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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**x****     ****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended March 31, 2010**

 

**o****        ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 1-6549**

 

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**AMERICAN SCIENCE AND ENGINEERING, INC.**

(Exactname of registrant as specified in 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’stelephone number, including area code)

 

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Securities registeredpursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

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

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

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

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

 

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

 

The aggregate market value ofvoting stock held by non-affiliates of the registrant, computed using theclosing sale price of common stock of $68.04 on September 30, 2009 was$595,557,000.

 

9,024,047 shares ofregistrant’s common stock were outstanding on May 31, 2010.

 

**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 ended March 31,2010. Portions of such Proxy Statement are incorporated by reference in Part III.**

 

 

 

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**AMERICANSCIENCE AND ENGINEERING, INC.**

**FORM 10-K**

**FOR THEPERIOD ENDED MARCH 31, 2010**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                           | ** ** | **Page  Number** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART I**   |                                                                                                                 |       |             |
| ITEM 1.           | Business                                                                                                             |       | 3                |
| ITEM 1A.          | Risk  Factors                                                                                                        |       | 9                |
| ITEM 1B.          | Unresolved Staff  Comments                                                                                           |       | 15               |
| ITEM 2.           | Properties                                                                                                           |       | 15               |
| ITEM 3.           | Legal Proceedings                                                                                                    |       | 15               |
|              |                                                                                                                 |       |             |
| **PART II**  |                                                                                                                 |       |             |
| ITEM 5.           | Market for the  Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities |       | 15               |
| ITEM 6.           | Selected Financial  Data                                                                                             |       | 17               |
| ITEM 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |       | 18               |
| ITEM 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                          |       | 24               |
| ITEM 8.           | Financial  Statements and Supplementary Data                                                                         |       | 24               |
| ITEM 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                |       | 24               |
| ITEM 9A.          | Controls and  Procedures                                                                                             |       | 25               |
| ITEM 9B.          | Other Information                                                                                                    |       | 25               |
|              |                                                                                                                 |       |             |
| **PART III** |                                                                                                                 |       |             |
| ITEM 10.          | Directors,  Executive Officers and Corporate Governance                                                              |       | 25               |
| ITEM 11.          | Executive Compensation                                                                                               |       | 25               |
| ITEM 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     |       | 25               |
| ITEM 13.          | Certain  Relationships and Related Transactions, and Director Independence                                           |       | 26               |
| ITEM 14.          | Principal  Accounting Fees and Services                                                                              |       | 26               |
|              |                                                                                                                 |       |             |
| **PART IV**  |                                                                                                                 |       |             |
| ITEM 15.          | Exhibits and  Financial Statement Schedules                                                                          |       | 26               |
| SIGNATURES        |                                                                                                                 | 49         |
| EXHIBIT  INDEX    |                                                                                                                 | 50         |

 

Z Backscatter TM, ZBVTM,CargoSearchTM, MobileSearchTM,  ShapedEnergy®, AS&E®, ParcelSearchTM, GeminiTM, OmniviewTM  Gantry, SentryTM Portal, SmartCheck®Inspection System, Z GantryTM, Z Portal® and all AS&E product names and the AS&E logos are eitherregistered trademarks or trademarks of American Science and Engineering, Inc.in the United States and/or other countries. Other product and company namesmentioned herein may be the trademarks of their respective owners.

 

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**CAUTIONARY STATEMENT**

 

This Annual Report and the documents incorporated byreference contain forward-looking statements. For this purpose, any statements contained herein that are notstatements of historical fact may be deemed to be forward-lookingstatements.  Without limiting theforegoing, the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “should”and similar expressions are intended to identify forward-lookingstatements.  The factors discussed under “Item1A. Risk Factors”, among others, could cause actual results to differmaterially from those indicated by forward-looking statements made herein andpresented elsewhere by management from time to time.  We expressly disclaim any obligation toupdate or alter our forward-looking statements, whether as a result of newinformation, future events or otherwise, except as required by law.

 

All references in this Annual Report to “AS&E”, the“Company”, “we”, “our” and “us” means American Science and Engineering, Inc.and its subsidiary.

 

**PART I**

 

**ITEM 1. BUSINESS**

 

American Science and Engineering, Inc., aMassachusetts corporation formed in 1958, develops, manufactures, markets, andsells X-ray inspection and other detection solutions for homeland security andother targeted markets.  AS&Eprovides maintenance, warranty, research, engineering, and training servicesrelated to these solutions.

 

The Company manufactures sophisticated X-ray inspectionproducts that can be used to inspect parcels, baggage, vehicles, pallets, cargocontainers, and people.  The Companysells its products throughout the world to a variety of customers, including:

 

·                  Authorities responsible for port andborder security;

 

·                  Military organizations;

 

·                  High threat commercial and governmentfacilities;

 

·                  Aviation security agencies; and

 

·                  Legal enforcement agencies.

 

AS&E’s products are used by these customers to help combatterrorism, trade fraud, drug trafficking, weapons smuggling, and illegalimmigration.  Our products are also usedfor military force protection and general facility security.

 

Beginning with the terrorist attacks on September 11,2001 and continuing with the proliferation of global terrorism, homelandsecurity and force protection concerns have become of paramount importancearound the world. The Company believes that homeland defense, force protectionand military security initiatives will continue to provide new opportunities,with additional growth in the seaports and borders, federal and militaryfacilities, and corporate security markets.

 

The Company’s objective is to distinguish itself fromits competitors by offering innovative products which provide customers withsuperior threat detection and/or improved operating efficiencies. To achievethis objective, AS&E incorporates a variety of X-ray imaging and imageprocessing technologies into its products. A number of the Company’s products use our patented Z Backscattertechnology.  Z Backscatter is a uniqueX-ray imaging technique that has distinct advantages for the detection oforganic or low atomic number (Z) materials, such as plastic explosives,composite weapons, and illegal drugs even when concealed by complexbackgrounds.

 

**Technology**

 

The Company’s X-ray imaging products utilize severaltechnologies including traditional transmission X-ray technology, ourproprietary Z Backscatter technology, Shaped Energy technology and RadioactiveThreat Detection (RTD).

 

X-ray imaging devices contain these basic subsystems:X-ray sources, detectors and software. The source generates an X-ray beam that is directed at the object to bescanned (baggage, container, or similar object).  When the source X-rays encounter the object,they are either absorbed by the object, pass directly through the object, orscatter off of the object.  Dense (highatomic number) materials tend to absorb X-rays. Materials that are less dense (low atomic number) tend to scatter X-rays.  The detectors record the intensity of thetransmitted or scattered X-rays. Software is then used to interpret the signals from the detectors and toconstruct and display X-ray images.

 

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

 

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dependent upon the size of the X-ray source and the composition andquantity of the material in the path of the X-ray beam.  Low energy sources are used to scan smallerobjects such as parcels and baggage, and high energy sources are used forscanning large densely packed items such as trucks and cargo containers.  Transmission X-ray images are useful forseeing “through” the object of interest. A transmission image, however, represents an aggregate of all objects inthe path on the beam and can therefore be difficult to interpret.

 

***ZBackscatter Technology:***   Most 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 easily readable,photo-like images.

 

Many threat items are organic in nature and have lowatomic numbers.  Such items includedrugs, explosives, composite weapons, and stowaways.  These items tend to scatter X-rays much moreso than inorganic materials like steel and other metals.  As a result, these organic threat items tendto stand out as bright, visible objects when scanned by a Z Backscatter imagingsystem.

 

Z Backscatter images complement transmission images andseveral of the Company’s products employ both technologies.  The combination of backscatter andtransmission images gives the operator more information about the contents ofthe baggage or container by differentiating dense materials, such as metals, fromlow-Z materials such as explosives.  Inaddition, the two images enable an inspector to perform a quicker and morethorough examination of the object in question.

 

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

 

**Products and Systems**

 

The Company’s products and services can be groupedinto five different areas: CargoSearch Inspection Systems, Z BackscatterSystems, ParcelSearch and Personnel Screening Inspection Systems, ContractResearch and Development, and Service and Support.

 

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

 

*OmniView Gantry System*:  a multi-view,relocatable high-energy cargo and vehicle inspection system.  This system combines 6 MeV high-energytransmission imaging and three Z Backscatter X-ray views for left, right andtop-side imaging of cargo.  The OmniViewGantry System utilizes AS&E’s patented Shaped Energy technology topenetrate densely loaded cargo containers. Shaped Energy “shapes” the highenergy spectrum to filter out non-essential radiation, making the system safefor operators and staff and eliminating the need for extensive exclusionzones.  High energy 6 MeV transmissionX-rays can penetrate 14 inches (35 cm) of steel or 8.5 feet (260 cm) of oil,yet does not require heavy shielding, an exterior building, or standoffzones.   The Z Backscatter images areideal for the detection of organic or “low Z” materials including explosives,drugs, alcohol, and tobacco that transmission X-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 overstationary vehicles and cargo.  Thesystem is bi-directional allowing for a throughput of approximately 25 trucksper hour.  OmniView Gantry is ideal forports, borders, and high-threat facilities.

 

*Z  Portal System*:  a multi-view, high throughput, drive-throughinspection system capable of scanning cargo and vehicles for threats andcontraband.  The Z Portal System isavailable in two basic configurations: a large tunnel version for screeningtrucks, buses, and cargo containers; and a small tunnel version for scanningpassenger vehicles. The relocatable Z Portal System can be installed with one,two or three Z Backscatter X-ray modules, allowing for left, right and/ortop-side imaging of the vehicle under examination.  The images produced by the Z Portal Systemare ideal for the detection of organic materials including explosives, drugs,alcohol, tobacco, and stowaways.  The ZPortal System is well-suited for scanning vehicles at border crossings, highthreat facilities, and other vehicle entry checkpoints.

 

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

 

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*SentryPortal System:*a high-throughput drive through transmission X-ray inspection system designedto screen cargo for security threats and contraband. The Sentry Portal Systemenables high volume scanning while producing a transmission image able topenetrate 12 inches (300 mm) of steel, sufficient for the inspection of evendensely loaded cargo containers. The system employs an advanced cargo sensingsubsystem that begins scanning only after the cab has passed to maintain a safeenvironment for vehicle drivers.

 

*MobileSearchHE (High-Energy):* a mobile inspection system for scanning trucks, cargo containers, andvehicles which utilizes both high energy transmission imaging and Z Backscatterimaging for superior contraband and threat detection. MobileSearch HE’stransmission imaging offers penetration of up to 12 inches (300 mm) of steelwhile the complementary Backscatter imaging highlights organic materials forimproved detection of explosives, drugs and other contraband. Together,transmission and Backscatter imaging provide the most information about thecontents of the cargo. The system can be used as a conventional mobile cargoscanner that drives past vehicles or containers to be scanned or inBackscatter-only mode, which allows MobileSearch HE to scan oversized oroddly-shaped cargo and to scan vehicles as they are driven past the system.

 

***ZBackscatter Systems:***  Z Backscatter Systems includesingle-sided imaging systems that use Z Backscatter imaging only.

 

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

 

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

 

Personnel screening is a crucial part of any threatdetection effort.  Today, threats cantake the smallest of forms and are often easily hidden on a person.  With the advent of suicide bombers, personnelscreening has taken on an even more important role.  Personnel screening is also important in theeffort to intercept prohibited substances, such as drugs and alcohol.

 

*Gemini**System*: a parcel and baggage inspection system which combines AS&E’s ZBackscatter technology with dual-energy transmission X-ray to provide enhanceddetection for a wide range of threats. Dual-energy transmission is best suited for the detection of threatssuch as guns and knives, and for identifying wires and other components of improvisedexplosive devices (IEDs). Z Backscatter imaging provides enhanced detection oforganic materials such as explosives and narcotics, which may be missed bytransmission-only systems in cluttered baggage. In addition, the complementary photo-like Z Backscatter image makes iteasier for security officers to interpret images, thus reducing analysis timeand minimizing operator fatigue. The Gemini system is offered in a range oftunnel sizes to suit a range of customer applications.

 

*SmartCheckSystem*:  apersonnel screening system for the effective screening for contraband andthreats hidden under a person’s clothing. The SmartCheck system simultaneously detects both metallic andnon-metallic objects, such as guns and knives, plastic explosives, liquidexplosives, composite weapons, drugs and other hidden threats andcontraband.  Smartcheck’s Z Backscatterimage gives the operator an easy-to-read display of where the threat orcontraband is hidden, thus eliminating the need for intrusive andtime-consuming pat-downs and strip searches. The SmartCheck system employs proprietary advanced image processingalgorithms to enhance privacy, while maintaining a high level of threatdetection.

 

***ContractResearch & Development***:  AS&Eengages in a variety of contract research and development (CRAD) programs,mostly for agencies of the U.S. government. AS&E pursues CRAD opportunities which it believes provide avenuesfor advancing our core technologies or developing product offerings forstrategic customers or markets.

 

***Service andSupport:***   AS&E’s highly skilled Field ServiceEngineers (FSEs) provide support services worldwide. Each FSE has a technicaldegree in Electrical and/or Mechanical Engineering (or equivalent experience),and is trained in the operation and repair of electronics, hydraulics, pneumatics,mechanics, electrical systems, and computers. FSEs are available 7 days a week,24 hours a day, and are located at AS&E sites in Asia, Europe, the MiddleEast, Africa and North America.  Inaddition, Technical Support is provided at the Company’s headquarters inBillerica, Massachusetts. AS&E provides comprehensive, cost-effective spareparts solutions customized for each system. The Company maintains an inventory of field-replaceable components invarious depots around the world in order to meet customer needs for spareparts.

 

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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 traininginforms customers about detection technologies and best practices throughdemonstrations and field activities that simulate real-life threat andcontraband encounters.  Technicaltraining is included with each system sale and additional training for serviceand maintenance training, and other customized training courses are providedaftermarket to interested customers.

 

**Component Availability**

 

Critical material and subsystems are procured fromboth domestic suppliers and global supply partners.  These supply sources may be single sources ofsupply for certain components and the material provided can have extended leadtimes.  In response to expanding customerdemand in the global security screening market, the Company has taken steps tomitigate sourcing risks by working closely with its suppliers to ensure future materialand subsystem availability to support its production plans. In some cases, theCompany has chosen to stock reserve material to ensure future availability.Efforts have also included identifying and qualifying second source suppliersfor critical material and a number of key subsystems in support of its productlines. The Company currently does not expect to experience sustaineddifficulties in securing required material and subsystems to support its futurebusiness operations.

 

**Intellectual Property**

 

The Company relies on a combination of patent,copyright, trademark, and trade secret laws, and contractual provisions toprotect its intellectual property. ** **In general, the Company pursues apolicy of obtaining patent protection both in the United States and in selectedforeign countries for subject matter we consider patentable and important toour business strategy.  As of March 31,2010, the Company has in excess of 40 unexpired patents issued by the UnitedStates Patent and Trademark Office and multiple pending applications directedto a variety of technologies.  TheCompany also has been granted patents or pending applications in over 35countries outside of the United States. A significant number of our patentshave been issued in the last five years**.**

 

Generally, if pending on June 8, 1995, a patentissued in the United States is effective for the longer of 17 years from thedate of issue or 20 years from the United States filing date of the earliestnon-provisional application upon which the patent is based.  If filed after June 8, 1995, a patent isgenerally effective for a term of 20 years from the United States filing dateof the earliest non-provisional application upon which the patent isbased.  The duration of foreign patentsvaries in accordance with applicable local law. While the duration of ourpatents varies, we believe that the duration of our patents is adequaterelative to the expected lives of our products. Although the Company believesthe ownership of such patents, copyrights, and trademarks is an importantfactor in its business and that its success depends in part on the ownershipthereof, the Company also relies on the innovative skills, technicalcompetence, and marketing abilities of its personnel.

 

The Company also has various trademarks registered andpending registration with the United States Patent and Trademark Office, aswell as marks registered and pending registration in various jurisdictionsaround the world.  Company patents and trademarksare reviewed regularly, and those with no foreseeable commercial value areabandoned to eliminate costly maintenance fees. The Company has ongoing research and development efforts and expects toseek additional intellectual property protection in the future.

 

In addition to patents and pending patentapplications, the Company uses trade secrets and proprietary know-how in ourproducts. Any of our know-how or trade secrets not protected by a patent couldbe disclosed to, or independently developed by, a competitor.

 

The Company believes that its patents, proprietarytechnology, trade secrets, know-how, and trademarks provide substantialprotection for the Company’s competitive position and the Company intends toaggressively protect its intellectual property assets, by litigation or othermeans, as appropriate.  We monitor theactivities of our competitors and other third parties with respect to their useof intellectual property. In addition, we require our employees, consultants,outside collaborators, and certain distributors and suppliers to executeconfidentiality and, where appropriate, non-competition agreements uponcommencing employment or other relationships with us.  Nevertheless, there can be no assurances thatthe steps taken by the Company in this regard will be adequate to preventmisappropriation or infringement of its technology or that the Company’scompetitors will not independently develop technologies that are substantiallyequivalent or superior to the Company’s technology.  Effective protection of intellectual propertyrights may be limited or unavailable in certain foreign countries.  See “Item 3. Legal Proceedings” below.

 

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**Customers**

 

The Company has a customer base consisting ofgovernment and commercial clients from both the United States and abroad.Domestically, the Company’s primary client base is comprised of agencies of theU.S. Government. Approximately 63%, 56%, and 55% of the Company’s total salesin fiscal 2010, 2009, and 2008, respectively, were derived from either (i) contractingdirectly with the U.S. Government, or (ii) contracting with contractorsworking directly with the U.S. Government. A significant number of the Company’scontracts with the U.S. Government provide the U.S. Government with thestandard unilateral right to terminate these contracts for convenience. Duringfiscal 2010 one of the Company’s contracts and in fiscal 2009 two of theCompany’s contracts with the U.S. Government were terminated in whole or inpart for convenience by the U. S. Government. These terminations did not result in any material losses to theCompany.   The Company is heavilydependent upon sales to agencies of the U.S. Government and reductions ordelays in procurement of the Company’s systems and services by these agenciesmay have a material adverse effect on the Company.

 

International sales, primarily to foreign governments,accounted for approximately 32%, 37%, and 36% of the Company’s total sales infiscal 2010, 2009, and 2008 respectively, and continue to be a high priorityfor the Company as part of its long-term growth strategy. International salesentail longer sales cycles and project financing requirements; however theCompany continues to focus on these sales as a means of broadening its customerbase. The Company manages its overseas risk in a number of ways, includingactively increasing the number of opportunities it is pursuing at any one timeand obtaining downpayments and letters of credit to secure its internationalreceivables. The majority of international contracts are bid in U.S. dollars.For those contracts that are bid in other currencies, the Company considers theneed to engage in hedging contracts to control foreign exchange risk. In fiscal2010, the Company entered into one foreign currency option contract to hedgecurrency risk in one region.  There wereno hedging activities in fiscal 2009 or 2008.

 

In fiscal 2010, the Company had sales to two majorcustomers, both agencies of the U.S. Government, which accounted for 24% and12% of total sales, respectively.  Infiscal 2009, the Company had sales to two major customers, one agency of theU.S. Government and one international government, which accounted for 18% and16% of total sales, respectively.  Infiscal 2008, the Company had sales to two major customers, both agencies of theU.S. Government, which accounted for 12% and 10% of total sales.  The loss of these significant customers couldsubstantially reduce our revenues and our business and prospects could beharmed.

 

**Sales Backlog**

 

The Company’s firm (signed contracts) sales backlogwas $195,729,000, $155,349,000, and $99,606,000 at March 31, 2010, March 31,2009, and March 31, 2008, respectively.

 

A significant number of the Company’s contracts withthe U.S. Government contain clauses permitting the government to terminate thecontract for convenience upon certain terms and conditions, including partialpayment to the Company for work performed. This right was exercised in fiscal2010 by one U.S. Government agency and in fiscal 2009 by two U.S. Governmentagencies who were parties to the contract. Total contracts with U.S Government agencies and subcontractors in thebacklog were $89,610,000, $71,545,000, and $42,640,000, at March 31, 2010,2009 and 2008, respectively. It is estimated that approximately 66% of the 2010backlog will be converted to revenue within the fiscal year ending March 31,2011.

 

**Sales and Marketing**

 

The Company’s products are marketed to corporate andgovernmental organizations through a sales force that contacts potentialcustomers and responds to public tenders and other expressions of interest.This sales force includes Company personnel based in the United States and abroad,as well as independent representatives under contracts to sell in foreigncountries.

 

**Competition**

 

The Company has many competitors in the homelandsecurity X-ray detection market, including several large and well-establishedmanufacturers of security equipment with financial and other resources greaterthan those of the Company. AS&E competes with approximately five othercompanies, who compete using a variety of methods including price, warrantycoverage, and product performance. Certain X-ray security system customers select such systems basedlargely on price. Other customers, including some agencies of the U.S.Government and certain users in countries with high levels of concern oversecurity, tend to select systems based largely on detection capability.  Many of the Company’s systems offer premiumperformance and have in some cases been priced higher than competing systems.The Company believes that its patented and proprietary technology gives it astrong competitive position in the sale of security systems to customersconcerned with performance and detection. The Company also believes that itsstrategy of concentrating on products with unique features, including ZBackscatter and Shaped Energy, and/or competitive pricing will give it a strongposition to increase its sales of X-ray inspection systems. However, a numberof companies have developed products that compete with the Company’s X-rayinspection products. (See “Item 1A.  RiskFactors” below)

 

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**Research and Development**

 

The Company spent approximately $19,764,000 of its ownfunds for research and development during fiscal 2010, compared to $18,070,000 and$12,306,000 in fiscal 2009 and 2008, respectively. The fiscal 2010 research anddevelopment efforts were focused on new product development, researching newtechnologies, the development of new applications, and design modifications andenhancements to existing products.

