the American National Standards Institute ANSIN43.17-2002.

**Researchand Development**

TheCompany spent approximately $7,184,000 of its own funds for research anddevelopment during fiscal 2007, compared to $9,601,000 and $5,727,000 in fiscal2006 and 2005, respectively. The fiscal 2007 research and development effortswere focused on design modifications and enhancements to existing products, thedevelopment of new applications and the development of new products.

Inaddition, the Company conducted government-sponsored research primarily focusedon advances in X-ray systems, image analysis and integrated system developmentfor niche security inspection problems. The Company recognized revenues of$6,597,000, $2,804,000, and $2,534,000 in fiscal 2007, 2006, and 2005,respectively for these efforts. A significant amount of the Company’sgovernment sponsored research and development contracts provide for a fixed feeor a reimbursement of allowable costs plus a fixed fee. The Company’s contractsin these areas are obtained by submitting research and development proposals tovarious organizations, sometimes in response to requests for such proposals.

**Personnel**

Asof March 31, 2007 the Company had 299 employees as compared to 288 employees atMarch 31, 2006.   It is the Company’spolicy to have employees sign nondisclosure agreements as a condition ofemployment. None of the Company’s employees are represented by labor unions.

**SalesBacklog**

TheCompany’s firm (under signed contracts) sales backlog was $105,634,000,$68,840,000, and $72,098,000 at March 31, 2007, March 31, 2006, and March 31,2005, respectively.

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Certainof the Company’s contracts with the U.S. Government contain clauses permittingthe government to terminate the contract for convenience upon certain terms andconditions, including partial payment to the Company for work performed. Totalcontracts with U.S Government agencies and subcontractors in the backlog were$58,833,000, $30,058,000, and $48,127,000, at March 31, 2007, 2006 and 2005,respectively. It is estimated that approximately 86% of the 2007 backlog willbe filled within the fiscal year ending March 31, 2008.

**FinancialInformation about Foreign and Domestic Operations and Export Sales**

Mostexport sales are transacted in U.S. dollars, and many are either secured byirrevocable letters of credit or paid in advance. The following table shows thebreakdown of net sales and contract revenues to international and domestic customersand the major regions of international activity based upon customer’s countryof domicile. All assets are maintained within the United States with theexception of small amounts of spares inventory and cash accounts maintained atforeign locations (approximately 1% of the Company’s assets).

***NetSales and Contract Revenues***

|                                                    | ** ** | **Fiscal Year** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| **(Dollars in  thousands)**                        | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                           |       | $                    | 111,335    |   | 73 | % | $ | 141,491 |   | 86 | % | $ | 75,376 |   | 85 | % |
| International                                      |       | 41,851               |       | 27 | % | 22,113 |   | 14 | % | 12,938 |   | 15 | % |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales and Contract  Revenues                   |       | $                    | 153,186    |   | 100 | % | $ | 163,604 |   | 100 | % | $ | 88,314 |   | 100 | % |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Percent of  International Revenue by Major Region: |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Middle East & Africa                           |       | 65.9                 | %          |   |   | 50.4 | % |   |   | 15.9 | % |   |   |   |
| Pacific Rim                                        |       | 20.3                 | %          |   |   | 36.4 | % |   |   | 62.6 | % |   |   |   |
| Europe                                             |       | 13.8                 | %          |   |   | 11.4 | % |   |   | 21.5 | % |   |   |   |
| All Other                                          |       | —               | %          |   |   | 1.8 | % |   |   | — | % |   |   |   |
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**AvailableInformation**

TheCompany’s principal executive offices are located at 829 Middlesex Turnpike,Billerica, MA 01821; telephone number 978-262-8700; corporate websitewww.as-e.com. We make available, free of charge through our website, our annualForm 10-K, current reports on Form 10-Q and Form 8-K, and amendments to thesereports filed or furnished pursuant to Section 13(a) of the Securities ExchangeAct of 1934 as soon as practicable. In addition, our reports, proxy andinformation statements and other information filed with the SEC are availableat the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington,DC 20549 (1-800-SEC-0330), and are also available from the SEC’s website atwww.sec.gov.

**ITEM 1A. RISK FACTORS**

***TheCompany’s reliance on a small number of customers for a large portion of itsrevenues could harm its business and prospects.***

TheCompany’s business is heavily dependent on sales to a small number ofcustomers, which include agencies of the United States government. Duringfiscal 2007, two customers accounted for 46% of the Company’s total revenues.During fiscal 2006, two customers accounted for 56% of the Company’s totalrevenues and during fiscal 2005, three customers accounted for 43% of theCompany’s total revenues. Certain of the Company’s government contracts may beterminated at the government’s discretion. The termination of the Company’srelationship with one or more of its significant customers or the reduction ordelay of orders of its systems by these customers would substantially reducethe Company’s revenues, and its business and prospects may be harmed.

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

TheCompany’s revenues to international customers, including foreign governments,accounted for approximately 27%, 14% and 15% of its net revenues for the fiscalyears ended March 31, 2007, March 31, 2006 and March 31, 2005, respectively,and a significant number of domestic customer orders require shipments to, andservices provided in, overseas locations. In addition, the Company transactsbusiness internationally with a number of its key suppliers. As a result of theCompany’s worldwide business operations, it is subject to various risks,including:

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·    international regulatory requirements andpolicy changes;

·    lengthy sales cycles;

·    longer payment cycles by foreign customers;

·    difficulties in inventory management,accounts receivable collection and the management of distributors orrepresentatives;

·    difficulties in staffing and managingforeign operations;

·    geopolitical instability;

·    political and economic changes anddisruptions;

·    favoritism towards local suppliers;

·    governmental currency controls;

·    interruption to transportation flow fordelivery of parts to us and finished goods to our customers;

·    currency exchange rate fluctuations; and

·    tariff regulations.

Althoughthe Company’s international sales have been denominated primarily in U.S.dollars, changes in currency exchange rates that increase the relative value ofthe U.S. dollar may make it more difficult for the Company to compete withforeign manufacturers on price or otherwise have a material adverse effect onits sales and operating results.

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

Asubstantial portion of the Company’s sales depends upon the decision ofgovernmental agencies to upgrade or expand security at border crossinginspection sites, existing airports, seaports and other facilities.Accordingly, a portion of the Company’s product sales is subject to delaysassociated with the lengthy approval processes that often accompany suchcapital expenditures. During these approval periods, the Company expendssignificant financial and managerial resources in anticipation of future ordersthat may not occur. If the Company fails to receive an order after expendingthese resources, it may be unable to generate sufficient revenue to recover thecosts incurred and its business and prospects may be harmed.

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

TheCompany’s largest customers are government agencies and demand for its productsis dependent upon national priorities and governmental initiatives. Thesepriorities and initiatives are subject to change from time to time in responseto the economic and political environment. The Company is also exposed to theUnited States budget approval and appropriation cycle, which may be subject tosignificant and unpredictable delays. If demand for the Company’s products isreduced because of a change in economic or political conditions, or if thereare delays in receiving governmental approvals and appropriations, sales of theCompany’s products may be adversely affected, and its business and prospectsmay be harmed.

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

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

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

TheCompany relies on only a limited number of suppliers for some key componentsfor its products. The Company’s reliance on limited supply sources reduces itscontrol over timely delivery, price increases, reliability, and quality ofcritical components. Obtaining alternative sources of supply of these keycomponents could involve significant delays and other costs, and may not be 

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available to the Companyon reasonable terms, if at all. If the Company changes any of its suppliers,the potential new supplier would be required to go through a qualificationprocess, creating potential delays or reductions in product shipments. Thefailure of any supplier to provide quality and timely components at anacceptable price, or an interruption of supplies from such a supplier couldresult in lost or deferred sales, which would harm the Company’s business andprospects.

***Fluctuationsin the Company’s quarterly operating results may cause its stock price tofluctuate.***

Giventhe nature of the markets in which the Company participates, it cannot reliablypredict future revenue and profitability. A high proportion of the Company’scosts are fixed, due in part to its significant sales, research and development,and manufacturing costs. As a result of its fixed costs, small declines inrevenue could disproportionately affect the Company’s operating results andstock price in a quarter. Factors that may affect the Company’s quarterlyoperating results and the market price of its common stock include:

·    demand for and market acceptance of itsX-ray inspection systems;

·    lengthy sales cycles and the effect of largeorders;

·    changes in political agendas or nationalpriorities;

·    adverse changes in the level of economicactivity in regions in which the Company does business;

·    political unrest in the regions where theCompany transacts business;

·    adverse changes in industries on which theCompany is particularly dependent;

·    competitive pressures resulting in lowerselling prices for its products;

·    delays or problems in the introduction ofnew products;

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

·    variations in the Company’s product mix;

·    the timing and amount of the Company’sexpenditures in anticipation of future sales;

·    increased costs of raw materials orsupplies; and

·    changes in the volume or timing of productorders.

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

Ifthe Company’s X-ray inspection systems fail to detect the presence of bombs,explosives, weapons, contraband or other threats to personal safety, theCompany could be subject to product liability claims and negative publicity,which could result in increased costs, reduced sales, and a decline in themarket price of the Company’s common stock. There are many factors beyond theCompany’s control that could result in the failure of its products to detectthe presence of bombs, explosives, weapons, contraband or other threats topersonal safety. Examples of these factors include operator error or misuse ofor malfunction of its equipment. The failure of the Company’s systems to detectthe presence of these dangerous materials may lead to personal injury, loss oflife, and extensive property damage and may result in potential claims againstthe Company.

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

TheCompany’s product liability and umbrella liability insurance may beinsufficient to protect it from product liability claims. Moreover, there is arisk that product liability insurance will not continue to be available to theCompany at a reasonable cost, if at all. If liability claims exceed theCompany’s current or available insurance coverage, its business and prospectsmay be harmed. Regardless of the adequacy of the Company’s product liabilityinsurance protection, any significant claim may have an adverse affect on itsindustry and market reputation, leading to a substantial decrease in demand forits products and reduced revenues.

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

TheCompany generates funds for its research and development activities fromoperations, private sources and the government. The Company may be unable togenerate the funds necessary to support its research and development activitiesif it does not generate sufficient funds from operations, other potentialprivate sources, or the government. The Company may not successfully competewith other companies and research institutions for government funding and fundingfrom other private sources. Additionally, government-funding priorities aresubject to frequent changes. For example, in fiscal 2007, 2006 and 2005, theCompany recorded $6,597,000, $2,804,000 and $2,534,000, respectively, forgovernment-sponsored research and development. There is no guarantee that theCompany will receive funds for government-sponsored research in the future. Ifthe Company is unable to fund its research and development activities throughits operations or from outside sources, the Company may be unable to continueto innovate or bring its innovations to market on a timely or cost effectivebasis, or its innovations may be surpassed by other competitors or newtechnologies.

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

TheCompany’s continuing research and development program is designed to developnew products and to enhance and improve its current products. The Company plansto expend significant resources on the development of its new products. Thesuccessful development of its products and product enhancements is subject tonumerous risks, both known and unknown, including:

·    unanticipated delays;

·    access to capital;

·    budget overruns;

·    technical problems; and

·    other difficulties that could result in theabandonment or substantial change in the design, development andcommercialization of new products and product enhancements, including forexample, changes requested or required by governmental and regulatory agencies.

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

***The Company’s success depends upon itsability to adapt to rapid changes in technology and customer requirements.***

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

***The Company may not be able tocompete successfully.***

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

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

·     product performance, functionality andquality;

·     price;

·     the overall costs of the system;

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·     prior customer relationships;

·     technological capabilities of the product;

·     certification by government authorities;

·     local market presence; and

·     breadth of the sales and service organization.

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

***The Company’s business could be harmed ifit is unable to protect its intellectual property.***

The Company relies primarily on a combination oftrade secrets, patents, copyrights, trademarks, licensing arrangements andconfidentiality 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 limitedprotection. The Company’s patents could be invalidated or circumvented. Thelaws of some foreign countries in which the Company’s products are or may bedeveloped, manufactured or sold may not protect its products or intellectualproperty rights to the same extent as do the laws of the United States. Thismay make the possibility of piracy of the Company’s technology and productsmore likely. The Company cannot assure that the steps it has taken to protectits intellectual property will be adequate to prevent misappropriation of itstechnology. The Company’s business could be harmed if it is unable to protectits intellectual property.

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

Initiatingor defending against the enforcement of the Company’s intellectual propertyrights may result in significant, protracted, and costly litigation. TheCompany has previously been involved in various litigations involving itsintellectual property and has been successful in protecting such interests todate. The Company expects intellectual property disputes to be an ordinary partof its business for the foreseeable future. The Company may initiate claims orlitigation against third parties for infringement of its intellectual propertyrights, or to establish the validity of its property rights. There can be noassurance that the Company will prevail in any such action. Litigation by oragainst the Company could result in significant expense and divert the effortsof technical and management personnel, whether or not such litigation resultsin a favorable outcome for the Company. In the event of an adverse result inany such litigation, the Company could be required to pay substantial damages,cease the manufacture, use and sale of infringing products, expend significantresources to develop non-infringing technology, discontinue the use of certainprocesses, or obtain licenses for the infringing technology. If a license wererequired, the Company cannot assure that it would be able to obtain one oncommercially reasonable terms, if at all. The Company cannot assure that itwill be successful in developing non-infringing technology or that the cost ortime required to develop such technology will be reasonable.

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

Duringfiscal 2004, the CEO and certain other members of our senior management teamleft the Company. The Company subsequently recruited what it believes to be ahighly qualified team of executives to join the Company. The Company’s futuresuccess will continue to depend in large measure upon the continuedcontributions of its senior management team and other key personnel. If we loseprofessionals or are unable to attract new talent, we will not be able tomaintain our position in the market or grow our business.

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

Substantiallyall of the Company’s outstanding shares of common stock are freely tradablewithout restriction or further registration. Affiliates must sell all sharesthey own in compliance with the volume and other requirements of Rule 144,except for the holding period requirements. Nevertheless, sales of substantialamounts of common stock by the Company’s stockholders, or even the potentialfor such sales, may cause the market price of the Company’s common stock todecline and could impair the Company’s ability to raise capital through thesale of the Company’s equity securities.

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

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

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

Themarket 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 theprice of the Company’s common stock to fluctuate, perhaps substantially,including:

·    announcements of developments related to theCompany’s business;

·    quarterly fluctuations in the Company’sactual or anticipated operating results and order levels;

·    general conditions in the worldwide economy;

·    announcements of technological innovations;

·    new products or product enhancements by theCompany or its competitors;

·    developments in patents or otherintellectual property rights and litigation; and

·    developments in the Company’s relationshipswith its customers and suppliers.

Inaddition, in recent years the stock market in general and the markets forshares of small capitalization and “high-tech” companies in particular, haveexperienced extreme price fluctuations which have often been unrelated to theoperating performance of affected companies. Any such fluctuations in thefuture could adversely affect the market price of the Company’s common stock.

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

Provisionsin the Company’s articles of organization and the Company’s shareholder rightsplan may have the effect of discouraging or preventing a change in control.These provisions could limit the price that certain investors might be willingto pay in the future for shares of the Company’s common stock. Specifically,the Company’s articles of organization authorize its Board of Directors toissue up to 100,000 shares of preferred stock in one or more series, to fixcertain rights, preferences, privileges and restrictions granted to or imposedupon any wholly unissued shares of preferred stock, to fix the number of sharesconstituting 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 ofpreferred stock, which may include priority claims to assets and dividends andspecial voting rights, could adversely affect the rights of the holders ofcommon stock and thereby reduce the value of the Company’s common stock. TheCompany has no present plans to issue shares of preferred stock. The Companyhas in place a shareholder rights plan, adopted in 1998, under which itsstockholders are entitled to purchase shares of its preferred stock undercertain circumstances. These circumstances include the purchase of 15% or moreof the outstanding shares of common stock by a person or group, or theannouncement of a tender or exchange offer to acquire 15% or more of theoutstanding common stock. The shareholder rights plan may have the effect ofimpeding or preventing certain types of transactions involving a change incontrol of the Company that could be beneficial to the stockholders.

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

Thereare no unresolved written comments that were received from the SEC staff 180days or more before the end of our fiscal year relating to our periodic orcurrent reports under the Securities Exchange Act of 1934.

**ITEM 2. PROPERTIES**

TheCompany’s executive offices, research, manufacturing and warehouse facilitiesare located in Billerica, Massachusetts. In December 2004, the Company renewed its lease for this facility andentered into an agreement with the landlord to add an additional 24,974 squarefeet to its leased space and to construct a 26,200 square foot high baymanufacturing space in the back of the premises. The lease provided for atenant allowance for this high bay space and for additional refurbishments inthe building. 

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The balance ofconstruction and renovation costs above this tenant allowance were theresponsibility of the Company. The construction and refurbishments werecompleted on March 1, 2006 at which time the lease commenced for a period of 10years.  In January 2007, the Companyamended this lease agreement to expand its lease to include the remainingavailable space in the building.  TheCompany now leases all of the 187,000 square foot facility owned by anunaffiliated real estate limited partnership.

TheCompany’s former High Energy Systems division had leased 24,733 square feet ofmanufacturing, research and development, and office space in Mountain View,California. The lease commenced on February 1, 2004 and had an initial term ofseven years with an option to extend for an additional five-year period. InJanuary 2005, as part of the asset sale agreement with Accuray, Incorporated,the Company assigned its rights and obligations under this lease to Accuray.The Company is secondarily liable for the lease payments in the event ofdefault by Accuray.

TheCompany believes that its facilities, with its recently completed and scheduledrenovations, and expansion, are adequate and provide sufficient productioncapacity for its present intended purposes. The Company’s facilities arecurrently utilized primarily on a one-shift basis. The Company is able to addadditional capacity by adding second and third shifts if necessary.

**ITEM 3. LEGAL PROCEEDINGS**

SinceFebruary 2004, the Company and L-3 Communications, Inc. had been engaged inlitigation in the United States District Court for the District ofMassachusetts in Boston over two of the Company’s patents – United StatesPatent No. 6,292,533 and No. 5,903,623. In August 2006, the parties entered into a Settlement Agreement thatresulted in the dismissal of the underlying suit.  This settlement had no material effect on theCompany, the value of its intellectual property or the development and sale ofany of its products.

