---

---

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

---

FORM 10-K

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

For the fiscal year ended March 31, 2002

or

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

Commission file number 1-6549

---

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

Massachusetts

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

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

01821(Address of principal executive offices)

(Zip Code)


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

---

Title of each class

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

American Stock Exchange


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

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

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

The
aggregate market value of voting stock held by non-affiliates of the registrant on May 21, 2002 was $107,835,232.

5,578,070
shares of Registrant's Common Stock were outstanding on May 21, 2002.

---

---

---

PART I

ITEM 1. BUSINESS

American Science and Engineering, Inc., a Massachusetts corporation formed in 1958 (together with its subsidiaries, the "Company" or "AS&E"), develops,
produces, markets, sells, maintains and provides research, engineering and training services with respect to X-ray inspection systems. The Company's High Energy Systems (HES) division in
Santa Clara, CA develops and manufactures linear accelerators for a variety of applications and products, including a proprietary high-energy accelerator for the Company's recently
introduced Shaped Energy technology. Other applications for HES's linear accelerators include medical, scientific, electron beam curing, and non-destructive testing.

The
Company develops and manufactures sophisticated X-ray inspection products for critical detection and security applications used by seaport and border authorities, federal
facilities and military bases, airports and corporations in the United States and around the globe. These security applications include X-ray inspection systems for combating terrorism,
drug and weapon smuggling, trade fraud and trafficking in illegal aliens. The Company's objective is to distinguish itself from its competitors through technical innovations and a superior approach to
detection. The Company's patented Z® Backscatter and Shaped Energy technologies detects plastic explosives, plastic weapons, illegal drugs, and other contraband, even when concealed in
complex backgrounds by terrorists and smugglers. The Company's market is driven by domestic and global trends in terrorism; the continued global proliferation of drug and people smuggling; and the
continuing increase in global trade which creates greater incentives and opportunities to evade duties or perpetrate trade fraud by misdeclaring cargo shipping manifests.

Historically,
the Company has focused its product development and marketing efforts on two broad markets: (i) the protection of high-risk government personnel and
facilities; and (ii) the inspection and clearance of cargo, trucks and cars at seaports, borders and airports. In the wake of the terrorist attacks on September 11, 2001, homeland
security concerns have become of paramount importance in the U.S. and around the world. The Company believes that homeland security initiatives will result in new revenue opportunities with increased
growth in the seaports and borders, federal facilities and force protection, aviation and corporate security markets.

Technology and Products

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

Z® Backscatter Technology.All of the Company's systems utilize the Company's
Z® Backscatter technology which refers to X-rays that are directed toward an object and are scattered, rather than absorbed, by that object. The key aspect of Z Backscatter is
that objects that are organic in content (e.g. drugs, explosives, plastic weapons, people) scatter X-rays very well. As a result, the backscatter images are able to show these potential
threats clearly. When used together with transmission X-ray technology, Z Backscatter adds significant interpretability to a transmission image, enabling an inspector to perform a more
thorough and complete examination of the object in question.

Shaped Energy Technology.This recently introduced, patented technology was specifically
designed for use in examining densely loaded cargo containers at seaports and border crossings, and will be available in various fixed or modular system configurations. The Shaped Energy system
combines the penetration capability of a high-energy X-ray source (3.5MeV) with the photo-like quality and material discrimination features of the Company's Z
Backscatter imaging technology. Most importantly, this technology allows for optimal penetration while maintaining one of the smallest footprints and radiation exclusion zones in the industry.
Historically, high-energy X-ray systems were constrained by the necessity for large exclusion zones and heavy shielding in order to protect against the hazards of excessive
radiation. The new Shaped Energy linear accelerator, designed and produced

2

---

by the Company's HES division, incorporates a X-ray system design that eliminates the need for cumbersome shielding and exclusion zones.

The
Company's product line currently includes 12 models. These models can be broadly grouped into three categories including the CargoSearch family, the
ParcelSearch family, and the BodySearch Personnel Inspection System.

CargoSearch Systems:The CargoSearch family of systems includes
non-intrusive inspection devices for the X-ray scanning of trucks, cars, cargo containers, pallets and air cargo primarily at border crossings, seaports, railroad centers,
airports, and cargo and transportation hubs. CargoSearch is designed to combat trade fraud, drug trafficking, weapons smuggling and terrorism. Currently CargoSearch systems are deployed in more than
70 locations in 10 countries. The CargoSearch family includes:



ParcelSearch Systems:The ParcelSearch systems are designed for the
non-intrusive X-ray scanning of parcels, baggage and mail. They are primarily located in airports, government and commercial office buildings, high-security federal
facilities (research facilities and military bases) and convention centers. There are currently ParcelSearch systems deployed in more than 500 locations in 116 countries. The ParcelSearch family
includes:



BodySearch Personnel Inspection System:The BodySearch Personnel Inspection system
offers a fast, safe, and non-intrusive way to screen individuals for weapons, drugs, and illegal contraband concealed under clothing, providing a viable alternative to pat or strip
searches. This system is used for drug detection and head of state security as well as for correctional facility security. There are currently 20 BodySearch systems deployed in 15 locations.

Intellectual Property

The Company has patents in the United States, Germany, Japan, and the United Kingdom, as well as patents pending in the United States and under the Patent
Cooperation Treaty. The Company has sold product or has marketing activity in most major regions of the world including Africa, Asia, Europe,
the Middle East, Australia, and South America. Each U.S. patent issued after May 1995 has a duration of twenty years from the date of application. The Company relies on certain proprietary
technology and know-how, as well as certain patents, to establish and maintain its competitive position. The Company believes that its patents, proprietary technology,
know-how, and trademarks provide substantial protection for the Company's competitive position and the Company has publicly stated its

3

---

intent to aggressively protect its intellectual property assets, by litigation or other means, as appropriate. (See Item 3"Legal Proceedings").

Sales and Marketing

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

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

Customers

The Company has a customer list consisting of government and commercial clients from both the U.S. and abroad. Domestically, the Company's primary client base is
comprised of agencies of the U.S. Government. International sales primarily to foreign governments accounted for approximately 30% of the Company's total sales in fiscal 2002. The international market
will continue to remain a high priority for the Company as part of its long-term growth strategy. The majority of the Company's sales are fixed price arrangements with installment payments
made to the Company during the term of the contract.

During
fiscal 2002, approximately 59% of sales of X-ray products were under (i) direct contracts with the U.S. Government, and (ii) subcontracts with prime
contractors working under direct contracts with the U.S. Government. Some of the Company's contracts with the government are on a cost reimbursement plus basis, and virtually all are cancelable at the
government's discretion. Thus far, the Company has not experienced any material losses as the result of such contractual provisions. The Company is heavily dependent upon sales to agencies of the U.S.
Government and reductions or delays in procurement of the Company's systems by these agencies may have a material adverse effect on the Company.

While
the longer sales cycles and project financing requirements often associated with international sales have increased with the corresponding rise in sales, historically it has had
the desired effect of reducing the Company's dependence on the U.S. Government. The Company manages its overseas risk in a number of ways, including actively increasing the number of opportunities it
is pursuing at any one time and by working with international funding sources to help customers finance and secure funding of these projects. The majority of international contracts are bid in U.S.
dollars. For those contracts that are bid in other currencies, the Company would engage in hedging contracts to control foreign exchange risk.

In
fiscal year 2002, the Company had sales to one major customer which accounted for 28% of total sales.

Competition

The Company has many competitors in the X-ray product market, including several large and well-established manufacturers of security
X-ray equipment with financial and other resources greater than those of the Company. Certain X-ray security system customers select such systems based largely on price. Other
customers, notably the U.S. Government and users in countries with high levels of concern over security, tend to select systems based largely on performance and detection capability. The Company's
systems offer premium performance and have historically been priced higher than

4

---

many competing systems. The Company believes that its patented and proprietary technology, coupled with an overall market shift from price to performance which the Company expects to occur as a
result of the events of September 11th, gives it a strong competitive position in the sale of security systems to customers concerned with performance and detection. The Company
also believes that its strategy of concentrating on differentiable products with unique features, including Z® Backscatter and Shaped Energy, and/or competitive pricing will give it a
strong position to increase its sales of X-ray systems. However, a number of companies have developed products that compete with the Company's X-ray inspection products. (See
"Forward-Looking Information and Factors Affecting Future Performance").

ISO 9001 Certification

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

Raw Material Availability

The Company has not experienced during the last year, and does not currently anticipate, any hardware delivery delays due to raw material shortages. Most procured
material is from U.S. sources. However, the Company is dependent upon certain overseas sole source providers of important components. No rare or exotic materials are utilized. In light of the events
of September 11, demand for X-ray system subcomponents increased significantly across the security industry. In response, the Company continues to take steps to mitigate sourcing
risks by working closely with its vendors to secure future raw material availability. These efforts also include identifying and qualifying second-source providers for several critical components on
all of its product lines.

Regulatory Compliance

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

Research and Development

During fiscal 2002 and 2000, the Company conducted government-sponsored research primarily focused on technologies for the detection of illicit drugs, explosives,
and other security issues. The Company recognized revenues of $635,000 and $416,000, in fiscal 2002 and 2000, respectively for these efforts. No government-sponsored research projects were performed
in fiscal 2001. In addition, the Company spent approximately $7,136,000 of its own funds for research relating to the development of new products or services during fiscal 2002, compared to $5,060,000
and $5,902,000 in fiscal 2001 and 2000, respectively.

A
significant amount of the Company's government sponsored research and development work is obtained via contracts or subcontracts that typically provide for reimbursement of allowable
costs plus a fixed fee. The Company's contracts in these areas are obtained by submitting research and development

5

---

proposals to various organizations, sometimes in response to requests for such proposals. The Company's contract research ranges from advances in X-ray systems and image analysis to
integrated system development for niche security inspection problems.

Personnel

As of March 31, 2002 the Company had 373 employees compared to 308 employees at the end of the prior year. All Company employees sign nondisclosure
agreements as a condition of employment.

Sales Backlog

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

A
majority of the Company's contracts with the U.S. Government contain clauses permitting the government to terminate the contract for convenience upon certain terms and conditions,
including payment to the Company of an appropriate fee or profit on work performed. The total of such contracts in the backlog was $22,233,000 at the end of fiscal year 2002 and $15,462,000 at the end
of fiscal year 2001. It is estimated that approximately 58% of the 2002 backlog will be filled within the fiscal year ending March 31, 2003.

Financial Information About Foreign and Domestic Operations and Export Sales

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

Net
Sales and Contract Revenues

|                                           |                      | 2002 |        | 2001 |      | 2000
|------------------------------------------ | -------------------- | ---- | ------ | ---- | ---- | ----
|
|Domestic                                   |                      | $    | 45,932 |      | 70%  |     
|Export                                     |                      | $    | 19,464 |      | 30%  |     
|                                           |                      |      |        |      |      |     
|Net Sales and Contract Revenues            |                      | $    | 65,396 |      | 100% |     
|Percent of Export Revenue by Major Region: |                      |      |        |      |      |     
|                                           | Middle East & Africa |      |        | 59.0 | %    |     
|                                           | Europe               |      |        | 28.1 |      |     
|                                           | Mexico               |      |        | 7.7  |      |     
|                                           | Pacific Rim          |      |        | 4.4  |      |     
|                                           | All Other            |      |        | 0.8  |      |     

6

---

ITEM 2. PROPERTIES

The Company's executive offices and its research, manufacturing and warehouse facilities are located in Billerica, Massachusetts and Santa Clara, California. In
Billerica, the Company occupies 118,300 square feet of space in a 160,000 square foot single-story, concrete and brick building owned by an unaffiliated real estate limited partnership. The remaining
space is currently unoccupied and is available for lease from the building owner. The Company occupies the space under a long-term lease with a ten-year initial term that
commenced March 1, 1995, and a one (1) ten-year optional extension term. In October 1999, the Company leased an additional 56,000 square feet of manufacturing and
office space in an office park near the main office. This lease has a term of five years. In addition, the Company maintains 12,700 square feet of separate manufacturing and office space which was
previously sub-leased to an unaffiliated company. The facilities are currently utilized on a one-shift basis. The Company can add additional capacity by adding second and third
shifts if necessary.

In
August 1998, the Company established the High Energy Systems ("HES") division. Located in Santa Clara, California, HES leases 11,700 square feet of manufacturing, research and
office space. The original lease had a term of three years that commenced on August 18, 1998. In August 2001, the Company exercised a one-year extension option to this lease,
which is cancelable with three-months notice. The Company's facilities are currently utilized on a one-shift basis. The Company can add additional capacity by adding second and third
shifts if necessary.