 

In addition, the Company conductedgovernment-sponsored research primarily focused on advances in X-ray systems,image analysis and integrated system development for security inspectionproblems. The Company recognized revenues of $2,306,000, $12,524,000 and$13,978,000 in fiscal 2010, 2009, and 2008, respectively for theseefforts.  This decrease in contractresearch and development revenues in fiscal 2010 was due to one large contractbeing terminated for convenience by the government in the fourth quarter offiscal 2009.   Many 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.

 

**ISO 9001 Certification**

 

In August 2009, the Company’s Quality ManagementSystem was recertified and upgraded to the ISO 9001:2008 Standard of theInternational Organization for Standardization.  American Science &Engineering has been an ISO 9001 registered company since 2000.   ISO 9001 is an internationally recognizedquality management and assurance standard. In qualifying, the Company met or exceeded the standards forestablishing a quality management system for preventing non-conformity at everylevel of the product life cycle, from customer order, through development andproduction, to installation and support. The Company believes that demonstrating continuous quality improvementis vital for building customer satisfaction and making business processes moreefficient in order to enhance its competitive edge.

 

**Personnel**

 

As of March 31, 2010 the Company had 395employees as compared to 375 employees at March 31, 2009.   It is the Company’s policy to have employeessign a non-compete and non-disclosure agreement as a condition of employment.None of the Company’s employees are represented by labor unions.

 

**Financial Information aboutForeign and Domestic Operations and Export Sales**

 

Most export sales are transacted in U.S. dollars, andmost are either secured by irrevocable letters of credit or paid in advance.The following table shows the breakdown of net sales and contract revenues tointernational and domestic customers based upon the customer’s country ofdomicile and the major regions of international activity. All assets aremaintained within the United States with the exception of inventory depots,inventory in transit or awaiting installation and cash accounts maintained atforeign locations (approximately 2.6% of the Company’s assets at March 31,2010).

 

***NetSales and Contract Revenues***

 
| ** **                                             | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|
| **(Dollars  in thousands)**                            | ** ** | **2010**        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Domestic                                               |       | $               | 163,873    |   | 68 | % | $ | 138,240 |   | 63 | % | $ | 107,021 |   | 64 | % |
| International                                          |       | 78,220          |       | 32 | % | 80,127 |   | 37 | % | 59,712 |   | 36 | % |
| Net  Sales and Contract Revenues                       |       | $               | 242,093    |   | 100 | % | $ | 218,367 |   | 100 | % | $ | 166,733 |   | 100 | % |
| **Percent  of International Revenue by Major Region:** |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Middle  East & Africa                         |       |            |       | 81 | % |   |   | 85 | % |   |   | 70 | % |
| Pacific  Rim                                           |       |            |       | 8 | % |   |   | 7 | % |   |   | 14 | % |
| Europe                                                 |       |            |       | 9 | % |   |   | 8 | % |   |   | 14 | % |
| All  Other                                             |       |            |       | 2 | % |   |   | — | % |   |   | 2 | % |

 

Our foreign operations involve certain risks, asdiscussed under “Item 1A.  Risk Factors”under the risk factor entitled “We conduct our business worldwide, whichexposes us to a number of difficulties in coordinating our internationalactivities and dealing with multiple regulatory environments, as well as risksassociated with geopolitical and economic instability.”

 

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**Available Information**

 

The Company’s principal executive offices are locatedat 829 Middlesex Turnpike, Billerica, MA 01821; telephone number 978-262-8700;corporate website www.as-e.com. We make available, free of charge through ourwebsite, our annual Form 10-K, current reports on Form 10-Q and Form 8-K,and amendments to these reports filed or furnished pursuant to Section 13(a) ofthe Securities Exchange Act of 1934 (the “Exchange Act”) as soon aspracticable. In addition, our reports, proxy and information statements andother information filed with the SEC are available at the SEC’s PublicReference Room at 100 F Street, NE, Room 1580, Washington, DC 20549(1-800-SEC-0330), and are also available from the SEC’s website at www.sec.gov.

 

**ITEM 1A.  RISK FACTORS**

 

You should carefully consider the following riskfactors, in addition to other information included in this Annual Report on Form 10-Kand other reports we file with the Securities and Exchange Commission.  If any of the following risks occur, ourbusiness, financial condition and operating results could be materiallyadversely affected.

 

**Our reliance on a small number of customers for alarge portion of our revenues could harm our business and prospects.  A number of contracts held by those customersmay be terminated at the customer’s discretion.**

 

Our business is dependent on sales to a small numberof customers, which include agencies of the U.S. Government. During fiscal2010, two customers accounted for 36% of our total revenues.  During fiscal 2009, two customers accountedfor 34% of our total revenues and during fiscal 2008, two customers accountedfor 22% of our total revenues.  We canprovide no assurance that our existing customers will increase or maintaintheir level of demand for our products.

 

A significant number of our government contracts maybe terminated at the government’s discretion. During fiscal 2010, one of ourcontracts with the U.S. Government was terminated for convenience by the U.S.Government.  During fiscal 2009, two ofour contracts with the U.S. Government were partially terminated forconvenience by the U.S. Government. Although these terminations did not result in material losses to us,future contract terminations could negatively impact our results ofoperations.  The termination of ourrelationship with one or more of our significant customers or the reduction ordelay of orders of our systems by these customers would substantially reduceour revenues, and our business and prospects may be harmed.

 

**Our results of operations are affected by theoverall economy and governmental spending.**

 

Our results of operations may be materially adverselyaffected by the conditions in the global economy and the impact of thoseconditions on U.S. and foreign government spending. The global economicrecession has caused extreme volatility and disruptions in the capital andcredit markets, including a significant reduction in the availability ofcapital resources to many business enterprises. U.S. and foreign economies haveexperienced significant declines in employment, spending, household wealth andlending.  Businesses have faced, and maycontinue to face, weakened demand for their products and services, difficultyobtaining access to financing, increased funding costs, and barriers toexpanding operations. U.S. and foreign government spending for programsinvolving products such as ours may be reduced or delayed, now or in thefuture, due to reduced tax revenues and other spending imperatives, includingfinancial institution support and economic stimulus programs.  Economic and market conditions may continueto worsen and could negatively impact our results of operations.

 

**Our business is dependent upongovernmental policies and appropriations.**

 

Our largest customers are government agencies anddemand for our products is dependent upon national priorities and governmentalinitiatives. These priorities and initiatives are subject to change from timeto time in response to the economic and political environment.   We are also exposed to budget approval andappropriation decisions and processes which are driven by numerous factors,including geo-political events and macroeconomic conditions which are beyondour control. While the overall level of U.S. defense spending has increased inrecent years for numerous reasons, we can give no assurance that such spendingwill continue to grow, or not be reduced. Significant changes in defensespending could have long-term consequences for our size and structure. Inaddition, changes in government priorities and requirements could impact thefunding, or the timing of funding, of our programs which could negativelyimpact our results of operations and financial condition.

 

**Our lengthy sales cycle requires us to incursignificant expenses with no assurance that we will generate revenue or recoversuch expenses.**

 

A substantial portion of our sales depends upon thedecision of governmental agencies to upgrade or expand security at bordercrossing inspection sites, existing airports, seaports and other facilities.Accordingly, a portion of our product sales is subject to delays associatedwith the lengthy approval processes that often accompany such capital expenditures.During these approval periods, we expend significant financial and managerialresources in anticipation of future orders that may not occur. If we fail toreceive an order after expending these resources, we may be unable to generatesufficient revenue to recover the costs incurred and our business and prospectsmay be harmed.

 

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**We use estimatesin recognizing revenues and if we make changes to estimates used in recognizingrevenues, our profitability may be adversely affected.**

 

Revenues for certain of our contracts arerecognized using the percentage-of-completion method based on progress towardscompletion, which requires estimates of total costs at completion. Estimatingcosts at completion on our long-term contracts, particularly due to thetechnical nature of the services being performed, is complex and involvessignificant judgment. Adjustments to original estimates are often required aswork progresses and additional information becomes known, even though the scopeof the work required under the contract may not change. Any adjustment as aresult of a change in estimate is recognized as events become known. Changes inthe underlying assumptions, circumstances or estimates could result inadjustments that may adversely affect future financial results.

 

**We conduct our business worldwide, which exposesus to a number of difficulties in coordinating our international activities anddealing with multiple regulatory environments, as well as risks associated withgeopolitical and economic instability**

 

Our revenues from international customers, includingforeign governments, accounted for approximately 32%, 37% and 36% of our netrevenues for the fiscal years ended March 31, 2010, March 31, 2009and March 31, 2008, respectively, and a significant number of domesticcustomer orders require shipments to, and services provided in, overseaslocations. In addition, we transact business internationally with a number ofour key suppliers. As a result of our worldwide business operations, we aresubject to various risks, including:

 

· international regulatory requirements and policychanges;

 

· lengthy sales cycles;

 

· longer payment cycles by foreign customers;

 

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

 

· difficulties in staffing and managing foreignoperations;

 

· geopolitical instability;

 

· political and economic changes and disruptions;

 

· preference towards local suppliers;

 

· governmental currency controls;

 

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

 

· currency exchange rate fluctuations; and

 

· tariff regulations.

 

Although our international sales have been denominatedprimarily in U.S. dollars, changes in currency exchange rates that increase therelative value of the U.S. dollar may make it more difficult for us to competewith foreign manufacturers on price or otherwise have a material adverse effecton our sales and operating results.

 

**Changes in governmentalregulations may reduce demand for our products or increase our expenses.**

 

We compete in markets in which we or our customersmust comply with federal, state, local and foreign regulations, such as healthand safety regulations. We develop, configure and market our products to meetour customers’ needs created by these regulations. Any significant change inthese regulations could reduce demand for our products or increase our costs tocomply with new regulations, both of which may adversely affect our operatingresults.

 

**We couldbe prohibited from shipping our products to certain countries****if we are unable****to obtain U.S. government authorization regarding the export of our products,or if current or future export laws limit or otherwise restrict our business.**

 

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We must comply with U.S. laws regulating the export ofour products. In some cases, explicit authorization from the U.S. government isneeded to export our products. The export regimes and the governing policiesapplicable to our business are subject to change. We cannot provide assurancethat such export authorizations will be available for our products in thefuture. If we cannot obtain required government approvals under applicableregulations, we may not be able to sell our products in certain internationaljurisdictions.

 

**Our reliance on a limited number of suppliers forsome key components and subsystems for our products could harm our business andprospects.**

 

We rely on a number of suppliers to provide materialsand subsystems for our products. We are reliant on a limited number of keyinternational supply partners for core technology products, includingsubsystems with complex sub-tier supply chains. In addition, certain material or subsystems used in our products may beavailable from a sole source or limited number of suppliers, increasing therisk of supply disruption. Although our products may be able to be redesignedto avoid using any sole source supplier, it would be expensive and timeconsuming to make such a change. If we change any of our suppliers, aqualification process would need to be completed and the affected product mayrequire redesign, creating potential delays in product shipments.

 

Some of our suppliers may allocate material due tomarket demand for the products they produce or market constraints such as theglobal availability of raw materials. We have no guaranteed supply arrangementswith our suppliers and there can be no assurance that our suppliers willcontinue to meet our requirements. Many of our competitors are much larger andmay be able to obtain priority allocations from these shared suppliers, therebylimiting or making our sources of supply unreliable for these criticalmaterials. There is also the possibility that a key single source supplier maybe acquired by or form a strategic alignment with a competitor, which couldimpact our ability to secure required materials.  If our supply of materials is disrupted, wecannot ensure that we would be able to find another supplier on a timely basis.

 

We depend on our subcontractors and suppliers todeliver material that is in full compliance with critical quality andspecification requirements. Quality issues may affect the reliability andperformance of our products, customer confidence, and adversely impactfinancial performance. Any difficulty in obtaining sufficient and timelydelivery of conforming material could result in delays or reductions in productshipments that could materially and adversely affect our business, financialcondition and consolidated results of operations. This in turn could alsodamage our reputation in the market and cause us to lose market share. We donot expect to experience sustained difficulties in securing required materialand subsystems to support forward business operations.

 

**Fluctuations in our operatingresults and unanticipated contract terminations may cause our stock price tofluctuate.**

 

Given the nature of the markets in which weparticipate, and given the right of key customers to terminate contracts attheir discretion, we cannot reliably predict future revenue and profitability.A high proportion of our costs are fixed, due in part to our significant sales,research and development, and manufacturing costs. As a result of our fixedcosts, declines in revenue could disproportionately affect our operatingresults and stock price at any time. Factors that may affect our quarterlyoperating results and the market price of our common stock include:

 

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

 

· lengthy sales cycles and the effect of large orders;

 

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

 

· changes in political agendas or national priorities;

 

· adverse changes in the level of economic activity inregions in which we do business;

 

· political unrest in the regions where we transactbusiness;

 

· adverse changes in industries on which we areparticularly dependent;

 

· competitive pressures resulting in lower sellingprices for our products;

 

· delays or problems in the introduction of newproducts;

 

· our competitors’ announcement or introduction of newproducts, services or technological innovations;

 

· variations in our product mix;

 

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· the timing and amount of our expenditures inanticipation of future sales;

 

· increased costs of raw materials or supplies; and

 

· changes in the volume or timing of product orders.

 

**We could incur substantial costs as a result ofliability claims and adverse publicity if our X-ray inspection systems fail todetect bombs, explosives, weapons, contraband or other threats to personalsafety.**

 

If our X-ray inspection systems fail to detect thepresence of bombs, explosives, weapons, contraband or other threats to personalsafety, we could be subject to product and other liability claims and negativepublicity, which could result in increased costs, reduced sales, and a declinein the market price of our common stock. There are many factors beyond ourcontrol that could result in the failure of our products to detect the presenceof bombs, explosives, weapons, contraband or other threats to personal safety.Examples of these factors include operator error or misuse of or malfunction ofour equipment. The failure of our systems to detect the presence of thesedangerous materials may lead to personal injury, loss of life, and extensiveproperty damage and may result in potential claims against us.

 

**Our insurance may be insufficientto protect us from product liability claims.**

 

Our product liability and umbrella liability insurancemay be insufficient to protect us from product liability claims. Moreover,there is a risk that product liability insurance will not continue to beavailable to us at a reasonable cost, if at all. If liability claims exceed ourcurrent or available insurance coverage, our business and prospects may be harmed.Regardless of the adequacy of our product liability insurance protection, anysignificant claim may have an adverse affect on our industry and marketreputation, leading to a substantial decrease in demand for our products andreduced revenues.

 

**We may not be able to fund ourresearch and development activities.**

 

We generate funds for our research and developmentactivities from operations, private sources and the government. We may beunable to generate the funds necessary to support our research and developmentactivities if we do not generate sufficient funds from operations, otherpotential private sources, or the government. We may not successfully competewith other companies and research institutions for government funding andfunding from other private sources. Additionally, government-funding prioritiesare subject to frequent changes. For example, in fiscal 2010, 2009, and 2008,we recorded $2,306,000, $12,524,000, and $13,978,000, respectively, forgovernment-sponsored research and development. There is no guarantee that wewill receive funds for government-sponsored research in the future. If we areunable to fund our research and development activities through our operationsor from outside sources, we may be unable to continue to innovate or bring ourinnovations to market on a timely or cost effective basis, or our innovationsmay be surpassed by other competitors or new technologies.

 

**Our success depends on newproduct development.**

 

Our continuing research and development program isdesigned to develop new products and to enhance and improve our currentproducts. We plan to expend significant resources on the development of our newproducts. The successful development of our products and product enhancementsis subject to numerous 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.

 

Given the uncertainties inherent with productdevelopment and introduction of X-ray inspection systems, we cannot assure thatour product development efforts will be successful on a timely basis or withinbudget, if at all. Our failure to develop new products and product enhancementson a timely basis or within budget would harm our business and prospects.

 

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**Our success depends upon ourability to adapt to rapid changes in technology and customer requirements.**

 

The market for our productshas been characterized by rapid technological changes, frequent productintroductions and evolving industry standards and customer requirements. Webelieve that these trends will continue into the foreseeable future. Oursuccess will depend, in part, upon our ability to enhance our existingproducts, successfully develop new products that meet changing customer andregulatory requirements and gain market acceptance. If we fail to do so, ourproducts may be rendered obsolete or noncompetitive by new industry standardsor changing technology, in which case our revenue and operating results wouldsuffer. In developing any new product, we may be required to make a substantialinvestment before we can determine the commercial viability of the new product.If we fail to accurately foresee our customers’ needs and future activities, wemay invest heavily in research and development of products that do not lead tosignificant revenue.

 

**We may not be able to competesuccessfully.**

 

A number of companies have developedproducts that compete with our X-ray inspection products. Many of ourcompetitors are larger and have greater financial resources. Some of ourcompetitors have more extensive research, marketing and manufacturingcapabilities and greater technical and personnel resources, and may be betterpositioned to continue to improve their technology in order to compete in anevolving industry. Our failure to compete successfully could decrease demandfor our products or make our products obsolete.

 

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

 

·**product performance,functionality and quality;

 

·**price;

 

·**the overall cost of ownershipof the system;

 

·**prior customer relationships;

 

·**technological capabilities ofthe product;

 

·**certification by governmentauthorities;

 

·**local market presence; and

 

·**breadth of the sales andservice organization.

 

To remain competitive, wemust develop new products and periodically enhance our existing products in atimely manner. We recognize that we may have to adjust the prices of some ofour products 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.

 

**Our business could be harmed if weare unable to protect our intellectual property.**

 

We rely on a combination oftrade secrets, patents, trademarks, copyrights and confidentiality proceduresto protect our technology. Despite our efforts, the steps we have taken toprotect our technology may be inadequate. Existing trade secret, patent,trademark and copyright laws offer only limited protection. Our patents couldbe invalidated or circumvented.  Inaddition, others may develop substantially equivalent or supersedingproprietary technology, or competitors may offer equivalent products incompetition with our products, thereby substantially reducing the value of ourproprietary rights. The laws of some foreign countries in which our productsare or may be developed, manufactured or sold may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates. We cannot assure that the steps we have taken to protect ourintellectual property will be adequate to prevent misappropriation of ourtechnology. Our inability to protect our intellectual property could have anegative impact on our operations and financial results.

 

**Our business may be materially and adverselyaffected by infringement claims initiated by us or our competitors.**

 

Initiating or defending against the enforcement of ourintellectual property rights may result in significant, protracted, and costlylitigation. We have previously been involved in various litigations involvingour intellectual property and have been successful in protecting such intereststo date. We expect intellectual property disputes to be an ordinary part of ourbusiness for the foreseeable future. We may initiate claims or litigationagainst third parties for infringement of our intellectual property rights, orto establish the validity of our property rights. There can be no assurancethat we will prevail in any such action. Litigation by or against us couldresult in significant expense and divert the efforts of technical andmanagement personnel, whether or not such litigation results in a favorable outcomefor us. In the event of an adverse result in any such litigation, we could berequired to pay substantial damages, cease the manufacture, use and sale ofinfringing products, expend significant resources to develop

 

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non-infringing technology, discontinue the use of certain processes, orobtain licenses for the infringing technology. If a license were required, wecannot assure that we would be able to obtain one on commercially reasonableterms, if at all. We cannot assure that we will be successful in developingnon-infringing technology or that the cost or time required to develop suchtechnology will be reasonable.

 

**We rely significantly on informationtechnology and any failure, inadequacy, interruption or security lapse of thattechnology could harm our ability to effectively operate our business.**

 

Our ability to effectively manage and maintain ourinventory and internal reports, and to ship products to customers and invoicethem on a timely basis depends significantly on our enterprise resourceplanning, production management, and other information systems. The failure ofthese systems to operate effectively or to integrate with other systems, or abreach in security of these systems could cause delays in product fulfillmentand reduced efficiency of our operations, and it could require significantcapital investments to remediate any such failure, problem or breach.

 

**Our success depends on ourability to attract and retain qualified management professionals.**

 

Our future success depends in large measure upon thecontinued contributions of our senior management team and other keypersonnel.  We cannot guarantee that wewill be able to attract and retain key personnel or executive management insufficient numbers, with the requisite skills or on acceptable terms necessaryor advisable to support our continued growth. If we lose professionals or are unable to attract new talent, we willnot be able to maintain our position in the market or grow our business.

 

**Existing external financing maynot be available in the future.**

 

We may require additional capital to financecontinuing operations. We cannot assure that operations will continue to beprofitable, that we will generate levels of revenues and cash flows sufficientto fund operations, or, if necessary, that we will be able to obtain additionalfinancing on satisfactory terms, if at all. Any existing financing arrangementsmay not be available or sufficient to meet our cash needs or may not beavailable in the future, or, if available, at a cost that we believe isreasonable.