TheCompany is also subject to various legal proceedings and claims that arise inthe ordinary course of business. At the present time, it is not possible topredict the outcome of these matters; however, the Company currently believesthat resolving these matters will not have a material adverse impact on itsfinancial condition, results of operations or cash flows.

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

Nomatter was submitted to a vote of the Company’s security holders during thefourth quarter of the fiscal year covered by this report.

**PART II**

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

Ourcommon stock is traded on the NASDAQ National Market under the symbol ASEI. Themarket price range for the common stock for the last two fiscal years asreported on the NASDAQ National Market or American Stock Exchange, as applicable,is as follows:
| Fiscal Year | ** ** | **Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|------------------------|------------|----------|------------|---------|------------|
|             |       |                   |       |     |       |    |       |
| 2007             |       | March  31, 2007        |       | $        | 60.45      |    | $          | 49.78 |   |
|             |       | December  31, 2006     |       | $        | 71.22      |    | $          | 44.86 |   |
|             |       | September  30, 2006    |       | $        | 61.97      |    | $          | 36.03 |   |
|             |       | June  30, 2006         |       | $        | 93.53      |    | $          | 51.00 |   |
|             |       |                   |       |     |       |    |       |
| 2006             |       | March  31, 2006        |       | $        | 93.86      |    | $          | 59.83 |   |
|             |       | December  31, 2005     |       | $        | 74.95      |    | $          | 52.33 |   |
|             |       | September  30, 2005    |       | $        | 73.05      |    | $          | 36.50 |   |
|             |       | June 30, 2005          |       | $        | 45.79      |    | $          | 35.95 |   |

 

Asof June 5, 2007, there were approximately 805 holders of record of theCompany’s common stock.

Nocash dividends have been declared in the two most recent fiscal years.  The Company, on May 21, 2007, announced thatit intends to initiate quarterly dividends during fiscal 2008. The Company hasreceived consent from its bank for this dividend as its credit facilityrestricts the payment of dividends (except in shares of the Company’s stock).

**EquityCompensation Plan Information**

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Thefollowing table provides information about the Company’s stock option plans andthe common stock that may be issued upon the exercise of options and rightsunder all existing equity compensation plans as of March 31, 2007.

|                                                                  | ** ** | **Number of securities to be** | ** ** | ** **                      | ** ** | **Number of securities**                    | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                       | ** ** | **issued upon exercise of**         | ** ** | **Weighted-average**            | ** ** | **remaining available for future**     | ** ** |
| ** **                                                       | ** ** | **outstanding options**                       | ** ** | **exercise price of** | ** ** | **issuance under equity**                   | ** ** |
| ** **                                                       | ** ** | **and rights as of**                | ** ** | **outstanding options**    | ** ** | **compensation plans as of**           | ** ** |
| ** **                                                       | ** ** | **March 31, 2007**                       | ** ** | **and rights**             | ** ** | **March 31, 2007 (excluding**          | ** ** |
| **Plan category**                                           | ** ** | **(a)**                                            | ** ** | **(b)**                         | ** ** | **securities reflected in column(a))** | ** ** |
| ** **                                                       |       |                                               |       |                            |       |                                                  |       |
| **Equity  compensation plans approved by security holders:**     |       |                                               |       |                            |       |                                                  |       |
| 1995 Combination  Plan                                           |       | 16,566                                             |       | $                               | 14.86      |                                                  | —     |   |
| 1999 Combination  Plan                                           |       | 74,667                                             |       | $                               | 18.25      |                                                  | —     |   |
| 2000 Combination  Plan                                           |       | 90,383                                             |       | $                               | 30.64      |                                                  | —     |   |
| 2002 Combination  Plan                                           |       | 171,354                                            |       | $                               | 26.75      |                                                  | 2,250      |   |
| 2003 Stock Plan  for                                             |       |                                               |       |                            |       |                                                  |       |
| Non-Employee Directors                                           |       | 121,000                                            |       | $                               | 40.77      |                                                  | —     |   |
| 2005 Equity and  Incentive Plan                                  |       | 385,887                                            |       | $                               | 53.76      |                                                  | 318,615    |   |
| **Equity  compensation plans not approved by security holders:** |       |                                               |       |                            |       |                                                  |       |
| 1996 Plan for  Non-Employee Directors                            |       | 7,000                                              |       | $                               | 13.06      |                                                  | —     |   |
| 1997  Non-Qualified Option Plan                                  |       | 44,811                                             |       | $                               | 23.25      |                                                  | —     |   |
| 1998  Non-Qualified Option Plan                                  |       | 49,422                                             |       | $                               | 29.83      |                                                  | —     |   |
| Total                                                            |       | 961,090                                            |       | $                               | 38.76      |                                                  | 320,865    |   |

 

TheCompany did not repurchase any of its securities during fiscal 2007.

**ITEM 6. SELECTED FINANCIAL DATA**

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

| Fiscal Year                      | ** ** | **2007**                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                            |       |                                                                               |       |     |       |     |       |     |       |     |       |
| Net sales and  contract revenues      |       | $                                                                                  | 153,186    |     | $          | 163,604  |       | $        | 88,314     |     | $          | 76,342 |   | $ | 61,958 |   |
| Net income  (loss)                    |       | 24,610                                                                             |       | 29,786   |       | 11,185   | (1)        | 1,911    |       | (7,951   | )          |
| Income (loss)  per share—diluted |       | 2.38                                                                               |       | 3.27     |       | 1.31     |       | 0.26     |       | (1.20    | )          |
| Total assets                          |       | 221,725                                                                            |       | 173,389  |       | 98,287   |       | 55,803   |       | 47,316   |       |
| Stockholders’ equity             |       | 167,698                                                                            |       | 130,198  |       | 61,570   |       | 38,433   |       | 32,358   |       |
|                                       |            |                                                                                    |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

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

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with our consolidated financialstatements and notes thereto which appear elsewhere in this Annual Report onForm 10-K. The following discussion contains forward-looking statements andshould also be read in conjunction with the “Cautionary Statement” included atthe beginning of this Annual Report on Form 10-K.

**2007Compared to 2006**

***        Overview***    AmericanScience and Engineering, Inc. develops and manufactures state-of-the-artX-ray inspection systems for homeland security and other critical defenseapplications. The Company’s primary technologies are: 1) Z Backscattertechnology which is used to detect plastic explosives, illegal drugs, and othercontraband even when artfully concealed in complex backgrounds; and2) Shaped Energy X-ray inspection systems which combine the materialdiscrimination features of Z Backscatter with the penetration capability ofhigh-energy X-rays for dense cargos.

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        Netsales and contract revenues for fiscal 2007 decreased by 6% to $153,186,000compared to fiscal 2006 revenues of $163,604,000. The Company reported netincome before taxes of $40,016,000 in fiscal 2007 compared to a net incomebefore taxes of $45,769,000 in the previous fiscal year. Net income for fiscal2007 was $24,610,000 ($2.38 per share, on a diluted basis) as compared to a netincome of $29,786,000 ($3.27 per share, on a diluted basis) in fiscal 2006.Backlog at March 31, 2007 was $105,634,000, a 53% increase from thebacklog of $68,840,000 reported at the previous fiscal year end, due primarilyto increases in backlog of service and maintenance and cargo systems contractsoffset somewhat by a decrease in Z Backscatter System backlog.

***        Results of Operations***    Totalnet sales and contract revenues of $153,186,000 in fiscal 2007 decreased by$10,418,000 or 6% from the previous year. Revenues related to product sales andcontracts decreased by $26,936,000 or 21% due to the following:  Z Backscatter System sales decreased$17,262,000 from the prior year as the multi-unit orders received from the USGovernment in the prior year were not repeated in the current year.  Aftermarket part sales decreased $6,799,000from the prior year and returned to more standard revenue levels.  The Company had received one large order infiscal 2006 which had contributed to its high parts revenues in the prior year.Parcel system revenues also decreased by $5,138,000 from the prior yearattributable primarily to a decrease in order volume in the year. These productrevenue decreases were offset by a $3,806,000 increase in contract research anddevelopment revenues as compared to the prior period attributable primarily toone large contract research and development contract received in the currentyear.  Service revenues increased infiscal 2007 by $16,518,000 or 46% to $52,046,000 due primarily to servicecontract revenues purchased with the shipments of systems in 2006 and 2007.

        Infiscal 2007, 73% of the Company’s revenues were from domestic customers ascompared to 86% in fiscal 2006. In fiscal 2007, the Company had sales to twocustomers which accounted for 46% of total sales. In fiscal 2006, the Companyhad sales to two major customers which accounted for 56% of total sales.

        Costof sales and contracts of $ 86,647,000 in fiscal 2007 increased by $1,241,000or 1% from the previous year. Cost of product sales and contracts of$60,033,000 decreased by $5,341,000 or 8% as compared to the prior year. Costof product sales and contracts totaled 59% of revenues in fiscal 2007 ascompared to 51% of revenues in fiscal 2006. This decrease in gross margin isdue primarily to $3,559,000 of stock-based compensation and a decrease in thevolume of shipments of higher margin Z Backscatter systems.  The cost of service revenues increased$6,582,000 or 33% from the prior year. Cost of service revenues totaled 51% ofrevenues in fiscal 2007 as compared to 56% of revenues in fiscal 2006.  This margin improvement is due primarily toimprove system performance of systems under service contracts as compared tothe prior year.

        Selling,general and administrative expenses in fiscal 2007 increased by $7,494,000 to$27,136,000 compared to fiscal 2006 and represented 18% of revenues in fiscal2007 as compared to 12% of revenues in fiscal 2006. This  increase in spending can be attributed to$5,035,000 of stock-based compensation expense, increases in incentivecompensation costs ($473,000) related to the bonuses and commissions earnedduring the period, increased salaries and payroll related costs ($497,000) asthe Company increased its sales and marketing capabilities, increased marketingcosts ($687,000),  increases in expensesrelated to the Company’s ongoing ERP system implementation project ($248,000),and increased legal expenditures ($534,000) related to legal costs incurredrelated to an abandoned acquisition and other corporate initiatives.

        Companyfunded research and development spending decreased by $2,417,000 to $7,184,000in fiscal 2007, a 25% change compared to the $9,601,000 spent in fiscal2006.  Research and development spendingrepresented 5% of revenues in fiscal 2007 as compared to 6% of revenues infiscal 2006. Fiscal 2007 costs decreased as the engineering team focused onrevenue related contracts including contract research and developmentengagements.  The Company’s fiscal 2007research and development activities focused on design modifications to itsexisting products and the development of product alternatives to continue tobring innovative products to its customers.

        Otherincome (expense) was $7,797,000 in income in fiscal 2007 as compared to $3,522,000in expense in fiscal 2006. Interest income increased by $3,108,000 due toincreased funds available for investment in higher return investment vehicles.In addition, the Company recorded $2,270,000 in income related to the fairvalue mark to market charge associated with outstanding warrants issued as partof a private placement of common stock in May of 2002. During fiscal 2006, thismark to market adjustment resulted in $6,094,000 in expense.

        TheCompany reported pre-tax income of $40,016,000 in fiscal 2007 as compared to apre-tax income of $45,769,000 in the previous fiscal year primarily due to thedecreased revenues and expense increases noted above. The Company recordedincome tax expense of $15,406,000 in fiscal 2007 as compared to $15,983,000 inthe prior fiscal year.  The Company’seffective tax rate excluding the impact of the warrant (income) expense was 41%in fiscal 2007 as compared to 31% in fiscal 2006.  This increase in the rate can be attributedto the utilization of remaining net operating loss carryforwards in fiscal2006, the implementation of FAS 123(R) in fiscal 2007, and the reduction ofcertain tax credits in fiscal 2007.

        TheCompany reported net income of $24,610,000 in fiscal 2007 as compared to netincome of $29,786,000 in fiscal 2006.

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**2006Compared to 2005**

***Results of Operations***    Totalnet sales and contract revenues of $163,604,000 in fiscal 2006 increased by$75,290,000 or 85% from the previous year. Revenues related to product salesand contracts increased by $59,166,000 or 86% due primarily to increasedrevenues of approximately $52,408,000 in sales of Z Backscatter Systems. Thesesystems continued to experience high order volume in fiscal 2006 from thefederal government customer base and experienced increased international demand.Revenues on the Company’s CargoSearch systems increased $8,401,000 from fiscal2005 due primarily to a large follow-on order from one customer.  After-market parts revenues increased by$3,704,000 to $10,588,000 due primarily to orders received for spares toaccompany new system installations. These product revenue increases were offset by a $906,000 decrease inParcelSearch product revenues attributable to lower unit sales and a decreasein revenues of $4,267,000 related to the Company’s former High Energy Systemsdivision which was sold in the fourth quarter of fiscal 2005. Service revenuesincreased in fiscal 2006 by $16,124,000 or 83% to $35,528,000 due to increasesin service contract revenues related to the increased shipments of systems in2005 and 2006.

In fiscal 2006,86% of the Company’s revenues were from domestic customers as compared to 85%in fiscal 2005. In fiscal 2006, the Company had sales to two customers whichaccounted for 56% of total sales. In fiscal 2005, the Company had sales to threemajor customers which accounted for 43% of total sales.

Cost of sales andcontracts of $85,406,000 in fiscal 2006 increased by $27,580,000 or 48% fromthe previous year. Cost of product sales and contracts of $65,374,000 increasedby $18,300,000 or 39% as compared to the prior year. Cost of product sales andcontracts totaled 51% of revenues in fiscal 2006 as compared to 68% of revenuesin fiscal 2005. This decrease is primarily attributable to the Company’sefforts in reducing direct product costs, to production efficiencies associatedwith higher volume manufacturing and to continued strong sales from the Company’shigher margin products.  The cost ofservice revenues increased $9,280,000 or 86% from the prior year. Cost ofservice revenues totaled 56% of revenues in fiscal 2006 as compared to 55% ofrevenues in fiscal 2005.

Selling, generaland administrative expenses in fiscal 2006 increased by $5,355,000 to$19,642,000 compared to fiscal 2005 and represented 12% of revenues in fiscal2006 as compared to 16% of revenues in fiscal 2005. This increase in spendingcan be attributed to increases in incentive compensation costs ($2,444,000)related to the bonuses and stock compensation earned during the period,increased salaries and payroll related costs ($359,000) as the Companyincreased its sales and marketing capabilities, increased marketing costs($722,000),  increased insurance relatedcosts ($451,000) attributable to the increased revenues, increase travel and telephoneexpenditures ($410,000), increases in expenses related to the Company’s ongoingERP system implementation project ($188,000), increased audit expenditures($232,000) attributable to the change in auditors during the year andSarbanes-Oxley compliance costs, and increased legal expenditures ($625,000)related to ongoing litigation expenses and other corporate initiatives.  Offsetting these increases was a decrease ingeneral and administrative costs of $638,000 associated with the Company’s HighEnergy Systems division which was sold in the fourth quarter of fiscal 2005.

Company fundedresearch and development spending increased by $3,874,000 to $9,601,000 infiscal 2006, a 68% increase compared to the $5,727,000 spent in fiscal2005.  Research and development spendingremained constant at 6% of revenues in both fiscal 2006 and fiscal 2005. Infiscal 2006, the Company continued to focus on design modifications to itsexisting products and the development of product alternatives to continue tobring innovative products to its customers.

In January 2005,the Company completed an agreement to sell certain assets, comprised ofinventory, fixed assets, intellectual property and certain revenue producingcontracts of its High Energy Systems Division to Accuray, Incorporated (“Accuray”).The Company recognized a gain, net of related expenses, on the sale of theseassets of $5,442,000 which was included in income from operations in the yearended March 31, 2005.  In fiscal2006 an additional $336,000 in gain was recognized related to this sale as theCompany adjusted certain reserves for warranty exposure established at the timeof sale due to favorable warranty experience in the current year.

Other income(expense) was $3,522,000 in expense in fiscal 2006 as compared to $4,649,000 inexpense in fiscal 2005. Interest income increased by $1,938,000 due toincreased funds available for investment in higher return investment vehicles.This increase in other income was offset by $6,094,000 related to the fairvalue mark to market charge associated with outstanding warrants issued as partof a private placement of common stock in May of 2002. During fiscal 2005, thismark to market adjustment resulted in $5,101,000 in expense.

The Companyreported pre-tax income of $45,769,000 in fiscal 2006 as compared to a pre-taxincome of $11,267,000 in the previous fiscal year primarily due to theincreased revenues and expense reductions noted above. The Company recordedincome tax expense of $15,983,000 in fiscal 2006 as compared to $82,000 in theprior fiscal year.  In prior years, theCompany was able to reduce its income tax expense primarily through the releaseof valuation allowance reserves established on tax net operating loss

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carryforward assets andother tax credits.  During fiscal 2006,all remaining reserves were released and all tax net operating losscarryforwards were fully utilized.

The Companyreported net income of $29,786,000 in fiscal 2006 as compared to net income of$11,185,000 in fiscal 2005.

**Liquidityand Capital Resources**

Cashand cash equivalents at year-end increased by $18,995,000 to $69,650,000 atMarch 31, 2007 as compared to $50,655,000 at March 31, 2006. Cash flow providedby operations of $44,854,000 resulted from the following:

·    Reportednet income of $24,610,000 adjusted for the following non-cash items:

·   Depreciation andamortization of $2,425,000 which was $1,436,000 higher than the previous yeardue primarily to the capitalization of the Company’s building facilities.

·   Provision for(reduction of) contracts, inventory and accounts receivable reserves of($203,000) as compared to $2,673,000 as certain receivables previously reservedwere collected during the year and certain inventory, previously reserved asexcess, was utilized during the year.

·   Decrease in the fairvalue of warrants issued of ($2,270,000) due to primarily to changes in theCompany’s stock price during the period.

·   Stockcompensation expense of $8,687,000.

·    A decrease in accountsreceivable of $2,621,000 from the prior year due primarily to improved collectionsin the current year which significantly improved the Company’s days salesoutstanding.