ITEM 3. LEGAL PROCEEDINGS

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

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

In
a related matter, EG&G has filed a request with the U.S. Patent and Trademark Office ("USPTO") for reexamination of the two patents that currently are at issue in the patent
infringement

7

---

action described above. The Company filed oppositions to the re-examination requests and was advised by the USPTO on November 21, 2000 that the Company's MobileSearch
X-ray inspection patent was upheld in all material respects. The Company has also been advised by the USPTO that the Company's patent on its Z® Backscatter
X-ray inspection technology was upheld in all material respects on January 30, 2001.

In
February 2000, Heimann Systems GmBH ("Heimann") filed a civil action in U.S. District Court in Boston, Massachusetts against the Company alleging that the Company infringed a
Heimann patent relating to a mobile vehicle and X-ray examining device. In December 2001, Heimann and the Company agreed to a settlement of the case. The settlement provides a
mutually satisfactory business arrangement that permits the parties to compete in the marketplace with their respective approaches to mobile X-ray inspection systems.

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

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

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

PART II

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

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

Fiscal Year

Quarter Ended

High

Low2002

March 31, 2002

$
18.10

$
13.75December 31, 2001


25.20


17.10September 30, 2001


15.25


5.70June 30, 2001


6.35


5.502001

March 31, 2001


6.23


4.95December 31, 2000


5.50


4.13September 30, 2000


7.25


5.75June 30, 2000


6.25


4.50


As
of May 21, 2002, there were approximately 1,038 holders of record of the Company's Common Stock.

No
cash dividends have been declared in the two most recent fiscal years and the Board of Directors does not contemplate paying any dividends in the immediate future.

The
Company's credit facility restricts the payment of dividends (except in shares of the Company's stock) without consent of the bank.

Equity Compensation Plan Information

The following table provides the information about the Company's common stock that may be issued upon the exercise of options and rights under all existing equity
compensation plans as of March 31, 2002. The Company has the following stock option plans outstanding as of March 31, 2002: 1993, 1994-1995 and 1996 Stock Option Plan for
Non-employee Directors; two CEO Employment

8

---

Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified Option Plan; 1994-95 Stock Option Plan for New Employees, a 1999 Combination Plan, and a 2000 Combination
Plan.

|Plan category                 |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights as of
March 31, 2002 |  | Weighted-average
exercise price of
outstanding
options, warrants
and rights |            | Number of securities
remaining available for future
issuance under equity
compensation plans as of
March 31, 2002 (excluding
securities reflected in
column (a))
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             
|                              |  | (a)                                                                                                              |  |                                                                             | (b)        |                                                                                                                                                                 
|Equity compensation plans     |  | 10,000  (1)                                                                                                      |  | $                                                                           | 6.38  (1)  |                                                                                                                                                                 
|approved by security holders  |  | 171,050  (2)                                                                                                     |  | $                                                                           | 9.33  (2)  |                                                                                                                                                                 
|                              |  | 398,800  (3)                                                                                                     |  | $                                                                           | 7.72  (3)  |                                                                                                                                                                 
|                              |  | 297,458  (4)                                                                                                     |  | $                                                                           | 9.77  (4)  |                                                                                                                                                                 
|                             
|Equity compensation plans not |  | 32,000  (5)                                                                                                      |  | $                                                                           | 7.25  (5)  |                                                                                                                                                                 
|approved by security holders  |  | 47,150  (6)                                                                                                      |  | $                                                                           | 6.19  (6)  |                                                                                                                                                                 
|                              |  | 126,000  (7)                                                                                                     |  | $                                                                           | 10.35  (7) |                                                                                                                                                                 
|                              |  | 167,200  (8)                                                                                                     |  | $                                                                           | 9.28  (8)  |                                                                                                                                                                 
|                              |  | 206,999  (9)                                                                                                     |  | $                                                                           | 10.42  (9) |                                                                                                                                                                 
|                              |  | 283,000(10)                                                                                                      |  | $                                                                           | 11.95(10)  |                                                                                                                                                                 
|                             
|Total                         |  | 1,739,657                                                                                                        |  | $                                                                           | 9.50       |                                                                                                                                                                 
|                              |  |                                                                                                                  |  |                                                                             |            |                                                                                                                                                                 

---

In
addition, the Company has a common stock installment purchase plan under which the Board of Directors may grant key personnel the right to purchase shares of the Company's common
stock at fair market value and to pay the purchase price in twelve equal monthly installments. As of March 31, 2002, no shares have been reserved or granted under this plan.

The
Company has instituted two common stock purchase plans. The Executive Equity Incentive Plan allows an executive officer of the Company to buy original issue Company common stock in
any dollar amount up to the gross amount of the annual bonus granted to the Officer and to receive half the number of shares purchased in restricted stock which vests after 3 years. If the
employee leaves the Company prior to 3 years then the shares revert back to the Company. As of both March 31, 2002 and 2001, 2,251 shares have been reserved and restricted under this
plan. The Reload Option Plan allows any eligible employee designated by the Board of Directors to receive new stock options (at an exercise

9

---

price equal to the fair market value of the common stock on the date of sale of the stock by the employee) for every share of Company common stock sold or used to exercise stock options.

ITEM 6. SELECTED FINANCIAL DATA

|Fiscal Year                      |  | 2002 |        | 2001 |   | 2000   |  | 1999 |        | 1998
|-------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|
|Net sales and contract revenues  |  | $    | 65,396 |      | $ | 67,374 |  | $    | 60,896 |     
|Net income/(loss)                |  |      | (4,512 | )    |   | 660    |  |      | 1,459  |     
|Income/(loss) per sharediluted  |  |      | (0.87  | )    |   | 0.13   |  |      | 0.29   |     
|Total assets                     |  |      | 50,241 |      |   | 44,310 |  |      | 38,205 |     
|Obligations under capital leases |  |      |       |      |   |       |  |      | 16     |     
|Stockholders' investment         |  |      | 23,129 |      |   | 22,634 |  |      | 21,375 |     
|Book value per share             |  |      | 4.17   |      |   | 4.52   |  |      | 4.31   |     

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

2002 Compared to 2001

Overview

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

Changes in Financial ConditionCash and cash equivalents at year-end increased by
$6,385,000 to $7,591,000, compared to $1,206,000 in 2001. Accounts receivable decreased by $2,510,000 from the prior year due to the timing of milestone billings on fixed price contracts and
comparatively lower fourth quarter revenues from fiscal 2001. Unbilled costs and fees decreased by $3,451,000 due to milestones achieved on certain contracts. Inventories increased by $7,014,000 due
to additional purchases made for current production and increased finished goods on hand at the end of fiscal 2002. Customer deposits increased by $2,983,000 due to milestones achieved on certain
long-term contracts. The Company's borrowings under its line of credit increased by $3,300,000 due to additional borrowings to primarily support working capital needs.

Results of OperationsNet sales and contract revenues decreased by $1,978,000 or 3% during fiscal
year 2002. The decrease in revenues was due primarily to a decline in sales of CargoSearch systems which had been experiencing declines prior to September 11th and has experienced
additional procurement delays as government agencies (both U.S. and foreign) determine the best security solution and budgets for security in the post-September 11th
environment. In contrast, ParcelSearch experienced an immediate increase in demand following September 11th which resulted in higher ParcelSearch system sales in the third and
fourth fiscal quarters and for the year. In addition, aftermarket field services experienced increased revenues compared to fiscal 2001 due to an increased installed base and certain system upgrade
projects delivered. The Company earned $635,000 in contract research and engineering revenues in fiscal 2002. There were no contract research and engineering revenues in fiscal 2001.

Cost
of sales and contracts in fiscal 2002 of $49,357,000 was $1,798,000 lower than the previous year primarily due to the decreased system revenues. Cost of sales and contracts
represented 75% of

10

---

revenues during fiscal 2002, compared to 76% in fiscal 2001. This percentage decrease in the cost of sales was due to a shift in product mix as ParcelSearch sales, a higher margin product line, made
up a greater percentage of the overall revenues in fiscal 2002.

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

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

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

The
Company experienced pre-tax operating losses in the current year as it invested in infrastructure and research and development projects in anticipation of increased
demand which did not occur in all product lines. The Company has reviewed its deferred tax assets as a whole for realizability over the next three to five years in light of the uncertain and variable
demand seen and has recorded a valuation reserve against its deferred tax asset to bring this asset to an amount which is more likely than not to be realized.

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

2001 Compared to 2000

Overview

Net sales and contract revenues for fiscal 2001 increased by 11% to $67,374,000 versus fiscal 2000 net sales and contract revenues of $60,896,000. The Company had
income before taxes of $805,000, an increase of 73% compared to $466,000 income before taxes in the previous year. Net income for fiscal 2001 was $660,000 ($.13 per share, on a diluted basis) as
compared to $1,459,000 ($.29 per share, on a diluted basis) in fiscal 2000. Backlog at March 31, 2001 was $40,150,000, a 58% increase from the backlog reported at the previous fiscal year end.

Changes in Financial ConditionCash and cash equivalents at year-end decreased by $40,000
to $1,206,000, compared to $1,246,000 in 2000. Accounts receivable increased by $3,450,000 from the prior year due to the increased shipments made during the fourth quarter of fiscal 2001. Unbilled
costs and fees decreased by $210,000 due to the timing of milestones invoiced on several contracts. Inventories increased by $3,553,000 due to additional purchases made on systems in progress and
increased spares requirements. Customer deposits decreased by $317,000 due to progress made on certain long-term contracts. The Company's borrowings under its line of credit increased by
$2,019,000 due to additional borrowings to primarily support working capital needs.

Results of OperationsNet sales and contract revenues increased by $6,478,000 or 11% during fiscal
year 2001 attributable to increased CargoSearch systems sales. There were no contract research and engineering revenues earned in fiscal 2001, a $416,000 decline from the prior year.

11

---

Cost
of sales and contracts in fiscal 2001 of $51,155,000 was $7,439,000 higher than the previous year primarily due to increased equipment sales and performance on several contracts.
Cost of sales and contracts represented 76% of revenues during fiscal 2001, compared to 72% in fiscal 2000. This percentage increase in the cost of sales was due to a shift in product mix, delays
encountered and cost overruns on systems projects, continued investments in global technical support capabilities and the introduction of new or enhanced products in response to growing domestic and
international demand.

Selling,
general and administrative expenses of $9,688,000 were $792,000 lower than the previous year and represented 14% of revenues, compared to 17% in 2000. The decreased spending
level was primarily due to the reduced legal and personnel related costs.

Company
funded research and development spending decreased to $5,060,000 in fiscal 2001, a 14% decrease compared to the $5,902,000 in spending in fiscal 2000. Research and development
spending in fiscal 2001 and fiscal 2000 was 8% and 10% of revenues, respectively.

Other
expenses increased $334,000 in the year to $666,000 for fiscal 2001 due primarily to increased borrowings under the Company's line of credit.

The
Company recorded net income of $660,000 for fiscal year 2001, a decrease of $799,000, or 55% below net income of $1,459,000 in the previous year. The Company was profitable in all
quarters of 2001.

Liquidity and Capital Resources

Cash and cash equivalents were $7,591,000 at March 31, 2002 as compared to $1,206,000 at March 31, 2001. Cash used for operating activities of
$260,000 was attributable primarily to increases in accounts receivable and inventory balances offset by increases in customer deposits and a decrease in unbilled costs and fees.

Fiscal
2002 capital expenditures totaled $1,109,000. This represents a decrease of 17%, or $233,000, from the prior year capital expenditures of $1,342,000. Capital expenditures were
comprised primarily of investments in demo and test equipment, information technology, and furniture and fixtures.

On
May 28, 2002, the Company closed on a private placement offering of common stock and warrants. A total of 1,115,000 shares were sold to accredited investors at a price of
$17.64 each. Net proceeds to the Company approximated $18.4 million. In addition, warrants to purchase additional 295,475 shares of common stock at a price of $23.52 were issued. These warrants
have a five-year life, expiring in May 2007. Historically, the Company has funded it operations and capital expenditures with cash generated by operations, including deposits from
customers on long-term projects, or from lines of credit available to the Company. In addition, in fiscal 2002, the Company received $3,814,000 in proceeds from the exercise of stock
options. The proceeds from this private placement offering will be utilized for general corporate purposes including debt repayment, capital expenditures, investments in product development and
working capital needs. The Company believes that the proceeds from this offering, along with its cash flows from operations, are sufficient to meet the current and foreseeable operating requirements
of the Company's business.