 

**Future sales of our common stock by existingstockholders could depress the market price of our common stock.**

 

Substantially all of our outstanding shares of commonstock are freely tradable without restriction or further registration.Affiliates must sell all shares they own in compliance with the volume andother requirements of Rule 144. Nevertheless, sales of substantial amountsof common stock by our stockholders, or even the potential for such sales, maycause the market price of our common stock to decline and could impair ourability to raise capital through the sale of our equity securities.

 

**The volatility of our stock pricecould adversely affect an investment in our common stock.**

 

The market price of our common stock has been, and maycontinue to be, highly volatile. We believe that a variety of factors couldcause the price of our common stock to fluctuate, perhaps substantially,including:

 

· announcements of developments related to ourbusiness;

 

· quarterly fluctuations in our actual or anticipatedoperating results and order levels;

 

· general conditions in the worldwide economy;

 

· announcements of technological innovations;

 

· new products or product enhancements by us or ourcompetitors;

 

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

 

· developments in our relationships with our customersand suppliers.

 

In recent years the stock market in general, and themarkets for shares of small capitalization and “high-tech” companies, 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 our common stock.

 

**Provisions in our articles of organization and ourshareholder rights plan may have the effect of discouraging advantageous offersfor our business or common stock, and limit the price that investors might be willingto pay in the future for shares of our common stock.**

 

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Provisions in our articles of organization and ourshareholder rights plan may have the effect of discouraging or preventing achange in control. These provisions could limit the price that acquirers mightbe willing to pay in the future for shares of our common stock. Specifically,our articles of organization authorize our Board of Directors to issue up to100,000 shares of preferred stock in one or more series, to fix certain rights,preferences, privileges and restrictions granted to or imposed upon any whollyunissued shares of preferred stock, to fix the number of shares constitutingany such series, and to fix the designation of any such series, without furthervote or action by our shareholders. The terms of any series of preferred stock,which may include priority claims to assets and dividends and special votingrights, could adversely affect the rights of the holders of common stock andthereby reduce the value of our common stock. We have no present plans to issueshares of preferred stock. We have in place a shareholder rights plan, whichwas renewed in April of 2008, under which our stockholders are entitled topurchase shares of our 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. The shareholderrights plan may have the effect of impeding or preventing certain types oftransactions involving a change in control of us that could be beneficial tothe stockholders.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2. PROPERTIES**

 

The Company leases an 186,000 square foot facilitylocated in Billerica, Massachusetts which is owned by an unaffiliated realestate limited partnership and serves as the Company’s executive offices,research, manufacturing and warehouse facilities.  The lease expires on February 29, 2016.  The Company believes that its facilities areadequate and provide sufficient production capacity for its present intendedpurposes. The Company’s facilities are currently utilized primarily on aone-shift basis. The Company is able to add additional capacity by addingsecond and third shifts if necessary.

 

The Company’s former High Energy Systems division hadleased 24,733 square feet of manufacturing, research and development, andoffice space in Mountain View, California. The lease commenced on February 1,2004 and had an initial term of seven years with an option to extend for anadditional five-year period. In January 2005, as part of the asset saleagreement with Accuray, Incorporated, the Company assigned its rights andobligations under this lease to Accuray. The Company is secondarily liable forthe lease payments in the event of default by Accuray during the lease term,which expires in February 2011.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

None.

 

**PART II**

 

**ITEM 5. MARKET FOR THE COMPANY’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

**Market Information**

 

Our common stock is traded on the NASDAQ Global Marketunder the symbol ASEI. The market price range for the common stock for the lasttwo fiscal years as reported on the NASDAQ Global Market is as follows:

 
| **Fiscal Year** | ** ** | **Quarter Ended**       | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|-------------------------|------------|----------|------------|---------|------------|
| 2010            |       | March 31, 2010     |       | $        | 84.49      |    | $          | 72.81 |   |
|            |       | December 31, 2009  |       | $        | 81.59      |    | $          | 63.01 |   |
|            |       | September 30, 2009 |       | $        | 71.29      |    | $          | 60.00 |   |
|            |       | June 30, 2009      |       | $        | 69.99      |    | $          | 53.66 |   |
|            |       |                    |       |     |       |    |       |   |   |
| 2009            |       | March 31, 2009     |       | $        | 83.22      |    | $          | 49.29 |   |
|            |       | December 31, 2008  |       | $        | 77.05      |    | $          | 50.26 |   |
|            |       | September 30, 2008 |       | $        | 73.99      |    | $          | 49.09 |   |
|            |       | June 30, 2008      |       | $        | 56.79      |    | $          | 42.10 |   |

 

**Holders**

 

As of June 1, 2010, there were approximately 589 holders of recordof the Company’s common stock.

 

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**Common Stock Dividends**

 

In May of 2007, the Company began declaringquarterly cash dividends for its common stock shareholders.   Common stock cash dividends declared duringthe fiscal years ended March 31, 2010 and March 31, 2009 were asfollows:

 
| **Date Declared**                      | ** ** | **Dividend per common  share** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| May 13,  2009                     |       | $                                        | 0.20       |   |
| August 6,  2009                   |       | 0.20                                     |       |
| November 5,  2009                 |       | 0.20                                     |       |
| February 9,  2010                 |       | 0.30                                     |       |
| Fiscal year  ended March 31, 2010 |       | $                                        | 0.90       |   |
|                                   |       |                                     |       |
| May 13,  2008                     |       | $                                        | 0.20       |   |
| August 8,  2008                   |       | 0.20                                     |       |
| November 10,  2008                |       | 0.20                                     |       |
| February 9,  2009                 |       | 0.20                                     |       |
| Fiscal year  ended March 31, 2009 |       | $                                        | 0.80       |   |

 

On May 11, 2010, theCompany declared another quarterly dividend of $0.30 for holders of record on May 24,2010 to be paid June 3, 2010.  Futuredividend payments will depend on our earnings, capital requirements, financialcondition and capital needs and other factors considered relevant by our Boardof Directors.

 

**Securities Authorized forIssuance under Equity Compensation Plans**

 

The following table provides information about theCompany’s equity compensation plans and the common stock that may be issuedupon the exercise of options and rights under all existing equity compensationplans as of March 31, 2010.

 
| **Plan Category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options  and rights as of March  31, 2010  (a)** | ** ** | **Weighted average  exercise price of  outstanding options  and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans as of March 31,  2010 (excluding securities  reflected in column (a))  (c)** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1995 Combination  Plan                                           |       | 5,500                                                                                                                                                                                |       | $                                                                                                      | 13.28      |                                                                                                                                                                                                                                                            | —     |   |
| 1999 Combination  Plan                                           |       | 35,134                                                                                                                                                                               |       | 20.58                                                                                                  |       | —                                                                                                                                                                                                                                                          |       |
| 2000 Combination  Plan                                           |       | 40,210                                                                                                                                                                               |       | 27.63                                                                                                  |       | —                                                                                                                                                                                                                                                          |       |
| 2002 Combination  Plan                                           |       | 85,136                                                                                                                                                                               |       | 27.38                                                                                                  |       | 1,300                                                                                                                                                                                                                                                           | (1)        |
| 2003 Stock Plan  for Non-Employee Directors                      |       | 82,520                                                                                                                                                                               |       | 47.36                                                                                                  |       | —                                                                                                                                                                                                                                                          |       |
| 2005 Equity and  Incentive Plan                                  |       | 344,195                                                                                                                                                                              |       | 58.63                                                                                                  |       | 364,272                                                                                                                                                                                                                                                         | (2)        |
| **Equity  compensation plans not approved by security holders:** |       |                                                                                                                                                                                 |       |                                                                                                   |       |                                                                                                                                                                                                                                                            |       |
| 1997  Non-Qualified Option Plan                                  |       | 3,000                                                                                                                                                                                |       | 39.06                                                                                                  |       | —                                                                                                                                                                                                                                                          |       |
| 1998  Non-Qualified Option Plan                                  |       | 18,239                                                                                                                                                                               |       | 42.47                                                                                                  |       | —                                                                                                                                                                                                                                                          |       |
| **Total**                                                        |       | 613,934                                                                                                                                                                              |       | $                                                                                                      | 47.60      |                                                                                                                                                                                                                                                            | 365,572    |   |

 

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(1)                     Shares under the 2002 Combination Planmay be issued in the form of incentive stock options or non-qualified stockoptions.

(2)                     Shares under the 2005 Equity andIncentive Plan may be issued in the form of incentive stock options,non-qualified stock options, stock appreciation rights, restricted stock andrestricted stock units.

 

**Purchases of Equity Securities**

 

On May 17, 2007, theBoard of Directors approved a Stock Repurchase Program which authorized the Companyto repurchase up to $35 million of shares of its common stock from time to timeon the open market.  This StockRepurchase Program was completed in the first quarter of fiscal 2009.  On May 13, 2008, the Board of Directorsapproved an additional Stock Repurchase Program which authorized the Company torepurchase up to another $35 million in shares of its common stock from time totime on the open market. As of March 31, 2010, the remaining balanceavailable under the program to purchase shares was $23,807,000.  The Company made no repurchases of equitysecurities in the quarter ended March 31, 2010.

 

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**Stock Performance Graph**

 

The following chart graphs the performance of thecumulative total return to shareholders (stock price appreciation plusdividends, if applicable) during the previous five years in comparison to thereturns of the Standard & Poor’s 500 Composite Stock Price Index (“S&P500”)and the S&P SmallCap 600 Index.  TheS&P SmallCap 600 Index is a published index which measures the performanceof small-cap companies which meet certain financial metrics.  The Company was added to the S&P SmallCap600 Index in January of 2009.

 

 

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

 

The information included under the heading “StockPerformance Graph” in Item 5 of this Annual Report on Form 10-K is “furnished”and not “filed” and shall not be deemed to be “soliciting material” or subjectto Regulation 14A, shall not be deemed “filed” for purposes of Section 18of the Exchange Act, or otherwise subject to the liabilities of that section,nor shall it be deemed incorporated by reference in any filing under theSecurities Act of 1933, as amended, or the Exchange Act.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The following selected financial data is qualified byreference to, and should be read in conjunction with, the consolidatedfinancial statements, including the notes thereto, and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” includedelsewhere in this Annual Report.  Theresults below are not necessarily indicative of the results to be expected forany future periods.

 

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| **(Dollars in thousands,**       | ** ** | **Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------|------------|
| **except per share amounts)**    | ** ** | **2010**        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales and  contract revenues |       | $               | 242,093    |   | $ | 218,367 |   | $ | 166,733 |   | $ | 153,186 |   | $ | 163,604 |   |
| Net income                       |       | 36,176          |       | 28,353 |   | 17,478 |   | 24,610 |   | 29,786 |   |
| Income per  share—diluted   |       | 3.97            |       | 3.18 |   | 1.87 |   | 2.38 |   | 3.27 |   |
| Total assets                     |       | 299,853         |       | 268,287 |   | 235,534 |   | 221,725 |   | 173,389 |   |
| Long-term  obligations           |       | 14,380          |       | 13,125 |   | 13,298 |   | 14,610 |   | 14,298 |   |
| Stockholders’  equity       |       | 221,768         |       | 182,066 |   | 166,072 |   | 167,698 |   | 130,198 |   |
| Dividends per  common share      |       | $               | 0.90       |   | $ | 0.80 |   | $ | 0.60 |   | $ | — |   | $ | — |   |

 

**ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion should be read in conjunctionwith our consolidated financial statements and notes thereto which appearelsewhere in this Annual Report on Form 10-K. The following discussioncontains forward-looking statements and should also be read in conjunction withthe “Cautionary Statement” included at the beginning of this Annual Report on Form 10-K.

 

***Overview***     American Science andEngineering, Inc. develops and manufactures state-of-the-art X-rayinspection systems for homeland security, force protection, and other criticaldefense applications.   We providemaintenance, warranty, research, engineering, and training services related tothese solutions.

 

Our primary technologies are: (1) Z Backscattertechnology which is used to detect plastic explosives, illegal drugs, and othercontraband even when artfully concealed in complex backgrounds; and (2) ShapedEnergy X-ray inspection technology which combines the material discriminationfeatures of the Z Backscatter technology with the penetration capability ofhigh-energy transmission X-rays for dense cargos.

 

Net sales and contract revenues for fiscal 2010increased by 11% to $242,093,000 compared to fiscal 2009 revenues of$218,367,000. We reported income before taxes of $54,846,000 in fiscal 2010compared to an income before taxes of $43,700,000 in the previous fiscal year.Net income for fiscal 2010 was $36,176,000 ($3.97 per share, on a dilutedbasis) as compared to a net income of $28,353,000 ($3.18 per share, on adiluted basis) in fiscal 2009. Backlog at March 31, 2010 was $195,729,000,a 26% increase from the year-end backlog of $155,349,000 reported at March 31,2009.

 

**2010 Compared to 2009**

 

***Results of Operations***    Total net sales and contractrevenues of $242,093,000 in fiscal 2010 increased by $23,726,000 or 11% fromthe previous year. Revenues related to product sales and contracts increased by$22,779,000 or 16% due to the following factors.  CargoSearch system revenues increased by$17,279,000 over the previous year as the volume of system installation andacceptances increased over the previous year. The number of customers receiving CargoSearch systems in the currentyear also increased as the client base for these products expanded on increasedorders.  Z Backscatter system revenuesincreased by $15,679,000, attributable to sales of our ZBV Militarized Trailersystem introduced in fiscal 2009 and an increase in number of units sold toboth international customers and to the U.S. Government and the Department ofDefense.  These revenue increases wereoffset by a decrease in contract research and development (CRAD) revenues of$9,925,000 as one large CRAD contract terminated in the fourth quarter of theprior fiscal year.  ParcelSearch Systemsales decreased $936,000 from the prior year due to a decrease in the number ofunits delivered in the current year. Service revenues increased in fiscal 2010 by $947,000 or 1% to$76,383,000 due primarily to new service contracts entered into in the currentyear on the increased installed base.

 

In fiscal 2010, 68% of our revenues were from domestic(based upon the customer’s country of domicile) customers as compared to 63% infiscal 2009. In fiscal 2010, we had sales to two customers which accounted for36% of total sales.  In fiscal 2009, wehad sales to two customers which accounted for 34% of total sales.

 

Cost of sales and contracts of $131,023,000 in fiscal2010 increased by $5,621,000 or 4% from the previous year. Cost of productsales and contracts of $91,554,000 increased by $8,480,000 or 10% as comparedto the prior year. Cost of product sales and contracts totaled 55% of revenuesin fiscal 2010 as compared to 58% of revenues in fiscal 2009. This decrease incosts as a percentage of revenue is due primarily to an increase in shipmentsof higher margin Z Backscatter systems over the prior year and improved marginson CargoSearch system projects with higher per unit revenues and decreased perunit costs as we overcame the learning curve and streamlined the production ofthe new products introduced in the past two years.   The cost of service revenues decreased$2,859,000 or 7% from the prior year. Cost of service revenues totaled 52% of revenuesin fiscal 2010 as compared to 56% of revenues in fiscal 2009.  This decrease in costs as a percentage ofrevenue is due primarily to improved performance of units under contractresulting in reduced replacement material costs from the prior year.

 

Selling, general and administrative expenses in fiscal2010 increased by $4,111,000 to $36,982,000 as compared to fiscal 2009 andrepresented 15% of revenues in both fiscal 2010 and fiscal 2009. This increasein spending can be attributed to

 

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increased incentive compensation costs ($2,100,000) as we achievedcertain incentive compensation goals in the current year, increased payroll andpayroll related costs ($867,000) due to increased headcount, increasedmarketing and bid and proposal related costs ($985,000) and increasedconsulting costs ($433,000) as we utilized additional marketing consultants inthe current year.  These expenses wereoffset in part by a decrease in legal fees ($509,000) due to the settlement inthe current year of some patent litigation, and a decrease in accounting fees($181,000) as we reduced certain outsourced accounting and compliance activities.

 

Company-funded research and development spendingincreased by $1,694,000 to $19,764,000 in fiscal 2010 which is a 9% increase ascompared to the $18,070,000 spent in fiscal 2009.  Research and development spending represented8% of revenues in both fiscal 2010 and fiscal 2009. The fiscal 2010 researchand development efforts were focused on new product development, newtechnologies,  the development of newapplications, and design modifications and enhancements to existing products.

 

Other income (expense) was $522,000 in income infiscal 2010 as compared to $1,676,000 in income in fiscal 2009. Interest andinvestment income decreased by $1,687,000 due to reduced yields on allinvestments and a need to move to more conservative, shorter term, lower yieldinvestments as a result of the economic recession.

 

We reported pre-tax income of $54,846,000 in fiscal2010 as compared to a pre-tax income of $43,700,000 in the previous fiscal yearprimarily due to the items noted above. We recorded income tax expense of$18,670,000 in fiscal 2010 as compared to $15,347,000 in the prior fiscalyear.  Our effective tax rate was 34.0%in fiscal 2010 as compared to 35.1% in fiscal 2009.  This decrease in rate can be attributed to adecrease in state taxes attributable to changes in state apportionment andother state tax planning activities offset by an increase in non-deductiblestock compensation expense and an establishment of a valuation reserve oncertain state tax credits.

 

We reported net income of $36,176,000 in fiscal 2010as compared to net income of $28,353,000 in fiscal 2009.

 

**2009 Compared to 2008**

 

***Results of Operations***    Total net sales and contractrevenues of $218,367,000 in fiscal 2009 increased by $51,634,000 or 31% fromthe previous year. Revenues related to product sales and contracts increased by$39,766,000 or 39% due to the following factors.  Z Backscatter system revenues increased by$24,037,000 attributable to an increase in number of units sold to new internationalcustomers and to the U.S. Government and Department of Defense.  CargoSearch system revenues increased by$13,432,000 due to primarily to one large multi-unit order received during theyear and an increased volume of sales of new products introduced in fiscal2008.  Aftermarket parts sales increasedby $5,066,000 on higher order volume. Contract research and developmentrevenues remained relatively constant year over year.  These revenue increases were offset by adecrease in ParcelSearch System sales of $3,029,000 from fiscal 2008 as onelarge multi-unit order of parcel systems in fiscal 2008 was not repeated infiscal 2009. Service revenues increased in fiscal 2009 by $11,868,000 or 19% to$75,436,000 due primarily to large service contracts sold during fiscal 2009for products sold internationally in fiscal 2009 not covered by a laborwarranty and for products sold in fiscal 2008 whose warranties expired duringfiscal 2009.

 

In fiscal 2009, 63% of our revenues were from domestic(based upon customer’s country of domicile) customers as compared to 64% infiscal 2008. In fiscal 2009, we had sales to two customers which accounted for34% of total sales.  In fiscal 2008, wehad sales to two customers which accounted for 22% of total sales.

 

Cost of sales and contracts of $125,402,000 in fiscal2009 increased by $18,419,000 or 17% from the previous year. Cost of productsales and contracts of $83,074,000 increased by $12,661,000 or 18% as comparedto fiscal 2008. Cost of product sales and contracts totaled 58% of revenues infiscal 2009 as compared to 68% of revenues in fiscal 2008. This decrease incosts as a percentage of revenue is due primarily to an increase in shipmentsof higher margin Z Backscatter systems over fiscal 2008 and improved margins onCargoSearch system projects with higher per unit revenues and decreased perunit costs as we overcame the learning curve and streamlined the production ofthe new products introduced in the past two years.   The cost of service revenues increased $5,758,000or 16% from fiscal 2008. Cost of service revenues totaled 56% of revenues infiscal 2009 as compared to 58% of revenues in fiscal 2008.  This decrease in costs as a percentage ofrevenue is due primarily to improved performance of units under contractresulting in reduced replacement material costs from fiscal 2008.

 

Selling, general and administrative expenses in fiscal2009 increased by $6,650,000 to $32,871,000 as compared to fiscal 2008 andrepresented 15% of revenues in fiscal 2009 as compared to 16% of revenues infiscal 2008. This increase in spending can be attributed to increased incentivecompensation costs ($4,611,000) as we achieved certain incentive compensationgoals in fiscal 2009, increased payroll and payroll related costs ($1,180,000)due to increased headcount  and the accrualof certain severance payments, increased marketing related costs ($540,000) aswe increased trade shows and demos to introduce new product offerings, andincreased legal fees ($1,499,000) related primarily to on-going patentlitigation.  In addition, in fiscal 2008there was a write-down of a note receivable of $1,608,000 that was deemeduncollectible.

 

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Company-funded research and development spendingincreased by $5,764,000 to $18,070,000 in fiscal 2009, a 47% increase ascompared to the $12,306,000 spent in fiscal 2008.  Research and development spending represented8% of revenues in fiscal 2009 as compared to 7% of revenues in fiscal 2008.Fiscal 2009 costs increased during the year as we hired additional engineeringresources to focus on our strategic development efforts.  The fiscal 2009 research and developmentefforts were focused on new product development, the development of newapplications, and design modifications and enhancements to existing products.

 

Other income (expense) was $1,676,000 in income infiscal 2009 as compared to $6,262,000 in income in fiscal 2008. Interest andinvestment income decreased by $4,454,000 due to reduced yields on allinvestments and a need to move to more conservative, shorter term, lower yieldinvestments as a result of the current economic recession.