·    An increase in inventories of$3,206,000 as the Company purchased certain long-lead inventory items duringthe year to improve order to delivery cycles.

·    The increase in customerdeposits of $5,451,000 as the Company received certain large milestonespayments on contracts entered into during the year.

·    The increase in deferredrevenue of $4,591,000 as the Company entered in a number of new servicecontracts during the year.

Netcash of $26,988,000 was used for investing activities in fiscal 2007. Fiscal2007 capital expenditures totaled $4,733,000 versus $11,224,000 for fiscal2006. Investments in fixed assets were comprised primarily of informationtechnology expenditures for the Company’s ERP system implementation, leaseholdimprovements related to the Company’s facilities expansion, and furniture andfixtures. The Company invested $130,600,000 in short-term investments duringthe year, and had maturities of $109,345,000 on short-term investments. Inaddition, the Company paid $1,000,000 in exchange for a note receivable from anunrelated company.

Netcash provided by financing activities was $1,113,000 in fiscal 2007. Cash wasprovided primarily from the receipt of $2,253,000 from the Company’s landlordfor leasehold improvements related to its corporate facilities expansion.  Restricted cash increased by $2,703,000 fromthe prior year as the Company issued certain stand-by letters of creditcollateralized by cash for contract entered into during the year.

OnNovember 16, 2006, the Company modified its domestic loan and securityagreement with Silicon Valley Bank East which was scheduled to expire onNovember 29, 2006.  The Company increasedits domestic facility from $5.0 million to $20.0 million to support theCompany’s routine working capital needs. The Company’s $10.0 million export loan and security facility,guaranteed by the Export-Import Bank of the United States, expired as ofNovember 29, 2006. Maximum amount available for borrowings under thedomestic facility is (a) if the Company’s unrestricted cash is greater than orequal to $30 million, is $20.0 million minus the amount of all outstanding letters of credit less certain reserves,and minus the outstanding principal balance of any advances or (b) if theCompany’s unrestricted cash is less than $30.0 million for a period of 30consecutive days, the lesser of (i) the $20.0 million, or ii) 85% of eligibledomestic accounts receivable minus  theamount of outstanding letters of credits adjusted for certain reserves andminus the principal balance of any advances. The modification of the domestic loan and security agreement extendedthis credit facility through November 14, 2008.

Thecredit facility bears an interest rate of the greater of 4.0% or the SiliconValley Bank prime rate (8.25% at March 31, 2007). The credit agreement iscollateralized by certain assets of the Company and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants.  As of March 31, 2007, the Company was incompliance with these covenants.

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AtMarch 31, 2007, there were no borrowings outstanding against this creditfacility.  Under the terms of the creditagreement, the Company was required to pay certain one-time facility fees whichare being amortized over the lives of the facilities and is required to pay afee of 0.50% quarterly on unused amounts under the line of credits.  Total expense incurred related to these feeswere $201,000, $172,000, and $300,000, in fiscal 2007, 2006 and 2005,respectively.

TheCompany had outstanding $16,763,000 in stand-by letters of credit against thedomestic facility at March 31, 2007 with $3,237,000 remainingavailability.   Of the outstandingletters of credit, $300,000 relates to the Company’s building lease and theremainder is guaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit. In addition at March 31, 2007, the Company has a restrictedcash balance of $2,801,000 related to certain bank required deposits foroutstanding letters of credits, bid bonds, and other bank-related fees.

Inrecent years, the Company has funded its operations and capital expenditureswith cash generated by operations, including deposits from customers onlong-term projects, from proceeds received from stock issuances and optionexercises, and from lines of credit available to the Company. The Companycurrently has no amounts drawn on its line of credit and believes that its cashflows from operations, cash and investments on hand and available lines ofcredit are sufficient to meet the current and foreseeable operatingrequirements of the Company’s business.

***Contractual Obligations*** The Company leasesvarious office equipment and facilities under non-cancelable leases. Inaddition, in the normal course of business, the Company enters into purchase orderswith its vendors for the purchase of materials or services to meet itsproduction needs. The following table summarizes the Company’s contractualobligations as of March 31, 2007.

| (In thousands)                      | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| **Recorded  Contractual Obligations:**   |       |      |       |                                |       |               |       |               |       |                        |       |
| Lease financing  liability               |       | $         | 11,642     |                                | $          | 1,263              |       | $                  | 2,174      |                        | $          | 2,529 |   | $ | 5,676 |   |
| Other long-term  obligations             |       | 69        |       | 17                                  |       | 35                 |       | 17                 |       | —                      |       |
|                                     |       |      |       |                                |       |               |       |               |       |                        |       |
| **Unrecorded  Contractual Obligations:** |       |      |       |                                |       |               |       |               |       |                        |       |
| Operating Leases                         |       | 1,658     |       | 192                                 |       | 370                |       | 370                |       | 726                         |       |
| Purchase  Commitments                    |       | 18,950    |       | 18,660                              |       | 233                |       | 57                 |       | —                      |       |
|                                     |       |      |       |                                |       |               |       |               |       |                        |       |
| Total                                    |       | $         | 32,319     |                                | $          | 20,132             |       | $                  | 2,812      |                        | $          | 2,973 |   | $ | 6,402 |   |

 

***Inflation*** The Company does not believe thatinflation has had a material effect on its results of operations. There can beno assurance, however, that the Company’s business will not be affected byinflation in the future.

**CriticalAccounting Policies**

TheCompany considers certain accounting policies related to revenue recognition, inventories,allowances for obsolete and excess inventory, stock-based compensation, warrantliability, and income taxes to be critical policies due to the estimationprocesses involved in each.

***Revenue Recognition:***  The Company derives a portion of its revenuefrom fixed-price contracts, which require the accurate estimation of the costand scope of each contract. The Company’s fixed-site CargoSearch systems aresold under fixed-price arrangements. Revenue is recognized using percentage ofcompletion accounting, generally using the Company’s best estimate of totalcosts to measure the percent complete with revisions to estimates reflected inthe period identified.

TheCompany recognizes certain other CargoSearch system sales and other productrevenue in accordance with SEC Staff Accounting Bulletin No. 101, RevenueRecognition in Financial Statements (“SAB 101”), modified by Emerging IssuesTask Force No. 00-21, Revenue Arrangements with Multiple Deliverables, andStaff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) whichrequires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices rendered; (3) the fee is fixed and determinable; and (4) collectibilityis reasonably assured. Determination of criteria (3) and (4) are based onmanagement’s judgments regarding the fixed nature of the fee charged forservices rendered and products delivered, and the collectibility of those fees.Should changes in conditions cause management to determine these criteria arenot met for certain future transactions, revenue recognized for any reportingperiod could be adversely affected. In those instances where the Company entersinto agreements involving multiple revenue elements, the agreement is dividedinto separate elements of accounting, the arrangement consideration isallocated to these elements based on fair value, and revenue recognition isconsidered separately for each individual element. The Company recognizes fieldservice revenues as services are performed and generally recognizes revenuesunder maintenance contracts on a

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straight-line basis overthe contract period which reasonably approximates the period under which theservices are rendered. Revenues received in advance of services being renderedare deferred until such services have been provided.

Certainof the Company’s products are covered by a warranty for a one-year period. TheCompany accrues a warranty reserve for estimated costs to provide warrantyservices. The Company’s estimate of costs to service its warranty obligationsis based on historical experience and management’s expectations of futureconditions. To the extent the Company experiences increased warranty claimactivity or increased costs associated with servicing those claims, itswarranty accrual will increase resulting in decreased gross profit.

***Inventories and Related Allowance for Obsolete and Excess Inventory:***   Inventories consist of material, labor andmanufacturing overhead and are recorded at the lower of cost or net realizablevalue. Excessive manufacturing overhead costs such as idle facility expense,freight, handling costs and wasted material (spoilage) attributable toabnormally low volumes (levels that materially differ from budgeted productionplans due primarily to changes in customer demand) are excluded from inventoryand recorded as an expense in the period incurred. The Company regularlyreviews inventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on the estimated forecast of product demand over thenext twelve to eighteen months. Demand for products can fluctuatesignificantly. A significant increase in the demand for the Company’s productscould result in a short-term increase in inventory balances, while asignificant decrease in demand could result in an increase in the amount ofexcess inventory quantities on hand. Additionally, inventory reserves requireestimates of future product demand, which may materially impact the provisionrequired for excess and obsolete inventory. In the future, if inventory weredetermined to be overvalued, the Company would be required to recognize suchcosts in its cost of goods sold at the time of such determination. Likewise, ifinventory is determined to be undervalued, the Company may have over-reportedcosts of goods sold in previous periods and would be required to recognize suchadditional operating income at the time of sale. Therefore, although theCompany makes every effort to ensure the accuracy of forecasts of futureproduct demand, any significant unanticipated changes in demand ortechnological developments could have a significant impact on the value of itsinventory and reported operating results.

***Stock-Based Compensation: ***OnApril 1, 2006, the Company adopted Statement of Financial Accounting StandardsNo. 123(R) (SFAS 123(R)) “Accounting for Stock-Based Compensation”, whichrequires the measurement and recognition of all compensation costs for allstock based awards made to employees and the Board of Directors based upon fairvalue over the requisite service period for awards expected to vest. Prior toadoption, the Company accounted for stock options under the intrinsic valuemethod set in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations, and provided therequired pro forma disclosures prescribed by SFAS  No. 123, “Accounting for Share-basedCompensation”, as amended.

SFAS123(R) requires the Company to estimate the fair value of share-based awards onthe date of grant using an option pricing model. The Company adopted SFAS123(R) using the modified prospective transition method which requires theapplication of the accounting standard starting April 1, 2006, the first day ofthe Company’s fiscal year 2007. Prior period information was not restated toreflect the fair value method of expensing share-based awards.

***Warrant Liability:***   In fiscal 2003, the Company issued 295,475warrants in connection with a private placement offering of common stock. As ofMarch 31, 2007, 21,625 of these warrants remain outstanding. These warrants canbe exchanged for cash under certain circumstances including a merger, sale ortender offer of the Company and as such the Company recorded the fair value ofthese warrants as a long-term liability on the balance sheet. The fair value ofthese warrants is adjusted each period with the resulting gain or loss recordedas other income (expense) in the statement of operations. The Black-Scholesmethod is used to value the warrants and the calculation requires the use ofestimates for stock price volatility and interest rates. The Black-Scholesvalue of these warrants can fluctuate significantly based on the current fairmarket value of the Company’s common stock, changes in interest rates orchanges in the volatility of the Company’s stock price.

***Income Taxes:*** The Company accounts for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.” Accordingly, the Company recognizes deferred income taxesbased on the expected future tax consequences of differences between thefinancial statement basis and the tax basis of assets and liabilities,calculated using enacted tax rates in effect for the year in which thedifferences are expected to be reflected in the tax return. The Companyevaluates the need for a valuation allowance against its net deferred taxassets at year end based upon its three year cumulative income and itsprojections of future income, and records a valuation allowance against any netdeferred tax assets if it is more likely than not that they will not berealized.

**New Accounting Pronouncements**

InJuly 2006, the FASB issued FASB Interpretation No. 48 “Accounting forUncertainty in Income Taxes” (“FIN48”). FIN 48 is an interpretation of FASB Statement No. 109.  “Accounting for Income Taxes,” and it seeksto reduce the diversity in practice associated with certain aspects ofmeasurement and recognition in accounting for income taxes.  In addition, FIN 48 requires expandeddisclosure with respect to the uncertainty in income taxes and is required tobe adopted for fiscal years beginning after

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December 15, 2006.  The Company is currently evaluating theimpact, if any, that FIN 48 will have on its consolidated financial statements.

InFebruary 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159),“The Fair Value Option for Financial Assets and Financial Liabilities.” SFASNo. 159 gives entities the option, at specified election dates, to measurecertain financial assets and liabilities at fair value. The election may beapplied to financial assets and liabilities on an instrument by instrumentbasis, is irrevocable, and may only be applied to entire instruments.Unrealized gains and losses on instruments for which the fair value option hasbeen elected will be reported in earnings at each subsequent reporting date.SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. Adoption of SFAS No. 159 is currently not expectedto have a material impact on the Company’s consolidated financial position orresults of operations

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157 “Fair Value Measurements”, (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosure requirements regarding fair valuemeasurement.  FAS 157 is effective forthe Company beginning April 1, 2008. The Company is currently reviewingthe Statement to determine the impact and materiality of its adoption to theCompany.

In September 2006,the SEC staff issued Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SAB 108”). SAB 108 was issued in order to eliminate the diversity inpractice surrounding how public companies quantify financial statementmisstatements. SAB 108 requires that registrants quantify errors using both abalance sheet and income statement approach and evaluate whether eitherapproach results in a misstated amount that, when all relevant quantitative andqualitative factors are considered, is material. SAB 108 was required to beimplemented by the end of fiscal 2007. We were not impacted by the adoption ofthis staff accounting bulletin.

**ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

TheCompany is subject to interest rate risk on its credit facilities which havevariable interest rates tied to the Prime Rate. As of March 31, 2007, theCompany had no variable interest rate debt outstanding. See Note 3 of Notes toConsolidated Financial Statements for a discussion of our long-termindebtedness.

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

Asof March 31, 2007, the Company holds short-term investments consisting of moneymarket funds and U.S. government and government agency bonds. The Company’sprimary objective with its investment portfolio is to invest available cashwhile preserving principal and meeting liquidity needs. These investments havean average interest rate of approximately 4.9% and are subject to interest raterisk. As a result of the average maturity and conservative nature of theinvestment portfolio, a sudden change in interest rates would not have amaterial adverse effect on the value of these investments.

Infiscal 2003, the Company issued 295,475 warrants in connection with a privateplacement offering of common stock. As of March 31, 2007, 21,625 of thesewarrants remain outstanding. These warrants can be exchanged for cash undercertain circumstances including a merger, sale or tender offer of the Companyand as such a liability equal to Black-Scholes value of the warrants isrecorded on the balance sheet. Changes in the fair value of the warrants arerecorded as other income (expense). The Black-Scholes value of these warrantscan fluctuate significantly based on the current fair market value of theCompany’s common stock. A 10% change in the fair market value of the Company’scommon stock, holding other assumptions constant, would have approximately an$114,000 positive or negative impact on earnings.

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

Thefinancial statements and supplementary financial information listed in the Indexto Consolidated Financial Statements on page 24 are filed as part of thisAnnual Report on Form 10-K and are incorporated into this Item by reference.

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

On November 3,2005, PricewaterhouseCoopers LLP (“PwC”) resigned as the Company’s independentregistered public accounting firm upon completion of its procedures on theCompany’s unaudited interim financial statements as of and for the three andsix-month periods ended September 30, 2005 and the Form 10-Q in which suchunaudited interim financial statements would be included.  The reports of PwC on the financialstatements for the years ended March 31, 2005 and 2004 contained no adverse ordisclaimer of opinion and were not qualified or modified as to uncertainty,audit scope or accounting principle. Except for the material weakness in internal control overfinancial reporting described in this paragraph, during the years ended March31, 2005 and 2004, and through November 3, 2005, the Company did not have anyreportable events within the meaning of Item 304(a)(1)(v) ofRegulation S-K. The Company and PwC reported a material weakness in theCompany’s internal control over financial reporting in the Company’s AnnualReport on Form 10-K for the year ended March 31, 2005. That Annual Reportstated the Company did not maintain effective controls over the review andmonitoring of the accounting presentation on the sale of long-lived assets,based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

During the yearsended March 31, 2005 and 2004 and through November 3, 2005, there were nodisagreements with PwC on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedure, whichdisagreements if not resolved to the satisfaction of PwC would have caused PwCto make reference thereto in its reports on the financial statements of theCompany for such years.

OnDecember 13, 2005, the Audit Committee of the Board of Directors ofAmerican Science and Engineering, Inc. (the “Company”) engaged Vitale,Caturano & Company, Ltd. (“Vitale”) as its independent registeredpublic accounting firm to audit the Company’s consolidated financial statementsand internal control over financial reporting as of and for the year endingMarch 31, 2006.  The Company did not consult withVitale during the two most recent fiscal years and through December 13, 2005regarding either the application of accounting principles to a specifictransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on the consolidated financial statements of the Company aswell as any matters or reportable events described in Items304(a)(2)(i) or (ii) of Regulation S-K.

**ITEM 9A. CONTROLS AND PROCEDURES**

Evaluation ofDisclosure Controls and Procedures

Asof the end of the period covered by this report, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e)and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2007 to ensure that information required to bedisclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiod specified in the Securities and Exchange Commission’s rules and forms,and to provide reasonable assurance that information required to be disclosedby the Company in such reports is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

Management’s Report onInternal Control over Financial Reporting

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rules 13a-15(f)and 15d-15(f) of the Exchange Act.  Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting using the framework in “Internal Control-IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this evaluationunder the criteria established in “Internal Control – Integrated Framework”,our management concluded that the Company’s internal control over financialreporting was effective as of March 31, 2007. Vitale, Caturano & Company, Ltd., our independent registered publicaccounting firm, has audited management’s assessment of the effectiveness ofthe Company’s internal control over financial reporting and the effectivenessof our internal control over financial reporting as of March 31, 2007, and hasissued their report thereon which is included herein.

Changes inInternal Controls over Financial Reporting

Therehave been no changes in our internal control over financial reporting, as suchterm is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Actof 1934, during the quarter ended March 31, 2007 that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

22

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**ITEM 9B. OTHER INFORMATION**

None.

**PART III**

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THECOMPANY**

**Code ofConduct**

TheCompany has adopted a Code of Conduct that applies to our Board of Directors,Chief Executive Officer, Chief Financial Officer, and all employees of theCompany. The Company’s Code of Conduct is posted on our website at www.as-e.comand may be accessed in the Corporate Governance section of the InvestorInformation page. The Company intends to satisfy the disclosure requirementunder Item 10 of Form 8-K, regarding an amendment to, or waiver from, our Codeof Conduct, by posting such information on our website at the locationspecified above.