On
November 30, 2000, the Company signed two new credit agreements with HSBC Bank USA ("HSBC"). The first agreement is for a $10.0 million domestic revolving credit
facility to support the Company's routine working capital and standby letter of credit needs. The second is a $30.0 million export credit and security agreement, guaranteed by the Export-Import
Bank of the United States to support the Company's overseas contract, trade finance and working capital needs. On February 14, 2002, these credit agreements were amended to increase the
domestic revolving credit facility to $20,000,000 and to reduce the export credit facility to $20,000,000 in anticipation of higher domestic demand. The domestic credit facility as amended provides
for maximum borrowings in an amount up to

12

---

the lower of: (a) the sum of 85% of eligible domestic accounts receivable plus the lower of (i) 40% of eligible inventory; or (ii) $5.0 million, or;
(b) $20.0 million. The export credit and security agreement as amended provides for maximum borrowings in an amount up to the lower of: (a) the sum of 90% of eligible
international billed and unbilled accounts; or (b) $20.0 million. The agreements expire on November 30, 2002. The credit facility bears an interest rate of the HSBC Bank USA prime
rate or LIBOR plus 2.0% at the Company's option (4.75% at March 31, 2002). At the end of fiscal 2002, $9.3 million in borrowings were outstanding and $3.8 million in standby
letters of credit were in effect against this credit facility. As noted above, subsequent to year end, the Company received $18.4 million net proceeds from a private placement offering of
securities which will be utilized to pay down outstanding debt under the Company's domestic revolving credit facility.The credit agreements are
collateralized by certain assets of the Company, and contain certain restrictions, including limitations on the amount of distributions that can be made to stockholders, encumbrances of assets, and
loans that can be made to officers, and requires the maintenance of certain financial covenants. As of March 31, 2002, the Company was not in compliance with the tangible net worth and cashflow
coverage ratio covenants, but has obtained a waiver from the bank for this non-compliance for the year end. With the receipt of the proceeds from the private placement offering of
securities, the Company expects that it will be in compliance with its tangible net worth covenant at the end of the first quarter and throughout fiscal 2003. However, the cash flow coverage ratio
covenant is a four quarter trailing requirement and, as a result of losses in prior quarters, the Company does not anticipate being in compliance with this covenant at the end of the first or second
quarter of fiscal 2003. The Company will request waivers of this covenant as required at each quarter end. To the extent the Company is
unable to obtain such waivers, HSBC could terminate the Company's domestic revolving credit and export credit facilities. In addition, the current credit agreements expire in November 2002 and
there can be no assurance that HSBC will renew the credit agreements or that alternative financing can be obtained. As discussed above, the Company intends to utilize a portion of the net proceeds
received from the private placement in May 2002 to pay off the amounts outstanding (approximately $9.3 million as of May 31, 2002) under the domestic credit facilities and
management believes the Company's working capital requirements through March 31, 2003 can be met without the line of credit. In addition, to the extent the Company's credit facility is
terminated, it would preclude the Company from obtaining financing through its current secure export credit and security agreement that could negatively impact the Company's ability to support
international sales. However, management believes the Company's planned level of sales in 2003 can be achieved without access to export credit.

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

Critical Accounting Policies

The Company considers certain accounting policies related to revenue recognition, the valuation of deferred tax assets, inventories and the valuation of
inventories to be critical policies due to the estimation processes involved in each.

13

---

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

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

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

Valuation of deferred tax assets.At March 31, 2002, the Company had $3.3 million of
net current and non-current deferred tax assets, net of a valuation allowance of approximately $2,739,000. The carrying value of the Company's net deferred tax assets assumes that the
Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the
Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company's consolidated statement of operations.
Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for valuation allowances quarterly.

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

14

---

Forward-Looking Information and Factors Affecting Future Performance

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

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

The
Company's business is heavily dependent on sales to a small number of customers, which include agencies of the United States government. During fiscal 2002, five customers accounted
for 62% of the Company's total revenues and during fiscal 2001, three customers accounted for 55% of total revenues. During fiscal 2002, the Company's largest customer, the U.S. Customs Service, an
agency of the United States government, accounted for approximately 28% of total revenues. In general, the Company's government contracts may be terminated at the government's discretion. The
termination of the Company's relationship with one or more of its significant customers or the reduction or delay of orders of its systems by these customers would substantially reduce the Company's
revenues and its business and prospects may be harmed.

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

The Company's international business, including sales to foreign governments, accounted for approximately 30%, 53% and 55% of its net revenues for the fiscal
years ended March 31, 2002, March 31, 2001 and March 31, 2000, respectively. The Company anticipates that international sales will continue to account for a significant percentage
of its revenues for the foreseeable future. As a result of the Company's worldwide business operations, it is subject to various risks, including:



15

---



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

The September 11, 2001 terrorist attacks have increased financial expectations that may not materialize.

Following the September 11, 2001 terrorist attacks, the United States government made it a national priority to increase security in airports,
high-threat federal facilities, U.S. military bases, and seaports and borders. The efforts of the United States government to revamp security in the United States have created increased
interest in the Company's X-ray inspection products. The Company is uncertain whether the level of demand for its products will be as high as anticipated. The Company is uncertain what
solutions, if any, ultimately will be adopted and implemented by the United States government and other international entities to combat terrorism and whether the Company's products will be a part of
the solution. Even if the Company's products are considered as part of the security solution, it is unclear what level the Company will be involved and how quickly funding to purchase its products may
be made available. The Company may incur non-recoverable expenditures in anticipation of future demand for its products that may not materialize. All of these factors may adversely impact
the Company's operations and create unpredictability in its revenues and operating results.

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

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

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

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

The Company's products may not obtain all of the required foreign and domestic governmental approvals.

Some of the Company's X-ray inspection products require the approval and certification of the U.S. Federal Aviation Administration (the "FAA"), and
other U.S. Government agencies, and may require from time to time, the approval of foreign government agencies. There can be no assurance that the Company's X-ray inspection systems will
obtain all of the approvals required by the FAA or other agencies, or that even if such approvals are obtained, demand or sales for the Company's X-ray inspection systems will increase.

16

---

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

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

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

The Company relies on one or only a limited number of suppliers for some key components for its products. In particular, the Company currently obtains some of its
X-ray tubes and related control devices from two sole source suppliers. The Company also relies on sole source suppliers for the assembly of proprietary circuit boards. While the Company
has long-term supply contracts with a few of its sole source suppliers, it generally purchases these materials on a purchase order basis and does not carry significant inventories of these
materials. The Company's reliance on sole or limited supply sources reduces its control over timely delivery, price increases, reliability, and quality of critical components. Obtaining alternative
sources of supply of these key components could involve significant delays and other costs, and may not be available to the Company on reasonable terms, if at all. If the Company changes any of its
suppliers, the potential new supplier would be required to go through a qualification process, creating potential delays or reductions in product shipments. The failure of any supplier to provide
quality and timely components at an acceptable price, or an interruption of supplies from such a supplier could result in lost or deferred sales, which would harm the Company's business and prospects.

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

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



17

---



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

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

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

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

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

The Company generates funds for its research and development activities from operations, private sources and the government. The Company may be unable to generate
the funds necessary to support
its research and development activities if it does not generate sufficient funds from operations, other potential private sources, or the government. The Company may not successfully compete with
other companies and research institutions for government funding and funding from other private sources. Additionally, government-funding priorities are subject to frequent changes. For example, in
fiscal 2002 and 2000, the Company earned $635,000 and $416,000, respectively, for government-sponsored research and development. In fiscal 2001 the Company did not receive any funds to conduct
government-sponsored research and development. There is no guarantee that the Company will receive funds from government-sponsored research in the future. If the Company is unable to fund its research
and development activities through its operations or from outside sources, the Company may be unable to continue to innovate or bring its innovations to market on a timely or cost effective basis, or
its innovations may be surpassed by other competitors or new technologies.

The Company's success depends on new product development.

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



18

---



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

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

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

The Company may not be able to compete successfully.

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

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



19

---





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

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

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

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

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

The Company's future success will depend on the continued services of its key personnel.

The loss of any of the Company's executive officers or key research and development personnel, could harm its business and prospects. The Company's success also
depends upon its ability to attract and retain other qualified managerial and technical personnel. Competition for such personnel, particularly software engineers and other technical personnel, is
intense. The Company may be unable to attract and retain all personnel necessary for the development of its business. In particular, the Company is dependent upon the services of Ralph Sheridan, its
President and Chief Executive Officer. The Company has an employment agreement with Mr. Sheridan, which expires in September 2002. The loss of Mr. Sheridan's services could harm
the Company's business and prospects.

20

---

The
market for skilled employees is highly competitive, especially for employees in technical fields. While the Company's compensation programs are intended to attract and retain the
employees required for it to be successful, there can be no assurance that the Company will be able to retain the services of all of its key employees or a sufficient number to execute on its plans,
nor can there be any assurances that the Company will be able to continue to attract new employees as required.

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

Substantially all of the Company's outstanding shares of common stock are freely tradable without restriction or further registration. Affiliates must sell all
shares they own in compliance with the volume and other requirements of Rule 144, except for the holding period requirements. Nevertheless, sales of substantial amounts of common stock by the
Company's stockholders, or even the potential for such sales, may cause the market price of the Company's common stock to decline and could impair the Company's ability to raise capital through the
sale of the Company's equity securities.

Existing external financing may not be sufficient to satisfy short-term cash requirements or may not be available in the future.

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

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

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



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

21

---

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

Provisions in the Company's articles of organization and the Company's stockholder purchase rights plan may have the effect of discouraging or preventing a change
in control. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's common stock.

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

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

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

As of March 31, 2002, the Company had $9.3 million of variable rate debt outstanding with a weighted average variable interest rate of 5.7%. If the
weighted average variable interest rate on our variable rate debt had increased by 1%, such increase would have had a negative impact on our net loss for the year ended March 31, 2002 of
approximately $83,000. See Note 3 of Notes to Consolidated Financial Statements for a discussion of our long-term indebtedness.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information listed in the Index to Consolidated Financial Statements and Schedule on page 28 are filed as
part of this Annual Report on Form 10-K and are incorporated into this Item by reference.

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

None.

22

---

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Directors and Executive Officers of the Company as of May 31, 2002.

|Name                                           |  | Age |  | Positions and Offices
of Company Held               |  | Date Assumed
Each Position   
|---------------------------------------------- |  | --- |  | --------------------------------------------------- |  | -----------------------------
|DIRECTORS                                      |  |     |  |                                                     |  |                              
|William E. Odom                                |  | 69  |  | Director
Chairman                                   |  | September 1996
September 1998
|Roger P. Heinisch                              |  | 64  |  | Director                                            |  | August 1999                  
|Hamilton W. Helmer                             |  | 55  |  | Director                                            |  | February 1993                
|Donald J. McCarren                             |  | 62  |  | Director                                            |  | February 1993                
|Ralph S. Sheridan                              |  | 52  |  | Director
President & CEO                            |  | January 1994
September 1993  
|Carl W. Vogt                                   |  | 66  |  | Director                                            |  | June 1997                    
|EXECUTIVE OFFICERS(Who are not also Directors) |  |     |  |                                                     |  |                              
|William L. Adams                               |  | 69  |  | Vice President, Chief Engineer                      |  | September 1998               
|Joseph Callerame                               |  | 52  |  | Vice President, Technology
Chief Technology Officer |  | June 1998                    
|Reed Clark                                     |  | 53  |  | Vice President, International Sales                 |  | July 2001                    
|Ralph G. Foose                                 |  | 58  |  | Vice President, Operations                          |  | September 1999               
|Edwin L. Lewis                                 |  | 56  |  | Vice President, General Counsel and Clerk           |  | March 2000                   
|Richard Mastronardi                            |  | 54  |  | Vice President, Field Operations                    |  | September 2000               
|Andrew Morrison                                |  | 50  |  | Vice President, Chief Financial Officer             |  | June 2001                    

All
Directors and Executive Officers hold office until the next annual meeting of Stockholders and until their successors are duly elected and qualified. No family relationship exists
between any of the listed Directors and Executive Officers.

General
William E. Odom is the Director of National Security Studies for the Hudson Institute in Washington, D.C. and an adjunct Professor in the Department of Political Science at Yale
University. Prior to joining the Hudson Institute in 1988, General Odom spent 34 years as an officer in the United States Army, retiring with the rank of Lieutenant General. While on active
duty, General Odom served as Director of the National Security Agency for three years, Assistant Chief of Staff for Intelligence for the Department of the Army for four years and Military Assistant to
the President's National Security Advisor for four years. General Odom received his B.S. degree from West Point and Masters and Ph.D. degrees from Columbia University. General Odom is on the Board of
Directors of V-ONE Corporation of Rockville, Maryland and the Institute for the Study of Diplomacy at Georgetown University. General Odom is the author of five books and numerous articles.

Dr. Roger
P. Heinisch joined the Honeywell Corporation in 1968 where he served in various scientific and engineering positions before becoming Director of Research in 1978. In
1980, Dr. Heinisch became the Director of the Systems and Research Center and was named Vice President in 1982. He became Vice President of Honeywell's Flight Systems Operations in 1985. In
1988, Dr. Heinisch was appointed Corporate Vice President of Advanced Technology. In 1990, he became Vice President of Materials and Manufacturing for the Defense Systems Group. When Alliant
Techsystems was spun off from Honeywell in 1991, he assumed the position of Vice President,

23

---

Engineering with the new company. From 1995 until April of 1997 he also assumed responsibility for Information Systems and Technology at Alliant. Dr. Heinisch holds a B.S., an M.S. and a Ph.D.
Dr. Heinisch is a former member of the Army Science Board and has been a member of various Department of Defense review panels and technical boards. Currently, Dr. Heinisch serves on the
boards of Third Wave Systems, and Superior Vocabulary. He is currently Chairman of the Board of Theseus Logic, Inc.