 

We reported pre-tax income of $43,700,000 in fiscal2009 as compared to a pre-tax income of $27,485,000 in the previous fiscal yearprimarily due to the items noted above. We recorded income tax expense of$15,347,000 in fiscal 2009 as compared to $10,007,000 in the prior fiscalyear.  Our effective tax rate was 35% infiscal 2009 as compared to 36% in fiscal 2008. This decrease in rate can be attributed to  the increase in manufacturing and researchand development credits available in fiscal 2009 due in part to thereinstatement of  certain research anddevelopment tax credits during this fiscal year by the federal government  and to a decrease in non-deductible stockcompensation expense,.

 

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

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents at year-end decreased by$70,507,000 to $34,912,000 at March 31, 2010 as compared to $105,419,000at March 31, 2009.   In addition, wehad $144,166,000 and $36,384,000 of short-term investments at March 31,2010 and March 31, 2009, respectively.

 

Cash flow provided by operations of $46,276,000resulted from the following:

 

· Reported net income of $36,176,000 adjusted for thefollowing non-cash items:

 

· Depreciation and amortization of $4,538,000;

· Stock compensation expense of $5,954,000;

· The amortization of bond discounts of $1,119,000; and

· The provision for contracts, inventory and accountsreceivable reserves of $1,170,000.

 

· A decrease in unbilled costs and fees of $4,238,000as we achieved billing milestones on projects in process at year end.

 

· A decrease in inventories of $1,474,000 due toincreased system shipments and system acceptances.

 

· An increase in accrued income taxes of $4,140,000 duea shift in the timing of the payment of estimated taxes in the current year

 

These cash contributors were offset by a decrease indeferred revenue of $10,453,000 as certain large service contracts, which werebilled in fiscal 2009 at the outset of the contract period, were earned duringthe current fiscal year.  67% of thedeferred revenue balance at March 31, 2010 is expected to be earned infiscal 2011.

 

Net cash of $112,162,000 was used for investingactivities in fiscal 2010. We purchased $213,157,000 in short-term investmentsduring the year, and had maturities of $104,261,000 on short-terminvestments.  Due to the global economicrecession, we had opted at the end of fiscal 2009 to invest our available fundsvery conservatively and had invested a majority of these funds in money marketfunds and other cash equivalents at March 31, 2009.  During fiscal 2010 we shifted these cashequivalents into other short-term investments. Fiscal 2010 capital expenditures totaled $3,266,000 versus $2,350,000for fiscal 2009. Investments in fixed assets were comprised primarily ofinformation technology expenditures, leasehold improvements, and equipment usedin production.

 

At March 31, 2010, short-term investments andcash equivalents were invested primarily in commercial paper, money marketfunds, treasury bills, government agency bonds, corporate debentures andcertificates of deposit.  We do notinvest in auction rate securities. Although management believes our investment policy is conservative innature, certain short-term investments in commercial paper can be exposed tothe credit risk of the underlying companies to which they relate and interestearned on these investments is subject to interest rate fluctuations. Thematurities within our investment portfolio generally range from 30 to365 days.

 

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Net cash used for financing activities was $4,621,000in fiscal 2010. Cash was used primarily for the payment of quarterly dividendpayments totaling $8,031,000 during the year as well as $2,922,000 used torepurchase 51,299 shares as part of our Stock Repurchase Program.  Cash provided by financing activitiesconsisted primarily of the receipt of $6,408,000 in proceeds from the exerciseof employee stock options.

 

On November 13, 2009, we modified our Loan andSecurity Agreement with Silicon Valley Bank to extend the facility through November 12,2010 and to decrease the facility from $40.0 million to $30.0 million tosupport our routine letters of credit and working capital needs.  If we maintain a cash and investments balanceof $40.0 million or greater, then the maximum amount available for borrowingunder the facility is $30.0 million minus the amount of all outstanding lettersof credit less certain reserves, and minus the outstanding principal balance ofany advances.  If our cash and investmentbalance falls below $40.0 million for a period of 30 consecutive days, then themaximum amount available for borrowings under the facility is the lesser of (i) $30.0million, or (ii) 80% of eligible domestic accounts receivable minus theamount of outstanding letters of credits adjusted for certain reserves andminus the principal balance of any advances.

 

The credit facility bears an interest rate of thegreater of 4.0% or the Silicon Valley Bank prime rate (4.0% at March 31,2010). The credit agreement is collateralized by certain of our assets andcontains certain restrictions, including limitations on the amount ofdistributions that can be made to stockholders, and the disposition orencumbrances of assets, and requires the maintenance of certain financialcovenants.  As of March 31, 2010,the Company was in compliance with these covenants.

 

At March 31, 2010, there were no borrowingsoutstanding against this credit facility. Under the terms of the modified credit agreement, we are required to paycertain one-time facility fees which are being amortized over the life of thefacility.   The credit facility whichexpired in November 2009, also required a fee of 0.50% quarterly on unusedamounts under the line of credit which was waived in any quarter in which theaverage aggregate credit extensions (as defined in the agreement) exceed $25.0million for such quarter. Total expenses incurred related to these fees were$227,000, $214,000 and $157,000 in fiscal 2010, 2009, and 2008, respectively.

 

In the normal course of business, we may providecertain customers and potential customers with performance guarantees, whichare generally backed by standby letters of credit. In general, we would only beliable for the amount of these guarantees in the event of default in theperformance of our obligations, the probability of which is remote inmanagement’s opinion.  At March 31,2010, we had outstanding $21,969,000 in standby letters of credit against theLoan and Security Agreement with $8,031,000 remaining availability.  No amounts have been drawn against theseletters of credit.

 

In recent years, we have funded our operations andcapital expenditures with cash generated by operations, including deposits fromcustomers on long-term projects and from proceeds received from optionexercises. We currently have no amounts drawn on our line of credit and believethat our cash flows from operations, cash and investments on hand and availablelines of credit are sufficient to meet the current and foreseeable operatingrequirements of our business.

 

**Contractual Obligations: **We lease certain facilities under non-cancelableleases. In addition, in the normal course of business, we enter into purchaseorders with our vendors for the purchase of materials or services to meet ourproduction needs. The following table summarizes our contractual obligations asof March 31, 2010.

 
| ** **                               | ** ** | **Payment due by period** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                  | ** ** | **Total**                                | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| **Recorded  Contractual Obligations:**   |       |                                     |       |   |   |   |   |   |   |   |   |
| Lease financing  liability               |       | $                                        | 8,377      |   | $ | 1,302 |   | $ | 2,672 |   | $ | 3,000 |   | $ | 1,403 |   |
| Other long-term  obligations             |       | 43                                       |       | 9 |   | 17 |   | 17 |   | — |   |
|                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Unrecorded  Contractual Obligations:** |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating leases                         |       | 1,102                                    |       | 192 |   | 370 |   | 370 |   | 170 |   |
| Purchase  commitments                    |       | 28,740                                   |       | 28,250 |   | 490 |   | — |   | — |   |
| Total                                    |       | $                                        | 38,262     |   | $ | 29,753 |   | $ | 3,549 |   | $ | 3,387 |   | $ | 1,573 |   |

 

In addition, in conjunction with the sale of adivision in fiscal 2005, the lease for that division’s facility was assigned tothe acquirer. We remain secondarily liable for the remaining lease payments inthe event of default by the acquirer during the lease term which expires in February 2011.Remaining lease payments at March 31, 2010 totaled $359,000. No accrualfor this contingent liability has been recorded at March 31, 2010 aspayment of this expense is considered remote.

 

**Inflation: **We do not believe that inflation has hada material effect on our results of operations. There can be no assurance,however, that our business will not be affected by inflation in the future.

 

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**Off-Balance Sheet Arrangements:** During the fiscal year ended March 31, 2010, we did not have anymaterial off-balance sheet arrangements.

 

**Critical Accounting Policies**

 

We consider certain accounting policies related torevenue recognition, inventories and related allowances for obsolete and excessinventory, and income taxes to be critical policies due to the estimationprocesses involved in each.

 

***RevenueRecognition:***  We recognize certain CargoSearch, ZBackscatter and ParcelSearch and Personnel Screening system sales andafter-market part sales, in accordance with Financial Accounting StandardsBoard Accounting Standards Codification (“FASB ASC”) 605-10, *Revenue Recognition*, which requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence ofan arrangement exists; (2) delivery has occurred or services rendered; (3) thefee is fixed and determinable; and (4) collectability is reasonablyassured.

 

Certain of our contracts are multiple-elementarrangements, which include standard products, custom-built systems or contractengineering projects, services (such as training), and service and maintenancecontracts. In accordance with FASB ASC 605-25, *RevenueRecognition — Multiple Element Arrangements*as amended by Accounting Standards Update No. 2009-13adopted retroactively to April 1, 2009, revenue arrangements thatinclude multiple elements are analyzed to determine whether the deliverablescan be divided into separate units of accounting or treated as a single unit ofaccounting. The consideration we receive is allocated among the separate unitsof accounting based on their relative selling prices determined based on pricesof these elements as sold on a stand-alone basis, and the applicable revenuerecognition criteria are applied to each of the separate units. Revenues areallocated to a delivered product or service when all of the following criteriaare met: (1) the delivered item has value to the customer on a standalonebasis; and (2) if the arrangement includes a general right of returnrelative to the delivered item, delivery or performance of the undelivered itemis considered probable and substantially in our control. There currently is nocustomer right of return in our sales agreements.

 

Revenues for certain long-term, custom-built systemsor contract engineering projects are recognized on a percentage of completionbasis. The lengths of these contracts typically range from one to three yearsfrom order to delivery and acceptance. Percentages-of-completion are determinedby relating the actual costs of work performed to date for each contract to ourestimated final costs. Revisions in costs and profit estimates are reflected inthe period in which the facts causing the revision become known.

 

We recognize sales for our systems that are producedin a standard manufacturing operation, have minimal customer site installationrequirements and have shorter order to delivery cycles, when title passes andwhen other revenue recognition criteria are met. Management believes thecustomer’s post-delivery acceptance provisions and installation requirements oncertain of these systems are perfunctory and inconsequential and the costs ofinstallation at the customer’s site are accrued at the time of revenuerecognition.  We have demonstrated ahistory of customer acceptance subsequent to shipment and installation of thesesystems.  For systems which entail moresignificant installation efforts and site work and/or have non-standardcustomer acceptance provisions, revenue recognition is deferred untilinstallation is complete and customer acceptance has occurred.

 

Service revenues are recognized on time and materialsengagements as the services are provided. Service contract revenues arerecognized as service is performed over the length of the contract whichreasonably approximates the period service revenues are earned.

 

Training and service contracts deliverables areaccounted for separately from the delivered product elements as our undeliveredproducts have value to our customers on a stand-alone basis. Accordingly,service revenue is deferred and recognized as such services are performed.

 

For all fixed price and long-term contracts, if a lossis anticipated on the contract, a provision is made in the period in which suchlosses are determined.

 

We record billed shipping and handling fees and billedout-of-pocket expenses as revenue and the associated costs as cost of goodssold in the accompanying consolidated statements of operations.

 

Certain contracts require payments from the customerupon execution of the agreement that are included in customer deposits.Individual customer deposits are reduced by the amount of revenue recognized onthe contract until a zero balance is reached. Revenue recognized in excess ofbillings under the contracts is included in unbilled costs and fees in theaccompanying balance sheet. Of the amounts in unbilled costs and fees at March 31,2010, $2,022,000 (97%) is expected to be billed and collected during fiscal2011.

 

Under the terms of certain of our cost reimbursement contracts, we are not permitted to bill customers a specified portion of the contract value until completion. Such retainages (approximately $58,000 and $74,000 at March 31, 2010 and March 31, 2009,

 

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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 our direct and indirect costs and expenses under these cost reimbursement contracts and our 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 we can give no assurances, in the  opinion  of  management,  any  adjustments  likely to  result  from inquiries or audits of our contracts will not have a  material  adverse impact on our financial condition or results of operations.

 

***Inventoriesand Related Allowance for Obsolete and Excess Inventory:***  Inventories consist of material, labor and manufacturing overhead andare recorded at the lower of cost or net realizable value. Excessivemanufacturing overhead costs such as idle facility expense, freight, handlingcosts and wasted material (spoilage) attributable to abnormally low volumes(levels that materially differ from budgeted production plans due primarily tochanges in customer demand) are excluded from inventory and recorded as anexpense in the period incurred. We regularly review inventory quantities onhand and record a provision for excess and obsolete inventory based primarilyon the estimated forecast of product demand over the next twelve to eighteenmonths. Demand for products can fluctuate significantly. A significant increasein the demand for our products could result in a short-term increase ininventory balances, while a significant decrease in demand could result in anincrease in the amount of excess inventory quantities on hand. Additionally,inventory reserves require estimates of future product demand, which maymaterially impact the provision required for excess and obsolete inventory. Inthe future, if inventory were determined to be overvalued, we would be requiredto recognize such costs in our cost of goods sold at the time of suchdetermination. Likewise, if inventory is determined to be undervalued, we mayhave over-reported costs of goods sold in previous periods and would berequired to recognize such additional operating income at the time of sale.Therefore, although we make every effort to ensure the accuracy of forecasts offuture product demand, any significant unanticipated changes in demand ortechnological developments could have a significant impact on the value of ourinventory and reported operating results.

 

***IncomeTaxes:***  We account for income taxes in accordancewith FASB ASC 740, *Income Taxes.*Accordingly, we recognize deferred income taxes based on the expected futuretax consequences of differences between the financial statement basis and thetax basis of assets and liabilities, calculated using enacted tax rates ineffect for the year in which the differences are expected to be reflected inthe tax return. We evaluate the need for a valuation allowance against our netdeferred tax assets at year end based upon our three year cumulative income andour projections of future income, and record a valuation allowance against anynet deferred tax assets if it is more likely than not that they will not berealized.

 

**New Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued FASB Accounting StandardsCodification (“FASB ASC”) 105,  *Generally Accepted Accounting Principles*,which establishes the FASB Accounting Standards Codification as the sole sourceof authoritative generally accepted accounting principles. Pursuant to theprovisions of FASB ASC 105, the Company has updated references to generally acceptedaccounting principles (“GAAP”) in its financial statements issued for the yearended March 31, 2010. The adoption of FASB ASC 105 did not impact theCompany’s financial position or results of operations.

 

In February 2008, theFASB issued FASB ASC 820-10-65-1, *Fair Value Measurementsand Disclosures*.  FASB ASC820-10-65-1 delayed the effective date of FASB ASC 820-10 for nonfinancialassets and nonfinancial liabilities, except for certain items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually) until fiscal years beginning after November 15,2008, and interim periods within those fiscal years. The Company adopted theprovisions of FASB ASC 820-10 for nonfinancial assets and nonfinancial liabilitieseffective April 1, 2009.  Theadoption of these provisions did not have a material impact on our ConsolidatedFinancial Statements.

 

In June 2008, the FASBissued FASB ASC 260-10-55-76C, *Earnings per Share —Implementation Guidance*, effective for fiscal years beginning after December 15,2008.  FASB ASC 260-10-55-55-76C clarifies that unvested share-basedawards that contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities and must be included inthe computation of EPS pursuant to the two-class method. The Company adoptedthe provisions of FASB ASC 260-10-55-55-76C effective April 1, 2009 andcalculated the impact of this adoption on prior periods.  The adoption of FASB ASC 260-10-55-55-76C didnot have a material impact on reported earnings per share.

 

In June 2008, the FASBissued FASB ASC 815-40-15, *Derivatives andHedging*. FASB ASC815-40-15 addresses the determination of whether provisions that introduceadjustment features (including contingent adjustment features) would preventtreating a derivative contract or an embedded derivative on a company’s ownstock as indexed solely to the company’s stock. FASB ASC 815-40-15 is effectivefor fiscal years beginning after December 15, 2008. The Company adoptedthe provisions of

 

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FASB ASC 815-40-15 effective April 1,2009.  The adoption of these provisionsdid not have a material impact on our Consolidated Financial Statements.

 

In October 2009, theFASB issued Accounting Standards Update No. 2009-13, *Revenue Recognition (Topic 605) Multiple-DeliverableRevenue Arrangements (A Consensus of the FASB Emerging Issues Task Force)* (ASU 2009-13), which amends existingaccounting standards for revenue recognition for multiple-element arrangements.To the extent a deliverable within a multiple-element arrangement is notaccounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU2009-13 establishes a selling price hierarchy that allows for the use of anestimated selling price to determine the allocation of arrangementconsideration to a deliverable in a multiple element arrangement where neithervendor-specific objective evidence nor third-party evidence is available forthat deliverable. ASU 2009-13 is to be applied prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010, however early adoption is permitted. The Companydecided to adopt the provisions of ASU 2009-13 in the quarter ended December 31,2009 and has applied the amendments in ASU 2009-13 retrospectively from thebeginning of the current fiscal year. The adoption of these provisions did not have a material impact on ourpreviously reported Consolidated Financial Statements.

 

In October 2009, theFASB issued Accounting Standards Update 2009-14, *Revenue Recognition (Topic 605)—Applicability of AICPA Statement ofPosition 97-2 to Certain Arrangements That Include Software Elements* (ASU 2009-14). ASU 2009-14 excludestangible products containing software components and non-software componentsthat function together to deliver the product’s essential functionality fromthe scope of ASC 605-985, Software-RevenueRecognition. ASU 2009-14 shall be applied on a prospective basis torevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010. Early adoption is permitted. Uponadoption, we must apply ASU 2009-14 retrospectively to the beginning of thefiscal year of adoption or to all periods presented. The Company is currentlyevaluating the impact of the pending adoption of ASU 2009-14 on ourConsolidated Financial Statements.

 

**ITEM 7A. QUANTITIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are subject to interest rate risk on our creditfacilities which have variable interest rates tied to the Prime Rate. As of March 31,2010, we had no variable interest rate debt outstanding. See Note 3 of Notes toConsolidated Financial Statements for a discussion of our long-termindebtedness.

 

The cash accounts for our operations in Hong Kong,England, and Abu Dhabi are maintained in Hong Kong dollars, pounds sterling anddirhams, respectively. The gains and losses from foreign currency transactionsare included in the statement of operations for the period and were immaterial.In addition, in fiscal 2010, we purchased for $601,000 one foreign currency putoption which was outstanding at year end. This contract did not qualifyfor hedge accounting treatment and is marked-to-market through the results ofoperations at the end of the period. A hypothetical 10% change inforeign currency rates would not have a material impact on our results ofoperations or financial position.

 

As of March 31, 2010, we held short-terminvestments and cash equivalents consisting of corporate debentures/bonds,treasury bills, government agency bonds, commercial paper, money market funds,and certificates of deposit. Our primary objective with our investmentportfolio is to invest available cash while preserving principal and meetingliquidity needs. These investments have an average interest rate ofapproximately 0.5% and are subject to interest rate risk. As a result of theaverage maturity and conservative nature of the investment portfolio, a suddenchange in interest rates would not have a material adverse effect on the valueof these investments.  To minimize thisrisk, we maintain a significant portion of our cash balances in money marketfunds. In general, money market funds are not subject to interest rate riskbecause the interest paid on such funds fluctuates with the prevailing interestrate.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The financial statements and supplementary financialinformation listed in the Index to Consolidated Financial Statements on page 27are filed as part of this Annual Report on Form 10-K and are incorporatedinto this item by reference.

 

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

 

None.

 

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**ITEM 9A. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

As of the end of the period covered by this report,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, the Company reviewedand evaluated the effectiveness of the Company’s disclosure controls andprocedures pursuant to Rules 13a-15(e) and 15d-15(e) of theExchange Act. Based upon their evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that our disclosure controls and procedureswere effective as of March 31, 2010 to ensure that information required tobe disclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Rules 13a-15(f) and 15d-15(f) of the ExchangeAct.  Our management conducted anevaluation of the effectiveness of our internal control over financialreporting using the framework in “Internal Control-Integrated Framework” issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation under the criteriaestablished in “Internal Control — Integrated Framework”, our managementconcluded that the Company’s internal control over financial reporting waseffective as of March 31, 2010. Caturano and Company, P.C., our independent registered public accountingfirm, has audited the effectiveness of our internal control over financialreporting as of March 31, 2010, and has issued their report thereon whichis included herein.

 

**Changes in Internal Controls overFinancial Reporting**

 

There have been no changes in our internal controlover financial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act, during the quarter ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10. DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

**Code of Conduct**

 

The Company has adopted a Code of Business Conduct andEthics that applies to our Board of Directors, Chief Executive Officer, ChiefFinancial Officer, and all employees of the Company. The Company’s Code ofBusiness Conduct and Ethics is posted on our website at www.as-e.com and may beaccessed in the Corporate Governance section of the Investor Information page.The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K,regarding an amendment to, or waiver from, our Code of Conduct, by posting suchinformation on our website at the location specified above.

 

The other information called for by this item ishereby incorporated by reference from our Definitive Proxy Statement relatingto the 2010 Annual Meeting of Stockholders, which we expect to file with theSecurities and Exchange Commission on or about July 29, 2010.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The information called for by this item is herebyincorporated by reference from our Definitive Proxy Statement relating to the2010 Annual Meeting of Stockholders, which we expect to file with theSecurities and Exchange Commission on or about July 29, 2010.