Theother information called for by this item is hereby incorporated by referencefrom the Registrant’s Definitive Proxy Statement relating to the 2007 AnnualMeeting of Stockholders, which Proxy Statement will be filed with theSecurities and Exchange Commission on or about July 27, 2007.

**ITEM 11. EXECUTIVE COMPENSATION**

Theinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2007 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 27, 2007.

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

Theinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2007 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 27, 2007.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

Theinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2007 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 27, 2007.

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

Theinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2007 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 27, 2007.

**PART IV**

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

Thefinancial statements listed in the Index to Consolidated Financial Statementson page 24 are filed as part of this report, and such Index is incorporated inthis Item by reference.

Theexhibits listed in the Exhibit Index on page 47 are filed as part of thisreport, and such Index is incorporated in this Item by reference.

23

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

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

(Submitted in answer to Item 8, Item 9A and Item 15 of Form 10-K,Securities and Exchange Commission)
| **CONSOLIDATED FINANCIAL STATEMENTS**                                                                                                                                                                            | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Reports of Independent  Registered Public Accounting Firms                                                                                                                                                       |       |       |
| Consolidated Balance  Sheets—March 31, 2007 and 2006                                                                                                                                                        |       |       |
| Consolidated  Statements of Operations for the Years Ended March 31, 2007, 2006, and 2005                                                                                                                        |       |       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the Years  Ended March 31, 2007, 2006, and 2005                                                                               |       |       |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2007, 2006, and 2005                                                                                                                        |       |       |
| Notes to  Consolidated Financial Statements                                                                                                                                                                      |       |       |
|                                                                                                                                                                                                             |       |       |
| **CONSOLIDATED  SUPPLEMENTARY FINANCIAL INFORMATION**                                                                                                                                                            |       |       |
| Unaudited  Quarterly Consolidated Financial Data for the Years Ended March 31, 2007 and  2006                                                                                                                    |       |       |
|                                                                                                                                                                                                             |       |       |
| Financial  statement schedules have been omitted because of the absence of conditions  under which they are required or because the required information is given in  the financial statements or notes thereto. |

 

24

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders

of American Science andEngineering, Inc.

We have audited theaccompanying consolidated balance sheets of American Science and Engineering,Inc. and subsidiary (“the Company”) as of March 31, 2007 and 2006 and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for the years then ended.  We also have audited management’s assessment,included in the accompanying Management’s Report on Internal Control overFinancial Reporting, appearing under item 9A, that American Science andEngineering, Inc. and subsidiary maintained effective internal control overfinancial reporting as of March 31, 2007, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).American Science and Engineering, Inc.’s management is responsible for thesefinancial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on thesefinancial statements, an opinion on management’s assessment, and an opinion onthe effectiveness of the Company’s internal control over financial reportingbased on our audits.

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

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

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

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of American Science andEngineering, Inc. and subsidiary as of March 31, 2007 and 2006 and the resultsof their operations and their cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States of America.Also, in our opinion, management’s assessment that American Science andEngineering, Inc. maintained effective internal control over financialreporting as of March 31, 2007 is fairly stated, in all material respects,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Furthermore, in our opinion,American Science and Engineering, Inc. maintained, in all material respects,effective internal control over financial reporting as of March 31, 2007, basedon criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

As discussed in Note 1 tothe consolidated financial statements, the Company adopted SFAS No. 123(R),Share-Based Payment, effective April 1, 2006.
| /s/ Vitale, Caturano &  Company, Ltd. |
|-------------------------------------------|
|                                      |
| VITALE, CATURANO  & COMPANY, LTD.     |
|                                      |
| June 12, 2007                             |
| Boston,  Massachusetts                    |

 

25

----

**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders of

American Science andEngineering, Inc.:

Inour opinion, the consolidated statements of operations, stockholders’ equityand comprehensive income and cash flows for the year ended March 31, 2005present fairly, in all material respects, the results of operations and cashflows of American Science and Engineering, Inc. and subsidiary for the yearended March 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit. We conducted ouraudit of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 
| /s/ PricewaterhouseCoopers  LLP |
|---------------------------------|
| Boston,  Massachusetts          |
| June 17, 2005                   |

 

26

----

**AmericanScience and Engineering, Inc. and Subsidiary**

**Consolidated Balance Sheets****March 31, 2007 and 2006**

(Amounts in thousands, except share and per share amounts)
|                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                    |       |     |       |     |       |
| Current assets:                                                               |       |     |       |     |       |
| Cash and cash equivalents                                                     |       | $        | 69,650     |     | $          | 50,655 |   |
| Restricted cash and  investments                                              |       | 202      |       | 98       |       |
| Short-term investments                                                        |       | 66,086   |       | 43,117   |       |
| Accounts receivable,  net of allowances of $224 in 2007 and $345 in 2006      |       | 23,366   |       | 25,868   |       |
| Unbilled costs and  fees, net of allowances of $0 in 2007 and $36 in 2006     |       | 5,841    |       | 4,057    |       |
| Inventories                                                                   |       | 20,140   |       | 16,886   |       |
| Prepaid expenses and  other current assets                                    |       | 6,730    |       | 9,862    |       |
| Deferred income taxes                                                         |       | 3,087    |       | 3,381    |       |
| **Total current assets**                                                      |       | 195,102  |       | 153,924  |       |
| Building, equipment and  leasehold improvements, net                          |       | 23,054   |       | 18,717   |       |
| Restricted cash and  investments                                              |       | 2,599    |       | —   |       |
| Deferred income taxes                                                         |       | 970      |       | 748      |       |
| ** **                                                                    |       |     |       |     |       |
| **Total assets**                                                              |       | $        | 221,725    |     | $          | 173,389 |   |
| ** **                                                                    |       |     |       |     |       |
| **Liabilities and Stockholders’  Equity**                                |       |     |       |     |       |
| Current liabilities:                                                          |       |     |       |     |       |
| Accounts payable                                                              |       | $        | 8,117      |     | $          | 6,659 |   |
| Accrued salaries and  benefits                                                |       | 7,241    |       | 6,554    |       |
| Accrued warranty costs                                                        |       | 1,997    |       | 3,606    |       |
| Deferred revenue                                                              |       | 4,321    |       | 3,331    |       |
| Customer deposits                                                             |       | 11,554   |       | 6,103    |       |
| Current portion of  lease financing liability                                 |       | 1,263    |       | 787      |       |
| Warrant liability                                                             |       | 634      |       | —   |       |
| Other current liabilities                                                     |       | 4,290    |       | 1,853    |       |
| **Total current liabilities**                                                 |       | 39,417   |       | 28,893   |       |
| Lease financing  liability, net of current portion                            |       | 10,379   |       | 9,630    |       |
| Warrant liability                                                             |       | —   |       | 4,038    |       |
| Other long term  liabilities                                                  |       | 4,231    |       | 630      |       |
|                                                                          |       |     |       |     |       |
| **Total liabilities**                                                         |       | 54,027   |       | 43,191   |       |
|                                                                          |       |     |       |     |       |
| Commitments and  contingencies (Notes 2 and 8)                                |       |     |       |     |       |
| Stockholders’ equity:                                                    |       |     |       |     |       |
| Preferred stock,  no par value                                                |       |     |       |     |       |
| Authorized—100,000  shares                                               |       |     |       |     |       |
| Issued—None                                                              |       | —   |       | —   |       |
| Common stock, $0.662/3 par value                                         |       |     |       |     |       |
| Authorized—20,000,000  shares                                            |       |     |       |     |       |
| Issued and outstanding  9,186,975 shares in 2007 and 9,070,679 shares in 2006 |       | 6,125    |       | 6,047    |       |
| Capital in excess of  par value                                               |       | 105,036  |       | 94,061   |       |
| Accumulated other  comprehensive income                                       |       | 48       |       | (16      | )          |
| Unearned compensation                                                         |       | —   |       | (1,773   | )          |
| Retained earnings                                                             |       | 56,489   |       | 31,879   |       |
|                                                                          |       |     |       |     |       |
| **Total stockholders’ equity**                                           |       | 167,698  |       | 130,198  |       |
| ** **                                                                    |       |     |       |     |       |
| **Total liabilities and stockholders’ equity**                           |       | $        | 221,725    |     | $          | 173,389 |   |

 

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

27

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**American Science and Engineering, Inc. andSubsidiaryConsolidated Statements of OperationsFor the Years Ended March 31, 2007, 2006, and 2005**

(Amounts in thousands except per share amounts)
|                                               | ** **        | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|-------------------|----------|------------|----------|------------|----------|------------|
| **Net  sales and contract revenues:**         |              |     |       |     |       |     |       |
| Net product  sales and contract revenues      |              | $        | 101,140    |     | $          | 128,076  |       | $ | 68,910 |   |
| Net service  revenues                         |              | 52,046   |       | 35,528   |       | 19,404   |       |
| **Total  net sales and contract revenues**    |              | 153,186  |       | 163,604  |       | 88,314   |       |
| ** **                                    |              |     |       |     |       |     |       |
| **Cost of  sales and contracts:**             |              |     |       |     |       |     |       |
| Cost of product  sales and contracts          |              | 60,033   |       | 65,374   |       | 47,074   |       |
| Cost of service  revenues                     |              | 26,614   |       | 20,032   |       | 10,752   |       |
| **Total  cost of sales and contracts**        |              | 86,647   |       | 85,406   |       | 57,826   |       |
| ** **                                    |              |     |       |     |       |     |       |
| **Gross  profit**                             |              | 66,539   |       | 78,198   |       | 30,488   |       |
| ** **                                    |              |     |       |     |       |     |       |
| Selling, general  and administrative expenses |              | 27,136   |       | 19,642   |       | 14,287   |       |
| Research and  development costs               |              | 7,184    |       | 9,601    |       | 5,727    |       |
| Gain on sale of  assets                       |              | —   |       | (336     | )          | (5,442   | )          |
|                                          |              |     |       |     |       |     |       |
| **Operating  expenses**                       |              | 34,320   |       | 28,907   |       | 14,572   |       |
| ** **                                    |              |     |       |     |       |     |       |
| **Operating  income**                         |              | 32,219   |       | 49,291   |       | 15,916   |       |
| ** **                                    |              |     |       |     |       |     |       |
| **Other  income (expense):**                  |              |     |       |     |       |     |       |
| Interest and  investment income               |              | 5,621    |       | 2,513    |       | 575      |       |
| Interest expense                              |              | (353     | )          | (24      | )          | —   |       |
| Other, net                                    |              | 259      |       | 83       |       | (123     | )          |
| Change in  warrant valuation                  |              | 2,270    |       | (6,094   | )          | (5,101   | )          |
| **Total  other income (expense)**             |              | 7,797    |       | (3,522   | )          | (4,649   | )          |
| ** **                                    |              |     |       |     |       |     |       |
| **Income  before provision for income taxes** |              | 40,016   |       | 45,769   |       | 11,267   |       |
| **Provision  for income taxes**               |              | 15,406   |       | 15,983   |       | 82       |       |
| ** **                                    |              |     |       |     |       |     |       |
| **Net  income**                               |              | $        | 24,610     |     | $          | 29,786   |       | $ | 11,185 |   |
| ** **                                    |              |     |       |     |       |     |       |
| **Income  per share**                         | **—Basic**   |     | $          | 2.70     |       | $        | 3.48       |   | $ | 1.41 |   |
| ** **                                    | **—Diluted** |     | $          | 2.38     |       | $        | 3.27       |   | $ | 1.31 |   |
| **Weighted  average shares**                  | **—Basic**   |     | 9,117      |     | 8,555      |     | 7,937      |   |
| ** **                                    | **—Diluted** |     | 9,368      |     | 9,113      |     | 8,565      |   |

 

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

28

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**AmericanScience and Engineering, Inc. and Subsidiary**

**Consolidated Statements of Stockholders’ Equityand Comprehensive IncomeFor the Years Ended March 31, 2007, 2006, and 2005**

(Amounts in thousands, except share amounts)
|                                                                      | ** ** | **Common Stock** | ** ** | ** **     | ** ** | **Retained**                                        | ** ** | **Accumulated**                      | ** ** | ** **               | ** ** | ** **                 | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                           | ** ** | **Shares**            | ** ** | **Par  Value** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Earnings  (Accumulated  Deficit)** | ** ** | **Other  Comp.  Income** | ** ** | **Unearned  Compensation** | ** ** | **Total**  | ** ** | **Comprehensive  Income** | ** ** |
| ** **                                                           |       |                  |       |           |       |                                                |       |                                 |       |                     |       |                       |       |       |       |   |   |
| **Balance,  March 31, 2004**                                         |       | 7,415,660             |       | $              | 4,943      |                                                | $          | 42,683                               |       | $                        | (9,092     | )                          | $          | 14         |       | $ | (115 | ) | $ | 38,433 |   |   |   |
| Net income                                                           |       | —                |       | —         |       | —                                              |       | 11,185                               |       | —                   |       | —                     |       | 11,185     |       | 11,185 |   |
| Exercise of stock  options  and warrants                        |       | 900,566               |       | 600            |       | 10,749                                              |       | —                               |       | —                   |       | —                     |       | 11,349     |       | — |   |
| Issuance of stock  under employee compensation plans                 |       | 17,296                |       | 12             |       | 424                                                 |       | —                               |       | —                   |       | —                     |       | 436        |       | — |   |
| Issuance of  restricted stock                                        |       | 7,958                 |       | 5              |       | 242                                                 |       | —                               |       | —                   |       | (247                       | )          | —     |       | — |   |
| Translation  adjustment                                              |       | —                |       | —         |       | —                                              |       | —                               |       | (2                       | )          | —                     |       | (2         | )          | (2 | ) |
| Amortization of  unearned compensation                               |       | —                |       | —         |       | —                                              |       | —                               |       | —                   |       | 193                        |       | 193        |       | — |   |
| Unrealized gain  (loss) on available for sale securities, net        |       | —                |       | —         |       | —                                              |       | —                               |       | (24                      | )          | —                     |       | (24        | )          | (24 | ) |
|                                                                 |       |                  |       |           |       |                                                |       |                                 |       |                     |       |                       |       |       |       |   |   |
| **Balance,  March 31, 2005**                                         |       | 8,341,480             |       | 5,560          |       | 54,098                                              |       | 2,093                                |       | (12                      | )          | (169                       | )          | 61,570     |       | $ | 11,159 |   |
| Net income                                                           |       | —                |       | —         |       | —                                              |       | 29,786                               |       | —                   |       | —                     |       | 29,786     |       | 29,786 |   |
| Exercise of stock  options and warrants                              |       | 695,777               |       | 465            |       | 19,700                                              |       | —                               |       | —                   |       | —                     |       | 20,165     |       | — |   |
| Issuance of stock  under employee compensation plans                 |       | 9,344                 |       | 6              |       | 484                                                 |       | —                               |       | —                   |       | —                     |       | 490        |       | — |   |
| Issuance of  restricted stock                                        |       | 24,078                |       | 16             |       | 2,135                                               |       | —                               |       | —                   |       | (2,151                     | )          | —     |       | — |   |
| Tax benefit  accrued on stock option exercises                       |       | —                |       | —         |       | 17,540                                              |       | —                               |       | —                   |       | —                     |       | 17,540     |       | — |   |
| Compensation  expense on stock options                               |       | —                |       | —         |       | 104                                                 |       | —                               |       | —                   |       | —                     |       | 104        |       | — |   |
| Translation  adjustment                                              |       | —                |       | —         |       | —                                              |       | —                               |       | (3                       | )          | —                     |       | (3         | )          | (3 | ) |
| Amortization of  unearned compensation                               |       | —                |       | —         |       | —                                              |       | —                               |       | —                   |       | 547                        |       | 547        |       | — |   |
| Unrealized gain  (loss) on available for sale securities,net         |       | —                |       | —         |       | —                                              |       | —                               |       | (1                       | )          | —                     |       | (1         | )          | (1 | ) |
|                                                                 |       |                  |       |           |       |                                                |       |                                 |       |                     |       |                       |       |       |       |   |   |
| **Balance,  March 31, 2006**                                         |       | 9,070,679             |       | 6,047          |       | 94,061                                              |       | 31,879                               |       | (16                      | )          | (1,773                     | )          | 130,198    |       | $ | 29,782 |   |
| Net income                                                           |       | —                |       | —         |       | —                                              |       | 24,610                               |       | —                   |       | —                     |       | 24,610     |       | 24,610 |   |
| Exercise of stock  options and warrants                              |       | 67,130                |       | 45             |       | 2,912                                               |       | —                               |       | —                   |       | —                     |       | 2,957      |       | — |   |
| Issuance of stock  under employee compensation plans                 |       | 10,530                |       | 7              |       | 631                                                 |       | —                               |       | —                   |       | —                     |       | 638        |       | — |   |
| Issuance of  restricted stock                                        |       | 38,636                |       | 26             |       | 11                                                  |       | —                               |       | —                   |       | —                     |       | 37         |       | — |   |
| Tax benefit  accrued on stock option exercises                       |       | —                |       | —         |       | 544                                                 |       | —                               |       | —                   |       | —                     |       | 544        |       | — |   |
| Compensation  expense on stock options                               |       | —                |       | —         |       | 7,186                                               |       | —                               |       | —                   |       | —                     |       | 7,186      |       | — |   |
| Compensation  expense on restricted stock and restricted stock units |       | —                |       | —         |       | 1,464                                               |       | —                               |       | —                   |       | —                     |       | 1,464      |       | — |   |
| Translation  adjustment                                              |       | —                |       | —         |       | —                                              |       | —                               |       | 16                       |       | —                     |       | 16         |       | 16 |   |
| Reversal of unearned  compensation upon adoption of FAS 123(R)       |       | —                |       | —         |       | (1,773                                              | )          | —                               |       | —                   |       | 1,773                      |       | —     |       | — |   |
| Unrealized gain  (loss) on available for sale securities, net        |       | —                |       | —         |       | —                                              |       | —                               |       | 48                       |       | —                     |       | 48         |       | 48 |   |
|                                                                 |       |                  |       |           |       |                                                |       |                                 |       |                     |       |                       |       |       |       |   |   |
| **Balance, March 31, 2007**                                          |       | 9,186,975             |       | $              | 6,125      |                                                | $          | 105,036                              |       | $                        | 56,489     |                       | $          | 48         |       | $ | — |   | $ | 167,698 |   | $ | 24,674 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