Dr. Hamilton
W. Helmer is the Managing Director of Strategy Capital, an investment fund focused on Strategic Arbitrage, an investment approach that capitalizes on the
convergence of market prices of publicly traded equities to the value predicted by Power Dynamics, a proprietary theory of prospective value based on Strategy precepts. Mr. Helmer has been an
active business strategist for over twenty years, first with Bain & Company and then with his own firm. His clients have included Adobe, Hewlett-Packard, Mentor Graphics, John Hancock, Raychem
and Pinkerton. Mr. Helmer received his Ph.D. in Economics from Yale University in 1978.

Dr. Donald
J. McCarren is President of an early stage; privately held, functional genomic research organization, AlphaGene, Inc. Previously, Dr. McCarren served as
President of the National Center for Genome Resources, a non-profit corporation located in Santa Fe, New Mexico, which supports genome projects with expertise in bioinformatics. Prior to
assuming that position in 1997, Dr. McCarren was the founder of Tacora Corporation, a medical technology company located in Seattle, Washington. From July 1992 to June 1994, he
was President and Chief Operating Officer of ImmunoGen, Inc., a small molecular cancer research and development company located in Cambridge, Massachusetts. Prior to that, Dr. McCarren
spent almost nine years at Erbamont N.V. serving as President (1990 to 1992) of the Adria Laboratories Division of Erbamont N.V. in Columbus, Ohio, and Corporate Vice President of Worldwide Marketing
and Business Development (1989 to 1990) and Vice President of Far East and Austral-Asian Operations (1986 to 1989). Dr. McCarren spent his earlier career with Abbott International
(31/2 years), Pfizer International (81/2 years), Merck International (2 years) and Warner Lambert (81/2 years). Dr. McCarren holds a Ph.D. in
Developmental Economics.

Mr. Ralph
S. Sheridan was elected President and Chief Executive Officer of the Company in September 1993, and in January of 1994, he was elected a Director. Prior to
joining the Company, Mr. Sheridan ran his own consulting and investment firm, Value Management Corporation, in Waltham, Massachusetts. Prior to that, Mr. Sheridan was President and CEO
(1988-1989) and Vice President of Marketing and Operations (1987-1988) of HEC Energy Corp., in Boston, Massachusetts. Before joining HEC, Mr. Sheridan held the position
of Vice President of Operations for the Engineered Systems and Controls Group (1984-1986) and Vice President of Corporate Business Development (1981-1984) at Combustion
Engineering, Inc. in Stamford, Connecticut. Before this, Mr. Sheridan spent three years with W. R. Grace and five years with Continental Group in a number of jobs of increasing
responsibility and scope including business development and international operations. Mr. Sheridan holds a B.S. in Chemistry and an M.B.A., both from Ohio State University. He currently serves
as an active member on both the American Electronics Association Board of Directors and the U.S.-Mexico Chamber of Commerce Board of Directors. Mr. Sheridan also holds memberships in the
American Chemical Society, the International Society for Optical Engineering, and the World's President Organization.

Mr. Carl
W. Vogt was elected to the Board in June 1997. He is of counsel (formerly a senior partner) in the Washington, D.C. office of the national law firm of
Fulbright & Jaworski. Mr. Vogt has been with that firm since 1966, with various periods away from the firm to perform government service. In 1992, he was appointed by President Bush as
the Chairman of the National Transportation Safety Board, where he served until 1994. Mr. Vogt earned his bachelor's degree from Williams College and his law degree from the University of Texas
Law School.

24

---

Dr. William
Adams is President of Adtech Consulting, Inc., a technology and management-consulting firm located in Columbus, Ohio. Dr. Adams joined AS&E in
July 1997 as acting Chief Technology Officer. In August 1998 he became the acting Vice President of Operations and he now serves as Chief Engineer. Prior to joining the Company,
Dr. Adams spent over thirty years in engineering and general management in process automation firms including AccuRay, Combustion Engineering, and ABB. During this period he held positions as
Vice President of Field Service, VP of Engineering, Senior Vice President of Engineering, Manufacturing, and Marketing, and Vice President of Quality. In 1987 Dr. Adams established a process
automation joint venture in Russia for Combustion Engineering. Dr. Adams and his wife moved to Moscow in 1991 where he managed the joint venture for ABB after Combustion Engineering was
acquired by ABB. Dr. Adams retired from ABB in 1994 and established Adtech Consulting, Inc. Dr. Adams holds a B.S. in Electrical Engineering from Michigan Technological
University, a SM in Electrical Engineering from MIT, and a Ph.D. from Purdue University.

Dr. Joseph
Callerame joined the Company in June 1998 as Vice President, Technology, and Chief Technology Officer. Prior to joining AS&E, Dr. Callerame spent over
twenty years at Raytheon Company, most recently as Manager, Engineering and Technology Development and Consulting Scientist, at Raytheon Electronic Systems. Prior to that appointment,
Dr. Callerame was Deputy General Manager of Raytheon's Corporate Research Division. Dr. Callerame received his B.A. in Physics from Columbia College, and his M.A. and Ph.D., also in
Physics, from Harvard University. After receiving his Ph.D. and prior to his employment at Raytheon, Dr. Callerame served as a Post-Doctoral Fellow in Nuclear Physics at M.I.T.

Mr. Reed
O. Clark joined the Company as Vice President, International Sales in July of 2001, to focus primarily on seaport market opportunities. Mr. Clark has extensive
experience in building international business in technical and maritime environments. Mr. Clark comes to the Company with over 20 years experience in growing international business and
trade markets, with particular emphasis on the seaports market segment. His most recent position was that of Director of Operations and Sales for Bond Communications in Dubai, UAE. He was instrumental
in leading a sales force of engineers and technicians in systems integration throughout the Middle East. This followed his successful tenure as President of Inter-America, a trade, logistics, and
shipping company, incorporated in California. Mr. Clark has held several executive positions with large international companies (American President Lines and United States Lines) while living
and working in the Far East, South Asia, the Middle East, and Europe. Mr. Clark holds a Bachelor of Science in Engineering from the United States Naval Academy, Annapolis,
MD.

Mr. Ralph
Foose joined the Company as Vice President of Operations in September 1999 after three years as President and Chief Financial Officer of Sight in Systems, a
software manufacturing company. Prior to his work at Sight in Systems, Mr. Foose was President of IRD Mechanalysis where he led a company turnaround. In 1986 Mr. Foose joined Combustion
Engineering as President of Taylor Instrument Systems. During his six-year tenure, the company split into two divisions and grew from $20 million in annual sales to
$150 million. Early on in his career, Mr. Foose held various technical
consulting and managerial positions with Booz-Allen Hamilton, AccuRay Corporation and NASA. Mr. Foose holds a B.S. in Electrical Engineering from Florida Institute of Technology and
an M.S. in Computer Science from Ohio State University.

Mr. Edwin
L. Lewis joined the Company in March 2000 after over two years as President of the Atlantic Legal Foundation, a public interest law firm in New York City. From
1995 to 1997, Mr. Lewis was Vice President, General Counsel and Corporate Secretary of Borg-Warner Corporation and from 1983 to 1995 was general counsel for its subsidiaries, Burns
International and Wells Fargo Alarm Services. Prior to that, Mr. Lewis was senior attorney for Atlantic Richfield Company. Mr. Lewis holds a Juris Doctor Degree from Temple University
School of Law and a Bachelor of Arts Degree in

25

---

International Affairs from Lafayette College. Mr. Lewis is a member of the Legal Advisory Board of the National Federation of Independent Business Legal Foundation.

Mr. Richard
Mastronardi rejoined the Company in September 2000 as Vice President, Field Operations after having worked with the organization as Senior Vice President and
Vice President of Engineering from 1975 through 1987. Prior to rejoining the Company, Mr. Mastronardi was Chief Operating Officer of Adcole Corporation, a manufacturer of satellite-borne sun
sensors and precision gages for the automotive industry. Before that, Mr. Mastronardi was Vice President and General Manager of Caprius, Inc., a manufacturer of Medical MRI Systems and
spent ten years as Vice President of R&D at Thermo Power Corporation, a Thermo Electron Company. Mr. Mastronardi holds a B.S. in Aeronautical Engineering from Rensselaer Polytechnic Institute
and a MBA from Northeastern University.

Mr. Andrew
R. Morrison joined the Company as the Chief Financial Officer in June 2001, after serving as Chief Financial Officer for Digital Goods, an internet company
marketing digital content on the Web. This followed his successful tenure as CFO at AAF-McQuay, Inc., a billion dollar HVAC and filtration company with diverse international
marketing, distribution and manufacturing. While at AAF-McQuay, he played a key business development role in leading strategic alliances, as well as a number of acquisition and divestiture
initiatives. Prior to this, Mr. Morrison held positions with BP Oil Company, Gulf Oil Company and the Chase Manhattan Bank. Mr. Morrison holds a BA in Political Science and Psychology
from the University of Rochester and an MBA from the University of Chicago.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires certain persons, including the Company's Directors and Executive Officers, to file initial
reports of beneficial ownership of the Company's securities and reports of changes in beneficial ownership with the Securities and Exchange Commission. For fiscal year 2002, to the Company's
knowledge, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except as follows: (i) an initial report of ownership
for Reed O. Clark will be filed late.

26

---

ITEM 11. EXECUTIVE COMPENSATION

The following chart provides information concerning compensation paid by the Company during the year ended March 31, 2002 to the Chief Executive Officer
and each of the four most highly compensated executive officers of the Company whose aggregate compensation exceeded $100,000 ("Named Executive Officers").

SUMMARY COMPENSATION

|                                                     |  |                |     |                         |  |                 |        | Long-Term
Compen-
sation |  |                      
|---------------------------------------------------- |  | -------------- | --- | ----------------------- |  | --------------- | ------ | ------------------------ |  | ---------------------
|
|
|
|Ralph S. Sheridan
President and CEO                  |  | 2002
2001
2000 |     | 270,000
274,710
267,120 |  | 

172,500     | (3)    | 

225,000              |  | 1,162,758
4,710
4,058
|Joseph Callerame
Vice President, CTO                 |  | 2002
2001
2000 |     | 210,000
211,502
211,964 |  | 

58,500      | (4)(5) | 20,000

               |  | 30,417
3,002
2,719   
|Ralph G. Foose
Vice President, Operations            |  | 2002
2001
2000 | (2) | 200,000
206,628
113,846 |  | 

           | (4)    | 40,000

50,000          |  | 8,434
10,474
       
|Edwin L. Lewis
Vice President, General Counsel       |  | 2002
2001
2000 | (2) | 180,000
181,550
12,461  |  | 10,000
10,000
 |        | 
10,000
40,000          |  | 3,150
3,100
        
|Richard Mastronardi
Vice President, Field Operations |  | 2002
2001      | (2) | 175,000
100,962         |  | 
             | (4)    | 
30,000                 |  | 126,078
4,306        

---

Mr. Sheridan
has an employment contract with the Company that provides for his employment as President and Chief Executive Officer, and as a Director, through
September 2002, at an annual salary of $270,000, subject to annual review, plus performance bonuses tied to specific accomplishments.

Under
the contract, Mr. Sheridan is eligible to receive an annual bonus of up to $270,000 in each contract year, based on his accomplishment of goals established by the
Compensation Committee. In addition, the Company granted Mr. Sheridan options to purchase 225,000 shares of the Company's Common Stock at an exercise price of $7.44 per share, the fair market
value of the Company's Common Stock on the date of grant. The options become exercisable at the rate of 75,000 options per year on the first three anniversaries of the grant.

27

---

Mr. Sheridan
recognized no income upon the issuance of the options. When the options are exercised, Mr. Sheridan will recognize ordinary income in an amount equal to the
difference between the fair market value of the Common Stock received upon the exercise of the option and the amount paid for
the Common Stock. At that time, the Company will be allowed a deduction equal to the amount recognized as ordinary income by Mr. Sheridan. The options provide that to the extent that exercise
of an option would give rise to compensation expense that the Company reasonably expects will not be deductible for tax purposes in any given taxable year pursuant to Section 162(m) of the
Internal Revenue Code of 1986, as amended, the number of shares as to which the options may be exercised during that taxable year shall be limited.

Under
his initial employment contract, Mr. Sheridan purchased 160,000 treasury shares of the Company's Common Stock payable by promissory note. This promissory note was paid in
full by Mr. Sheridan in December 2001.

Mr. Sheridan
is entitled to receive the same benefits as other senior executives of the Company, as well as the use of a car.