 

**ITEM 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information called for by this item is herebyincorporated by reference from our Definitive Proxy Statement relating to the2010 Annual Meeting of Stockholders, which we expect to file with theSecurities and Exchange Commission on or about July 29, 2010.

 

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

 

The information called for by this item is herebyincorporated by reference from our Definitive Proxy Statement relating to the2010 Annual Meeting of Stockholders, which we expect to file with theSecurities and Exchange Commission on or about July 29, 2010.

 

**ITEM 14. PRINCIPAL ACCOUNTANTFEES AND SERVICES**

 

The information called for by this item is herebyincorporated by reference from our Definitive Proxy Statement relating to the2010 Annual Meeting of Stockholders, which we expect to file with the Securitiesand Exchange Commission on or about July 29, 2010.

 

**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIALSTATEMENT SCHEDULES**

 

The financial statements listed in the Index toConsolidated Financial Statements on page 27 are filed as part of thisreport, and such Index is incorporated in this item by reference.

 

The exhibits listed in the Exhibit Index on page 51are filed as part of this report, and such Index is incorporated in this itemby reference.

 

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

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 

(Submitted in answer toItem 8, Item 9A and Item 15 of Form 10-K, Securities and ExchangeCommission)

 
| ** **                                                                                                                              | ** ** | **PAGE** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **CONSOLIDATED FINANCIAL  STATEMENTS**                                                                                                  |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                |       | 28       |
| Consolidated  Balance Sheets—March 31, 2010 and 2009                                                                          |       | 29       |
| Consolidated  Statements of Operations for the Years Ended March 31, 2010, 2009, and  2008                                         |       | 30       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the Years  Ended March 31, 2010, 2009, and 2008 |       | 31       |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2010, 2009, and  2008                                         |       | 32       |
| Notes to Consolidated Financial Statements                                                                                              |       | 33       |
|                                                                                                                                    |       |     |
| **CONSOLIDATED SUPPLEMENTARY  FINANCIAL INFORMATION**                                                                                   |       |     |
| Unaudited Quarterly Consolidated Financial Data for  the Years Ended March 31, 2010 and 2009                                       |       | 48       |

 

Financial statement schedules have been omittedbecause of the absence of conditions under which they are required or becausethe required information is given in the financial statements or notes thereto.

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders

of American Science and Engineering, Inc.

 

We have audited the accompanying consolidated balance sheets ofAmerican Science and Engineering, Inc. and subsidiary (“the Company”) asof March 31, 2010 and 2009 and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income, and cash flows foreach of the years ended March 31, 2010, 2009 and 2008.  We also have audited American Science andEngineering, Inc. and subsidiary’s internal control over financialreporting as of March 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).Management is responsible for these financial statements, for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on these financial statements and anopinion on the Company’s internal control over financial reporting based on ouraudits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit of the financial statements included examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audits also includedperforming such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for ouropinions.

 

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

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial position ofAmerican Science and Engineering, Inc. and subsidiary as of March 31,2010 and 2009 and the consolidated results of their operations, stockholders’equity and their cash flows for each of the three years in the period ended March 31,2010 in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, American Science and Engineering, Inc.maintained, in all material respects, effective internal control over financialreporting as of March 31, 2010 based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 
| /s/ Caturano and Company, P.C. |   |
|--------------------------------|--------|
|                           |   |
| Caturano and Company, P.C.     |   |
|                           |   |
| June 7, 2010              |   |
| Boston, Massachusetts          |   |

 

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

**CONSOLIDATEDBALANCE SHEETS**

**MARCH 31, 2010 AND 2009**

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

 
| ** **                                                                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                         |       |     |       |     |       |
| Current assets:                                                                                                    |       |     |       |     |       |
| Cash and cash  equivalents                                                                                         |       | $        | 34,912     |     | $          | 105,419 |   |
| Restricted cash  and investments                                                                                   |       | 35       |       | 35       |       |
| Short-term  investments, at fair value                                                                             |       | 144,166  |       | 36,384   |       |
| Accounts  receivable, net of allowances of $330 at March 31, 2010 and $286 at  March 31, 2009            |       | 37,735   |       | 36,956   |       |
| Unbilled costs  and fees                                                                                           |       | 2,078    |       | 6,316    |       |
| Inventories                                                                                                        |       | 45,387   |       | 47,975   |       |
| Prepaid expenses  and other current assets                                                                         |       | 8,998    |       | 7,224    |       |
| Deferred income  taxes                                                                                             |       | 2,389    |       | 1,807    |       |
| **Total  current assets**                                                                                          |       | 275,700  |       | 242,116  |       |
| Building,  equipment and leasehold improvements, net                                                               |       | 18,216   |       | 19,488   |       |
| Deferred income  taxes                                                                                             |       | 5,171    |       | 5,290    |       |
| Other assets,  net                                                                                                 |       | 766      |       | 1,393    |       |
| **Total  assets**                                                                                                  |       | $        | 299,853    |     | $          | 268,287 |   |
| ** **                                                                                                         |       |     |       |     |       |
| **Liabilities  and Stockholders’ Equity**                                                                     |       |     |       |     |       |
| Current  liabilities:                                                                                              |       |     |       |     |       |
| Accounts payable                                                                                                   |       | $        | 10,970     |     | $          | 10,639 |   |
| Accrued salaries  and benefits                                                                                     |       | 13,663   |       | 10,387   |       |
| Accrued warranty  costs                                                                                            |       | 965      |       | 1,130    |       |
| Accrued income  taxes                                                                                              |       | 4,203    |       | 63       |       |
| Deferred revenue                                                                                                   |       | 14,975   |       | 28,003   |       |
| Customer  deposits                                                                                                 |       | 13,714   |       | 14,818   |       |
| Current portion  of lease financing liability                                                                      |       | 1,302    |       | 1,163    |       |
| Other current  liabilities                                                                                         |       | 3,913    |       | 6,893    |       |
| **Total  current liabilities**                                                                                     |       | 63,705   |       | 73,096   |       |
| Lease financing  liability, net of current portion                                                                 |       | 7,075    |       | 8,377    |       |
| Deferred revenue                                                                                                   |       | 7,271    |       | 4,696    |       |
| Other long term  liabilities                                                                                       |       | 34       |       | 52       |       |
| **Total  liabilities**                                                                                             |       | 78,085   |       | 86,221   |       |
|                                                                                                               |       |     |       |     |       |
| Commitments and  contingencies (Notes 2 and 9)                                                                     |       |     |       |     |       |
| Stockholders’  equity:                                                                                        |       |     |       |     |       |
| Preferred stock,  no par value                                                                                     |       |     |       |     |       |
| Authorized—100,000  shares                                                                                    |       |     |       |     |       |
| Issued—None                                                                                                   |       | —   |       | —   |       |
| Common stock,  $0.662/3 par value                                                                             |       |     |       |     |       |
| Authorized—20,000,000  shares                                                                                 |       |     |       |     |       |
| Issued and  outstanding— 9,013,508 shares at March 31, 2010 and 8,810,760 shares at  March 31, 2009 |       | 6,008    |       | 5,873    |       |
| Capital in  excess of par value                                                                                    |       | 97,819   |       | 86,477   |       |
| Accumulated  other comprehensive income (loss), net                                                                |       | 33       |       | (47      | )          |
| Retained  earnings                                                                                                 |       | 117,908  |       | 89,763   |       |
| **Total  stockholders’ equity**                                                                               |       | 221,768  |       | 182,066  |       |
| **Total  liabilities and stockholders’ equity**                                                               |       | $        | 299,853    |     | $          | 268,287 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED MARCH 31,2010, 2009, AND 2008**

(Amounts in thousandsexcept per share amounts)

 
| ** **                                                                                               | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Net  sales and contract revenues:**                                                                    |       |     |       |     |       |     |       |
| Net product  sales and contract revenues                                                                 |       | $        | 165,710    |     | $          | 142,931  |       | $ | 103,165 |   |
| Net service  revenues                                                                                    |       | 76,383   |       | 75,436   |       | 63,568   |       |
| **Total  net sales and contract revenues**                                                               |       | 242,093  |       | 218,367  |       | 166,733  |       |
|                                                                                                     |       |     |       |     |       |     |       |
| **Cost of  sales and contracts:**                                                                        |       |     |       |     |       |     |       |
| Cost of product  sales and contracts                                                                     |       | 91,554   |       | 83,074   |       | 70,413   |       |
| Cost of service  revenues                                                                                |       | 39,469   |       | 42,328   |       | 36,570   |       |
| **Total  cost of sales and contracts**                                                                   |       | 131,023  |       | 125,402  |       | 106,983  |       |
| **Gross  profit**                                                                                        |       | 111,070  |       | 92,965   |       | 59,750   |       |
|                                                                                                     |       |     |       |     |       |     |       |
| **Operating  expenses:**                                                                                 |       |     |       |     |       |     |       |
| Selling, general  and administrative expenses                                                            |       | 36,982   |       | 32,871   |       | 26,221   |       |
| Research and  development expenses                                                                       |       | 19,764   |       | 18,070   |       | 12,306   |       |
| **Total  operating expenses**                                                                            |       | 56,746   |       | 50,941   |       | 38,527   |       |
| **Operating  income**                                                                                    |       | 54,324   |       | 42,024   |       | 21,223   |       |
|                                                                                                     |       |     |       |     |       |     |       |
| **Other  income (expense):**                                                                             |       |     |       |     |       |     |       |
| Interest and  investment income                                                                          |       | 701      |       | 2,388    |       | 6,842    |       |
| Interest expense                                                                                         |       | (136     | )          | (144     | )          | (158     | )          |
| Other, net                                                                                               |       | (43      | )          | (568     | )          | (433     | )          |
| Change in  warrant valuation                                                                             |       | —   |       | —   |       | 11       |       |
| **Total  other income**                                                                                  |       | 522      |       | 1,676    |       | 6,262    |       |
| ** **                                                                                               |       |     |       |     |       |     |       |
| **Income  before provision for income taxes**                                                            |       | 54,846   |       | 43,700   |       | 27,485   |       |
| **Provision  for income taxes**                                                                          |       | 18,670   |       | 15,347   |       | 10,007   |       |
| ** **                                                                                               |       |     |       |     |       |     |       |
| **Net  income**                                                                                          |       | $        | 36,176     |     | $          | 28,353   |       | $ | 17,478 |   |
| **Income  per share            —Basic** |       | $        | 4.06       |     | $          | 3.26     |       | $ | 1.92 |   |
| **—Diluted**                                                                                        |       | $        | 3.97       |     | $          | 3.18     |       | $ | 1.87 |   |
| **Weighted  average shares—Basic**                                                                  |       | 8,900    |       | 8,692    |       | 9,114    |       |
| **—Diluted**                                                                                        |       | 9,107    |       | 8,928    |       | 9,347    |       |
| **Dividends  declared per share**                                                                        |       | $        | 0.90       |     | $          | 0.80     |       | $ | 0.60 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED MARCH 31,2010, 2009, AND 2008**

(Amountsin thousands, except share amounts)

 
| ** **                                                          | ** ** | **Common  Stock  Shares** | ** ** | **Common  Stock********Par Value** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other Comp.  Income** | ** **  | **Total**   | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------|------------|------------------------------------|------------|--------------------------------------|------------|------------------------|------------|--------------------------------------|-------------|-------------|------------|---------------------------|------------|
| **Balance, March 31, 2007**                                    | ** ** | **9,186,975**             | ** ** | **$**                              | **6,125**  | ** **                           | **$**      | **105,036**            | ** ** | **$**                                | **56,489**  | ** **  | **$**      | **48**                    | ** ** | **$** | **167,698** | ** ** | ** ** | ** ** |
| Net income                                                          |       | —                    |       | —                             |       | —                               |       | 17,478                 |       | —                               |        | 17,478      |       | $                         | 17,478     |   |
| Repurchase of common stock                                          |       | (473,303                  | )          | (316                               | )          | (24,852                              | )          | —                 |       | —                               |        | (25,168     | )          | —                    |       |
| Exercise of stock options and warrants                              |       | 149,260                   |       | 99                                 |       | 4,062                                |       | —                 |       | —                               |        | 4,161       |       | —                    |       |
| Issuance of stock under employee compensation plans                 |       | 12,091                    |       | 8                                  |       | 681                                  |       | —                 |       | —                               |        | 689         |       | —                    |       |
| Issuance of restricted stock                                        |       | 70,640                    |       | 47                                 |       | (47                                  | )          | —                 |       | —                               |        | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                       |       | —                    |       | —                             |       | 1,350                                |       | —                 |       | —                               |        | 1,350       |       | —                    |       |
| Compensation expense on stock options                               |       | —                    |       | —                             |       | 3,258                                |       | —                 |       | —                               |        | 3,258       |       | —                    |       |
| Compensation expense on restricted stock and restricted stock units |       | —                    |       | —                             |       | 2,056                                |       | —                 |       | —                               |        | 2,056       |       | —                    |       |
| Dividends declared                                                  |       | —                    |       | —                             |       | —                               |       | (5,516                 | )          |                                 |        | (5,516      | )          | —                    |       |
| Other                                                               |       | —                    |       | —                             |       | —                               |       | —                 |       | 66                                   |        | 66          |       | 66                        |       |
| **Balance, March 31, 2008**                                    | ** ** | **8,945,663**             | ** ** | **5,963**                          | ** ** | **91,544**                           | ** ** | **68,451**             | ** ** | **114**                              | ** **  | **166,072** | ** ** | **$**                     | **17,544** | ** ** |
| Net income                                                          |       | —                    |       | —                             |       | —                               |       | 28,353                 |       | —                               |        | 28,353      |       | $                         | 28,353     |   |
| Repurchase of common stock                                          |       | (349,327                  | )          | (233                               | )          | (17,827                              | )          | —                 |       | —                               |        | (18,060     | )          | —                    |       |
| Exercise of stock options                                           |       | 161,753                   |       | 108                                |       | 5,795                                |       | —                 |       | —                               |        | 5,903       |       | —                    |       |
| Issuance of stock under employee compensation plans                 |       | 13,117                    |       | 8                                  |       | 768                                  |       | —                 |       | —                               |        | 776         |       | —                    |       |
| Issuances of restricted stock, net of forfeitures                   |       | 39,554                    |       | 27                                 |       | (27                                  | )          | —                 |       | —                               |        | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                       |       | —                    |       | —                             |       | 1,284                                |       | —                 |       | —                               |        | 1,284       |       | —                    |       |
| Compensation expense on stock options                               |       | —                    |       | —                             |       | 1,458                                |       | —                 |       | —                               |        | 1,458       |       | —                    |       |
| Compensation expense on restricted stock and restricted stock units |       | —                    |       | —                             |       | 3,482                                |       | —                 |       | —                               |        | 3,482       |       | —                    |       |
| Dividends declared                                                  |       | —                    |       | —                             |       | —                               |       | (7,041                 | )          | —                               |        | (7,041      | )          | —                    |       |
| Other                                                               |       | —                    |       | —                             |       | —                               |       | —                 |       | (161                                 | )           | (161        | )          | (161                      | )          |
| **Balance, March 31, 2009**                                    | ** ** | **8,810,760**             | ** ** | **5,873**                          | ** ** | **86,477**                           | ** ** | **89,763**             | ** ** | **(47**                              | **)**       | **182,066** | ** ** | **$**                     | **28,192** | ** ** |
| Net income                                                          |       | —                    |       | —                             |       | —                               |       | 36,176                 |       | —                               |        | 36,176      |       | $                         | 36,176     |   |
| Repurchase of common stock                                          |       | (51,299                   | )          | (34                                | )          | (2,888                               | )          | —                 |       | —                               |        | (2,922      | )          | —                    |       |
| Exercise of stock options                                           |       | 158,863                   |       | 106                                |       | 6,302                                |       | —                 |       | —                               |        | 6,408       |       | —                    |       |
| Issuance of stock under employee compensation plans                 |       | 14,192                    |       | 9                                  |       | 941                                  |       | —                 |       | —                               |        | 950         |       | —                    |       |
| Issuances of restricted stock, net of forfeitures                   |       | 80,992                    |       | 54                                 |       | (54                                  | )          | —                 |       | —                               |        | —      |       | —                    |       |
| Tax benefit accrued on stock option exercises                       |       | —                    |       | —                             |       | 1,087                                |       | —                 |       | —                               |        | 1,087       |       | —                    |       |
| Compensation expense on stock options                               |       | —                    |       | —                             |       | 1,264                                |       | —                 |       | —                               |        | 1,264       |       | —                    |       |
| Compensation expense on restricted stock and restricted stock units |       | —                    |       | —                             |       | 4,690                                |       | —                 |       | —                               |        | 4,690       |       | —                    |       |
| Dividends declared                                                  |       | —                    |       | —                             |       | —                               |       | (8,031                 | )          | —                               |        | (8,031      | )          | —                    |       |
| Other                                                               |       | —                    |       | —                             |       | —                               |       | —                 |       | 80                                   |        | 80          |       | 80                        |       |
| **Balance, March 31, 2010**                                    | ** ** | **9,013,508**             | ** ** | **$**                              | **6,008**  | ** **                           | **$**      | **97,819**             | ** ** | **$**                                | **117,908** | ** **  | **$**      | **33**                    | ** ** | **$** | **221,768** | ** ** | **$** | **36,256** | ** ** |

 

The accompanying notes are an integral part of theseconsolidated financial statements

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED MARCH 31,2010, 2008, AND 2008**

(Amountsin thousands)

 
| ** **                                                                                | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash  flows from operating activities:**                                                |       |     |       |     |       |     |       |
| Net income                                                                                |       | $        | 36,176     |     | $          | 28,353   |       | $ | 17,478 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:        |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                            |       | 4,538    |       | 4,294    |       | 4,123    |       |
| Provisions for  contracts, inventory, and accounts receivable reserves                    |       | 1,170    |       | 2,790    |       | 380      |       |
| Write-down of  note receivable                                                            |       | —   |       | —   |       | 1,608    |       |
| Change in fair  value of warrants                                                         |       | —   |       | —   |       | (11      | )          |
| Amortization of  bond discount (premium)                                                  |       | 1,119    |       | (384     | )          | (2,278   | )          |
| Stock  compensation expense                                                               |       | 5,954    |       | 4,940    |       | 5,314    |       |
| Other                                                                                     |       | 122      |       | —   |       | —   |       |
| Deferred income taxes                                                                     |       | (463     | )          | (289     | )          | (2,751   | )          |
| Change in assets  and liabilities:                                                        |       |     |       |     |       |     |       |
| Accounts  receivable                                                                      |       | (835     | )          | (9,622   | )          | (4,236   | )          |
| Unbilled costs  and fees                                                                  |       | 4,238    |       | (202     | )          | (273     | )          |
| Inventories                                                                               |       | 1,474    |       | (10,409  | )          | (20,328  | )          |
| Prepaid expenses  and other assets                                                        |       | (1,269   | )          | (2,964   | )          | 576      |       |
| Accrued income  taxes                                                                     |       | 4,140    |       | 63       |       | —   |       |
| Accounts payable                                                                          |       | 331      |       | (2,021   | )          | 4,543    |       |
| Deferred revenue                                                                          |       | (10,453  | )          | 5,873    |       | 18,326   |       |
| Customer  deposits                                                                        |       | (1,104   | )          | 8,271    |       | (5,007   | )          |
| Accrued expenses  and other current liabilities                                           |       | 1,138    |       | 6,483    |       | (136     | )          |
| Sale of leased  equipment                                                                 |       | —   |       | 116      |       | —   |       |
| Total  adjustments                                                                        |       | 10,100   |       | 6,939    |       | (150     | )          |
| Net cash  provided by operating activities                                                |       | 46,276   |       | 35,292   |       | 17,328   |       |
| **Cash flows from investing activities:**                                                 |       |     |       |     |       |     |       |
| Proceeds from  maturities of short-term investments                                       |       | 104,261  |       | 101,966  |       | 159,725  |       |
| Purchases of  short-term instruments                                                      |       | (213,157 | )          | (65,347  | )          | (163,971 | )          |
| Issuance of note  receivable                                                              |       | —   |       | —   |       | (608     | )          |
| Purchases of  property and equipment                                                      |       | (3,266   | )          | (2,350   | )          | (3,270   | )          |
| Net cash  provided by (used for) investing activities                                     |       | (112,162 | )          | 34,269   |       | (8,124   | )          |
| **Cash flows from financing activities:**                                                 |       |     |       |     |       |     |       |
| Decrease in  restricted cash and investments                                              |       | —   |       | 2,488    |       | 278      |       |
| Proceeds from  financing of leasehold improvements                                        |       | —   |       | —   |       | 417      |       |
| Repurchase of  shares of common stock                                                     |       | (2,922   | )          | (18,060  | )          | (25,168  | )          |
| Payment of  common stock dividend                                                         |       | (8,031   | )          | (7,041   | )          | (5,516   | )          |
| Repayment of  leasehold financing                                                         |       | (1,163   | )          | (1,134   | )          | (1,335   | )          |
| Proceeds from  exercise of warrants                                                       |       | —   |       | —   |       | 509      |       |
| Proceeds from  exercise of stock options                                                  |       | 6,408    |       | 5,903    |       | 3,029    |       |
| Reduction of income taxes paid due to the tax benefit from employee  stock option expense |       | 1,087    |       | 1,284    |       | 1,350    |       |
| Net cash used  for financing activities                                                   |       | (4,621   | )          | (16,560  | )          | (26,436  | )          |
| **Net  increase (decrease) in cash and cash equivalents**                                 |       | (70,507  | )          | 53,001   |       | (17,232  | )          |
| **Cash  and cash equivalents at beginning of year**                                       |       | 105,419  |       | 52,418   |       | 69,650   |       |
| **Cash  and cash equivalents at end of year**                                             |       | $        | 34,912     |     | $          | 105,419  |       | $ | 52,418 |   |
| **Supplemental  disclosures of cash flow information:**                                   |       |     |       |     |       |     |       |
| Interest paid                                                                             |       | $        | 185        |     | $          | 144      |       | $ | 158 |   |
| Income taxes  paid                                                                        |       | $        | 15,661     |     | $          | 13,625   |       | $ | 11,417 |   |
| **Non-cash transactions:**                                                                |       |     |       |     |       |     |       |
| Issuance of stock for 401K match                                                          |       | $        | 950        |     | $          | 776      |       | $ | 689 |   |
| Fair value of  warrants exercised                                                         |       | $        | —     |     | $          | —   |       | $ | 623 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**Nature of Operations and Basis of Presentation**

 

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

 

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

 

**Use ofEstimates**

 

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

 

**Cash andCash Equivalents**

 

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

 

**RestrictedCash and Investments**

 

The Company’s loanand security agreement with its bank requires certain cash and investmentbalances to be restricted as collateral against outstanding standby letters ofcredit if the Company exceeds its credit availability under this creditfacility. The restricted cash amounts with Silicon Valley Bank are typically inthe form of certificates of deposits that mature beyond 90 days.