29

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**AmericanScience and Engineering, Inc. and Subsidiary**

**Consolidated Statements of Cash FlowsFor the Years Ended March 31, 2007, 2006, and 2005**

(Amounts in thousands)
|                                                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash  flows from operating activities:**                                                                  |       |     |       |     |       |     |       |
| Net income                                                                                                  |       | $        | 24,610     |     | $          | 29,786   |       | $ | 11,185 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                          |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                               |       | 2,425    |       | 989      |       | 1,234    |       |
| Provisions for contracts, inventory, and accounts  receivable reserves                                      |       | (203     | )          | 2,673    |       | 2,057    |       |
| Gain on sale of assets                                                                                      |       | —   |       | (336     | )          | (5,442   | )          |
| Change in value of warrants                                                                                 |       | (2,270   | )          | 6,094    |       | 5,101    |       |
| Realized gain on short-term investments                                                                     |       | —   |       | —   |       | (8       | )          |
| Amortization of bond discount                                                                               |       | (1,666   | )          | (356     | )          | (95      | )          |
| Stock compensation expense                                                                                  |       | 8,687    |       | 651      |       | 193      |       |
| Deferred income taxes                                                                                       |       | 72       |       | 5,627    |       | —   |       |
| Reversal of deferred tax asset valuation allowance  relating to the utilization of tax net operating losses |       | —   |       | (2,715   | )          | —   |       |
| Change in assets and liabilities:                                                                           |       |     |       |     |       |     |       |
| Accounts receivable                                                                                         |       | 2,621    |       | 2,408    |       | (13,650  | )          |
| Unbilled costs and fees                                                                                     |       | (1,748   | )          | (3,338   | )          | 3,722    |       |
| Inventories                                                                                                 |       | (3,206   | )          | 5,248    |       | (16,660  | )          |
| Prepaid expenses and other assets                                                                           |       | 1,878    |       | (5,566   | )          | (67      | )          |
| Accounts payable                                                                                            |       | 1,458    |       | (84      | )          | 3,053    |       |
| Deferred revenue                                                                                            |       | 4,591    |       | (212     | )          | 1,577    |       |
| Customer deposits                                                                                           |       | 5,451    |       | (5,029   | )          | 6,713    |       |
| Accrued expenses and other current liabilities                                                              |       | 2,154    |       | 4,358    |       | 3,476    |       |
| Non-current liabilities                                                                                     |       | —   |       | (51      | )          | 7        |       |
|                                                                                                        |       |     |       |     |       |     |       |
| Total  adjustments                                                                                          |       | 20,244   |       | 10,361   |       | (8,789   | )          |
|                                                                                                        |       |     |       |     |       |     |       |
| Net cash  provided by operating activities                                                                  |       | 44,854   |       | 40,147   |       | 2,396    |       |
| ** **                                                                                                  |       |     |       |     |       |     |       |
| **Cash  flows from investing activities:**                                                                  |       |     |       |     |       |     |       |
| Proceeds from maturities of short-term investments                                                          |       | 109,345  |       | 39,146   |       | 9,987    |       |
| Purchases of short-term instruments                                                                         |       | (130,600 | )          | (61,334  | )          | (28,653  | )          |
| Proceeds from sale of assets                                                                                |       | —   |       | 2,800    |       | 5,500    |       |
| Issuance of note receivable                                                                                 |       | (1,000   | )          | —   |       | —   |       |
| Purchases of property and equipment                                                                         |       | (4,733   | )          | (11,224  | )          | (2,691   | )          |
| Disposals of property and equipment                                                                         |       | —   |       | —   |       | 127      |       |
| Cash used for investing activities                                                                          |       | (26,988  | )          | (30,612  | )          | (15,730  | )          |
| ** **                                                                                                  |       |     |       |     |       |     |       |
| **Cash  flows from financing activities:**                                                                  |       |     |       |     |       |     |       |
| (Increase) decrease in restricted cash and  investments                                                     |       | (2,703   | )          | 257      |       | 230      |       |
| Proceeds from financing of leasehold improvements                                                           |       | 2,253    |       | 3,339    |       | —   |       |
| Repayment of leasehold financing                                                                            |       | (804     | )          | (378     | )          | —   |       |
| Proceeds from exercise of warrants                                                                          |       | 834      |       | 1,854    |       | 1,743    |       |
| Proceeds from exercise of stock options                                                                     |       | 989      |       | 10,118   |       | 8,549    |       |
| Reduction of income taxes paid due to the tax benefit  from employee stock option expense                   |       | 544      |       | 10,515   |       | —   |       |
| Cash provided by financing activities                                                                       |       | 1,113    |       | 25,705   |       | 10,522   |       |
|                                                                                                        |       |     |       |     |       |     |       |
| Foreign currency  translation effect on cash                                                                |       | 16       |       | (3       | )          | (2       | )          |
|                                                                                                        |       |     |       |     |       |     |       |
| **Net  increase (decrease) in cash and cash equivalents**                                                   |       | 18,995   |       | 35,237   |       | (2,814   | )          |
| **Cash  and cash equivalents at beginning of year**                                                         |       | 50,655   |       | 15,418   |       | 18,232   |       |
| **Cash  and cash equivalents at end of year**                                                               |       | $        | 69,650     |     | $          | 50,655   |       | $ | 15,418 |   |
| ** **                                                                                                  |       |     |       |     |       |     |       |
| **Supplemental  disclosures of cash flow information:**                                                     |       |     |       |     |       |     |       |
| Interest paid                                                                                               |       | $        | 353        |     | $          | 24       |       | $ | — |   |
| Income taxes paid                                                                                           |       | $        | 12,495     |     | $          | 7,598    |       | $ | 166 |   |
| **Non-cash  transactions:**                                                                                 |       |     |       |     |       |     |       |
| Issuance of stock for 401K match                                                                            |       | $        | 638        |     | $          | 490      |       | $ | 436 |   |
| Issuance of restricted stock                                                                                |       | $        | —     |     | $          | 2,151    |       | $ | 247 |   |
| Assumption of debt / lease financing receivable                                                             |       | $        | 2,029      |     | $          | 2,303    |       | $ | — |   |
| Note receivable in exchange for sale of assets                                                              |       | $        | —     |     | $          | —   |       | $ | 2,800 |   |
| Fair value of  warrants exercised                                                                           |       | $        | 1,134      |     | $          | 8,193    |       | $ | 1,057 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**AmericanScience and Engineering, Inc. and Subsidiary**

**Notes to Consolidated Financial Statements**

**1. Natureof Operations and Summary of Significant Accounting Policies**

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

**Principles of Consolidation:**  The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiary. All significantinter-company balances and transactions have been eliminated in consolidation.

**Use of Estimates:**  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

**Cash and Cash Equivalents:**  The Company considers all investments withoriginal maturities of 90 days or less to be cash equivalents.  The Company maintains cash and cashequivalent balances with financial institutions that exceed federally insuredlimits.  The Company has not experiencedany losses related to these balances, and management believes its credit riskto be minimal. Cash and cash equivalents are carried at cost, whichapproximates fair market value at fiscal year-end 2007 and 2006.

**Restricted Cash and Investments:** The Company’s loan and security agreement withits bank require certain cash and investment balances to be restricted ascollateral against outstanding standby letters of credit. The restricted cashamounts with Silicon Valley Bank are in the form of certificates of depositsthat mature beyond 90 days.  Restrictionsthat mature beyond one year are classified as long-term in the accompanyingbalance sheet.

**Short-term Investments and Cash Equivalents:**  Short-term investments and cash equivalentsconsist of investments in money market funds and U.S government and governmentagency bonds. These investments are classified as available-for-sale and arerecorded at their fair market values. The unrealized holding gains or losses onthese securities are included as a component of comprehensive income in theConsolidated Statements of Stockholders’ Equity and Comprehensive Income.

|                               | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **2007:**                     |       |                |       |                         |       |                          |       |                |       |
| Money market  funds           |       | $                   | 6,240      |                         | $          | —                        |       | $                   | —     |   | $ | 6,240 |   |
| Certificates of  deposit      |       | 4,201               |       | —                       |       | (1                            | )          | 4,200               |       |
| Commercial paper              |       | 72,760              |       | 6                            |       | (1                            | )          | 72,765              |       |
| Corporate  debentures/bonds   |       | 37,762              |       | 9                            |       | (6                            | )          | 37,765              |       |
| U.S. Government  agency bonds |       | 3,974               |       | —                       |       | —                        |       | 3,974               |       |
|  Total                   |       | $                   | 124,937    |                         | $          | 15                            |       | $                   | (8         | ) | $ | 124,944 |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| Classified as:                |       |                |       |                         |       |                          |       |                |       |
| Cash equivalents              |       |                |       |                         |       |                          |       | $                   | 58,858     |   |
| Short term  securities        |       |                |       |                         |       |                          |       | 66,086              |       |
|                          |       |                |       |                         |       |                          |       | $                   | 124,944    |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| **2006:**                     |       |                |       |                         |       |                          |       |                |       |
| Money market funds            |       | $                   | 5,081      |                         | $          | —                        |       | $                   | —     |   | $ | 5,081 |   |
| Certificates of deposit       |       | 5,792               |       | —                       |       | (8                            | )          | 5,784               |       |
| Commercial paper              |       | 46,761              |       | 4                            |       | (3                            | )          | 46,762              |       |
| Corporate  debentures/bonds   |       | 15,306              |       | —                       |       | (23                           | )          | 15,283              |       |
| U.S. Government agency  bonds |       | 15,161              |       | 1                            |       | (12                           | )          | 15,150              |       |
|  Total                   |       | $                   | 88,101     |                         | $          | 5                             |       | $                   | (46        | ) | $ | 88,060 |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| Classified as:                |       |                |       |                         |       |                          |       |                |       |
| Cash equivalents              |       |                |       |                         |       |                          |       | $                   | 44,943     |   |
| Short term securities         |       |                |       |                         |       |                          |       | 43,117              |       |
|                          |       |                |       |                         |       |                          |       | $                   | 88,060     |   |

 

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**Accounts Receivable:**  The allowance for doubtful accounts reflectsour best estimate of probable losses inherent in the accounts receivablebalance. We determine the allowance based on known troubled accounts,historical experience, and other currently available evidence. Activity in theallowance for doubtful accounts is as follows:

| (In thousands) | ** ** | **Balance at  Beginning of  Year**                           | ** ** | **Charged  (Credited) to  Costs and  Expenses**              | ** ** | **Deductions /  Writeoffs  Charged to  Reserves**                                  | ** ** | **Balance  at End  of Year**                                 | ** ** |
|---------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| 2007                |       | $           345 |       | $         (119            | )          | $               2 |       | $           224 |       |
| 2006                |       | $           501 |       | $         (106            | )          | $             50            |       | $           345 |       |
| 2005                |       | $           250 |       | $           251 |       | $            —              |       | $           501 |       |

 

In fiscal 2007 and2006, the Company had a net credit to bad debt expense as it collected oncertain accounts receivable balances which were significantly aged and deemedto be uncollectible at the prior year ends.

**Inventories:** Inventories consistof material, labor and manufacturing overhead and are recorded at the lower ofcost, using the weighted average cost method, or net realizable value. Excessivemanufacturing overhead costs attributable to idle facility expenses, freight,handling costs and wasted material (spoilage) attributable to abnormally lowproduction volumes (levels that materially differ from budgeted productionplans due primarily to changes in customer demand) are excluded from inventoryand recorded as an expense in the period incurred.

Thecomponents of inventories at March 31, 2007 and 2006 were as follows:

| (In thousands)                                     | ** ** | **2007**                  | ** ** | **2006**                             | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| Raw materials, completed  subassemblies and spare parts |       | $   11,260 |       | $     6,856 |       |
| Work-in-process                                         |       | 6,681                     |       | 6,325                                |       |
| Finished goods                                          |       | 2,199                     |       | 3,705                                |       |
| **Total**                                               |       | $   20,140 |       | $   16,886            |       |

 

TheCompany periodically reviews quantities of inventory on hand and compares theseamounts to expected usage of each particular product or product line. TheCompany records, as a charge to cost of sales, any amounts required to reducethe carrying value to net realizable value.

**Building,****Equipmentand Leasehold Improvements:** The Company provides for depreciation and amortization of its fixedassets on a straight-line basis over estimated useful lives of 3-11 years orremaining lease terms. Expenditures for normal maintenance and repairs arecharged to expense as incurred. Significant additions, renewals or bettermentsthat extend the useful lives of the assets are capitalized at cost. The costand accumulated depreciation applicable to equipment and leasehold improvementssold, or otherwise disposed of, are removed from the accounts, and anyresulting gain or loss is included in the consolidated statements ofoperations.

Building,equipment and leasehold improvements consisted of the following at March 31:
| **(In thousands)**                             | ** ** | **Estimated Useful Lives**         | ** ** | **2007**                                                                                                                                          | ** ** | **2006**                                                                                                                                          | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Building and leasehold  improvements                |       | Lesser  of 11 years or  remaining lease term |       | $                       17,252 |       | $                       14,380 |       |
| Equipment and tooling                               |       | 3-10  years                                  |       | 2,306                                                                                                                                             |       | 2,465                                                                                                                                             |       |
| Computer equipment and  software                    |       | 3-5  years                                   |       | 14,272                                                                                                                                            |       | 10,268                                                                                                                                            |       |
| Furniture and fixtures                              |       | 5-7  years                                   |       | 1,319                                                                                                                                             |       | 1,272                                                                                                                                             |       |
| Demo and test equipment                             |       | 3-7  years                                   |       | 3,120                                                                                                                                             |       | 3,122                                                                                                                                             |       |
| Motor vehicles                                      |       | 3  years                                     |       | 18                                                                                                                                                |       | 18                                                                                                                                                |       |
| Total                                               |       |                                         |       | 38,287                                                                                                                                            |       | 31,525                                                                                                                                            |       |
| Less accumulated  depreciation and amortization     |       |                                         |       | (15,233                                                                                                                                           | )          | (12,808                                                                                                                                           | )          |
| Building, equipment and leasehold improvements, net |       |                                         |       | $                       23,054 |       | $                       18,717 |       |

 

**Revenue Recognition:**  The Company recognizes certain CargoSearchand Z Backscatter system sales and other product revenue, primarilyParcelSearch systems and after-market parts, in accordance with SEC StaffAccounting Bulletin  (“SAB”)No. 101,Revenue Recognition in Financial Statements modified by Emerging Issues TaskForce (“EITF”) No. 00-21 and SAB No. 104 which requires that four basiccriteria must be met before revenue can be recognized: (1) persuasive evidenceof an arrangement exists; (2) delivery has occurred or services rendered; (3)the fee is fixed and determinable; and (4) collectibility is reasonablyassured. In those instances where the Company enters into agreements involvingmultiple revenue elements, the

32

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agreement is divided intoseparate elements of accounting, the arrangement consideration is allocated tothese elements based on fair value, and revenue recognition is consideredseparately for each individual element. Revenues on cost reimbursable andlong-term fixed price contracts are generally recorded as costs are incurred usingthe percentage of completion method. These contracts are for custom-builtsystems or contract engineering projects and the length of these contractstypically range from 9 to 24 months from order to delivery and acceptance.Percentages-of-completion are determined by relating the actual costs of workperformed to date for each contract to its estimated final costs. Revisions incosts and profit estimates are reflected in the period in which the factscausing the revision become known.

Certaincontracts require payments from the customer upon execution of the agreementthat are included in customer deposits. Individual customer deposits arereduced by the amount of revenue recognized on the contract until a zerobalance is reached. Revenue recognized in excess of billings or customerdeposits under the contracts is included in unbilled costs and fees in theaccompanying balance sheet. The amounts in unbilled costs and fees at March 31,2007 are expected to be billed and collected during fiscal 2008.

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

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 $46,000 and $77,000 at March 31, 2007 and 2006, respectively)  result from both commercial contract retentions and government contract withholdings generally for up to 15% of fees, as well as the difference between the actual and provisional indirect cost billing rates. Retainages are included in the accompanying consolidated balance sheets as components of unbilled costs and fees. The accuracy and appropriateness of the Company’s direct and indirect costs and expenses under these cost reimbursement contracts and its accounts receivable recorded pursuant to such contracts, are subject to regulation and audit, including by the U.S.  Defense Contract Audit Agency (“DCAA”) or by other appropriate agencies of the U.S. Government.  Such agencies  have the right to  challenge  the  Company’s  cost  estimates  or allocations  with  respect  to any  government  contract.  Additionally, a portion of the payments to the Company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.  Historically, such audits have not resulted in any significant disallowed costs.  Although the Company can give no assurances, in the  opinion  of  management,  any  adjustments  likely to  result  from inquiries  or  audits of its  contracts  will not have a  material  adverse impact on the Company’s financial condition or results of operations.

TheCompany recognizes sales for its systems that are produced in a standardmanufacturing operation and have shorter order to delivery cycles at the timeof shipment of the system to the customer and when other revenue recognitioncriteria are met. The costs of installation at the customer’s site are accruedat the time of shipment. Management believes the customer’s post-deliveryacceptance provisions and installation are perfunctory and inconsequential. TheCompany has never failed to successfully complete a system installation.Installation is non-complex and does not require specialized skills and therelated costs are predictable and insignificant to the total purchase price.The Company has demonstrated a history of customer acceptance subsequent toshipment and installation of these systems.

Servicerevenues are recognized on time and materials engagements as the services areprovided. Service contract revenues are recognized on a straight-line basisover the length of the contract which reasonably approximates the periodservice revenues are earned.

TheCompany records billed shipping and handling fees and billed out-of-pocketexpenses as revenue and the associated costs as cost of goods sold in theaccompanying consolidated statements of operations.