In
the event that Mr. Sheridan's employment with the Company is terminated without "Cause", or by him for Good Reason (as defined in the employment contract), he will receive
twelve months' pay and any previously earned bonuses. In the event that Mr. Sheridan's employment with the Company is terminated for "Cause", or by him other than for Good Reason (as defined in
the employment contract), or by his death or disability, he will not be entitled to receive any salary beyond the date of termination, and he will only be entitled to receive previously earned bonuses
if the termination is caused by death or disability.

Each
of the Named Executive Officers has an agreement with the Company granting severance payments equal to one year's salary if he is terminated in connection with a change of control
of the Company as defined in the agreement. The agreement also provides that if he is terminated for any reason other than "Cause" as defined in the agreement, he will be entitled to receive an amount
equal to at least six months salary.

The
following tables provide information concerning the grant of options in fiscal year 2002 to Executive Officers named in the Summary Compensation Table and options exercised by those
officers.

OPTION GRANTS IN THE LAST FISCAL YEAR

|                 |  | Individual Grants |  | Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Term ($)
|---------------- |  | ----------------- |  | --------------------------------------------------------------------------------------------------
|
|
|
|Joseph Callerame |  | 20,000            |  | 4.13                                                                                              
|Ralph G. Foose   |  | 40,000            |  | 8.26                                                                                              

Mr. Sheridan,
Mr. Lewis, and Mr. Mastronardi received no option grants in fiscal 2002.

28

---



AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR  AND FISCAL YEAR END OPTION VALUES

|                    |  |        |  |           |  | Number of
Unexercised Options
at Fiscal Year End
March 31, 2002(#) |  | Value of Unexercised In-
The-Money Options at
Fiscal Year End
March 31, 2002 ($)
|------------------- |  | ------ |  | --------- |  | ------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|
|
|
|Ralph S. Sheridan   |  | 62,000 |  | 1,156,241 |  | 433,000                                                             |  | 75,000                                                                           
|Joseph Callerame    |  | 3,000  |  | 27,895    |  | 47,000                                                              |  | 20,000                                                                           
|Ralph G. Foose      |  | 10,000 |  | 158,500   |  | 27,500                                                              |  | 52,500                                                                           
|Edwin Lewis         |  |       |  |          |  | 36,667                                                              |  | 13,333                                                                           
|Richard Mastronardi |  | 10,000 |  | 121,220   |  | 5,000                                                               |  | 15,000                                                                           

See
Item 5 for additional Equity Compensation Plan information.

Compensation of Directors

Directors who are also employees of the Company do not receive additional compensation as Directors. Non-Employee Directors receive annual
compensation of 2,000 shares (the Chairman receives 3,000 shares) of Company Common Stock issuable on January 10th in each year, and options to purchase 7,000 shares of Common Stock at the
closing price on the date of the Annual Meeting in each year. No meeting fees or other fees are payable to any Director. See Item 13Certain Relationships and Related Transactions for
additional information concerning certain Directors.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended March 31, 2002, the Company's Compensation Committee consisted of General William Odom and Mr. Carl Vogt. No reportable
relationship existed with respect to any member of the Compensation Committee.

Board Compensation Committee Report on Executive Compensation

The Compensation Committee of the Board of Directors (consisting of the two outside Directors whose names appear below this Report) has sole responsibility for
compensation issues relating to the Chief Executive Officer. Compensation practices and policies for the other executive officers are set by the Chief Executive Officer with the advice of the
Compensation Committee.

The
Compensation Committee has formulated an approach to all executive compensation that emphasizes the establishment of goals and objectives for each executive and for the Company as a
whole and ties a substantial portion of executive compensation to the performance of the executive and the Company with respect to these goals and objectives. Base compensation for executive officers
(and many other Company employees) is established on the basis of an analysis of salaries received by comparable employees of high-tech and manufacturing companies in the Greater Boston
area, company financial results and prospects, and individual contributions relative to the job description and past performance of each officer.

Also
in keeping with its performance-based compensation philosophy, in the spring of 1994 the Company implemented an incentive compensation program for all executives who report directly
to the Office of the President. Under this new policy, these executives receive a specified portion of their total compensation (ranging from 22% to 50%) based upon two factors: their completion of
agreed upon goals and objectives, and the performance of the entire Company.

Report
Submitted By: William Odom and Carl Vogt.

29

---

Stock Performance Chart

The following chart graphs the performance of the cumulative total return to shareholders (stock price appreciation plus dividends) during the previous five years
in comparison to the returns of the Standard & Poor's 500 Composite Stock Price Index and the Standard & Poor's 500 Information Technology Composite Stock Price Index.

LOGO

30

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following chart shows the Company Common Stock beneficially owned by Officers, Directors and entities owning 5 percent or more
of the Company on May 21, 2002.

|Name of Beneficial Owner                       |  | Amount and Nature of
Beneficial Ownership(1) |  | Percent
of Class |  
|---------------------------------------------- |  | -------------------------------------------- |  | ---------------- | -
|Joseph Callerame                               |  | 59,016                                       |  | (2               | )
|Ralph G. Foose                                 |  | 48,512                                       |  | (2               | )
|Roger P. Heinisch                              |  | 11,000                                       |  | (2               | )
|Hamilton W. Helmer                             |  | 58,000                                       |  | (2               | )
|Edwin Lewis                                    |  | 37,635                                       |  | (2               | )
|Richard Mastronardi                            |  | 5,460                                        |  | (2               | )
|Donald J. McCarren                             |  | 69,581                                       |  | 1.2              | %
|William E. Odom                                |  | 41,000                                       |  | (2               | )
|Ralph S. Sheridan(3)                           |  | 639,086                                      |  | 10.6             | %
|Carl W. Vogt                                   |  | 37,916                                       |  | (2               | )
|Directors and Officers as a Group (13 persons) |  | 1,063,934                                    |  | 18.2             | %
|Essex Management Co., Inc.(4)                  |  | 373,505                                      |  | 6.7              | %

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Al Gladen, a director of the Company until June 1999, provided engineering and management services to the Company. The compensation paid to
Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal years 2002 and 2000 was approximately $19,550 and $20,600, for services rendered, respectively. No services
were provided by Mr. Gladen in fiscal 2001.

See
Item 11 regarding repayment of executive promissory note.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



31

---

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

(Submitted in answer to Item 8 and Item 14 of Form 10-K, Securities and Exchange Commission)

|                                                                                                                                                                                                                                                         |  | PAGE
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                        |  |     
|Report of Independent Public Accountants                                                                                                                                                                                                                 |  | 32  
|Consolidated Balance SheetsMarch 31, 2002 and 2001                                                                                                                                                                                                      |  | 33  
|Consolidated Statements of Operations For the Years Ended March 31, 2002, 2001 and 2000                                                                                                                                                                  |  | 34  
|Consolidated Statements of Stockholders' Investment For the Years Ended March 31, 2002, 2001 and 2000                                                                                                                                                    |  | 35  
|Consolidated Statements of Cash Flows For the Years Ended March 31, 2002, 2001 and 2000                                                                                                                                                                  |  | 36  
|Notes to Consolidated Financial StatementsMarch 31, 2002                                                                                                                                                                                                |  | 37  
|CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION                                                                                                                                                                                                         |  |     
|Unaudited quarterly consolidated financial data for the years ended March 31, 2002 and 2001                                                                                                                                                              |  | 49  
|(Separate Financial Statements of the Company have been omitted since the net assets of its wholly owned subsidiaries are not so restricted with respect to payment of loans, advances and cash dividends to the Company as
to require such disclosure.) |  |     
|FINANCIAL STATEMENT SCHEDULE                                                                                                                                                                                                                             |  |     
|Schedule IIValuation and Qualifying Accounts and Reserves for the years ended March 31, 2002, 2001 and 2000                                                                                                                                             |  | 50  

Other
schedules have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes
thereto.

32

---

Report of Independent Public Accountants

To
American Science and Engineering, Inc.:

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

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

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

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

/s/
Arthur Andersen LLP
Boston, Massachusetts
May 31, 2002

33

---



American Science and Engineering, Inc. and Subsidiaries        Consolidated Balance Sheets        March 31, 2002 and 2001(Dollars in thousands)

|                                                                                                                      |                                                              | 2002 |        | 2001  |  
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---- | ------ | ----- | -
|Assets                                                                                                                |                                                              |      |        |       |  
|Current assets:                                                                                                       |                                                              |      |        |       |  
|Cash and cash equivalents (Note 1)                                                                                    |                                                              | $    | 7,591  |       | $
|Accounts receivable, net of allowances of $111 in 2002 and $134 in 2001 (Note 1)                                      |                                                              |      | 7,216  |       |  
|Unbilled costs and fees, net of allowances of $437 in 2002 and $437 in 2001 (Note 1)                                  |                                                              |      | 5,456  |       |  
|Inventories (Note 1)                                                                                                  |                                                              |      | 21,013 |       |  
|Deferred income taxes (Notes 1 and 4)                                                                                 |                                                              |      | 2,475  |       |  
|Prepaid expenses and other current assets                                                                             |                                                              |      | 685    |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total current assets                                                                                                  |                                                              |      | 44,436 |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Non-current deferred income taxes (Notes 1 and 4)                                                                     |                                                              |      | 823    |       |  
|Deposits                                                                                                              |                                                              |      | 104    |       |  
|Equipment and leasehold improvements, net of accumulated depreciation of $15,366 in 2002 and $13,071 in 2001 (Note 1) |                                                              |      | 4,663  |       |  
|Other assets                                                                                                          |                                                              |      | 100    |       |  
|Patents and other intangibles, net of accumulated amortization of $351 in 2002 and $265 in 2001                       |                                                              |      | 115    |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total assets                                                                                                          |                                                              | $    | 50,241 |       | $
|                                                                                                                      |                                                              |      |        |       |  
|Liabilities & Stockholders' Investment                                                                                |                                                              |      |        |       |  
|Current liabilities:                                                                                                  |                                                              |      |        |       |  
|Line of credit                                                                                                        |                                                              | $    | 9,319  |       | $
|Accounts payable                                                                                                      |                                                              |      | 6,557  |       |  
|Accrued salaries and benefits                                                                                         |                                                              |      | 1,577  |       |  
|Accrued warranty costs (Note 1)                                                                                       |                                                              |      | 196    |       |  
|Accrued income taxes (Notes 1 and 4)                                                                                  |                                                              |      | 763    |       |  
|Deferred revenue (Note 1)                                                                                             |                                                              |      | 1,030  |       |  
|Customer deposits (Note 1)                                                                                            |                                                              |      | 4,875  |       |  
|Other current liabilities                                                                                             |                                                              |      | 1,783  |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total current liabilities                                                                                             |                                                              |      | 26,100 |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Non-current liabilities:                                                                                              |                                                              |      |        |       |  
|Deferred revenue (Note 1)                                                                                             |                                                              |      | 691    |       |  
|Deferred compensation (Note 9)                                                                                        |                                                              |      | 109    |       |  
|Deferred rent (Note 1)                                                                                                |                                                              |      | 212    |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total non-current liabilities                                                                                         |                                                              |      | 1,012  |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Commitments and contingencies (Notes 2, 3, and 9)                                                                     |                                                              |      |        |       |  
|Stockholders' investment: (Notes 5 and 6)                                                                             |                                                              |      |        |       |  
|Preferred stock, no par value                                                                                         |                                                              |      |        |       |  
|                                                                                                                      | Authorized100,000 shares                                    |      |        |       |  
|                                                                                                                      | IssuedNone                                                  |      |        |      |  
|Common stock, $0.662/3 par value                                                                                      |                                                              |      |        |       |  
|                                                                                                                      | Authorized20,000,000 shares                                 |      |        |       |  
|                                                                                                                      | Issued 5,549,478 shares in 2002 and 5,012,752 shares in 2001 |      |        | 3,699 |  
|Capital in excess of par value                                                                                        |                                                              |      | 22,482 |       |  
|Retained earnings (deficit)                                                                                           |                                                              |      | (3,052 | )     |  
|                                                                                                                      |                                                              |      |        |       |  
|                                                                                                                      |                                                              |      | 23,129 |       |  
|Note receivable-officer (Note 6)                                                                                      |                                                              |      |       |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total stockholders' investment                                                                                        |                                                              |      | 23,129 |       |  
|                                                                                                                      |                                                              |      |        |       |  
|Total liabilities and stockholders' investment                                                                        |                                                              | $    | 50,241 |       | $
|                                                                                                                      |                                                              |      |        |       |  