 

**Short-termInvestments and Cash Equivalents**

 

Short-terminvestments and cash equivalents consist of investments in corporatedebentures/bonds, treasury bills, government agency bonds, commercial paper,money market funds and certificates of deposit. These investments areclassified as available-for-sale and are recorded at their fair values usingthe specific identification method. 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.

 

**AccountsReceivable and Unbilled Costs and Fees**

 

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

 
| **(In  thousands)** | ** ** | **Balance at   Beginning  of Year** | ** ** | **Charged  (Credited)  to Costs  and  Expenses** | ** ** | **Deductions  or Write-  offs  Charged to  Reserves** | ** ** | **Balance at  End of  Year** | ** ** |
|---------------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|
| **2010**            |       | $                                   | 286        |                                             | $          | 56                                                    |       | $                            | 12         |   | $ | 330 |   |
| **2009**            |       | $                                   | 230        |                                             | $          | 249                                                   |       | $                            | 193        |   | $ | 286 |   |
| **2008**            |       | $                                   | 224        |                                             | $          | 19                                                    |       | $                            | 13         |   | $ | 230 |   |

 

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Included inaccounts receivable and unbilled costs and fees at March 31, 2010 and 2009are $23,952,000 and $30,233,000, respectively, attributable to both prime andsubcontracts with federal and state governments. The Company establishes areserve against unbilled costs and fees based on known troubled accounts orcontracts, historical experience, and other currently available evidence. Therewas no activity in the reserve for unbilled costs and fees during fiscal 2010,2009 and 2008.

 

**Inventories**

 

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

 

The components ofinventories at March 31, 2010 and 2009, net of inventory reserves, were asfollows:

 
| **(In  thousands)**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Raw  materials, completed subassemblies and spares parts |       | $        | 19,821     |     | $          | 20,527 |   |
| Work-in-process                                          |       | 15,813   |       | 13,911   |       |
| Finished  goods                                          |       | 9,753    |       | 13,537   |       |
| **Total**                                                |       | $        | 45,387     |     | $          | 47,975 |   |

 

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

 

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

 
| **(In  thousands)** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged  (Credited)  to Costs  and  Expenses** | ** ** | **Deductions  / Write-  offs  Charged to  Reserves** | ** ** | **Balance at  End of  Year** | ** ** |
|---------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|
| **2010**            |       | $                                  | 4,165      |                                             | $          | 1,114                                                |       | $                            | 1,297      |   | $ | 3,982 |   |
| **2009**            |       | $                                  | 2,187      |                                             | $          | 2,542                                                |       | $                            | 564        |   | $ | 4,165 |   |
| **2008**            |       | $                                  | 2,083      |                                             | $          | 361                                                  |       | $                            | 257        |   | $ | 2,187 |   |

 

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

 

The Companyprovides for depreciation and amortization of its fixed assets on astraight-line basis over estimated useful lives of 1-25 years or remaininglease terms. Expenditures for normal maintenance and repairs are charged toexpense as incurred. Significant additions, renewals or betterments that extendthe useful lives of the assets are capitalized at cost. The cost andaccumulated depreciation applicable to equipment and leasehold improvementssold, or otherwise disposed of, are removed from the accounts, and anyresulting gain or loss is included in the consolidated statements ofoperations.

 

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

 
| **(In  thousands)**                                  | ** ** | **Estimated  Useful Lives**                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|----------|------------|
| Building  and leasehold improvements                 |       | Lesser of 25  years or remaining lease term |       | $        | 19,581     |     | $          | 18,267 |   |
| Equipment  and tooling                               |       | 5-10 years                                  |       | 3,240    |       | 2,825    |       |
| Computer  equipment and software                     |       | 5 years                                     |       | 17,977   |       | 16,580   |       |
| Furniture  and fixtures                              |       | 5-7 years                                   |       | 1,703    |       | 1,656    |       |
| Demo  and test equipment                             |       | 2-5 years                                   |       | 3,741    |       | 3,701    |       |
| Leased  equipment                                    |       | 1-2 years or  life of lease                 |       | 63       |       | 63       |       |
| Motor  vehicles                                      |       | 3 years                                     |       | 71       |       | 18       |       |
| Total                                                |       |                                        |       | 46,376   |       | 43,110   |       |
| Less  accumulated depreciation and amortization      |       |                                        |       | (28,160  | )          | (23,622  | )          |
| Building,  equipment and leasehold improvements, net |       |                                        |       | $        | 18,216     |     | $          | 19,488 |   |

 

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**RevenueRecognition**

 

The Companyrecognizes certain CargoSearch, Z Backscatter and ParcelSearch and PersonnelScreening system sales and after-market part sales, in accordance withFinancial Accounting Standards Board Accounting Standards Codification (“FASBASC”) 605-10, *Revenue Recognition*, whichrequires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or services rendered; (3) the fee is fixed and determinable; and (4) collectabilityis reasonably assured.

 

Certain of theCompany’s contracts are multiple-element arrangements, which include standardproducts, custom-built systems or contract engineering projects, services (suchas training), and service and maintenance contracts. In the quarter ended December 31, 2009 the Company adoptedFASB ASC 605-25, *Revenue Recognition — Multiple ElementArrangements*as amended by AccountingStandards Update No. 2009-13, retroactively to April 1, 2009.  This adoption did not have a material impacton the Company’s previously reported Consolidated Financial Statements.   In accordance with FASB ASC 605-25, revenuearrangements that include multiple elements are analyzed to determine whetherthe deliverables can be divided into separate units of accounting or treated asa single unit of accounting. The consideration received is allocated among theseparate units of accounting based on their relative selling prices determinedbased on prices of these elements as sold on a stand-alone basis, and theapplicable revenue recognition criteria are applied to each of the separateunits. There currently is no customer right of return in the Company’s salesagreements.  Revenues are allocated to adelivered product or service when the following criteria are met: (1) thedelivered item has value to the customer on a standalone basis; and (2) ifthe arrangement includes a general right of return relative to the delivereditem, delivery or performance of the undelivered item is considered probableand substantially in our control.

 

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

 

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

 

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

 

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

 

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

 

Training andservice contracts deliverables are accounted for separately from the deliveredproduct elements as the Company’s undelivered products have value to itscustomers on a stand-alone basis. Accordingly, this service revenue is deferredand recognized as such services are performed.

 

Certain contractsrequire payments from the customer upon execution of the agreement that areincluded in customer deposits. Individual customer deposits are reduced by theamount of revenue recognized on the contract until a zero balance is reached.Revenue recognized in excess of billings under the contracts is included inunbilled costs and fees in the accompanying balance sheets. Of the amounts inunbilled costs and fees at March 31, 2010, $2,022,000 (97%) is expected tobe billed and collected during fiscal 2011.

 

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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 $58,000 and $74,000 at March 31, 2010 and March 31, 2009, 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.

 

**WarrantyCosts**

 

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

 

**DeferredRevenue**

 

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

 

**Impairmentof Long-Lived Assets**

 

Long-lived assetsare reviewed for possible impairment whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable.

 

Impairment isassessed by comparing the estimated undiscounted cash flows over the asset’sremaining life to the carrying amount of the asset. If the estimated cash flowsare insufficient to recover the asset, an impairment loss is recognized basedon the difference between the carrying value of the asset and the fair value ofthe asset less any costs of disposal.  Noimpairment costs were recorded in the fiscal years ended March 31, 2010,2009 and 2008.

 

**AccruedSalaries and Benefits**

 

Accrued salariesand benefits at March 31, 2010 and March 31, 2009 include thefollowing:

 
| **(In  thousands)**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  payroll and payroll related taxes |       | $        | 1,162      |     | $          | 1,137 |   |
| Accrued  benefits                          |       | 227      |       | 280      |       |
| Accrued  incentive compensation            |       | 10,485   |       | 7,425    |       |
| Accrued  vacation                          |       | 1,789    |       | 1,545    |       |
| Total  accrued salaries and benefits       |       | $        | 13,663     |     | $          | 10,387 |   |

 

**CustomerDeposits**

 

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

 

**Researchand Development**

 

Internally fundedresearch and development costs including direct labor, material, subcontractorexpenses and related overheads are expensed as incurred. Internally fundedresearch and development costs were $19,764,000, $18,070,000 and $12,306,000,in fiscal 2010, 2009, and 2008, respectively. In addition, the Company recognized revenues of $2,306,000,

 

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$12,524,000 and$13,978,000, in fiscal 2010, 2009, and 2008, respectively related togovernment-sponsored research and development earned primarily on a costreimbursement and fee basis as discussed above.

 

**FairValue of Financial Instruments**

 

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

 

**Incomeper Common and Potential Common Shares**

 

Basic earnings percommon share is computed by dividing net income available to commonstockholders by the weighted average number of shares of common stockoutstanding during the year. Diluted earnings per share include the dilutiveimpact of options, warrants, restricted stock and restricted stock units usingthe average share price of the Company’s common stock for the period. For theyears ended March 31, 2010, 2009, and 2008, respectively, common stockequivalents of approximately 132,000, 215,000, and 253,000 are excluded fromdiluted earnings per share, as their effect is anti-dilutive.

 
| **(In  thousands except per share amounts)**                                                                                | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Earnings per Share - Basic**:                                                                                             |       |                     |       |                     |       |                     |       |
| Net  income                                                                                                                 |       | $                        | 36,176     |                     | $          | 28,353                   |       | $ | 17,478 |   |
| Weighted  average number of common shares outstanding—basic                                                            |       | 8,900                    |       | 8,692                    |       | 9,114                    |       |
| Income  per Share — Basic                                                                                              |       | $                        | 4.06       |                     | $          | 3.26                     |       | $ | 1.92 |   |
|                                                                                                                        |       |                     |       |                     |       |                     |       |
| **Earnings per Share - Diluted:**                                                                                           |       |                     |       |                     |       |                     |       |
| Net  income                                                                                                                 |       | $                        | 36,176     |                     | $          | 28,353                   |       | $ | 17,478 |   |
| Adjustment  to net income for change in warrant valuation                                                                   |       | —                   |       | —                   |       | (11                      | )          |
| Adjusted  net income                                                                                                        |       | $                        | 36,176     |                     | $          | 28,353                   |       | $ | 17,467 |   |
|                                                                                                                        |       |                     |       |                     |       |                     |       |
| Weighted  average number of common shares outstanding—basic                                                            |       | 8,900                    |       | 8,692                    |       | 9,114                    |       |
| Assumed  exercise of stock options, warrants, restricted stock and restricted stock  units, using the treasury stock method |       | 207                      |       | 236                      |       | 233                      |       |
| Weighted  average number of common and potential common shares outstanding —diluted                                    |       | 9,107                    |       | 8,928                    |       | 9,347                    |       |
| Income  per share — Diluted                                                                                            |       | $                        | 3.97       |                     | $          | 3.18                     |       | $ | 1.87 |   |

 

**IncomeTaxes**

 

The Companyaccounts for income taxes in accordance with FASB ASC 740, *Income Taxes*.Accordingly, the Company recognizes deferred income taxes based on the expectedfuture tax consequences of differences between the financial statement basisand the tax basis of assets and liabilities, calculated using enacted tax ratesin effect for the year in which the differences are expected to be reflected inthe tax return. The Company records a valuation allowance against any netdeferred tax assets if it is more likely than not that they will not berealized.

 

**Concentrationsof Credit Risk**

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, short-term investments and accounts andunbilled receivables.  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, investment gradecorporate bonds, treasury bills, government agency bonds, commercial paper, andcertificates of deposit.

 

Three customers, twoagencies of the U.S. Government and one international customer, accounted for56% of the accounts receivable balance at March 31, 2010.  The Company generally requires letters ofcredit and/or prepayments from international customers.  The Company has not experienced anysignificant losses from uncollectible accounts.

 

**Common Stock Dividends**

 

In May of2007, the Company began declaring quarterly cash dividends for its common stockshareholders.   Common stock cashdividends declared during the fiscal year ended March 31, 2010 were asfollows:

 

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| **Date  Declared**                     | ** ** | **Dividend per  common share** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|
| May 13,  2009                     |       | $                              | 0.20       |   |
| August 6,  2009                   |       | 0.20                           |       |
| November 5,  2009                 |       | 0.20                           |       |
| February 9,  2010                 |       | 0.30                           |       |
| Fiscal  year ended March 31, 2010 |       | $                              | 0.90       |   |

 

On May 11, 2010, the Company declared a quarterly dividend of $0.30for holders of record on May 24, 2010 paid on June 3, 2010.

 

**Stock-BasedCompensation**

 

Compensation expense forthe fair value of stock based awards made to employees and the Board ofDirectors is recognized over the requisite service period for awards expectedto vest. The Company estimates the fair value of share-based awards on the dateof grant using the Black-Scholes option pricing model. The Black-Scholes methodof valuation requires several assumptions: (1) the expected term of thestock award, (2) the expected future stock volatility over the expectedterm, (3) the expected dividend yield and (4) risk-free interestrate. The expected term represents the expected period of time the Companybelieves the options will be outstanding based on historical information.Estimates of expected future stock price volatility are based on the historicvolatility of the Company’s common stock. The expected dividend yield was based on the expectation we wouldcontinue paying dividends on our common stock at the same rate for theforeseeable future.  The risk freeinterest rate is based on the U.S. Zero-Bond rate.

 

The Companyrecognized $5,954,000, $4,940,000 and $5,314,000 of stock-based compensationcosts in the consolidated statements of income for the year ended March 31,2010, 2009 and 2008, respectively. The income tax benefit related to suchcompensation for the years ended March 31, 2010, 2009 and 2008 wasapproximately $2,038,000, $1,724,000 and $818,000, respectively.

 

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

 
| ** **                                         | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| **(In thousands)**                            | ** ** | **March 31,  2010**        | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
| Cost  of revenues                                  |       | $                               | 975        |   | $ | 754 |   | $ | 1,478 |   |
| Selling,  general and administrative               |       | 4,979                           |       | 4,186 |   | 3,836 |   |
| Total  share-based compensation expense before tax |       | $                               | 5,954      |   | $ | 4,940 |   | $ | 5,314 |   |

 

The fair value of optionsat date of grant was estimated with the following assumptions:

 
| ** **               | ** ** | **Year Ended**      | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** | **March 31,  2008** | ** ** |
| **Assumptions:**         |       |                     |       |   |   |   |   |
| Expected  life           |       | 5 years                  |       | 5 years |   | 3 years |   |
| Risk-free  interest rate |       | 2.37                     | %          | 2.99 | % | 4.1 | % |
| Stock  volatility        |       | 46                       | %          | 49 | % | 51 | % |
| Dividend  yield          |       | 1.2                      | %          | 1.3 | % | 1.3 | % |

 

**NewAccounting Pronouncements**

 

***Recent Accounting Changes***

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued FASB ASC 105,  *Generally Accepted Accounting Principles*,which establishes the FASB Accounting Standards Codification as the sole sourceof authoritative generally accepted accounting principles. Pursuant to theprovisions of FASB ASC 105, the Company has updated references to generallyaccepted accounting principles (“GAAP”) in its financial statements issuedbeginning with the period ended September 30, 2009. The adoption of FASBASC 105 did not impact the Company’s financial position or results ofoperations.

 

In February 2008, the FASB issued FASB ASC 820-10-65-1, *Fair Value Measurements and Disclosures*.  FASB ASC 820-10-65-1 delayed the effectivedate of FASB ASC 820-10 for nonfinancial assets and nonfinancial liabilities,except for certain items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually) until fiscalyears beginning after November 15, 2008, and interim periods within thosefiscal years. The Company adopted the provisions of

 

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FASBASC 820-10 for nonfinancial assets and nonfinancial liabilities effective April 1,2009.  The adoption of these provisionsdid not have a material impact on the Company’s Consolidated FinancialStatements.

 

In June 2008, the FASB issued FASB ASC 260-10-55-76C, *Earnings per Share — Implementation Guidance*, effective forfiscal years beginning after December 15, 2008.  FASB ASC260-10-55-55-76C clarifies that unvested share-based awards that containnonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid)are participating securities and must be included in the computation of EPSpursuant to the two-class method. The Company adopted the provisions of FASBASC 260-10-55-55-76C effective April 1, 2009 and calculated the impact ofthis adoption on prior periods.  Theadoption of FASB ASC 260-10-55-55-76C did not have a material impact onreported earnings per share for any period presented.

 

In June 2008, the FASB issued FASB ASC 815-40-15 *Derivatives and Hedging*. FASB ASC 815-40-15 addresses thedetermination of whether provisions that introduce adjustment features(including contingent adjustment features) would prevent treating a derivativecontract or an embedded derivative on a company’s own stock as indexed solelyto the company’s stock. FASB ASC 815-40-15 is effective for fiscal yearsbeginning after December 15, 2008. The Company adopted the provisions ofFASB ASC 815-40-15 effective April 1, 2009.  The adoption of these provisions did not havea material impact on the Company’s Consolidated Financial Statements.

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13,*Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB EmergingIssues Task Force)* (ASU2009-13), which amends existing accounting standards for revenue recognitionfor multiple-element arrangements. To the extent a deliverable within amultiple-element arrangement is not accounted for pursuant to other accountingstandards, including ASC 985-605, Software-RevenueRecognition, ASU 2009-13 establishes a selling price hierarchy thatallows for the use of an estimated selling price to determine the allocation ofarrangement consideration to a deliverable in a multiple element arrangementwhere neither vendor-specific objective evidence nor third-party evidence isavailable for that deliverable. ASU 2009-13 is to be applied prospectively forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010, however early adoption is permitted.The Company adopted the provisions of ASU 2009-13 in the quarter ended December 31,2009 and applied the amendments in ASU 2009-13 retrospectively from thebeginning of the current fiscal year. The adoption of these provisions did not have a material impact on ourpreviously reported Consolidated Financial Statements.

 

***Accounting Changes to be Implemented***

 

In October 2009, the FASB issued Accounting Standards Update2009-14, *Revenue Recognition (Topic605)—Applicability of AICPA Statement of Position 97-2 to Certain ArrangementsThat Include Software Elements* (ASU 2009-14). ASU 2009-14 excludes tangible products containingsoftware components and non-software components that function together todeliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition. ASU2009-14 shall be applied on a prospective basis to revenue arrangements enteredinto or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. Upon adoption, we must apply ASU 2009-14retrospectively to the beginning of the fiscal year of adoption or to allperiods presented. The Company is currently evaluating the impact of thepending adoption of ASU 2009-14 on our Consolidated Financial Statements.

 

**2. LEASEAGREEMENTS**

 

The Company leasescertain facilities under non-cancelable operating leases with various renewaloptions. For operating leases which contain fixed escalations in rentalpayments, the Company records the total rent payable on a straight-line basisover the original lease term. The Company incurred $262,000, $253,000 and$269,000 of operating rent expense in the fiscal years ended March 31,2010, 2009, and 2008 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 which containsautomatic extensions through May 15, 2016.

 

In March 2005,the Company renewed its lease agreement for its corporate headquarters andmanufacturing facilities in Billerica, Massachusetts.  As part of thelease agreement, the Company’s landlord agreed to certain renovations to theBillerica facility including the construction of additional high bay manufacturingspace.  The Company was responsible for a portion of the constructioncosts and was deemed to be the owner of the building during the constructionperiod. In January 2007, the Company amended this lease agreement toexpand its lease to include the remaining available space in the building.  During the fiscal year ended March 31,2007, the Company capitalized $2,029,000 to record the facility on its bookswith an offsetting amount to the Lease Financing Liability.  In addition,amounts paid for construction were recorded as construction in progress and thelandlord construction allowances of $367,000 in 2008 were recorded asadditional lease financing liability.