Includedin accounts receivable and unbilled costs and fees at March 31, 2007 and 2006are $23,976,000  and $24,241,000,respectively, attributable to both prime and subcontracts with federal andstate governments. The Company establishes a reserve against unbilled costs andfees based on known troubled accounts or contracts, historical experience, andother currently available evidence. Activity in the allowance for unbilledcosts and fees is as follows:

| (In thousands) | ** ** | **Balance at  Beginning of  Year**                                | ** ** | **Charged  (Credited) to  Costs and  Expenses**                   | ** ** | **Deductions /  Writeoffs  Charged to  Reserves**                     | ** ** | **Balance at  End of  Year**                                          | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **2007**            |       | $            36 |       | $           (36      | )          | $            — |       | $            — |       |
| **2006**            |       | $            76 |       | $           (28      | )          | $            12     |       | $            36     |       |
| **2005**            |       | $          394            |       | $            55 |       | $          373                |       | $            76     |       |

 

**Warranty Costs:** The Company generally provides on certain ofits products a one year parts and labor warranty with the purchase of domesticequipment, and a one year parts only warranty on international equipment. Theanticipated cost for this one

33

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year warranty is accruedfor at the time of the sale based upon historical experience and management’sestimates of future liabilities, and is recorded as accrued warranty costs (SeeNote 5).

**Deferred Revenue:**  The Company offers to its customers extendedwarranty and service contracts. The coverage period of these contracts willtypically range from one to five years, and typically with advance paymentsthat are recorded as deferred revenue. Revenue is recognized on a straight-linebasis over the life of the contract, which reasonably approximates the periodthese revenues are earned. Costs associated with these extended warranty andservice contracts are expensed to cost of goods sold as incurred.

**Impairment of Long-Lived Assets:**  Long-lived assets are reviewed for possibleimpairment whenever events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable in accordance with SFASNo. 144, Accounting for the Impairment and Disposal of Long-Lived Assets.

Impairmentis assessed by comparing the estimated undiscounted cash flows over the asset’sremaining life to the carrying amount of the asset. If the estimated cash flowsare insufficient to recover the asset, an impairment loss is recognized basedon the difference between the carrying value of the asset and the fair value ofthe asset less any costs of disposal.

**Accrued Salaries and Benefits:**  Accrued salaries and benefits at March 31,2007 and March 31, 2006 include the following:

| (In thousands)                        | ** ** | **2007**               | ** ** | **2006**               | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Accrued payroll  and payroll related taxes |       | $   510 |       | $   461 |       |
| Accrued benefits                           |       | 212                    |       | 166                    |       |
| Accrued bonus                              |       | 5,269                  |       | 4,799                  |       |
| Accrued vacation                           |       | 1,250                  |       | 1,128                  |       |
|                                       |       | $ 7,241           |       | $ 6,554           |       |

 

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

**Research and Development:**  Internally funded research and developmentcosts including direct labor, material, subcontractor expenses and relatedoverheads are expensed as incurred. Internally funded research and developmentcosts were $7,184,000, $9,601,000 and $5,727,000 in fiscal 2007, 2006 and 2005,respectively.  In addition, the Companyrecognized revenues of $6,597,000, $2,804,000, and $2,534,000, in fiscal 2007,2006, and 2005, respectively related to government-sponsored research anddevelopment earned primarily on a cost reimbursement and fee basis as discussedabove.

**Fair Value of Financial Instruments:**  The Company’s financial instruments consistprimarily of cash and cash equivalents, short-term investments, accountsreceivable, unbilled costs and fees, accounts payable, warrant liability andletters of credit. The recorded amounts of these instruments approximate fairvalue.

**Income Per Common and Potential Common Shares:**  Basic earnings per common share is computedby dividing net income available to common stockholders by the weighted averagenumber of shares of common stock outstanding during the year. Diluted earningsper share include the dilutive impact of options and warrants using the averageshare price of the Company’s common stock for the period. For the years endedMarch 31, 2007, 2006 and 2005, respectively, 108,000, 72,000, and 42,000 shares attributable to the exercise ofoutstanding options and warrants are excluded from diluted earnings per share,as their effect is anti-dilutive.

|                                                                                          | ** ** | **Year Ended**                 | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                               | ** ** | **March 31,**                  | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| **(In thousands except per share amounts)**                     | ** ** | **2007**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Earnings per Share Basic:**                                                            | ** ** | ** **                          |       |   |   |   |   |
| Net income                                                                               | ** ** | $ 24,610                       |       | $ 29,786 |   | $ 11,185 |   |
| Weighted average number  of common shares outstanding—basic                         | ** ** | 9,117                               |       | 8,555 |   | 7,937 |   |
| Income per Share –  Basic                                                           | ** ** | $     2.70 |       | $     3.48 |   | $     1.41 |   |
| ** **                                                                               | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings per Share Diluted:**                                                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                               |       | $ 24,610                       |       | $ 29,786 |   | $ 11,185 |   |
| Adjustment to net  income for change in warrant valuation                                |       | (2,270                              | )          | — |   | — |   |
| Adjusted net income                                                                      | ** ** | $ 22,340                       |       | $ 29,786 |   | $ 11,185 |   |
| Weighted average number  of common shares outstanding—basic                         |       | 9,117                               |       | 8,555 |   | 7,937 |   |
| Assumed exercise of  stock options and warrants, using the treasury stock method         |       | 251                                 |       | 558 |   | 628 |   |
| Weighted average number  of common and potential common shares outstanding —diluted |       | 9,368                               |       | 9,113 |   | 8,565 |   |
| Income per share — Diluted                                                          | ** ** | $     2.38 |       | $     3.27 |   | $     1.31 |   |

 

34

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**Income Taxes:**  The Company accounts for income taxes inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accountingfor Income Taxes.” Accordingly, the Company recognizes deferred income taxesbased on the expected future tax consequences of differences between thefinancial statement basis and the tax basis of assets and liabilities,calculated using enacted tax rates in effect for the year in which thedifferences are expected to be reflected in the tax return. The Company recordsa valuation allowance against any net deferred tax assets if it is more likelythan not that they will not be realized.

**Concentrationsof credit risk:**  Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash and cash equivalents, investments and accountsreceivable.  At times, the Companymaintains cash balances in excess of insured limits. The Company maintains itscash and cash equivalents with major financial institutions.  The Company’s credit risk is managed byinvesting its cash in high quality money market funds, U.S. Governmentinstruments, investment grade corporate bonds and certificates of deposit.

The Company’s twolargest customers at March 31, 2007 comprised 40% of the total accountsreceivable balance, both of whom were agencies of the U.S. Government.  The Company generally requires letters ofcredit and/or prepayments from higher-risk and international customers.  The Company has not experienced anysignificant losses from uncollectible accounts.

**      New Accounting Pronouncements:**  In July 2006, the FASB issued FASBInterpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN48”).  FIN 48 is an interpretation of FASB StatementNo. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity inpractice associated with certain aspects of measurement and recognition inaccounting for income taxes.  Inaddition, FIN 48 requires expanded disclosure with respect to the uncertaintyin income taxes and is required to be adopted for fiscal years beginning afterDecember 15, 2006.  The Company iscurrently evaluating the impact, if any, that FIN 48 will have on itsconsolidated financial statements.

InFebruary 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159),“The Fair Value Option for Financial Assets and Financial Liabilities.” SFASNo. 159 gives entities the option, at specified election dates, to measurecertain financial assets and liabilities at fair value. The election may beapplied to financial assets and liabilities on an instrument by instrumentbasis, is irrevocable, and may only be applied to entire instruments.Unrealized gains and losses on instruments for which the fair value option hasbeen elected will be reported in earnings at each subsequent reporting date.SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. Adoption of SFAS No. 159 is currently not expectedto have a material impact on the Company’s consolidated financial position orresults of operations

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157 “Fair Value Measurements”, (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosure requirements regarding fair valuemeasurement.  FAS 157 is effective for theCompany beginning April 1, 2008. The Company is currently reviewing theStatement to determine the impact and materiality of its adoption to theCompany.

In September 2006,the SEC staff issued Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SAB 108”). SAB 108 was issued in order to eliminate the diversity inpractice surrounding how public companies quantify financial statementmisstatements. SAB 108 requires that registrants quantify errors using both abalance sheet and income statement approach and evaluate whether eitherapproach results in a misstated amount that, when all relevant quantitative andqualitative factors are considered, is material. SAB 108 was required to be implementedby the end of fiscal 2007. We were not impacted by the adoption of this staffaccounting bulletin.

**Stock-Based Compensation: **On April 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(R) (SFAS123(R)) “Accounting for Stock-Based Compensation”, which requires themeasurement and recognition of all compensation costs for all stock basedawards made to employees and the Board of Directors based upon fair value overthe requisite service period for awards expected to vest. Prior to adoption,the Company accounted for stock options under the intrinsic value method set inaccordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,”

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and relatedinterpretations, and provided the required pro forma disclosures prescribed bySFAS  No. 123, “Accounting forShare-based Compensation”, as amended.

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

Stock- based compensationcosts recognized for the year ended March 31, 2007, includes compensation costsfor awards granted prior to, but not yet vested as of April 1, 2006 (adoptiondate), as well as any new grants issued after April 1, 2006.  The Company recognized $8,594,000 of theshare-based compensation costs in the consolidated statements of income for theyear ended March 31, 2007.  In addition,at March 31, 2007, a total $93,000 of compensation costs were capitalized toinventory as such costs qualified for capitalization.  These costs will be recognized in the incomestatement when the inventory is disposed of or consumed.  The income tax benefit related to suchcompensation for the year ended March 31, 2007 was approximately $1,140,000.

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

|                                                    | ** ** | **Fiscal Year Ended**                                                            | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(In thousands)**                            | ** ** | **March 31, 2007**                                                               | ** ** |
| Cost of revenues                                   |       | $              3,559 |       |
| Selling, general  and administrative               |       | 5,035                                                                                      |       |
| Total share-based  compensation expense before tax |       | $              8,594 |       |

 

The Company hadpreviously adopted the provisions of SFAS No. 123, “Accounting forShare-based Compensation,” as amended by SFAS No. 148, “Accounting forShare-based Compensation—Transition and Disclosure,” through disclosure only.The following table illustrates the effect on net income and earnings per sharefor the fiscal years ended March 31, 2006 and 2005 as if the Company hadapplied the fair value recognition provisions of SFAS No. 123 toshare-based employee awards.

| (In thousands except per share amounts)       | ** ** | **2006**                      | ** ** | **2005**                      | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Net income                                                             |       |                          |       |                          |       |
| As reported                                                            |       | $ 29,786                 |       | $ 11,185                 |       |
| Add: Stock based  compensation included in net income as reported      |       | 651                           |       | 193                           |       |
| Less: Stock  based compensation using fair value method for all awards |       | (9,234                        | )          | (5,623                        | )          |
| Pro forma net  income                                                  |       | $ 21,203                 |       | $  5,755            |       |
|                                                                   |       |                          |       |                          |       |
| Income per share  –Basic                                          |       |                          |       |                          |       |
| As reported                                                            |       | $    3.48 |       | $    1.41 |       |
| Pro forma                                                              |       | $    2.48 |       | $    0.73 |       |
| Income per share  –Diluted:                                       |       |                          |       |                          |       |
| As reported                                                            |       | $    3.27 |       | $    1.31 |       |
| Pro forma                                                              |       | $    2.34 |       | $    0.67 |       |

 

Upon adoption of SFAS123(R), in accordance with Staff Accounting Bulletin No. 107, the Companyselected the Black-Scholes option pricing model as the most appropriate methodfor determining the estimated fair value for the stock awards.  The Black-Scholes method of valuationrequires several assumptions: (1) the expected term of the stock award, (2) theexpected future stock volatility over the expected term and (3) risk-freeinterest rate. The expected term represents the expected period of time theCompany believes the options will be outstanding based on historicalinformation. Estimates of expected future stock price volatility are based onthe historic volatility of the Company’s common stock and the risk freeinterest rate is based on the U.S. Zero-Bond rate.  The fair value of options at date of grantwas estimated with the following assumptions:

36

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|                         | ** ** | **Year Ended** | ** ** |
|-------------------------|------------|---------------------|------------|
| ** **              | ** ** | **March 31,**  | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **              | ** ** | **2007**            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Assumptions:**        |       |                |       |   |   |   |   |
| Option life             |       | 3 years             |       | 3 years |   | 5 years |   |
| Risk-free interest rate |       | 4.8                 | %          | 3.4 | % | 3.7 to 5 | % |
| Stock volatility        |       | 56                  | %          | 53 | % | 73 | % |
| Dividend Yield          |       | 0                   | %          | 0 | % | 0 | % |

 

**2. LeaseAgreements**

TheCompany leases certain equipment under operating lease arrangements andfacilities under non-cancelable operating leases with various renewal options.For operating leases which contain fixed escalations in rental payments, theCompany records the total rent payable on a straight-line basis over theoriginal lease term as defined in SFAS 98 “Accounting for Leases.” The Companyincurred $204,000, $634,000, and $1,226,000 of operating rent expense in 2007,2006, and 2005 respectively.   Inconjunction with the Company’s lease for its headquarters, the Company hasissued security in the form of a standby letter of credit in the amount of$300,000 with an original expiration date of March 1, 2006 and containsautomatic extensions through May 15, 2016.

InMarch 2005, the Company renewed its lease agreement for its corporateheadquarters and manufacturing facilities in Billerica, Massachusetts.  Aspart of the lease agreement, the Company’s landlord agreed to certainrenovations to the Billerica facility including the construction of additionalhigh bay manufacturing space.  The Company was responsible for a portionof the construction costs and was deemed to be the owner of the building duringthe construction period under EITF 97-10 “The Effect of Lessee Involvement inAsset Construction”.  In January 2007, the Company amended this leaseagreement to expand its lease to include the remaining available space in thebuilding.  During the year ended March31, 2007 and 2006, the Company capitalized $2,029,000 and $5,153,000 to recordthe facility on its books with an offsetting credit to the Lease FinancingLiability.  In addition, amounts paid for construction were recorded asconstruction in progress and the landlord construction allowances of $5,642,000in 2006 (of which $50,000 was receivable at year end) were recorded asadditional lease financing liability.

Atthe completion of the construction of the initial renovations in February 2006,the lease was reviewed for potential sale-leaseback treatment in accordancewith SFAS No. 98.  Based on this review, it was determined that thelease did not qualify for sale-leaseback treatment in accordance with SFASNo. 98.  As a result, building and tenantimprovement and associated lease financing liabilities remained on the Company’sbooks.  The Lease Financing Liability isbeing amortized over the lease term based on the payments designated in theagreement and the building and tenant improvement assets are being depreciatedon a straight line basis over their useful lives.

Futureminimum rental payments under the Company’s non-cancelable leases, excludingreal estate taxes, insurance and operating costs paid by the Company, requiredover the initial terms of the leases are as follows (in thousands):

| Year Ending March 31,                | ** ** | **Operating Leases**                                                                                        | ** ** | **Capital Leases**                                            | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| 2008                                                |       | $                  192 |       | $          1,278 |       |
| 2009                                                |       | 185                                                                                                              |       | 1,278                                                              |       |
| 2010                                                |       | 185                                                                                                              |       | 1,290                                                              |       |
| 2011                                                |       | 185                                                                                                              |       | 1,412                                                              |       |
| 2012                                                |       | 185                                                                                                              |       | 1,412                                                              |       |
| Thereafter                                          |       | 726                                                                                                              |       | 5,922                                                              |       |
| Total payments                                      |       | $               1,658                 |       | 12,592                                                             |       |
| Imputed interest                                    |       |                                                                                                             |       | (950                                                               | )          |
| Lease financing  liability                          |       |                                                                                                             |       | $        11,642            |       |
| Less: Current portion  of lease financing liability |       |                                                                                                             |       | 1,263                                                              |       |
| Lease financing liability, net of current portion   |       |                                                                                                             |       | $        10,379            |       |

 

**3. Lineof Credit**

OnNovember 16, 2006, the Company modified its domestic loan and securityagreement with Silicon Valley Bank East which was scheduled to expire onNovember 29, 2006.  The Company increasedits domestic facility from $5.0 million to $20.0 million to support theCompany’s routine working capital needs. The Company’s $10.0 million export loan and security facility,guaranteed by the Export-Import Bank of the United States, expired as ofNovember 29, 2006. Maximum amount available for borrowings under thedomestic facility is (a) if the Company’s unrestricted cash is greater than orequal to $30 million, $20.0 million minus the amount of all outstanding letters of credit less certain reserves,and minus the outstanding principal balance of any advances or (b) if theCompany’s unrestricted cash is less than $30.0 million for a period of 30consecutive days, the lesser of (i) the $20.0 million, or ii) 85% of eligibledomestic accounts receivable minus  theamount of outstanding letters of credits adjusted for certain reserves and minusthe principal balance of any advances. The modification of the domestic loan and security agreement extendedthis credit facility through November 14, 2008.

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Thecredit facility bears an interest rate of the greater of 4.0% or the SiliconValley Bank prime rate (8.25% at March 31, 2007). The credit agreement iscollateralized by certain assets of the Company and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants.  As of March 31, 2007, the Company was incompliance with these covenants.

AtMarch 31, 2007, there were no borrowings outstanding against this creditfacility.  Under the terms of the creditagreement, the Company was required to pay certain one-time facility fees whichare being amortized over the lives of the facilities and is required to pay afee of 0.50% quarterly on unused amounts under the line of credits.  Total expenses incurred related to these feeswere $202,000, $172,000, and $300,000, in fiscal 2007, 2006 and 2005,respectively.

Inthe normal course of business, the Company may provide certain customers andpotential customers with performance guarantees, which are generally backed bystandby letters of credit. In general, the Company would only be liable for theamount of these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.   The Company had outstanding $16,763,000 instand-by letters of credit against the domestic facility with $3,237,000remaining availability.   Of theoutstanding letters of credit, $300,000 relates to the Company’s building leaseand the remainder is guaranteeing performance on certain internationalprojects.   No amounts have been drawnagainst these letters of credit. In addition at March 31, 2007, the Company hada restricted cash balance of $2,801,000 related to certain bank requireddeposits for outstanding letters of credits, bid bonds, and other bank-relatedfees.