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

34

---

American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Operations        For the Years Ended March 31, 2002, 2001 and 2000(Dollars in thousands, except per share amounts)

|                                                               |  | 2002 |        | 2001 |   | 2000   |  
|-------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|Net sales and contract revenues(Notes 1 and 8)                 |  | $    | 65,396 |      | $ | 67,374 |  
|Cost of sales and contracts (Note 1)                           |  |      | 49,357 |      |   | 51,155 |  
|                                                               |  |      |        |      |   |        |  
|Gross profit                                                   |  |      | 16,039 |      |   | 16,219 |  
|                                                               |  |      |        |      |   |        |  
|Expenses:                                                      |  |      |        |      |   |        |  
|Selling, general and administrative                            |  |      | 12,753 |      |   | 9,688  |  
|Research and development                                       |  |      | 7,136  |      |   | 5,060  |  
|                                                               |  |      |        |      |   |        |  
|Total expenses                                                 |  |      | 19,889 |      |   | 14,748 |  
|                                                               |  |      |        |      |   |        |  
|Operating income (loss)                                        |  |      | (3,850 | )    |   | 1,471  |  
|Other expense:                                                 |  |      |        |      |   |        |  
|Interest, net                                                  |  |      | (437   | )    |   | (483   | )
|Other, net                                                     |  |      | (225   | )    |   | (183   | )
|                                                               |  |      |        |      |   |        |  
|Total other expense                                            |  |      | (662   | )    |   | (666   | )
|                                                               |  |      |        |      |   |        |  
|Income (loss) before provision for (benefit from) income taxes |  |      | (4,512 | )    |   | 805    |  
|Provision for (benefit from) income taxes(Note 4)              |  |      |       |      |   | 145    |  
|                                                               |  |      |        |      |   |        |  
|Net income (loss)                                              |  | $    | (4,512 | )    | $ | 660    |  
|                                                               |  |      |        |      |   |        |  
|Income/(loss) per shareBasic                                  |  | $    | (0.87  | )    | $ | 0.13   |  
|                                                               |  |      |        |      |   |        |  
|&
#151;Diluted                                                 |  | $    | (0.87  | )    | $ | 0.13   |  
|                                                               |  |      |        |      |   |        |  
|Weighted average sharesBasic                                  |  |      | 5,191  |      |   | 4,978  |  
|                                                               |  |      |        |      |   |        |  
|Diluted                                                       |  |      | 5,191  |      |   | 5,006  |  
|                                                               |  |      |        |      |   |        |  

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

35

---



American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Stockholders' Investment        For the Years Ended March 31, 2002, 2001 and 2000(Amounts in thousands, except share amounts)

|                                                  |  | Common Stock |  |   |       | Retained
Earnings
(Accumulated
Deficit) |   |        |  |   |       
|------------------------------------------------- |  | ------------ |  | - | ----- | --------------------------------------- | - | ------ |  | - | ------
|
|
|Balance, March 31, 1999                           |  | 4,877,767    |  | $ | 3,252 |                                         | $ | 17,394 |  | $ | (659  
|Net income                                        |  |             |  |   |      |                                         |   |       |  |   | 1,459 
|Exercise of stock options (Note 6)                |  | 18,308       |  |   | 12    |                                         |   | 79     |  |   |      
|Retirement of treasury stock                      |  |              |  |   |       |                                         |   |        |  |   |       
|Issuance of stock                                 |  | 65,799       |  |   | 44    |                                         |   | 434    |  |   |      
|                                                  |  |              |  |   |       |                                         |   |        |  |   |       
|Balance, March 31, 2000                           |  | 4,961,874    |  | $ | 3,308 |                                         | $ | 17,907 |  | $ | 800   
|Net income                                        |  |             |  |   |      |                                         |   |       |  |   | 660   
|Exercise of stock options and related tax benefit |  | 8,158        |  |   | 5     |                                         |   | 352    |  |   |      
|Issuance of stock                                 |  | 42,720       |  |   | 29    |                                         |   | 213    |  |   |      
|                                                  |  |              |  |   |       |                                         |   |        |  |   |       
|Balance, March 31, 2001                           |  | 5,012,752    |  | $ | 3,342 |                                         | $ | 18,472 |  | $ | 1,460 
|Net loss                                          |  |             |  |   |      |                                         |   |       |  |   | (4,512
|Exercise of stock options                         |  | 484,116      |  |   | 323   |                                         |   | 3,491  |  |   |      
|Repayment of officer note                         |  |             |  |   |      |                                         |   |       |  |   |      
|Issuance of stock                                 |  | 52,610       |  |   | 34    |                                         |   | 519    |  |   |      
|                                                  |  |              |  |   |       |                                         |   |        |  |   |       
|Balance, March 31, 2002                           |  | 5,549,478    |  | $ | 3,699 |                                         | $ | 22,482 |  | $ | (3,052
|                                                  |  |              |  |   |       |                                         |   |        |  |   |       

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

36

---

American Science and Engineering, Inc. and Subsidiaries        Consolidated Statements of Cash Flows        For the Years Ended March 31, 2002, 2001 and 2000(Dollars in thousands)

|                                                                                                    |                                                                               | 2002                                           |        | 2001   |        | 2000  |       
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ------ | ------ | ----- | ------
|Cash flows from operating activities:                                                               |                                                                               |                                                |        |        |        |       |       
|Net income (loss)                                                                                   |                                                                               | $                                              | (4,512 | )      | $      | 660   |       
|Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Depreciation and amortization                                                 |                                                |        | 2,379  |        |       | 2,171 
|                                                                                                    | Provisions for contract, inventory, accounts receivable and warranty reserves |                                                |        | 607    |        |       | 664   
|                                                                                                    | Deferred (prepaid) income tax                                                 |                                                |        |       |        |       | (40   
|                                                                                                    | Change in assets and liabilities:                                             |                                                |        |        |        |       |       
|                                                                                                    |                                                                               | Accounts receivable                            |        |        | 2,510  |       |       
|                                                                                                    |                                                                               | Unbilled costs and fees                        |        |        | 3,451  |       |       
|                                                                                                    |                                                                               | Inventories                                    |        |        | (7,421 | )     |       
|                                                                                                    |                                                                               | Prepaid expenses, other assets, and deposits   |        |        | 229    |       |       
|                                                                                                    |                                                                               | Accounts payable                               |        |        | (870   | )     |       
|                                                                                                    |                                                                               | Accrued income taxes                           |        |        | 325    |       |       
|                                                                                                    |                                                                               | Deferred revenue                               |        |        | 218    |       |       
|                                                                                                    |                                                                               | Customer deposits                              |        |        | 2,983  |       |       
|                                                                                                    |                                                                               | Accrued expenses and other current liabilities |        |        | (98    | )     |       
|                                                                                                    |                                                                               | Noncurrent liabilities                         |        |        | (61    | )     |       
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Total adjustments                                                             |                                                |        | 4,252  |        |       | (1,409
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Net cash provided by (used for) operating activities                          |                                                |        | (260   | )      |       | (749  
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|Cash flows from investing activities:                                                               |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Purchase of property and equipment, net                                       |                                                |        | (1,109 | )      |       | (1,342
|                                                                                                    | Purchase of patents and intangibles                                           |                                                |        |       |        |       |      
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Cash used in investing activities                                             |                                                |        | (1,109 | )      |       | (1,342
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|Cash flows from financing activities:                                                               |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Proceeds from borrowings                                                      |                                                |        | 3,300  |        |       | 2,019 
|                                                                                                    | Repayment of officer loan                                                     |                                                |        | 640    |        |       |      
|                                                                                                    | Proceeds from exercise of stock options                                       |                                                |        | 3,814  |        |       | 48    
|                                                                                                    | Principal payments of capital lease obligations                               |                                                |        |       |        |       | (16   
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Cash provided by financing activities                                         |                                                |        | 7,754  |        |       | 2,051 
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|Net increase (decrease) in cash and cash equivalents                                                |                                                                               |                                                | 6,385  |        |        | (40   | )     
|Cash and cash equivalents at beginning of year                                                      |                                                                               |                                                | 1,206  |        |        | 1,246 |       
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|Cash and cash equivalents at end of year                                                            |                                                                               | $                                              | 7,591  |        | $      | 1,206 |       
|                                                                                                    |                                                                               |                                                |        |        |        |       |       
|Supplemental disclosures of cash flow information:                                                  |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Interest paid                                                                 |                                                | $      | 481    |        | $     | 437   
|                                                                                                    | Income taxes paid                                                             |                                                |        | 15     |        |       | 95    
|Non-cash transactions:                                                                              |                                                                               |                                                |        |        |        |       |       
|                                                                                                    | Issuance of stock in lieu of fees                                             |                                                | $      | 553    |        | $     | 242   

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

37

---



American Science and Engineering, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        March 31, 2002

1.    Nature of Operations and Summary of Significant Accounting Policies

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

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

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

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

Cash and Cash Equivalents:The Company considers all investments with original maturities of 90 days or less to be
cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair market value at year end 2002 and 2001. The Company has repurchase agreements with its banks. The repurchase
agreements are collateralized by investments principally consisting of U.S. Government Agency securities in the amount of at least 100% of such obligation.

Inventories:Inventories consist of material, labor and manufacturing overhead and are recorded at the lower of cost or net
realizable value. Cost is determined by the first-in, first-out method.

The
components of inventories at March 31, 2002 and 2001 were as follows (dollars in thousands):

2002

2001Raw materials and completed subassemblies

$
10,483

$
7,839Work-in-process


7,981


6,160Finished goods


2,549


$
21,013

$
13,999


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

Equipment and Leasehold Improvements:The Company provides for depreciation and amortization of its fixed assets, principally
equipment, using straight-line and accelerated methods over estimated useful lives of 3-10 years. Expenditures for normal maintenance and repairs are charged to expense
as incurred. Significant additions, renewals or betterments that extend the useful lives of the assets are capitalized. The cost and accumulated depreciation applicable to equipment and leasehold
improvements sold or otherwise disposed of are removed from the accounts, and any resulting gain or loss is included in the consolidated statements of operations.

38

---

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

Revenue Recognition:Revenues are generally recorded on cost reimbursable and long-term fixed price contacts as
costs are incurred using the percentage of completion method. Percentages-of-completion are determined by relating the actual costs of work performed to date for each contract
to its estimated final costs. Revisions in costs and profit estimates are reflected in the period in which the facts causing the revision become known.

Certain
other fixed price contracts are recognized as shipments are made. Profit on fixed price contracts is determined by applying the estimated average profit rate to the contract
value of the items shipped.

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

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

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 $85,000 in 2002 and $114,000 in 2001) result from both commercial contract retentions and government contract withholdings generally for 15% of fees, as well as the difference between
the actual and provisional indirect cost billing rates. Retainages are included in the accompanying consolidated balance sheets as components of unbilled costs and fees.

During
the fourth quarter of 2001, effective as of April 1, 2000, the Company adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." The Company recognizes sales at the time of shipment of the system to the customer. The costs of installation at the customer's site are accrued at the time of
shipment. Management believes
the customer's post-delivery acceptance provisions and installation are routine. The Company has never failed to successfully complete a system installation. Should an installation not be successfully
completed, the contractual provisions do not provide for forfeiture of refund. Installation is non-complex and does not require specialized skills and the related costs are predictable and
insignificant to the total purchase price. The Company has demonstrated a history of customer acceptance subsequent to shipment and installation of these systems.

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

Included
in accounts receivable and unbilled costs and fees at March 31, 2002 and 2001 are $5,878,000 and $5,223,000, respectively, attributable to both prime and subcontracts
with the U.S. Government.

39

---

Deferred Revenue:The Company offers to its customers extended warranty and service contracts. The coverage period of these
contracts will typically range from one to five years, with payments in advance recorded as Deferred Revenue. Approximately 60% of the deferred revenue included in the accompanying 2002 consolidated
balance sheet will be recognized within 1 year.

Customer Deposits:For most international orders, the Company generally includes, as part of its terms and conditions, an
advance deposit with order acceptance. For long-term international contracts, the Company will generally include milestone payments tied to a specific event and/or passage of time. These
deposit amounts are recorded as a liability under "Customer Deposits" until reduced by revenue recognized against the specific contract. As of March 31, 2002 and 2001, total customer deposits
amounted to $4,875,000 and $1,892,000, respectively.

Deferred Rent:The Company has a lease for its office and manufacturing facilities, which includes escalation clauses.
Generally accepted accounting principles require normalization of the rental expense over the life of the lease, resulting in deferred rent being reflected in the accompanying consolidated balance
sheets.

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

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

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

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

Year EndedMarch 31,
2002

March 31,
2001

March 31,
2000(in thousands)Weighted average number of common shares
outstandingbasic

5,191

4,978

4,925Assumed exercise of stock options, using the treasury stock method



28

96Weighted average number of common and potential common shares outstandingdiluted

5,191

5,006

5,021


40

---

Options
to purchase 1,857,493 shares for the year ended March 31, 2001 were outstanding but were not included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of common stock for the period reported.

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

New Accounting Pronouncements:In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets", which is effective for the Company as of April 1, 2002.SFAS 142 discusses how
intangible assets that are acquired should be accounted for in financial statements upon their acquisition. In addition, under SFAS No. 142, goodwill and other indefinite lived intangible
assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separate intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. As of March 31, 2002, all of the Company's intangible assets are being amortized on a straight-line basis over their
contractual useful lives. As of March 31, 2002, the Company does not have any goodwill or assets with indefinite lives recorded and therefore, the adoption of SFAS No. 142 had no impact on the
Company's financial position or results of operations.