 

At the completionof the construction of the initial renovations in February 2006, the leasewas reviewed for potential sale-leaseback treatment in accordance with ASC 840 *Leases*.  Based on this review, it was determined thatthe lease did not qualify for sale-leaseback treatment.  As a result, building and tenant improvementsand associated lease financing liabilities remained on the Company’s financialstatements.  The Lease FinancingLiability is being amortized over the lease term based on the payments

 

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designated in theagreement and the building and tenant improvement assets are being depreciatedon a straight line basis over their useful lives.

 

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

 
| **Year  Ending March 31,**                     | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| 2011                                                |       | $                    | 192        |               | $          | 1,412 |   |
| 2012                                                |       | 185                  |       | 1,412              |       |
| 2013                                                |       | 185                  |       | 1,424              |       |
| 2014                                                |       | 185                  |       | 1,542              |       |
| 2015                                                |       | 185                  |       | 1,542              |       |
| Thereafter                                          |       | 170                  |       | 1,414              |       |
| Total  payments                                     |       | $                    | 1,102      |               | 8,746      |   |
| Imputed  interest                                   | ** ** | ** **           |       | (369               | )          |
| Lease  financing liability                          | ** ** | ** **           |       | 8,377              |       |
| Less:  Current portion of lease financing liability | ** ** | ** **           |       | 1,302              |       |
| Lease  financing liability, net of current portion  | ** ** | ** **           |       | $                  | 7,075      |   |

 

**3. LINEOF CREDIT**

 

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

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (4.0% at March 31, 2010). The credit agreement iscollateralized by certain assets of the Company and contains certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequires the maintenance of certain financial covenants.  As of March 31, 2010, the Company was incompliance with these covenants.

 

At March 31,2010, there were no borrowings outstanding against this credit facility.  Under the terms of the modified creditagreement, the Company was required to pay certain one-time facility fees whichare being amortized over the life of the facility.   The expired credit facility required a feeof 0.50% quarterly on unused amounts under the line of credit which was waivedin any quarter in which the average aggregate credit extensions (as defined inthe agreement) exceed $25.0 million for such quarter. Total expenses incurredrelated to these fees were $227,000, $214,000 and $157,000 in fiscal 2010,2009, and 2008, respectively.

 

In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of itsobligations, the probability of which is remote in management’s opinion.  At March 31, 2010, the Company hadoutstanding $21,969,000 in standby letters of credit against the Loan andSecurity Agreement with $8,031,000 remaining availability.  No amounts have been drawn against theseletters of credit.

 

**4. INCOMETAXES**

 

The provision forincome taxes for the years ended March 31, 2010, 2009, and 2008 consistedof the following:

 
| **(In thousands)**        | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                       |       |     |       |     |       |     |       |
| Federal                        |       | $        | 20,420     |     | $          | 14,470   |       | $ | 12,040 |   |
| State                          |       | (1,288   | )          | 1,108    |       | 680      |       |
| Foreign                        |       | 35       |       | 40       |       | 40       |       |
|                           |       | 19,167   |       | 15,618   |       | 12,760   |       |
| Deferred:                      |       |     |       |     |       |     |       |
| Federal                        |       | (399     | )          | (227     | )          | (2,713   | )          |
| State                          |       | (954     | )          | (44      | )          | (40      | )          |
| Change  in valuation allowance |       | 856      |       | —   |       | —   |       |
|                           |       | (497     | )          | (271     | )          | (2,753   | )          |
| Provision  for income taxes    |       | $        | 18,670     |     | $          | 15,347   |       | $ | 10,007 |   |

 

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The differencebetween the total expected provision for income taxes computed by applying thestatutory federal income tax rate to income before provision for income taxesand the recorded provision for income taxes for the three years in the periodended March 31, 2010 is as follows:

 
| **(In thousands)**                              | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provision  for income taxes at statutory rate        |       | $        | 19,196     |     | $          | 15,295   |       | $ | 9,620 |   |
| State  tax provision (benefit) net of federal effect |       | (1,458   | )          | 692      |       | 416      |       |
| Permanent  tax differences for stock warrant         |       | —   |       | —   |       | (4       | )          |
| Stock  based compensation                            |       | 736      |       | 286      |       | 242      |       |
| Research  tax credits                                |       | (291     | )          | (395     | )          | (191     | )          |
| Qualifying  manufacturing credits                    |       | (719     | )          | (539     | )          | (179     | )          |
| Change  in valuation allowance                       |       | 856      |       | —   |       | —   |       |
| Other                                                |       | 350      |       | 8        |       | 103      |       |
| Provision  for income taxes                          |       | $        | 18,670     |     | $          | 15,347   |       | $ | 10,007 |   |

 

The significantcomponents of the net deferred tax assets at March 31, 2010 and 2009 areas follows:

 
| ** **                                       | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(In  thousands)**                              | ** ** | **Current**             | ** ** | **Non-current**         | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| Deferred  tax assets (liabilities):              |       |                    |       |                    |       |   |   |   |   |
| Accounts  receivable and unbilled costs and fees |       | $                       | —     |                    | $          | 118 |   | $ | — |   | $ | 104 |   |
| Inventory                                        |       | 319                     |       | 1,412                   |       | 109 |   | 1,521 |   |
| Deferred  revenue                                |       | —                  |       | 1,617                   |       | — |   | 1,235 |   |
| Accrued  vacation                                |       | 571                     |       | —                  |       | 508 |   | — |   |
| Accrued  warranty costs                          |       | 342                     |       | —                  |       | 413 |   | — |   |
| Depreciation                                     |       | —                  |       | (559                    | )          | — |   | (321 | ) |
| Unearned  compensation                           |       | 919                     |       | 2,583                   |       | 735 |   | 2,751 |   |
| State  credit carryforwards                      |       | —                  |       | 813                     |       | — |   | — |   |
| Other                                            |       | 281                     |       | —                  |       | 42 |   | — |   |
| Deferred  income tax assets                      |       | 2,432                   |       | 5,984                   |       | 1,807 |   | 5,290 |   |
| Valuation  allowance                             |       | (43                     | )          | (813                    | )          | — |   | — |   |
| Net  deferred income taxes                       |       | $                       | 2,389      |                    | $          | 5,171 |   | $ | 1,807 |   | $ | 5,290 |   |

 

During fiscal year2010, state tax benefits, net of federal effect, of approximately $825,000 wererealized as a result of state tax planning initiatives adopted by theCompany.  At March 31, 2010, theCompany has $1,250,000 of state credit carryforwards of which approximately$400,000 have unlimited carryforward and $850,000 expire in various yearsthrough March 31, 2025.

 

During fiscal year2010, the Company established a deferred tax valuation allowance of $856,000 onstate credit carryforwards and other deferred tax assets for which managementis unsure whether or not will be realized.

 

Effective April 1,2007, the Company adopted the provisions of ASC 740-10, *IncomeTaxes,*which had no material effect on the financialstatements.  ASC 740-10 clarifies thecriteria that an individual tax position must satisfy for some or all of thebenefits of that position to be recognized in a company’s financial statements.ASC 740-10 prescribes a recognition threshold of more-likely-than-not, and ameasurement attribute for all tax positions taken or expected to be taken on atax return, in order for those tax positions to be recognized in the financialstatements.  With the adoption of ASC740-10 the Company adopted the expensing of interest and penalties in otherincome and expenses.  There was nocumulative effect related to adopting ASC 740-10 and no interest or penaltiesrelated to uncertain tax positions was accrued.

 

The Company iscurrently open to audit under the statute of limitations by the Internal RevenueService for the years ending March 31, 2007 through 2009 and for variousstate taxing authorities for the years ending March 31, 2006 through2009.  The 

 

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Company recentlycompleted an audit by the Internal Revenue Service for tax years ended March 31,2006 and 2007 the results of which did not have a material impact on theCompany’s financial position or results of operations.   The Company believes that there are nouncertain tax positions that required a reserve as of March 31, 2010.

 

**5.WARRANTY OBLIGATIONS**

 

Certain of theCompany’s products carry a one-year warranty, the costs of which are accruedfor at time of shipment or delivery. Accrual rates are based upon historicalexperience over the preceding twelve months and management’s judgment of futureexposure. Warranty experience for the years ended March 31, 2010 and 2009is as follows:

 
| **(In thousands)**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Warranty  accrual at beginning of period          |       | $        | 1,130      |     | $          | 1,671 |   |
| Accruals  for warranties issued during the period |       | 1,212    |       | 2,487    |       |
| Adjustment  of preexisting accrual estimates      |       | (815     | )          | (1,879   | )          |
| Warranty  costs incurred during period            |       | (562     | )          | (1,149   | )          |
| Warranty  accrual at end of period                |       | $        | 965        |     | $          | 1,130 |   |

 

**6. STOCKHOLDERS’ EQUITY**

 

**Preferred Stock**

 

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

 

**Common Stock and Warrant Offering**

 

On May 28,2002, the Company closed on a private placement offering of common stock andwarrants. A total of 1,115,000 shares were sold to accredited investors at aprice of $17.64 each. In addition, warrants to purchase an additional 295,475shares of common stock at a price of $23.52 were issued. Proceeds to the Companyapproximated $18.4 million, net of approximately $1.3 million of issuance costsof which $3.1 million was assigned to the warrants issued. The warrants wereimmediately vested and had a five-year life which expired in May of 2007.Due to certain conversion features of these warrants that provided that theholder could opt for a cash settlement in certain instances, including amerger, a sale of all or substantially all of the Company’s assets, or a tenderoffer or exchange offer of shares of the Company’s stock, a liability equal tothe Black-Scholes valuation of the warrants at the deal closing date wasrecorded on the Company’s balance sheet. The “mark to market” change in thewarrants valuation of ($11,000) was recorded as other (income) expense for the yearended March 31, 2008. In May of 2007, all remaining warrants wereexercised and no liability for these warrants remains at March 31, 2010.

 

During fiscal2008, warrants to purchase 21,625 shares of common stock were exercisedresulting in total proceeds received of $509,000.  The fair market value of the warrants at thedate of exercise totaled $623,000 in fiscal 2008. The cash proceeds and thefair value of the liability were recorded as additional paid in capital at March 31,2008.

 

**Share Repurchase Program**

 

OnMay 17, 2007, the Board of Directors approved a Stock Repurchase Programwhich authorized the Company to repurchase up to $35 million of shares of itscommon stock from time to time on the open market.  This Stock Repurchase Program was completedin the first quarter of fiscal 2009.  On May 8,2008 the****Board of Directorsapproved an additional Stock Repurchase Program which authorizes the Company torepurchase up to $35 million of shares of its common stock from time to time onthe open market.  During the fiscal yearended March 31, 2010, the Company repurchased 51,299 shares of commonstock under this Program at an average price of $56.97.  As of March 31, 2010, the remainingbalance available under the program to purchase shares was $23,807,000.

 

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**StockOption and Other Compensation Plans**

 

The Company hasvarious stock option and other compensation plans for directors, officers, andemployees. The Company had the following stock option plans outstanding as of March 31,2010: the 1995 Combination Plan, the 1997 Non-Qualified Option Plan, the 1998Non-Qualified Option Plan, the 1999 Combination Plan, the 2000 CombinationPlan, the 2002 Combination Plan, the 2003 Stock Plan for Non-Employee Directorsand the 2005 Equity and Incentive Plan. There are 3,980,000 shares authorizedunder these plans. Vesting periods are at the discretion of the Board ofDirectors and typically range from one to three years. Certain of the optionsgranted vest upon the achievement of certain performance based goals as well asservice time incurred.  Options underthese plans are granted at fair market value and have a term of ten years fromthe date of grant.

 

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

 
| ** **                                                                | ** ** | **2010**              | ** ** | **2009**                               | ** ** | **2008**              | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **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                                   |       | 709,254               |       | $                                      | 44.47      |                  | 828,063    |   | $ | 41.70 |   | 887,573 |   | $ | 37.43 |   |
| Options  granted                                                          |       | 63,993                |       | 64.28                                  |       | 64,191                |       | 64.13 |   | 76,970 |   | 63.21 |   |
| Options  exercised                                                        |       | (158,863              | )          | 40.34                                  |       | (161,753              | )          | 36.49 |   | (127,635 | ) | 23.73 |   |
| Options  canceled or expired                                              |       | (450                  | )          | 53.55                                  |       | (21,247               | )          | 56.58 |   | (8,845 | ) | 59.71 |   |
| Options  outstanding, end of year                                         |       | 613,934               |       | $                                      | 47.60      |                  | 709,254    |   | $ | 44.47 |   | 828,063 |   | $ | 41.70 |   |
| Options  exercisable, end of year                                         |       | 544,080               |       | $                                      | 45.54      |                  | 625,646    |   | $ | 41.90 |   | 712,356 |   | $ | 38.74 |   |
| Options  available for grant                                              |       | 365,572               |       |                                   |       | 294,629               |       |   |   | 145,691 |   |   |   |
| Weighted  average fair value per share of options granted during the year |       |                  |       | $                                      | 23.52      |                  |       |   | $ | 26.54 |   |   |   | $ | 22.60 |   |

 

The followingsummarizes certain data for options outstanding and exercisable at March 31,2010:

 
| ** **            | ** ** | **Number of  Shares** | ** ** | **Range of  Exercise Prices** | ** **       | **Weighted  Average Exercise  Price** | ** ** | **Weighted  Average Remaining  Contractual Life** | ** ** |
|-----------------------|------------|----------------------------|------------|-----------------------------------------|------------------|--------------------------------------------|------------|-------------------------------------------------------------|------------|
| Options  outstanding: |       | 85,855                     |       | $                                       | 6.50–$20.00 |                                       | $          | 12.76                                                       |       | 3.26 |   |
|                  |       | 67,634                     |       | 20.01–30.00                        |             | 28.13                                      |       | 4.24                                                        |       |
|                  |       | 32,000                     |       | 30.01–40.00                        |             | 39.07                                      |       | 4.68                                                        |       |
|                  |       | 71,000                     |       | 40.01–50.00                        |             | 45.84                                      |       | 5.33                                                        |       |
|                  |       | 130,821                    |       | 50.01–60.00                        |             | 53.33                                      |       | 5.11                                                        |       |
|                  |       | 226,624                    |       | 60.01–67.98                        |             | 65.04                                      |       | 6.49                                                        |       |
|                  |       | 613,934                    |       | $                                       | 6.50-$67.98      |                                       | $          | 47.60                                                       |       | 5.27 |   |
| Options  exercisable: |       | 85,855                     |       | $                                       | 6.50–$20.00 |                                       | $          | 12.76                                                       |       |   |   |
|                  |       | 67,634                     |       | 20.01–30.00                        |             | 28.13                                      |       |                                                        |       |
|                  |       | 32,000                     |       | 30.01–40.00                        |             | 39.07                                      |       |                                                        |       |
|                  |       | 71,000                     |       | 40.01–50.00                        |             | 45.84                                      |       |                                                        |       |
|                  |       | 126,960                    |       | 50.01–60.00                        |             | 53.39                                      |       |                                                        |       |
|                  |       | 160,631                    |       | 60.01–67.98                        |             | 65.35                                      |       |                                                        |       |
|                  |       | 544,080                    |       |                                    |             | $                                          | 45.54      |                                                        |       |   |

 

The totalintrinsic value, representing the difference between market value on the dateof exercise and the option price, of stock options exercised during fiscal2010, 2009 and 2008 was $4,796,000, $5,265,000 and $4,892,000,respectively.   Nonvested stock optionawards are subject to the risk of forfeiture until the fulfillment of specifiedconditions. As of March 31, 2010, there was $843,000 of total unrecognizedcompensation cost related to nonvested stock option awards granted under theCompany’s stock plans. This cost is expected to be recognized over a weightedaverage of 1.2 years.

 

The Companyrealizes a tax deduction upon the exercise of non-qualified stock options anddisqualifying dispositions of incentive stock options due to the recognition ofcompensation expense in the calculation of its taxable income. The amount ofthe compensation recognized for tax purposes is based on the difference betweenthe market value of the common stock and the option price at the date theoptions are exercised and/or sold. These tax benefits are credited toadditional paid-in capital if it is considered more likely than not that theywill be realized. During fiscal 2010, 2009 and 2008, a tax benefit of$1,087,000, $1,284,000 and $1,350,000, respectively, was recorded to additionalpaid-in capital for exercises and/or sales of stock options or stock.

 

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

 

Nonvestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of March 31, 2010 therewas $3,935,000 of total unrecognized compensation cost related to nonvestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a weighted average of 1.4 years.

 

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

 
| ** **                                                          | ** ** | **2010**              | ** ** | **2009**                               | ** ** | **2008**              | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Unvested  restricted stock and units outstanding, beginning of year |       | 137,687               |       | $                                      | 56.74      |                  | 110,301    |   | $ | 58.34 |   | 49,538 |   | $ | 54.52 |   |
| Granted                                                             |       | 80,149                |       | 62.53                                  |       | 53,259                |       | 53.69 |   | 72,970 |   | 60.80 |   |
| Vested                                                              |       | (120,096              | )          | 57.32                                  |       | (9,194                | )          | 56.59 |   | (9,807 | ) | 56.77 |   |
| Forfeited                                                           |       | (500                  | )          | 60.65                                  |       | (16,679               | )          | 57.64 |   | (2,400 | ) | 60.62 |   |
| Unvested  restricted stock and units outstanding, end of year       |       | 97,240                |       | $                                      | 60.78      |                  | 137,687    |   | $ | 56.74 |   | 110,301 |   | $ | 58.34 |   |

 

**7.BUSINESS SEGMENT INFORMATION**

 

In accordance withthe provisions of FASB ASC 280-10, *Segment Reporting,*theCompany has determined that it has only one operating segment, the X-rayproduct segment. This includes X-ray detection and imaging products usedprimarily for the detection of illegal drugs, weapons and explosives, andsmuggled goods. The equipment is purchased by sophisticated government andcommercial clients focused on the detection of organic material in complexbackgrounds and the ability to see the contents of containers with precision.

 

**Geographical Data**

 

All of the Company’sexport sales originate from the United States. At March 31, 2010, approximately 2.6% of the Company’s assets werein foreign countries.  The foreign assetswere comprised of cash in foreign banks, and inventory in international depotsfor field replacements or systems shipped internationally but not accepted byfiscal year end.

 

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

 

***Net Sales and Contract Revenues***

 
| ** **                                             | ** ** | **Fiscal Year** | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|
| **(Dollars in thousands)**                             | ** ** | **2010**        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Domestic                                               |       | $               | 163,873    |   | 68 | % | $ | 138,240 |   | 63 | % | $ | 107,021 |   | 64 | % |
| International                                          |       | 78,220          |       | 32 | % | 80,127 |   | 37 | % | 59,712 |   | 36 | % |
| Net Sales and Contract Revenues                        |       | $               | 242,093    |   | 100 | % | $ | 218,367 |   | 100 | % | $ | 166,733 |   | 100 | % |
| **Percent of International Revenue by Major  Region:** |       |            |       |   |   |   |   |   |   |   |   |   |   |
| Middle East & Africa                          |       |            |       | 81 | % |   |   | 85 | % |   |   | 70 | % |
| Pacific Rim                                            |       |            |       | 8 | % |   |   | 7 | % |   |   | 14 | % |
| Europe                                                 |       |            |       | 9 | % |   |   | 8 | % |   |   | 14 | % |
| All Other                                              |       |            |       | 2 | % |   |   | — | % |   |   | 2 | % |

 

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

 

*Fiscal2010****:***   $59,204,000 and $28,591,000, respectively,to two customers.

 

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

 

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

 

Domestically, theCompany’s primary client base is comprised of agencies of the U.S. Government.Approximately 63%, 56% and 55%, of the Company’s sales in fiscal 2010, 2009,and 2008 respectively, were derived from either (i) contracting directlywith the U.S. Government, or (ii) contracting with contractors workingdirectly with the U.S. Government. Certain of the Company’s contracts with theU.S. Government provide the U.S. Government with the standard unilateral rightto terminate these contracts for convenience. During fiscal 2010, one of theCompany’s contracts with the U.S. Government was terminated for convenience bythe U.S. Government.  During fiscal 2009,two of the Company’s contracts with the U.S. Government were partiallyterminated for convenience by the U.S. Government.  These terminations of these contracts did notresult in material losses to the Company.

 

Three customers atMarch 31, 2010 had accounts receivable balances representing in excess of10% of consolidated accounts receivable. These customers, two agencies of theU.S. Government and one international customer, had receivables totaling$21,360,000 (56% of total receivables) at March 31, 2010.   Three customers at March 31, 2009 hadaccounts receivable balances representing in excess of 10% of consolidatedaccounts receivable. These customers, two agencies of the U.S. Government andone international customer, had receivables totaling $22,447,000 (60% of totalreceivables) at March 31, 2009.