**4. IncomeTaxes**

Theprovision for income taxes for the years ended March 31, 2007, 2006, and 2005consisted of the following:

| (In thousands)            | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2005**                                      | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|-----------------------------------------------|------------|
| Current:                       |       |          |       |          |       |                                          |       |
| Federal                        |       | $ 13,909 |       | $ 11,388 |       | $       46 |       |
| State                          |       | 1,419         |       | 1,653         |       | 6                                             |       |
| Foreign                        |       | 30            |       | 30            |       | 30                                            |       |
|                           |       | 15,358        |       | 13,071        |       | 82                                            |       |
| Deferred                       |       |          |       |          |       |                                          |       |
| Federal                        |       | (204          | )          | 5,090         |       | —                                        |       |
| State                          |       | 252           |       | 537           |       | —                                        |       |
| Change in Valuation  Allowance |       | —        |       | (2,715        | )          | —                                        |       |
|                           |       | 48            |       | 2,912         |       | —                                        |       |
| Total                          |       | $ 15,406 |       | $ 15,983 |       | $       82 |       |

 

Thedifference between the total expected provision for income taxes computed byapplying the statutory federal income tax rate to income before provision forincome taxes and the recorded provision for income taxes for the three years inthe period ended March 31, is as follows:

| (In thousands)                                                              | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2005**                                      | ** ** |
|----------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|-----------------------------------------------|------------|
| Provision for  income taxes at statutory rate                                    |       | $ 14,005 |       | $ 16,019 |       | $  3,944                            |       |
| State tax  provision net of federal effect                                       |       | 1,085         |       | 1,424         |       | 4                                             |       |
| Permanent tax  differences for stock warrant                                     |       | (795          | )          | 2,133         |       | 1,795                                         |       |
| Permanent tax  differences for other non-deductible expenses/ non-taxable income |       | —        |       | —        |       | 13                                            |       |
| Non-deductible  stock based compensation                                         |       | 1,369         |       | —        |       | —                                        |       |
| Research tax  credits                                                            |       | (30           | )          | (226          | )          | (25                                           | )          |
| Effect of ETI  exclusion                                                         |       | (229          | )          | (678          | )          | (70                                           | )          |
| Change in  valuation allowance                                                   |       | —        |       | (2,715        | )          | (5,380                                        | )          |
| Qualifying  manufacturing credits                                                |       | (206          | )          | (189          | )          | —                                        |       |
| Other                                                                            |       | 207           |       | 215           |       | (199                                          | )          |
|  Provision for income taxes                                                 |       | $ 15,406 |       | $ 15,983 |       | $       82 |       |

 

Duringfiscal 2006, the deferred tax valuation allowance at March 31, 2005 of$9,740,000 was reversed, due to the determination by the Company that thebenefits of the deferred tax asset will more likely that not be realized in thecurrent and future years.  This valuationallowance was established by a combination of prior year operating activitiesand the exercise of non-qualified stock options and disqualifying dispositionsof incentive stock options by employees. The amount that related to prior year operating activities totaled $2,715,000and was recorded as a reduction of current year income tax expense.  The amount that

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related to the exerciseof stock options of $7,025,000 was recorded as a component of the tax benefitaccrued on stock option exercises in equity in accordance with the provisionsof APB No. 25 and SFAS No. 109.

Thesignificant components of the net deferred tax assets at March 31, 2007 and2006 are as follows:

|                                                  | ** ** | **2007**                                                                  | ** ** | **2006**                                                                               | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **(In thousands)**                          | ** ** | **Current**                                                               | ** ** | **Non-current**                                                                        | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| Assets:                                          |       |                                                                      |       |                                                                                   |       |   |   |   |   |
| Net operating  loss carry forwards               |       | $           — |       | $              3 |       | $           — |   | $              3 |   |
| Accounts  receivable and unbilled costs and fees |       | 83                                                                        |       | —                                                                                 |       | 147 |   | — |   |
| Inventory                                        |       | 814                                                                       |       | —                                                                                 |       | 1,468 |   | — |   |
| Deferred revenue                                 |       | —                                                                    |       | 276                                                                                    |       | — |   | 131 |   |
| Accrued vacation                                 |       | 326                                                                       |       | —                                                                                 |       | 338 |   | — |   |
| Accrued warranty  costs                          |       | 733                                                                       |       | —                                                                                 |       | 1,396 |   | — |   |
| Depreciation                                     |       | —                                                                    |       | 468                                                                                    |       | — |   | 470 |   |
| Unearned  compensation                           |       | 1,103                                                                     |       | 223                                                                                    |       | — |   | 144 |   |
| Other                                            |       | 28                                                                        |       | —                                                                                 |       | 32 |   | — |   |
| Deferred income  tax assets                      |       | 3,087                                                                     |       | 970                                                                                    |       | 3,381 |   | 748 |   |
| Valuation  allowance                             |       | —                                                                    |       | —                                                                                 |       | — |   | — |   |
| Net deferred income  taxes                       |       | $       3,087                          |       | $          970                       |       | $       3,381 |   | $          748 |   |

 

Includedin prepaid expenses at March 31, 2006 is $5,157,000 of prepaid taxes forestimated tax payments made during the course of the year which are refundableas the Company experienced greater than anticipated tax benefits from exercisesof stock options during the latter half of the fiscal year which have reducedthe Company’s taxable income.  A portionof this amount was applied to the Company’s 2007 tax liability and theremainder refunded during 2007.

**5.Warranty Obligations**

Certainof the Company’s products carry a one-year warranty, the costs of which areaccrued for at time of shipment or delivery. Accrual rates are based uponhistorical experience over the preceding twelve months and management’sjudgment of future exposure. Warranty experience for the years ended March 31,2007 and 2006 is as follows:

| (In thousands)                               | ** ** | **2007**     | ** ** | **2006**     | ** ** |
|---------------------------------------------------|------------|--------------|------------|--------------|------------|
|                                              |       |         |       |         |       |
| Warranty accrual  at beginning of period          |       | $ 3,606 |       | $ 2,322 |       |
| Accruals for  warranties issued during the period |       | 2,585        |       | 4,098        |       |
| Adjustment of  preexisting accrual estimates      |       | (2,735       | )          | (1,282       | )          |
| Warranty costs  incurred during period            |       | (1,459       | )          | (1,532       | )          |
| Warranty accrual at end  of period                |       | $ 1,997 |       | $ 3,606 |       |

 

**6.Stockholders’ Equity**

**Preferred Stock:**  The Company’s articles of organizationauthorize its Board of Directors to issue up to 100,000 shares of preferredstock in one or more series, to determine and fix certain relative rights andpreferences of the shares of any series, to fix the number of sharesconstituting any such series, and to fix the designation of any such series,without further vote or action by its shareholders. The Company has no presentplans to issue shares of preferred stock. In 1998, the Company designated aseries of Preferred Stock as Series A Junior Participating Cumulative PreferredStock (the “Series A Preferred Stock”) to be issued upon the exercise of Rightsissued under the Company’s Shareholder Rights Plan. Under the ShareholderRights Plan, adopted in 1998, its stockholders are entitled to purchase sharesof its Series A Preferred Stock under certain circumstances. Thesecircumstances include the purchase of 15% or more of the outstanding shares ofcommon stock by a person or group, or the announcement of a tender or exchangeoffer to acquire 15% or more of the outstanding common stock.

**Common Stock and WarrantOffering:** On May 28, 2002, the Company closed on a privateplacement offering of common stock and warrants. A total of 1,115,000 shareswere 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 ofapproximately $1.3 million of issuance costs of which $3.1 million was assignedto the warrants issued. The warrants were immediately vested and have afive-year life expiring in May of 2007. Due to certain conversion features ofthese warrants that provide that the holder may opt for a cash settlement incertain instances, including a merger, a sale of all or substantially all ofthe Company’s assets, or a tender offer or exchange offer of shares of theCompany’s stock, a liability equal to the Black-Scholes valuation of thewarrants at the deal closing date was recorded on the Company’s balance sheet.The “mark to

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market” change inthe warrants valuation of ($2,270,000), $6,094,000, and $5,101,000 was recordedas other (income) expense for the years ended March 31, 2007, March 31, 2006,and March 31, 2005, respectively. The liability of $634,000 and $4,038,000representing the fair market value of outstanding warrants at period end isrecorded as a current liability at March 31, 2007 and a non-current liabilityat March 31, 2006, respectively. The fair market value of the warrants wasdetermined using the Black-Scholes pricing model with an assumed volatility of31% and 49% at March 31, 2007 and March 31, 2006, respectively, an interestrate of 4.96% and 4.6% at March 31, 2007 and March 31, 2006, respectively and alife equal to the remaining term of the warrants at each period end.  The remaining outstanding warrants at March31, 2007 were exercised during the first quarter of fiscal 2008.

During fiscal 2007 and2006, warrants to purchase 35,450 and 78,825 shares of common stock wereexercised resulting in total proceeds received of $834,000 and $1,854,000,respectively.  In addition, in fiscal2006 the Company issued 61,998 shares of common stock upon the cashlessexercise of warrants to purchase 85,475 shares of common stock.  The fair market value of the warrants at thedate of exercise totaled $1,134,000 and $8,193,000 in fiscal 2007 and 2006,respectively. The cash proceeds and the fair value of the liability wererecorded as additional paid in capital at March 31, 2007 and March 31, 2006.

**Stock Option and Other Compensation Plans:**  The Company has various stock option andother compensation plans for directors, officers, and employees. The Companyhad the following stock option plans outstanding as of March 31, 2007: the 1995Combination Plan, the 1996 Plan for Non-Employee Directors, the 1997Non-Qualified Option Plan, the 1998 Non-Qualified Option Plan, the 1999Combination Plan, the 2000 Combination Plan, the 2002 Combination Plan, the2003 Stock Plan for Non-Employee Directors and the 2005 Equity and IncentivePlan. There are 3,780,000 shares authorized under these plans. Vesting periodsare at the discretion of the Board of Directors and typically range between oneand three years. Options under these plans are granted at fair market value andhave a term of five or ten years from the date of grant.

**Stock Option Activity: **A summary of the Company’sstock option activity is as follows:

|                                                                                | ** ** | **2007**                   | ** ** | **2006**                                           | ** ** | **2005**                   | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** |
|                                                                           |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Options outstanding, beginning  of year                                        |       | 878,470                    |       | $     36.79               |       | 1,065,964                  |       | $     20.66 |   | 1,480,641 |   | $     10.66 |   |
| Options granted                                                                |       | 60,670                     |       | 48.23                                              |       | 378,010                    |       | 55.23 |   | 507,795 |   | 31.75 |   |
| Options exercised                                                              |       | (31,680                    | )          | 31.23                                              |       | (554,954                   | )          | 18.23 |   | (826,466 | ) | 10.34 |   |
| Options canceled or  expired                                                   |       | (19,887                    | )          | 51.94                                              |       | (10,550                    | )          | 44.44 |   | (96,006 | ) | 13.87 |   |
|                                                                           |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Options outstanding,  end of year                                              |       | 887,573                    |       | $     37.43               |       | 878,470                    |       | $     36.79 |   | 1,065,964 |   | $     20.66 |   |
|                                                                           |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Options exercisable,  end of year                                              |       | 639,219                    |       | $     33.88               |       | 265,778                    |       | $     18.80 |   | 371,585 |   | $     10.74 |   |
|                                                                           |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Options available for  grant                                                   |       | 320,865                    |       |                                               |       | 440,835                    |       |   |   | 87,943 |   |   |   |
|                                                                           |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Weighted average fair value per  share of options granted during the year |       |                       |       | $     20.09               |       |                       |       | $     20.99 |   |   |   | $     21.68 |   |

 

The following summarizescertain data for options outstanding and exercisable at March 31, 2007:
| ** **            | ** ** | **Number of  Shares** | ** ** | **Range of   Exercise Prices** | ** ** | **Weighted   Average Exercise   Price**                                                 | ** ** | **Weighted   Average Remaining  Contractual Life** | ** ** |
|-----------------------|------------|----------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Options outstanding:  |       |                       |       |                                          |       |                                                                                                   |       |                                                              |       |
|                  |       | 246,720                    |       | $  6.50-$20.00                      |       | $                11.78 |       | 5.84                                                              |       |
|                  |       | 110,100                    |       | 20.01–30.00                              |       | 27.17                                                                                                  |       | 7.43                                                              |       |
|                  |       | 73,041                     |       | 30.01–40.00                              |       | 38.95                                                                                                  |       | 7.69                                                              |       |
|                  |       | 137,199                    |       | 40.01–50.00                              |       | 45.82                                                                                                  |       | 8.53                                                              |       |
|                  |       | 224,113                    |       | 50.01–60.00                              |       | 53.63                                                                                                  |       | 8.20                                                              |       |
|                  |       | 96,400                     |       | 60.01–83.02                              |       | 64.04                                                                                                  |       | 8.61                                                              |       |
|                  |       | 887,573                    |       |                                          |       | $             37.43                   |       | 7.50                                                              |       |
| Options  exercisable: |       |                       |       |                                          |       |                                                                                                   |       |                                                              |       |
|                  |       | 233,720                    |       | $ 6.50–$20.00                       |       | $                11.60 |       |                                                              |       |
|                  |       | 101,050                    |       | 20.01–30.00                              |       | 27.74                                                                                                  |       |                                                              |       |
|                  |       | 39,208                     |       | 30.01–40.00                              |       | 38.85                                                                                                  |       |                                                              |       |
|                  |       | 42,666                     |       | 40.01–50.00                              |       | 45.20                                                                                                  |       |                                                              |       |
|                  |       | 158,641                    |       | 50.01–60.00                              |       | 53.71                                                                                                  |       |                                                              |       |
|                  |       | 63,934                     |       | 60.01–83.02                              |       | 65.24                                                                                                  |       |                                                              |       |
|                  |       | 639,219                    |       |                                          |       | $             33.88                   |       |                                                              |       |

 

40

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The Company realizes atax deduction upon the exercise of non-qualified stock options anddisqualifying dispositions of incentive stock options due to the recognition ofcompensation expense in the calculation of its taxable income. The amount ofthe compensation recognized for tax purposes is based on the difference betweenthe market value of the common stock and the option price at the date theoptions are exercised and/or sold. These tax benefits are credited toadditional paid-in capital if it is considered more likely than not that theywill be realized. No tax benefits were recorded in fiscal 2005 as available taxbenefits of $5,115,000 were offset by valuation allowances in accordance withSFAS 109. During fiscal 2007 and 2006, a tax benefit of $544,000 and$10,515,000, respectively, was recorded to additional paid-in capital forexercises and/or sales of stock options or stock and an additional $7,025,000was recorded in fiscal 2006 for prior year exercises and/or sales upon thereversal of the valuation allowance on deferred tax assets.

On April 22, 2005American Science and Engineering, Inc. announced that its Board of Directorshad accelerated the vesting of certain unvested stock options previouslyawarded to employees. The accelerated options were issued under various equityincentive plans maintained by the Company. The acceleration of outstandingunvested options was immediately effective on a fully-vested basis. Options heldby the Chief Executive Officer, the Chief Financial Officer, all other membersof management, and any other employees participating in incentive or commissioncompensation plans were not included in the acceleration plan. Options held bymembers of the Board of Directors were also excluded from the vestingacceleration. Options to purchase approximately 193,553 shares of common stockwere subject to acceleration. The Company effected this acceleration in orderto provide a deserved reward to relevant employees for their significantcontributions in connection with the outstanding performance of the Company.The Board of Directors determined that such action was also in the bestinterests of the shareholders as it believed that such plan would engender loyalty,promote equity ownership, and encourage increased future performance by thesubject employee population.  The Companyrecorded compensation expense of $64,000 during the year ended March 31, 2006related to these accelerated options for options exercised by individuals whoterminated employment prior to the original option vesting date.

***      Restricted Stock and Restricted StockUnits: ***Duringfiscal 2006, the Company instituted a long term incentive plan for certain keyemployees. The plan calls for the issuance of restricted stock and optionswhich vest upon the achievement of certain performance based goals as well asservice time incurred.  In addition,restricted stock and restricted stock units may be granted to other employeeswith vesting periods that range from one to three years.  Annually on January 10th the Board of Directors is granted restrictedstock. The stock vests pro-rata based on service time incurred in the upcomingcalendar year.  The fair values of theserestricted stock awards are equal to the market price per share of the Company’scommon stock on the date of grant.

Nonvestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of March 31, 2007 there was$2,131,000 of total unrecognized compensation cost related to nonvestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a 3 year period.

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

|                                                            | ** ** | **2007**                   | ** ** | **2006**                                           | ** ** | **2005**                   | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average   Exercise   Price** | ** ** |
|                                                       |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Restricted Stock and  Units outstanding, beginning of year |       | 23,125                     |       | $    54.92                     |       | 4,889                      |       | $    34.52 |   | 9,750 |   | $    11.88 |   |
| Granted                                                    |       | 49,538                     |       | 54.52                                              |       | 24,077                     |       | 55.32 |   | 7,958 |   | 31.08 |   |
| Vested                                                     |       | (23,125                    | )          | 54.92                                              |       | (5,841                     | )          | 39.50 |   | (12,819 | ) | 15.16 |   |
| Forfeited                                                  |       | —                     |       | —                                             |       | —                     |       | — |   | — |   | — |   |
|                                                       |       |                       |       |                                               |       |                       |       |   |   |   |   |   |   |
| Restricted Stock and Units outstanding, end of year        |       | 49,538                     |       | $    54.52                     |       | 23,125                     |       | $    54.92 |   | 4,889 |   | $    34.52 |   |

 

41

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**7.Business Segment Information**

In accordance with theprovisions of SFAS No. 131 “Disclosures about Segments of an Enterprise andRelated Information,” the Company has determined that it has only one operatingsegment, the X-ray product segment. This includes X-ray detection and imagingproducts used primarily for the detection of illegal drugs, weapons andexplosives, and smuggled goods. The equipment is purchased by sophisticatedgovernment and commercial clients focused on the detection of organic materialin complex backgrounds and the ability to see the contents of containers withprecision.