In
October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which was
effective for the Company on April 1, 2002. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of
operations and cash flows.

2.    Lease Agreements

The Company leases various office and manufacturing facilities under noncancelable operating leases. Additionally, the Company entered into a sublease agreement
(as lessor) as of May 2000 in regards to certain manufacturing and office space, which was cancelled during fiscal 2002. The Company incurred $1,062,000, $1,053,000, and $901,000 of rent
expense in 2002, 2001, and 2000 respectively. The security deposits on these leases amount to $139,000.

41

---

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

Year Ending March 31,

(in thousands)2003

$
1,1322004


9592005


8262006


152007


2Thereafter


$
2,934


3.    Line of Credit

In November 2000, the Company entered into two credit agreements with HSBC Bank USA ("HSBC"), replacing its previous credit facilities. The first agreement
was for a $10 million domestic revolving credit facility to support the Company's routine working capital and standby letter of credit needs. The second was a $30 million export credit
and security agreement, guaranteed by the Export Import Bank of the United States ("ExIm"), to support the Company's overseas contract, trade finance and working capital needs. The credit facility
bears an interest rate at the HSBC prime rate (4.75% at March 31, 2002) or LIBOR plus 2.0% at the Company's option.

On
February 14, 2002, these credit agreements were amended to increase the domestic revolving credit facility to $20,000,000 and to reduce the export credit facility to
$20,000,000. The domestic credit facility as amended provides for maximum borrowings in an amount up to the lower of: (a) the sum of 85% of eligible domestic accounts receivable plus the lower
of (i) 40% of eligible inventory; or (ii) $5.0 million, or; (b) $20.0 million. The export credit and security agreement as amended provides for maximum borrowings in an
amount up to the lower of: (a) the sum of 90% of eligible international billed and unbilled accounts, or; (b) $20.0 million. The agreements expire on November 30, 2002.

As
of March 31, 2002, there was approximately $9.3 million advanced against the line. On May 28, 2002, the Company received approximately $18.4 million in net
proceeds from a private placement offering of common stock which will be utilized to pay down outstanding debt under the Company's domestic revolving credit
facility.As of March 31, 2002, there were approximately $3.8 million of outstanding letters of credit in effect against the credit
facilities. The credit agreements are collateralized by certain
assets of the Company, and contain certain restrictions, including limitations on the amount of distributions that can be made to stockholders, encumbrances of assets, and loans which can be made to
officers, and requires the Company to meet certain financial covenants, including among others, minimum tangible net worth and debt service coverage. As of March 31, 2002, the Company was not
in compliance with certain of these financial covenants, but has obtained a waiver from the bank for this non-compliance.

With
the receipt of the proceeds from the private placement offering of common stock, the Company expects that it will be in compliance with the tangible net worth covenant at the end of
the first quarter and throughout fiscal 2003. However, the cash flow coverage ratio covenant is a four-quarter trailing requirement and, as a result of losses in prior quarters, the
Company does not

42

---

anticipate being in compliance with this covenant at the end of the first or second quarter of fiscal 2003. The Company will request waivers of the covenant as required at each quarter end. To the
extent the Company is unable to obtain such waivers, HSBC could terminate the Company's domestic revolving credit and export credit facilities. In addition, the current credit agreements expire in
November 2002 and there can be no assurance that HSBC will renew the credit agreements or that alternative financing can be obtained. As discussed above, the Company intends to utilize the
equity funding received in May 2002 to pay off the amounts outstanding (approximately $9.3 million as of May 31, 2002) under the domestic credit facilities and management believes
the Company's working capital requirements through March 31, 2003 can be met without the line of credit. In addition, to the extent the Company's credit facility is terminated, it would
preclude the Company from obtaining financing through its current secured export credit and security agreement which could negatively impact the Company's ability to support international sales.
However, management believes the Company's planned level of sales in 2003 can be achieved without access to export credit.

4.    Income Taxes

The provision (benefit) for income taxes for the years ended March 31, 2002, 2001 and 2000 consisted of the following:

2002

2001

2000(in thousands)Current:Federal

$


$
165

$
238State





20


94


185


332Deferred/(Prepaid):Federal





(37
)

(1,223
)State





(3
)

(102
)


(40
)

(1,325
)Change in valuation allowance








Total

$


$
145

$
(993
)


43

---

The
difference between the total expected provision (benefit) for income taxes computed by applying the statutory federal income tax rate to income before provision (benefit) for income
taxes and the recorded provision (benefit) for income taxes for the three years in the period ended March 31, 2002 follows:

2002

2001

2000(in thousands)Provision for income taxes at statutory rate

$
(1,534
)
$
274

$
174State tax provision (benefit) net of federal effect


13


13


(5
)Permanent non-deductible expenses


31


30


32Expiration of tax credits


8


6


Change in valuation allowance


1,282





Effect of FSC and EIE exclusion


(86
)

(206
)

(430
)R&D tax credit








(700
)Other


286


28


(64
)$


$
145

$
(993
)


The
significant components of the net deferred tax asset at March 31, 2002 and 2001 follow:

|                                                |  | 2002 |        | 2001
|----------------------------------------------- |  | ---- | ------ | ----
|
|
|Assets:                                         |  |      |        |     
|Net operating loss carryforwards                |  | $    | 3,124  |     
|Accounts receivable and unbilled costs and fees |  |      | 213    |     
|Inventory                                       |  |      | 361    |     
|Deferred revenue                                |  |      |       |     
|Accrued vacation                                |  |      | 320    |     
|Accrued warranty costs                          |  |      | 106    |     
|Research & development and other tax credits    |  |      | 701    |     
|Other                                           |  |      | 311    |     
|                                                |  |      |        |     
|Deferred income tax assets                      |  |      | 5,136  |     
|Valuation Allowance                             |  |      | (2,661 | )   
|                                                |  |      |        |     
|Net deferred income taxes                       |  |      | 2,475  |     
|                                                |  |      |        |     

The
Company has available general business and other credits of approximately $701,000 expiring at various times through 2018. Approximately $1,457,000 of the valuation allowance is
attributable to net operating losses generated by deductions for stock options which will be recorded in equity when recognized.

44

---



5.    Common Stock

Stock Option and Other Compensation Plans:The Company has various stock option and other compensation plans for directors,
officers, and employees. The Company has the following stock option plans outstanding as of March 31, 2002: 1993, 1994-1995 and 1996 Stock Option Plan for Non-employee
Directors; two CEO Employment Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified Option Plan; 1994-95 Stock Option Plan for New Employees, a 1999 Combination
Plan, and a 2000 Combination Plan. There were 2,728,000 shares authorized under these plans. Vesting periods on these plans range from immediate vesting to four years. Options under these plans are
granted at fair market value and generally become exercisable within one to two years of the grant date and terminate ten years from the date of grant. In addition, the Company has a common stock
installment purchase plan under which the Board of Directors may grant key personnel the right to purchase shares of the Company's common stock at fair market value and to pay the purchase price in
twelve equal monthly installments. As of March 31, 2002, no shares have been reserved or granted under this plan.

The
Company has instituted two common stock purchase plans. The Executive Equity Incentive Plan allows an executive officer of the Company to buy original issue Company common stock in
any dollar amount up to the gross amount of the annual bonus granted to the Officer and to receive half the number of shares purchased in restricted stock which vests after 3 years. If the
employee leaves the Company prior to 3 years, then the shares revert back to the Company. As of both March 31, 2002 and 2001, 2,251 shares have been reserved and restricted under this
plan. The Reload Option Plan allows any eligible employee designated by the Board of Directors to receive new stock options (at an exercise price equal to the fair market value of the common stock on
the date of sale of the stock) for every share of Company common stock sold or used to exercise stock options.

Pro Forma Stock-Based Compensation Expense:As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock-based compensation plans. Had
compensation cost for awards in 2002, 2001 and 2000 under the Company's
stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income (loss)
and income (loss) per share would have been as follows:

2002

2001

2000In thousands except per share amountsNet income (loss):As reported

$
(4,512
)
$
660

$
1,459Pro forma


(7,863
)

(371
)

186Income (loss) per shareBasic:As reported

$
(0.87
)
$
0.13

$
0.30Pro forma


(1.52
)

(0.07
)

0.04Income (loss) per shareDiluted:As reported

$
(0.87
)
$
0.13

$
0.29Pro forma


(1.52
)

(0.07
)

0.04


45

---

The
fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free
interest rates of 4.53% to 5.13%, 5.5% to 6.75%, and 5.97% to 6.83% for 2002, 2001, and 2000, respectively, an expected life of 7, 7, and 5 years for 2002, 2001 and 2000, respectively, expected
volatility of 68%, 56%, and 55% for 2002, 2001, and 2000, respectively, and an expected dividend yield of 0% for all three years.

Stock Option Activity

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

|                                                                         |  | 2002      |   | 2001 |       | 2000
|------------------------------------------------------------------------ |  | --------- | - | ---- | ----- | ----
|
|Options outstanding, beginning of year                                   |  | 2,025,133 |   | $    | 8.78  |     
|Options granted                                                          |  | 484,400   |   |      | 10.04 |     
|Options exercised                                                        |  | (484,367  | ) |      | 7.78  |     
|Options expired                                                          |  | (285,509  | ) |      | 7.92  |     
|                                                                         |  |           |   |      |       |     
|Options outstanding, end of year                                         |  | 1,739,657 |   | $    | 9.50  |     
|                                                                         |  |           |   |      |       |     
|Options exercisable                                                      |  | 1,112,392 |   | $    | 9.62  |     
|                                                                         |  |           |   |      |       |     
|Options available for grant                                              |  | 327,615   |   |      |       |     
|                                                                         |  |           |   |      |       |     
|Weighted average fair value per share of options granted during the year |  |           |   | $    | 8.17  |     

The following summarizes certain data for options outstanding and exercisable at March 31, 2002:

|                     |  | Number of
Shares |  | Range of
Exercise Prices |  | Weighted
Average
Exercise
Price |       | Weighted
Average
Remaining
Contractual
Life
|-------------------- |  | ---------------- |  | ------------------------ |  | ------------------------------- | ----- | -------------------------------------------
|Options outstanding, |  |                  |  |                          |  |                                 |       |                                            
|End of year:         |  | 469,258          |  | $3.25$7.00              |  | $                               | 5.96  |                                            
|                     |  | 458,050          |  | 7.0110.25               |  |                                 | 7.71  |                                            
|                     |  | 765,649          |  | 10.2614.00              |  |                                 | 12.46 |                                            
|                     |  | 41,700           |  | 14.0117.75              |  |                                 | 15.53 |                                            
|                     |  | 5,000            |  | 17.7622.00              |  |                                 | 18.82 |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|                     |  | 1,739,657        |  |                          |  | $                               | 9.50  |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|Options Exercisable: |  | 265,677          |  | $3.25$7.00              |  | $                               | 5.83  |                                            
|                     |  | 356,216          |  | 7.0110.25               |  |                                 | 7.78  |                                            
|                     |  | 482,599          |  | 10.2614.00              |  |                                 | 13.03 |                                            
|                     |  | 7,900            |  | 14.0117.75              |  |                                 | 14.59 |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            
|                     |  | 1,112,392        |  |                          |  | $                               | 9.62  |                                            
|                     |  |                  |  |                          |  |                                 |       |                                            

On
April 15, 1998, the Company announced that its Board of Directors adopted a Shareholders' Rights Plan (the Plan) and declared a dividend of one preferred stock purchase right
for each outstanding share of common stock. The dividend was payable to all holders of record of shares of

46

---

common stock as of the close of business on April 17, 1998. The rights become exercisable ten days after a person or group acquires 15% or more of the Company's common stock, and in certain
other situations described in the Plan. As of March 31, 2002, no options have been granted or exercised under this plan.

6.    Note Receivable from Officer

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

7.    Related Party Transactions

Mr. Al Gladen, a director of the Company until June 1999, provided engineering and management services to the Company. The compensation paid to
Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal years 2002 and 2000 was approximately $19,550 and $20,600 for services rendered, respectively. No payments
were made to Dabster, Inc. or Mr. Gladen during fiscal 2001.

8.    Business Segment Information

In accordance with the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", the Company has determined that it
has only one operating segment, the X-ray product segment. This includes X-ray detection and imaging products used primarily for the detection of illegal drugs, terrorist
explosives, and smuggled goods. The equipment is purchased by sophisticated government and commercial clients who place a premium on the detection of organic material in complex backgrounds and the
ability to see the contents of containers with precision.