 

**8. FAIRVALUE MEASUREMENTS**

 

FASB ASC 820, *Fair Value Measurements and Disclosures,*defines and establishesa framework for measuring fair value and expands disclosures about fair valuemeasurements. In accordance with ASC 820, we have categorized our financialassets, based on the priority of the inputs to the valuation technique, into athree-level fair value hierarchy as set forth below. If the inputs used tomeasure the financial instruments fall within different levels of thehierarchy, the categorization is based on the lowest level input that issignificant to the fair value measurement of the instrument.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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The followingtable presents the financial assets and liabilities we measure at fair value ona recurring basis, based on the fair value hierarchy as of March 31, 2010and March 31, 2009:

 
| **(In thousands)**                            | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Level 1 – Financial Assets**                |       |                     |       |                     |       |
| U.S.  Treasury bills                               |       | $                        | 35,005     |                     | $          | 8,978 |   |
| **Level 2 – Financial Assets**                |       |                     |       |                     |       |
| Corporate  debentures/bonds                        |       | 42,588                   |       | 12,489                   |       |
| Government  agency bonds                           |       | 28,589                   |       | 4,026                    |       |
| Commercial  paper                                  |       | 25,983                   |       | 31,976                   |       |
| Money  market funds                                |       | 19,705                   |       | 76,618                   |       |
| Certificates  of deposit                           |       | 12,001                   |       | 3,200                    |       |
| Total  Level 2 Financial Assets                    |       | 128,866                  |       | 128,309                  |       |
| Total  cash equivalents and short-term investments |       | $                        | 163,871    |                     | $          | 137,287 |   |

 

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

 
| ** **                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| **2010:**                    |       |                |       |                         |       |                          |       |           |       |
| Available for Sale:          |       |                |       |                         |       |                          |       |           |       |
| Corporate debentures/bonds   |       | $                   | 42,585     |                         | $          | 26                            |       | $              | (23        | ) | $ | 42,588 |   |
| Treasury bills               |       | 34,982              |       | 28                           |       | (5                            | )          | 35,005         |       |
| Government agency bonds      |       | 28,600              |       | 2                            |       | (13                           | )          | 28,589         |       |
| Commercial paper             |       | 25,982              |       | 1                            |       | —                        |       | 25,983         |       |
| Certificates of deposit      |       | 12,001              |       | —                       |       | —                        |       | 12,001         |       |
| Total short-term investments |       | $                   | 144,150    |                         | $          | 57                            |       | $              | (41        | ) | $ | 144,166 |   |
|                         |       |                |       |                         |       |                          |       |           |       |
| Cash equivalents:            |       |                |       |                         |       |                          |       |           |       |
| Money market funds           |       | $                   | 19,705     |                         | $          | —                        |       | $              | —     |   | $ | 19,705 |   |
| ** **                   |       |                |       |                         |       |                          |       |           |       |
| **2009:**                    |       |                |       |                         |       |                          |       |           |       |
| Available for Sale:          |       |                |       |                         |       |                          |       |           |       |
| Corporate debentures/bonds   |       | $                   | 12,507     |                         | $          | 3                             |       | $              | (21        | ) | $ | 12,489 |   |
| Treasury bills               |       | 8,972               |       | 7                            |       | (1                            | )          | 8,978          |       |
| Government agency bonds      |       | 4,002               |       | 24                           |       | —                        |       | 4,026          |       |
| Commercial paper             |       | 7,691               |       | —                       |       | —                        |       | 7,691          |       |
| Certificates of deposit      |       | 3,200               |       | —                       |       | —                        |       | 3,200          |       |
| Total                        |       | $                   | 36,372     |                         | $          | 34                            |       | $              | (22        | ) | $ | 36,384 |   |
|                         |       |                |       |                         |       |                          |       |           |       |
| Cash equivalents:            |       |                |       |                         |       |                          |       |           |       |
| Money market funds           |       | $                   | 76,618     |                         | $          | —                        |       | $              | —     |   | $ | 76,618 |   |
| Commercial paper             |       | 24,285              |       | —                       |       | —                        |       | 24,285         |       |
| **Total**                    |       | $                   | 100,903    |                         | $          | —                        |       | $              | —     |   | $ | 100,903 |   |

 

**DerivativeFinancial Instruments**

 

The Company purchased in fiscal year 2010 a foreign currency put optioncontract to manage the risk associated with foreign currency exchange ratefluctuations on an anticipated obligation and transaction, which wasoutstanding at year end.  The foreigncurrency put option contract was paid in full at execution and is related toour activities in Europe. The put option contract provides us with the optionto exchange Euros for U.S. dollars at a fixed exchange rate such that, if theEuro were to depreciate against the U.S. dollar to predetermined levels as setby the contract, we could exercise our option and mitigate our foreign currencyexchange losses. This contract did not qualify for hedge accounting treatmentand is marked-to-market through the results of operations at the end of theperiod. The net losses/expenses on this contract were not material to resultsof operations or cash flows for the year ended March 31, 2010.

 

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**9.COMMITMENTS AND CONTINGENCIES**

 

**Lease Liability**

 

In conjunctionwith the sale of the High Energy Systems division in fiscal 2005, the lease forthe California operations of the High Energy Systems division was assigned toAccuray, Inc. The Company remains secondarily liable for the remaininglease payments in the event of default by Accuray, Inc. during the leaseterm which expires in February 2011. Remaining lease payments at March 31,2010 totaled $359,000. No accrual for this contingent liability has beenrecorded at March 31, 2010 as payment of this expense is consideredremote.

 

**Purchase Commitments**

 

In the normalcourse of business, the Company enters into purchase orders with its vendorsfor the purchase of materials or services to meet its production needs. At March 31,2010, the Company had $28,740,000 of open purchase orders which are expected tobe substantially fulfilled within the next 2 years. Certain single sourcevendors or vendors producing custom material require significant lead timesfrom order to delivery of their material. Should the demand for the Company’sproducts decline significantly, or should there be a significant shift in themix of products being demanded, the Company may incur cancellation chargesrelated to these commitments, that could be material to the Company’s resultsof operations. To date, the Company has not experienced any material lossesrelated to cancellation penalties.

 

**EmploymentAgreements**

 

On February 7,2008, the Company entered into a new employment agreement with its ChiefExecutive Officer, Anthony Fabiano. Under this agreement, Mr. Fabiano, in the event of a terminationpursuant to a change of control, is eligible to receive a payment equal to 2.9times his base salary in effect on the date of termination plus a pro rataportion of his bonus for the fiscal year in which the termination occurred, hisannual target bonus, the continuation of health benefits for a period of threeyears, the vesting of all options and restricted stock and the continuation ofcertain life insurance benefits.  Inaddition, in the event that any of Mr. Fabiano’s stock-based awards arenot assumed or replaced upon a change of control of the Company, his optionsand restricted stock will fully vest upon the change of control, regardless oftermination of employment.  In the eventof a qualifying termination not pursuant to a change of control, Mr. Fabianois eligible for a payment equal to two times his base salary in effect at thedate of termination, plus a pro rata portion of his bonus for the fiscal yearin which the termination occurred, his annual target bonus, the continuation ofhealth benefits for a period of eighteen months and the continuation of certainlife insurance benefits.

 

On July 29, 2008the Company entered into new Change in Control and Severance Benefit Agreementswith members of its executive staff including its Chief Financial Officer.Under these agreements, these executives, in the event of termination withintwo years following a change of control, are eligible to receive a paymentequal to two times the highest annual rate of base salary payable to theexecutive during the one-year period ending on the change of control date orthe termination date (whichever results in a higher amount) plus his or herannual target bonus, the continuation of health benefits for a period of threeyears and the vesting of all options and restricted stock.   Inaddition, in the event that an executive’s stock-based awards are not assumedor replaced upon a change of control of the Company, his or her options andrestricted stock will fully vest upon the change of control, regardless oftermination of employment.  In the eventof qualifying termination not pursuant to a change of control, the members ofthe executive staff are eligible to receive a payment equal to one times his orher highest annual rate of base salary payable to the executive during theone-year period ending on the termination date and the continuation of healthbenefits for one year.

 

**Retirement Savings Plan**

 

The Companymaintains a 401(k) Retirement Savings Plan for all employees.   Employees are eligible to participate on thefirst of the month following date of employment.  The Plan is funded by elective employeecontributions of up to 100% of their compensation up to IRS limits. Under thePlan the Company at its discretion matches 50% of the first 6% of employeecontributions for each participant in the form of Company common stock or cash.Expenses under the Plan, consisting of Company contributions which were made inCompany stock and Plan administrative expenses paid by the Company, totaled$993,000, $789,000 and $731,000, in 2010, 2009, and 2008 respectively.

 

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

**UNAUDITEDQUARTERLY CONSOLIDATED FINANCIAL DATA**

**FOR THE YEARS ENDED MARCH 31,2010 AND MARCH 31, 2009**

(In thousands, except pershares amounts)

 
| ** **                       | ** ** | **2010 by quarter** | ** ** | **2009 by quarter** | ** ** |
|----------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                       | ** ** | **1st**             | ** ** | **2nd**             | ** ** | **3rd** | ** ** | **4th** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Net  sales and contract revenues |       | $                   | 54,692     |                | $          | 61,248 |   | $ | 54,889 |   | $ | 71,264 |   | $ | 39,494 |   | $ | 56,293 |   | $ | 65,290 |   | $ | 57,290 |   |
| Gross  profit                    |       | $                   | 25,620     |                | $          | 29,454 |   | $ | 22,627 |   | $ | 33,369 |   | $ | 14,529 |   | $ | 22,527 |   | $ | 28,760 |   | $ | 27,149 |   |
| Operating  income                |       | $                   | 11,112     |                | $          | 16,494 |   | $ | 8,851 |   | $ | 17,867 |   | $ | 3,267 |   | $ | 10,957 |   | $ | 14,813 |   | $ | 12,987 |   |
| Net  income                      |       | $                   | 7,336      |                | $          | 10,695 |   | $ | 5,819 |   | $ | 12,326 |   | $ | 2,689 |   | $ | 7,361 |   | $ | 10,059 |   | $ | 8,244 |   |
| Net  income per share            |       |                |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| —Basic                      |       | $                   | 0.83       |                | $          | 1.21 |   | $ | 0.65 |   | $ | 1.37 |   | $ | 0.31 |   | $ | 0.85 |   | $ | 1.16 |   | $ | 0.94 |   |
| —Diluted                    |       | $                   | 0.81       |                | $          | 1.18 |   | $ | 0.64 |   | $ | 1.34 |   | $ | 0.30 |   | $ | 0.83 |   | $ | 1.13 |   | $ | 0.92 |   |

 

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**SIGNATURES**

 

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

 
|                      | AMERICAN SCIENCE  AND ENGINEERING, INC. |
|---------------------------|-----------------------------------------|
|                      |                                    |
| DATED: June 7,  2010 | By:                                     | /s/ ANTHONY R. FABIANO |
|                      |                                    | Anthony R. Fabiano |
|                      |                                    | President and Chief  Executive Officer |

 

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

 

 
| **Signature**            | ** ** | **Title**                                                                                    | ** ** | **Date**           |
|--------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------|
|                     |       |                                                                                         |       |               |
| /s/ ANTHONY R.  FABIANO  |       | Director and  President and Chief Executive Officer (Principal Executive Officer)            |       | June 7,  2010 |
| Anthony R.  Fabiano      |       |                                                                                         |       |
|                     |       |                                                                                         |       |               |
| /s/ KENNETH J.  GALAZNIK |       | Senior Vice  President, Chief Financial Officer and Treasurer (Principal Financial  Officer) |       | June 7,  2010 |
| Kenneth J.  Galaznik     |       |                                                                                         |       |
|                     |       |                                                                                         |       |               |
| /s/ DENIS R.  BROWN      |       | Chairman of the  Board, Director                                                             |       | June 7,  2010 |
| Denis R. Brown           |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ JOHN A.  GORDON      |       | Director                                                                                     |       | June 7,  2010 |
| John A. Gordon           |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ HAMILTON W.  HELMER  |       | Director                                                                                     |       | June 7,  2010 |
| Hamilton W.  Helmer      |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ DON R. KANIA         |       | Director                                                                                     |       | June 7,  2010 |
| Don R. Kania             |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ ERNEST J.  MONIZ     |       | Director                                                                                     |       | June 7,  2010 |
| Ernest J. Moniz          |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ MARK S.  THOMPSON    |       | Director                                                                                     |       | June 7,  2010 |
| Mark S. Thompson         |       |                                                                                         |       |               |
|                     |       |                                                                                         |       |               |
| /s/ CARL W. VOGT         |       | Director                                                                                     |       | June 7,  2010 |
| Carl W. Vogt             |       |                                                                                         |       |               |

 

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**EXHIBITINDEX**

** **
| **Exhibit********Number** | ** ** | ** ** | ** ** | **Description  of Exhibit  (and Statement of Incorporation by Reference, If Applicable)**                                                                                                                                                                                            |
|---------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |       |       |                                                                                                                                                                                                                                                                                 |
| 2.1                       |       | **         |       | Asset  Purchase Agreement between Accuray Incorporated and the Company dated  December 11, 2004 (filed as Exhibit 10(d)(xiii) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 2005 and  incorporated herein by reference)         |
| 3.1                       |       | †     |       | Restated  Articles of Organization of the Company, as amended, including Certificate of  Designation, Preferences, and Rights of Preferred Stock of the Company, dated  April 16, 2008                                                                                          |
| 3.5                       |       |       |       | Amended  and Restated By-laws of the Company (filed as Exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2003, and incorporated herein by reference)                                                               |
| 4.2                       |       |       |       | Rights  Agreement, dated April 17, 2008, between the Company and American Stock  Transfer & Trust Company (filed as Exhibit 4.1 to the Company’s  filing on Form 8-A12B filed on April 18, 2008 and incorporated  herein by reference)             |
| 10.1                      |       | *          |       | 1997  Non-Qualified Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-27927, filed on  May 28, 1997 and incorporated herein by reference)                                                           |
| 10.2                      |       | *          |       | 1998  Non-Qualified Stock Option Plan (filed as Exhibit (10)(b)(xiii) to the  Company’s Annual Report on Form 10-K for the year ended March 31,  1998 and incorporated herein by reference)                                                                      |
| 10.3                      |       |       |       | Lease  of Billerica property (filed as Exhibit 10(c) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 1995 and  incorporated herein by reference)                                                                                  |
| 10.4                      |       |       |       | Amendment  to Lease of Billerica property (filed as Exhibit 10(c)(ii) to the  Company’s Annual Report on Form 10-K for the year ended March 28,  1997 and incorporated herein by reference)                                                                 |
| 10.5                      |       | *          |       | 1999  Combination Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-91801, filed on  November 30, 1999 and incorporated herein by reference)                                                        |
| 10.6                      |       | *          |       | 2000  Combination Stock Option Plan (filed as Exhibit A to the Definitive  Proxy Statement on Schedule 14A filed on August 18, 2000 and  incorporated herein by reference)                                                                                                 |
| 10.7                      |       | *          |       | 2002  Combination Stock Option Plan (filed as Exhibit 99.1 to the Company’s  Registration Statement on Form S-8, No. 333-102338, filed on  January 3, 2003 and incorporated herein by reference)                                                            |
| 10.8                      |       |       |       | Lease  of Mountain View, California facility for High Energy Systems Division (filed  as Exhibit 10(c)(xv) to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2003 and incorporated herein by  reference)                            |
| 10.10                     |       |       |       | Second  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(vii) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2004 and incorporated  herein by reference)                 |
| 10.11                     |       | *          |       | Amendment  of 2002 Combination Stock Option Plan (filed as Exhibit 99.1 to the  Company’s Registration Statement on Form S-8, No. 333-102338, filed  on January 3, 2003 and incorporated herein by reference)                                               |
| 10.12                     |       | *          |       | 2003  Stock Plan for Non-Employee Directors (filed as Exhibit 4.1 to the  Company’s Registration Statement on Form S-8, File No. 333-117843,  filed on July 30, 2004 and incorporated herein by reference)                                                  |
| 10.13                     |       | *          |       | Amendment  to 2003 Stock Plan for Non-Employee Directors (filed as  Exhibit 10(c)(xx) to the Company’s Annual Report on Form 10-K for  the year ended March 31, 2005 and incorporated herein by reference)                                                       |
| 10.14                     |       | *          |       | 2005  Equity and Incentive Plan (filed as Exhibit 99.1 to the Company’s  Registration Statement on Form S-8, No. 333-162291, filed on  October 2, 2009 and incorporated herein by reference)                                                                |
| 10.17                     |       | *          |       | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10(c)(xxiv) to the Company’s Annual  Report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)    |
| 10.18                     |       | *          |       | Form of  Stock Option Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10(c)(xxv) to the Company’s Annual  Report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)         |
| 10.19                     |       | *          |       | Form of  Stock Option Agreement (ISO) under the AS&E 2005 Equity and Incentive  Plan (filed as Exhibit 10(c)(xxvi) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                |
| 10.20                     |       |       |       | Form of  Stock Option Agreement (NQ) under the AS&E 2005 Equity and Incentive Plan  (filed as Exhibit 10(c)(xxvi) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                 |
| 10.21                     |       |       |       | Third  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(xxviii) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2007 and incorporated herein  by reference)                             |
| 10.22                     |       | *          |       | Employment  Agreement between the Company and Anthony R. Fabiano dated February 2,  2008 (filed as Exhibit 10(c)(xxix) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2008 and incorporated herein  by reference)                |
| 10.24                     |       | *          |       | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference) |
| 10.25                     |       | *          |       | Form of  Incentive Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference)  |

 

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Tableof Contents

 
| 10.26 |   | *       |   | Form of  Long-Term Incentive Plan Agreement — Cash Component (filed as  Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2008 and incorporated herein by reference)                                                                                               |
|-------|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27 |   | *       |   | Form of  Change in Control and Severance Benefit Agreement between the Company and  Named Executives (filed as Exhibit 10.5 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2008 and  incorporated herein by reference)                                                            |
| 10.28 |   |    |   | American  Science and Engineering, Inc. 401(k) and Profit Sharing Plan (filed  as Exhibit 4.1 to the Company’s Registration Statement on Form S-8  dated July 25, 2008 and incorporated herein by reference)                                                                                                      |
| 10.30 |   |    |   | Loan  and Security Agreement between the Company and Silicon Valley Bank East dated  August 11, 2003 (filed as Exhibit 10(d)(xi) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2003 and incorporated herein by reference)                                                       |
| 10.34 |   |    |   | First  Loan Modification Agreement dated as of June 30, 2004 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.1 to the Company’s  report on Form 8-K dated November 14, 2008 and incorporated herein  by reference)      |
| 10.35 |   |    |   | Second  Loan Modification Agreement dated as of November 30, 2004 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.2 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference) |
| 10.36 |   |    |   | Third  Loan Modification Agreement dated as of November 16, 2006 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.3 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference)  |
| 10.37 |   |    |   | Fourth  Loan Modification Agreement dated as of November 14, 2008 between the  Company and Silicon Valley Bank and guaranteed by the Company’s subsidiary,  AS&E Global, Inc. (filed as Exhibit 10.4 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference) |
| 10.38 |   |    |   | Consent  to Stock Repurchase Program dated as of November 14, 2008 between the  Company and Silicon Valley Bank. (filed as Exhibit 10.5 to the Company’s  filing on Form 8-K dated November 14, 2008 and incorporated herein  by reference)                                                                            |
| 10.39 |   |    |   | Form of  Short Term Incentive Bonus Plan Document (filed as Exhibit 10.1 to the  Company’s filing on Form 10-Q dated November 5, 2009 and  incorporated herein by reference)                                                                                                                                           |
| 10.40 |   |    |   | Fifth  Loan Modification Agreement dated November 13, 2009 between the Company  and Silicon Valley Bank (filed as Exhibit 99.1 to the Company’s filing  on form 8-K (File No. 001-06549) on November 18, 2009 and  incorporated herein by reference)                                                                   |
| 10.41 |   | *† |   | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan                                                                                                                                                                                                                                       |
| 10.42 |   | *† |   | Form of  Nonstatutory Stock Option Agreement (Performance) under the AS&E 2005  Equity and Incentive Plan                                                                                                                                                                                                                              |
| 10.43 |   | *† |   | Form of  Long-Term Incentive Plan Agreement — Cash Component                                                                                                                                                                                                                                                                          |
| 10.44 |   | †  |   | Form of  Non-Employee Director Restricted Stock Award Agreement under the AS&E  2005 Equity and Incentive Plan                                                                                                                                                                                                                         |
| 10.45 |   | †  |   | Form of Non-Statutory Stock Option Agreement For  Directors under the AS&E 2005 Equity and Incentive Plan                                                                                                                                                                                                                              |
| 21.1  |   |    |   | Identification  of Company’s subsidiary, AS&E Global, Inc., incorporated in  Massachusetts (filed as Exhibit 22.1 to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2003 and incorporated herein  by reference)                                                                       |
| 23.1  |   | †  |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                       |
| 31.1  |   | †  |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                                                       |
| 31.2  |   | †  |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                                                       |
| 32.1  |   | †  |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |
| 32.2  |   | †  |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |

 

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†   Filed herewith

*   Management contract or compensatory plan

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

 

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