**Geographical Data:**  All of the Company’s export sales originatefrom the United States. Less than 1% of the Company’s assets are in any foreigncountry. The following table shows the breakdown of net sales and contractrevenues to foreign and domestic customers and the major regions ofinternational activity based upon customer country of domicile:

***NetSales and Contract Revenues***

|                                                    | ** ** | **Fiscal Year**                 | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| **(In thousands)**                            | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Domestic                                           |       | $                                    | 111,335    |   | 73 | % | $ | 141,491 |   | 86 | % | $ | 75,376 |   | 85 | % |
| International                                      |       | 41,851                               |       | 27 | % | 22,113 |   | 14 | % | 12,938 |   | 15 | % |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales and Contract  Revenues                   |       | $                                    | 153,186    |   | 100 | % | $ | 163,604 |   | 100 | % | $ | 88,314 |   | 100 | % |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Percent of  International Revenue by Major Region: |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Middle East  & Africa                          |       | 65.9                                 | %          |   |   | 50.4 | % |   |   | 15.9 | % |   |   |
| Pacific Rim                                        |       | 20.3                                 | %          |   |   | 36.4 | % |   |   | 62.6 | % |   |   |
| Europe                                             |       | 13.8                                 | %          |   |   | 11.4 | % |   |   | 21.5 | % |   |   |
| All Other                                          |       | —                               | %          |   |   | 1.8 | % |   |   | — | % |   |   |

 

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

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

***Fiscal2006:***  $48,722,000and $43,485,000, respectively, to two customers.

***Fiscal2005:***  $14,639,000,$11,755,000 and $11,274,000 respectively, to three customers.

Domestically, the Company’sprimary client base is comprised of agencies of the U.S. Government.Approximately 70%, 77%, and 75% of the Company’s sales in fiscal 2007, 2006,and 2005 respectively, were derived from either (i) contracting directly withthe U.S. Government, or (ii) contracting with contractors working directly withthe U.S. Government. Certain of the Company’s contracts with the U.S.Government provide the U.S. Government with the standard unilateral right toterminate these contracts for convenience. To date, the Company has notexperienced any material losses as a result of this contractual provision.

Two customers at March 31,2007 had accounts receivable balances representing in excess of 10% ofconsolidated accounts receivable.  Thesecustomers, both agencies of the U.S. Government, had receivables totaling$6,322,000 (26%) and $3,535,000 (14%) at March 31, 2007.  Three customers at March 31, 2006 hadaccounts receivable balances representing in excess of 10% of consolidatedaccounts receivable.  These customers,all agencies of the U.S. Government, had receivables totaling $8,128,000 (31%),$3,574,000 (14%) and $2,713,000 (10%) at March 31, 2006.

Included in unbilledcosts and fees at March 31, 2007 was $5,074,000 related to three customers,which is expected to be billed and collected during fiscal 2008.  Included in unbilled costs and fees at March31, 2006 was $2,414,000 related to two customers, which was collected duringfiscal 2007.

**8. Salesof Assets**

In January 2005, theCompany completed an agreement to sell certain assets, comprised of inventory,fixed assets, intellectual property, and certain revenue producing contracts ofits High Energy Systems Division to Accuray, Incorporated (“Accuray”). Thesales price for these assets totaled $8,300,000 of which $5,500,000 wasreceived in cash and $2,800,000 in the form of a promissory note, $2,000,000 ofwhich was secured by a letter of credit. The note receivable bore an interestrate of 7% and matured in January of 2006. The Company recognized a gain on thesale of these assets of $5,442,000, which was included in

42

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income fromoperations in the year ended March 31, 2005. During fiscal 2006, upon expiration of the warranty period for materialsold, the unused warranty reserve of $336,000, established at the time of sale,was reversed and is included as additional gain on sale of assets for the yearended March 31, 2006. In conjunction with this sale, certain employees of theHigh Energy Systems Division were employed by Accuray and the Company enteredinto a license agreement and a supply agreement for linear accelerators withAccuray.

**9.Commitments and Contingencies**

**Deferred Compensation:**  The Company had an unfunded deferredcompensation plan, originally adopted in 1976 and amended at various times, forcertain retired directors.  This plan isclosed such that no other directors are qualified for compensation under thisplan.  This plan provides for periodicpayments beginning at age 65, the amount of which depends on the director’slength of service. The Company paid $17,000 in 2007, $17,000 in 2006, and$18,000 in 2005 under this deferred compensation plan. As of March 31, 2007 and2006, $69,000 and $69,000 respectively, is accrued for under this plan.

**Lease Liability: **In conjunction with thesale of the High Energy Systems division in fiscal 2005 (see Note 8), the leasefor the California operations of the High Energy Systems Division was assignedto Accuray. The Company remains secondarily liable for the remaining leasepayments in the event of default by Accuray during the lease term which expiresin February 2011. Remaining lease payments at March 31, 2007 totaled $1,486,000.No accrual for this contingent liability has been recorded at March 31, 2007 aspayment of this expense is considered remote.

**Litigation: **  Since February 2004, the Company and L-3Communications, Inc. had been engaged in litigation in the United StatesDistrict Court for the District of Massachusetts in Boston over two of theCompany’s patents – United States Patent No. 6,292,533 and No. 5,903,623.  In August 2006, the parties entered into aSettlement Agreement that resulted in the dismissal of the underlyingsuit.  This settlement had no materialeffect on the Company, the value of its intellectual property or thedevelopment and sale of any of its products.

The Company is also subject to various legalproceedings and claims that arise in the ordinary course of business. At thepresent time, it is not possible to predict the outcome of these matters;however, the Company currently believes that resolving these matters will nothave a material adverse impact on its financial condition, results of operationsor cash flows.

**Purchase Commitments:**  In the normal course of business, the Companyenters into purchase orders with its vendors for the purchase of materials orservices to meet its production needs. At March 31, 2007, the Company had$18,950,000 of open purchase orders which are expected to be fulfilledprimarily within the next 2 years. Certain single source vendors or vendorsproducing custom material require significant lead times from order to deliveryof their material. Should the demand for the Company’s products declinesignificantly, or should there be a significant shift in the mix of productsbeing demanded, the Company may incur cancellation charges related to thesecommitments, that could be material to the Company’s results of operations. Todate, the Company has not experienced any material losses related tocancellation penalties.

**EmploymentAgreements:**   On September 15, 2005, the Company’sBoard of Directors approved a Change of Control and Termination for Convenienceprogram for the Company’s Chief Executive Officer and other members of theCompany’s executive staff, including its Chief Financial Officer.  Theprogram was amended on February 8, 2007 by the Company’s Board ofDirectors.  Under this program, asamended, the Company’s Chief Executive Officer, in the event terminationpursuant to a change of control, is eligible to receive a payment equal tothree times his average base salary plus his annual target bonus, thecontinuation of health benefits for a period of three years and the vesting ofall options and restricted stock.  In theevent of qualifying termination not pursuant to a change of control, the ChiefExecutive Officer is eligible for a payment equal to two times his average basesalary and the continuation of health benefits for a period of eighteenmonths.  The Company’s other executivestaff, in the event of a change of control, are eligible to receive a paymentequal to two year’s average base salary plus his or her annual target bonus ,the continuation of health benefits for a period of three years and the vestingof all options and restricted stock.   Inthe event of qualifying termination not pursuant to a change of control, themembers of the executive staff are eligible to receive a payment equal to onetimes his or her average base salary and the continuation of health benefitsfor one year.

**Retirement Savings Plan:**  The Company maintains a 401(k) RetirementSavings Plan for all employees with more than 500 hours and 6 months ofcredited service annually. The Plan is funded by elective employeecontributions of up to 100% of their compensation. Under the Plan the Companymatches 50% of the first 6%of employee contributions for each participant inthe form of Company common stock. Expenses under the Plan, consisting ofCompany contributions and Plan administrative expenses paid by the Company,totaled $660,000, $520,000, and $462,000, in 2007, 2006, and 2005 respectively.

43

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**AmericanScience and Engineering, Inc. and Subsidiary**

**UnauditedQuarterly Consolidated Financial Data**

**For theYears Ended March 31, 2007 and March 31, 2006**

|                                  | ** ** | **2007 by quarter**                                     | ** ** | **2006 by quarter** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **1st**                                                           | ** ** | **2nd**                       | ** ** | **3rd** | ** ** | **4th** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| ** **                       | ** ** | (In thousands, except per share amounts) | ** ** |
|                             |       |                                                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales and contract  revenues |       | $                                                                 | 29,882     |                          | $          | 29,588 |   | $ | 47,797 |   | $ | 45,919 |   | $ | 35,162 |   | $ | 49,141 |   | $ | 38,540 |   | $ | 40,761 |   |
| Gross profit                     |       | 13,497                                                            |       | 13,529                        |       | 21,938 |   | 17,575 |   | 14,592 |   | 24,776 |   | 19,374 |   | 19,456 |   |
| Operating income                 |       | 5,553                                                             |       | 6,067                         |       | 12,559 |   | 8,040 |   | 8,032 |   | 17,607 |   | 12,627 |   | 11,025 |   |
| Net income                       |       | 5,995                                                             |       | 4,753                         |       | 8,072 |   | 5,790 |   | 6,997 |   | 8,396 |   | 9,668 |   | 4,725 |   |
| Net income per  share            |       |                                                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| —Basic                      |       | $                                                                 | 0.66       |                          | $          | 0.52 |   | $ | 0.89 |   | $ | 0.63 |   | $ | 0.84 |   | $ | 0.99 |   | $ | 1.12 |   | $ | 0.54 |   |
| —Diluted                    |       | $                                                                 | 0.41       |                          | $          | 0.49 |   | $ | 0.86 |   | $ | 0.60 |   | $ | 0.78 |   | $ | 0.93 |   | $ | 0.95 |   | $ | 0.51 |   |

 

44

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                       |   | AMERICAN SCIENCE AND ENGINEERING, INC. |
|-----------------------|--------|----------------------------------------|
|                  |   |                                   |
| DATED: June 12,  2007 |   | By:                                    | /s/ ANTHONY R. FABIANO |   |
|                  |   |                                   |   |
|                  |   | Anthony R.  Fabiano                    |
|                  |   | President and  Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Company and in thecapacities and on the dates indicated:
| Signature              | ** ** | **Title**                                  | ** ** | **Date**       |
|------------------------|------------|--------------------------------------------|------------|----------------|
|                   |       |                                       |       |           |
| /s/ ANTHONY R. FABIANO |       | Director and President and Chief Executive |       | June 12,, 2007 |
| Anthony R. Fabiano     |       | Officer (Principal Executive Officer)      |       |           |
|                   |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ KENNETH J.GALAZNIK |       | Chief Financial Officer and Treasurer      |       | June 12, 2007  |
| Kenneth J. Galaznik    |       | (Principal Financial Officer)              |       |           |
|                   |       |                                       |       |           |
| /s/ DENIS R. BROWN     |       | Director                                   |       | June 12, 2007  |
| Denis R. Brown         |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ ROGER P. HEINISCH  |       | Director                                   |       | June 12, 2007  |
| Roger P. Heinisch      |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ HAMILTON W. HELMER |       | Director                                   |       | June 12, 2007  |
| Hamilton W. Helmer     |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ ERNEST J. MONIZ    |       | Director                                   |       | June 12, 2007  |
| Ernest J. Moniz        |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ WILLIAM E. ODOM    |       | Chairman of the Board, Director            |       | June 12, 2007  |
| William E. Odom        |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ MARK S. THOMPSON   |       | Director                                   |       | June 12, 2007  |
| Mark S. Thompson       |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ CARL W. VOGT       |       | Director                                   |       | June 12, 2007  |
| Carl W. Vogt           |       |                                       |       |           |

 

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**EXHIBITINDEX**
| Exhibit  Number | ** ** | **Description of Exhibit (and Statement)  of Incorporation by Reference, If Applicable)**                                                                                                                                                                   | ** ** | **Page  Number  (If Filed)** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                  | ** ** | ** **                   |
| (3)(a)          |       | Restated Articles of Organization of the Company  (filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year  ended September 30, 1967, and incorporated herein by reference)                                                       |       |                         |
| (3)(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 the Company’s Registration Statement on Form S-7, No. 2-56452,  filed May 25, 1976, and incorporated herein by reference)                                                               |       |                         |
| (3)(e)          |       | Amended and Restated By-laws of American Science  & Engineering, Inc. (filed as Exhibit 3.2 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2003, and incorporated  herein by reference)                        |       |                         |
| (4)             |       | Shareholders Rights Plan (filed as Exhibit to the  Company’s filing on Form dated, 1992 and incorporated herein by references)                                                                                                                         |       |                         |
| (4)(a)          |       | Shareholder Rights Agreement (filed as Exhibit to  the Company’s filing on Form 8-A12B dated April 17, 1998 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 Company’s Annual Report on Form 10-K for the  year ended March 31, 1998, and incorporated herein by reference)                                                            |       |                         |
| (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  Exhibit 10(c)(ii) to the Company’s Annual Report on Form 10-K for the year  ended March 28, 1997 and incorporated herein by reference)                                                             |       |                         |
| (10)(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)(xv)     |       | Lease of Mountain View, California facility for High  Energy Systems Division (filed as Exhibit 10(c)(xv) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and  incorporated herein by reference)                  |       |                         |
| (10)(c)(xvi)*   |       | Employment Offer Letter between the Company and  Anthony R. Fabiano dated August 21, 2003 (filed as Exhibit 10(c)(xv) to the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2003, and incorporated herein by reference) |       |                         |
| (10)(c)(xvii)   |       | Second Amendment of Lease of 829 Middlesex Turnpike,  Billerica, Massachusetts (filed as Exhibit 10(c)(vii) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended December 31, 2004, and  incorporated herein by reference)            |       |                         |
| (10)(c)(xviii)  |       | Amendment of 2002 Combination Stock Option Plan  (filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8,  No. 333-102338, filed on January 3, 2003 and incorporated herein by  reference)                                          |       |                         |
| (10)(c)(xix)    |       | 2003 Stock Plan for Non-Employee Directors (filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-8, File No.  333-117843, filed on July 30, 2004 and incorporated herein by reference)                                              |       |                         |
| (10)(c)(xx)     |       | Amendment to 2003 Stock Plan for Non-Employee  Directors (filed as Exhibit 10(c)(xx) to the Company’s Annual Report on Form  10-K for the year ended March 31, 2005 and incorporated herein by reference)                                              |       |                         |
| (10)(c)(xxi)    |       | 2005 Equity and Incentive Plan (filed as Exhibit 4.1  to the Company’s Registration Statement on Form S-8, No. 333-129851, filed on  November 21, 2005 and incorporated herein by reference)                                                           |       |                         |
| (10)(c)(xxii)*  |       | Change in Control & Severance Benefit Agreement  between the Company and Anthony Fabiano, dated November 3, 2005 (filed as  Exhibit 10(c)(xxii) to the Company’s Annual report                                                                     |       |                         |

 

46

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|                 |   | on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                                                                                                                                                                                                  |   |   |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| (10)(c)(xxiii)* |   | Form of Change in Control & Severance Benefit  Agreement between the Company and Named Executives (filed as Exhibit  10(c)(xxiii) to the Company’s Annual report on Form 10-K for the year ended  March 31, 2006 and incorporated herein by reference)                                                        |   |   |
| (10)(c)(xxiv)   |   | Form of Restricted Stock Agreement (Performance)  under the AS&E 2005 Equity and Incentive Plan (filed as Exhibit  10(c)(xxiv) to the Company’s Annual report on Form 10-K for the year ended  March 31, 2006 and incorporated herein by reference)                                                           |   |   |
| (10)(c)(xxv)    |   | Form of Stock Option Agreement (Performance) under  the AS&E 2005 Equity and Incentive Plan (filed as Exhibit 10(c)(xxv) to  the Company’s Annual report on Form 10-K for the year ended March 31, 2006  and incorporated herein by reference)                                                                |   |   |
| (10)(c)(xxvi)   |   | Form of Stock Option Agreement (ISO) under the  AS&E 2005 Equity and Incentive Plan (filed as Exhibit 10(c)(xxvi) to the  Company’s Annual report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                                       |   |   |
| (10)(c)(xxvii)  |   | Form of Stock Option Agreement (NQ) under the  AS&E 2005 Equity and Incentive Plan (filed as Exhibit 10(c)(xxvi) to the  Company’s Annual report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                                                                        |   |   |
| 10(c)(xxviii)   |   | Third Amendment of Lease of 829 Middlesex Turnpike,  Billerica, Massachusetts (filed herewith)                                                                                                                                                                                                                         |   |   |
| (10)(d)(xi)     |   | Loan and Security Agreement between American Science  and Engineering, Inc., and Silicon Valley Bank East dated August 11, 2003  (filed as Exhibit 10(d)(xi) to the Company’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2003, and incorporated herein by  reference)                     |   |   |
| (10)(d)(xii)    |   | Export Import Bank Loan and Security Agreement  between American Science and Engineering, Inc., and Silicon Valley Bank East  dated August 11, 2003 (filed as Exhibit 10(d)(xii) to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003, and  incorporated herein by reference) |   |   |
| (10)(d)(xiii)   |   | Asset Purchase Agreement between Accuray  Incorporated and American Science and Engineering, Inc. dated December 11,  2004**                                                                                                                                                                                           |   |   |
| (10)(d)(xix)    |   | Third Loan Modification Agreement between Silicon  Valley Bank and American Science and Engineering dated November 15, 2006                                                                                                                                                                                            |   |   |
| (21.1)          |   | Identification of Company’s subsidiary, AS&E  Global, Inc., incorporated in Massachusetts (filed as Exhibit 22.1 to the  Company’s Annual Report on Form 10-K for the year ended March 31, 2003, and  incorporated herein by reference)                                                                  |   |   |
| (23.1)          |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                              |   |   |
| (23.2)          |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                              |   |   |
| (31.1)          |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                                                                   |   |   |
| (31.2)          |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                                                                   |   |   |
| (32.1)          |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                    |   |   |
| (32.2)          |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                    |   |   |

 

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* Contract withManagement

** The Registrant agreesto furnish a supplemental copy of the schedules to this agreement to the SECupon request

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