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

|                                           |                      | 2002 |        | 2001 |     | 2000 |  
|------------------------------------------ | -------------------- | ---- | ------ | ---- | --- | ---- | -
|
|Domestic                                   |                      | $    | 45,932 |      | 70  | %    | $
|Export                                     |                      | $    | 19,464 |      | 30  | %    | $
|                                           |                      |      |        |      |     |      |  
|Net sales and contract revenues            |                      | $    | 65,396 |      | 100 | %    | $
|Percent of Export Revenue by Major Region: |                      |      |        |      |     |      |  
|                                           | Middle East & Africa |      |        | 59.0 | %   |      |  
|                                           | Europe               |      |        | 28.1 |     |      |  
|                                           | Mexico               |      |        | 7.7  |     |      |  
|                                           | Pacific Rim          |      |        | 4.4  |     |      |  
|                                           | All Other            |      |        | 0.8  |     |      |  

47

---

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

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

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

Fiscal 2000:$12,644,000 and $11,779,000 to two customers.

9.    Commitments and Contingencies

Deferred Compensation:The Company has an unfunded deferred compensation plan, originally adopted in 1976 and amended at
various times, for certain current and former directors. This plan provides for periodic payments beginning at age 65, the amount of which depends on length of service. The Company paid $16,182 in
2002, $50,291 in 2001, and $4,752 in 2000 under this deferred compensation plan.

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

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

In
a related matter, EG&G has filed a request with the U.S. Patent and Trademark Office ("USPTO") for reexamination of the two patents that currently are at issue in the patent
infringement action described above. The Company filed oppositions to the re-examination requests and was advised by the USPTO that the Company's MobileSearch X-ray inspection
patent was upheld in all material

48

---

respects. The Company has also been advised by the USPTO that the Company's patent on its Z® Backscatter X-ray inspection technology has been upheld in all material
respects.

In
February 2000, Heimann Systems GmBH ("Heimann") filed a civil action in U.S. District Court in Boston, Massachusetts against the Company alleging that the Company infringed a
Heimann patent relating to a mobile vehicle and X-ray examining device. In December 2001, Heimann and the Company agreed to a settlement of the case. The settlement provides a
mutually satisfactory business arrangement that permits the parties to compete in the marketplace with their respective approaches to mobile X-ray inspection systems.

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

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

10.  Subsequent Event

On May 28, 2002, the Company closed on a private placement offering of common stock and warrants. A total of 1,115,000 shares were sold to accredited
investors at a price of $17.64 each. In addition, warrants to purchase an additional 295,475 shares of common stock at a price of $23.52 were issued. These warrants have a five-year life
expiring in May of 2007. Net proceeds to the Company approximated $18.4 million. The proceeds from this private placement offering will be utilized for general corporate purposes including debt
repayment, capital expenditures, investments in product development and working capital needs. (Refer to Note 3Line of Credit.)

49

---



American Science and Engineering, Inc. and Subsidiaries        Unaudited Quarterly Consolidated Financial Data        For the years ended March 31, 2002 and March 31, 2001

|                                |                   | 2002 by quarter |        | 2001 by quarter
|------------------------------- | ----------------- | --------------- | ------ | ---------------
|
|
|Net sales and contract revenues |                   | $               | 19,105 |                
|Gross profit                    |                   |                 | 4,614  |                
|Operating income (loss)         |                   |                 | 349    |                
|Net income (loss)               |                   |                 | 99     |                
|Net income per share            |                   |                 |        |                
|                                | Basic (Note 1)   |                 | $      | 0.02           
|                                | Diluted (Note 1) |                 | $      | 0.02           

---

50

---

SCHEDULE II

AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the years ended March 31, 2002, March 31, 2001, and March 31, 2000

DescriptionAllowance for Doubtful Accounts

|     |  | Balance at
Beginning of
Year |     | Charged to
Costs and
Expenses |   | Deductions
from
Reserves |  | Balance
At End
of Year
|---- |  | ---------------------------- | --- | ----------------------------- | - | ------------------------ |  | ----------------------
|
|2002 |  | $                            | 134 |                               | $ |                         |  | $                     
|2001 |  | $                            | 250 |                               | $ | 110                      |  | $                     
|2000 |  | $                            | 259 |                               | $ | 150                      |  | $                     

DescriptionAllowances for Unbilled Cost and Fees

|     |  | Balance at
Beginning of
Year |     | Charged to
Costs and
Expenses |   | Deductions
from
Reserves |  | Balance
At End
of Year
|---- |  | ---------------------------- | --- | ----------------------------- | - | ------------------------ |  | ----------------------
|
|2002 |  | $                            | 437 |                               | $ |                         |  | $                     
|2001 |  | $                            | 447 |                               | $ |                         |  | $                     
|2000 |  | $                            | 447 |                               | $ |                         |  | $                     

51

---



SIGNATURES

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

|                   |  | AMERICAN SCIENCE AND ENGINEERING, INC.
|------------------ |  | --------------------------------------
|DATED: 31 May 2002 |  | By:                                   
|                   |  |                                       

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

|Signature                               |  | Title                                                                                        |  | Date       
|--------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------
|                                        |  |                                                                                              |  |            
|/s/RALPH S. SHERIDANRalph S. Sheridan   |  | President and Director
(Principal Executive Officer)                                         |  | 31 May 2002
|/s/ANDREW R. MORRISONAndrew R. Morrison |  | Chief Financial Officer, Treasurer and Vice President, Finance
(Principal Financial Officer) |  | 31 May 2002
|/s/ROGER P. HEINISCHRoger P. Heinisch   |  | Director                                                                                     |  | 31 May 2002
|/s/HAMILTON W. HELMERHamilton W. Helmer |  | Director                                                                                     |  | 31 May 2002
|/s/DONALD J. MCCARRENDonald J. McCarren |  | Director                                                                                     |  | 31 May 2002
|/s/WILLIAM E. ODOMWilliam E. Odom       |  | Chairman of the Board, Director                                                              |  | 31 May 2002
|/s/CARL W. VOGTCarl W. Vogt             |  | Director                                                                                     |  | 31 May 2002

52

---



EXHIBIT INDEX

|Exhibit
Number |  | Description of Exhibit (and Statement
of Incorporation by Reference, If Applicable)                                                                                                                                             |  | Page Number
(If Filed)
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------
|(3)(a)         |  | Restated Articles of Organization of the Company (filed as an Exhibit to Company's Annual Report on Form 10-K for the year ended September 30, 1967, and incorporated herein by reference)                                      |  |                       
|(3)(b)         |  | Articles of Amendment to Restated Articles of Organization of Company (filed as Exhibit 2(a)(ii)(B) to the Company's Registration Statement on Form S-7, No. 2-56452, filed May 25, 1976, and incorporated
herein by reference) |  |                       
|(3)(c)         |  | Articles of Amendment to Restated Articles of Organization of Company (filed as Exhibit 12 to the Company's Annual Report on Form 10-K for the year ended March 31, 1976, and incorporated herein by
reference)                 |  |                       
|(3)(d)         |  | By-laws of Company, as amended (filed as Exhibit 2(a)(iii) to Company's Registration Statement on Form S-7, No. 2-56452, filed May 25, 1976, and incorporated herein by reference)                                              |  |                       
|(4)            |  | Shareholders Rights Plan (filed as Exhibit to the Company's filing on Form dated            , 1992 and incorporated herein by references)                                                                                       |  |                       
|(10)(a)(ii)    |  | Deferred Compensation Plan for Herman Feshbach (filed as Exhibit 20 to the Company's Annual Report on Form 10-K for the year ended March 31, 1976, and incorporated herein by reference)                                        |  |                       
|(10)(a)(iv)    |  | Amendment to Deferred Compensation Plans for Ismael Escobar and Herman Feshbach (filed as Exhibit 7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1980, and incorporated
herein by reference) |  |                       
|(10)(a)(v)     |  | Deferred Compensation Plan for Marie Spaulding (filed as Exhibit (10)(a)(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference)                                |  |                       
|(10)(b)(I)     |  | 1981 Incentive Stock Option Plan (filed as Exhibit (10)(b)(I) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference)                                              |  |                       
|(10)(b)(iii)   |  | 1984 Incentive Stock Option Plan (filed as Exhibit (10)-3 to the Company's Annual Report on Form 10-K for the year ended March 31, 1985, and incorporated herein by reference)                                                  |  |                       
|(10)(b)(iv)    |  | Amendment 1 to 1981 Incentive Stock Option Plan (filed as Exhibit (10)(b)(iv) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference)                              |  |                       
|(10)(b)(v)     |  | Amendment 1 to 1984 Incentive Stock Option Plan (filed as Exhibit (10)(b)(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference)                               |  |                       
|(10)(b)(vi)    |  | 1987 General Stock Option Plan (filed as an exhibit to the Company's current report on Form 8-K for the month of October 1987, and incorporated herein by reference)                                                            |  |                       
|(10)(b)(ix)    |  | 1996 Stock Plan For Non-Employee Directors (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-09257, filed on July 31, 1996, and incorporated herein by
reference)                          |  |                       

53

---

|(10)(b)(x)    |  | Executive Equity Incentive Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-27929, filed on May 28, 1997 and incorporated herein by reference)                                         |  | 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(10)(b)(xi)   |  | Reload Option Plan (filed as Exhibit (10)(b)(xi) to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference)                                                              |  | 
|(10)(b)(xii)  |  | 1997 Non-Qualified Stock Option Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-27927, filed on May 28, 1997 and incorporated herein by reference)                                    |  | 
|(10)(b)(xiii) |  | 1998 Non-Qualified Stock Option Plan (filed as Exhibit (10) (b) (xiii) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference)                                                 |  | 
|(10)(b)(xv)   |  | Employment Agreement between the Company and Dr. Joseph Callerame dated May 6, 1998, (filed as Exhibit (10) (b) (xv) to the Annual Report on Form 10-K for the year ended March 31, 1998, and
incorporated herein by reference)   |  | 
|(10)(b)(xvii) |  | Employment Agreement between the Company and Lee C. Steele dated September 29, 1997, (filed as Exhibit (10) (b) (xvii) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated
herein by reference) |  | 
|(10)(c)(i)    |  | Lease of Billerica property (filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 and incorporated herein by reference)                                                           |  | 
|(10)(c)(ii)   |  | Amendment to Lease of Billerica property (filed as to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference)                                                            |  | 
|(10)(c)(iii)  |  | Lease of 33 Manning Road, Billerica, MA                                                                                                                                                                                           |  | 
|(10)(c)(iv)   |  | 1999 Combination Stock Option Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No 333-91801, filed on November 30, 1999 and incorporated herein by
reference).                                 |  | 
|(10)(c)(v)*   |  | Employment Agreement between the Company and Ralph S. Sheridan dated September 25, 1999.                                                                                                                                          |  | 
|(10)(c)(vi)*  |  | Employment Agreement between the Company and Ralph G. Foose dated September 1, 1999.                                                                                                                                              |  | 
|(10)(c)(vii)* |  | Employment Agreement between the Company and Edwin L. Lewis dated February 3, 2000.                                                                                                                                               |  | 
|(10)(c)(viii) |  | Sub-lease from the Company of 30 Manning Road, Billerica, Massachusetts (filed as Exhibit (10)(c)(viii) to the Annual Report on Form 10-K for the year ended March 31, 2000, and incorporated herein by
reference).               |  | 
|(10)(c)(ix)*  |  | Employment Agreement between the Company and Richard Mastronardi dated August, 2000                                                                                                                                               |  | 
|(10)(c)(x)*   |  | Employment Agreement between the Company and Andrew R. Morrison dated May 30, 2001                                                                                                                                                |  | 

54

---

|(10)(c)(xi)*  |  | Employment Agreement between the Company and Reed Clark dated July 23, 2001                                                                                                                                                           |  | 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(10)(c)(xii)* |  | Employment Agreement between the Company and Ralph Foose dated February 11, 2002                                                                                                                                                      |  | 
|(10)(d)(i)    |  | Export Credit and Security Agreement between American Science & Engineering and HSBC Bank USA                                                                                                                                         |  | 
|(10)(d)(ii)   |  | Revolving Loan and Security Agreement between American Science & Engineering, Inc. and HSBC Bank USA                                                                                                                                  |  | 
|(10)(d)(iii)  |  | Amended Export Credit and Security Agreement between American Science and Engineering and HSBC Bank USA dated February 14, 2002                                                                                                       |  | 
|(10)(d)(iv)   |  | Amended Revolving Loan and Security Agreement between American Science and Engineering and HSBC Bank USA dated February 14, 2002                                                                                                      |  | 
|(22)          |  | Identification of Company's subsidiary, AS&E Radiography, Inc., incorporated in Massachusetts (filed as Exhibit (22) to Company's Annual Report on Form 10-K for the year ended March 31, 1988, and
incorporated herein by reference) |  | 
|(23)          |  | Consent of Independent Public Accountants                                                                                                                                                                                             |  | 
|(99-1)        |  | Letter to Securities and Exchange Commission pursuant to Temporary Note 3T                                                                                                                                                            |  | 

---

55

---

QuickLinks